IRS Tax Penalties And The Tax Professional Reliance Defense

IRS Tax Penalties and the Tax Professional Reliance Defense

No one wants to pay federal taxes.  And this truism applies more so with respect to federal tax penalties.  Accordingly, clients often call upon their tax professionals to request waiver or abatement of any asserted penalties.

Chief among the waiver or abatement defenses is so-called “reasonable cause.”[i]  To show reasonable cause, a taxpayer must show that he or she exercised ordinary business care and prudence in determining a tax obligation but nevertheless was unable to comply with the tax obligation.[ii]  Because taxpayers routinely rely upon their tax advisers, federal courts have for some time now recognized a reasonable cause defense for reliance on a tax professional.

Contrary to popular belief, the usage of a tax professional to prepare a tax return is not a get-out-of-jail free card.  Rather, taxpayers have the burden of proof to show that reliance on the tax adviser was reasonable under the circumstances.  In many cases, this requires a taxpayer to meet all three requirements under the United States Tax Court’s decision in Neonatology.  This article discusses the Neonatology requirements and the professional reliance defense.

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