Does my accountant's mistake shield me from the IRS?

Where the claim comes from

Many taxpayers assume that hiring a professional transfers responsibility for the return. When a notice arrives, the first reaction is often that the preparer made the mistake, so the IRS should look to the preparer.

There is a real legal rule behind part of that instinct. Reliance on a professional can matter, but only for penalties, and only when the facts support it.

What the law actually says

The tax shown on your return, and any additional tax determined later, is your liability. Interest generally accrues on unpaid tax from the original due date until it is paid, and the rules for abating interest are narrow and do not cover preparer errors.

IRC §6662(a) adds a penalty equal to 20% of the portion of an underpayment attributable to negligence, disregard of rules, a substantial understatement of income tax, and certain other causes. IRC §6664(c)(1) provides that no penalty is imposed under §6662 or §6663 on any portion of an underpayment if you show reasonable cause for that portion and that you acted in good faith.

Treas. Reg. §1.6664-4(b)(1) makes this a case-by-case determination based on all pertinent facts and circumstances. For reliance on professional advice, §1.6664-4(c)(1) requires, at a minimum, that the advice be based on all pertinent facts and circumstances, and that it not rest on unreasonable factual or legal assumptions. The Tax Court often frames the question as whether the adviser was a competent professional with enough expertise to justify reliance, whether you provided necessary and accurate information, and whether you actually relied on the advice in good faith (Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000)).

IRM 20.1.1.3.2 describes reasonable cause as based on all the facts and circumstances, and IRM 20.1.1.3.2.2.5 addresses claims based on erroneous advice or reliance on others. Under IRM 20.1.1, first-time abatement applies to failure-to-file, failure-to-pay, and failure-to-deposit penalties, not to accuracy-related penalties. Reasonable cause cannot excuse the portion of an underpayment tied to a transaction lacking economic substance under IRC §6664(c)(2).

What is true and what is not

It is true that a preparer's error can support penalty relief when you gave the preparer complete and accurate records, the error involved a question you could reasonably rely on a professional to answer, and you had no reason to doubt the result. It is also true that a preparer can be subject to separate penalties under IRC §6694.

It is not true that the IRS will look only to the preparer. The additional tax remains yours, and interest on it generally remains too. Reliance does not help if you withheld information, ignored obvious problems on the return, or did not review what you signed.

• Additional tax: owed by you.
• Interest on that tax: generally owed by you.
• Accuracy-related penalty: may be removed if reasonable cause and good faith are shown.
• Your recourse against the preparer: a separate matter between you and the preparer.

What to do instead

Give your preparer complete records, answer their questions fully, and review the return before you sign it. Ask about any entry you do not understand. Keep copies of what you provided and any written advice you received, since those documents are the evidence for a reasonable cause request.

If a notice arrives that traces to a preparer error, respond by the deadline, pay or arrange to pay the tax to limit further interest, and request penalty relief with a written explanation and supporting documents. Review your engagement letter to understand what the preparer agreed to do.

How ebotCPA helps

We review the notice and the return, identify what went wrong, and prepare a reasonable cause request built on your records and the regulation's standards. We also explain your options for resolving the balance.

Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.

Primary sources

1. 26 U.S.C. §6664(c)(1). Reasonable cause exception for underpayments.

   “No penalty shall be imposed under section 6662 or 6663 with respect to any portion of an underpayment if it is shown that there was a reasonable cause for such portion and that the taxpayer acted in good faith with respect to such portion.”

   Provides penalty relief only; it does not reduce the underlying tax.

2. 26 U.S.C. §6662(a). Accuracy-related penalty.

   “If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.”

   Sets the 20% accuracy-related penalty.

3. Treas. Reg. §1.6664-4(b)(1), (c)(1). Reasonable cause and reliance on advice.

   “The advice must be based upon all pertinent facts and circumstances and the law as it relates to those facts and circumstances.”

   Makes reasonable cause a facts-and-circumstances test and sets minimum requirements for reliance on professional advice.

4. IRM 20.1.1.3.2 and 20.1.1.3.2.2.5. Reasonable cause; erroneous advice or reliance.

   “Reasonable cause is based on all the facts and circumstances in each situation and allows the IRS to provide relief from a penalty that would otherwise apply.”

   IRS guidance for evaluating reasonable cause, including claims based on reliance on others.

5. Neonatology Associates, P.A. v. Commissioner, 115 T.C. 43 (2000), aff'd, 299 F.3d 221 (3d Cir. 2002). Three-part reliance test.

   Frames reliance as requiring a competent adviser, full and accurate information from the taxpayer, and actual good-faith reliance.

Frequently asked questions