The IRS sends out millions of letters every year, typically looking for more money. Many taxpayers try to assert a reasonable-cause defense to avoid a penalty and interest from those letters.
In doing so, they have to prove their position was based on reasonable cause and that they acted in good faith. They must show that they exercised the same care that a reasonably prudent person would have under similar circumstances.
Here are key factors IRS looks at in weighing a reasonable-cause defense: The taxpayer’s effort to report the proper tax liability. The taxpayer’s experience, education, knowledge and sophistication with respect to federal tax laws. Plus reliance on the advice of a tax advisor who was provided all relevant information.
A man escapes a penalty because he relied on his lawyer in good faith. After the IRS assessed a substantial understatement penalty against the man, he claimed the penalty was erroneous because he reasonably relied in good faith on the advice of an experienced tax attorney. He gave his lawyer all the facts and documents. He had no tax or financial background, and he took extensive steps to try to ensure that he was receiving adequate tax advice.
Hussey, 156 TC No. 12