Tax Court Appeals
Tax Court Appeals and IRS Audits
- We have handled hundreds of audits from payroll taxes, workmen’s compensation, sales tax, IRS federal and state income taxes.
- Office audits, field audits, SC2000 audits, mail audits, and tax court audit appeals. I have a 100% success rate winning in tax court with all of my last five audits.
- Complete understanding of what causes audit probability and DIF scores.
- Last office audit by the small business task force in San Bernardino was with “no change” audit results.
TAX COURT
This is the place of last resort. You have exhausted the time wasting office or field audit appeal and this is the end of the road. An appeal to this level is something I always look forward to [nervously]. In all of my five Tax Court appeals I have always been treated professionally and have won all five appeals. The Tax Court is distinctly separate level of government, not directly connected to the IRS to achieve true independence. They sometimes wear neckties with little baby eagles on them [Treasury Department birds] which tells you who they work for. The people at this level are the best [promoted] of the auditors from office and field. They are to be respected for their endurance with the ever expanding tax code. Remember always, the IRS does not create the tax laws, the people you elect in Congress do. They are the enforcers of the tax code for better or worse. In years past they would digest a lot of small data during the presentation. On my last Tax Court case we bluntly discussed the tax code numbers and merits of both sides of the case. At this level there is a lot of pressure to settle the case before it actually goes to trial and everybody suffers the expense and experience of the hazards of litigation. The process can take many months depending on the complexity of the case. My last case was one year from initial audit to Tax Court appeal settlement. Oh, I forgot to mention that I will not take a frivilous case to Tax Court.
My Five Tax Court Appeal cases:
I received a call from a client being audited by the IRS. He had been referred to me, as they do for Enrolled Agents when clients have no representation. He had sold a residence near year-end and the escrow company got the wrong year on the 1099 form. Subsequently, his tax preparer had prepared the return for the correct year but failed to ask the escrow company to correct their form. Now the sale was in two different years at the IRS computer and a year later they were looking for the sale again. The bill was huge and the client’s tax preparer had died [probably from stress]. We went back to the office auditor with the escrow docs and the proper explanation, but he didn’t buy it. The incompetent office auditor had the client prepare all kinds of tax schedules and returns, which he later ignored. I appealed to his supervision and got no response. The client got the 30 day final letter and I appealed to the Tax Court. Later we went to San Diego and laid the whole process out before their Revenue Officer. The IRS makes you petition the independent Tax Court as a last resort. Very few cases go to trial so the case is reviewed one on one with their very good Revenue Officer representative. Their people agreed that the sale had been duplicated and passed on the issue, thus avoiding the hazards of litigation.
A client received a SC2000 letter from the computer center which matches information with filed tax returns. The item was a 1099 on gambling winnings. The client professed to be a professional gambler but in practice was a professional loser. The item was one missing of a stack that he had won cruising the poker casinos in Gardena and other places where tournaments are played. We had reported all but that one item in his tax returns and responded that he had offsetting losses to wash out the additional winnings that were missed, but the person behind the IRS machine ignored our information. I appealed to the San Diego Tax Court and we presented our case. That day the Revenue Officer learned how people lose tons of money gambling, as the client had gambled both his business and an inheritance away at the casinos. An easy win.
A corporate client suffered through a tough audit with the auditor coming and going in our office for a full month. The Revenue Agent disputed everything and we fought to untangle the items he disputed.
Several he disputed was the amount of rent the client paid himself for the business property and the officer wages paid to the principal owner and his wife who was fully employed there. The client did his telephone homework on local properties to support the rent on the commercial lot and building, and also prepared a list of other officer wages on officers in his business based on the size of their operation. Still, the auditor didn’t budge so I appealed to the Tax Court in Riverside. On the day of the audit I met the Revenue Officer in the hallway waiting for the elevator. We introduced ourselves and I explained my position.
Like all good professionals she had already read the case beforehand.
“Well,” she said as the door opened, “I don’t see any merits to the case and will close it in your favor.” I thanked her and called my client.
I have found that in corporate audits the auditors push for all kinds of extra marginal or disputable issues and many clients fold rather than fight for their rights.
The medical doctor-psychiatrist was used to being audited because of his very high income and extreme deductions. I loved working with this guy because he was intense, sincere, a fun guy, and a good hit for a diet prescription as needed. On this audit we went through the gentleman farmer routine which produced large losses and the list of what grew there including his count of “strawberry trees’. Like I said, he was funny guy who took a lot of chances with his tax returns. One big item that bounced was a huge cash deduction for “name the number prize.” The IRS likes factual data to back up “”ordinary and necessary”" business deductions. In this instance the good doctor claimed that, for an attention getter, he would meet with ten foster children in a therapy group session and ask them each to write down a number. Then he would produce a $20 bill and hold it up to show the serial number. The kid who guessed the right last number got to keep the bill. The Revenue Agent field auditor didn’t like this one at all because it was a ‘no cash, no deduction’ issue which he couldn’t prove. Or could he? We appealed the findings to the Riverside Tax Court where the Revenue Officer just happened to have a high regard, probably television oriented, regard for shrinks. To create evidence the doctor videotaped several sessions of children responding to the attention getting deduction. The RO bought the evidence and allowed half of the huge amount the client claimed. That was a big win for a client who lived an extremely expensive life style and never had any money in his pocket for lunch.
The last and most recent audit was for a client rental house which had been her prior residence. Because she was attached to her old home, which was out of state, she decided to use a real estate management firm to handle the renters and property. The tax code separates income into ordinary income which allows for ordinary losses, and passive income which doesn’t allow for losses until the assets are disposed of. Rental properties are both passive and active but the code requires the taxpayer to be actively involved in some way which would not be the case if it were a rental partnership with passive investors. The office auditor claimed that the client wasn’t active enough to make it a true rental loss because she had used a management agency. We appealed to supervision, which is a waste of time because they review all audits anyway, and got the 30 day letter to pay or appeal to the Tax Court.
The client and I showed up in the Riverside Appeals Court again and we showed that the client had indeed, been actively involved along with the property manager. It was disputed by the Revenue Officer quoting the strict rules of the code. He had done his homework on the code and our case before we met so it was a discussion of the code, not the dollars or items involved. He appealed it further and after signing extensions for the case later on, after one year-from the original audit we won.
It was a narrow victory and a warning to people renting property to amend the boilerplate property manager agreement to require owner approval on all repairs that are not incidental, and for the owner to review the application of the selected tenant for final approval.
One last case, which was not Tax Court, but was significant, was on a corporation which leased cars they bought at the auction. This was a Task Force audit on Car Dealers by a Revenue Agent who audited only this specialty. The client business would also buy hundreds of quality cars for the dealers which would be certified for resale. The business kept terrible records. The auditor had his own little room in our office and after a month finally quit in disgust. The client then received a final notice showing over a million dollars owed because the Revenue Agent disallowed all deductions for lack of substantiation. The client suddenly got serious and hired a lady,who worked out of her house, to reconstruct each of the car purchases and sales. The client survived the audit but was completely worn out from the stress and cost. There was another audit the next year and the client closed the business and walked away.
The best way to survive a business audit is to have a good accountant/tax consultant and keep him for many years. He or I will keep you advised about what is right or wrong with your business as you go. It is really a long-term educational process. For every business that survives, there are ten that fail. Businesses have good and bad times and a good accountant/tax consultant will advise you financially during the good and be around to help you survive the bad.