California Willfulness Ruling Protects Tax Preparers

California Willfulness Ruling Protects Tax Preparers 

A great case was recently decided (again) in the California Court of Appeals in Rodgers. The case involved supposed misconduct by the Tax Preparer in preparing tax returns — and what is the legal standard for willful penalties (distinct from Willful FBAR Penalty Requirements). The key takeaway of this case is that the holding can help protect tax preparers by making it more difficult for the government to prove that a Tax Preparer acted willfully in making errors with a tax return – such as underreporting of income — and if penalties should be issued against the tax prepaper. This was Rogers’ second appeal; in the first Appeal, the Court held reckless disregard was not sufficient in order to support penalties against the tax preparer. In his second appeal – the Court remanded back to District Court to require a showing of Specific Intent in order to show willful blindness.

26 USC 6694 (b)(2)(A): Understatement of Taxpayer’s Liability By Tax Return Preparer

• • • (b) Understatement due to willful or reckless conduct

    • (1) In general Any tax return preparer who prepares any return or claim for refund with respect to which any part of an understatement of liability is due to a conduct described in paragraph (2) shall pay a penalty with respect to each such return or claim in an amount equal to the greater of— (A)$5,000, or (B)75 percent of the income derived (or to be derived) by the tax return preparer with respect to the return or claim.

    • (2) Willful or reckless conduct

    • Conduct described in this paragraph is conduct by the tax return preparer which is—

      • (A) a willful attempt in any manner to understate the liability for tax on the return or claim, or

      • (B) a reckless or intentional disregard of rules or regulations.

    • (3)  Reduction in penalty

      • The amount of any penalty payable by any person by reason of this subsection for any return or claim for refund shall be reduced by the amount of the penalty paid by such person by reason of subsection (a).

Case Highlights

Here are some case highlights from Rodgers:

Reckless Disregard & Willful Tax Preparer Penalties

• • • The district court held a bench trial and entered judgment for the government. Relevant here, the court held that Rodgers acted willfully under § 6694(b)(2)(A) after concluding that willfulness includes reckless disregard.

    • Rodgers appealed, and a panel of this court held that the district court erred in reaching that conclusion. Rodgers v. United States, 772 Fed.Appx. 555, 556 (9th Cir. 2019). The panel stated that willfulness under § 6694(b)(2)(A) requires “a conscious act or omission made in the knowledge that a duty is therefore not being met.” Id. (simplified). The case was then remanded for the district court to apply the correct willfulness standard. Id. On remand, the district court once again found Rodgers liable for willfully understating taxes-this time, under a theory of willful blindness.

Willful Blindness & Willful Tax Preparer Penalties

• • • Rodgers now appeals to this court again. He argues that the willful blindness doctrine alone cannot satisfy the willfulness requirement of § 6694(b)(2)(A) because, while willful blindness allows the factfinder to impute knowledge, the statute also requires a finding of specific intent. We review de novo, Rykoff v. United States, 40 F.3d 305, 307 (9th Cir. 1994), and agree that § 6694(b)(2)(A) requires specific intent.

    • The district court based its willfulness conclusion solely on a finding that Rodgers was “willfully blind” to the fact that he was preparing understated tax returns. Specifically, the court found the willfulness standard satisfied because “Rodgers knew there was a high probability that he was understating the tax on the 2009 and 2010 tax returns” and “took deliberate actions to avoid learning of these facts,” which established willful blindness under the two-part test of Global-Tech Appliances, Inc. v. SEB S.A., 563 U.S. 754, 769 (2011). But that conclusion does not encompass the full meaning of “willful” under § 6694(b)(2)(A). The court must determine whether Rodgers acted with the specific intent to understate the reported tax liabilities.

    • And because the district court did not make that finding, we vacate the order and remand for further proceedings on whether the willfulness standard is satisfied. Willfulness under § 6694(b)(2)(A), including specific intent, may be established by circumstantial evidence. See United States v. Conforte, 624 F.2d 869, 875 (9th Cir. 1980) (holding that willfulness may be inferred from all the facts and circumstances in part because “[d]irect proof of a taxpayer’s intent to evade taxes is rarely available”)

Golding & Golding: International Tax Lawyers Worldwide

Our FBAR Lawyer team specializes exclusively in international tax, and specifically IRS offshore disclosure. 

Contact our firm today for assistance.