I am Under IRS Audit but Relied on a Tax Pro: Penalty Risks

I am Under IRS Audit and Relied on a Tax Professional (Penalty Risks)

I am Under IRS Audit and Relied on a Tax Professional 

With the Internal Revenue Code becoming ever more complex each year, it is not uncommon for taxpayers across the globe to rely on a tax professional to assist them with filing tax returns, business returns, and international information reporting forms. Especially if the taxpayer has foreign accounts, listed transactions, or significant amounts of business or investment income, a trusted tax professional can be a huge help to a taxpayer who may be getting lost in the weeds trying to make sense of the complex tax code. But what happens if the taxpayer who relies on a tax professional is then audited? In other words, if the taxpayer is staring down the barrel of a very large penalty or interest on tax liability because they relied on a tax professional to prepare the returns, what happens next?

First, Anyone Can get Audited by the IRS

When a person finds himself under IRS examination, their first inclination may be to immediately point fingers at the tax professional they used to file the tax return. While it is understandable, it is also important to note that even if the tax return was perfectly prepared, that does not mean that the taxpayer can automatically avoid an audit. Taxpayers get audited all the time for many different types of reasons — and it may not have even been a mistake by the tax professional or an inaccuracy in the information supplied by the taxpayer. Thus, while an IRS examination notice can be distressing, it is important to first try to determine why the Taxpayer was audited.

Perfect Tax Returns vs Accurate Returns

Sometimes, it is simply impossible for a tax professional to prepare a perfect tax return. For example, the taxpayer may have come to the tax professional late in the tax year and they may be under a very tight deadline – with the taxpayer unable to provide their tax preparer with all the accurate information prior to filing. This may result in the Taxpayer providing estimates to the tax professional which the tax professional may reasonably rely upon. If thereafter the IRS gets information that does not match what the taxpayer provided to the tax professional, it may lead to an audit. Noting, an exam does not mean that it will lead to any additional taxes or penalties because oftentimes the result of the audit will be in NC or ‘no change letter.’

Was the Taxpayer Penalized Due to the Tax Professional’s Mistake?

If the taxpayer is put into a situation because they relied on a tax professional to take a tax position or to file a certain form that was either not filed, filed incorrectly, or just done plain wrong, there is the concern that it is the tax professional’s fault that the taxpayer received the penalty. In that case, what happens next?

Reasonable Cause Based on Professional Reliance

One strategy the taxpayer may want to take with the IRS is that they reasonably rely on the tax professional. Oftentimes, if the taxpayer can prove that they meet the reasonable cause exception to penalties, then they could avoid penalties or have any penalties that were already issued to be abated. It is important to note, that the IRS must be convinced that a Taxpayer meets the reasonable cause standard — and two agents may disagree on the subjective nature of whether or not the reasonable cause standard was met. While there are objective factors to consider, at the end of the day it is up to the agents and supervisor to determine whether based in part on their own experience they believe the facts and circumstances justify a waiver of the penalty based on reasonable cause.

Was the Tax Professional Experienced in the Area of Tax?

One important aspect of reasonable cause is that the IRS will want to know the experience level of the tax professional in the specific area of tax at issue. For example, if the taxpayer relied on the tax professional in submitting forms involving certain business filings and those forms were filed incorrectly and led to penalties, but it turns out that the tax professional had no experience in this area of tax — then the IRS may determine that reasonable cause is not justified. That is why it is important to interview the tax professional beforehand to make sure that they have the experience in this particular area that you may need assistance in.

Did the Taxpayer Provide Accurate Information to the Tax Professional?

Sometimes, the taxpayer will not provide the proper information to their tax professional. Maybe they did not receive the proper information from their financial institution or they’re necessary K-1s to complete the forms and so the taxpayer and the tax professional must try to recreate the information without having the benefit of the necessary records. In this type of situation, while the taxpayer may be penalized – they will also have an opportunity to dispute the penalty and possibly supplement the returns once that information is available or if the IRS received that information with the information that was received by the IRS. Typically, in this type of situation, it would not be the tax professional’s fault.

Did the Taxpayer Take the Tax Professional’s Advice?

Sometimes the taxpayer will disagree with the strategy of the tax professional. As a result, after communicating back and forth, the tax professional may agree to follow the position of the taxpayer, presuming it is an ethical position. If the tax professional followed a legitimate position proposed by the taxpayer, which was simply rejected by the IRS, then typically the tax professional will not be at fault for any penalties that were issued, and the IRS would not accept a reasonable cause exception based on any mistake of the tax professional. Rather, that taxpayer would have to try to prove that their position should be accepted by the IRS.

International Tax is an IRS enforcement Mainstay

One common situation where tax professionals sometimes find themselves in the crosshairs of the client’s expectations and the IRS penalty machine is on matters involving international tax and reporting. In this particular area of tax, it is often better for the taxpayer to be proactive and seek to avoid penalties by making a submission under one of the amnesty or penalty waiver programs than to wait (and risk being penalized) and then try to fight the penalty on the to get the penalty reduced or abated. In this arena of tax, taxpayers should work with a Board-Certified Tax Law Specialist team that specializes exclusively in international tax-related matters.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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.