When (if Ever) is Relying on Tax Advice a Defense During an IRS Audit?

If you are like most high-income and high-net-worth taxpayers, you rely on professionals to help make sure you pay what you owe (while also making sure you pay as little as possible). So, what happens if one of your tax professionals makes a mistake? Are you liable to the Internal Revenue Service (IRS), and if so, do you have legal recourse against the advisor, accountant, or lawyer who is responsible?

The answers to these questions depend on the circumstances involved. Learn more from Texas tax relief attorney Lawrence Brown:

IRS: “You’re Generally Responsible for Complying with Tax Law Even if Someone Else Handles Your Taxes”

First and foremost, it is important to understand the IRS’s general position on U.S. taxpayer responsibility. As the IRS makes clear, “[y]ou’re generally responsible for complying with tax law even if someone else handles your taxes.” As the IRS goes on to explain, “[y]ou should know what your tax preparer files . . . [and y]ou’re responsible for making sure your tax returns, payments and deposits are correct and on time.”

In other words, as a U.S. taxpayer, it is up to you to make sure you pay what you owe—and, if you don’t pay what you owe, you can be held accountable. But, reliance on professional tax advice is not entirely irrelevant to your accountability. While you are generally responsible for paying your taxes, even if your tax professionals give you bad advice, receiving bad advice can serve as a defense to penalty liability in some cases.

3 Keys to Asserting a Successful “Tax Advice” Defense

As a general rule, non-compliance with the Internal Revenue Code triggers immediate liability for back taxes, interest and penalties—and interest and penalties continue to accrue from the time of your tax law violation until you pay the full amount you owe. But, taxpayers can qualify for penalty relief in certain circumstances. One of these circumstances is reliance on the advice of a tax adviser.

However, simply claiming reliance on tax advice is not sufficient to avoid IRS penalties—even if your claim is completely true. Instead, the U.S. Tax Court has established three criteria for asserting this defense. In order to avoid IRS penalties based on the receipt of bad tax advice, you (or your Texas tax relief attorney) must be able to establish that:

• Your tax advisor was a competent professional with sufficient expertise;
• You provided all necessary information to your tax advisor so that he or she could provide accurate advice; and,
• You actually relied in good faith on your tax advisor’s judgment.

Proving each of these three elements requires different types of evidence, and building a successful “tax advice” defense can prove challenging. However, if this defense is available to you, an experienced Texas tax relief attorney should be able to help, and asserting the defense successfully could save you from substantial penalty liability. The IRS‘ failure to pay penalty, for example, is 0.5 percent of the tax due for each month the tax remains unpaid, up to a maximum penalty of 25 percent. This can easily add hundreds of thousands of dollars, if not millions of dollars, to the amount that high-income and high-net-worth taxpayers owe to the IRS.

Holding Your Tax Advisor Liable for the Costs of an IRS Underpayment

If you have questions about avoiding IRS penalties because you received bad tax advice, you probably also have questions about holding your tax advisor liable. So, can you hold your tax advisor liable for the costs of an IRS underpayment (i.e., interest and penalties)?

Generally speaking, the answer is “Yes”—provided that you can prove your tax advisor was negligent and that his or her negligence is to blame for your accrued liability to the IRS. This is true regardless of whether you qualify for penalty relief, as the IRS establishes its own standards for liability, and as you may have a claim even if (or, perhaps, especially if) your tax advisor was not a competent professional with sufficient expertise. With that said, the terms of your engagement agreement will come into play, and holding your tax advisor may ultimately mean going to court. But, here, too, the effort can prove well worth it in the end, and it will be worth exploring all of your legal options with your attorney.

Responding to an IRS Audit When You Received Bad Tax Advice

With all of this in mind, what should you do if you need to respond to an IRS audit after receiving bad tax advice? At this point, you need to be certain that you are relying on competent professional advice, and this means that you should speak with a highly qualified Texas tax relief attorney as soon as possible. Once you hire an attorney to represent you, your attorney will walk you through your next steps, which will likely include (among others):

• Tracking down your engagement agreement with your tax advisor;
• Collecting all of the documentation you provided to your tax advisor;
• Collecting all documented communications between you and your tax advisor (i.e., emails, text messages and voicemails);
• Independently assessing the IRS’ determination of your tax liability (and imposition of interest and penalties); and,
• Determining how best to proceed in light of all relevant facts, circumstances and practical considerations.

If you have a viable case for penalty relief, your attorney can then deal with the IRS on your behalf. If the IRS miscalculated your tax liability, your attorney can deal with the IRS on your behalf in this scenario as well. Finally, if you have a professional malpractice claim against your tax advisor, your attorney can assist with this as well—and, ultimately, your attorney can help ensure that your total out-of-pocket costs are no greater than necessary.

Request a Consultation with Texas Tax Relief Attorney Lawrence Brown

If you are a high-income or high-net-worth taxpayer and need to know more about how to deal with an IRS audit after receiving bad tax advice, we invite you to get in touch. Call 888-870-0025 or contact us online to request a consultation with Texas tax relief attorney Lawrence Brown today.