CCA 201805001 — Section 6701 Penalty for Inflated Cost-Seg Study

Where this comes from

The IRS Office of Chief Counsel issued CCA 201805001 in February 2018. It examined a specific situation where a consultant prepared a cost segregation study and made what the memo called egregious misrepresentations. The consultant overstated the amount of personal property in the building, producing much larger deductions on the tax return than the building actually supported.

The memo analyzed whether the consultant could be penalized under Section 6701, which targets people who aid or assist in the preparation of a document that could understate a tax liability. The conclusion was yes.

What it says

Section 6701 applies to a person who aids, assists in, procures, or advises with respect to the preparation of any portion of a return or other document in connection with any matter arising under federal tax law, knowing that the document will be used in connection with a material matter under the tax laws, and knowing that the use of the document will result in an understatement of the liability of another person.

The consultant in this situation met all of those elements. The inflated personal property classifications went into a study that was used on the tax return. The consultant knew what the study was for. The result was a larger deduction than the building warranted.

The memo is labeled non-precedential. The IRS is not legally bound to reach the same conclusion in every similar situation. But the analysis makes clear that the IRS views inflated studies as a preparer-penalty problem, not just a taxpayer-audit problem.

How it shows up in a study

This memo draws a clear line between a study built on honest engineering analysis and one that manipulates classifications to generate bigger numbers. A study that is built on field data, original cost records, an engineer's site inspection, and a methodology that matches the IRS's own Audit Technique Guide is on solid ground.

A study that inflates the personal property percentage without supporting evidence, or that assigns expensive structural components to faster classes without a defensible legal basis, risks the very penalty this memo describes. The penalty can fall on the study preparer, not just the property owner.

IRS Publication 5653, the Cost Segregation Audit Technique Guide, cites this CCA in its discussion of study quality standards. Examiners reviewing studies are aware of it.

What it does not mean

This memo does not mean that aggressive but defensible positions are penalized. Cost segregation involves real classification judgment calls. Some components are genuinely close cases. An engineer and tax professional can reach a well-supported conclusion that the IRS later disagrees with, and that disagreement does not trigger a Section 6701 penalty.

The penalty targets knowing misrepresentation, not honest professional judgment. The distinction matters. A study that discloses its methodology, documents its source data, and applies the legal tests consistently produces conclusions the preparer can stand behind. That is the standard this memo is really calling for.