Tax penalties present taxpayers with unique issues to consider. Wilson v. Commissioner, T.C. Summary Opinion 2008-91, describes the situation where a tax attorney represents a taxpayer with a tax penalty that was imposed for a tax return prepared by the attorney’s firm. The issue that the case describes is the conflict of interest that the tax attorney has in representing taxpayers in this situation.
In Wilson, the taxpayers failed to report their Social Security income on their federal tax return. The taxpayers had their tax return prepared by Tax Help, Inc. The IRS sent the taxpayers a notice that it intended to increase the taxpayers’ tax liability to account for their Social Security income. The taxpayers submitted an amended tax return to reflect this income and the IRS assessed an accuracy related penalty. The taxpayers filed a petition to redetermine the tax, apparently, arguing that the penalty should be abated.
There are several defenses that taxpayers may assert to ward off accuracy related penalties. The most common defense is that there was no understatement of tax. If there was an understatement, another common defense is that the taxpayer acted in good faith in relying on a professional tax return preparer.
