Fundamentals · Brief · Working level
Reasonable cause and good faith: when reliance on an adviser actually protects you
Section 6664(c) waives accuracy penalties for taxpayers who acted with reasonable cause and good faith. Reliance on a qualified adviser can qualify — under a three-part test that reliance on a credit mill's sales pitch does not survive.
Section 6664(c) provides that no accuracy-related penalty applies to any portion of an underpayment for which the taxpayer had reasonable cause and acted in good faith. It is the defense of last resort and often the only one left when a specialty credit fails at exam — and its most common form is reliance on professional advice. That reliance works only when it satisfies the three-part test courts articulated in Neonatology Associates, P.A. v. Commissioner: a competent adviser, complete and accurate facts given to that adviser, and actual good-faith reliance.
The test is where credit-mill customers discover what they actually bought.
The three-part test, part by part
1. Competence. The adviser must be a professional with expertise sufficient to justify reliance on the specific issue — a CPA or attorney with actual experience in the area, not a salesperson with a calculator. Treas. Reg. §1.6664-4 (at eCFR Title 26) frames the whole inquiry as the taxpayer's effort to assess the proper liability in light of experience, knowledge, and education; a sophisticated CFO is held to more skepticism than a first-time founder.
2. Complete and accurate information. Advice built on facts the taxpayer shaded is no defense. If the credit study assumed engineers spent 75% of their time on qualified research because the taxpayer said so without checking, the reliance fails at part two — the adviser opined on facts nobody verified.
3. Actual good-faith reliance. The taxpayer must have genuinely relied on the adviser's judgment, and the reliance must have been reasonable. Advice that is conclusory, that ignores the obvious, or that promises a result "too good to be true" cannot be relied on in good faith — courts repeatedly hold that a deal too good to be true obliges the taxpayer to ask more questions, not fewer.
What reliance on a credit mill does not protect
Courts draw a hard line between advisers and promoters. A promoter — the party marketing and selling the position, compensated by its size — has an inherent conflict of interest, and reliance on a promoter is presumptively unreasonable. The pattern shows up across the specialty-tax landscape: firms that cold-call with a pre-computed credit, take a percentage of it, and deliver a templated study. That fee structure is also restricted by Circular 230, which is itself a signal.
How the same engagement reads under the three-part test:
| Feature | Independent adviser | Credit mill |
|---|---|---|
| Compensation | Fixed or hourly | Contingent on credit size |
| Fact-gathering | Interviews, records, verification | Taxpayer questionnaire, unverified |
| Deliverable | Signed analysis citing authority | Template reciting the statute |
| Result if disallowed | Reasonable-cause defense plausible | Reliance defense fails at parts 1 and 3 |
The IRS's own Taxpayer Bill of Rights confirms the right to retain representation — it says nothing about the representative absorbing your penalty. Vetting is the taxpayer's job before signing, which is why the diligence questions in choosing a specialty tax provider double as penalty planning, and why the underlying Section 6662 exposure should be understood before the engagement, not after.
Reasonable cause is a genuine safety valve for taxpayers who tried honestly and were advised competently. It is not a warranty that transfers penalty risk to whoever charged the fee. The distinction is the whole doctrine.
Frequently asked questions
- What is the three-part test for reliance on a tax adviser?
- From Neonatology Associates v. Commissioner: the adviser was a competent professional with sufficient expertise to justify reliance; the taxpayer provided the adviser with necessary and accurate information; and the taxpayer actually relied in good faith on the adviser's judgment. All three parts must hold. Reliance fails if the adviser lacked expertise, was fed incomplete facts, or gave advice the taxpayer should have doubted.
- Does hiring an R&D credit firm protect me from penalties?
- Not by itself. Courts distinguish advisers from promoters: reliance on the party selling the position — especially one paid contingent on the credit's size — is presumptively unreasonable because the adviser has a conflict of interest. Penalty protection generally requires independent advice, complete disclosure of facts, and a result that was not too good to be true.