FBAR Non-Willful Update – When is it Reasonable to Rely on a CPA?

Professional Reliance on Tax Advisor Defense to IRS Penalties

Professional Reliance on a Tax Advisor Defense to Penalties from IRS

In general, issues involving the US and international tax laws can be very complicated. In order to help navigate through the never-ending maze of tax reporting and compliance, taxpayers may hire a tax professional such as an accountant, enrolled agent, CPA, and/or tax attorney to assist them with filing. Sometimes, even though a taxpayer hired a professional in order to get into compliance or to file in the current year, the tax professional may have made a mistake or provided incorrect advice — which resulted in a taxpayer being penalized. This is especially true in situations involving international tax and reporting. Sometimes, in order to abate or remove penalties, the taxpayer will take the position that they relied on a professional as a defense against IRS penalties — the question then becomes how to qualify for the professional reliance defense against IRS penalties.

IRM 20.1.1.3.3.4.3 – Advice From a Tax Advisor

When evaluating how the Internal Revenue Service may consider certain tax positions that a Taxpayer may make, a good starting point is the Internal Revenue Manual. When it comes to professional reliance on a tax advisor, the important section is Internal Revenue Manual, section 20.1.1.3.3.4.3, which provides the following:

1. 1. 1. Reliance on the advice of a tax advisor generally relates to the reasonable cause exception in IRC 6664(c) for the accuracy-related penalty under IRC 6662. See IRM 20.1.5.7.4, Reliance on Advice, and Treas. Reg. 1.6664–4(c).

      2. However, in very limited instances, reliance on the advice of a tax advisor may provide relief from other penalties when the tax advisor provides advice on a substantive tax issue.

         • Example: The employer researched all available IRS publications on the subject of contract labor, provided clear and convincing documentation as to the duties of the workers to the tax advisor, and requested an opinion from the tax advisor as to whether the workers were “contract labor” or “employees.” As a result, the tax advisor advised the employer that the workers were “contract labor.” However, the IRS later determined that the workers were “employees” and not “contract labor.”

      3. Penalty relief based on reliance on the advice of a tax advisor is limited to issues generally considered technical or complicated. The taxpayer’s responsibility to file, pay, or deposit taxes generally cannot be excused by reliance on the advice of a tax advisor.

      4. Because the IRC and treasury regulations sections that provide penalty relief criteria for erroneous advice from a tax advisor are generally limited to the accuracy-related penalty, relief from other penalties must meet the reasonable cause standards. See IRM 20.1.1.3.2, Reasonable Cause.

What Does IRS Say About Professional Reliance Exception to Penalties?

As provided by the IRS:

• • • Other factors to consider are the taxpayer’s experience, knowledge, education, and reliance on the advice of a tax advisor. When considering the facts and circumstances, the taxpayer’s experience, education, and sophistication with respect to the tax laws are relevant in determining whether the taxpayer has reasonable cause. Reliance on advice from a tax professional must be objectively reasonable.

    • The taxpayer must provide the advisor with all the necessary information to evaluate the tax matter. Additionally, the advisor must have knowledge and expertise related to the tax matter.

3 Prong Test: Neonatology Associates, P.A. v. Commissioner

As provided by the IRS:

Courts generally apply a three-pronged analysis to establish whether a taxpayer acted with reasonable cause in relying on professional advice:

1. 1. 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.

         1. Examiners should consult with Counsel if unsure about the application of particular case law to the taxpayer’s facts and circumstances.

Neonatology Associates, P.A. v. Commissioner

The case of Neonatology Associates, P.A. explains the test to determine whether or not a person properly relied on a tax professional and whether this establishes reasonable cause sufficient to avoid, abate, or remove a penalty:

• • • In sum, for a taxpayer to rely reasonably upon advice so as possibly to negate a section 6662(a) accuracy-related penalty determined by the Commissioner, the taxpayer must prove by a preponderance of the evidence that the taxpayer meets each requirement of the following three-prong test:

      • (1) The adviser was a competent professional who had sufficient expertise to justify reliance,

      • (2) the taxpayer provided necessary and accurate information to the adviser, and

      • (3) the taxpayer actually relied in good faith on the adviser’s judgment. See Ellwest Stereo Theatres, Inc. v. Commissioner, T.C. Memo. 1995-610; see also Rule 142(a); Welch v. Helvering, 290 U.S. at 115. 

We Specialize in IRS Offshore Compliance and Disclosure

Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm today for assistance with getting compliant.