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Friday, June 01, 2012

"Too Good to Be True" Rule Applied in Penalty Situation

Taxpayers subject to accuracy-related penalties can get out of them if they can show reasonable cause for their erroneous return positions. Thus, taxpayers will often argue that they reasonably relied on the advice of counsel to avoid penalties.

Simply relying on counsel of another is not a free pass. To show reasonable cause, the taxpayer must show that that their counsel was a competent professional with sufficient expertise, that they provided adequate information to the counsel so that the counsel could properly do their job, and the taxpayer actually relied on the counsel in good faith.

In a recent Tax Court case, the taxpayer argued that he relied on a tax preparer, and an expert, in adopting an erroneous return position. The Tax Court rejected his reliance on both of them.

In rejecting reliance on the expert, the Tax Court had problems with the expert being a promoter of the economic arrangement (relating to borrowing from a pension plan) that was the subject of the erroneous reporting. The promoter had a conflict of interest since he was getting paid for setting up the arrangement. The Tax Court further noted that a reasonable person would believe the promoter's advice to be "too good to be true" such that reliance on him would be unreasonable.

Reliance on the tax preparer was also rejected, since the preparer had no expertise in the area at issue, and indeed told the taxpayer that. Further, the taxpayer was found not to have given all relevant information to the tax preparer.

Reliance on counsel to avoid penalties is still viable, but not under facts like these. Who knew that when your mother told you "if it is too good to be true, it probably isn't true" that she was educating you in Tax Court doctrine!

Hristov, Tax Court Memo 2012-147

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