Another Example of Why Taxpayers Should Hire a Tax Attorney

A number of taxpayers attempt to represent themselves in tax court litigation. The recent case of Bhattacharyya v. Commissioner provides yet an example of why it is often best to hire a tax attorney to handle tax court litigation.

During the tax periods in question, the taxpayers received income of well over a million dollars. This income consisted of income resulting from the exercise of stock options, distributions from non-qualified deferred compensation plans and IRAs. The taxpayers did not fully report all of their taxable income and they claimed a significant amount of itemized deductions which, it turned out, they could not support.

The taxpayers filed their 1999 tax return in tax year 2003, requesting a tax refund for more than $100,000. The IRS examined that return and determined that the taxpayers were not entitled to a refund, they were liable for an alternative minimum tax in excess of $100,000. The taxpayers filed a suit for a tax refund in the US District Court, which was dismissed for lack of jurisdiction. The taxpayers appealed to the Ninth Circuit Court of Appeal, which affirmed the dismissal.

The taxpayers also filed their 2000 tax return in tax year 2003, again requesting a tax refund of more than $100,000. Upon inquiry from the IRS, the taxpayers submitted an amended return to reflect an alternative minimum tax liability. The taxpayers also reduced their taxable income on that amended return by a significant amount. The IRS issued the taxpayers a notice of deficiency for over $300,000 in tax and another $50,000 in tax penalties and the taxpayers filed a petition to have their case heard in tax court.

The IRS attorney filed an answer to the taxpayers’ petition, but he failed to request an increase in tax or an addition to tax for the increased penalties and interest. A month after the case was called, the IRS asked the court permission to increase the tax and addition to tax in the answer and the taxpayer asked permission to increase the tax refund claimed in the petition.

Not only did the taxpayers opt to prepare their own federal income tax returns (because their tax preparer had a brain tumor), they also opted not to hire a tax attorney. The arguments made by the taxpayers in the court proceeding were without merit (it appears that the taxpayers did not fully understand the tax consequences of their financial transactions) and the court ruled in favor of the IRS. The IRS also imposed a $100,000 Section 6651(a)(1) penalty due to the taxpayers filing their 2001 tax return twenty five months late, which the court upheld.

At the end of the day the taxpayers ended up paying several hundred thousand dollars in taxes that they may not have otherwise had to pay, they incurred a hundred thousand dollar tax penalty, and the taxpayers no doubt spent a considerable amount of time working with the IRS and attending court hearings.

Had the taxpayers opted to pay a tax preparer they would probably not have incurred any of these costs. Moreover, had the taxpayers hired a tax attorney they might have won their tax court case (possibly by responding appropriately to the IRS request to amend the pleadings after the court case had started) and they might have been able to have the IRS penalty waived.