Accountant's Willful Blindness Was Not Sufficient to Sustain IRS Preparer Penalty

An accountant's willful ignorance of tax understatements on client returns isn't enough to hold him liable for certain penalties, the Ninth Circuit said, vacating for the second time a California federal court's decision affirming Internal Revenue Service penalties against him.

In John Q. Rodgers v. U.S., case number 20-55378, in the U.S. Court of Appeals for the Ninth Circuit, John Q. Rodgers' "willful blindness" to the tax understatements on returns he prepared for clients isn't enough to hold him liable for penalties under Internal Revenue Code Section 6694(b)(2)(A), the appeals court said Monday. It sent the case back to the California federal court to determine if Rodgers had the "specific intent to defraud the government" as required under relevant precedent, the Ninth Circuit said.

"The court must determine whether Rodgers acted with the specific intent to understate the reported tax liabilities," the opinion said. "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."

The IRS issued penalties against Rodgers for issues with some of his clients' taxes, including overstated deductions for salaries and wages, incorrect deductions for country club dues and overstatements of costs-of-goods sold, according to court filings. Rodgers paid some of those penalties and then sued for a refund.

In the California federal court's first decision in 2017, it said Rodgers acted willfully under Section 6694(b)(2)(A) and found him liable for penalties. His "reckless disregard" was enough to find he willfully understated those taxes, the lower court ruled.

The Ninth Circuit partially vacated that ruling in June 2019, finding that Rodgers' recklessness in lowballing clients' tax liabilities didn't mean he acted willfully within the meaning of the statute, according to the opinion.

But on remand, the lower court found in 2020 that Rodgers knew there was a good chance there were understatements on his clients' returns and avoided learning of the understatements, according to filings. That "willful blindness" was enough to find that his understatements were intentional, warranting the penalties, according to the court. 

In its opinion August 30, 2021, the Ninth Circuit found that the lower court's application of the "willful blindness" doctrine wasn't enough to find that Rodgers acted willfully in his erroneous tax preparation services. In United States v. Salerno, the Ninth Circuit had found that finding a tax preparer willfully understated a client's taxes required addressing whether the preparer had the specific intent to do so, according to the opinion.

"It Is Settled Law That Willfulness 
Under Section 6694(B)(2)(A) Requires
Specific Intent To Understate Tax Liability
On Tax Returns or Claims," The Ninth Circuit Said.

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