Taxpayers are eligible for relief when they rely on actual advice from a tax advisor, i.e. professional judgment or analysis of a tax advisor, as opposed to “tax preparation” or clerical tasks associated with a tax advisor’s duties.

However, if the tax advisor simply transcribed figures provided by you in preparing a tax return and did not exercise any judgment or perform any analysis regarding the tax position, you are likely ineligible for relief.

In order to obtain relief by claiming reasonable reliance on the erroneous advice of a tax advisor, the taxpayer must show that each of the following requirements were met:

(1) the advisor was a competent tax professional who had sufficient expertise to justify reliance;

(2) the taxpayer accurately provided all the necessary information to the advisor;

(3) the taxpayer actually and reasonably relied in good faith on the advice received from the advisor; and

(4) the advisor must be a person other than the taxpayer; and

(5) the advisor must actually render advice, i.e., the advisor must communicate his analysis or conclusion to the taxpayer.

The determination is made on a case-by-case basis, taking into account all pertinent facts and circumstances.

The tax advisor must be competent with respect to the specific tax matter and the taxpayer must furnish the advisor with all necessary and relevant information to make a determination. However, a taxpayer is not required to share details that a reasonably prudent taxpayer would not know, or that the taxpayer would neither know nor reasonably should know are relevant.

Whether a taxpayer reasonably relied on the advice in good faith is also made on a case-by-case basis, taking into account all the facts and circumstances. Generally, the most important factor is the taxpayer’s efforts to comply with his tax obligations. Accordingly, the inquiry typically focuses on what the taxpayer knew or should have known at the time he or she obtained the advice. The taxpayer’s education, sophistication and business experience must also be considered in determining the need for the advice, as well as whether the taxpayer disclosed all relevant facts and whether the taxpayer’s reliance on the advice is reasonable.

Finally, a taxpayer must be cognizant of a proposed tax benefit that is “too good to be true.” Generally, in determining whether a taxpayer acted reasonably and in good faith, the most important factor is the extent of the taxpayer’s efforts to determine the correct tax liability.  Negligence is strongly indicated where a taxpayer fails to make a reasonable attempt to ascertain the correctness of a deduction, credit or exclusion which would seem to a reasonable and prudent person to be “too good to be true” under the circumstances. Where the tax benefits far exceed the cost, the taxpayer must ask additional questions.