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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