Tax Procedure: Sometimes Even Bad Advice Is Helpful

bad adviceBad tax advice can be expensive, but sometimes it’s better than no advice at all.

Last week, the Tax Court issued an opinion in a complicated international tax case that illustrates the principle that incorrect advice can still help a taxpayer, as it may support a defense to a penalty. Grecian Magnesite Mining, Indus. & Shipping Co. v. Comm’r, No. 19215-12, 2017 U.S. Tax Ct. LEXIS 36 (July 13, 2017).

In Grecian Magnesite, the taxpayer was a foreign corporation formed in the Hellenic Republic and based in Athens. 2017 U.S. Tax Ct. LEXIS 36 at *3. The taxpayer had an interest in Premier Chemicals, LLC (“Premier”), which was its sole connection to the United States.… Read More

A Peek Behind the Curtain: How Tax Return Information Is Disclosed in an Investigation Involving Non-Tax Crimes

behind-the-curtain-taxBy their nature, tax returns contain highly sensitive information. Consequently, the Internal Revenue Code makes return information, which is broadly defined, confidential. I.R.C. § 6103(a). This confidentiality provision comes with real teeth:

  • If an employee of the federal government inspects or discloses a return or return information, either “knowingly, or by reason of negligence,” in violation of section 6103, the taxpayer may sue the United States for damages. I.R.C. § 7431(a). If the taxpayer wins, she can recover statutory damages of $1,000 per violation, actual damages if greater, and, if the violation is either willful or the result of gross negligence, punitive damages.
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Partnership Taxation: The Tenth Circuit Holds that the Good Faith/Reasonable Cause Defense Should Be Determined at the Partner Level

partnership level auditTEFRA died in 2015, but the wake is still going on.

While the Bipartisan Budget Act of 2015 repealed TEFRA (or the Tax Equity and Fiscal Responsibility Act of 1982) for tax years ending after December 31, 2017, courts continue to grapple with cases governed by its partnership audit and assessment procedures. Tuesday, the Tenth Circuit issued an interesting opinion on when a good faith/reasonable cause defense to a penalty determination can be raised by an individual partner in a refund action. McNeill v. United States, No. 15-8095, 2016 U.S. App. LEXIS 16343 (10th Cir. Sept. 6, 2016).

TEFRA’s audit process works like this:

  • There is a partnership-level audit that results in a final partnership administrative adjustment.
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Tax Advice Might Mean Something: the Third Circuit Looks at Reasonable Cause.

The failure to file a timely return or make timely tax payments will trigger penalties under the Internal Revenue Code, but there is a defense: the penalty will not apply if the taxpayer can show “that such failure is due to reasonable cause and not due to willful neglect.” I.R.C. § 6651(a)(1), (2). The relevant regulations indicate that reasonable cause exists if the taxpayer exercises ordinary business care and prudence. Proc. & Admin. Regs. § 301.6651-1(c).
Common sense would then suggest that a taxpayer who does not file a return because his lawyer or his accountant told him that he didn’t need to would have a defense to the penalty for failure to file.… Read More

Don’t Count on Your Accountant: the Ninth Circuit Looks At Reasonable Cause.

In Knappe v. United States, 2013 U.S. App. LEXIS 6809 (9th Cir. Apr. 4, 2013), the Ninth Circuit posed a question: “When can you trust your accountant’s advice about when your taxes are due?”  Knappe, 2013 U.S. App. LEXIS 6809, slip op. at *2.

The answer: at least in the Ninth Circuit, you can’t.

Peter Knappe was the executor of a friend’s estate. Id. at *3. As he had never been an executor before, Mr. Knappe did what any sensible person would do, he hired an accountant. The accountant, Mr. Burns, correctly advised him that an estate return would be required and that the deadline was nine months the date of death.Read More