There is currently an academic debate swirling around in tax professional circles. The particular debate that I’m referring to involves taxpayers’ ability to avoid the accuracy-related penalty imposed by the tax code in cases where the taxpayer reasonably relied on the advice of a tax professional with respect to a position taken on the taxpayers return that is later determined to be incorrect.
How Does Reasonable Reliance Exception to Penalties Work?
Basically, here’s how the rule works. If a position taken on your return is subject to the accuracy-related penalty (the applicability of this penalty will have to be the subject of another discussion), you can be excepted from the penalty if you reasonably relied on a professional’s advice and: (1) the adviser was a competent professional with sufficient expertise to justify reliance; (2) the taxpayer provided the adviser necessary and accurate information; and (3) the taxpayer actually relied in good faith on the adviser’s judgment. See Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d (299 F.3d 221 (3d Cir.2002).
The big picture idea here is that taxes are complicated, many people rely on tax professionals to prepare their return, and the taxpaying public shouldn’t be penalized for receiving bad advice.
Well some in the tax academic world want this exception to the penalty eliminated. Basically, they cite that this exception can give more sophisticated taxpayers and their tax professionals a “get out of jail free” card with respect to aggressive positions taken on their tax return.
As an experienced tax attorney, I know that there are people that abuse the system. I also know that most individuals and small businesses are legitimately seeking the correct answer. Having dealt with many small business tax audit problems and individuals in an IRS audit, I can attest that most of these folks just want legitimate tax help.
I personally believe that the exception, with its required criteria, does a pretty good job of protecting the government from tax cheats while also protecting ordinary taxpayers from penalties of receiving not so accurate advice from their tax attorney or CPA.
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