Hiring A Tax Attorney to Abate A Tax Penalty

Tax penalties present taxpayers with unique issues to consider.  Wilson v. Commissioner, T.C. Summary Opinion 2008-91, describes the situation where a tax attorney represents a taxpayer with a tax penalty that was imposed for a tax return prepared by the attorney’s firm. The issue that the case describes is the conflict of interest that the tax attorney has in representing taxpayers in this situation.

In Wilson, the taxpayers failed to report their Social Security income on their federal tax return. The taxpayers had their tax return prepared by Tax Help, Inc. The IRS sent the taxpayers a notice that it intended to increase the taxpayers’ tax liability to account for their Social Security income. The taxpayers submitted an amended tax return to reflect this income and the IRS assessed an accuracy related penalty. The taxpayers filed a petition to redetermine the tax, apparently, arguing that the penalty should be abated.

There are several defenses that taxpayers may assert to ward off accuracy related penalties. The most common defense is that there was no understatement of tax. If there was an understatement, another common defense is that the taxpayer acted in good faith in relying on a professional tax return preparer.

The U.S. Tax Court said that:

Petitioners failed to demonstrate reasonable and good faith reliance on their tax return preparer. In fact, at the trial petitioners’ attorney, who is also an accountant and employed at Tax Help, Inc., did not pursue this defense in any meaningful way but instead rested his case on [a] baseless contention…

The U.S. Tax Court also noted that:

Insofar as they might be indicative of the nature or quality of advice dispensed at Tax Help, Inc., petitioners’ attorney’s contentions tend to call into question whether the return preparer had sufficient expertise to justify petitioners’ reliance.

This is harsh language from the relatively reserved U.S. Tax Court. The issue that this raises is whether, given the facts described by the court, the tax attorney had an impermissible conflict of interest. As an employee of Tax Help, Inc., the attorney may have owed some duty of loyalty to his employer. As a tax attorney for the taxpayer, the attorney also owed a duty to the taxpayers as clients. The tax attorney’s duty to his clients is to be a zealous advocate for the taxpayers, which may have been muted by his duty to his employer. A tax attorney in this position may not be able to zealously argue that his employer was negligent.  An outside tax attorney would be in a better position to make this type of argument.

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