Be Careful in Your Choice of Tax Advisors /Returns

On September 12th, the Treasury Inspector General for Tax Administration (TIGTA) released its annual report on IRScompliance trends. Individual income tax return examinations conducted by the US Internal Revenue Service decreased in 2013 for the third year in a row, falling to USD1.4 million or one for every 104 tax returns. Just over 80 per cent were done by correspondence, with only one of every 541 returns being examined in a face-to-face interview. This is to be expected given the ongoing staff and budget cuts but that’s not an opportunity to take them for granted.

The IRS are still pretty good at their jobs.

Every week, I hear from tax payers who often do not like what I have to say. Some are considering products or structures that appears too good to be true. My view remains the same – if something appears too good to be true, it typically is. Be very careful. Not that I am rushing to judgment but Gary Stern is the latest professional to become ensnared in the coils of the criminal justice system. The once prominent lawyer who represented NFL players, doctors, lawyers, and other professionals has been charged with tax fraud. Federal prosecutors allege that Stern organized, operated, and promoted elaborate and bogus tax schemes, primarily to help his wealthy clients evade federal income taxes. As if things couldn’t get any worse for Stern, he is still facing civil litigation involving famous football players, like former Bears quarterback Kyle Orton, Ray Lewis, and Terrell Owens for fraudulent tax schemes that engulfed these players as well.

Aside from structures or products that appear too good to be true, there are those clients that either ignore professional advice or believe that they are able to do their own (particularly complex) tax work. In Wole Odujinrin v. IRS Commissioner the petitioner, a hematology oncologist who represented himself, did not have adequate substantiation to support his petition and was not entitled to claim a net operating loss. He was also liable for an accuracy-related penalty under IRC 6662. It appears that this petitioner showed up with little documentation in support of his claimed deductions and had inadequate evidence to show that he correctly assessed his 2009 tax liability. He testified that he relied on the advice of a tax practitioner but that person was not present to testify at trial nor provide an affidavit.

It is really unfortunate to say but the unregulated nature of the US tax practitioner community means that there are some scary characters out there. Anyone can claim to be a US tax professional. This profound lack of regulation brings with it an unbelievable amount of fallout.

All I can say is “caveat emptor” – or let the buyer beware. When your tax situation becomes too complex as is the case of many expat Americans, be sure to engage the services of someone both licensed and experienced with expat tax law. If you are given improper advice, you can establish a defense based off reliance on professional advice which is an excellent defense to use but available only when you rely on the advice of a competent tax professional under Sec. 1.6664-4(c)(1).

Basically any petitioner engaging this defense needs to establish that:
1. The tax practitioner relied upon was a competent tax professional;
2. The taxpayer made full disclosure to the tax practitioner of all relevant facts; AND
3. The tax advice received from the tax practitioner was reasonably reliable

Be careful out there guys…