Academic journal article Journal of Accountancy

When Giving Advice, Experience Is Key

Academic journal article Journal of Accountancy

When Giving Advice, Experience Is Key

Article excerpt

IRC section 6662 imposes a penalty on taxpayers who underpay their tax as a result of negligence. Before 1989 section 6653 imposed a similar penalty. Taxpayers can usually avoid negligence penalties by showing they relied on professional advice. A recent decision in a case that began nearly 20 years ago, however, illustrates an instance in which such reliance did not eliminate the section 6653 penalty. If a similar situation arose today, would a penalty be imposed under current law?

Addington, Cohn and Sann were attorneys employed by Sann and Howe, which also employed Guy Maxfield as senior tax partner on an "of counsel" basis. In 1981 Maxfield introduced the three attorneys to an investment partnership engaged in plastics recycling, which he had spent 50 to 75 hours investigating. Rather than independently investigating the partnership, the three attorneys invested solely on Maxfield's advice.

More than 200 tax cases have resulted from plastics recycling partnerships. The courts uniformly have concluded such transactions are shams and denied the claimed tax benefits. Consequently, the IRS denied the three taxpayers the 1981 and 1982 deductions they claimed and assessed negligence penalties. The Tax Court upheld the penalties. The taxpayers appealed the decision based on the argument that they relied on professional advice.

Result. For the IRS. It has long been established that taxpayers may rely on professional advice in preparing their tax returns without fear of a negligence penalty for failure to investigate the tax rules themselves. …

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