Mr. JY, a commercial artist, engaged Mr. DE, a local attorney, to prepare his income tax return. Mr. JY provided the attorney with his check register, deposit slips, receipts, and pertinent financial documents, and read through the completed return before signing it. This year, the return was selected for audit. The IRS agent discovered that Mr. DE incorrectly deducted certain of Mr. JY’s personal living expenses. Consequently, the tax was understated by $8,900. The agent decided that the deduction was based on an unreasonable legal position.
a. Is Mr. JY liable for payment of the $8,900 tax deficiency plus interest?
b. Could the IRS impose a negligence penalty on Mr. JY?
c. Could Mr. DE be penalized because of the error made in preparing Mr. JY’s income tax return?
d. Would your answer to the preceding questions change if Mr. DE were Mr. JY’s brother-in-law, who prepared the return as a favor rather than for compensation?