Tax Report: Where Taxpayers Won Against the IRS
January 13 2017 - 12:34PM
Dow Jones News
By Laura Saunders
Are you dreaming of taking the Internal Revenue Service to
court? Your chances of winning may not be as bad as you think, and
it isn't crazy to represent yourself.
These insights come from data compiled by National Taxpayer
Advocate Nina Olson, who is charged with representing taxpayer
interests before the IRS and Congress. Each year, Ms. Olson
publishes a deep dive into the IRS's civil litigation as part of
her annual report to Congress, which was released this week.
This year's report analyzes results from 609 federal tax
decisions on the most-litigated code sections for the 12 months
ended May 31. Most of the cases were in Tax Court, a specialized
forum devoted to taxpayer conflicts with the IRS.
A big winner in the recent survey was billionaire Sumner
Redstone. A judge ruled that because Mr. Redstone relied on
professional advice, he didn't owe a penalty of up to $368,800,
plus millions in interest, for a gift-tax return he should have
filed in 1972 but didn't.
The IRS had the upper hand in most of the cases surveyed by Ms.
Olson. The agency won about three-quarters of them outright, while
taxpayers won only about 10% outright. The rest were split
decisions.
But overall results obscure important little victories. In the
largest category of cases, which involved a 20% penalty for
negligence and large underpayments, taxpayers won total or partial
victories in about 30% of decisions. Taxpayers also got good news
in about one-third of cases on business expense write-offs, the
fifth-largest category.
A common thread running through many decisions was
record-keeping. For example, a Tax Court judge ruled that an
Arizona couple with a landscaping business didn't owe the IRS about
$12,000 in penalties because they had good records showing they
relied on the advice of a tax preparer.
In another case, a Missouri couple won a deduction for nearly
$7,000 of car and truck expenses for a small business. While they
didn't have the written records the IRS likes to see, the judge
believed their oral testimony, which was "specific and
detailed."
Careful records don't help if a deduction simply isn't allowed,
however.
When a Maryland couple with their own company and two children
under 12 showed the Tax Court a spreadsheet listing "business
expenses" for vendors such as Macy's, Toys "R" Us, and Hair
Cuttery, the judge disallowed the deductions because they were
personal expenses for the benefit of the children.
Ms. Olson's report also offered interesting details on taxpayers
and their representation in court. Overall, taxpayers represented
themselves in about 60% of the cases, winning about 17% of the
time. By contrast, taxpayers represented by approved specialists
such as lawyers won about 22% of their cases -- which isn't much
higher.
"If taxpayers are prepared and have good facts, good records,
and good manners, it's entirely possible for them to represent
themselves and win, " says Harry Bergland, a CPA in Richmond,
Calif., who advised a couple who represented themselves in Tax
Court and won late last year.
Taxpayers in one category of cases nearly always argue on their
own behalf -- those fighting a penalty up to $25,000 for making
frivolous arguments to the IRS. These taxpayers often lose.
In one case reviewed by Ms. Olson, the taxpayer assured a Tax
Court judge that he didn't owe the IRS $3,840 of tax and penalties
for dozens of reasons, including that he was a citizen of
California, not the U.S., and that he had his own definition of
income. Asked to provide it, he said, "It's a cat with a pink
bow."
After warning the taxpayer four times, the judge imposed a
$3,500 penalty.
Write to Laura Saunders at laura.saunders@wsj.com
(END) Dow Jones Newswires
January 13, 2017 12:19 ET (17:19 GMT)
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