Delray Beach, FL asked in Tax Law for Florida

Q: Can I get a substantial underpayment penalty abated based on incorrect advice given to me by my accountant?

My 2020 return was audited, and the IRS sent me a 30-day letter proposing a substantial underpayment penalty based on disallowed business deductions that my accountant told me I was entitled to.

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1 Lawyer Answer
A. Brian Phillips
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A: You will need to protest the 30-day letter's proposed adjustments. Generally, a taxpayer who can show "reasonable cause" has a good chance of securing penalty relief. Fully informed advice from a competent tax advisor is a solid ground for showing reasonable cause and obtaining such relief. Taxpayers are eligible for relief when they rely on actual advice from a tax professional (professional judgment or analysis of a tax advisor) as compared to the “tax preparation” or clerical tasks that are carried out in the preparation of the return itself.

If you in fact relied upon the erroneous advice from a tax professional, you must generally make the following showings: that the advisor was a competent tax professional who had sufficient expertise to justify reliance on such advice, you accurately provided all the necessary information to the advisor, the advisor must be a person other than yourself in which you reasonably relied in good faith on the advice rendered from such individual, and that such individual actually rendered the advice (the advice regarding the analysis and conclusion was in fact communicated to you).

This determination must consider all pertinent facts and circumstances. Some additional factors that will be relevant to this analysis include: whether the tax advisor was competent with respect to the specific tax matter at issue, whether the advisor was furnished with all relevant and necessary information to make a determination/conclusion, whether your reliance on the tax advice was reasonable (taking into account your education, sophistication with tax law, etc.) and whether the advice was based on reasonable factual or legal assumptions. One last important consideration is whether the position a tax advisor is recommending is “too good to be true” in the sense that the tax benefits proposed far outweigh the cost. When a tax benefit is too good to be true, you should be asking additional questions.

Remember, accountant and CPA are not the same thing! The protest process does require some finesse (and some additional facts), but I would say the prognosis is positive.

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