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How a taxpayer argued and lost in Tax Court. Moral: you really have to take some responsibility for your taxes. Ever wonder if you could blame your tax preparer to avoid a 20% penalty from the IRS? Did you come up with a new version of “The dog ate my homework” or “The devil made me do it”? If your tax return is audited and you “lose,” the IRS is quick to impose your penalty for negligence in addition to the back taxes, plus interest. The additional tax you owe is called the “deficiency” and the penalty is the “accuracy-related penalty,” and it is imposed at a fixed 20% of the deficiency – if you owe $ 5,000 because you missed the audit, the penalty is $ 1,000 .

“Expect!” you can cry. “I gave all my things to the preparer. The fact that I made mistakes should not be a reason to penalize me. I already have enough problems to solve the deficiency. I am a victim here. It is not fair. Going to the Tax Court.” Which is precisely what a California woman did when faced with a $ 1,059.20 fine. Not wanting to pay a lot of money for a tax attorney, she represented herself [Pro Se] before the Tax Court [T.C. Memo 2009-278]. And she lost.

What happened? She asked her longtime tax preparer to prepare her 2005 Form 1040. She gave the preparer financial documents, including a 2005 Social Security Benefit Statement Form SSA-1099, indicating that she and her decedent had received $ 21,445 of Social Security benefits in 2005. However, you did not provide the preparer with a 2005 Form 1099-DIV, Dividends and Distributions, indicating that you had received $ 216 of dividend income, or a Form 1099-INT, Income interest, which indicates that you also received $ 24 of interest income.

Now, the Preparer, in the language of the Tax Court, “did not consider or include” these three taxable items when preparing the 2005 Form 1040: Social Security Income $ 21,445, Dividends $ 216 and Interest $ 24. $ 21,445 and of course you were unable to deposit the dividends and interest income because you did not know anything about them. However, the Preparer provided the Taxpayer with a summary of the elements that would be included in the tax return, but a copy of the return was not provided to the Taxpayer until the return has been electronically filed and the presentation has been recognized by the taxpayer. IRS. (This is not considered an acceptable practice by any tax preparer.)

The Taxpayer was well aware of the receipt of Social Security Benefits subject to tax in fiscal years 2002, 2003 and 2004. However, he did not detect any error in the summary of the income items considered by the Preparer both in the preparation of the return. , as in the form itself when it is delivered after receiving the electronic filing.

The Internal Revenue Service (IRS), using its document comparison programs, noted the underreported income and generated a letter calculating the deficiency of $ 5,296 and imposing the related precision penalty of $ 1,059.20. A direct calculation of 20% multiplied by $ 5,296. [IRC Sec. 6662(a)].

The legal framework is as follows:

The penalty
The Internal Revenue Code, subsection (a) of section 6662 imposes a penalty related to the accuracy of 20 percent of any underpayment that is attributable to the causes specified in subsection (b).

Among the causes that justify the imposition of the penalty is

or any substantial understatement of income tax as defined in section 6662 (d)
Substantial underestimation occurs when the amount of underestimation exceeds the greater of

– [1] 10 percent of the tax that is required to be shown on the taxable year return, or
– [2] $ 5,000.
– In this case, the deficiency is $ 5,296 which is greater than $ 5,000 and meets the second condition.

Exceptions to the penalty
The section 6662 (a) penalty is not imposed if a taxpayer can show

or (1) reasonable cause for the underpayment and
or (2) that the taxpayer acted in good faith with respect to the underpayment. Dried. 6664 (c) (1).

Subjective considerations
The regulations promulgated under section 6664 (c) further provide that

or the determination of reasonable cause and good faith “is made on a case-by-case basis, taking into account all the relevant facts and circumstances.” Dried. 1.6664-4 (b) (1), Income Tax Reg.
o Relying on the advice of a tax professional may, but does not necessarily, establish reasonable cause and good faith for the purpose of avoiding a penalty under section 6662 (a).

Based on this, the Taxpayer, of course, tried to fit his case into the Exceptions indicated above by alleging special facts and circumstances, as well as relying on the advice of his tax professional. A taxpayer cannot really accomplish more than that.

The Tax Court has established the following three requirements for a taxpayer to rely on a tax professional to avoid liability for a section 6662 (a) penalty:

or (1) the advisor was a competent professional who had sufficient experience to warrant reliance,
or (2) the taxpayer provided necessary and accurate information to the assessor, and
or (3) the taxpayer actually relied in good faith on the assessor’s judgment. “See Neonatology Associates, PA v. Commissioner, 115 TC 43, 99 (2000), affd. 299 F.3d 221 (3d Cir. 2002) .

These requirements are also known as “tips”, a three-prong test. Unconditional reliance on a coach or advisor does not always, by itself, constitute reasonable reliance. The Tax Court has established additional guidelines based on facts and circumstances. [Such guidelines are called dicta]

o The taxpayer must also exercise “Diligence and prudence” Marine v. Commissioner, 92 TC 958, 992-993 (1989), affd. no published opinion 921 F.2d 280 (9th Cir. 1991).
or “The general rule is that the duty to present accurate statements cannot be avoided by placing the responsibility on an agent.” Pritchett v. Commissioner, 63 TC 149, 174 (1974).
o Taxpayers have a duty to read their returns to ensure that all income items are included.

– Relying on a preparer with complete information about a taxpayer’s business activities is not reasonable cause if a cursory review of the return by the taxpayer would have revealed errors. Metra Chem Corp. v. Commissioner, 88 TC 654, 662-663 (1987).

or “Even if all the data is provided to the preparer, the taxpayer still has the duty to read the return and make sure that all income elements are included.” Magill v. Commissioner, 70 TC 465, 479-480 (1978), affd. 651 F.2d 1233 (6th Cir. 1981).

The Court began with a consideration of the third extreme, the trust in good faith in the judgment of the preparers. In a show of common sense rarely seen in any federal court, the Tax Court issued its opinion that

or “We conclude that the petitioners did not rely in good faith on [the Preparer] to accurately prepare your return. We conclude that the petitioners did not rely in good faith on [Preparer’s] advice because they didn’t examine your return before sending it to the IRS. [Emphasis added]

– There you go! If you don’t read the statement, you aren’t really trusting someone, right?
– “Therefore, the unconditional confidence of the petitioners in [The Preparer] it does not constitute, on these facts, a reasonable confidence and does not excuse that they have not examined closely their return “.

What about the second tooth? That the Taxpayer must provide the necessary and truthful information to the Preparer.

o The Tax Court noted that “the defense of trust is also undermined by the fact that [Taxpayer] I do not provide [Tax Preparer] with the necessary Form 1099 documentation regarding your 2005 dividend and interest income.

– Sure, the amounts are negligible, $ 216 in dividend income and $ 24 in interest income. But the failure to deliver them shows carelessness and makes the taxpayer not comply with the Second Line.

After considering the second and third extremes, the Tax Court did not even concern itself with the first extreme, whether the tax advisor was a competent professional. It concluded that the Taxpayer “had not demonstrated good faith and reasonable cause for its insufficient payments for 2005. Consequently, the Court holds [the IRS] determination that the petitioners are responsible for the fine related to the precision of section 6662 (a) for substantial underestimations of income tax for fiscal year 2005 “.

That is all. The 20% penalty is maintained. Obviously, the Taxpayer was protesting the principle of the penalty, since $ 1,059.20 is not a lot of money and it is not worth the work of filing a Petition to hear the case in Tax Court. We have discussed this particular case because it illustrates quite clearly the principles involved in protesting the penalty, as well as the burden of proof required by the taxpayer.

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