An attorney’s tax return had two major errors: $450,000 of gross receipts were left off the return and $505,417 of Contract Labor expenses were deducted as not only Contract Labor but also as Cost of Goods Sold. The return was audited, and the taxpayer agreed with the additional income and that the labor was double-deducted and pays the tax. However, he disputed the 20% accuracy-related penalty. The dispute ends up in Tax Court.
The amount of income underreported is enough where the penalty would apply if an exception doesn’t exist.
The section 6662 penalty does not apply to any portion of an underpayment “if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to * * * [it]…” Reasonable cause has been found when a taxpayer selects a competent tax adviser, supplies the adviser with all the relevant information, and consistent with ordinary business care and prudence, relies on the adviser’s professional judgment as to the taxpayer’s tax obligations.
Put simply, the Court didn’t believe that the attorney used sufficient care in reviewing his return.
Petitioners contend that they reasonably and in good faith relied on their C.P.A.’s advice in the preparation of their 2010 return. We disagree. On the basis of Mr. Ogden’s testimony at trial, we find that his cursory review of petitioners’ return did not constitute proper review…
A reasonable inspection of the return by petitioners would have uncovered both the unreported gross receipts and the improperly claimed deduction. Although petitioners’ C.P.A. [firm] testified that the portion of contract labor expenses treated as COGS on petitioners’ return was hard to spot, we believe Mr. Ogden had sufficient knowledge to detect the error on the return. Because Mr. Ogden prepared the Forms 1099-MISC for the attorneys at his firm, he should have known the total amount of contract labor expenses. Even so, the amount of contract labor expenses reported on petitioners’ return did not remotely match the amount of total contract labor expenses reported on Mr. Ogden’s law firm’s Form 1096. This, combined with the fact that petitioners did not report $450,000 of income on their return, shows that more diligence was needed on their part to reasonably assess their proper tax liability. [citations omitted]
There are a couple of lessons from this decision. First, have everyone you need at the trial. While the CPA who represented the taxpayer in the audit testified at the trial, the CPA who prepared the return did not. “Petitioners did not call the C.P.A. who prepared their 2010 return as a witness, and they presented no evidence that this C.P.A. gave “advice” that they could rely on.” This didn’t sit well with the Court.
More importantly, if you’re an attorney, a CPA, or an Enrolled Agent, the Tax Court is going to expect you to know tax law. You will also be held to a higher standard on any financial disputes. (The same will be true of other financial officers, such as a controller, CFO, etc.) When you’re reviewing a tax return, do not simply take a cursory look at the return. You should want to make sure it’s accurate. If you’re signing a return with $1 million of income, isn’t it worth more than a few seconds to review it? I would certainly think so. The Tax Court definitely did.
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