Woodard v. Commissioner, T.C. Summary Opinion 2009-150 (T.C. 2009).
Question for the Tax Court
Does Mr. Woodard's reliance on unknown internet resources constitute reasonable cause for purposes of avoiding the accuracy-related penalty under section 6662(a)?
Background
Mr. Woodard received $100,000 from his IRA and deposited that amount into his personal checking account in 2004. (3). In February 2005, Mr. Woodard wired funds to Amanda M. Mahn pursuant to demand notes and statutory mortgage documents . . . [naming] Ms. Mahn as debtor and Hunter Financial, LLC as lender. (3). Mr. Woodard established Hunter Financial, LLC (Hunter) almost six months later in September 2005. (4).
The IRS determined that Mr. Woodard failed to include in income the $100,000 in distributions from his IRA and issued a notice of deficiency as well as assessed an accuracy-related penalty pursuant to section 6662(a). (2).
Mr. Woodard concedes the distributions are taxable but challenges the section 6662(a) accuracy-related penalty. (5).
In a separate action the Minnesota Court of Appeals voided the mortgage that granted Hunter a property interest because Hunter was not registered until September 2005, therefore it could not have taken delivery [of the mortgage] in February 2005. (5).
Requirements Under Section 6662
Section 6662(a) and (b)(1) and (2) imposes a penalty equal to 20 percent of any underpayment of tax that is attributable to negligence or disregard of rules or regulations or to a substantial understatement of income tax. (6). The term “negligence” includes any failure to make a reasonable attempt to comply with the provisions of the internal revenue laws. (6). The term “disregard” includes any careless, reckless, or intentional disregard. (6). An understatement of income tax is “substantial” if it exceeds the greater of 10 percent of the tax required to be shown on the return or $5,000. (6).
Section 6664 provides a defense to the penalty if a taxpayer establishes that there was reasonable cause for the underpayment and that he acted in good faith. (7). The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case-by-case basis, taking into account all the pertinent facts and circumstances. (7).
Generally, the most important factor is the extent of the taxpayer’s effort to assess the proper tax liability, including reliance on the advice of a tax return preparer. (7). An honest misunderstanding of fact or law that is reasonable considering the taxpayer’s education, experience, and knowledge may indicate reasonable cause and good faith. (7).
Mr. Woodard's Argument
Mr. Woodard explained that he thought he had a self-directed IRA and that he intended to reinvest the $100,000 in private mortgages. He searched the Internet for information about self-directed IRAs, and he followed advice he found on line. He deposited the $100,000 into his personal checking account and wired the funds from that account to Ms. Mahn as mortgagor. (8).
The Court's Analysis
Good-faith reliance on advice from an independent, competent professional as to the tax treatment of an item may meet the reasonable cause requirement. (9). A taxpayer must act with ordinary business care and prudence to claim reasonable cause. (9).
Mr. Woodard claims that he relied on information found on unspecified Web sites written by unidentified individuals or organizations. (9). From the record, it is not clear that he questioned the provenance or accuracy of the information he found through the Google search engine. (10). Mr. Woodard has not provided the Court with any information about the sources of the information he found on the Internet. (9). Without knowing the sources of the information, it is impossible for the Court to determine that those sources were competent to provide tax advice. (10).
Accordingly, we cannot conclude that Mr. Woodard exercised ordinary business care and prudence in selecting and relying upon the information he found on line. (10).
Blog Comments
The court's recitation of the facts was poorly written. On the other hand their statement of the law and their analysis was well done.
This case is interesting because the court does not actually say Mr. Woodard could not meet his burden by using an internet source, rather Mr. Woodard did not provide the internet source he relied on therefore they could not continue their analysis. Had he done that, the court presumably would need to visit the internet source and determine if the advice on the website met the "independent, competent professional" requirement.
Given the proliferation of tax advice on the internet in the form of newspaper articles, magazine articles, finance website, blogs, etc., I believe this is an area of concern for taxpayers. My advice is to not use websites or blogs for tax advice, but if you do, this case should make clear that the taxpayer should document where the advice came from and inquire about the writer's competence to give advice.
Additionally, most websites and blogs (like mine) have disclaimers regarding the use of information to avoid penalties imposed by the IRS. I am not sure how this would effect the analysis for the taxpayer, but it probably would not be helpful to the taxpayer's argument.
Finally, the tax court footnotes on the last page of the opinion that credible information is on the internet; "such as, for example, the Internal Revenue Code and the income tax regulations." Good Luck With That!
Comments