July 29, 2008

Taxpayer Cannot Rely on Incompetent Tax Attorney

Houston Tax Attorney Blog

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The IRS can impose a number of different types of penalties.  It often does so when it should not.  The recent Wilson v. Commissioner, T.C. Summary Opinion 2008-91, case considers a situation where the court concludes that the tax attorney was incompetent and could not be relied on to avoid the imposition of penalties.

Facts & Procedural History

The taxpayers had their tax return prepared by Tax Help, Inc.   The tax return did not report the taxpayers’ Social Security income.  The IRS’s computer matching system triggered a notice to the taxpayers to include the omitted Social Security income.

The taxpayers submitted an amended tax return to reflect this income and the IRS assessed an accuracy related penalty.  When the return position was not accepted, the taxpayers filed a petition to redetermine the tax and argued that the penalty should be abated.

Reasonable Cause for Not Imposing Penalties

There are several defenses that taxpayers may assert to ward off accuracy related penalties. Reasonable cause is a common defense.  Reasonable cause can include the good faith reliance on tax advice from a reputable tax advisor.  Neonatology Associates P.A. v. Commissioner, 115 T.C. 43 (2000) is the most often cited case for this defense.

In Neonatology involved a deduction for an employee benefit plan.  The U.S. Tax Court concluded that penalties should be imposed given that the taxpayers only relied on an insurance agent who stood to profit considerably from the transaction rather than from a competent, independent tax professional with sufficient expertise to warrant reliance.

Reliance on Incompetent Tax Attorney

The taxpayers in the present case argued that they relied on their tax attorney.  Unlike Neonatology, the tax attorney did not necessarily stand to profit from omitting the Social Security benefits on the taxpayers’ tax return.

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.

Thus, the reliance on an incompetent tax advisor will not suffice.  It has to be reliance on a competent tax advisor.

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