My chronicle of how the IRS and Tax Court affect taxpayers' daily lives.

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Thursday, October 1, 2009

"I read it on the internet" is not an excuse!

A former employee who is studying for his masters degree sent me a great case that shows a taxpayer's attempt to escape accuracy related penalties for reasonable cause.  Thanks Ethan!

IRC§ 6662 imposes a 20% penalty for the underpayment of tax that is due to the negligence or disregard of rules and regulations.  Kenneth & Trudi Woodard represented themself before the US Tax Court concerning the applicability of these penalties for a $150,000 understatement of income resulting in $27,606 of additional taxes.  The IRS tacked on $5,521 of accuracy related penalties. 

Mr. Woodard believed that $100,000 of the income would be considered a rollover to a self-directed IRA when he withdrew the money and lent it to a mortgagee, who stole the money and eventually was convicted of fraud.  He asked the court to accept that his research on Google was substantial proof that he should not be considered negligent.  He was unable to specify any website or any articles that he read, nor did he present any evidence about his attempt to confirm the accuracy of information that he read on the intenet.

The Tax Court determined that, in light of the following information, that the taxpayer should have known better, and that his education with a Bachelor of Science in Accountancy, a M.B.A. and his lapsed license as a Certified Public Accountant should have given him a proper framework to determine what information could be relied upon as difinitive guidance.  Not only did he lose the $100,000 which was stolen from him, he now owes tax and penalty on the amount, and his wife left him!

Aaron's Take:  I am currently working on a case where the taxpayer prepared their own return, read the instructions, and has subsequently and substantially understated their income.  They attempted to prepare a tax return that was substantially more complicated than their education or experience would allow for.  We already understand that there will be a substantial amount of tax due, and that the accuracy related penalty will apply.  We will be fighting this same exact issue, and hopefully will come out more successful than Mr. Woodard.  The point?  Using a tax professional can have substantial value.  Had Mr. Woodard been able to prove that he consulted with someone with expertise, he would likely have been able to get out of the penalty.

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Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.

For official comments, please e-mail NAEA Director of Communications at or Arizona Society president

"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."