The 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.
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