Lost Records, A Dead Professional And A Tax Audit

 

I admit I was suspicious when I read the following:

The corporation had a bookkeeper during the years at issue, Robin Greenslade, who is now deceased. Petitioners trusted Ms. Greenslade to handle the accounting and did not regularly review her work.”

The corporation … also used the bookkeeping services of Joan Falanga during the years at issue. She recorded Mr. Ataya’s capital contributions …, but these records and, indeed, all of her records for the corporation are lost.”

That’s quite a run of bad luck.

By 2008 Hani Ataya had nearly 20 years’ experience in car sales. In 2008 he founded Cost U Less Cars, Inc., a California corporation, with a partner. The partner left in 2012 and Inaam Ataya (Hani’s mother) joined the business shortly thereafter. His mom had an IT degree and had worked for the state of California.

The business was relatively straightforward: it bought cars at auction and resold them. Hani was the primary buyer, and he regularly used cashier’s checks to buy cars. Sometimes he used them all, sometimes he did not. When he did not, he kept the unused checks in a desk drawer for later use.

COMMENT: Not loving this: it is weak control over cash and will look bad in the event of audit.

It appears Cost U Less Cars, Inc was making bank:

             

Wow.

The company then started losing money and ceased operations in 2020.

The company was audited by the IRS for years 2014 through 2017. The audit went poorly.

The company filed with the Tax Court. The filing was thrown out in August, 2023 because the corporation no longer existed under California law. A corporation is an artificial legal entity. It exists because a state says it exists and does not exist when a state says otherwise.

The IRS saw the Ataya’s taking approximately $1.5 million in 2015 via cashier’s checks to purchase a house in Granite Bay, California.

COMMENT: No problem as long as they reported it as income: wages, dividends, Nigerian prince 419 scam, whatever.

They took out additional cashier’s checks in 2016 to pay for flooring and improvements to the place.

COMMENT: Ditto.

The IRS next examined the two shareholder personal returns.

COMMENT: Not an uncommon expansion of the audit, and (frankly) expected in this instance.

Here are proposed adjustments to Hani’s 2015 and 2016 tax years:

     

Here are adjustments to his mom:

How can you miss $1.5 million? You would think they were in Congress or something.

The IRS came in hot. They wanted tax. They wanted penalties. And interest. Hani’s tab alone for the two years was over $600 grand.

The Ataya’s wanted penalty relief.

First up: Cost U Less Cars, Inc was hamstrung during its audit. Key players were gone. Its charter had been revoked, causing difficulties with obtaining alternative records.

Yep, the loss of two key players and business documentation was odd. What accounting remained was questionable, to such a degree that the IRS used bank account analysis to arrive at more solid numbers. Neither fact helped Hani and his mom, as those were outside normal business practices. And that charter thing was self-inflicted.

Next up: reliance on a professional.

I like it.

There were two bookkeepers, and someone (not a CPA) to prepare the tax returns.

Professionals.

Here are the ingredients to arguing reliance:

·       The advisor was competent with sufficient expertise to justify reliance.

·       The taxpayer provided necessary and accurate information to the advisor.

·       The taxpayer actually relied on the advisor’s judgement.

Then I read something I am unsure I have ever read before:

Although petitioners testified that they relied on … and … for bookkeeping services and on Mr. Packey for tax preparation services, the record lacks evidence of their professional qualifications or, in the case of Mr. Packey, evidence of his competence as a tax professional.”

Ouch. I am feeling vicarious pain on behalf of Mr. Packey.

The Tax Court sustained the penalties.

My thoughts?

I would have argued the penalties too. I almost have to, as a professional.

However, when I read the two Tax Court cases (business and personal), I was expecting fraud penalties at the end of the story.

Know when to walk away, folks.

Our case today was Ataya v Commissioner, T.C. Memo 2025-55.

IRS Penalties and First Time Abatement

I drafted a letter this past Monday. Later in the day I saw a report from the Treasury Inspector General of Tax Administration (TIGTA) on the same topic. Serendipity.

We have a newer client who set-up an S corporation in 2011. That’s fine, except that he had not spoken with an accountant and did not meet us until April, when his individual tax return was due. This meant that his S corporation return was already late, as corporate returns are due a month earlier than individual returns.

Sure enough, he received a letter from the IRS asking for $195 – because the S corporation return was a month late.

So I drafted a letter that included the following magic words:

The taxpayer requests first-time abatement under IRM 20.1.1.3.6.1. Tax year 2011 was the taxpayer’s initial year of existence.”

The “IRM” is the Internal Revenue Manual.

The idea behind the first-time abatement (FTA) is “get out of jail free.” You haven’t had problems with the IRS before, and the IRS spots you a mulligan.

IRS penalties normally do not work this way. One usually has to provide “reasonable cause”for why one failed to file, pay or whatever. Penalties can add up. There are two common ones:

(1) The failure-to-file (FTF) penalty is usually 5 percent of the unpaid taxes for each month or part of a month that a tax return is late, not to exceed 25 percent. If you file the tax return more than 60 days late, figure the minimum FTF penalty to be the smaller of $135 or 100 percent of tax due.

(2) If you file but do not pay in full, then the failure-to-pay (FTP) is usually one-half of one percent each month or part of a month that the taxes remain unpaid. This penalty can be as much as 25 percent of the unpaid taxes.     

The IRS can abate both penalties if one shows reasonable cause. A top-of-the-line reasonable cause is to get hit by a bus and be in the hospital. As you can guess, the IRS does elevate the bar a bit for reasonable cause. “I was busy” is almost a guaranteed loser.

Let’s circle back to the FTA. You do not need to show reasonable cause; all you have to do is ask for it. And with that we have the following from the TIGTA report:

“Penalty waivers should not be granted only to taxpayers or preparers with knowledge of IRS processes,” said TIGTA Inspector General J. Russell George.

TIGTA estimated that for 2010, approximately 250,000 taxpayers with FTF penalties and 1.2 million taxpayers with FTP penalties qualified for FTA but not receive abatement. The reason? The taxpayers did not to ask for it. TIGTA estimated the unabated penalties at more than $181 million.

TIGTA is requesting that the IRS review its procedures for penalty assessment, especially with an eye toward first-time abatement. For example, perhaps the IRS could send a notice but immediately apply the FTA. It would inform the taxpayer of the penalty and abatement, thereby saving on IRS manpower and reducing the number of times folks like me have to write an FTA letter. Sounds like a winner.

Until then, remember that first-time abatement is available. Do not be one of the $181 million.