Tax Professional Reliance, Reasonable Cause & Penalty Relief

Is Reliance on a Tax Advisor a Defense to IRS Penalties?

Reliance on a Tax Professional ‘Defense’ to IRS Penalties?

In recent years, the Internal Revenue Service has significantly increased the issuance of penalties against US Taxpayers who do not properly report their income or assets. This is especially true in the world of international tax and the issuance of international information reporting penalties – which are usually assessed against the taxpayer without notice until the Taxpayer receives a CP15 Notice. One common defense Taxpayers turn to when trying to avoid, remove or abate IRS penalties is that they relied on a tax professional. The question then becomes whether reliance on a Tax Professional is a defense against IRS penalties. In general, the IRS requires the Taxpayer to jump through several hoops in order to successfully claim this defense. Let’s take a look at what the IRS has to say about it, with a focus on the IRS requirements regarding:

• • • (1) the competence of the advisor;

    • (2) the taxpayer’s supplying all necessary information to the advisor;

    • (3) the taxpayer’s actual reliance on the advice.

IRS LB&I Concept Unit

Here are key excerpts from the IRS Concept Unit:

• • • Examiners must consider all facts and circumstances when determining whether a taxpayer has reasonably relied in good faith on the advice or opinion of another, including professional advisors. Taxpayers’ education, sophistication and business experience are relevant. In no event will a taxpayer be considered to have reasonably relied in good faith on advice or an opinion unless certain minimal requirements are satisfied.

    • These alone will not necessarily establish that the taxpayer reasonably relied on the advice in good faith but are a threshold standard. First, the person providing the advice must be competent to do so. If the taxpayer knew, or reasonably should have known, that the advisor lacked knowledge in the relevant aspects of federal tax law, the taxpayer cannot have reasonably relied on the advice. Next, the taxpayer must have supplied necessary and accurate information to the advisor. The advice must be based upon all pertinent facts and circumstances and the law as it relates to those facts and circumstances. The advice must consider the taxpayer’s purposes (and the relative weight of such purposes) for entering into a transaction and for structuring a transaction in a particular manner.

    • The advice must not be based on unreasonable factual or legal assumptions and must not unreasonably rely on the representations, statements, findings, or agreements of the taxpayer or any other person. The advice must not be based upon a representation or assumption which the advisor or taxpayer knows, or has reason to know, is unlikely to be true, such as an inaccurate representation or assumption as to the taxpayer’s purposes for entering into a transaction or for structuring a transaction in a particular manner. Courts generally apply a three-pronged analysis to establish whether a taxpayer acted with reasonable cause in relying on professional advice:

      • • (1) the competence of the advisor;

        • (2) the taxpayer’s supplying all necessary information to the advisor;

        • (3) the taxpay er’s actual reliance on the advice.

    • Examiners should consult with Counsel if unsure about the application of particular case law to the taxpayer’s facts and circumstances. If any portion of an underpayment is attributable to a reportable transaction, the taxpayer’s failure to disclose the transaction in accordance with Treas. Reg. 1.6011-4 is a strong indication that the taxpayer did not act in good faith with respect to the portion of the underpayment attributable to the reportable transaction.

    • In determining whether a taxpayer exercised ordinary business care and prudence, you should consider all the facts and circumstances and review all available information such as the taxpayer’s stated reason, compliance history, length of time and circumstances beyond the taxpayer’s control.

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.