IRS Notices And Waiting To The Last Minute

We have been fighting a penalty with the IRS for a while.

What set it up was quite bland.

We have a client. The business had cash flow issues, so both the owner and his wife took withdrawals from their 401(k) to put into the business.

They each took the same amount – say $100,000 for discussion purposes.

OK.

They did this twice.

Folks, if you want to confuse your tax preparer, this is a good way to do it.

At least they clued us that the second trip was the same as the first.

They told us nothing.

The preparer thought the forms had been issued in duplicate. It happens; I’ve seen it. Unfortunately, the partner thought the same.

Oh oh.

Eventually came the IRS notices.

I got it. The client owes tax. And interest.

And a big old penalty.

Here at CTG galactic command, yours truly seems to be the dropbox for almost all penalty notices we receive as a firm. In a way it is vote of confidence. In another way it is a pain.

I talked to the client, as I wanted to hear the story.

It is a common story: I do not know what all those forms mean. You guys know; that is why I use you.

Got it. However, we are not talking about forms; we are talking about events – like tapping into retirement accounts four times for the exact amount each time. Perhaps a heads up would have been in order.

But yeah, we should have asked why we had so many 1099s.

So now I am battling the penalty.

Far as I am concerned there is reasonable cause to abate. Perhaps that reasonable cause reflects poorly on us, but so be it. I have been at this for over three decades. Guess what? CPA firms make mistakes. Really. This profession can be an odd stew of technicality, endurance and mindreading.

However, the IRS likes to use the Boyle decision as a magic wand to refuse penalty abatement for taxpayer reliance on a tax professional.

Boyle is a Supreme Court case that differentiated reliance on a tax professional into two categories: crazy stuff, like whether a forward contract with an offshore disregarded entity holding Huffenpuffian cryptocurrency will trigger Subpart F income recognition; and more prosaic stuff, like extending the return on April 15th.

Boyle said the crazy stuff is eligible for abatement but the routine stuff is not. The Court reasoned that even a dummy could “check up” on the routine stuff if he/she wanted to.

Talk about a Rodney Dangerfield moment. No respect from that direction.

So I distinguish the client from Boyle. My argument? The client relied on us for … crazy stuff. Withdrawals can be rolled within 60 days. Loans are available from 401(k)s. Brokerages sometimes issue enough copies of Form 1099 to wallpaper a home office.

I was taking the issue through IRS penalty appeal.

The IRS interrupted the party by sending a statutory notice of deficiency, also known as the 90-day letter.

Class act, IRS.

And we have to act within 90 days, as the otherwise the presently proposed penalty becomes very much assessed. That means the IRS can shift the file over to Collections. Trust me, Collections is not going to abate anything. I would have to pull the case back to Appeals or Examination, and my options for pulling off that bright shiny dwindle mightily.

You have to file with the Tax Court within 90 days. Make it 91 and you are out of luck.

I am looking at a case where someone used a private postage label from Endicia.com when filing with the Tax Court. She responded on the last day, which is to say on the 90^th day. Then she dropped the envelope off at the post office, which date stamped it the following day.

I get it.

That envelope has an Endicia.com postmark. Then it has a U.S. Postal Service postmark dated the following day.

Then there is another USPS postmark 13 days later.

And the envelope does not get delivered until 20 days after the date on the Endicia.com label.

Who knows what happened here.

But there are rules with the Tax Court. One is allowed to use a delivery service or a postmark other than the U.S. Post Office. If the mail has both, however, the USPS postmark trumps.

In this case, the USPS postmark was dated on the 91^st day. 

You are allowed 90.

She never got to Tax Court. Her petition was not timely mailed.

Sheeeessshhh.

BTW always use certified mail when dealing with time-sensitive issues like this. In fact, it is not a bad idea to use certified mail for any communication with the IRS.

And - please - never wait to the last day.