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A Limit On The IRS’s Prerogative To Change Its Mind: Reliance On A Prior No-Change Letter As A Defense To Penalties

By Megan L. Brackney
Journal of Passthrough Entities
May-June 2016 Edition

It is the IRS’s prerogative to change its mind. The IRS can conclude the audit of one tax year with no change and then make adjustments in a later tax year on the exact same tax positions present in the prior audit. But, can the IRS approve of a tax reporting position in one year and then turn around and assess penalties on the ground that the taxpayer was negligent for having taken that position in a later year? Two recent decisions consider when the result in a prior audit is a reasonable cause defense to penalties: Brinks Gilson & Lione and J.J. Powell, Inc. This column discusses both cases and then provides some tips for successfully defending against penalties based on a favorable result in a prior audit.


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