A Limit on the IRS's Prerogative to Change its Mind: Reliance on a Prior No-Change Letter as a Defense to Penalties

By Megan L. Brackney
Journal of Passthrough Entities
May - June 2016 Edition

It is the IRS’s prerogative to change its mind. The IRS can conclude the audit of one tax year with no change and then make adjustments in a later tax year on the exact same tax positions present in the prior audit. But, can the IRS approve of a tax reporting position in one year and then turn around and assess penalties on the ground that the taxpayer was negligent for having taken that position in a later year? Two recent decisions consider when the result in a prior audit is a reasonable cause defense to penalties: Brinks Gilson & Lione and J.J. Powell, Inc. This column discusses both cases and then provides some tips for successfully defending against penalties based on a favorable result in a prior audit.