Identity Theft and A Tax Deficiency

 

To me it reads like a nightmare.

Brendan Bettis wanted to file his 2022 tax return. He had worked in 2021 for several employers, including Federal Express, DoorDash and Instacart. In April 2023 he saw a social media post recommending a tax preparer. Bettis called the phone number.

He spoke with someone. She instructed him to provide further information, including his W-2s, Forms 1099, social security number and bank account information through an online portal.

He - of course - heard nothing back for months.

COMMENT: I may be betraying my age, but hiring a professional sight unseen and through a website is unacceptable. Sending confidential information is less so. Even working among CPAs, I have known practitioners which I would not personally use and which I could not refer. To be fair, though, I suspect this one was a professional as much as I am a deep-sea diver.

In April 2023 she filed a 2022 Form 1040 reflecting Bettis’ name and social security number.

He did not know about it, much less authorize it. The return was signed by a Ms. Victoria Jackson of Cypress, Texas. Bettis never met her in person.

The return did show the W-2s, but then it became a work of fiction. It showed Bettis’ occupation as “landscaping,” as well as household wages of $21,108. The return also claimed a fuel tax credit of $23,790 for the off-highway use of 130,000 gallons of gasoline. I presume that is how and why “landscaping” entered the story.

At 130,000 gallons Bettis might as well have been installing a pipeline.

I suppose he was getting a surprise tax refund.

Nope.

Ms. Jackson, or someone in her employ, wanted to receive a “refund product.” This means that Jackson and/or her firm would receive some/all of the refund. The refund was to be sent to a bank Bettis did not know.

The IRS processed the return in June 2023.

It made three adjustments:

• The IRS applied $5,561 of the refund to offset Bettis’ 2015 tax liability.
• It next used $1,077 to offset his remaining 2018 tax liability.
• It then used the remainder of the refund to satisfy Bettis’ past-due child support.

Ms. Jackson – or someone in her employ – was furious. She/they demanded that Bettis pay his tax preparation fee.

Righhttt.

Eventually the IRS figured it out. In May 2025 the IRS sent Bettis a Notice of Deficiency for $24,780.

Which is how we got into Tax Court.

The IRS and Bettis agreed that the correct tax was $1,263. The court case was about the difference - $23,517.

And the key was the tax definition of the word “deficiency.”

26 U.S. Code § 6211 - Definition of a deficiency

(a) In general For purposes of this title in the case of income, estate, and gift taxes imposed by subtitles A and B and excise taxes imposed by chapters 41, 42, 43, and 44 the term “deficiency” means the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of—

(1) the sum of

(A) the amount shown as the tax by the taxpayer upon his return, if a return was made by the taxpayer and an amount was shown as the tax by the taxpayer thereon, plus

(B) the amounts previously assessed (or collected without assessment) as a deficiency, over—

(2) the amount of rebates, as defined in subsection (b)(2), made. 

(b) Rules for application of subsection (a) For purposes of this section—

(1) The tax imposed by subtitle A and the tax shown on the return shall both be determined without regard to payments on account of estimated tax, without regard to the credit under section 31, without regard to the credit under section 33, and without regard to any credits resulting from the collection of amounts assessed under section 6851 or 6852 (relating to termination assessments).

(2) The term “rebate” means so much of an abatement, credit, refund, or other repayment, as was made on the ground that the tax imposed by subtitle A or B or chapter 41, 42, 43, or 44 was less than the excess of the amount specified in subsection (a)(1) over the rebates previously made.  

The IRS came in hot. The fuel tax credit was the “rebate” referred to in Section 6211(b)(2). A rebate increases a deficiency (via the arithmetic of 6211(a)(2). Give me my money, said the IRS.

The Tax Court was not persuaded.

The Court reasoned that – before a 6211(b)(2) argument could be made – a Section 6211(a)(1)(A) argument must be made: the amount shown as tax by the taxpayer on his return.

Issue: Bettis was scammed. He never filed an authorized return. No real tax return was filed meaning no real tax was shown by the taxpayer on his return.

The IRS could not get past Section 6211(a)(1)(A) to get to the Section 6211(b)(2) it wanted.

The Court explained its reasoning:

• A fraudster obtains confidential information and files a false return seeking a refund to the fraudster’s bank account.
• The taxpayer has no idea. In fact, taxpayer does not even have to file a return.
• The IRS issues the refund.
• The IRS catches its mistake. It wants its money back from the defrauded taxpayer.

Nope. Can’t. What we have just described does not rise to the level of a “deficiency” that the IRS can pursue against the taxpayer.

The Court decided that the correct deficiency was $1,263, to which both sides had previously agreed.

Our case this time was Bettis v Commissioner, US Tax Court, Docket No. 6560-25S, dtd 9.25.26

When Does A Grocery Store Get To Deduct the Fuel Points You Receive?

There is a grocery store chain that my wife uses on a regular basis. They have a gasoline-discount program, whereby amounts spent on purchasing groceries go toward price discounts on the purchase of gasoline. As the gas stations are adjacent to the grocery store, it is a convenient perk.

I admit I used the discount all the time. I purchased a luxury car this year, however, and my mechanic has advised me not to use their gasoline. It sounds a bit over the top, but until I learn otherwise I am purchasing gasoline elsewhere. My wife however continues as a regular customer.

Giant Eagle is a grocery store chain headquartered out of Pittsburgh. They have locations In Pennsylvania, Ohio, West Virginia and Maryland. They have a similar fuel perk program, except that their gasoline station is called “GetGo” and their fuel points are called “fuelperks!”

Their fuelperks! operate a bit differently, though. The perks expire after three months, and they reduce the price of the fuel to the extent possible. I suppose it is possible that they could reduce the price to zero. My fuel points reduce the price of a gallon by 10-cent increments, up to a ceiling. I am not going to get to zero.

Giant Eagle found itself in Tax Court over its 2006 and 2007 tax returns. The IRS was questioning a deduction on its consolidated tax return: the accrued liability for those fuelperks! at year-end. The liabilities were formidable, amounting to $6.1 million and $1.1 million for 2006 and 2007, respectively. Multiply that by a corporate tax rate of 34% and there are real dollars at stake.

What are they arguing over?

To answer that, let’s step back for a moment and talk about methods of accounting. There are two broad overall methods: the cash method and the accrual method. The cash method is easy to understand: one has income upon receiving money and has deductions upon spending money. There are tweaks for uncashed checks, credit cards and so forth, but the concept is intuitive.

The accrual method is not based on receiving or disbursing cash at all. Rather, one has income when monies are due from sale of product or for performance of services. That is, one has income when one has a “receivable” from a customer or client. Conversely one has a deduction when one owes someone for the provision of product or services. That is, one has a “payable” to a vendor, government agency or employee.

If one has inventories, one has to use the accrual method for tax purposes. Take a grocery store – which is nothing but inventory – and Giant Eagle is filing an accrual-basis tax return. There is no choice on that one.

There are additional and restrictive tax rules that are placed on “payables” before one is allowed to deduct them on a tax return. These are the “all events” rules, are found in IRC Section 461(h), and have three parts:

·        Liability must be fixed as of year end

·        Liability must be determined with reasonable accuracy

·        Economic performance must occur

Why all this?

Congress was concerned that accrual taxpayers could “make up” deductions willy-nilly absent more stringent rules. For example, a grocery store could argue that its coolers were continuously wearing out, so a deduction for a “reserve” to replace the coolers would be appropriate. Take the concept, multiply it by endless fact patterns and – unfortunately – Congress was probably right.

All parties would agree that Giant Eagle has a liability at year-end for those fuel points. Rest assured that the financials statement auditors are not have any qualms about showing the liability. The question becomes: does that liability on the financial statements rise to the level of a deduction on the tax return?

You ever wonder what people are talking about when they refer to a company’s financial statements and tax return and say that there are “two sets of books?” Here is but a small example of how that happens, and it happens because Congress made it happen. There are almost endless examples throughout the tax Code.

The IRS is adamant that Giant Eagle has not met the first requirement: the “liability must be fixed.”

To a non-tax person, that must sound like lunacy. Giant Eagle has tens of thousands of customers throughout multiple states, racking up tons of fuel discount points for the purchase of gasoline at – how convenient – gasoline stations right next to the store. What does the IRS think that people are going to do with those points? Put them on eBay? If that isn’t a liability then the pope is not Catholic.

But consider this…

The points expire after three months. There is no guarantee that they are going to be used.

OK, you say, but that does not mean that there isn’t a liability. It just means that we are discussing how much the liability is. The existence of the liability is given.

COMMENT: Say, you have potential as a tax person, you know that?

That is not what the IRS was arguing. Instead they were arguing that the liability was not “fixed,” meaning that all the facts to establish the liability were not in.

How could all the facts not be in? The auditors are going to put a liability on the year-end audited financial statements. What more do you want?

The IRS reminds you that it refuses to be bound by financial statement generally-accepted-accounting-principles accounting. Its mission is to raise and collect money, not necessarily to measure things the way the SEC would require in a set of audited financial statements in order for you not to go to jail. In fact, if you were to release financial statements using IRS-approved accounting you would probably have serious issues with the SEC.

OK, IRS, what “fact” is missing?

The customer has to return. To the gasoline station. And buy gasoline. And enough gasoline to zero-out the fuel points. Until then all the facts are not in.

Another way of saying it is that there is a condition precedent to the redemption of the fuel points: the purchase of gasoline. Test (1) of Sec 469(h) does not allow for any conditions subsequent to the liability in order to claim the tax deduction, and unfortunately Giant Eagle has a condition subsequent. No deduction for you!

Mind you the deduction is not lost forever. It is delayed until the following year, because (surely) by the following year all the facts are in to establish the liability. The effect is to put a one-year delay on the liability: in 2008 Giant Eagle would deduct the 12/31/2007 liability; in 2009 it would deduct the 12/31/2008 liability, and so on.

And the government gets its money a year early. It is a payday-lender mentality, but there you are.

BTW test (1) is not even the difficult part of Section 469(h). That honor is reserved for test (3): the economic performance test. Some day we will talk about it, but not today. That one does get bizarre.