I Filed A Petition With The Tax Court

This week I put in a petition to the Tax Court.

It used to be that I could go for years without this step. Granted, I have become more specialized, but unfortunately this filing is becoming almost routine in practice. A tax CPA unwillingly to push back on the new IRS will have a frustrating career.

Heck, it is already frustrating enough.

The IRS caused this one.

We have a client. They received an audit notice near the end of 2018. They were traveling overseas. We requested and received an extension of time to reply.

Then happened the government shutdown.

We submitted our paperwork.

The client received a proposed assessment.

We contacted the IRS and were told that the assessment had been postdated and should not have gone out. Aww shucks, it was that IRS-computers-keep-churning-thing even though there were no people in the building. The examining agent had received our pack-o’-stuff and we should expect a revised assessment.

Sure. And I was drafted by the NFL in Nashville recently.

We received a 90-day notice, also known as a statutory notice of deficiency. The tax nerds refer to it as a “NOD” or “SNOD.” Believe it or not, it was dated April 15.

Let’s talk this through for a moment, shall we?

The IRS returned from the government shutdown on January 28^th.  We had an audit that had not started. Worst case scenario there should have been at least one exchange between the IRS and us if there were questions. There was no communication, but let’s continue. I am supposed to believe that an IRS agent (1) returned from the shutdown; (2) picked-up my client file immediately; (3) wanted additional paperwork and sent out a notice that never arrived requesting the same; (4) allowed time for said notice’s non-delivery, non-review and non-reply; (5) forgot to contact taxpayer’s representative, despite having my name, address, CAFR number, telephone number, fax number, waist size and favorite ice cream; (6) and yet manage to churn a SNOD by April 15^th?

I call BS.

I tell you what happened. Someone returned from the shutdown and cleared off his/her desk, consequences be damned. Forget about IRS procedure. Kick that can down the road. What are they going to do – fire a government employee? Hah! Tell me another funny story.

If you google, you will learn that there are two conventional ways to respond to a SNOD. One is to contact the IRS. The other is to file a petition with the Tax Court.

Thirty-plus years in the profession tells me that the first option is bogus. Go 91 days and the Tax Court will reject your petition. The 90 days is absolute; forget about so-and-so at the IRS told me….

What happens next? The case will return to Appeals and – if it proceeds as I expect – it will return to Examination. Yes, we would have wasted all that time to get back to where the initial examining agent failed to do his/her job.

I wish there were a way to rate IRS employees. Let’s provide tax professionals - attorneys, CPAs and enrolled agents - a website to rate an IRS employee on their performance, providing reasons why. Allow for employee challenge and an impartial hearing, if requested. After enough negative ratings, perhaps these employees could be - at a minimum - removed from taxpayer contact. With the union, it probably is too much to expect them to be fired.

You can probably guess how I would rate this one.

Estimated Taxes Matter

Sometimes I read a case and I wonder if the most interesting part was not included.

There is a couple – a doctor and a financial consultant - who are not keen on paying their taxes. Here is a quick recap:

          Year            Tax           Withheld         Due

          2014         $70,018      $24,148         $45,870

          2015         $58,293      $11,677         $45,995

          2016         $52,474      $20,230         $32,244

          2017         $37,001      $11,720         $25,281

This is not rocket science. Chances are that one person has withholdings and the other person is supposed to pay estimated taxes. No estimated taxes were paid. The solution? Simple: (1) pay estimated taxes, or (2) increase the other spouse’s withholdings to compensate for the lack of estimated taxes.

On November, 2016 the IRS sent a Notice of Intent to Levy.

COMMENT: This tells you the taxpayers had been in the system for a while.

The taxpayers requested for a Collection Due Process Hearing.

COMMENT: Good step. The CDP is a chance to halt the IRS automated machinery and allow the taxpayers an opportunity to speak with an Appeals Officer about their specific situation.

The taxpayers were interested in collection alternatives, including:

(a)  an installment agreement

(b)  an offer in compromise

(c)  a “cannot pay balance” status

Seems to me they covered the bases.

They did not submit financial data with the CDP request, but they did later when the Appeals Officer requested. Their information showed monthly income of $25,317 and monthly living expenses of $17,217, leaving a monthly net of $8,100.

The IRS wanted the $8,100.

Surprise factor: zero.

The taxpayers balked, arguing that it was beyond their means.

COMMENT: How can the $8,100 be beyond their means, if that is the amount they calculated? The likely reason is that the IRS has tables for certain expense categories, such as transportation. Say that you have an expensive monthly car payment. You will bump up against that limit, and good luck getting the IRS to spot you more. Mind you, the IRS says that it will consider specific circumstances, but they do not consider them for long. You may find yourself having to trade-down on your car or pulling your kid from private school.

The taxpayers indicated they were going to file an offer in compromise.

They did – eight months later.

COMMENT: Folks, seriously, do not do this. If you are hip deep in a CDP hearing with the IRS, it is a very poor decision to stall.

The Appeals Officer – not willing to wait the better part of a year – sustained the proposed levy.

Next stop: Tax Court.

From the Court we learn that the taxpayers withdrew the offer in compromise because they were “unable” to make estimated tax payments.

Huh?

Folks, this act is fatal. Here is a requirement for an offer:

“Proof of sufficient withholding or estimated tax payments”

The Tax Court’s purview can be broad or narrow, depending on the issue. If there is an issue of tax law, the Court generally has broad powers. This case was not an issue of tax law; rather it was an issue of IRS procedure. Did the IRS follow its own rules? To phrase it another way, did the IRS abuse its authority?

This narrows the Court’s reach – a lot.

It means the Court is not reviewing whether the taxpayers should have received an installment plan, an offer in compromise or whatnot. Rather, the Court is reviewing whether the IRS abused its authority by not allowing said installment plan, offer in compromise or whatnot.

The Court decided the IRS had not.

Why?

“Proof of sufficient withholding or estimated tax payments”

To me, the take-away question is: what are these people doing with their money?

Our case this time was Reid v Commissioner.

The Parking Lot Tax

Last year’s Tax Cuts and Jobs Act created a 21% tax on transportation-related fringe benefits provided by nonprofits.

That does not sound so bad until you consider that qualified transportation fringe benefits include:

1.    Transit passes or reimbursement for the same

2.    Use of a commuter highway vehicle or reimbursement for the same

3.    Qualified bicycle commuting reimbursement

4.    Qualified parking expenses or reimbursement for the same

That last one proved to be a shocker.

What started the issue was the new deduction disallowance for qualified transportation fringe benefits paid by taxable employers. For example, if the employer pays for employee parking, up to $260 per month can be excluded from the employee’s 2018 W-2. In the past the employer could deduct that $260 on its tax return. Now it could not. Congress felt that – if taxable employers were to be affected – then nonprofit employers should also be affected.

But how does a nonprofit even pay tax?

It can happen, and it is called unrelated business income. In general, it means that the nonprofit is veering away from its charitable mission and is conducting an activity that is virtually indistinguishable from a for-profit business next door.

The nonprofit has to separately account for this activity. The IRS then spots it a $1,000 exemption. If it has more than a $1,000 in profit then it has to pay tax at the corporate rate – which is now 21%.

This change entered the tax Code in December, 2017 via Code Section 512(a)(7):

      (7)  Increase in unrelated business taxable income by disallowed fringe.

Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable under this chapter by reason of section 274 and which is paid or incurred by such organization for any qualified transportation fringe (as defined in section 132(f) ), any parking facility used in connection with qualified parking (as defined in section 132(f)(5)(C) ), or any on-premises athletic facility (as defined in section 132(j)(4)(B) ).

There are three things to note here:

(1)  Congress is treating these disallowed deductions as if they were income to the nonprofit.

(2)  We have to track down the meaning of “qualified parking,” and

(3)  The phrase “deduction is not allowable” has a meaning that is not immediately apparent.

Let’s start with qualified parking, defined as:

… parking provided to an employee on or near the business premises of the employer or on or near a location from which the employee commutes to work …. 

Qualified parking does not include parking provided near the employee’s residence. 

Employer-provided parking includes parking on property an employer owns or leases, parking for which the employer pays, or parking for which an employer reimburses an employee.

So we know that qualified parking is provided near the employer and the employer pays for, reimburses, leases or owns the parking facility.

This makes sense if there is a public garage across the street and the employer pays the garage directly or reimburses an employee who paid the garage. However, how does this work if the employer owns the parking lot?  More specifically, how does this work if the parking lot is available to employees, customers – that is, to everyone and for free?

There is (what appears to be) a Congressional mistake when drafting Code Section 512(a)(7).

In 1994 the IRS published a rule in Notice 94-3, conveniently titled “IRS Explains Rules For Qualified Transportation Fringe Benefits.” Here is Question 10 and its example:

EXAMPLE. Employer Z operates an industrial plant in a rural area in which no commercial parking is available. Z furnishes ample parking for its employees on the business premises, free of charge. The parking provided by Z has a fair market value of $0 because an individual other than an employee ordinarily would not pay to park there.

The answer makes sense. Anyone can park on that lot for free. If an employee parks there, it seems reasonable that the value of the parking would be zero (-0-).

That is not what Code Section 512(a)(7) did:

Unrelated business taxable income of an organization shall be increased by any amount for which a deduction is not allowable ….

There is no reference here to value. To the contrary, the reference is to a deduction – which to an accountant means cost. Parking may be free to the user, but it will cost something to maintain that parking facility. The cost may be a lot or a little, but there is a cost.

The Notice 94-3 rule that tax practitioners had gotten used to was overturned.

Needless to say, there were many questions on what the new rules meant and how to apply them. Consider that a nonprofit is supposed to make quarterly estimated tax payments against any expected unrelated-business-income tax, and guidance was needed sooner rather than later. On December 10, 2018 the IRS published interim guidance (Notice 2018-99) on qualified transportation fringe benefits. 

It started with the easiest example:

A taxable employer pays a garage $12,000 annually so that its employees can park. None of this exceeds the $260 monthly threshold per employee for 2018. The entire $12,000 is non-deductible by the employer.

Introduce any complexity and there are steps to the calculation:   

(1)  Calculate the cost for reserved employee spots.

a.     These costs are disallowed.

(2)  Calculate the primary use of the remaining spots.

a.     If more than 50% is for customers, clients and the general public, the calculation ends.

                                                             i.     Any remaining cost is fully deductible.

b.    If more than 50% is for employees, there is math:

                                                             i.     Calculate the cost for reserved nonemployee parking; these costs are allowed.

                                                           ii.     Calculate the cost for nonreserved employee parking; these costs are disallowed.

Let’s go through an example from the Notice.

An accounting firm leases a parking lot for $10,000 next to its office. The lot has 100 spaces, used by clients and employees. The firm has 60 employees.

(1)  There are no reserved employee parking spaces

a.     We have zero (-0-) from this step.

(2)  The primary use is for employees (60/100).

a.     We have math.

(3)  There are no reserved nonemployee parking spaces (think visitor parking).

a.     We have zero (-0-) from this step.

(4)  One must use a reasonable allocation method. The accounting firm determines that employee use constitutes 60% (60/100) of parking lot use during business days, with no adjustment for evenings, weekends or holidays. The disallowance is $6,000 ($10,000 times 60%).

An accounting firm is a taxable entity, so the $6,000 is not deductible on its return.

What if we were talking about a nonprofit? Then the $6,000 magically “transforms” into unrelated business taxable income. The IRS spots $1,000 exemption, so the taxable amount is $5,000. Apply a 21% tax rate and the tax on the parking lot is $1,050.

What if the employer owns the parking lot? What costs could there be to a parking lot?

The IRS thought of this:

For purposes of this notice, “total parking expenses” include, but are not limited to, repairs, maintenance, utility costs, insurance, property taxes, interest, snow and ice removal, leaf removal, trash removal, cleaning, landscape costs, parking lot attendant expenses, security, and rent or lease payments or a portion of a rent or lease payment (if not broken out separately). A deduction for an allowance for depreciation on a parking structure owned by a taxpayer and used for parking by the taxpayer’s employees is an allowance for the exhaustion, wear and tear, and obsolescence of property, and not a parking expense for purposes of this notice.

At a minimum, I anticipate that one is allocating insurance and taxes.

So a nonprofit can have tax because it provides parking to its employees. You may have heard this referred to as the “church parking lot tax.” Yes, churches are 501(c)(3)s, meaning they are nonprofits just like the March of Dimes. Granted, there are additional tax breaks to being a church, such as not having to file a Form 990. The unrelated business income tax is not filed on a Form 990, however; it is filed on a Form 990-T. They both have “990” in their name, but they are separate tax forms. Who knows how many churches will have to file a Form 990-T for the first time for 2018, even though their board has never filed – or even seen - a Form 990.

How can a church have income from its parking lot?

If it charges for parking, obviously. That however is a low probability event.

Another way would be to have reserved employee parking spaces. Those are allocated cost (which morphs into income) immediately.

A third way is the employee:nonemployee calculation. That calculation would be tricky because of the uneven use of a church over an average week. One would somehow weight the use of the parking lot. Church employees are there Monday through Friday. The congregation is there on Sunday and (maybe) one night during the week. Perhaps employee parking is weighted using a factor of eight (hours) and congregational use is weighted using a factor of 2.5 (hours). Hopefully the result is to get congregational use above 50%. Why?

Remember: if nonemployee use at step (2) is more than 50%, the calculation ends. All the church would have to pay tax on is income from reserved employee parking. If that is below $1,000, there is no tax.

There is an effort to include a repeal of Code Section 512(a)(7) on any extender or other bill that Congress may pass, but that would require Congress to be able to pass a bill – any bill – in the near future.

The Notice also has one of the more unusual “make-up” provisions I have seen. Say that you want to do away reserved employee parking (that is, step (1)) because the tax gets expensive. It is way too late to do anything for 2018, as the guidance came out in December. The Notice allows you to make the change by March 31, 2019 and consider it retroactive to January 1, 2018.

Our church would have no step (1) income as long as it did away with reserved employee parking by March 31, 2019. That would mean taking down the sign saying “Pastor Parking Only,” but that may be the best alternative until Congress can correct this mess.

You Receive A Wage Garnishment

I was minding my own business. My partner sweeps into my office and says we have to take care of something right away – hopefully that very afternoon.

Hey, I am a career CPA. Some level of ADD is almost requisite to longevity in this profession.

He drops an IRS Form 668-W on my desk.

There is something I had not seen in a while.

What is a 668-W?

A wage garnishment. The IRS refers to it as a “levy.” If you get to this point, you have almost gone through the belly of the whale. The IRS has sent notice after notice, giving you a chance to contest, request abatement, defer collection or set up a payment plan. You have ignored them all. They got angry. They are now garnishing your paycheck.

This notice goes to your employer, and your employer is charged with notifying you. Your employer is going to garnish your next paycheck. Your employer does not want to go resistance here, as an employer becomes liable should they just blow it off. And then there is a 50% “hi there” penalty on top of that.

The IRS publishes tables telling you how much you get to keep. Say that the you are married, have one kid and receive a weekly net check of $1,017.65. The table indicates that you can keep $541.35. The employer withholds and remits the $476.30 balance ($1,017.65 – 541.35) to the IRS.

On the upside, the IRS is not touching your health insurance or 401(k) withholding. On the down side, it is jonesing the rest of your paycheck.

Can you live on $541.35?

That is not the point.

The point is that the IRS wants you to reenter the grid and establish a payment plan. Once you do so, the IRS will release the levy. As far as they are concerned, you should have done so already. The levy is to slap you into reality.

And you have forfeited some (at this point) important procedural rights.

Say that there is a question whether you actually owe some or all of the tax. Had you paid attention to the increasingly strident string of IRS notices, you would have noticed one titled “Notice of Intent to Levy.”

That one is serious. Not as serious as the 668-W, of course, but serious.

At that time, you had the right to request an IRS appeals hearing, called a Collection Due Process hearing. That puts you in front of an Appeals officer to plead your case, including whether you actually owe some or all of what the IRS wants.

Say you ignored the Notice of Intent.

It is a year or two later and you receive the 668-W.

You bring it to me. You may note that I am not humored.

Guess what important right you forfeited by ignoring the earlier notice?

That’s right: being able to argue whether you actually owe some or all of the tax.

That is dandy if there is no question whether you owe the money.

Not my situation. The friend has a very good case that he does not owe (at least some) of the tax.

But we are past the point where I can force a collection hearing to talk about the matter.

Is it hopeless?

Nope. A proficient tax practitioner still has tricks.

Like?

Like an offer in compromise. You know, those middle of the night commercials to settle millions of dollars of tax debt for the change in your pocket.

Is the friend broke?

Not the point.

What is the point then?

There is more than one type of offer. The one I am considering has nothing to do with your ability to pay. It instead has to do with whether you actually owe the money. The first addresses doubt as to collectability. The second addresses doubt as to liability.

It is one way to get the IRS to review the file with an eye as to liability.

Is this what we are going to do?

Doubt it.

Why not?

Because an offer will stay that levy only so long. The IRS can still demand a weekly wage levy WHILE they are considering the offer. Will it happen? Maybe yes, maybe no, but why run the risk?

What is an alternative?

File an appeal.

An appeal shuts down all collections action, meaning that I do not have to bank on the IRS’ better nature to stay that levy. Appeals allows me to introduce evidence that the friend does not owe all the assessment. I am also hoping to get penalties abated, at least some, but that would be a bonus.

Should the friend’s situation have gotten to this point?

I am sympathetic. Those who have followed me know that I am generally pro-taxpayer, but that is not what we have here. There were notices, which were ignored. There was a statutory notice of deficiency, which was ignored. After the statutory notice, taxes and penalties were officially assessed, which was also ignored. There was a chance for reconsideration, which was ignored. 

During all this there was ALWAYS a chance for a payment plan.

As I said, you may note that I am not humored.

It’s A Trap

Let’s talk about an IRS trap.

It has to do with procedure.

Let’s say that the you start receiving notices from the IRS. You ignore them, perhaps you are frightened, confused or unable to pay.

Granted, I would point out that this is a poor response to the chain-letter sequence you will be receiving, but it is a human response. It happens more frequently than you might think. Too many times I have been brought into these situations rather late, and sometimes options are severely limited.

The BIG notice from the IRS is called a 90-day letter, also known as a Statutory Notice of Deficiency. Tax nerds refer to it as a SNOD.

This is the final notice in the chain-letter sequence, so one would have been receiving correspondence for a while. The IRS is going to assess, and one has 90 days to file with the Tax Court.

Assessment means that the IRS has 10 years to collect from you. They can file a lien, for example, and damage your credit. They might levy or garnish, neither of which is a good place to be.

I have sometimes used a SNOD as a backdoor way to get to IRS appeals. Perhaps the taxpayer had ignored matters until it reached critical mass, or perhaps the first Appeals had been missed or botched. I had a first Appeals a few years back with a novice officer, and her lack of experience was the third party on our phone call.

Let the 90 days run out and the Tax Court cannot hear the case.

NOTE: Most times a Tax Court filing never goes to court. The Tax Court does not want to hear your case, and the first thing they do is send it back to Appeals. The Court wants to machinery to solve the issue without them getting involved.

Our case this time involves Caleb Tang. He filed pro se with the Tax Court, meaning that he represented himself. Technically Caleb does not have to go by himself – he can hire someone like me – but there are limitations.  

There is a game here, and the IRS has used the play before.

The taxpayer makes a mistake with the filing. In our story, Caleb filed but he forgot to pay the filing fee.

Technically this means the Court would not have jurisdiction.

Caleb also filed an amended return.

As I said, sometimes there are few good options.

The IRS contacted Caleb and said that they would not process his amended return unless he dropped the Tax Court petition.

Trap.

You see, Caleb was past the 90-day window. If he dropped his filing, the IRS would automatically get its assessment, and Caleb would have no assurance they would process his amended return.

Caleb would then not be able to get back to Tax Court. Procedure requires that he pay the tax and then sue in District Court or Court of Federal Claims. There is no pro se in that venue, and Caleb would have no choice but to hire an attorney.

That will weed out a lot of people.

Fortunately, the Court (Chief Judge L Paige Marvel) knew this.

He allowed Caleb additional time to pay his application fee.

Meaning that the case got into the Tax Court’s pipeline.

What happens next?

It could go three different ways:

(1) Both parties drop the case.

(2) They do not drop the case and the matter goes back to Appeals.

(3) The Court hears the case.

I suspect the IRS will process Caleb’s amended return now.

Will The IRS Ever Call You?

You have likely read or heard that the IRS will not contact you by telephone. If you receive a phone call claiming to be the IRS, hang up immediately. It is a fraud.

Then we read that some IRS offices were calling people.

Sigh.

I admit, it came as a surprise to me too.

Only a government agency could be this flat-footed.

Let’s talk about it.

To most of us, a call from the IRS is a call from the IRS. We are not particularly concerned whether it is examination, collections or Star Trek productions.

But to the IRS there is a difference. You see, Examination is the part of the IRS that audits you, disallowing all your deductions and assessing penalties for the presumption to deduct anything in the first place. Once you have served your time in the White Tower, your file is turned over to Collections. These kindly people will explain how you can easily pay $45,000 over 12 months when you only make $40,000 annually. It takes a little discipline and the elimination of frivolous expenses, like food, shelter and a car to get you to work .

Collections will never call you.

But it turns out that certain Examinations offices would.

The IRS explanation borders on a Zucker brothers comedy.

The IRS really, really thought that people would understand that Examinations is not Collections. How could there possibly be any confusion?

To be fair, they had a point. You see, Examinations will not ask for money. They may ask to set up a time for you to see them downtown, but the money part is later. They reasoned that fraudsters would not pretend to be Examinations, as that is not whether the money is. Fraudsters would pretend to be Collections.

Even though the average person could no more identify different IRS departments than identify different varieties of quinoa.

After all this went public, the IRS has NOW said that will not initiate contact by telephone, whether it be Examinations or Collections.

Good.

Mind you, this does not mean that they will never call. It does mean that their initial contact will be by mail. Once you are engaged with them – say you are in audit – then they may call. That seems reasonable. First contact does not.