Tuesday, February 14, 2012

The ‘Have a Heart’ Case

A taxpayer successfully made a case that the IRS collections agent had abused her discretion in not adequately factoring into her assessment of his offer in compromise request that the taxpayer: was diagnosed with a brain tumor; his doctors had urged that the tumor be surgically removed and he had no health insurance; he had no significant assets and had been denied charity care, and that he continued to have health problems which limited his ability to earn money.

Take aways:

• The court stated that: “The settlement officer’s approach is difficult to square with the applicable administrative guidelines” which specifically permit officers to make allowances for special circumstances such as serious health conditions.

• The IRS agent did not dispute the existence of the health problems. Her log indicates that in calculating petitioner’s ability to pay, she took his health condition into account by allowing him a $200 monthly allowance for health insurance (even though he had none) “due to his medical condition.” (If only! $200/mon won’t cover health insurance, much less brain surgery!)

• The Court remanded the case to the Appeals Office for further consideration and clarification and instructed them to consider any new collection alternative that petitioner may wish to propose.

Friday, February 10, 2012

The ‘The I in IRA Stands for Individual’ Case


Taxpayer was denied an AGI adjustment for a $5000 contribution to his IRA. he was phased out for a deductible IRA contribution due to their AGI and the fact that he participated in a work sponsored retirement plan. Taxpayer thought an IRA in his name naming his spouse as the beneficiary was the same thing as a spousal IRA – an IRA in the name of the spouse (who did not participate at work). He argued the IRS was partially to blame because they did not issue the deficiency notice in time for him to correct his error. He was told that ignorance of the law is no excuse for not complying.

Take aways:

• That would have to have been one lightening fast deficiency notice because IRA contributions but be made by the due date of the return NOT including extensions.

• Losing an adjustment to arrive at AGI can have an impact on your itemized deductions and eligibility for various credits thereby costing you far more than just the disallowed deduction times your tax rate.

Thursday, February 9, 2012

The 'Oops - My Bad' Case


Taxpayer was denied the dependency exemption, head of household status, EIC, and CTC for her son. The boys father had also (appropriately) claimed him as a dependent in this year. A new custody agreement gave the father primary custody, she acknowledged he lived with his father all year, and the support agreement required her to provide only 20% of her son’s support in this year making it amply clear that she did not provide 50% of his support. Apparently, she had just prepared her tax return in the same manner she had prior to relinquishing custody. I am not sure how she got all the way to take court before realizing she did not have a leg to stand on.

Take aways:

• In cases such as this, the custodial parent may execute a Form 8332, Release of Claim to Exemption for Child of Divorced or Separated Parents to allow the other parent the dependency exemption if so desired.

• If all the requirements are met, a child may qualify you for HOH status even if you are allowing the other parent the dependency exemption.

Wednesday, February 8, 2012

The ‘Mi Casa no es Su Casa’ Case


Taxpayers were denied a first time homebuyer credit because they had an ownership interest in a principal residence within 3 years of the date they acquired the new house. (This preceded the long term homeowner credit.) They sold their former residence on 6/6/07 and purchased their new residence on 7/28/09/ They listed the former residence for sale in February of 2006 and claimed that at that point they began to reside with Mrs. Foster’s parents ergo the former residence ceased being their principal residence as of that point.

Take aways:

• Whether or not a dwelling is the principal residence of a TP is relevant for a number of tax laws and the IRS considers all facts and circumstances to make these determinations. Whatever they determine, it will be 100% one way or the other. In other words, nothing is pro-rated – you either totally win or totally lose.

• In this case, between February 2006 and June of 2007: Mrs. Foster renewed her State-issued driver’s license which set forth the old house address; provided the former home address on their joint Federal income tax return; maintained utility services at the house; frequently stayed overnight and hosted family holiday gatherings at the house; kept all their personal belongings at the house; accessed the Internet at the house; and received bills and correspondence at the house. Additionally they did not pay rent or contribute toward household expenses at the alternate purported dwelling. All factors that weighed against them.

Tuesday, February 7, 2012

The ‘Less Indignation and More Substantiation’ Case


Taxpayer unsuccessfully fought the disallowance of considerable per diem payments/expenditures. Taxpayers operated a trucking co and paid drivers per diem for meals, motels, and other expenses. Sioux calculated per diem amounts on the basis of the number of travel days. Those amounts were recorded in payroll books that indicated travel dates but not destinations.

Take aways:

• The per diem method is an allowed method for calculating these types of deductible reimbursements. The rates are set by the IRS annually and vary by destination. There is a standard and high cost of living allowance. Recording the location of the travel would be important. The TP must still retain records substantiating that expenses were incurred.

• Taxpayer first stated that they failed to provide the records because there would be hundreds of thousands of them but then changed the story and testified that the records had been destroyed in a flood caused by a broken pipe in the storage unit. (They waited nearly 6 years to raise the issue of the destroyed records.)

• When records are destroyed or lost due to circumstances beyond TP control, TP is generally allowed to substantiate his deductions by reasonable reconstruction of his expenditures. A taxpayer is required to try to salvage or reconstruct what he can.

• TP presented no credible evidence, for example, of how many drivers they had, how long on average they were away from home, or what per diem amount was used. Based on the type of business one would imagine the expenses were legit but TP was completely fixated on proving they shouldn’t have to substantiate the costs.

Monday, February 6, 2012

The ‘Wrong on SO Many Levels’ Case


Taxpayer was found ineligible for: dependency exemptions, head of household status, earned income credit, AND additional child tax credit. Children claimed were the grandchild and nephew of TP’s wife. On the bright side, he did prevail in reducing the assessment for unreported unemployment benefits by showing he did not actually receive the amount reported on the 1099-G. The state recouped some money he defrauded them out of in a past year by garnishing his benefits in the questioned year but they never adjusted the amount reported on his 1099-G for those debits.

Take aways:

• If a taxpayer asserts a reasonable dispute with respect to any item of income reported on a third-party information return and he has fully cooperated with the IRS, the IRS will have the burden of persuasion.

• TP provided documents from the state that showed what he actually received. There is no legal basis for including in income for 2009 amounts that were “denied” to petitioner in 2009 because of overpayments in at least 1 year before.

• Taxpayer might have been entitled to at least the dependency exemption if the children lived with him all year, they were not dependents of someone else, and he provided over one-half of their support but he offered no evidence to that effect.

• The first test for determining if you are eligible for head of household status is that you can’t be married as of the close of the tax year. Taxpayer was married.

• In order to be eligible for EIC you must file a joint tax return. In this case, the combined income on a joint return would have been too high to qualify for EIC.

• In some cases a TP would qualify for regular child tax credit but be unable to benefit from it due to a lack of tax liability. To mitigate this situation, the nonrefundable portion of the CTC may be replaced with the refundable ACTC for TPs within a certain income bracket. As you might guess, this TP was eligible for neither regular CTC nor additional CTC.

Thursday, February 2, 2012

The 'Interest-ed Broker' Case



Taxpayer received a $500k sum of money from his employer, in 1998. The employer deemed this a loan which would be forgiven if taxpayer stayed employed with the company for five years. Taxpayer included the forgiven loan and accrued interest on his tax return in the year forgiven (since it was in his W2) however sought to exclude the accrued interest portion from income upon being audited and assessed taxes related to other, unrelated tax positions he had adopted on his return.

Take aways:

• The courts noted that the facts agreed to by both the taxpayer and the IRSwere in just plain wrong with respect to the law because payments such as this (forgiveness taking place in part for each year of services as an employee) have been deemed to be recognizable each year and not all at the end, however, since the IRS didn’t try to make that case they let it slide.

• The court took administrative notice that the taxpayer and his employer executed a legal agreement but didn’t follow it’s provisions. The agreement didn’t weigh for or against taxpayer but if it had supported his argument that would have been nullified by the fact that TP himself had disregarded it.

• The law does not require realization in income of discharge from indebtedness to the extent such liability would give rise to a tax deduction so if the TP could prove that he would have been able to deduct the interest he would not have to recognize it.

• TP was a stockbroker and argued that the loan was to allow him to acquire a securities portfolio with which he could showcase his skills. He claimed that the money was used for this purpose and therefore should be deductible as an ordinary and necessary cost incurred in the production of income. Unfortunately all he did was point to all the stocks he purchased right after receiving the money and did not enter into evidence any bank statments or other proof that they were purchased with the loan money specifically.

• The court found that even if TP had offered proof that the money was used for the purchase of the portfolio, such interest would be deemed investment interest and therefore only deductible to the extent of invest income. As luck would have it, TP had no investment income in that year. (It does carry forward for deduction in future years but the court did not seem to think that caused the interest to be called deductible. I would tend to disagree but the TP did not argue this point.)

• Investment interest is interest on monies use to acquire property held for investment. Property is held for investment if it produces income in the form of interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business (i.e., portfolio income).

• I wonder if the IRS would have questioned it if he had reported the interest as investment interest to begin with, enabling its use in future years? Taxpayers may elect to offset dividends and capital gains with investment interest expense carry-forwards even though those types of income are currently taxes at lower rates. He would likely have obtained the benefits at some point, given his large stock portfolio and career.