IRS concludes ‘aiding and abetting’ penalty may be applicable to certain consultants

Tax Hot Topics newsletterThe IRS Office of Associate Chief Counsel (Procedure & Administration) has concluded in Chief Counsel Advice (CCA 201805001) that a tax consultant who was also an engineer that assisted with the preparation of a cost segregation study is liable for the Section 6701 penalty for aiding and abetting understatements of tax.

Under the facts of the CCA, the engineer analyzed a taxpayer’s assets to determine the classification of articles of property for purposes of depreciation deductions. For a fee, the engineer analyzed the assets and prepared a report for individual and corporate taxpayers. This report recharacterizes certain components of 39-year depreciable property to five-, seven- and 15-year depreciable property. The engineer presented the report to the taxpayers, who used it to prepare their income tax returns and claim accelerated depreciation deductions for certain property.

The IRS determined that the reports incorrectly reclassified property to “front-load” depreciation deductions, resulting in larger tax losses for the engineer’s clients. The IRS also determined that some of the recharacterizations were “egregious misrepresentations.”

Section 6701 imposes a penalty on a person who aids or abets another person in the understatement of that person’s tax liability. Under Section 6701, any person who (1) aids or assists in, procures, or advises with respect to, the preparation of any portion of a return, affidavit, claim or other document; (2) who knows or has reason to believe that the document will be used in connection with any material matter arising under the tax law; and (3) who knows such document (if so used) would result in an understatement of tax liability of another person, shall pay a penalty. This penalty is $1,000 per person, per period, and extends to all returns of investors in pass-throughs. The penalty, as it relates to corporations, is $10,000 per person, per period.

In determining that the Section 6701 penalty applies to this engineer, the Office of Chief Counsel concluded that the engineer prepared and furnished to each client a report, which the engineer knew the taxpayers would rely on to file their tax returns to claim the depreciation deductions, a material matter under the tax law. The IRS also concluded that the engineer knew the reports, if relied upon, would result in understatements of tax liability.

While the aiding and abetting penalty has typically been utilized by the IRS in the tax shelter context, the CCA indicates the willingness of the IRS to extend the penalty to more routine types of tax assistance, including the preparation of reports issued in connection with cost segregation studies, R&D studies, earnings and profits studies, basis studies, or similar engagements.

Contact Liz Askey
Managing Director, Tax Practice Policy & Quality
T +1 202 521 1513

Shamik Trivedi
Senior Manager, Washington National Tax Office
T +1 202 521 1511

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.