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Know Your Rights When Taking the IRS to Tax Court

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Mar 27th 2018
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Our long-time tax contributor Julian Block regularly receives commentary about his posts, as well as a multitude of emails from other practitioners. Here he has compiled a list of Q&As around many of the latest tax-related issues from other practitioners and business owners. 

We hope you find it informative and, as ever, feel free to add your own comments and questions to this as well. Questions may have been edited and condensed for clarity and brevity.

Question: I’m being audited for the previous three years by an agent who claims that lots more taxes are due than the amounts listed on my returns. Also, he’s aware that I’m a woman who’s well-known in the entertainment field. That might account for this oaf’s unwillingness to suppress a smirk when he says the additional taxes will be augmented by interest charges and all kinds of hefty penalties.

I want to challenge the agent’s findings. Assuming it’s worthwhile to do so, what are my appeal rights?

Something else that’s troubling is that unfavorable publicity about my appeal would adversely affect my career. Should I be concerned?

Answer: Appeal rights within the IRS are available if you conclude that the examiner incorrectly interpreted the frequently fuzzy language in the Internal Revenue Code or unreasonably refused to accept the receipts and other documentation you submitted to support questioned items. Moreover, all isn’t lost if your appeals within the agency get you nowhere.

One of your options is to turn to the Tax Court, which is entirely independent of the IRS. The advantage of going that route is that you can contest additional taxes, interest and penalties without first paying the disputed amounts; not until you settle with the IRS or the Tax Court sides with it, are you required to pay anything.

Inevitably, there’s paperwork. To have your case heard by the Tax Court, you must ask the IRS for a "statutory notice of deficiency"— a formal letter assessing additional taxes that’s your ticket to the court and is referred to as a "90-day letter." Usually, it gives you no more than 90 days from the date when it’s mailed to you to file a form, known in legal lingo as a "petition."

You should consult with an experienced tax practitioner before deciding to bump the dispute up to the Tax Court.

Court records are generally open to the public. Given your prominence, the facts and figures in the IRS’s 90-day letter and your petition, along with other documents and testimony, might prove sufficiently newsworthy to eventually go viral on social media.

Q: How likely am I to prevail if I ask the Tax Court to seal its records?

A: Usually, the court will reject your request.

Take, for instance, a confrontation that pitted country music singer Willie Nelson and his wife Connie (the third of his four wives) against the tax gatherers. The couple sought to keep their Tax Court proceedings from public view when they challenged attention-attracting assessments of over $1,500,000 in taxes, plus negligence and fraud penalties of over $750,000. The Nelsons asked that the court seal all of its records until the time of trial and to prohibit any disclosure of information in those records to the media.

The couple contended that "intense and continual" scrutiny by the media of their tax tribulations had caused them "undue embarrassment and considerable emotional distress." Then there was the slowdown of their cash flow. Because of the publicity, they had been "unable to negotiate large up front payments in long term, product endorsement contracts."

The court, though, wouldn’t buy those arguments; it refused to stop the presses. True, the Nelsons correctly argued that the law does authorize the court to seal records to protect a party from embarrassment or harassment. Nevertheless, their case went down the drain because the facts were against them.

Generally, the press coverage was fair; most of the newspaper articles mentioned their denials of fraud. The clincher was that the publicity hadn’t hurt their bookings for performances. "If anything," observed the court, "Willie Nelson's popularity and desirability as a performer has remained intact, if not increased."

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 250 and counting). 

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