Ignorance of Tax Laws Won’t Always Grant You a Pass

“I’m sorry, officer. I didn’t know the speed limit was only 25 in a school zone.”

When is the last time that one worked for you? Right. Ignorance of the law is no excuse.

It usually doesn’t fly with the IRS either. Despite this, the tax court issued an opinion suggesting that, in some cases, ignorance can indeed be bliss. Well, maybe not bliss, but it can be a valid excuse—at least to escape certain accuracy-related penalties.

For example, a California couple that botched the tax treatment of the short sale of their former residence was found not liable for accuracy-related penalties. The judge found that the actual basis for the holding was that the IRS “failed to meet the burden of production on the accuracy-related penalty.”

Reasoning behind this judgment?

Turns out the IRS didn’t introduce any evidence of compliance per the Tax Court’s newly discovered reading of 6751(b)(1). Furthermore, immediately following this judgment, the judge wrote four pages of dicta saying even if the IRS had met its burden of proof, the taxpayers in this situation would still have been relieved of penalties.

In the dicta, the judge stated that the couple acted with “reasonable cause and in good faith.” He did say to be clear that, “we will not penalize taxpayers for mistakes of law in a complicated subject area that lacks clear guidance.”

Taxpayers – One 

IRS – Zero.

This time.

This case teaches a lesson on the tax treatment of a short sale property with specific circumstances. It does not necessarily mean you will have the same experience.

Ignorance of tax laws will not always grant you a pass. But maybe….

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