Relying on Very Bad Tax Advice Is No Excuse

The federal accuracy-related substantial payment that relates to a substantial underpayment of tax may be waived on a showing that the taxpayer acted in good faith. This can sometimes, but not always, be demonstrated by relying on the advice of a CPA or other professional. In one case, a business owner didn’t report as income a $24 million wire transfer from a business associate, so the IRS assessed the underpayment penalty (there was no dispute that he owed taxes on this amount). He argued he acted in good faith because his lawyer called the transfer a “gift.” The Tax Court sided with the IRS, characterizing his lawyer’s advice as “remarkably bad.” Interestingly, he never told his CPA about the wire transfer. If he had, likely he would have learned that, according to the U.S. Supreme Court in the famous Duberstein case, transfers in a business context usually lack the “detached and disinterested generosity” necessary for gift treatment. #IdeaoftheDay