No Reasonable Cause For Failing To Include $238,000 From Information Return Sent To Old Address

0 Flares Filament.io 0 Flares ×

Back in 2013, I wrote about Andersen v Comm’r, a summary opinion where a taxpayer failed to include $28,000 of W-2 income but was not subject to a 20% civil penalty for substantially understating income. In Andersen, the Tax Court held that there was reasonable cause for the omission and the taxpayer acted in good faith.

These types of cases are notoriously fact intensive. Whether the taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis. Courts, based on the regulations, examine the pertinent facts and circumstances, including the taxpayer’s knowledge, education, and experience, as well as the taxpayer’s reliance on professional advice.

In Andersen, the taxpayers were sympathetic, with a long history of tax compliance, a consistent recordkeeping practice, and a longtime competent tax preparer. The preparer testified about why he reasonably believed that his clients had retired and would not have had wage income. In finding that the taxpayers had established reasonable cause and good faith, the Tax Court acknowledged that it was an “exceptionally close case” but held that no penalties applied.

Contrast Andersen with last week’s LaRochelle v. Commissioner, another summary opinion involving a failure to include income reported on an information return.

read more...

The facts in LaRochelle were not nearly as sympathetic as Andersen. The amount at issue was $238,000 from an IRA distribution in 2017. In 2016, the taxpayers had moved from DC to Florida but still owned a DC residence. They set up US Postal Service mail forwarding. They recalled receiving the $238,000 IRA distribution but not the 1099-R, which had been sent to their DC address.

The husband was sophisticated; he was “professionally engaged in more than ten business partnerships”, including one where he was in charge of day to day operations, including recordkeeping.  The taxpayers used a tax return preparer ( I assume a lawyer, though not clear from the opinion), who also represented the taxpayers in Tax Court (uh oh, see below).

The opinion itself is fairly straightforward. After discussing why the substantial understatement penalty is “determined by an IRS computer program without human review” and “automatically calculated through electronic means” it held that under Tax Court precedent it is exempt from the Section 6751 written supervisory approval requirement (for a different view on that, see Caleb’s discussion in Walquist Harms The Poor: Revisiting Supervisory Approval For Accuracy Penalties.)

The summary opinion also concludes that the taxpayers had not established that they were entitled to a reasonable cause good/faith defense. Failure to receive an information return is not enough to insulate a taxpayer from a penalty, especially when, as here, the taxpayer admits to recalling having received the money, especially a lot of money.

The taxpayers also argued that their use of a preparer justified excusing the penalty. The use of a preparer alone is not enough to establish that the taxpayers’ reliance amounted to good faith/reasonable cause:

Mr. LaRochelle did not explain what was meant by petitioners’ relying upon Mr. Lander to handle their tax return

Moreover, as the opinion notes, a failure to provide necessary information is fatal to a good faith/reasonable cause defense predicated on reliance on a competent tax return professional.

Concluding Thoughts

Tax Court Rule 24(g)(2)(A) generally provides that “[c]ounsel may not represent a party at trial if the counsel is likely to be a necessary witness within the meaning of the ABA Model Rules of Professional Conduct.” The opinion notes that Judge Leyden apprised the parties of the rule, and that the taxpayers stated that their preparer was not likely to be a necessary witness.  While it would not have mattered in this case had the preparer testified, it is almost always a bad idea, and a conflict of interest, to have the taxpayers’ return preparer represent the taxpayer at trial.

For taxpayers with numerous information returns, it would be prudent to set up an online account with IRS. On extension, the preparer and taxpayer can easily access all of the information returns, even those that a taxpayer may not have physically received.

Of course, all of this nonsense could be avoided if the IRS provided taxpayers with a government sourced online filing platform that could access information that the IRS has received from third parties. That day may be coming, as I discussed this past May in Momentum Possibly Building for IRS To Provide Online Filing Options For Taxpayers, but for now we have a back end process where a taxpayer who omits an item has to go through a post filing automated underreporter program and possible disputes as to whether there is enough justification to avoid a penalty. Sad.

Hat tip on this case to Ed Zollars, whose post in Current Federal Tax Developments alerted me to this case. Ed’s work is terrific, and I recommend readers subscribe. As Ed notes, many taxpayers mistakenly believe that the hiring of a preparer means that taxpayers can avoid responsibility.

Ed notes the responsibility that preparers have to correct clients about that misperception:

But tax professionals need to be aware of this belief on the part of their clients that merely hiring the professional and dropping off the documents they decided were relevant means the return they get back will contain no errors. It is important to remind clients that it is their responsibility to provide all relevant information for their return and to make use of tools the professional may provide…

About Leslie Book

Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law.

Comments

  1. G.T. Wert says

    We need ESP to know what IRP forms were issued and where they were mailed. The only method more unreliable than the postal service is email delivery. And it seems like every financial account I have wants to go to email only delivery. What are the odds i lose one valuable email somewhere sometime? Throw in long distance moves and mail forwarding and you’re asking for trouble. It’s getting way too complicated for the average person, let alone someone sophisticated.

  2. Robert Kantowitz says

    Email is better than USPS in that your email address goes with you wherever you are. But pointing that out is like the Mets’ press conference after the 2000 World Series, which they lost to the Yankees in 5 games, at which they pointed out that they had put more runners in scoring position that the Yankees. As noted in the post, it would behoove the government to let taxpayers set up access to a secure website to see the documents that the IRS has received that identify reportable gross income and other numbers that enter into a return. And the IRS should maintain photographic copies or transcribe everything. As things stand now, if the IRS receives a W-2 that the taxpayer never received and the income for which the taxpayer therefore never included on the return, the IRS can and will supply in tabular form the missing federal information and a calculation of what the taxpayer owes net of withholding but including interest (and not necessarily other penalties), but the taxpayer is on his own regarding state and local tax withheld (unless he pays the Social Security Administration for a copy of the W-2).

Comment Policy: While we all have years of experience as practitioners and attorneys, and while Keith and Les have taught for many years, we think our work is better when we generate input from others. That is one of the reasons we solicit guest posts (and also because of the time it takes to write what we think are high quality posts). Involvement from others makes our site better. That is why we have kept our site open to comments.

If you want to make a public comment, you must identify yourself (using your first and last name) and register by including your email. If you do not, we will remove your comment. In a comment, if you disagree with or intend to criticize someone (such as the poster, another commenter, a party or counsel in a case), you must do so in a respectful manner. We reserve the right to delete comments. If your comment is obnoxious, mean-spirited or violates our sense of decency we will remove the comment. While you have the right to say what you want, you do not have the right to say what you want on our blog.

Speak Your Mind

*