Want to save yourself from thousands of dollars in penalties? It’s important to carefully review your tax returns, even if you pay someone to prepare them for you. In a recent ruling the IRS upheld a substantial penalty despite their claim that they relied on the practitioner for tax advice. Careful review and understanding of each and every assertion on your tax return is crucial before signing and sending to the IRS.
Stough vs IRS is a complicated case, but the basic premise is that the taxpayer considered a payment for property improvement as a deductible expense. However, the court ruled that this payment was actually rent because it had the substance of rent. For example, the tenant was making this payment to reduce future rents, and the lease provision allowing this payment was in a section of the lease entitled ‘rent’. After the finding, Stough requested the penalty be waived because they relied exclusively on their practitioner’s advice.
The court has a special set of criteria that must be met in order to substantiate that claim.
“The adviser is competent with sufficient expertise;
The taxpayer provided appropriate information to the adviser; and
The taxpayer “actually relied in good faith on the adviser’s judgment.”
In this case the third criteria was not met as the tax payer admitted that they didn’t review the return or Schedule E (the schedule where supplemental income is reported) prior to signing it. In addition the preparer didn’t discuss the return with them. According to the court unconditional reliance isn’t a defense especially when the taxpayer should have known about these tax provisions.
You must remember you are always responsible for the contents of your tax return. Always take a few minutes to examine the return before filing and don’t be afraid to ask questions. Keep this in your mind and you’ll keep your butt out of court.