Tax Court Case Addresses Reasonable Cause Standard and Tax Penalties

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Zachary J. Montgomery

Zachary J. Montgomery

Attorney

469.998.8484
zmontgomery@freemanlaw.com

Zachary J. Montgomery is a dual-credentialed attorney and CPA. He practices in the area of federal and state tax litigation, white-collar defense, business and tax planning, and litigation. Mr. Montgomery has experience representing both businesses and individuals in federal tax controversies, including appeals, examinations, penalty abatement and collection matters. He has also represented taxpayers—from small organizations to Fortune 500 companies—with Texas franchise tax refund claims, audits, penalty abatement, and corporate structuring.

Mr. Montgomery is a graduate of the University of Virginia School of Law where he focused his studies on corporate and tax law and served on the editorial board of the Virginia Tax Review. Prior to joining the firm, he gained experience with PricewaterhouseCoopers, LLP, and a regional firm, focusing on federal and state tax controversies. His previous experience also includes Ernst & Young, Deloitte & Touche, and a judicial student clerkship with the First Court of Appeals of Texas.

Mr. Montgomery is a graduate of Texas A&M University, where he graduated Summa Cum Laude and received his B.B.A. with a double major in Accounting and Business Honors and his M.S. in Management Information Systems. While attending Texas A&M, he developed his business acumen, working as an enterprise risk consultant and financial analyst.

Tax Court Case Addresses Reasonable Cause Standard and Tax Penalties

A recent Tax Court decision addresses the “reasonable cause” standard — a frequent issue in the IRS-penalty context.  As the case demonstrates, whether a taxpayer acted with reasonable cause and in good faith is determined on a case-by-case basis. Woll highlights the fact that a taxpayer who has an advanced degree, such as an attorney, will likely have more difficulty demonstrating reasonable cause. Based on the Woll decision, reliance on a computer program or failure to read a tax form, such as a Form 1099-R, is not sufficient without more to prove reasonable cause.

Woll v. Comm’r, Bench Opinion| April 29, 2021 | Holmes, J. | Dkt. No. 7024-20

Short Summary: Petitioner Molly Woll was laid off from her employer in 2017, resulting in the termination of her 401(k) savings plan that had a balance of more than $86,000. Ms. Woll and her husband spent part of the proceeds from the plan on paying back a loan, as well as paying medical expenses, student loan payments, mortgage bills, house expenses, and other bills. This resulted in a taxable distribution.

Ms. Woll prepared the couple’s 2017 tax return and reported the taxable distribution but did not add the extra 10 percent tax imposed by I.R.C. § 72(t). This triggered an IRS audit, which resulted in the assessment of the 10 percent tax, as well as a substantial understatement penalty. Mr. and Mrs. Woll timely filed their tax court petition.

Key Issues:

Primary Holdings:

Key Points of Law:

Insight: Whether a taxpayer acted with reasonable cause and in good faith is determined on a case-by-case basis. Woll highlights the fact that a taxpayer who has an advanced degree, such as an attorney, will likely have more difficulty showing reasonable cause. Reliance on a computer program or failure to read a tax form, such as a Form 1099-R, are not sufficient alone to prove reasonable cause.