Being Unemployed, Depressed And Owing The IRS

The case is 55 pages long.

Even a tax guy gets tired of marathon reading.

The story got me fired up, however, so let’s talk about it.

A frequent area of taxpayer request for IRS relief from penalties is rollovers of retirement monies, especially IRAs. Used to be that one filed for a Private Letter Ruling to obtain official absolution. Those bad boys are not cheap, as you will pay a tax CPA or attorney to draft the PLR, as well as pay the IRS filing fee. The filing fee alone can run you $10,000.

In 2016 the IRS published Revenue Procedure 2016-47 allowing for alternate means of absolution without requesting a PLR. Even the IRS got tired of taking your money.

Mr Trimmer was a retired cop with the New York Police Department. He was moving on after 20 years with the NPD, taking a security job with the New York Stock Exchange. He needed the job to supplement his pension, as he had two sons going through college. The new job however fell through. He was hosed, as the NYPD does not rehire.

And Trimmer went major depressive. He was antisocial, rarely left the house, neglected his hygiene and grooming – all the classic symptoms.

Somewhere in there he received two retirement checks: one for $99,990 and a second for $710. They lay on his dresser for weeks until he finally got around to depositing them into … his checking account.

COMMENT: If you were thinking a rollover, he flubbed because the roll did not go into an IRA account.

Months later Trimmer and his wife met with their accountant for their taxes. The accountant advised that he transfer the monies to an IRA immediately.

COMMENT: Trimmer was well outside the 60-day window at that point.

The IRS sent him a notice asserting that he failed to report over $100,000 of income and demanded taxes, penalties, interest, a Weimaraner puppy and a month’s pass to Planet Fitness.

It added up close to $40.000.

Yipes!

Trimmer wrote back to the IRS: 

    Dear Sirs:

I am contesting the amount of money said to be owed. Please allow me to explain the situation. In April 2011 I retired from my job and took a pension loan. After my retirement I went through a period of depression and was not managing my affairs. I received my check for the loan and deposited it into Santander bank on July 5, 2011. The money remained in this account until April of 2012 when it was switched to an I.R.A. in the same bank where it remains to this day.

A few points

- There was no deception or spending, investing of the money at all. I received the check and deposited it into the bank.

- My wife and I have been paying taxes for a combined 60 years and NEVER had the least bit a problem.

- There was no harm done to anyone with the money staying in the bank except me (I was receiving 0.25% interest.)

- I switched the money to an I.R.A. before I was notified by the I.R.S.

I am now employed again and am driving a school bus and have a son in college and another a year away. To pay $40,000 in taxes for money that is in an I.R.A. would absolutely cripple my family as it would be 3 years of my salary. Sir no harm was done to anyone. I went through a rough time upon separation from my job, causing me emotional hard times that caused this situation. Penalizing me and my family would not benefit anybody, only cause extreme duress and punish my children who played no part in this situation. I ask you to consider these facts and please come to a fair decision. Please contact me if you need at [phone number redacted].

Thank You,

John Trimmer

I feel sorry for the guy.

Here is the IRS reply:

“The law requires you to roll over your distribution within 60 days of the distribution date. If the roll over exceeds the time frame it becomes fully taxable.”

Nice folk over there.

Here is the tax issue: The IRS can issue waivers for this penalty, but they did not mention such fact to Mr Trimmer or how to apply for a waiver. Heck, they did not even reference Trimmer’s unfortunate circumstances. A reasonable person could question whether anyone even read his letter.

The IRS sent a Statutory Notice of Deficiency, also known as a 90-day letter.

Trimmer filed with the Tax Court.

The IRS went right for the throat:

•  Trimmer did not follow procedures (Rev Proc 2013-16 for the nerds).
• This made the hardship waiver provision “inapplicable.”
•  Since Trimmer had not pressed the point, there technically had been no “final administrative determination.”
• Without that “final,” the Tax Court had no authority over the case.
• In any event, Trimmer had never explained why he was unable to accomplish the two rollovers within 60 days.
• And where is that puppy?

Well, thank you Darth.

The Tax Court seemed to like Trimmer:

(1) OK, so he did not follow procedures.

(2) Not so quick, Sith Lord. How does the IRS reconcile 2003-16 with the following from the Internal Revenue Manual:

Examiners are given the authority to recommend the proper disposition of all identified issues, as well as any issued raised by the taxpayer.”

(3) The examiner’s authority to consider a hardship waiver “strongly implies” that the taxpayer may request the waiver.

COMMENT: 

(4) From the Court:

As might be expected from a self-represented taxpayer unversed in the technicalities of the tax law, he did not expressly cite section 402(c)(3)(B). But his letter leaves little doubt that he was seeking a hardship waiver of the 60-day rollover requirement….”

(5) The Court points out that the examiner 

… did not decline to consider Mr. Trimmer’ request, did not request that petitioners provide any additional information, and did not advise them that they were required to submit a private letter request or do anything else in particular to have their request considered.”

(6) If anything, the examiner wrote Mr. Trimmer that

… you do not need to do anything else for now. We will contact you within 60 days to let you know what action we are taking.”

(7) And 3 days later the examiner

… wrote petitioners again, denying requested relief, not on the basis that petitioners had requested it in the wrong manner or had provided insufficient information, but on the basis of cursory and incomplete legal analysis that failed to take into account the provision for hardship waivers under section 402(c)(3)(B).”

The Tax Court found in favor of Trimmer. He could do a late rollover. He was not subject to tax or penalty and could keep his Weimaraner puppy.

Good.

But it should not have gone this far. We are not in unexplored tax country here.

One could argue that our tax system is near-to breaking when you have to hire a professional to resolve near-routine tax problems. This man did not roll-over his money within 60 days. He was clinically depressed for a while. I can see requesting a doctor’s letter attesting to the taxpayer’s condition, but this is not cutting-edge tax practice.  

So why the HBO-level drama?

Here is one commentator’s remark:

We have a lazy revenue agent who probably just glances over the response. Is it the revenue agent’s fault? No, I don’t blame the revenue agent. With budget cuts, the caseloads of revenue agents are insane.”

I was listening until the “overworked” card. Seriously? I recommend this revenue agent not consider a career as a tax CPA, although – as a positive – it would probably be a short one.  

I do think our case highlights a disturbingly under-skilled IRS employee.

I also think it shows a trigger-happy IRS assessing penalties on anyone for anything. That examiners are throwing them around like sugar packets from a McDonalds drive-through indicates that they are under pressure to sweeten the take, irrespective of whether penalties are appropriate. Those penalties are under-the-table income to an IRS already facing a tight budget.

We have spoken before of a goose-and-gander bill, requiring the IRS to pay a taxpayer when the agency acts recklessly. The IRS already has people on payroll to pin your ears back, whereas you have to hire someone like me to fend them off. Their incremental cost to chase you is minimal, but your incremental cost to defend yourself can be significant if not ruinous.

Our goose-and-gander bill might or might not have protected Trimmer specifically, but eventually the IRS would lose enough cases to reconsider the automatic-tax-and-penalty-no-reasonable-cause-raised-middle-finger policy it has adopted. Cutting a check really focuses one’s attention.