Recklessness Does Not Amount to Willfully Understating Tax By a Preparer

In the case of Rodgers v. United States, 123 AFTR 2d 2019-2294[1], the Ninth Circuit Court of Appeals agreed that the District Court had applied the wrong standard in determining if a preparer penalty applied.  But, as will become clear, that doesn’t mean the preparer will fare any better when the case goes back to the District Court to have the proper standard applied.

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Preparer Failed To Exercise Proper Due Diligence in Failing to Seek Additional Supporting Evidence of Business Income

In the case of Foxx v. United States, U.S. Court of Federal Claims, No. 1:15-cv-01266 the IRS had assessed a penalty against a tax preparer, claiming he had failed to exercise proper due diligence in reporting over $18,000 from an auto detailing business that caused a taxpayer to qualify for the earned income tax credit.  When the IRS examined the taxpayer’s return, the taxpayer admitted she had no such business and, thus, was not eligible to have received the credit.

The IRS had assessed a penalty against Dr. Foxx under IRC §6694(b) for “willful or reckless conduct” in preparing the tax return.  Dr. Foxx argued that he has simply relied upon the representations of the taxpayer about her income.  So the key question became whether Dr. Foxx’s actions were sufficient to show an exercise of proper due diligence.

Image copyright spaxia / 123RF Stock Photo

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IRS Updates Adequate Disclosure Revenue Procedure, Offers Some Schedule M-3 Information Relief

In revising the annual Revenue Procedure (Revenue Procedure 2016-13) that contains the provisions that would provide for adequate disclosure for purposes of avoiding certain penalties under §6662 (accuracy related penalty imposed on taxpayers) and §6694 (paid preparer penalties), the IRS reduced the amount of information certain taxpayers must provide on Schedule M-3 to have adequate disclosure.

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Failure to Object to Tax Shelter By Tax Preparer Treated As Recommendation of Shelter, Insurance Carrier Allowed to Deny Coverage

A tax preparation firm discovered that its preparation of a tax return ended up being treated as part of a promotion of an illegal tax shelter by its liability insurance carrier, which meant the carrier refused coverage when clients sued the firm when the IRS came after the programs.  The Sixth Circuit’s decision in the case of Financial Strategy Group, PLC v. Continental Casualty Company, CA6, Docket No. 14-6296, 2015 TNT 152-16 may prove surprising to some since it turns out the firm did not have the protective net it thought it did against these claims.

The firm in this case prepared LLC returns for two clients who had been convinced by financial advisers with a national accounting firm (which is not the firm in this suit) to enter into a program to buy and sell distressed debt that the national firm advised them would reduce their tax bills.  For the year they entered into the program the national firm prepared the LLC tax return for the partnerships through which these investments were held.

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Penalty Under §6694 May Be Assessed Against Preparer Up to Three Years After Meritless Refund Claim Filed

The IRS addressed the period during which a penalty may be assessed against a preparer under IRC §6694 for having prepared a claim for refund that contained a meritless position in Chief Counsel Advice 201514008.  As well the memo addressed the statute of limitations for the preparer to claim a refund of such a penalty.

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