Getting The IRS To Believe A College Student Paid For … College

We can argue whether it is a good thing that so many economically-related transactions are reported to the IRS.

It is not just the drag on the economy - which would include practitioners like me, I suppose. It has also allowed the IRS to increasingly delegate its compliance responsibilities to computer algorithms, often functioning without human eyes sparing a glance at the endless notices the IRS sends every year.

And that sets up the problem.  

You see, the notice assumes that you are wrong, and the IRS will likely revise your account – and bill you - should you not reply. That means that you are spending time resolving the matter, or you are sending the notice to me and I am spending time. You and I are being deputized as ad hoc IRS employees.

Personally I want a paycheck and retirement benefits.

This arrangement works fine as long as there is a balance. You agree not to send works of fiction to the IRS and they agree not to contact you like a kid in college wanting money.

That balance is increasingly a thing of the past. Perhaps as a consequence, I am reading or hearing more often that taxpayers should be able to sue the IRS for professional fees incurred with these notices. I am not certain if that means that my client would pay me and then sue, or whether I would sue to receive my fee, but you get the idea. It would be a “reverse penalty” on the IRS. 

I am looking at a pro se decision from the Tax Court. As we have discussed before, “pro se” means the taxpayer is representing himself/herself. It does not technically mean there is no tax practitioner present (for example, I can represent a client in a pro se case), but it probably does mean that there is not a lot of money at issue.

Angela Terrell was a college student. During 2010 and 2011 she was attending Hampton University in Virginia. In the fall of 2010 she registered for the 2011 spring semester. In November, 2010 the University billed her $2,460 for the upcoming semester. In January, 2011 they billed an additional $1,230.

She was borrowing to go through school. In January, after the add/drop period ended, her student loan released $10,199 directly to the university. She paid her tuition and used the rest for living expenses.

Let’s go to the end of the year. The university sent a 1099 for 2011 (technically, a Form 1098-T, but we are on a roll). It showed $1,180 (the $1,230 billed less fees of $50). It did not show what she actually paid.

COMMENT: This reporting was allowable that year.

Angela filed her 2011 tax return and claimed the American Opportunity credit, one of the education credits in the Code. She claimed $2,500.

Wouldn’t you know the IRS sent her a notice? They saw the $2,500. They also saw the 1099 for $1,180.  

The IRS disallowed her credit – in full. They did not even spot her the $1,180.

Surely someone at the IRS would recognize what happened and close the file.

Perhaps in a galaxy far away. In our galaxy Angela and the IRS went to Tax Court.

Did I mention that Angela was a COLLEGE student?

She submitted an account statement from the University – on official letterhead – detailing her tuition charges and payments.

The IRS argued that the 1099 said $1,180, she provided a different number and consequently they could not verify the credit. There was nothing more to see.

Does it sound to you like the IRS even listened to her? 

Here is the Court:

The only dollar amount appearing on that form … is in the box that shows the ‘amounts billed’ for tuition during calendar year 2011. The amount billed to petitioner during 2011 does not control the size of her credit; the relevant number is the qualified tuition that she actually paid during 2011. The Form 1098-T has no entry in box 1, which was supposed to show ‘payments received’ for qualified tuition.”

The Court decided in her favor.

Angela’s case looks very much like the IRS pursuing a frivolous argument, not to mention the inability of IRS machinery to resolve a “duh”-level tax issue at the earliest possible point of contact. Reverse the situation and the IRS would not hesitate to hit you with every penalty imaginable.