A real estate developer who argued that hiring a certified public accountant should have protected him from paying penalties for nearly $1 million in tax deficiencies lost his case.
In
The "sole argument" revolved around the idea that the real estate investor and his late wife had "relied on their certified public accountant," Nega wrote. "Petitioners presented no evidence that their CPA told them that the seven-year depreciation schedule was applicable to commercial buildings or that the mortgage interest deduction could be claimed twice."
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Nega found no evidence suggesting the tax professional advised them to use the seven-year schedule rather than the correct 39-year period or about any of the other deficiencies. The couple's return had incorporated a county assessor's valuation of a building they donated rather than a qualified appraisal for their calculation of a charitable contribution deduction, according to the ruling. They also reported their Social Security income inaccurately and "substantially understated their income tax" on their returns from 2015 to 2018, Nega noted.
"Failing to show that they received any advice about the correct tax treatment of any of the items noted in the deficiency, petitioners' last remaining contention is that they are entitled to the reasonable cause and good faith exception merely because their CPA prepared the returns," he wrote. "Taxpayers have a nondelegable duty to review the return for accuracy before filing. We are unpersuaded that Mr. Johnson — a sophisticated participant in real estate transactions — would have missed the duplicate interest deductions, the grossly overstated depreciation or the lack of a qualified appraisal if he had conducted even a cursory review of the returns."
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For financial advisors and tax professionals, the key takeaway for the case comes from the responsibility incumbent on clients when they submit their returns to the IRS, according to
"You're signing your return, you know what's in there. It isn't just that you could say that, 'Oh, the CPA did that, I had no knowledge,'" Remund said in an interview. "I try to stay conservative in that world. When you try to go edgy, it can come back to bite you."
The total understatement of $982,700 worth of deficiencies amounted to 100% of the Johnsons' required taxes in one year, 88% in the next and more than 10% in the two other years, which met the criteria for "accuracy-related penalties" and a finding that the couple were "negligent and in disregard of rules and regulations," Nega's ruling stated. The Johnsons "concede the correctness of these adjustments other than the accuracy-related penalties" of 20% of the deficiency, Nega wrote.
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Tax professionals shouldn't assume that this decision means they have no potential liability when their clients face penalties, wrote CPA Ed Zollars
"Readers should note that the tax preparer was not the subject of this case; the focus was solely on the taxpayer's potential liability for penalties," Zollars wrote. "While the court determined that the taxpayer had not appropriately relied on the advice of a tax professional in taking the positions deemed unreasonable, it made no comments on whether the CPA's conduct could be subject to civil liability for negligence toward the client, or whether such conduct could prompt action by either the IRS or the appropriate State Board of Accountancy."
