Accuracy - Negligence of rules - Audit Techniques Guide | irstaxattorney.com



Accuracy-Related Penalties: Up Introduction Accuracy Related Penalty Negligence of Rules Substantial Understatement Valuation Misstatement Fraud Penalty Reasonnable Cause Annoucement 2002-2 Policy Statements Audit Techniques	Audit Techniques Guide Chapter 3: Negligence or Disregard of Rules or Regulations Negligence Negligence includes any failure to make a reasonable attempt to comply with the provisions of the tax law, exercise ordinary and reasonable care in tax return preparation, or keep adequate books and records. Negligence is strongly suggested if a taxpayer fails to make a reasonable attempt to ascertain the correctness of a reported item "which would seem to a reasonable and prudent person to be 'too good to be true' under the circumstances." Treas. Reg. § 1.6662–3(b)(1)(ii). For example, the facts may establish that a taxpayer reported losses from a transaction that lacked economic substance or reported losses or deductions from assets with bases traceable to lease stripping transactions that would have seemed, to a reasonable and prudent person, to be "too good to be true.” The accuracy-related penalty attributable to negligence may be applicable if the taxpayer failed to make a reasonable attempt to ascertain the correctness of the claimed losses or deductions by thoroughly investigating the bona fide economic or other relevant actual aspects of the transaction. Consultation with a tax advisor, regardless of the advisor’s independence, is not, standing alone, conclusive evidence of a thorough investigation by the taxpayer. All relevant facts, including the nature of the tax investment, the independence of the tax advisor, the competence of the tax advisor, the quality of the opinion, and the sophistication of the taxpayer must be considered. The penalty for negligence does not apply if the taxpayer’s position has a reasonable basis. If a return position is reasonably based on one or more of the authorities in Treas. Reg. § 1.6662-4(d)(3)(iii), the position will generally satisfy the reasonable basis standard even though it does not rise to the level of substantial authority. The penalty for negligence may, however, apply if the taxpayer fails to keep adequate books and records to substantiate the items properly. Disregard of Rules or Regulations Disregard of rules or regulations relates to the taxpayer’s failure to follow the appropriate law in completing the return, and reflects a disregard of the Code, temporary or final regulations, revenue rulings or notices (other than notices of proposed rule making). The term “disregard” includes careless, reckless, or intentional disregard. Treas. Reg. § 1.6662–3(b)(2). Except for a reportable transaction, as defined in the regulations under IRC § 6011, entered into on or after January 1, 2003, and reported on a return filed after December 31, 2003, there is no penalty for a position contrary to a revenue ruling or notice published in the IRB if the position has a realistic possibility of being sustained on its merits. Otherwise, a taxpayer may not avoid a penalty for disregard of a rule or regulation on the basis that the position had a realistic possibility of being sustained on its merits. Adequate Disclosure The penalty for negligence or disregard of rules or regulations does not apply if the taxpayer adequately discloses the position on Form 8275 or 8275-R (as appropriate). In the case of a transaction entered into on or after January 1, 2003, and reported on a return filed after December 31, 2003, taxpayers also must disclose reportable transactions on Form 8886, as required under the IRC § 6011 regulations. The penalty does not apply to a position that is contrary to a regulation if the taxpayer discloses the position and the position represents a good faith challenge to the regulation. A good faith challenge to the validity of a regulation generally requires a showing that the taxpayer conducted a careful analysis of reasonably available authorities relating to the issue, including statutory language, legislative history, the underlying Treasury decision, relevant case law (including case law pertaining to the presumption of validity to which regulations are entitled), and the persuasiveness of the rationale supporting the contrary position. The adequate disclosure exception does not apply if the position with respect to a rule or regulation does not have a reasonable basis or if the taxpayer fails to keep adequate books and records or fails to substantiate records properly.

Audit Techniques Guide

Chapter 3: Negligence or Disregard of Rules or Regulations