Tax Court In Brief | Mulu v. Comm’r | Accuracy-Related Penalty And No Reasonable-Cause Excuse – Tax Authorities

The Tax Court in Brief – January 23rd – January
27th, 2023

Freeman Law’s “The Tax Court in Brief” covers every
substantive Tax Court opinion, providing a weekly brief of its
decisions in clear, concise prose.

For a link to our podcast covering the Tax Court
in Brief, download here or check out other
episodes of The Freeman Law
Project.

Tax Litigation: The Week of January 23rd, 2022, through January
27th, 2023

• Lim v. Comm’r, T.C. Memo. 2023-11|
  January 23, 2023 | Lauber, J. | Dkt. No. 14015-20




• Freman v. Comm’r, T.C. Memo. 2023-10|
  January 23, 2023 |Jones, J. | Dkt. No. 8895-20




• Shilgevorkyan v. Comm’r, T.C. Memo.
  2023-12| January 23, 2023 | Ashford, J. | Dkt. No.
  9247-15




• Belton v. Comm’r, T.C. Memo. 2023-13|
  January 24, 2023 |Toro, J. | Dkt. No. 22438-19P




• Adams v. Comm’r, 160 T.C. No. 1|
  January 24, 2023 | Toro, J. | Dkt. No. 1527-21P




• Aragoni v. Comm’r, T.C. Summary
  Opinion 2023-3| January 25, 2023 | Panuthos, J. | Dkt. No.
  20914-21S




• Johnson v. Comm’r, 160 T.C. No. 2|
  January 25, 2023 |Nega, J. | Dkt. No. (Consolidated) 19973-18,
  19975-18, 19978-18, 20001-18

Mulu v. Comm’r, T.C. Summary Opinion 2023-2| January 25,
2023 | Leyden, J. | Dkt. No. 12975-21S

Summary: In this non-precedential opinion
(see section 7463(b)), the Tax Court addresses whether or
not to uphold an accuracy-related penalty assessed to taxpayer,
Ashenafi Getachew Mulu (Mulu). Mulu hired David
Clerie—self-coined, “Dave, Tax Doctor”—to
prepare Mulu’s federal income tax return as Clerie had done for
at least four years. Mr. Clerie did not have a preparer tax
identification number (PTIN), and the federal income tax return in
issue (2018) was electronically submitted as though it had been
self-prepared by Mulu. In 2017 Mulu purchased a house. Clerie
advised Mulu to renovate the house for the purpose of renting
certain floors. Mulu began renting out those floors during 2018.
Clerie visited Mulu’s workplace in February 2019 to gather
information to prepare the 2018 tax return. Mulu’s return
prepared by Clerie claimed deductions and reported expenses related
to the purchase of the house and costs incurred with respect to the
rental. Mulu claimed passive activity losses on Form 8582, Passive Activity Loss Limitations,
and deductions on Schedule E, Supplemental Income and Loss,
related to the purchase of the house. Mulu substantiated only a
portion of the repairs expense. Mulu claimed deductions for car and
truck expenses on
Schedule C, Profit or Loss From Business, and reported his
principal business or profession as a “driver.” Mulu
actually worked as a pharmacist, but the return listed Mulu’s
occupation as “Laborer.” Soon before April 15, 2019, Mulu
learned, from Clerie’s brother, that Clerie died on March 8,
2019. The brother told Mulu that the brother was handling
Clerie’s tax return preparation business. No qualifications
were given. Mulu did not review the tax return before it was
e-filed by the brother. The IRS examined the 2018 tax return. The
IRS later sent a Form 4549, Report of Income Tax Examination
Changes, and a Civil Penalty Lead Sheet and Civil Penalty
Approval Form was signed by a review agent supervisor, personally
approving of an accuracy-related penalty. Mulu petitioned the Tax
Court. After concessions, the sole issue related to the
accuracy-related penalty assessed by the IRS.

Key Issues: Whether for 2018 Mulu is liable for
a section 6662(a) accuracy-related penalty of $1,212.20?

Primary Holdings: Yes. The Civil Penalty Lead
Sheet and the Civil Penalty Approval Form signed by the IRS
examiner’s immediate supervisor met the section 6751(b) written
supervisory approval requirement. And, the record showed an
undisputed understatement of tax that meets the definition of a
substantial understatement of income tax under section 6662(d).
Mulu was not entitled to a reasonable cause excuse. He did not
exercise diligence and prudence or good faith because he did not
review the tax return before it was filed.

Key Points of Law:

Accuracy-Related Penalty. Section 6662(a) and
(b)(2) imposes an accuracy-related penalty equal to 20% of the
amount of any underpayment of tax required to be shown on a return
that is attributable to any substantial understatement of income
tax. An understatement is a “substantial understatement”
if it exceeds the greater of $5,000 or 10% of the tax required to
be shown on the return. I.R.C. § 6662(d)(1)(A).

Burden of Production. The IRS bears the burden
of production with respect to an individual taxpayer’s
liability for any penalty. I.R.C. § 7491(c); Higbee v.
Commissioner, 116 T.C. 438, 446–47 (2001). Once the IRS
meets his burden of production, the taxpayer must come forward with
persuasive evidence that the IRS’s determination is incorrect.
See Rule 142(a); Welch v. Helvering, 290 U.S.
111, 115 (1933). Substantial understatement penalties generally
must be approved in writing by the immediate supervisor of the IRS
employee who made the penalty determination. See I.R.C.
§ 6751(b).

Reasonable Cause and Good Faith. A taxpayer may
avoid a section 6662(a) penalty by showing that there was
reasonable cause for the underpayment and that the taxpayer acted
in good faith. I.R.C. § 6664(c)(1). This determination is made
on a case-by-case basis, taking into account all pertinent facts
and circumstances. Treas. Reg. § 1.6664-4(b)(1); see
Higbee, 116 T.C. 438. “Relevant factors include the
taxpayer’s efforts to assess his proper tax liability,
including the taxpayer’s reasonable and good faith reliance on
the advice of a professional such as an accountant.”
Higbee, 116 T.C. at 448–49. A taxpayer must exercise
diligence and prudence in filing his return. Stough v.
Commissioner, 144 T.C. 306, 323 (2015). Reasonable cause is
not met if a cursory review of a return might have revealed errors.
Walton v. Commissioner, T.C. Memo. 2021-40, at *12. A
taxpayer has a duty to read and review his return. Id. at
*12–13.

Insights: Mulu claimed he acted with reasonable
cause and in good faith because he lacks knowledge regarding tax
and finance and had always relied on a tax return preparer to
prepare his federal income tax returns. He claimed he did not
understand the depreciation and expenses and that he was victimized
by an unscrupulous return preparer who had been recommended to him
by family and friends. Such blind ignorance and unjustifiable
reliance was not “reasonable cause” to avoid
accuracy-related penalties.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.