Many people, myself included, can sometimes be accused of poor penmanship. As our paperwork becomes more and more electronic, we write less and less down with pen and paper. However, a recent decision from the tax court may be sending more supervisors at the IRS to penmanship classes.  The taxpayers, Gregory and Simone Colbert, were assessed income tax deficiencies and associated accuracy related penalties. The Colberts admitted the deficiencies but disputed the interest and penalties.
Continue Reading IRS Penalty Denied Because of Poor Penmanship

It is well-established that attorneys and their clients are entitled to private and protected communications.  But what level of protections are available when an accountant is used in an engagement to provide an area of expertise not possessed by the attorney?

This is a significant question because accountants are frequently relied upon as indispensable members of legal teams because they have the ability to properly interpret complex technical accounting concepts and explain them to lawyers, judges and juries.  When utilizing accountants in legal matters, the level of protections afforded will often depend on the agreement entered into between the parties.

As an initial matter, parties involved in legal disputes should understand that the accountant-client privilege generally does not provide the same level of protections as the attorney-client privilege.  Relying solely on the accountant-client privilege presents substantial risks for the client.  Rather, the parties should recognize and consider the benefits of entering into a Kovel Agreement to protect their communications.
Continue Reading Protecting Client Information When Using Accountants in Legal Matters

Cryptocurrencies might, simplistically, be defined as virtual currencies that use cryptography to secure transactions which are digitally recorded on a widely distributed ledger.  The ledger technology uses independent digital systems to timestamp and harmonize transactions. The cryptocurrencies associated with a ledger are often called “coins” or “tokens”.

Cryptocurrency can be acquired in multiple ways.  This post covers only common methods, such as purchase, gift, or airdrop following a hard fork.  A hard fork occurs when a ledger is subject to modifications that “break” compatibility with an earlier protocol; in other words, each leg of the fork follows different “rules” so the blockchain ledger is split into an original chain and new chain. Hard forks sometimes result in the creation of a new cryptocurrency.  An airdrop is a method of distributing cryptocurrency units to the ledger addresses of individual taxpayers. Airdrops sometimes, but not always, follow hard forks. While blockchain technology is interesting, and an elementary understanding of its technological mechanics is useful, it is the tax consequences of the receipt and disposition of cryptocurrency which is the subject of this post.
Continue Reading Cryptocurrency: The Basics of Tax Treatment and Recognition

Although the government bears the burden of production for penalties, this often involves nothing more than showing that the penalties were properly assessed. Penalty relief is usually only given when the taxpayer can marshal their best facts and make a persuasive argument for leniency. This is because the focus is usually on the actions of the taxpayer in properly reporting amounts on the tax return and not the procedures followed by the IRS. However, recent litigation surrounding Code Sec. 6751 has turned added focus onto the IRS procedures for assessing penalties. This focus has resulted in numerous taxpayers having the opportunity to challenge penalties on technical grounds without delving into the actions of the taxpayer’s tax reporting. In some cases, the IRS has even conceded penalties when faced with their own lack of evidence regarding the proper approval procedures.
Continue Reading IRS Fails to Follow its Own Procedures and IRS Counsel Claims Supervisory Approval Still Valid

Dealing with the IRS can be a dangerous labyrinth for the untrained taxpayer or their non-tax advisors. In a recent Federal court case, E. John Rewwer, et al. v. United States, the taxpayers filed the wrong form claiming a refund and both the IRS and the DOJ Tax Division cried foul and tried to dismiss their case.  Fortunately, the court found that the taxpayer’s filing met the “informal refund claim” requirements and denied the government’s motion.

The taxpayers received an unfavorable audit determination increasing their tax liabilities for 2007, 2008 and 2009.  All amounts were paid and the taxpayers then filed IRS Form 843 (Claim for Refund and Request for Abatement) for all three years. The taxpayer’s attorney, not the taxpayers, signed the requests for refund but didn’t include IRS Form 2848 (Power of Attorney). The IRS allowed the 2008 claim but then denied the 2007 and 2009 claims, so the taxpayers appealed within the IRS.  A taxpayer generally has two years from the date of the determination to file a refund suit in federal district court.  The taxpayers didn’t hear from IRS Appeals, and the two years was expiring, so they filed their refund suit.
Continue Reading Taxpayer Wins Tax Refund Despite IRS Claims That The Taxpayer Used The Wrong Form

Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business.
Continue Reading Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties

All kinds of penalties are being assessed by the Internal Revenue Service (IRS) against taxpayers, and more can be expected in the future.  In 1954 there were 13 penalties in the Internal Revenue Code, and now there are more than 150. Taxpayers should not overlook the opportunity to request the IRS to abate penalties.  The IRS abates many penalties for reasonable cause.
Continue Reading Asking the IRS to Abate Penalties

3D illustration of a rubber stamp with the word compromise printed on a brown paper with the text party one and twoOnce the IRS makes an assessment against a taxpayer, the taxpayer will receive several notices before the IRS takes enforced collection action.

Notice of Intent to Levy

This is the notice that is required before the IRS can levy and seize a taxpayer’s assets.

Some form of response should be sent with respect to these notices.  The response, along with a copy of the notice, should be sent by certified mail, return receipt requested, using the envelope provided by the IRS. The purpose in sending a response is so that it will show that the taxpayer is concerned about the taxes and is not ignoring them.
Continue Reading Negotiating with the IRS Collection Division

Vintage composition of handwriting, quill pen and ink. Selective focus on ink and pen. Text is from Shakespeare's Sonnet 18. (Vintage composition of handwriting, quill pen and ink. Selective focus on ink and pen. Text is from Shakespeare's Sonnet 18.,In Shakespeare, an English King blames the loss of an important battle on his lack of a horse:  “A horse, a horse, my kingdom for a horse!”[1]

In real life (and especially, it seems, in tax law) it is more like to be the lack of a timely piece of paper that causes the taxpayer to lose.

In the course of administering a trust, it sometimes happens that mistakes are made that require correction.  For example, distributions may be made that are not in accordance with the provisions of a trust: payments to the wrong beneficiaries, or in the wrong amounts or for the wrong purposes.  A similar situation may arise when a trust instrument requires the trustee not to make any disposition of certain “legacy” assets, and the trustee erroneously sells them anyhow.

In such situations, the way to “undo” the transactions is for the parties to reverse the erroneous transaction by returning the distributions made in error.  When the year of distribution is a closed tax year and the act of correction is made in a later year, it is important to make sure that the distribution that is returned is treated as a tax-deductible expense, thus offsetting the taxable receipt of the erroneous distribution in the prior tax year.
Continue Reading A Horse, a Horse, My Kingdom for a Horse! Lack of Proper Documentation Dooms IRS Disputes

Audit Envelope Are You Prepared on white paper an yellow envelope holding by human handsWhen a tax return has been selected for office examination, generally the examination of the return will be conducted at the office of the IRS.  Normally a taxpayer will find an office examination has begun when he or she has received a letter or telephone call from the IRS informing him of such examination and that the IRS wants further records and information. Returns selected for office examination present issues which require some analysis and judgment in addition to verification of records.
Continue Reading A Guide to Office Audits with the IRS