Reasonable cause is a common defense to civil tax penalties. Generally, taxpayers fall within the contours of reasonable cause if they can show that they exercised ordinary business care and prudence—for example, with respect to a filing obligation or regarding an item claimed on a tax return. Taxpayers who use tax professionals can sometimes also show reasonable cause—i.e., ordinary business care and prudence—to the extent the taxpayer reasonably relied on the substantive tax advice of their tax professional. This professional-reliance defense can negate penalties, even if the advice ultimately proves wrong.
But blind reliance on a tax professional to prepare a tax return is not sufficient to meet the reasonable cause standard. Rather, the United States Tax Court has held that taxpayers raising a professional-reliance defense must meet three requirements: (1) the professional was competent and had sufficient expertise to justify reliance; (2) the taxpayer provided the professional with accurate and necessary information to permit the professional to render tax advice; and (3) the taxpayer relied in good faith on the professional’s advice and judgment. Under these Neonatology factors, a taxpayer’s reasonable cause defense necessarily succeeds or fails based on whether the taxpayer can introduce evidence to satisfy each requirement.
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