Odd Reason To Be In Tax Court

 

Not all accountants practice tax.

To the contrary, I suspect most accountants do not. The confusion, I suspect, has to do with the CPA license. One associates the license with practicing at a CPA firm, but that is not necessarily true. Most accountants do not practice at a firm, and just practicing at a firm does not mean that one works tax. I have worked with a firm my entire career, and there have been many CPAs – auditors, forensics, valuation experts and so on – who have little crossover with tax. Step outside a firm – say internal audit or accounting at a corporate employer – and those numbers only increase.

I am looking at a pro se case in the Tax Court.

We have discussed pro se many times. It is commonly described as a taxpayer representing himself/herself before the Court. That technically is not true. A taxpayer can have professional representation and still be considered pro se. What it means is that the representative does not have a license to independently practice before the Court. The representative can act as an agent, advocating for and advising a taxpayer, but without that license the taxpayer is still considered pro se.

That license requires one to pass an exam, and the Tax Court exam is commonly considered one of the more challenging exams in tax practice. The exam BTW is not about tax law; rather it is about rules and procedures at the Tax Court. I have been involved in this area for decades, and I admit that those rules and procedures can be a bit … arcane.

Eva Zaczek finds herself in Tax Court. There is only one issue: how much does she owe? The answer in turn depends on how much of her Affordable Care (that is, Obamacare) subsidy was overpaid and now has to be returned. The concept is straightforward: make little money and the subsidy might fully pay for the premiums; make too much money and there is no subsidy at all. The rub is that someone is applying for the subsidy early in the tax year, before knowing what income for the year will be. Take a promotion or job change or marriage – or just ignore the too-much-income issue altogether - and the numbers can swing hard.

The IRS sent Eva a Notice of Deficiency for $2,418.

COMMENT: Eva sent a handwritten tax return, and the IRS made mistakes reading her writing.  

To its credit, the IRS admitted its mistake and revised the balance due to $900.

Eva challenged the calculation.

The rub was line 11 of Form 8962 Premium Tax Credit.

Both Eva and the IRS agreed that the number in box 11(b) should be $7,294.

This box represents the maximum premium that can be subsidized.

Both agreed that box 11(c) should be $9,057.

This amount represents the amount of premium the taxpayer is expected to pay himself/herself, without subsidy.

Eva calculated box 11(d) as $1,763 ($9,057 - $7,294).

Eva got the numbers reversed. Box 11(d) should be minus $1,763 ($7,294 - $9,057).

So?

If you read the instructions, box 11(d) cannot go below zero ($-0-).

Eva was convinced she owed the IRS $1,763.

The IRS said no, no: you only owe us $900.

And Eva was in Court arguing that she owed the $1,763 and not the $900 the IRS was seeking.

Here is the Court:

      

I will spare both of us the difference in tax law between a “deficiency” and a “balance due,” other than to point out the IRS notice that got Eva into Tax Court is called a Notice of Deficiency.

Pro se cases have a reputation for being entertaining, and we have looked at a number of them over the years.

But to go to Tax Court to argue that one owes more than the IRS wants? And this action from an accountant?

I consider this to be shade: 

I truly, truly hope that Eva doesn’t practice anywhere near a tax return.

This time we talked about Eva Zaczek v Commissioner, docket 4667-25S, filed 7/15/26.

What Makes A Tax Extension Valid?

 

You file an extension on April 15th for your personal tax return.

Is the extension valid if you wind up owing money but entered zero (-0-) on line 6?

What if you entered a balance due on line 6 but entered zero (-0-) on line 7?

A couple of things come immediately to mind:

(1)  There are clients – numerous clients – who have no intention of fully paying their taxes by April 15^th. The best the CPA can do is get them to pay something - anything - to take the pressure off the tax due (plus interest and penalties) when they finally file. I have heard the scold many times over the decades: the tax should be fully paid-in by April 15; the extension is for time to file not time to pay; yada yada. This is not a classroom, folks. This is real life, and I cannot control people. I think that I do some good just by nudging clients closer to compliance with the tax law.

(2)  Are you trying to get me sued? What if I (i) enter a number on line 4 but (ii) file the extension with no payment due (line 6)? Will the IRS bounce the extension? This is where procedural consistency is critical. I need high confidence in how the IRS will process this extension.

Let’s look at Karp.

The Karps wanted the IRS to apply a 2016 tax overpayment (of $336,558) to a later tax year.

Problem: The Karps were not diligent about filing tax returns on time. They were counting on that huge overpayment/carryover to keep them out of trouble. While true, there are ways this can blow up.

The IRS told the Karps that the 2016 overpayment could not be applied to 2017 because they filed the 2016 return in April 2021.

COMMENT: That’s how it blows up: you have to get that return in within 3 years (plus the extension, if you obtained one). The 2016 return was due April 15, 2017. Three more years is April 15, 2020. The IRS did not receive the return until April 2021 - a year late.

The Karps responded with proof that the IRS received their 2016 return on October 15, 2020.

COMMENT: Good! That is why practitioners recommend certified mail (which is becoming a dinosaur as we move to electronic filing) with proof of mailing.

FURTHER: We are not told whether the Karps actually waited until the last day for filing or were instead impacted by IRS closures during COVID.

The IRS backed down when presented proof. The IRS refunded $154,720 and credited the remaining 2016 overpayment to 2022.

The IRS then changed its mind.

Huh?

The IRS argued that the 2016 extension was invalid.

Because it was invalid, there was no extension until October 15, 2017.

Which means that the 2016 return filed October 15, 2020 was outside the three-year window (without the extension, that date was now April 15, 2020). The IRS wanted its $154,720 back. Oh, the IRS also reversed the portion of the overpayment that was credited to 2022.

“No soup for you” snarled the IRS.

Let’s catch our breath.

First, what was the IRS’ reasoning to blow up the 2016 extension?

The IRS looked at Form 4868 and saw zero (-0-) on both lines 5 and 6.

Mind you, the Karps had a sizeable overpayment from 2015 to 2016 (in fact, the Karps had reported sizeable overpayments for years). There was enough there to pay a subsequent year’s tax and send the Karps a refund check for 2016.

The IRS was relying on a Tax Court case (Crocker) where the taxpayer did not appear to even try to estimate the tax due on the extension. When finally filed, the return showed significant additional income and tax (because: of course). The Court agreed with the IRS that the extension was void. The return was late. Penalties. Interest. Brussels sprouts and lima beans. It was catastrophic.

Second, how was the IRS to know?

The 2015 return had not been received or processed by the time the 2016 extension arrived. Maybe - if the Karps ever got around to filing a tax return on time - the IRS might have had a clue of knowing what they intended for 2016.

While I disagree, I do have some sympathy for the IRS.

First, the Court noted that the Karps had a track record of (a) huge overpayments that (b) they repetitively applied to the following tax year.

COMMENT: I personally think this was THE factor that saved the Karps here.

The Karps looked at that overpayment and said: we do not owe anything for 2016. They then put zeros all over that Form 4868. Technically, they should have put (1) estimated gross tax on line 4; (2) the overpayment on line 5: and the (resulting) negative amount on line 6. The Karps did not do that, explaining that they mistakenly thought that the tax estimate was the amount they would be required to pay upon filing. The Court considered it a ministerial error, and they had conflated gross tax with net tax.

The Court also pointed out – devastatingly, I think – that the IRS initially accepted the 2016 return, including the extension as filed. That is why the IRS now wanted the refund check back.

Second, the Court noted that the IRS was put in a tough spot, as it did not have a 2015 return when processing the 2016 extension.

While it was easy for the Court to point out that the Karps had applied their prior overpayments, the IRS could not automatically predict that they would do so again. This dance was getting close to: heads you win, tails I lose for the IRS.

The Court pointed out that the Karps were still within procedural guardrails. They pushed it, but they got it done within three years.

Technically correct, but not an optimal real-world approach to tax filing.

The Court ordered summary judgement for the Karps and instructed both sides to sort the dollars involved and report the results back to for judgement.

I point out that this was not a Tax Court case. It was heard in the Court of Federal Claims, which hears civil claims against the federal government. While specialized (cases against the U.S. government), it is not the same specialization as the Tax Court (which hears only tax cases).

The cynical part of me wonders if the verdict would have been the same had the case gone to Tax Court. The Karps had an advantage: many cases go to Tax Court because one does not need to pay the tax before bring suit in Tax Court. Here, the Karps had already paid the tax (hence the huge overpayment), so filing outside the Tax Court was an option.

Our case this time was Karp v United States, U.S. Court of Federal Claims, No. 23-926, filed May 21, 2026.

AI Practicing Tax Law

 

I was working with a younger accountant this busy season who is a fan of AI in tax research. He uses it quite a bit. He also has a client who in turn has used AI to review his work. This has not amused my friend, and I understand he intends to fire the client.

Irony, methinks.

There has always been research in tax practice, and AI is just the newest and shiniest model on the lot. My concern about AI is that previous research alternatives did not invent answers - that is, hallucinate. This can be a problem, especially for a young(er) practitioner learning the ropes. An experienced hand may recognize when AI leaves the pavement. That is small comfort, as I question whether an experienced hand would rely heavily on AI.

As we have commented before: you don’t know what you don’t know.

Let’s look at the Clinco case.

Peter Clinco was an attorney in California. He mostly practiced real estate and business law. He was also an entrepreneur and spent much of his time running MedCafe Westwood, a restaurant and bar near the UCLA campus. It started off as a partnership, but over the years Clinco wound up owning the place by himself. MedCafe had approximately 60 employees but did not have strong accounting for sales and tips. This would become an issue.

Clinco personally prepared his 2015 tax return, although he filed it late (2018). He reported restaurant gross receipts of approximately $1.6 million, with enough expenses to show a net loss of $400 grand. We do not know whether filing late was an issue, but 2015 got pulled for audit. There were two areas on that return the IRS clearly wanted to look at:

• The restaurant
• Two rental properties

Why do I say “clearly?”  See a tax return the way I do: where are your subtractions – that is, your deductions? More specifically, where are your biggest deductions? That is where an auditor would want to look, because that is where the dollars – and audit adjustments – are.

The exam started in 2019, when Clinco was already quite ill. The accountant stepped in for Cinco, but this was after Clinco commented to the revenue agent that an estimated 10% of the restaurant’s revenues were in cash.

Clinco planted a bug in the auditor’s ear. The auditor responded by using a common-enough technique: comparing known credit (and debit) card transactions to reported cash transactions. While the ratios can vary (in this case, 90/10), it is a starting point. Sure enough, the auditor decided something was off and expanded her audit.

What does it mean to “expand”? Easy. She requested Forms 1099 issued to MedCafe. The IRS would have those as a matter of routine.

She also requested copies of bank statements.

COMMENT: The bank deposit analysis is virtually de rigueur for all Schedule C audits at this point (MedCafe was a Schedule C because Clinco owned 100%). The concept is easy: all deposits are income unless proven otherwise. Fail to prove otherwise and you have a problem. I had an audit – with deposit analysis – a few years ago. A son (my client) intermingled his business deposits with his father’s (both were contractors). Why? Who knows. It is not normal business practice; I had a difficult time understanding why he did this; the auditor had a difficult time believing either of us; and his foolishness made the audit much more difficult than it needed to be.

The IRS thought actual revenues were about $3.8 million – approximately $2.2 million more than the $1.6 million reported on the tax return.

Yep, you can see that train a ‘coming.

What was Clinco’s first line of defense?

COMMENT: Somewhere during this Clinco passed away. Technically the matter would have been pressed by his estate and agents.

Clinco challenged whether one of the early procedural steps - the Notice of Deficiency – needed to be signed by the IRS in fresh ink.

This is well-trod road with (very) low risk of victory, but Clinco’s attorney (Mr. Wagner) brought novelties to the party:

He cites ‘Cacchillo v Commissioner’ … as a case where the taxpayer challenged the validity of the notice of deficiency because it lacked an official signature. He claims we held the IRS’s failure to issue a valid signed notice of deficiency ousted us out of jurisdiction.”

Mr. Wagner claims ‘Cacchillo v Commissioner’ … overturned ‘Miller v Commissioner’ and ‘Tefel v Commissioner’ ….”

Here is the Court:

Neither of these cases exist as cited.”

OK.

There is no case named “Tefel v Commissioner …”

Going down folks.

The bouillabaisse of case names, reporter citations and legal propositions suggests something cooked up by AI.”

Hard landing imminent.

Their presence is unacceptable.”

So…  I would say that the IRS was not required to hard-sign the Notice of Deficiency.

On to the audit adjustments.

Cash deposit analysis is a long-standing technique. The Court granted an adjustment when Clinco could prove that a deposit was not income, but it was not going to reject the entire analysis.

Even money-losing businesses, however, can have unreported income.”

There was one more issue.

The IRS wanted some proof for depreciation expense on two rental properties.

Normally, this is not outrageous to provide. One gets a copy of the closing statement. Sometimes the municipality itself maintains those records. Granted, it may not show later improvements and whatnot, but it is a start.

Clinco went in a different direction. Clinco argued that the IRS could not challenge depreciation because they had allowed it in a different tax year.

Folks - with minimal exceptions - this is not the way it works. The IRS not asking about your “fill-in-the-box” deduction in year one does not mean they cannot ask about it in year three. This is long-standing practice and predates me being in school.

Even AI should have picked that up.

Our case this time was Peter L. Clinco, Deceased, C. M. Barone-Clinco, Successor in Interest, and C. M. Barone-Clinco, T. C. Memo. 2026-16