Corporation That Failed to Provide Accountant with Sufficient Information to Prepare Return Was Liable for Accuracy-Related Penalties

R was a Nebraska corporation that, through a subsidiary, operated a Ford dealership in Nebraska. In 1993 and 1994, R employed individuals and used computer systems to keep records. R provided some, but not all, of its records (i.e., Ford Motor Company Dealer Financial Statements) to an accountant hired to prepare consolidated corporate income tax returns for the years in issue. The IRS determined that R understated its income and is liable for accuracy-related penalties for 1993 and 1994.

Sec. 6662(a) imposes a penalty on an underpayment of tax reportable on a return if such underpayment is attributable to negligence. Sec. 6664(c)(1) provides that no penalty shall be imposed if it is shown that there was reasonable cause for the underpayment and that the taxpayer acted in good faith. The determination of whether a taxpayer acted with reasonable cause and in good faith depends on the facts and circumstances; see Regs. Sec. 1.6664-4(b)(1). Reliance on the advice of an accountant may demonstrate reasonable cause and good faith; see Regs. Sec. 1.6664-4(b)(1).

R contends that it complied with all recordkeeping obligations, provided the proper statements to the accountant, had other records available for review and relied in good faith on the advice of the accountant. R, however, did not provide its accountant with sufficient information from which he could prepare an accurate return. Under such circumstances, reliance on an accountant's advice is not in good faith and does not establish that the taxpayer acted with reasonable cause. Accordingly, R is liable for accuracy-related penalties for 1993 and 1994.

Reed-Merrill, Inc., TC Memo 2000-215