We welcome back guest blogger Megan L. Brackney who is a partner in the New York City Office of Kostelanetz. We also welcome as her co-author first time guest blogger Melina Watson who is an intern at Kostelanetz and a student at Spelman College. After graduation in May, Melina will return to Kostelanetz as a paralegal and will be attending Columbia Law School in 2025. Megan would like to thank Prof. Tom Weninger, Jessica L. Jeane, Travis W. Thompson, Jonathan T. Amitrano, and the other members of the Individual and Family Income Tax Committee of the American Bar Association Tax Section who gave her the idea for this post during their excellent presentation, “Combatting Misinformation on Social Media” at the ABA Tax Section meeting in San Diego on February 10, 2023. Les
Given the popularity of TikTok, it is not surprising that there are numerous TikTok videos relating to tax. Some of these videos contain useful and accurate information for people seeking tax advice, some are obviously not trustworthy, and others fall in between and may seem dependable to a layperson, but not actually provide accurate advice.
At right, Taxes with AJ @vidaincometax accurately warns against shady tax preparers
As people rely more on social media sources, such as TikTok, for news and information, and the number of qualified, affordable, and available tax professionals continues to decrease, have we reached a point where reliance on tax advice from TikTok could be reasonable cause? When I have asked this question, the reaction of my fellow tax practitioners has been, “no way!” Instead, they say, taxpayers should obtain advice from tax professionals. This is great advice, in theory, but it is becoming more difficult for taxpayers of limited financial means to find affordable and qualified tax professionals who will provide any better advice than what they can get for free on TikTok.
TikTok is one of the many social media platforms that have attracted people seeking free financial advice. This tax season, the hashtag “#taxes” has received increased engagement on TikTok, and according to the platform’s analytics has over 500 million views and 44,000 posts. Posters on TikTok range from CPAs and other tax practitioners to scammers, and while there is quality advice available on TikTok, scams, hacks, and “secret techniques” are being posted, promising higher returns or fewer taxes owed, which may appeal to lower income taxpayers and those who cannot consult a credentialed paid tax preparer or expert. The IRS has even included social media tax advice on its “Dirty Dozen” list for 2023, as this Tax Notes (paywall) article from a few weeks ago discusses.
We can see from statistics from the National Taxpayer Advocate that obtaining quality tax return preparation services and advice is a huge problem for lower income taxpayers. Looking at the statistics related to taxpayers who claim the Earned Income Tax Credit (“EITC”) in 2021, paid return preparers prepared just 53% of those returns, but of those returns, non-credentialed return preparers prepared approximately 58%. see e.g., the NTA 2022 annual report to Congress, at pg. 129. And, in case you wonder whether it matters if a tax return preparer has credentials, i.e., whether a tax authority requires them to have some training and competence, we see that with respect to EITC’s, about 92% of the total amount of dollars in audit adjustments made on 2020 returns occurred on returns prepared by non-credentialed return preparers. see e.g. , the NTA 2022 annual report to Congress, at pg. 128.
And even if you can afford to pay a credential preparer, good luck finding one. There is a shortage of tax return preparers creating difficulties for people of all income levels from getting assistance. Between 2020 and 2022, the Wall Street Journal reports (paywall) that more than 300,000 U.S. accountants and auditors have left their jobs, amounting to a 17% decline. This “exodus” of qualified tax professionals is part of an ongoing and larger economic trend, coupled with fewer people pursuing degrees in accounting.
The Volunteer Income Tax Assistance (VITA) grant program, a service provided by the IRS, is experiencing shortages in volunteers, especially in rural and low-income communities in which those taxpayers have the greatest need. The number of tax filing assistance programs dropped considerably during the pandemic, and the rate of growth has slowed in recent years. The livelihood of low-income tax return preparation services like VITA is mainly dependent on the number of qualified volunteers to assist with these returns. As NewAmerica discusses, a lack of professionals and volunteers means that taxpayers of all incomes, especially low-income taxpayers, will have limited resources.
Where does this leave someone without the resources or ability to find and hire a credentialed and competent return preparer? It leads them to do their own research. IRS.gov is full of great resources and information, but it can be difficult to find the answer you are looking for, and, if you have limited time, education, or English language skills, it can be even more challenging. Many taxpayers will look for answers to question on the internet, and this may take them to TikTok.
And what do we find when we go there?
First, we actually see legitimate advice. This poster also provides basic, but also accurate and useful, information about standard deductions, tax brackets, and home mortgage deductions, and some slightly more sophisticated advice on topics like “tax loss harvesting,” i.e., selling some stocks at a loss to offset your gains before ethe end of the tax year. And, the same poster, Eric Powell, also posted a video countering the bad advice (see below) that you can hire your children from birth to get a tax write-off.
In How to pay less in taxes, understand how the tax code works and work… this poster talks about IRC § 1031 exchanges as if they are a secret, illicit strategy, but the advice is accurate This post contains a skit about paying a family member for providing childcare to get the credit for child and dependent care. In the skit, the grandmother is actually providing child care, and the son is actually paying her. The idea is to get a tax benefit and keep the money in their family, which is not a bad idea so long as they comply with the rules. See IRC § 21; and a summary here in IRS pub 503 on the topic.
But, we also see really bad advice. This clip was featured during the ABA Tax Section program, “Combatting Misinformation on Social Media.” In Clothing is not tax-deductible, but UNIFORMS are 🤓 #Taxtiptuesday the poster correctly states that clothing is usually not deductible, but then goes on to say that if you print your name on your clothing, it becomes a uniform, and it is then a valid deduction.
The responses to the tax posts could be an article in themselves, but my favorite response here is: “welcome to your audit.” In any event, what this poster neglects to mention is that uniform expenses are deductible under IRC § 162(a) if the uniforms are “(1) of a type specifically required as a condition of employment, (2) not adaptable to general use as ordinary clothing, and (3) not so worn.” Patitz v. Comm’r, T.C. Memo. 2022-99, at *8 (citing Yeomans v. Comm’r, 30 T.C. 757, 767 (1958)).
In This is how you can legally write-off your travel #taxwriteoff this TikTocker crosses the line on business travel. He explains that business travel expenses are deductible, which may be true depending on the circumstances, but then goes on to claim that as long as you do some work on vacation, you can deduct the cost of basically any travel. The video begins by stating: “You can take your kids to Disneyland and write that trip off if you do work while you’re at Disneyland!” The video does not mention, however, that this trip to Disneyland itself must be “reasonable and necessary in the conduct of the taxpayer’s business and directly attributable to it.” Treas. Reg. § 162-2(a). And moreover, if a taxpayer is engaging in both business and personal activities when they travel, for the travel costs to be deductible, the regulations provide that “traveling expenses to and from such destination are deductible only if the trip is related primarily to the taxpayer’s trade or business.” If the trip is “primarily personal in nature, the traveling expenses to and from the destination are not deductible even though the taxpayer engages in business activities while at such destination.”
Another TikTocker advises viewers to pay their children “from birth” up to $12,000 per year and deduct it as a business expenses. Obviously, if the children are not providing services to the business, they cannot be treated as employees.
There are also a lot of videos about the IRC § 179 bonus depreciation for vehicles that way over 6,000 pounds. This post is typical. In this video, the poster actually does mention that the deduction has to be proportional to the business use of the vehicle, although that is a quick note at the end.
Now that you have a sense of what is out there, we return the question – If a taxpayer relies on advice from TikTok that turns out not to be correct, and ends up with an adjustment of their tax liability, can the taxpayers rely on that advice as a reasonable cause defense to accuracy penalties?
The baseline for reasonable cause as a defense to accuracy penalties in IRC § 6662 (and fraud penalties in IRC § 6663) is in Treasury Regulation 1.6664-4(b)(1), which states that this facts and circumstances determination “made on a case-by-case basis.” [Note that there is a different articulation of reasonable cause for failure to file and failure to pay penalties. Also, fraud penalties raise other issues that are outside of the scope of this post]. The key factor is “is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” The Regulation goes on to say that circumstances that indicate a good faith effort to assess the proper liability include: “the experience, knowledge, and education of the taxpayer.” Id.
One of the most effective reasonable cause defenses to accuracy penalties is reliance on a tax professional. The regulations state that the minimum requirements for this defense are that the taxpayer provided all of the pertinent facts to the advisor, the advice is not based on unreasonable factual or legal assumption, and the taxpayer relies in good faith on the advice. Treas. Reg. § 1.6664-4(c)(1). The advice does not have to be in any particular form and can be “any communication. . . provided to (or for the benefit of) the taxpayer and on which the taxpayer relies, directly or indirectly.” Treas. Reg. § 1.6664-4(c)(2).
Courts have articulated similar tests for reasonable cause, most notably in Neonatology Assocs., P.A. v. Comm’r, 115 T.C. 43, 98-99 (2000), aff’d, 299 F.3d 221 (3d Cir. 2002), in which the Tax Court and Court of Appeals explained that good faith reliance on an independent, competent professional as to the tax treatment of an item may constitute reasonable cause. Reasonable cause and good faith are present where: (1) the taxpayer reasonably believes that the professional upon whom the reliance is placed is a competent tax adviser who has sufficient expertise to justify reliance; (2) the taxpayer provides necessary and accurate information to the adviser; and (3) the taxpayer actually relies in good faith on the adviser’s judgment. See Internal Revenue Manual 184.108.40.206.3.4.3. Neonatology, 115 T.C. at 99. Similarly, in United States v. Boyle, 469 U.S. 241 (1985), a case that concerned reliance on a tax advisor to meet a filing deadline, the Supreme Court explained that reliance on a tax advisor establishes reasonable cause where the issue was substantive, and the taxpayer provided all of the information to a competent tax advisor. As stated in Boyle:
When an accountant or attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a “second opinion,” or to try to monitor counsel on the provisions of the Code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place.Id. at 251.
The obvious problem with trying to fit the TikTok advice into reasonable cause based on reliance on professionals is that the communication is one-directional – the taxpayer receives general advice but has not provided the factual information about their situation to the tax advisor.
Given the lack of access to tax professionals and the complexity of some Code provisions that impact low income taxpayers, the Neonatology/Boyle iterations of reasonable cause are insufficient for current times. Instead, the IRS should adopt a more expansive view of reasonable cause that includes information from advisors on social media, along with taxpayer’s own study of the issue. What the IRS and courts should not do is determine that a taxpayer does not have reasonable cause merely because they did not consult a tax professional. In that regard, the case of Reiff v. Comm’r, T.C. Summ.Op. 2013-40, at *6, is troubling. There, the Tax Court sustained accuracy penalties, noting that although the taxpayer conducted online research regarding deductions on his self-prepared return, he “did not consult or otherwise seek the advice of a tax professional in preparing their return.” There is simply no requirement in the Treasury Regulations that a taxpayer consult a tax professional. Of course, in some circumstances, it might be appropriate in the reasonable cause analysis to require a high net worth taxpayer who can afford competent tax advisors to seek professional tax advice, but this requirement should not be imposed without analysis of the taxpayer’s ability to hire a tax professional.
Taxpayers with limited resources should not be shut out of penalty relief because they were not able to hire a tax professional and instead looked to advice that seemed reasonable to them, recalling the Supreme Court’s statement in Boyle that most taxpayers are not competent to discern errors in tax advice. As one of the facts and circumstances, the IRS should consider the taxpayer’s access to a tax professional, and, whether the taxpayer was not able to hire a tax professional, either because of lack of resources or lack of availability.
There is a basis for this approach already recognized by the IRS and the courts. In Internal Revenue Manual (“IRM”) 220.127.116.11.2.2.6, the IRS states that reasonable cause can include ignorance of the law, and looks to the taxpayer’s education, whether the taxpayer has previously been subject to the tax, if the taxpayer has been penalized before, if there were recent changes in the tax forms or law that a taxpayer could not reasonably be expected to know, and the level of complexity of the issue.
In Pemberton v. Comm’r, T.C. Summ. Op. 2017-91, at *7–8, where the taxpayer deducted undergraduate education expenses. This was incorrect, but the Court found that the taxpayer had consulted an IRS publication and believed that his education expenses were deductible under its guidance. The Tax Court noted that “[a]lthough petitioner had some undergraduate education at the time he prepared his . .. Form 1040, he is not a tax professional. The determination of whether education expenses are deductible as ordinary and necessary business expenses under section 162 is a fact-intensive analysis and requires a reference to and analysis of caselaw as more fully discussed in this opinion.”
In contrast, in Remy v. Comm’r, T.C. Memo. 1997-72, at *8, the Tax Court found that “it is evident that he attempted to research the tax law to find authority for his position,” but because there was such a weight of authority against the position (that he could reduce his taxable income by deducted the value of uncompensated services to clients), the Tax Court found that that there was no reasonable case. The lesson from this case is that the taxpayer should double-check the advice on TikTok to confirm it has not been previously rejected by the IRS or the courts.
A taxpayer who is relying on TikTok or other social media, or internet searches for tax information should maintain these sources. In Woodard v. Comm’r, T.C. Summ.Op. 2009-150, at *3-4, the Tax Court seems open to the idea that internet research could provide reasonable cause, but the taxpayer was not able to provide any information about the sources he relied on. “From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. Accordingly, we cannot conclude that [the taxpayer] exercised ordinary business care and prudence in selecting and relying upon the information he found on line.”
TikTok videos remain online indefinitely (unless the poster or the site removes them), but there is no guarantee that a particular video will be there in two or three years when the return is being audited. This is true for other internet sources as well. In order to successfully raise a “TikTok Defense,” the taxpayer will need to preserve the video along with other tax records.
Applying these standards to our examples here, a taxpayer who attempts to deduct a personal vacation is unlikely to avoid penalties by relying on the TikTok post above. The poster is not a CPA or other tax professional, and the comments from other users should raise skepticism. Also, this is not a new, obscure, or complex question, and other basic internet research, including IRS.gov., provides accurate information in a user-friendly format. See e.g., IRS discussions here and here.
In contrast, the TikToks on the IRC § 179 deduction may provide a reasonable cause defense. There are hundreds if not thousands of people claiming to use it or endorse it, many of whom appear to be tax professionals. If taxpayers try to do their own internet research, the IRS’s guidance does not even appear on the first page of an internet search for “Section 179 heavy vehicle deduction.” When you find it, the IRS guidance contains terms like “depreciation,” and “MACR’s” that may not be familiar to the average taxpayer, see e.g., IRS Pub 946 and instructions for Form 4562. It is not surprising that instead of trying to find information about IRC § 179 from the IRS, that a taxpayer would return to quick and easy explanations on TikTok.
Before closing out this post, I’d like to recognize a couple of TikTockers trying to bring some order to the chaos. Nick Krop, “Nick the CPA,” very quickly knocks down the five worst tax ideas on TikTok including the purported IRC § 179 deduction for heavy vehicles. He has many other videos cutting through the nonsense of other posters that are worth checking out.
Also, Alisha Rodriguez, a CPA at AJ’s Tax, provides a spot-on explanation of how to identify unscrupulous return preparers and why you should avoid them and hire credentialed tax professionals. And she even provides a version of this video in Spanish!
These posters show that just because information is on TikTok, rather than published by the IRS or in a more formal, academic or professional journal, does not mean that it is not reliable and cannot form the basis of a reasonable cause defense.