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When Is Relying on a Tax Professional Reasonable?

When Is Relying on a Tax Professional Reasonable?

By    |   Sunday, 23 July 2017 08:22 PM

The federal tax code is horribly complex and convoluted.

For decades, various members of Congress have introduced bills to repeal the tax law while Congress annually makes it more byzantine.

It’s difficult enough when US persons are relying on professional tax advisers, but even more sticky when there is non-US involvement.

If the proper tax is not paid, then the IRS wants the tax not only but also may assert penalties. Congress enacted lots of penalty provisions for the IRS to use.

An exception to the penalty provisions provides that where a taxpayer reasonably relies on professional tax advice the penalties are not applicable.

When it is reasonable to rely on professional tax advice is important to both US and foreign taxpayers facing tax penalties?

This exact issue arose in a tax court case decided last week.

In Grecian Magnesite, Industrial & Shipping Co., SA v Commissioner, a Greek Corporation sold its interest in a Delaware limited liability company. For US tax purposes the LLC was treated as a partnership.

The tax adviser for the Greek company determined that the company did not need to report the gain in 2008, when the transaction occurred, and did not need to file a return in 2009.

 As the tax court determined, this was partially right and partially wrong.

The IRS determined that the gain , some $6.2 million, was all taxable. 

The Tax Court found that $2.2 million was subject to tax, but the remaining $4 million was properly not subject to tax.

The IRS also claimed that accuracy-related, failure-to-file, and failure-to-pay penalties applied.

The Tax Court agreed in principle unless there was reasonable cause for the tax payer (the Greek company) to rely on the professional tax adviser recommended by their lawyer.  Here, the tax adviser was a CPA/lawyer with 40 years of experience in preparing US tax returns.

The IRS said that the Greek company should not be entitled to establish good faith in relying on the tax advice. Instead, the taxpayer should have conducted both an independent investigation of the CPA/attorney’s background and experience and hired an expert who specialized in international tax law or an attorney with an LL.M degree.

The IRS assertion is interesting in that implicit in taking that position is confirmation that tax questions, particularly involving international tax, are so complicated that even a CPA/attorney with decades of experience in preparing tax returns had sufficient knowledge or experience. 

Was the IRS right?

It was a fact that the Greek company was the tax adviser’s first non-US client. 

The Tax Court looked at the issue from taxpayer’s viewpoint. It determined that the standard to be applied is whether the tax adviser had sufficient expertise to justify the taxpayer relying on his advice.

Here, the Tax Court found that the tax adviser had sufficient credentials and rejected the IRS’s position that heightened due diligence on the tax adviser and specialized education was necessary before relying on his advice.

The lesson to be learned is that both the taxpayers and the IRS might have far fewer conflicts, and court cases if Congress made the federal tax law understandable without the need to consult with ultra-skilled tax experts.

Denis Kleinfeld is known as a strategic tax and wealth protection lawyer, widely published author and creative teacher.

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When it is reasonable to rely on professional tax advice is important to both US and foreign taxpayers facing tax penalties?
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Sunday, 23 July 2017 08:22 PM
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