Recent developments in a Ninth Circuit civil tax case have determined a more concrete standard of demonstrating the willfulness requirement of tax preparer penalties. The panel determined that penalties can only be assessed for tax preparers who underreport a taxpayer’s liability if they had specific intent when taking this action, as opposed to reckless disregard or willful blindness.
The procedural history of the case should send just as strong of a message as the Ninth Circuit’s most recent reversal. Despite already having been reversed, the lower court continued to attempt to impose the IRS’ penalties without finding the specific intent necessary under the statutory language. If you are charged with willful preparer penalties, you may need to bring your case past the trial level to obtain justice.
For all questions regarding past, pending, or future civil tax penalty assessments, you can benefit from the counsel of the dual-licensed Tax Attorneys and CPAs at The Tax Law Offices of David W. Klasing. To hear more about our services and how we could help you, get in touch today by calling (800) 681-1295.
In a recent appeal, the Ninth Circuit Court of Appeals reversed a lower court’s decision allowing the IRS to impose civil penalties for understating a taxpayer’s liability on a tax return. The lower court had concluded that John Rodgers, a professional tax preparer, had acted willfully in violating 26 U.S.C. § 6694(b)(2)(A) and (b)(2)(B). However, the Ninth Circuit found issue with the lower court’s criteria for determining willfulness in the alleged civil tax charges.
This most recent decision was the second appeal for this case on the same issue of willfulness. Under the statutory language, the defendant must have acted “willfully” to understate the taxpayer’s liability to satisfy the definition of the violation. The first appeal came after the lower court found that Rodgers’ “reckless disregard” was sufficient to establish the willfulness element. On appeal, the Ninth Circuit panel rejected the lower court’s conclusion, stating that willfulness under § 6694(b)(2)(A) requires a “conscious act or omission made in the knowledge that a duty is therefore not being met.”
The case was remanded, where the lower court again found Rodgers liable, this time for his “willful blindness,” a separate legal doctrine used to impute willfulness. Willful blindness is the deliberate failure to reasonably investigate wrongdoing despite suspecting the high likelihood of its existence.
Rodgers again appealed the lower court’s reasoning for finding willfulness in his actions. On appeal, Rodgers argued that the statutory language in his case requires specific intent, which cannot be satisfied through a finding of willful blindness. The Ninth Circuit agreed and reversed the lower court again, but with a specific reminder to the lower court that specific intent can be established through circumstantial evidence.
There are situations where willfulness can be established using willful blindness. According to the Ninth Circuit and the precedent that it cited, however, willful blindness is not available for the return preparer penalty under the statutes that Rodgers was alleged to have violated.
Determining the burden for the willfulness element all depends on which statute you are using (and which court is evaluating it, apparently). We know from Ninth Circuit precedent that specific intent is required for the willfulness element in not only § 6694, but also § 7206, regarding fraud and false statements on tax filings. However, the Ninth Circuit has also concluded that willful blindness is enough to satisfy the willful element when it comes to FBAR civil penalties under 31 U.S.C. § 5321(a)(5)(C).
In theory, the Ninth Circuit’s decision makes it harder to charge tax preparers with willful civil tax code violations. However, the lower court’s disregard of the Ninth Circuit’s initial reversal shows that practically, the IRS has leeway to go after alleged violators without paying attention to the letter of the law, potentially securing decisions in their favor at trial and discouraging defendants from going through the appeals process in search of justice.
No matter what situation you may find yourself in, you can always benefit from the seasoned advice of the dual-certified tax attorneys and CPAs at The Tax Law Offices of David W. Klasing.
It is hard to predict whether tax code interpretation precedent will be altered in the future. Overruling precedent requires the satisfaction of a number of specific conditions. However, we can tell you whether it is possible, and in this case, it certainly is.
The Ninth Circuit used precedent from their own prior decisions to determine that the specific intent requirement from § 7206 should be used for tax preparer understatement penalties under § 6694. Specifically, they cited a case from 1993, Richey v. IRS, where they held simply that the term “willful” had the same meaning in both statutes. However, there seems to be little reasoning provided for this decision.
Since the decision to use the specific intent requirement for enforcing penalties under § 6694 seems to have been merely discretionary, there is certainly a possibility that the determining guidelines could be altered if a pertinent case went higher. In other words, this law is subject to change. The dual-licensed Tax Attorneys and CPAs at The Law Offices of David W. Klasing stay on top of all of these developments so that you are never caught off guard.
At The Tax Law Offices of David W. Klasing, our dual-licensed tax attorneys and CPAs are waiting for your call. To get the facts about your tax situation, call our offices today at (800) 681-1295. If you are a tax preparer accused of fraud or suspect you are under criminal tax investigation we can also help.
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