As tax professionals, understanding the nuances of accuracy-related penalties under Internal Revenue Code (I.R.C.) Section 6662 is paramount. The recent U.S. Tax Court Memorandum Opinion in Ataya v. Commissioner, T.C. Memo. 2025-55, provides a compelling case study illustrating the stringent requirements for taxpayers to demonstrate reasonable cause and good faith, particularly concerning recordkeeping and reliance on tax preparers. This analysis will delve into the factual background, the legal framework applied by the Court, and its ultimate conclusions.

I. Factual Background

The consolidated cases involved Hani G. Ataya and Inaam Ataya (mother and son), who resided in California and timely filed their petitions with the Tax Court. The Internal Revenue Service (IRS) issued separate Notices of Deficiency to each petitioner, determining deficiencies in their 2015 and 2016 federal income tax and imposing I.R.C. Section 6662 accuracy-related penalties. The primary issues leading to the deficiencies were unreported qualified dividends and disallowed gross receipts and deductions from Schedule C, Profit or Loss From Business. Following mutual concessions, the sole remaining issue for the Court was whether petitioners were liable for the Section 6662(a) and (b)(1) accuracy-related penalties attributable to negligence or disregard of rules or regulations.

A. Petitioners and Business Operations Hani Ataya, a high school graduate with some college education, had nearly 20 years of experience in car sales. In 2008, he incorporated Cost U Less Cars, Inc. (Cost U Less), a C corporation, with a partner, contributing $200,000 for startup costs. Neither consulted with a financial planner or attorney before incorporation. Inaam Ataya, Hani’s mother, held a bachelor’s degree in information systems, had prior experience with California’s Employment Development Department (overseeing payroll taxes), and worked as a real estate agent. She joined Cost U Less in 2012 after the original partner left, and like her son, did not consult an attorney or financial planner before joining.

Cost U Less’s business model involved purchasing used cars in bulk from auction and reselling them. Hani Ataya served as the primary buyer, using cashier’s checks drawn on corporate accounts. A critical operational flaw was the lack of a redepositing or accounting routine for unused cashier’s check balances; Mr. Ataya simply returned them to a drawer in the office for later use. Inaam Ataya took over operations in 2012, had access to corporate bank accounts, and occasionally made withdrawals.

B. Unreported Income and Accounting Deficiencies In 2015, Ms. Ataya directed Mr. Ataya to withdraw $1.5 million from Cost U Less’s Wells Fargo checking account (held in the name of “Hani Ataya, DBA Cost U Less Cars”) to purchase a multigenerational family home. In 2016, Mr. Ataya purchased cashier’s checks from the Wells Fargo account, designated them "Held for Future Deposit," and deposited them into another corporate account at Chase Bank. These funds were used for corporate inventory as well as home improvements.

The corporation had a bookkeeper, Robin Greenslade (now deceased), who managed business operations with Ms. Ataya. Petitioners were unable to find Cost U Less’s business and accounting records held by Ms. Greenslade, whom they trusted and whose work they did not regularly review. Another bookkeeper, Joan Falanga, whose records are also lost, recorded Mr. Ataya’s capital contributions. Steven Packey of Packey Law Corp. prepared Cost U Less’s corporate returns and petitioners’ individual 2015 and 2016 income tax returns. Petitioners did not review their returns or Mr. Packey’s qualifications, trusting him to prepare and file them correctly.

For tax years 2015 and 2016, petitioners reported Schedule C business income and expenses on their individual returns but did not report dividends received from Cost U Less. The IRS audit, which expanded to petitioners’ individual returns by 2021, used a bank-deposits analysis method to reconstruct income, determining that petitioners, as 50% shareholders of a C corporation, received qualified dividends and were not entitled to claim Schedule C deductions.

Cost U Less ceased operations in September 2020 and was later placed in suspended status by California authorities. A prior corporate audit resulted in deficiencies and accuracy-related penalties for 2014-2017, and a subsequent petition to the Tax Court was dismissed for lack of jurisdiction due to the corporation’s suspended status.

II. Legal Framework and Burdens of Proof

The Court’s analysis began by addressing the burdens of proof and production:

Commissioner’s Burden of Proof (Unreported Income): Generally, the Commissioner’s determinations in a Notice of Deficiency are presumed correct, but in unreported income cases, the Commissioner must establish a minimal evidentiary showing connecting the taxpayer to the income-producing activity. Once met, the burden shifts to the taxpayer to prove the determinations are arbitrary or erroneous. The Court noted that respondent had met this minimal evidentiary foundation through stipulated facts linking bank deposits, cash withdrawals, and cashier’s checks from Cost U Less to petitioners.
Commissioner’s Burden of Production (Penalties - I.R.C. Section 7491(c)): For individuals, the Commissioner bears the burden of production with respect to penalties. This requires presenting sufficient evidence that the penalty imposition was appropriate, including written approval by the immediate supervisor of the individual making the determination (I.R.C. § 6751(b)(1); Graev v. Commissioner, 149 T.C. 485 (2017)).
Supervisor Approval Timing (Ninth Circuit Precedent): Citing Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, 29 F.4th 1066 (9th Cir. 2022), the Ninth Circuit holds that supervisor approval must occur before penalty assessment and while the supervisor has discretional authority to approve the assessment. In deficiency cases, this discretion is lost when a Notice of Deficiency is issued (Kraske v. Commissioner, 161 T.C. 104, 110-12 (2023)). In this case, Revenue Agent Frizzi proposed penalties on March 25, 2022, and Group Manager Yu approved them the same day, well before the Notices of Deficiency were issued on August 16, 2022. Thus, the Court found respondent met the burden of production for managerial approval.

A. Imposition of Accuracy-Related Penalty (I.R.C. Section 6662) I.R.C. Section 6662(a) and (b)(1) imposes a 20% accuracy-related penalty on any underpayment attributable to negligence or disregard of rules or regulations. Petitioners had conceded their underpayments due to unreported qualified dividends and disallowed deductions.

B. Reasonable Cause and Good Faith Exception (I.R.C. Section 6664(c)(1)) A crucial avenue for relief from penalties is the reasonable cause and good faith exception. Penalties will not be imposed if any portion of the underpayment is attributable to a taxpayer’s reasonable cause and good faith actions to comply with tax obligations (I.R.C. § 6664(c)(1)). The determination depends on the particular facts and circumstances, considering factors such as:

Taxpayer’s experience, education, and sophistication.
Extent to which the taxpayer made efforts to assess the proper tax liability (Higbee v. Commissioner, 116 T.C. 438, 448 (2001); Treas. Reg. § 1.6664-4(b)(1)).

C. Reliance on a Tax Professional Reliance on the advice of a tax professional can serve as a good-faith defense under I.R.C. Section 6664(c)(1) if three factors are met (Neonatology Assocs., P.A. v. Commissioner, 115 T.C. 43, 99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002)):

The adviser was a competent professional who had sufficient expertise to justify reliance.
The taxpayer provided necessary and accurate information to the adviser.
The taxpayer actually relied in good faith on the adviser’s judgment. Whether reliance was reasonable depends on specific facts and circumstances (Higbee, 116 T.C. at 448–49; Treas. Reg. § 1.6664-4(c)(1)).

III. Application of Law to Facts and Conclusion

The Court systematically addressed each of petitioners’ arguments against the penalties:

Arguments Regarding Corporate Suspension and Lost Records: Petitioners argued unfairness due to the inability to contest the corporate deficiency and claiming their corporate records were seized by California, hindering their ability to dispute deficiencies. The Court found these arguments unpersuasive, noting that the individual deficiencies had been settled through Stipulations of Settled Issues, which are conclusive admissions. Furthermore, petitioners failed to adequately show that California seized their records, only stipulating that the bulk were lost. The Court found no interference by California with their ability to litigate the cases.
Recordkeeping Negligence: The Court found that petitioners’ recordkeeping for Cost U Less exhibited a pattern of negligence. Mr. Ataya’s routine of designating unused cashier’s checks for future deposit and returning them to a drawer, without additional controls to substantiate their use or return, fell short of the requirement to keep sufficient records to substantiate gross income and claimed deductions (I.R.C. § 6001; Treas. Reg. § 1.6001-1(a)).
Taxpayer Experience and Sophistication: The Court emphasized petitioners’ experience and education. Mr. Ataya’s nearly two decades in the car business, including starting Cost U Less, and Ms. Ataya’s bachelor’s degree, real estate background, and experience with a state payroll tax agency, meant they should have been exposed to methods of recordkeeping consistent with ordinary business care and prudence.
Reliance on Professionals: While petitioners claimed reliance on bookkeepers Ms. Greenslade and Ms. Falanga, and tax preparer Mr. Packey, the Court found critical deficiencies in their defense.
- Lack of Evidence of Competence: The record lacked evidence of the professional qualifications of Ms. Greenslade or Ms. Falanga, or the competence of Mr. Packey as a tax professional.
- Failure to Prove Information Provision: Crucially, petitioners failed to sufficiently prove with evidence that they provided the necessary documents and information to these professionals. The Court noted that "mere statements alone do not show a taxpayer actually relied on advice from a tax professional during the return preparation process" (Clark v. Commissioner, T.C. Memo. 2025-13, at *8).

IV. Conclusion

The Court concluded that petitioners failed to present persuasive evidence demonstrating a cognizable effort to assess their proper tax liabilities or reasonable cause for their underpayments. As a result, the Court sustained the accuracy-related penalties under I.R.C. Section 6662(a) and (b)(1) for underpayments of tax due to negligence or disregard of rules or regulations. Decisions will be entered under Rule 155 to reflect the findings.

V. Key Takeaways for Tax Professionals

The Ataya decision underscores several critical points for CPAs, EAs, and tax attorneys:

Documentation is Paramount: Taxpayers must maintain robust and verifiable records. The "drawer system" for cashier’s checks, even with good intentions, will not suffice without proper internal controls and accounting procedures. The loss of records, regardless of cause, heavily disadvantages the taxpayer.
Sophistication Impacts Reasonable Cause: The Court will consider a taxpayer’s education, business experience, and professional background when evaluating claims of reasonable cause. Individuals with business experience are held to a higher standard regarding financial diligence and recordkeeping.
Proving Professional Reliance: Merely stating reliance on a professional is insufficient. To successfully assert a professional reliance defense, taxpayers must be able to demonstrate:
- The professional’s actual competence and expertise.
- That all necessary and accurate information was provided to the professional.
- That the reliance was genuinely in good faith, which implies some level of taxpayer engagement and review of the prepared returns. "Blind reliance" without review or understanding of the basics of one’s own tax situation is rarely successful.
Supervisor Approval: The timing of supervisor approval for penalties is critical for the IRS to meet its burden of production. However, as demonstrated in Ataya, the IRS generally meets this requirement by securing approval prior to the issuance of the Notice of Deficiency.

Ataya v. Commissioner serves as a stark reminder that while professional assistance is vital, the ultimate responsibility for tax compliance and the maintenance of adequate records rests squarely with the taxpayer. This case highlights the importance of thorough client education regarding recordkeeping best practices and the precise requirements for a successful professional reliance defense.

Prepared with assistance from NotebookLM.