We can argue
whether it is a good thing that so many economically-related transactions are reported
to the IRS.
It is not
just the drag on the economy - which would include practitioners like me, I
suppose. It has also allowed the IRS to increasingly delegate its compliance
responsibilities to computer algorithms, often functioning without human eyes
sparing a glance at the endless notices the IRS sends every year.
And that
sets up the problem.
You see, the
notice assumes that you are wrong, and the IRS will likely revise your account
– and bill you - should you not reply. That means that you are spending time
resolving the matter, or you are sending the notice to me and I am spending
time. You and I are being deputized as ad hoc IRS employees.
Personally I
want a paycheck and retirement benefits.
This arrangement
works fine as long as there is a balance. You agree not to send works of
fiction to the IRS and they agree not to contact you like a kid in college wanting
money.
That balance
is increasingly a thing of the past. Perhaps as a consequence, I am reading or
hearing more often that taxpayers should be able to sue the IRS for
professional fees incurred with these notices. I am not certain if that means
that my client would pay me and then sue, or whether I would sue to receive my
fee, but you get the idea. It would be a “reverse penalty” on the IRS.
I am looking
at a pro se decision from the Tax Court. As we have discussed before, “pro se”
means the taxpayer is representing himself/herself. It does not technically
mean there is no tax practitioner present (for example, I can represent a
client in a pro se case), but it probably does mean that there is not a lot of
money at issue.
Angela
Terrell was a college student. During 2010 and 2011 she was attending Hampton
University in Virginia. In the fall of 2010 she registered for the 2011 spring
semester. In November, 2010 the University billed her $2,460 for the upcoming semester. In January, 2011 they billed an additional $1,230.
She was
borrowing to go through school. In January, after the add/drop period ended,
her student loan released $10,199 directly to the university. She paid her tuition
and used the rest for living expenses.
Let’s go to
the end of the year. The university sent a 1099 for 2011 (technically, a Form 1098-T, but we are on a roll). It showed $1,180
(the $1,230 billed less fees of $50). It did not show what she actually paid.
COMMENT: This reporting was allowable that year.
Angela filed
her 2011 tax return and claimed the American Opportunity credit, one of the
education credits in the Code. She claimed $2,500.
Wouldn’t you
know the IRS sent her a notice? They saw the $2,500. They also saw the 1099 for
$1,180.
The IRS
disallowed her credit – in full. They did not even spot her the $1,180.
Surely someone
at the IRS would recognize what happened and close the file.
Perhaps in a
galaxy far away. In our galaxy Angela and the IRS went to Tax Court.
Did I
mention that Angela was a COLLEGE
student?
She submitted
an account statement from the University – on official letterhead – detailing
her tuition charges and payments.
The IRS
argued that the 1099 said $1,180, she provided a different number and
consequently they could not verify the credit. There was nothing more to see.
Does it sound
to you like the IRS even listened to her?
Here is the Court:
The only dollar amount appearing on that form … is in the box
that shows the ‘amounts billed’ for tuition during calendar year 2011. The
amount billed to petitioner during 2011 does not control the size of her
credit; the relevant number is the qualified tuition that she actually paid
during 2011. The Form 1098-T has no entry in box 1, which was supposed to show
‘payments received’ for qualified tuition.”
The Court
decided in her favor.
Angela’s case
looks very much like the IRS pursuing a frivolous argument, not to mention the
inability of IRS machinery to resolve a “duh”-level tax issue at the earliest
possible point of contact. Reverse the situation and the IRS would not hesitate
to hit you with every penalty imaginable.
