IRS Private Tax Debt Collection Agencies

Congress recently enacted new Section 6306. That section provides for the IRS to assign certain delinquent tax accounts to private collection agencies. The IRS has recently made some progress in implementing this program (see Announcement 2006-63 and Publication 4815).

While this arrangement may sound good on paper, my bet is that the program will just add yet another layer of delay and dysfunction to the IRS tax administration process. Because of this I am looking forward to adding additional litigation services related to the third party tax debt collectors to my firm’s menu of services. Here are some general thoughts about this new program:

First, these third party tax collectors present tax litigators with a new and promising target. Generally tax litigators have been prevented from pursuing the IRS for civil damages outside of the limited provisions provided under federal law because the IRS, as a government agency, enjoys some immunity against suit. These third party tax collection firms do not have this type of immunity.

There will be at least three types of cases that taxpayers may want to pursue against these third party tax debt collectors, namely agent-principal contract cases, unlawful disclosure and other torts, and debt collection violation cases.

The agent-principal contract cases will likely involve the third party tax collector having exceeded their authority, resulting in damage to taxpayers. Section 6306 and IRS rules provide a number of limitations on the third party tax debt collector’s authority. For example, the IRS (in its Announcement cited above) specifies that the private tax collector is not able to bind the IRS with regard to certain installment agreements that it offers to taxpayers. Given that most of the employees of these third party tax firms will probably be temporary workers who earn low wages (which will result in substantial employee turnover) and the firm is paid by the IRS based on the amount of tax collected, there will no doubt be many instances where the third party tax debt collector exceeds their authority.

Every state has principal-agent laws and that the third party debt collector agency may, assuming that it offers an agreement beyond its scope, be binding itself to the terms of the agreement. As such we will probably see a lot of civil cases brought against these third party tax collectors based on principal-agent and authority issues. If we do not see this type of litigation up front, we will no doubt see class action law suits at some later point.

The unlawful disclosure and other tort litigation that will probably arise will consist of third party debt collector firms violating the disclosure and contact rules in 6306, defamation cases, and even unlawful disclosure of taxpayer return information. In each of these cases the third party tax debt collection agency will be subject to the state and federal laws which regulate this type of conduct.

The debt collection violation cases will also be problematic for these agencies. Section 6306 specifies that these agencies are subject to the rules outlined in the Federal Fair Debt Collections Practices Act. These agencies will also be subject to the state debt collection acts - the rules for which vary from state to state. In many cases these acts provide specific “do’s” and “do not’s” for debt collectors and violations often result in stiff penalties and even treble damages (i.e., three times actual damages).

Given these new litigation options, a viable strategy that taxpayers will now have to consider is whether they should seek damages from these third parties under state and federal law to offset the tax that they will have to pay to the IRS. In many cases this may prove to be the best way for taxpayers to pay their underlying tax debts.

In anticipation of these types of litigation, Congress specifically included a provision in Section 6306 that states “The United States shall not be liable for any act or omission of any person performing services” under 6306. This provision will no doubt be challenged on Constitutional and other grounds at some point, as even a government agency will not be fully immune from rampant and obvious abuses of its agents that it is mandated to approve and supervise.

Aside from this type of litigation, the new program also raises a number of other issues.

For example, an interesting question is whether a taxpayer refuses to deal with a third party tax collector and litigation ensues between the IRS and the taxpayer, if the failure to cooperate with the third party tax debt collector will be sufficient to prevent the taxpayer from shifting the burden of proof in the court proceeding to the IRS pursuant to Section 7491. Section 7491 specifies that the burden of proof only shifts to the IRS if the taxpayer “cooperated with reasonable requests by the Secretary for witnesses, information, documents, meetings, and interviews.” A literal reading of the Code leads me to believe that failing to cooperate with the third party taxpayer would not be sufficient to prevent the burden of proof from being placed on the IRS, as the statute does not specify that it includes requests made by the Secretary “or the Secretaries agents.”

If that is the case, what is the harm if the taxpayer simply ignores the third party tax debt collector? Section 6306 limits the function of the private tax collectors to locating the taxpayer, asking for full payment and offering certain installment agreements, and obtaining financial information about the taxpayer. What makes a debt collector effective, be it a private or governmental debt collector, is their ability to (1) report the debt to third parties (such as credit bureaus) and (2) to use our courts to force the debtor to pay. Because these third party tax collectors do not have these powers, taxpayers are going to learn very quickly that they can just ignore the third party tax collector and there is nothing that the third party debt collector can do about it.

Other interesting issues involve how the third party tax debt collector is going to have the correct information given that the IRS’s records are often incomplete and inaccurate, how the third party tax debt collector is going to know if the IRS will pay them for their efforts (as the IRS has a practice of not paying IRS tax informants, why would they pay these third parties), and whether taxpayers will start using disenfranchised employees of third party tax debt collection agencies to provide inside information to bolster their tax case against the IRS.

It will be interesting to see how some of these issues play out. My guess is that these third party debt collectors will really only be people locater services, in that their function will be so limited that all they do is find taxpayers and provide that information to the IRS. Personally, as a taxpayer, I do no know if that type of service should entitle the tax debt collection firm to substantial monetary compensation from the government that is provided for in Section 6306.

September 27th, 2006 | No Comments »

State vs. Federal Tax Court Litigation

I often hear criminal attorneys say that they always have a good chance to win state criminal cases, but they almost never are able to win in federal criminal cases. The idea seems to be that federal agencies spend a lot more time and effort preparing and gathering evidence against the accused than do state officials. I have found that this logic is also applicable in the non-criminal tax arena as well. Case in point: Hanson vs. Colorado Department of Revenue.

Hanson was the president of Internet Commerce and Communication Corporation (ICC). The State of Colorado had assessed delinquent withholding taxes against ICC for failure to pay $43 thousand dollars in Colorado taxes. ICC filed for bankruptcy and there were not enough assets in the bankruptcy estate to satisfy the Colorado tax. The State of Colorado then imposed a penalty on Hanson equal to 150% of the delinquent taxes of ICC.

The applicable Colorado statute reads as follows:

[With an exception not relevant here] any director or officer of a corporation … in the process of dissolution or which has been dissolved who distributes the … fund in his control without having first paid any taxes covered by this article due from such … corporation … shall be personally liable to the extent of the property so distributed for any unpaid taxes of the … corporation … covered by this article which may be assessed within the [statutory time limits].

C.R.S. § 39-21-116(2) (2005).

In addition to the personal liability provided in section 39-21-116, all officers of a corporation … required to collect, account for, and pay over any tax administered by this article who willfully fail to collect, account for, or pay over such tax or who willfully attempt in any manner to evade or defeat any such tax, or the payment thereof, are subject to, in addition to other penalties provided by law, a penalty equal to one hundred fifty percent of the total amount of the tax not collected, accounted for, paid over, or otherwise evaded. An officer of a corporation … shall be deemed to be subject to this section if the corporation … is subject to filing returns or paying taxes administered by this article and if such officers of corporations … voluntarily or at the direction of their superiors assume the duties or responsibilities of complying with the provisions of any tax administered by this article on behalf of the corporation….

C.R.S. §39-21-116.5 (2005).

It was the State of Colorado’s position that this penalty could be imposed on any corporate officer regardless of whether the officer was responsible for or had the ability to ensure that the tax payments were timely remitted.

The court ruled that, as outlined in the statute, the penalty only applies to offers who are responsible for tax compliance and who willfully fail to collect, account for and pay over the tax.

Hanson was lucky in that the State of Colorado did not adequately prepare their case for court, as they failed to present any evidence as to what Hanson’s role was as president of ICC. It appears that the State of Colorado merely relied on the fact that Hanson was the president of the corporation to support their case that he was responsible for ICC’s tax compliance.

The result would have been the same under the federal rules, because the law is clear that the equivalent penalty at the federal level is only to be imposed on “responsible persons” (the Section 6672 trust fund recovery penalty is the equivalent penalty at the federal level).

What is different is that the IRS attorney would have at least been prepared to put on their case in court. I am not aware of a single case where the IRS attorney failed to prepare a trust fund recovery penalty case such that they put on no evidence of the taxpayer’s role in the corporation.

That is not to say that IRS attorneys do no lose cases, as they do. It is just to say that they typically do not lose for want of putting on basic evidence in support of their position.

September 26th, 2006 | No Comments »

Estate Tax Valuation vs. Income Tax Valuation

The question in Janis v. Commissioner is whether a taxpayer can claim that property has a low value for estate tax purposes and then turn around and claim that the property has a high value for income tax purposes. The Ninth Circuit said “no,” but the answer could have been different under slightly different facts.

Conrad and Maria Janis inherited a gallery of artwork from Conrad’s father. The artwork consisted of over 500 pieces of art by famous artists, such as Piet Mondrian, Jean Arp, and Grandma Moses. Several years prior to his demise Conrad’s father had transferred the gallery of artwork to a trust for the benefit of himself and his two sons – one of whom is Conrad. The father and the two sons were named as the trustee and the sons were named as the executors of their father’s last will and testament.

After the father’s demise, Conrad and his brother, as executors and trustees of the trust, hired Sotheby’s to value the art collection. Sotheby’s valued the collection without applying any discounts. Conrad filed fiduciary trust tax returns listing the artwork at a discounted value of $12 million. This discounted value caused the art gallery to report a net operating loss each year, minimizing the amount of taxes it owed.

The IRS Art Advisory Panel determined that the undiscounted value of the collection was $36 million and the discounted value was $14 million.

Conrad, as co-executor and trustee, consented to the IRS’s adjustment and to its discounted valuation of the estate’s artwork. Conrad signed a Form 890 Waiver of Restrictions on Assessment and Collection of Deficiency and Acceptance of Overassessment. The IRS time period for assessing the estate tax return had already expired before this time.

Immediately after signing the Form 890 Conrad filed amended fiduciary income tax returns for the trust claiming the undiscounted value of $36 million for the artwork. This increased valuation created an even larger net operating loss for the gallery.

The trust was terminated shortly thereafter and its assets were distributed to a partnership created by Conrad and his brother. The net operating losses for the trust were rolled over into the partnership. These losses allowed Conrad and his brother to reduce their federal income tax on their personal tax returns.

The IRS reviewed the brothers’ individual and trust tax returns and determined that the brothers should have used the $14 million discounted value that was calculated by the IRS for their father’s estate tax liability on the trust tax returns, which would limit the net operating losses that flowed through to the brothers’ personal tax returns.

The court applied the “duty of consistency” in holding that the brothers must use the estate tax value for the artwork for the trust and their personal tax returns. The “duty of consistency” only applies where (1) a taxpayer has made a representation, (2) the Commissioner has relied on the representation, and (3) the taxpayer has attempted to recharacterize the representation after the statute of limitations has run in such a way as to harm the Commissioner.

The taxpayer argued that if any “representation” was made it was made by the estate, not by Conrad. The court did not buy this argument because Conrad was the beneficiary and co-executor of the estate. Thus, the idea is that Conrad was an interested party with regard to the valuation. It would have been interesting if Conrad had not been the co-executor or trustee, but merely a trust beneficiary. In that case it would have been even harder for the court to argue that Conrad “represented” that the value of the artwork on his father’s estate tax return was $14 million and not $36 million.

While this case involved estate tax discounts associated with artwork, the same situation often arises with regard to estate tax discounts for real estate or ownership of small business interests. In each of these cases the game is to try to claim a lower valuation for estate tax purposes and a higher value when the property is later sold for federal income tax purposes. In many cases taxpayers plan on holding the assets for a period of time following the death of the owner so that they can claim that the disparity in the value of the asset for estate tax and income tax purposes resulted from appreciation in the assets that occurred after the owner’s demise.

Of course what beneficiaries are giving up in these scenarios is the stepped up tax basis in the inherited property, which results in a higher federal income tax liability upon the subsequent sale of the property. In most cases it is more beneficial for taxpayers to take the lower estate tax valuation regardless of the lower tax basis and ride out the waiting period because the federal estate tax rates are higher than the federal income tax rates. This is especially true given that the full step up in tax basis is set to be eliminated in coming years.

Perhaps the lesson to be taken from this case is that if the taxpayer is faced with this dilemma, they should remove themselves from the estate administration process so that they are not the taxpayer who is making the “representation” as to the lower estate tax value. Then once the time for assessing additional taxes has expired for the estate tax, the taxpayer can make a “representation” using the higher value for federal income tax purposes.

September 26th, 2006 | No Comments »

Recent Colorado Tax Case is an Example of why Taxpayers Should Hire a Tax Attorney

Taxpayers often ask me why they should hire a tax attorney. My response is always that hiring a tax attorney to review and structure your financial affairs can give you some certainty that things are done right, in many cases it can save you significant amounts of tax and later IRS problems, and it can reduce the chances that your neighbors and creditors will find out about your financial and tax affairs. The recent tax court case of Guerrero v. Commissioner highlights each of these points.

Orlando and Christina Guerrero were residents of Continental, Colorado (which is not too far from my office by the way). They opted to withdraw about $174,000 dollars from their pension plan and 401(k) retirement plan and they used those funds to purchase a house in Denver, Colorado and to invest in the stock market. Orlando and Christina opted to only report approximately $90,000 of these distributions as taxable income on their federal income tax return and they erroneously claimed an approximate $12,000 IRA contribution deduction.

Apparently Orlando and Christina thought that submitting a letter with their timely filed federal income tax returns asking the IRS to recomputed their tax liability would be sufficient (even then, they failed to keep a copy of the letter).

Six years after Orlando and Christina filed their tax return, they had no doubt spoken with several IRS employees, written numerous letters and sent other correspondence to the IRS, were subject to an IRS wage garnishment, had to negotiate with the IRS to release the wage garnishment, had to file an IRS penalty and interest abatement request, and they even had to file multiple tax court petitions and attend a tax court hearing.

What was the result of all of this time and energy? A tax penalty of over $8,000 and interest on the tax of over $3,700 - - in addition to having to pay the tax that they failed to property report and timely pay and having their financial and tax information made public.

An experienced tax lawyer in Colorado would probably have only charged Orlando and Christina a few hundred dollars (if even that) to structure and correctly report this type of transaction. That advice might have consisted of trying to borrow money from their retirement plans as a loan or possibly even trying to qualify part of the distributions under the “hardship” rules.

Even if Orlando and Christina had opted to not follow the tax lawyer’s advice, they would have at least known now to correctly account for the retirement distributions - - saving the approximate $12,000 dollars in IRS tax penalties and interest that they had to pay. In addition that would have saved the taxpayers from having their wages garnished and their having to come up with $40,000 to have the wage garnishment released.

Even if they opted not to follow the tax attorney’s advice on how to report the transactions, they could have hired a tax lawyer to resolve the tax matter with the IRS. The tax lawyer could have raised additional arguments as to why the tax interest should be abated. For example, the tax attorney might have been able to argue that the IRS sending the taxpayers a tax refund and a notice in 2001 constituted written advice from the IRS sufficient to qualify for mandatory interest abatement under IRC § 6404(f).

The tax attorney may have also been able to head off the future adjustments by arguing that the same tax year could not be reopened pursuant to IRC § 7605(b). If those options were not successful, the tax lawyer could have prevented the tax wage garnishment and/or negotiated more favorable terms to get the wage garnishment released. A Colorado tax lawyer would probably only charge a couple of hundred dollars for this type of service.

At the end of the day Orlando and Christina spent several thousand dollars, their tax plight has been made public, and they have wasted considerable amounts of their time, the IRS’s time and the court’s time. They should have hired an experienced tax attorney.

September 22nd, 2006 | No Comments »

The IRS Announces an Online Tax Payment Agreement System

The IRS recently announced that it will be launching a system to allow “tax professionals” to apply online for tax payment agreements or tax installment agreements for their clients.

While this is a step in the right direction, it does present yet another opportunity to consider whether the IRS should be allowed to simply provide a FREE suite of online tools for taxpayers to complete and submit >tax forms< to and interact online directly with the IRS.

To its credit, the IRS has attempted to provide FREE tax return preparation tools for taxpayers in the past. Unfortunately the tax software giants were able to convince Congress to reign in the IRS's efforts.

According to the tax software folks, the IRS should not be in the business of providing taxpayers with a FREE method for complying with our tax laws or interacting with the IRS because this would significantly harm their businesses. I agree that the IRS providing a FREE service would harm these businesses, but I do not agree that their business provide a value that warrants protection from government competition.

The current tax software vendors and tax resolution firms are now providing services that are squarely within the government’s interest and function. In these cases the businesses should have to show that they provide some value over and above what the government could do if the government were to provide the same or similar service. If the business cannot make this showing, it is the business model upon which the business is based that is faulty and the business does not warrant protection from government competition.

With regard to being able to complete and submit IRS forms online, the tax software and tax resolution firms cannot make this showing. To the contrary, there are a number of reasons why taxpayers would be better off if the IRS were to provide FREE tools to complete and submit IRS forms online.

It is hard to argue that passing taxpayer information to a private third party middlemen is a more secure and efficient means for getting online forms delivered to the IRS. Given the real threat of identity theft and online security it just does not make sense to have taxpayers submit their information to a private third party middleman only to have that middleman pass the information on to the IRS. This extra step increases the chances that taxpayer information will be intercepted by others.

Also, imposing third party middlemen helps to insure that IRS forms will not be presented to the IRS in a way that is most efficient for the IRS. For example, there are a number of “tax resolution” firms that use scare tactics to charge taxpayers thousands of dollars for the firm to complete and submit one IRS form to the IRS. IRS statistics show that the majority of the IRS forms submitted by these “tax resolution” firms are rejected because they are incomplete or otherwise incorrectly submitted. If the IRS were to create and maintain a FREE online process for taxpayers to submit these offers, the IRS could impose computer restrictions that would prevent taxpayers and “tax resolution” firms from submitting incomplete or otherwise faulty forms.

Of course, this would also save taxpayers the millions if not billions of dollars that they pay to the “tax software” vendors and “tax resolution” firms. It could also save taxpayers and the government quite a bit of money by reducing the costs associated with administering our tax collection system.

For example, the IRS currently only accepts offers in compromise or Form 656s that are submitted using the IRS printed forms. The current wait time for the IRS to process these printed forms and to prepare a written response to an offer in compromise is somewhere between six to twelve months. In many cases offers that are submitted are lost by the IRS as the files are transferred to different IRS offices throughout the nation. In these cases taxpayers have no ability to track where or what is happening to their offer; therefore, taxpayers end up making multiple calls to the IRS service centers, to the Taxpayer Advocates Office, and to the IRS Appeals Office in an effort to locate and get their offer processed.

By having a FREE online tool available taxpayers could print a verification form to ensure that their offer was accepted and they might even be able to track the progress of their offer online. This would save the IRS operator phone time, it would speed up the IRS internal case file transmission process, and it would provide a means for the IRS and taxpayers to easily track the progress and location of submitted offers in compromise. And the offer in compromise form is just one of hundreds of IRS forms that taxpayers frequently submit.

If this isnt bad enough, the reality is that the government subsidizes tax software and tax resolution businesses in that it allows taxpayers who itemize their deductions to deduct amounts that they pay for the tax software or “tax resolution” services.

Why should the government use taxpayer money to support these businesses, instead of just providing a better service itself? These tax software vendors and tax resolution firms are an inefficiency in and a drag on our economy. The greater good requires that the government provide the service - especially since it will save taxpayer and government money.

September 19th, 2006 | No Comments »

Deposits vs. Payments: A Distinction Taxpayers Must Understand Before Making Payments to the IRS

There is a difference between making a payment and a deposit when you pay the IRS.  Blom v. United States, a recent case in the Federal District Court of Pennsylvania, highlights the difference between an IRS tax deposit and an IRS tax payment.

Blom’s aunt died and named Blom as the personal representative of her estate. The aunt’s husband died prior to the aunts demise and the husband had left part of his estate in trust for the benefit of the aunt. Blom asked the trustee of this trust to turn the assets over to her as the personal representative of the estate. The trustee refused and litigation ensued.

Prior to litigation, Blom had approached the IRS about getting an extension to file the federal estate tax return for her aunt’s estate. Blom filed the Form 4768 (Application for Extension of Time to File a Return) and gave the IRS $140,000 for estimated taxes. The IRS applied the $140,000 as “payment” of the estate’s estimated taxes.

Blom missed the extended deadline to file the estate tax return because the estate litigation was still going on. About a year after this deadline, Blom filed a federal estate tax return showing that no estate taxes were due. The IRS treated this return as a request for a refund of the $140,000 that was already paid.

The IRS refused to issue Blom a refund, even though the IRS acknowledged that no tax was due. The IRS’s position was that the IRC 6511 time for filing a claim for a tax refund for “payments” had expired. Blom filed suit to recoup the $140,000 held by the IRS and argued that the “payment” was actually a “deposit.”

The court looked at the following three factors: (1) the timing of the payment, (2) the intent of the taxpayer in making the payment, and (3) how IRS treated the payment when it was received. The court fond that the $140,000 was a “deposit” and not a “payment” because the first two factors favored Blom’s position and only the last factor favored the IRS’s position.

This three part test is unfortunate in that it is not really workable. In almost all cases the third factor will usually favor the IRS and the second factor will usually favor the taxpayer. Thus, the first factor is the only real factor that must be considered, but that factor could be construed to favor either the IRS or the taxpayer – depending on how the judge happens to feel that day. Having to rely on legal analysis like this is just too risky for taxpayers, especially given the amount of money that could be involved. This makes knowing the difference between a “payment” and a “deposit” even more important.

So what is the difference between a “payment” and a “deposit?” New IRC Section 6603 provides that a “deposit” is a payment to the IRS equal to the amount that is under dispute that is made by the taxpayer to suspend the running of interest on a tax debt. Whereas, a “payment” is simply an amount that is applied to an outstanding tax debt. The difference is that the “deposit” does not belong to the IRS upon payment, whereas the “payment” does. As such, the IRS is required to return “deposits” to taxpayers upon receiving a written request from the taxpayer. The IRS is not required to return “payments” to taxpayers.

Section 6603 goes on to provide procedures for making “deposits.” That section also specifies that any payment that does not follow these procedures will be deemed a “payment” and the payment will be applied to the earliest tax year in which there is a tax liability and it will first be applied to the tax, then the penalties and then the interest.

Taxpayers should note that the amount that will be treated as a “deposit” is the amount that is “under dispute.”  When making “deposit” under Section 6603 taxpayers will need to be very careful to ensure that the full amount that they pay will be treated as a “deposit” and not partially a “deposit” and partially a “payment.”

Had Blom followed these procedures (technically the prior procedures, which were outlined in Rev. Proc. 84-58) she probably would not have had to resort to litigation to recoup her “deposit.” The Blom case provides an excellent example of why it is important to know the difference between a “deposit” and a “payment.”

September 4th, 2006 | No Comments »

Many IRS Audits Are All About What is Not Brought Up

I have been running into more and more taxpayers who inadvertently underreport the amount of income they earn in a particular year due to an employer or brokerage company not sending the taxpayer a timely Form 1099. That is why I am always interested in reading cases where taxpayers are able to successfully avoid the imposition of penalties and interest in these types of situations.

The general rule is that failure to receive a Form 1099 is not necessarily “reasonable cause” for failure to report income. As a result, taxpayers who do not receive Form 1099’s are generally are liable for penalties and interest on the unreported 1099 income. Regrettably, there are a number of court cases that support this conclusion. There are also a few court cases where the court found that the taxpayer was not liable penalties and interest that resulted from unreported 1099 income.

Mabinuori v. Commissioner is one such case. In that case the taxpayer employed by MetLife. He was first hired by MetLife as an independent contractor and subsequently hired as an employee. As such, MetLife had issued the taxpayer a Form W2 for his wages as an employee and a Form 1099-Misc for his non-employee earnings.

The court found the fact that MetLife had mailed the 1099 to the taxpayer’s prior address and the W2 to the taxpayer’s current address significant. Also, the court found that the taxpayer may have reasonably believed that part of his MetLife income was reimbursement for costs of setting up an office.

The court sides with the taxpayer on this issue, but it the court notes that “the facts present a close question.” Despite the cours interpretation, this issue may not have been as close of a question as the court states.

What is absent from the opinion is whether the taxpayer claimed or tried to claim business expenses for his time as an independent contractor for MetLife or unreimbursed employee expenses for the period when he was an employee of MetLife. If the taxpayer had listed some business expenses it would most likely have been litigated (and a part of the court opinion), as the IRS was arguing that the taxpayer was paid as an employee by MetLife for at least part of the time the taxpayer was affilated with MetLife. It is hard to believe that the taxpayer did not incur some tax deductible expenses during this time - even if it was just training or home office expenses.

The court opinion also does not specify when the IRS notice of deficiency was issued (which is very unusual and — in my mind, suspicious — for a published Tax Court opinion), but the opinion does say that the tax year in question was 2002. The opinion was issued in mid-2006. Thus, it appears that the taxpayer should have been able to file an amended return for 2002 to claim the additional business expenses at the time when the IRS first notified the taxpayer of its position. These additional deductions may very well have offset any tax that resulted from the taxpayers MetLife proceeds being counted as income.

Had the taxpayer raised this issue during the IRS audit, the IRS agent may very well have just made the adjustments and the agent might not have even raised or even conceded the other issues that were litigated. In that case the taxpayers probably would not have had to resort to litigation, saving them the time, cost and brain damage that results from even simple tax litigation. Unfortunately these taxpayers, according to the court opinion, opted to represent themselves.

Of course I do not know if these particular taxpayers had additional deductible expenhses, but I see these types of scenarios time and time again. Specifically, I often encounter scenarios where it is apparent that an IRS agent is aware of a perfectly legal and obvious way that the taxpayer can reduce their tax liability to a point where they owe nothing or where they are entitled to a refund, but the agent opts not to alert the taxpayer to the proper tax reporting method but instead opts to pursue the taxpayer for other items of unreported or under-reported income.

July 25th, 2006 | No Comments »