I am looking at a Tax Court pro se decision.
Pro se means that the taxpayer represents himself or herself.
Technically, that is explanation insufficient. I, for example, could represent someone in Tax Court and it would still be considered to be pro se.
I tend to shudder at pro se cases, because too often it is a case of someone not knowing what they don’t know. And – once you are that far into the tax system – you had better be up-to-speed with tax law as well as tax procedure. Either can trip you up.
There is a cancer surgeon who inherited an IRA in 2013. He took distributions in both 2014 and 2015 – distributions totaling over $508 thousand - but he researched and came to the conclusion that the distributions were not income.
COMMENT: How did he get there? The first thing that comes to mind is that these were Roth IRAs, but that was not the case. He argued instead that the IRAs included nondeductible contributions, and those nondeductible amounts were not taxable income coming out.
The reference here is to nondeductible IRAs, the cousin to Roth IRAs. These bad boys would be almost extinct except for their use in backdoor Roth conversions. Still, the doctor was wrong: it is EXTREMELY unlikely that a nondeductible IRA would be fully nontaxable. The reason is that only the contributions are nontaxable; any earnings on the contribution would be taxable. I suppose that one could have a completely nontaxable distribution, but that would mean the nondeductible IRA had no - none, nada, zippo - earnings over its existence. That would be among the worst investments ever.
The IRS computerized matching program kicked-in, as the IRA distributions would have triggered issuance of a 1099. The IRS caught 2014. The doctor disagreed he had income. The IRS machinery ground-on and resulted in the issuance of a 90-day letter (also known as a Statutory Notice of Deficiency) for 2014. The purpose of the SNOD is to reduce a proposed tax assessment to an actual assessment, and it is nothing to snicker about. The doctor had the option to appeal to the Tax Court, which he did.
Practice can be described as doing what is not taught in school, so the story took an unusual twist. The doctor was contacted by a revenue agent for a real and actual audit of his 2014 tax return. The agent however was looking at issues other than the IRA, and the doctor did not mention that the IRS Automated Under Reporting unit was looking at 2014. The agent continued blithely on, not knowing about the AUR and eventually expanding his audit to 2015.
QUESTION: Why didn’t the doctor tell the agent about AUR? I would have tried to consolidate the exams myself.
The doctor was dealing with AUR over matching. They wanted money for 2014.
The doctor was also dealing with a living, breathing agent about 2014. The agent wanted money, but that money was from areas other than the IRA.
The doctor took both SNODs to Tax Court.
He argument was straightforward – he invoked the tax equivalent of double jeopardy: Section 7605(b):
(b) Restrictions on examination of taxpayer
No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.
If there was double jeopardy, the doctor clearly wanted the revenue agent’s proposed assessment, as it did not include the IRA.
Did the doctor have an argument?
This Code section has an interesting history. It goes back to the 1920s, at a time when only the wealthy were subject to income tax and there were no computers, 1099s and what-not. Matching was not even a fevered dream. What did exist, however, was the potential for human abuse and repetitive examinations to beat someone into submission. The progenitor of our Section 7605(b) came into existence as an early version of taxpayer protection and rights.
What the Tax Court focused on was whether there were two “examination(s) or investigations.” If the answer was yes, the Court would have to continue to the next question: was the additional examination “unnecessary?”
The Court did not need to continue to the second question, as technically there were not two examinations. You see, the matching program is driven by 1099s and other reporting forms. The AUR unit is not “auditing” in the traditional sense; it is instead trying to reconcile what a taxpayer reported to what an independent party reported.
Additionally, the only thing AUR is looking at is income. AUR is not concerned with deductions. Its review does not rise to the level of an examination as AUR is intentionally ignoring all the deductions on one’s return.
But I get it: it does not feel that way to the person interacting with the AUR unit. And there definitely is no real-world difference when AUR wants additional money from you.
But there is a technical difference.
The doctor saw two examinations. I suspect most people would agree. However, the doctor technically had one examination. He was not in double jeopardy. Section 7605(b) did not apply.
Our case this time was Richard Essner v Commissioner, TC Memo 2020-23.