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If a taxpayer establishes that he acted in good faith and
there was reasonable cause for the underpayment, the taxpayer will
not be liable for the penalty under section 6662. See sec.
6664(c). The determination of whether a taxpayer acted with
reasonable cause and in good faith is made on a case-by-case
basis, taking into account all the pertinent facts and
circumstances. See sec. 1.6664-4(b)(1), Income Tax Regs. The
most important factor is the extent of the taxpayer's efforts to
assess his proper tax liability. See id.
A taxpayer who reasonably relies in good faith on competent
professional advice may in some circumstances avoid liability for
negligence penalties. See Freytag v. Commissioner, 89 T.C. 849,
888 (1987), affd. 904 F.2d 1011 (5th Cir. 1990), affd. on other
issue 501 U.S. 868 (1991); sec. 1.6664-4(b)(1) and (c), Income Tax
Regs. Such reliance, however, is “not an absolute defense to
negligence, but rather a factor to be considered.” Freytag v.
Commissioner, supra. To establish good faith reliance on the
advice of a competent adviser, a taxpayer must show: (1) That he
provided the return preparer with complete and accurate
information, (2) that an incorrect return resulted from the
preparer's mistakes, and (3) that the taxpayer was relying in good
faith on the advice of a competent return preparer. See Cramer v.
Commissioner, 101 T.C. 225, 251 (1993), affd. 64 F.3d 1406 (9th
Cir. 1995).
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