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Hand-Wringing Over ’Authority’

Posted on Apr. 7, 2020

Kip Dellinger is a CPA in Santa Monica, California. He is a former chair of the Tax Practice Responsibilities Committee of the American Institute of CPAs Tax Division, and he writes and teaches in the areas of tax practice, quality control, and ethics.

In this article, Dellinger considers tax professionals’ concerns over potential penalty exposure from following nonauthoritative IRS guidance arising from the coronavirus crisis.

Along with all the hand-washing, the tax profession appears to have a hand-wringing obsession over potential preparer and taxpayer penalty exposure for tax positions that lack authority — at least a minor one. The concern arises from the IRS’s issuing interpretations of tax law in the form of frequently asked questions that do not constitute “authority” for a tax position, for purposes of the taxpayer accuracy-related penalty imposed by section 6662 and the tax return preparer penalty under section 6694 (what does constitute authority is set forth in reg. section 1.6662-4). In fact, the IRS affirmatively indicated in some FAQ releases that the information does not constitute authority. In some cases, the IRS indicated — although not especially helpfully — that it’s considering publishing the information in a manner that does constitute authority.

Generally, to avoid taxpayer and preparer penalties, a tax position not disclosed in an income tax return must be based on “substantial” authority (based on an analysis of those authorities). Absent substantial authority, a tax position can be taken when there is a reasonable basis (again based on the authorities) and the position is disclosed in the return (either on forms 8275 or 8275-R or in accordance with Rev. Proc. 2018-11). Reasonable basis for purposes of disclosure is a relatively low confidence threshold — most commentaries on the topic place that level at about a 25 percent chance of prevailing on the merits of the tax position in an administrative or judicial proceeding. So let’s think about this for a moment.

Surely, considering the unprecedented health and financial crises we are experiencing, it is unfathomable that the IRS will later assess taxpayer or preparer penalties when the taxpayer or the preparer — at the time of filing — relied on IRS published guidance of any type, formally authoritative or not. This is certainly the case when disclosure is made with a return.

IRS Leadership

Those of us who have represented and advised taxpayers and tax professionals in accuracy-related, return preparer penalty, and Circular 230 inquiry matters are aware that IRS Exam and Appeals personnel have a great deal of discretion in making determinations to assess penalties or to pursue sanctions against a tax professional. And the regulations governing penalty assessment do allow for a reasonable-cause defense for taxpayers who rely on their tax advisers and do contain mitigating factors when determining whether to assess a tax adviser penalty.

For Circular 230 disciplinary purposes, section 10.34, “Standards With Respect to Tax Returns and Documents, Affidavits and Other Papers,” applies for disciplinary purposes only when the governed tax professional’s conduct is willful, reckless, or grossly incompetent – a relatively high threshold for the IRS Office of Professional Responsibility to meet in its administration of the circular.

As we know, how any organization carries out its daily functions is heavily influenced by its leadership — that is, the tone at the top — in this case, Commissioner Charles Rettig, Chief Counsel Michael Desmond, and, Sharyn Fisk, the Director of OPR. Each has extensive experience as a tax professional in private practice — not only providing advice to taxpayers and return preparers but also giving countless presentations on ethical and conduct issues for audiences of tax professionals for many years before beginning their current government service. I had the privilege of joining each of these leaders for presentations on multiple occasions. I believe a fair reading of their advice on many panels has been that the practitioner’s effort to do the right thing for both the taxpayer and the government is equally, if not more, important than trying to split hairs on strict adherence to the regulations and similar ethical conduct guidance.

There is no reason to believe that their views have changed. Consequently, there is every reason to believe that when a tax professional makes a reasonable effort to comply with the tax law and does not engage in an obvious effort to game the system regarding coronavirus tax issues, he or she should be given wide latitude when considering any penalty assertion. That includes that the tax professional relied on nonauthoritative published IRS guidance.

And if that tone at the top prevails, then I hope it will filter through the Service without tax professionals needing to defend themselves in administrative proceedings for actions based on the best guidance available during an unprecedented situation.

Perhaps the best advice to give a practitioner in a frightening and chaotic world comes from a quote commonly attributed to President Theodore Roosevelt: “Do what you can, where you are, with what you have.”

What About FAQs or Nonauthoritative Guidance That Changes?

Nonauthoritative guidance can change at any time and render advice incorrect, incomplete, or inconsistent — confronting the return preparer with having given incorrect nonauthoritative guidance and opening up exposure to taxpayer complaints (or more) and penalty assertions. Assuming the tax professional is entitled to wide latitude for relying on the best (though nonauthoritative) advice available from the IRS, this should not be a problem regarding the penalty assertion issue; taxpayers should be granted reasonable-cause exceptions to their penalty exposure.

As for the duty of a tax professional to inform a client of changes in the law or guidance, that duty has long existed under professional guidance and Circular 230. There is nothing new here; there is always a duty to inform an existing client of the discovery of an error in a return regarding such a filing requirement.

In conclusion, the least of our many concerns in today’s uncertain world should be whether penalties might be proposed for following nonauthoritative guidance from the IRS when assisting in our clients’ efforts to comply with tax law arising from the direct and indirect effects of the coronavirus.

 

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