Reasonable cause and good faith

If the preparer shows that an understatement was due to reasonable cause and the tax return preparer acted in good faith, no penalty shall be imposed (Code Sec. 6694(a)(3), as amended by the Small Business Tax Act of 2007 (P.L. 110-28)). This is a "facts and circumstances" determination made with reference to the nature of the error, the frequency and materiality of the errors, the preparer's normal office practice, and reliance on another preparer's advice (Reg. §1.6694-2(d))

Transitional Relief. Until further guidance issued, for all tax returns, amended tax returns, and claims for refund (other than 2007 employment and excise tax returns) filed on or after January 1, 2008 with respect to advice provided on or after that date, and for all 2007 employment or excise tax returns filed on or after February 1, 2008 with respect to advice provided on or after that date, the factor regarding reliance on advice found in Reg. §1.6694-2(d)(5) is replaced by a different rule. A tax return preparer will be found to have acted in good faith when he or she relied on the oral or written advice of a third party who is not in the same firm, and who the former had reason to believe was competent to render the advice. The burden of establishing that the advice was received is on the tax return preparer, and the penalty cannot be avoided if the advice is unreasonable on its face, if the tax return preparer knew or should have known that the third party advisor was not aware of all relevant facts, or if, because of developments in the law, the tax return preparer knew or should have known at the time the tax return or claim for refund was prepared that the advice was no longer reliable. (Notice 2008-13, I.R.B. 2008-3, December 31, 2007).

Example (1):

In preparing a 2008 tax return, George, an accountant, relies on the advice of an actuary not in George's accounting firm concerning the limit on deductibility of a contribution by an employer to a qualified pension trust. There is a later determination of an understatement of liability for tax because the actuary's advice is incorrect. George had no reason to believe that the advice was incorrect or incomplete at the time he prepared the return, or that the actuary did not know all the relevant facts, and the advice appeared reasonable. George was also not aware of any development in the law since the time the advice was given which would have rendered it unreliable. George is not subject to a penalty under Code Sec. 6694..