Wells Fargo v. US: A Potential Beginning of The End of The Objective Reasonable Basis Tax Penalty Defense

The Internal Revenue Code (“IRC”) § 6662(a) permits the IRS to impose a twenty-percent (20%) accuracy-related penalty to an underpayment of tax, and there are several different defenses to this penalty depending on the facts of the case and the reason for the penalty.

One of the most common accuracy-related penalties is the negligence penalty. Although there are multiple different reasons for the application of an accuracy-related penalty, only one penalty may be applied for each understatement. If a taxpayer faces the negligence penalty, one common defense is that the taxpayer’s return position has a reasonable basis under the relevant authorities.

Until recently, most courts simply proceeded through a discussion on whether the authorities supported the taxpayer’s return position, and did not even reach whether the taxpayer actually relied on relevant authorities when forming a return position. However, over the past few years, several courts have begun to require a subjective actual reliance component to the reasonable basis standard, in addition to the other requirements described under the regulations. This article explores these concepts more in detail in six parts.

 

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