(Olsen, TC Summ. Op. 2011-131)
Facts and cirumstances:
Taxpayer received a K-1 from his mother-in-law’s estate. Taxpayer was unfamiliar with this tax form. The taxpayer entered the form K-1 data incorrectly into his tax software. About a year later the taxpayer received an IRS matching notice for underpayment of tax along with an assessment of a 20% penalty (for substantial underpayment of tax). Taxpayer appealed and court ruled that the mistake was isolated and that he acted in good faith. Court ruled in favor of taxpayer, removing the 20% penalty.
* Planning note – Although this taxpayer’s notice was accurate, many IRS notices are issued in error and assess late or underpayment penalties. Two lessons can be taken from todays blog: 1) Don’t just pay an IRS assessment of additional tax and penalties. Many IRS CP2000 tax notices stating additionally tax assessment can be cleared up by simply sending the IRS proper documentation displaying the IRS’s or third party’s error. 2) Should you have made an honest error request the IRS or state agency to abate (remove) penalties . 50% of the time this actually works!
– Eric J. Buechler, EA