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NewsNotes Lesli S. Laffie, J.D., LL.M. Overpayment SOL
Accuracy-Related Penalty
Defenses E-Mail
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Court Decisions In Bruce L. Brosi, 120 TC No. 2 (2003), the Tax Court held that a taxpayer did not qualify for suspension of the refund statute of limitations (SOL) on account of financial disability, when his claim for a suspension was based on caring for his disabled mother. In February 2001, the IRS issued a deficiency notice to the taxpayer for failure to file his 1996 return. In May 22, 2001, he petitioned the Tax Court, seeking a redetermination for 1996, and filed Form 1040 in July 2002 with the IRS Appeals Office. The return showed that his income tax withholding exceeded his tax liability by $8,260. The IRS argued that the Tax Court had to dismiss the case; it lacked jurisdiction because the SOL had expired. The taxpayer claimed that Sec. 6511(h) suspended the SOL. The Tax Court noted that Sec. 6512 grants it limited jurisdiction to determine and award overpayments to taxpayers; any such refund is restricted under Sec. 6512(b)(3) according to when the overpayment was made. In this case, the taxpayer was deemed under Sec. 6513(b)(1) to have paid his taxes withheld during 1996 on April 15, 1997. The deficiency notice was mailed before he filed his 1996 return. Based on these undisputed facts, the court concluded that the taxpayer was not entitled to a refund under Sec. 6511(b), unless the running of the SOL was suspended. Sec. 6511(h)(2) suspends the SOL for any period of an individuals life during which he is financially disabled (i.e., unable to manage his financial affairs because of a medically determinable mental or physical impairment that can be expected to result in death, or has lasted (or can be expected to last) for a continuous period of not less than 12 months). The taxpayer argued that his failure to file was a result of his caring for his mother while being employed as an airline pilot. He said that he was his mothers primary healthcare provider for four years, starting in 1996, and had traveled weekly from Pennsylvania to his parents home in Illinois to care for his mother for four days and to work full time the rest of the week. While the Tax Court sympathized with the taxpayer, it stated that those types of problems are not covered by Sec. 6511(h) and dismissed the case. (For more information on Sec. 6511(h), see Grooms, Tax Practice Management, SOL on Tax Refunds, this issue.)
From the IRS Accuracy-Related Penalty Defenses Proposed regulations (REG-126016-01) would limit the defenses available when an accuracy-related penalty is imposed on (1) the failure to disclose reportable transactions or (2) a return position based on an invalid regulation. Under Sec. 6662, a 20% accuracy-related penalty applies to underpayments attributable to negligence or disregard of rules or regulations and to substantial understatements of income tax. Sec. 6664(c) allows taxpayers to avoid the penalty if they can establish, among other things, that they had reasonable cause for underpaying and had acted in good faith. Temp. Regs. Sec. 1.6011-4T requires taxpayers to disclose reportable transactions on their returns. The IRS believes that taxpayers have improperly relied on opinions or advice issued by tax advisers to establish reasonable cause and good faith as a basis for avoiding the accuracy-related penalty, even when the opinion or advice relates to a reportable transaction that the taxpayer should have disclosed (but did not) under Temp. Regs. Sec. 1.6011-4T. It further believes that taxpayers have improperly relied on opinions or advice that a regulation is invalid without disclosing this position on their returns. Under the proposed rules, the adequate-disclosure exception to the accuracy-related penalty for underpayments of tax attributable to negligence or disregard of rules or regulations would not apply to underpayments relating to a reportable transaction unless the transaction is disclosed under Temp. Regs. Sec. 1.6011-4T. Further, according to Prop. Regs. Sec. 1.6662-3(a), if a position relates to a reportable transaction and is contrary to a revenue ruling or notice (other than a notice of proposed rulemaking), a taxpayer could not rely on the fact that the position had a realistic possibility of being sustained on the merits as a defense to the penalty. Instead, he or she would have to satisfy the Regs. Sec. 1.6662-3(c)(1) adequate-disclosure exception, including the disclosure of the reportable transaction under Temp. Regs. Sec. 1.6011-4T. Prop. Regs. Sec. 1.6664-4(c) would clarify and modify the standards for (and limits on) the use of opinions and advice to satisfy the reasonable-cause and good-faith exception under Sec. 6664(c) as a defense to the penalty (e.g., by making it clear that a taxpayers education, sophistication and business experience would be relevant in determining whether his or her reliance on the opinion or advice was reasonable and made in good faith). Prop. Regs. Sec. 1.6664-4(c) states that a taxpayer cannot rely on an opinion or advice to satisfy the reasonable-cause and good-faith exception if he or she has not disclosed a (1) reportable transaction or (2) position based on a regulation being invalid. The regulations would apply to returns filed after Dec. 30, 2002 for transactions entered into after 2002. The IRS says it will rigorously apply the existing Regs. Sec. 1.6664-4(c) facts-and-circumstances standard regarding a taxpayers reasonable reliance in good faith on advice from a tax professional. Regardless of when a taxpayer entered into a transaction, the IRS may consider his or her failure to disclose a reportable transaction or a position that a regulation is invalid as a factor in determining whether the taxpayer has met the reasonable-cause and good-faith exception.
A new, expanded IRS e-subscription service is now available. According to IR-2003-9, subscribers will receive timely, specialized information sent via e-mail on topics such as state practitioner meetings, news releases, filing season tax tips and other programs. To subscribe to any of the services, visit The Newsroom section at www.irs.gov, look under the contents listing and click on e-News Subscriptions. Among the new features:
Office of Professional Responsibility According to IR 2003-3, the IRS recently created a new Office of Professional Responsibility (OPR) as part of its ongoing modernization effort; Brien Downing is the director. The OPR is in charge of enhancing the oversight of tax professionals. It replaces the office of the Director of Practice and will be responsible for licensing enrolled agents. In addition, it will investigate allegations of misconduct and negligence against agents, attorneys, accountants and other professionals representing taxpayers before the IRS. The OPR will have more than twice the staff of its predecessor, and use these additional resources to thoroughly concentrate on enforcing the practice standards for those who represent taxpayers before the IRS. . |
