Can the Code Sec. 6700 Tax Shelter Promoter Penalty Apply to Everyday Tax Advice?

By Bryan C. Skarlatos and Megan L. Brackney

Journal of Tax Practice & Procedure, October - November 2016

Tax practitioners often give tax advice on things like how to structure an investment in a business venture, sell an asset, plan for retirement or pass wealth to the next generation. Sometimes a practitioner’s tax advice turns out to be wrong and the IRS assesses a tax deficiency against the taxpayer.

Typically, the question of whether the tax practitioner could be subject to a penalty for providing faulty advice would be governed by the standards under Code Sec.6694—i.e., whether the advice had a reasonable basis and was adequately disclosed, or was supported by substantial authority or, in the case of a tax shelter, it was reasonable to believe that the position was more likely than not to be sustained on its merits. However, another standard also could apply to the tax advisor’s advice. Under Code Sec. 6700, the IRS could attempt to impose a much larger tax shelter promoter penalty if the advisor “had reason to know” the advice was wrong. Most practitioners believe that the penalty under Code Sec. 6700 is designed for abusive tax shelters that are marketed by unscrupulous tax shelter promoters. While that appears to have been the purpose behind the enactment of Code Sec. 6700, the statute itself contains some technical yet broad language which, taken literally, possibly could apply to a wide variety of arrangements that involve tax benefits. There is nothing in the body of the statute that limits the penalty to tax practitioners or tax return preparers, defines the type of investment plan or arrangement that is covered or requires any specific marketing efforts. Thus, the IRS could attempt to argue that Code Sec. 6700 applies to ordinary tax advice if the practitioner giving the advice “knew or had reason” to know that the advice was wrong.

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