Just because you use a tax pro to handle tax matters doesn’t absolve you from tax liability. In fact, you could still be hit with a penalty when you use a professional to prepare your federal tax return, unless you meet certain requirements.
New case: A taxpayer in Idaho hired a CPA to prepare the books for his real estate business and to complete his personal tax returns. The CPA had a master’s degree in accounting and had also worked extensively in real estate. But the taxpayer became concerned when his personal returns were audited by the IRS.
It turned out that the CPA failed to report income on the company’s books. In addition, the taxpayer provided the Boise police with a list of criminal allegations against the CPA, including theft, fraud and misappropriation of funds. The alleged loss totaled more than $1.2 million.
To avoid accuracy-related penalties on your return, you must show that:
- The tax advisor was a competent professional who had sufficient expertise to justify your reliance on him or her.
- You provided necessary and accurate information to the advisor.
- You relied on the advisor’s judgment in good faith.
The Tax Court found that the taxpayer met this three-pronged test. Based on their dealings, it was reasonable for the taxpayer to consider the CPA to be a competent professional. (Thomas, TC Memo 2013-60)