Friday, February 19, 2010

Taxpayers Cannot Rely On Preparer to Avoid Penalty

Taxpayers met with their preparer with respect to their 2005 federal income tax return and gave the preparer financial documents, including a 2005 Form SSA-1099, Social Security Benefit Statement, indicating that they had received $21,445 of Social Security benefits in 2005. Petitioners did not give the preparer a 2005 Form 1099-DIV, Dividends and Distributions, indicating that they had received $216 of dividend income, or a 2005 Form 1099-INT, Interest Income,indicating that they had received $24 of interest income.

Subsection (a) of Section 6662 imposes an accuracy-related penalty of 20 percent of any underpayment that is attributable to causes specified in subsection (b). Among the causes justifying the imposition of the penalty is any substantial understatement of income tax as defined in Section 6662(d). The Section 6662(a) penalty is not imposed if a taxpayer can demonstrate (1) reasonable cause for the underpayment and (2) that the taxpayer acted in good faith with respect to the underpayment.

Reliance on the advice of a professional can give the taxpayer a defense of reasonable cause.

The Tax Court found that Taxpayers did not rely in good faith on their preparer’s advice because they did not examine their return before it was submitted to the IRS. See Estate of Edsel Stiel v. Commissioner, TC Memo 2009-278.

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