As social media continues to grow with new platforms such as TikTok emerging onto the scene, many purported tax advisors are finding a market with large demand for free tax advice. Given the ease of distributing information through this platform and the need for tax advice from laypersons who may not have the financial means to obtain professional advice, more individuals are resorting to TikTok as an alternative authoritative source.
However, much of the free tax advice that is being distributed on these platforms must be taken with a grain of salt. While there are legitimate CPAs and other tax professionals out there who are providing meaningful and quality advice, there are also a fair share of scammers and other individuals who promote supposed “secret hacks” and other inaccurate tips that advise of larger tax benefits or a reduced tax liability.
When an individual takes a position on a return based on advice from TikTok and is subsequently audited resulting in an adjusted tax liability, there remains questions whether the taxpayer has a reasonable cause defense to the imposition of an accuracy-related penalty or other penalties where reasonable cause serves as a defense. Reasonable cause is determined based on pertinent facts and circumstances and varies from case to case. The primary focus in these cases appears to turn on whether the taxpayer made a genuine effort to assess the proper tax liability. Factors such as the taxpayer’s knowledge of tax law, business experience, education are weighed in determining whether a genuine effort was made.
Reliance on a tax advisor is one effective reasonable cause defense that displays a taxpayer’s genuine effort to assess the proper tax liability. To assert such a defense, the taxpayer must show the advisor was a competent tax professional who had sufficient expertise to justify reliance, necessary information was accurately provided to the advisor, and that the advice was reasonably relied upon in good faith. When it comes to advice received through a platform like TikTok, the challenge faced by the taxpayer when asserting this reasonable cause defense is that the “advisor” does not consider any of the taxpayer’s specific facts and circumstances. Instead, the same advice is being rendered to millions of users simultaneously and it is up to those individuals to determine how that advice fits into their unique circumstances.
Despite this, taxpayers who do not have the means to hire a tax professional should not be precluded from penalty relief just because they sought out free advice that appeared reasonable on its face, especially since most are unable to ascertain whether such advice is erroneous. Consequently, whether the taxpayer had access to a tax professional or not due to limited means or availability should be a factor considered alongside the taxpayer’s education, whether the taxpayer was previously subject to the tax, whether the taxpayer was penalized before, whether there was a recent change in in law that a taxpayer could not reasonably be expected to know, and the level of complexity of the issue (see: Internal Revenue Manual 20.1.1.3.2.2.6).
As a result, when a taxpayer chooses to rely on tax advice from TikTok, the taxpayer should be diligent to confirm that such advice hasn’t already been rejected. The required level of diligence may depend on the complexity of the issue. For example, a taxpayer relying on advice from TikTok that one can deduct a vacation that is primarily personal in nature will be unable to avoid penalties where a simple search on Google would provide otherwise. On the other hand, a TikTok video advising a taxpayer how to take advantage of the IRC §179 deduction is more reasonable to rely upon where the issue is more complex, related IRS guidance is minimal, and where available information is hard to comprehend.
Lastly, if the taxpayer intends to rely on advice through TikTok, the video relied upon should be preserved so that the IRS and Courts may determine whether that source of information was competent to provide tax advice. Without it, it becomes impossible to determine whether the taxpayer exercised ordinary business care and prudence in selecting and relying upon information found on TikTok.
