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Does a Long-Term Relationship Indicate a Taxpayer's Reliance on a Tax Preparer was Reasonable?

By Aaron P. Borden on April 18, 2016

            Yes, in Vandenbosch v. Commissioner, the Tax Court listed the taxpayers’ long-term relationship with their tax preparer as one of the facts supporting its decision that the taxpayer acted with reasonable cause. 

        The taxpayers had taken a $125,000 distribution from their SEP-IRA to loan to a friend who was involved in a company formed to develop a liquefied natural gas plant in Columbia. On their federal income tax return, the taxpayer took the position that the $125,000 distribution was a nontaxable rollover. The taxpayers attached a letter to the return written by their tax preparer which stated that the tax preparer believed that distribution was a rollover from the taxpayers’ SEP-IRA to either the friend’s account or to the company with which the friend was involved.

        The IRS examined the return and concluded that the taxpayers owed an additional $52,682 in tax and a $10,536 section 6662(a) accuracy–related penalty, and the taxpayers sought a redetermination of the deficiency and penalty in Tax Court. The Tax Court upheld the additional tax, but held that the taxpayers were not liable for the accuracy-related penalty because, based on the facts and circumstances, the taxpayers acted with reasonable cause and good faith in their reliance on the tax preparer.

        The Tax Court discussed three facts that indicated the taxpayers’ reliance established reasonable cause. First, the taxpayers had been using the accounting firm for over 20 years. Second, the taxpayers explained what happened to the tax preparer and provided him with the underlying documents. Third, the taxpayers included with their return a letter from the tax preparer stating that he believed the distribution to be a rollover.

        The IRS almost always imposes the accuracy-related penalty when an audit results in a deficiency that exceeds 10% of the tax required to be shown on the return or $5,000. However, in Vandenbosch v. Commissioner, the Tax Court has again held that a taxpayer is not liable for the accuracy-related penalty when the taxpayer reliance on a tax preparer establishes reasonable cause. Furthermore, the taxpayer’s long relationship with the return preparer is a fact that indicates the taxpayer acted with reasonable cause and good faith when they relied on the tax preparer.