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Tax Digest Federal June 2012

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McGladrey Tax Digest

A monthly newsletter highlighting tax developments of interest to today's companies.

June 2012

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Federal State and Local

FEDERAL
Contingent fee research and development credit study may not be a defense against civil tax penalties

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With very limited exceptions, Treasury regulations prohibit tax practitioners from charging contingent fees for their work. Karen Hawkins, Director of the IRS Office of Professional Responsibility (OPR), recently commented that the OPR was aware of a "large unauthorized practice" ignoring this prohibition by charging contingent fees on research and development (R&D) tax credit studies, and that the OPR is "preparing to take on practitioners and firms offering contingent fee agreements." This could have implications for taxpayers that have paid practitioners contingent fees for R&D credit studies and who are later assessed accuracy-related penalties under section 6662 or fraud penalties under section 6663. While reliance on professional tax advice may provide a defense to the aforementioned civil tax penalties, such reliance must be objectively reasonable. Relevant case law holds that reliance on tax advice is not reasonable if the tax professional effectively has an economic interest in the underlying transaction. Since a contingent fee creates such an economic interest, a taxpayer's reliance on a professionally prepared R&D credit study subject to a contingent fee may not provide a defense against civil tax penalties. Tom Windram, partner, Washington National Tax Steve Pashley, manager, Washington National Tax High court rules overstatement of basis is not omission of income Though the IRS must generally challenge a tax return within three years from the date the return is filed, an extended six-year statute of limitations period applies to tax returns that omit substantial amounts (25 percent or more) of the taxpayer's gross income. In United States v. Home Concrete & Supply, LLC, et al., the taxpayer had fully reported the gross proceeds of a sale, but had used a questionable tax shelter to increase its tax basis. The Supreme Court rejected an IRS argument that the extended six-year statute applied whenever the taxpayer's gross income was understated by 25 percent and held that the word "omits" means that the statute applies only to understatements of gross proceeds or amounts realized, not to overstatements of basis that have the effect of understating gross income. Of potentially greater importance, the Court disregarded new regulations the IRS had issued to buttress its legal argument. The Court held that such regulations could not overrule its own prior interpretation of the statutory language involved in the case. For more details, see our extended article, Supreme Court rules against IRS on statute of limitations issue. Harvey Coustan, associate, Chicago, Ill.

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Tax Digest Federal June 2012

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