The Freak Tackles The IRS

Let’s go hard procedural on this post.

He played defensive end in the NFL with the Tennessee Titans and Philadelphia Eagles from 1999 to 2010. At 6’4”, 260 pounds, 86-inch wingspan and 4.43 forty, NFL fans remember him as “The Freak.”

Jevon Kearse is in the tax literature.

It looks like a business deal went bad, because in 2010 he claimed a $1,359,000 bad debt deduction.

The IRS bounced it. The IRS now wanted over $430 thousand in tax. They issued a Notice of Deficiency (NOD) on May 11, 2012.

COMMENT: Procedurally, the IRS issues a NOD (also known as a SNOD) before it can officially assess the additional tax. Once assessed, the IRS can bring all its collection powers to bear.

Problem: Kearse says he never received the NOD.

Let us start our walk through IRS procedure.

Once assessed, the IRS sent Kearse a Notice of Federal Tax Lien.

COMMENT: One has the right to request a hearing (called a Collection Due Process hearing) in response.

Kearse requested a CDP hearing, at which he asserted that he never received the NOD and presented an offer in compromise (liability – for the home gamers) for $1.

COMMENT: There are three flavors of offer in compromise. The one we are talking about is when there is substantial doubt that the assessed tax is correct. At $1, that is exactly the point Kearse was making.

IRS Appeals tuned him down, and off to Tax Court they went.

A taxpayer has the right to challenge the underlying tax liability in a CDP hearing IF he/she never received the NOD or otherwise never had a chance to dispute the proposed assessment. This is a procedural requirement, and the Court can bring it up even if the taxpayer fails to.

Responsibility now shifted to the IRS. The Appeals officer had to prove that the IRS properly mailed the NOD. There are two general ways to do this:

(1) Reviewing an internal IRS document management system

(2) Reviewing a postal Form 3877 or an equivalent mailing list with date stamps and/or initials.

The IRS said they did the first option: they reviewed the internal system.

Kearse’s tax attorneys also got the Appeals officer to stipulate that she could not produce a Form 3877 or otherwise prove the mailing of the NOD.

NOTE: We will come back to the importance of a “stipulation” in a moment.

There is a second procedural issue here: the IRS can rely on its internal system unless the taxpayer alleges that the NOD was not properly mailed.

Which is what Jevon Kearse had done. The IRS could not rely on option (1).

Incredibly, the IRS finally found the Form 3877, explaining that the eventual success had resulted from an update to their systems.

The Court bounced the Form 3877.

What ….?

It has to do with the stipulation. You see, a stipulated fact is treated as conclusive evidence. It cannot be changed, barring extraordinary circumstances.

The IRS had to argue extraordinary circumstances.

And we have the third procedural issue: the IRS failed to do so.

Meaning the IRS was bound by its stipulation that it could not prove the mailing of the NOD.  

The IRS attorney flubbed.

Jevon Kearse won.

What a freak case.

Travel Expenses When You Have One Client

It is an issue I know well: when are your away-from-home travel expenses deductible?

Granted, this issue has a lot less lift underneath it now that miscellaneous itemized deductions are disallowed, but it can still affect the self-employeds, including partners and LLC members.

What sets it up is the concept of a “tax home.”

This term does not mean what you would first think.

A tax home is primarily an economic concept: where do you earn your paycheck? Depending on that answer, you may or may not have deductible travel expenses.

Say that you live in northern Kentucky. Your job is in San Francisco. Every Sunday you catch a plane out, and every Friday you return home.

COMMENT: I am not making this up. I had a client who did this – for a while. It was a VERY good paycheck.

You do not have deductible travel. You earn your paycheck in San Francisco. You are not travelling away from your tax home. You are travelling away from your residence, but in this case your residence is not your tax home.

Let’s mix it up. Say that you work one week in San Francisco and one week from Kentucky. Have you moved the needle?

You may have.

Let’s mix it up again.

Say you have five clients. One week you travel to San Francisco. Another week you travel to Nashville. One week you stay home and work on your three other clients.

Have you moved the needle?

Yep.

When a taxpayer does not have a permanent place of business but rather is employed by various clients and at different locations, the default rule is that the taxpayer’s residence is deemed the tax home. This is the Zbylut case, and feel free to call me on how to correctly pronounce the name.

I am looking at the Brown case (TC Memo 2019-30).

Brown was based out of Atlanta. He was a business consultant working as a CFO. If you needed his skill set but not a full-time CFO, Brown might be your guy. He had several clients over several years, and in 2012 he picked up a sweet multiyear contract in New Jersey.

Two key facts:

(1)  For 2012 and 2013, his only business income was from New Jersey.

(2)  And wouldn’t you know that the IRS audited his 2012 and 2013 returns.

Brown argued that New Jersey was a temporary gig.

In the sense of eternity, he is right. In real time, however, the contract was for three years. The IRS considers one year to be the demarcation between temporary and indefinite. There is probably no deduction if you go indefinite.

But New Jersey could terminate the contract, argued Brown.

Could but not likely, replied the Court.

Brown then wanted to rely on Zbylut.

The IRS wanted to see other paychecks.

Brown argued that in 2013 he started working one week in New Jersey and one week at home.

The IRS wanted to see his travel and other records.

Which he never provided. Why? Who knows.

He argued that he was working on other clients and that focusing solely on cash received during the period under audit was misfocused.

Yep, I get it. Maybe he could not invoice until a job was complete or materially so. Or some client stiffed him.

The Court paused. Provide us a schedule or calendar with client meetings, work assignments, business-related tasks, correspondence. Help us out here.

That seems reasonable. Surely he can come up with telephone records, exchanged e-mails, any snail mail correspondence….

Brown provided nothing.

Folks, the Tax Court has a long-standing rule-of-thumb:

If you fail to produce documentation in your possession that would be favorable to you, the Court will take the presumption that the documentation, if presented, would be unfavorable to you.

And that is what the Court did: it ruled against Brown.

He did not lose because of uninterpretable technical issues. He lost for the most basic reason: he provided no support or documentation for his position.

And I suspect I know why: he really had only one gig and that gig was in New Jersey. There was no travel as defined in the tax Code. His tax home locked arms with his paycheck and they both moved to New Jersey. It’s OK.

But there is no tax deduction.

Getting Married And ObamaCare Subsidies

I am reading a case that reminds me of a return from last year’s filing season. I had an accountant who became upset, arguing that the result was unfair.

I agree, but this is tax.

I started practice in the eighties, and a significant portion of my tax education was at a law school.  Tax accounting classes tended to be staccato-like:  issue-driven, procedural and reliably arithmetic. Tax law classes were case and doctrine-focused: what is income, for example, and we would study the concept of income as it evolved over the decades.

It seemed to me that tax law early in my career followed – as a generalization - more of that law school feel: corporate liquidations and the General Utilities doctrine; the claim of right doctrine and North American Oil; business purpose and Helvering v Gregory. There were strong Ways and Means and Finance Committee chairs with some understanding of the issues (and precedent) their committees were addressing.  

But those were different politicians. Both they and taxes have gotten progressively weirder.

Congress went on to introduce something called uniform capitalization, arguing that accountants did not know how to absorb costs into inventory; tax items – personal exemptions or itemized deductions, for example – that would evaporate like a Thanos movie moment; an alternative minimum tax that would tax something that ultimately went down in value; the increasing refundability of tax credits, meaning that those at the low end of the income scale had as much if not more opportunity to game the system than any big-baddy McMoneybags did.

Let’s look at the Fisher case.

Christina Fisher began the year as a single mom. She married Timothy in November. Christina was struggling, and she received Obamacare subsidies.

You may recall that there are two relevant aspects to Obamacare that will come into play in this case:

(1)  If you are below a certain income level, you might be entitled to some – or even full – subsidy of your health insurance premiums.

(2)  You can use that subsidy to pay your premiums immediately rather than wait to the end of the year and receive the subsidy via a tax refund.

There was no question that Christina was entitled to a subsidy for more than 10 months. Her circumstances changed when she married; she no longer qualified.

Time to prepare her taxes.

One is supposed to attach a reconciliation of projected income when receiving the subsidy to actual income ultimately reported on the tax return. The Fishers did not.

The IRS did it for them. They also wanted approximately $4,500, saying she was not entitled to the subsidy.

A rational mind would expect that the tax law would go to a month-by-month calculation. There was no doubt that she qualified for 10 months. Let’s allow for some doubt in the month of marriage. Let’s also disqualify the last month of the year because of Timothy’s income.

At worst she would have to pay back 2 months, right?

Nah.

She has to use her household income for the year – including Timothy’s income.

Then she takes half of that amount for her monthly testing.

Not her OWN income, mind you, but one-half of combined income for the year.

Who came up with this?

Not the best and brightest exercising due deliberation, clearly.

Well, using even one-half of the combined household income, Christina failed all 10 months one would have expected her to pass. She owed almost $4,500 to the IRS.

And that is why my accountant lost his mind last year. He could not believe that what he was reading is really what was meant. It made no sense! Surely there is an alternative calculation? Does the tax Code allow a facts and circumstances …?

Ahh, he is still young. He will learn.

I Filed A Petition With The Tax Court

This week I put in a petition to the Tax Court.

It used to be that I could go for years without this step. Granted, I have become more specialized, but unfortunately this filing is becoming almost routine in practice. A tax CPA unwillingly to push back on the new IRS will have a frustrating career.

Heck, it is already frustrating enough.

The IRS caused this one.

We have a client. They received an audit notice near the end of 2018. They were traveling overseas. We requested and received an extension of time to reply.

Then happened the government shutdown.

We submitted our paperwork.

The client received a proposed assessment.

We contacted the IRS and were told that the assessment had been postdated and should not have gone out. Aww shucks, it was that IRS-computers-keep-churning-thing even though there were no people in the building. The examining agent had received our pack-o’-stuff and we should expect a revised assessment.

Sure. And I was drafted by the NFL in Nashville recently.

We received a 90-day notice, also known as a statutory notice of deficiency. The tax nerds refer to it as a “NOD” or “SNOD.” Believe it or not, it was dated April 15.

Let’s talk this through for a moment, shall we?

The IRS returned from the government shutdown on January 28^th.  We had an audit that had not started. Worst case scenario there should have been at least one exchange between the IRS and us if there were questions. There was no communication, but let’s continue. I am supposed to believe that an IRS agent (1) returned from the shutdown; (2) picked-up my client file immediately; (3) wanted additional paperwork and sent out a notice that never arrived requesting the same; (4) allowed time for said notice’s non-delivery, non-review and non-reply; (5) forgot to contact taxpayer’s representative, despite having my name, address, CAFR number, telephone number, fax number, waist size and favorite ice cream; (6) and yet manage to churn a SNOD by April 15^th?

I call BS.

I tell you what happened. Someone returned from the shutdown and cleared off his/her desk, consequences be damned. Forget about IRS procedure. Kick that can down the road. What are they going to do – fire a government employee? Hah! Tell me another funny story.

If you google, you will learn that there are two conventional ways to respond to a SNOD. One is to contact the IRS. The other is to file a petition with the Tax Court.

Thirty-plus years in the profession tells me that the first option is bogus. Go 91 days and the Tax Court will reject your petition. The 90 days is absolute; forget about so-and-so at the IRS told me….

What happens next? The case will return to Appeals and – if it proceeds as I expect – it will return to Examination. Yes, we would have wasted all that time to get back to where the initial examining agent failed to do his/her job.

I wish there were a way to rate IRS employees. Let’s provide tax professionals - attorneys, CPAs and enrolled agents - a website to rate an IRS employee on their performance, providing reasons why. Allow for employee challenge and an impartial hearing, if requested. After enough negative ratings, perhaps these employees could be - at a minimum - removed from taxpayer contact. With the union, it probably is too much to expect them to be fired.

You can probably guess how I would rate this one.