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

Income and Credit Card Rebates

I am reading a case so unique that I doubt there is much takeaway taxwise, other than someone beat the IRS.

What gets the story started is automobile rebates back in the mid -70s. The economy was limping along, and car manufacturers wanted to sell cars. Buy a car, get money back from the manufacturer.

To a tax geek, receiving a check in the mail raises the question of whether there is income somewhere.

The overall concept behind taxable income is that one has experienced an accession to wealth. That is how discharge of debt can create income, for example. As one’s debt goes down, one’s wealth increases.

What to do with a car rebate?

The IRS did the obvious thing: it saw a car; it saw payment for a car; and it saw a rebate going back to whoever bought the car. There was no increase in wealth here, it decided. The result was that one paid less for the car.

There are countless variations on the theme. What to do with airline miles, for example?

Our case features Konstantin Anikeev (K). K got himself a Blue Cash American Express credit card. The card had a reward program. American Express would send you money for buying (approved) things with the card.

American Express disallowed certain purchases from the program, however, including:

(1)  Interest charges and fees

(2)  Balance transfers

(3)  Cash advances

(4)  Purchase of traveler’s checks

(5)  Purchase or reloading of prepaid cards

(6)   Purchase of any cash equivalent

I get it. American Express did not want someone to walk the transaction through back to cash.

K noticed something: the program did not address gift cards.

A gift card is just a prepaid card, right? Not quite. A gift card is not redeemable in cash or eligible for deposit into your bank account.

I had not really thought about it.

K did think about.

You know what you can do with a gift card?

You can buy a money order, that’s what. You then deposit the money order in the bank.

Sounds like a lot of work for a couple of bucks.

K went to town. Over the course of a year or so, he and his wife generated rebates of over $300 grand.

K knows how to commit.

Interestingly enough, American Express did not seem to care. 

The IRS however did care. They were going to tax K on his $300 grand. K pointed out that the IRS had provided guidance way back by saying that rebates were not income, and all he received were rebates. Granted, there were more bells and whistles here than a 1978 Chrysler Cordoba, but that did not change anything.

The IRS said nay-nay. The guidance they put out back in the 70s involved a product or service. That product or service had a cost, and that cost could then be reduced to absorb the effect of the rebate. There were no goods and services with K’s scheme. There was nothing to “absorb” the rebate.

Off they went to Tax Court.

There is a tax subtlety that we need to point out.

The IRS could have argued that the exchange of the gift card for a money order was a taxable event. Since the cost of the gift card had been adjusted down by the rebate K received (meaning the cost was less than a dollar-on-a-dollar), there would be a gain upon the exchange.

It is a formidable argument.

That is not what the IRS did. They instead argued that K had an income recognition event when he bought the gift card.

Huh? How?

Because he intended to ….

The Court was having none of this argument.

The Court reminded the IRS that gift cards are a product. The card has a uniform product code that the cashier uses to ring up the cost. It is a product, just like a car. The IRS was upset because it got gamed. It did not like the result, but that did not give the IRS leash to arbitrarily look down the road and back-up the tax truck when it did not like the destination. The IRS should tighten its rules.

Here is the Court:

These holdings are based on the unique circumstances of this case. We hope that respondent polices the IRS policy in the future in regulations or in public pronouncements rather than relying on piecemeal litigation.”

K won. He and his wife had tax-free cash.

BTW, K did all this with a card whose credit limit was $35 grand. I am REALLY curious how much time they put into this.

Our case this time was Anikeev v Commissioner, TC Memo 2012-23.