The CPA Added Phony Deductions. Who Owes the Tax?

The Tax Court looked today at the case of an unlucky taxpayer who used a Bozo CPA. The Bozo CPA added phony deductions (completely unbeknownst to the taxpayer). The IRS found out and assessed the tax rightly owed and penalties. The taxpayer claimed that the Bozo CPA (who is now residing in ClubFed) should pay the tax; the IRS says the taxpayer owes the tax. Who is right?

Unfortunately, there have been several recent cases where Bozo tax preparers have added phony deductions and/or credits to give unlucky taxpayers refunds. I say unlucky because once the IRS finds out about the problem they will come back and assess the tax.

The Court noted,

In Kelly v. Commissioner, T.C. Memo. 1983-156, we held that even though we sympathized with the taxpayers “about the quality of the return preparation services they received, this is simply no reason to relieve petitioners of taxes which were legally owing and which would have been paid upon the filing of their 1976 return if their return had been correctly calculated.”

The taxpayer is responsible for his tax.

But should the IRS assess the penalty against the taxpayer? After all, the taxpayer didn’t realize that the CPA he used was a Bozo.

Although numerous cases address this question, it is one that is essentially a factual determination that must be considered ad hoc in each case. Petitioner’s educational and work background did not provide him with any expertise in tax preparation or an understanding of tax law. It was reasonable and appropriate that he seek assistance in the preparation of his Federal income tax return. It was also reasonable for him to hire a C.P.A. who had formerly worked for the IRS as his preparer. Under the circumstances, it was reasonable for petitioner to rely on his C.P.A. We accordingly hold that petitioner has shown reasonable cause and is not liable for the accuracy-related penalties for his 2003 and 2004 tax years.

So our unlucky taxpayer will owe the tax but won’t owe the penalty. This should serve as a reminder that you should always review your return before signing it and always ask questions if there’s anything on your return that you don’t understand.

Case: Ytshaky v. Commissioner, T.C. Summary 2008-157


One Response to “The CPA Added Phony Deductions. Who Owes the Tax?”

  1. Greg says:

    What? No comment on the line:

    “It was also reasonable for him to hire a C.P.A. who had formerly worked for the IRS as his preparer…”

    That line alone could spark some lengthy discussion….