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.
