Friday, July 17, 2009

Taxpayers Held Liable for the Accuracy-Related Penalty

The Court of Appeals for the Fifth Circuit has held a couple liable for the accuracy-related penalty under Section 6662 of the Internal Revenue Code. In Prudhomme v. Commissioner, the Court found that the Prudhommes could not avoid the penalty because they did not act in “good faith” and with “reasonable cause,” as required by Section 6664(c)(1). Generally, good faith and reasonable cause may exist when relying on an accountant to prepare a tax return. The Tax Court held that the Prudhommes did not meet this standard because they provided their accountants with insufficient information to prepare their tax return accurately and did not make a reasonable effort to assess their proper tax liability. The Fifth Circuit affirmed the decision of the Tax Court.

The Tax Court found the Prudhommes’ reliance on their accountant was not reasonable, because they did not fully inform the accountant of all facets of their finances.

If a taxpayer relies on an expert, all facts and circumstances regarding whether that reliance was reasonable and in good faith, including the taxpayer’s education, sophistication and business experience, must be taken into account.

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