IRS examiner lied to me!

[vegasrealtor]

I was recently audited and during the initial examination the examiner blatantly lied to me 4 times that I recognized! Two of them were just casual lies but two others were attempts to disqualify me from being a real estate professional and resulted in him trying to shove $35,000 bill at me.

I have repeatedly read all of irc469 and I can recite 469(C)7 in my sleep. I have also read the examination techniques and I believe that I am right and that the examiner is wrong. Unless there is some new case law or ruling that modifies the law as written.

The areas of dispute are;

1. The examiner says that I have to have 750 hours per rental to qualify for real estate pro. I explained that maybe he is mistaking the 500 per for material participation and that the 750 hours is cumulative of all my real estate activities. (I own 9 rentals and have a Nevada real estate salesman license).

2. He fabricated an income based method for the "more than half of personal services rule". I explained to him that it was time based and had nothing to do with income.

Am I missing something or am I dealing with a lazy examiner that fabricates methods to extort money from taxpayers rather than following the law

[mwcpa]

here is the rule per IRS publication 925 related to "real estate" professional status

"More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. "

"You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated."

it's a 2 part test, not just 750 hours of service.....
so, if say you are a lawyer and log in 2000 hours at the office and spend 751 hours with the 9 real estate ventures..... you are not a real estate professional

now, if you use your real estate license and are a real estate broker, with no other job and spend the 751 hours with the 9 real estate ventures, then you probably are a real estate professional... from the same IRS publication

"Real property trades or businesses. A real property trade or business is a trade or business that does any of the following with real property.

Develops or redevelops it.

Constructs or reconstructs it.

Acquires it.

Converts it.

Rents or leases it.

Operates or manages it.

Brokers it."

As all of the facts are not presented (only snippets) it is hard to know the position that the examiner is coming from. I do know from experience in dealing with an IRS office in that area (Vegas) that they are tough....

Do you have professional representation.... you may want to seek the advise of a local qualified tax professional that can review all of the facts and give you guidance or intervene. In many cases that I have been called into assist after a client tried to do it themselves the issue comes down to a disconnect in terminology, understanding and explaining.... many IRS agents (and many tax professionals too) are technically proficient but lack the skills to explain things to the person on the other side of the desk (whether it be taxpayer or client) in terms they understand.....

[mwcpa]

more food for thought....

from IRS audit guide..

"LAW: Under IRC § 469(c)(7) & Reg. 1.469-9, if the taxpayer spends the majority of his time in real property businesses, meeting the 1/2 personal services and 750-hour tests, rental real estate losses are no longer per se passive. If the taxpayer materially participates in each rental real estate activity, losses are fully deductible. If not, even though the taxpayer is a real estate professional, losses are passive and deductible only up to $25,000 (if MAGI is less than $100,000). The IRC § 469(c)(7) does not trigger carryover losses from prior years."

"Time spent as an employee in real property activities counts only if the taxpayer is more than a 5 percent owner."

this "interview" example in the IRS audit guide may be helpful for you.... if you answered something wrong that could lead the IRS examiner to his conclusion...(that is one reason why professional representation is sometimes needed... sometimes how you answer a question can determine the outcome.... I never have the client appear with me during an audit for that reason (unless absolutely necessary)..... I do not want the IRS agent to ask a question and my client blurt out an emotional answer that could be damaging

www.irs.gov/businesses/small/article/0,,id=146828,00.html

[vegasrealtor]

I believe that I understand irc469(C)(7). It is written very clearly in plain English. My point is that Examiner <NAME REMOVED> at the Las Vegas IRS office took it upon himself to flat out lie and told me that I needed 750 hours per rental to qualify for real estate professional. This is mathematically improbable with 9 rentals.

I told him that he was mistaken and pointed out the law so then he went on to fabricate a mathematical method to disqualify me based on income. (I do have a w-2 job as well.) At our second meeting I brought along a printed copy of IRC469 and attempted to show him the pertinent section but he would have none of it. I pointed out that he lied to me at our first meeting about the income method he used rather than the correct method based on hours spent in each activity. He then yelled at me and said" YOU DO NOT QUALIFY ANYWAY". He must be clairvoyant because up to that point he had not asked me any questions relating to the amount of time I spend in each activity!

This must be the way that they are trained in this office because when I returned a week later for the mangers review the manager <NAME REMOVED> said that <NAME REMOVED> fabricated method for determining 1/2 personal services was "an acceptable way to do it"! IRS manager <NAME REMOVED> also said "You do need 750 hours per property". I wrote this down as soon as he said it and he became visibly agitated that I was taking notes. He then stated that he was not going to sit here and let me call his examiner a liar and he was going to issue me a 90 day demand letter. I told him that would be fine and picked up my stuff and was escorted outside.

Three days later he wrote a letter to me stating that he was sending it to appeal. I can only hope that at appeal they follow the law and do not lie and make up methods to disqualify me as <NAME REMOVED> and his manager <NAME REMOVED>have done.

My point is the above mentioned representatives of the Las Vegas IRS office that I have come into contact with so far have been less than ethical and perhaps criminal in their behavior at my audit so far. Telling outright lies and bullying taxpayers in an attempt to extort cash from the uninformed should be a crime.

I am sure that if I lied to someone and then based on my lies sent them a bill in the mail for $35,000+ in an attempt to separate them from their cash it would be a criminal offense.


ALL PERSONALLY IDENTIFYING INFO REMOVED. THAT WAS UNACCEPTABLE BEHAVIOR. ~moon mod

[mwcpa]

vegas... be careful about disclosing names of IRS agents in a public forum like this.... they are not able to defend themselves.... they are private citizens not in the public eye.... please remove the names....actually I am going to ask the moderators to do such in case you do not check in for a while....

It seems you are very emotional about this situation. The IRS agent has a position, the manager agrees, but you disagree.... they have done the right thing by passing the case up to the level of appeals, normally you would do this when the proposed audit adjustment came.... I highly doubt they committed a crime or were unethical.... they are probably being difficult.... please read the notice you got, it's a notice of proposed audit changes and you are given the right to agree or appeal to the next level....take a breath and read the documents you got before you get more worked up and do or say something that can get you into trouble... this is a prime reason why one should have professional representation in front of the IRS when a difficult topic comes up....

Remember, you do not just need 750 hours in real property activities, you need to show that 50% of your activities are in these real property activities....

I am a CPA.... I work anywhere from 2300-2500 hours per year in that task.... lets say I never slept and I spent 751 hours on real property activities.... I am NOT a real estate professional.... while I met the 750 hour rule I did not meet the 50% of personal services....

You need to prove that you worked more in real estate activities than other activities.... you are focused just on the 750 hour rule... but note it's a two part test....excerpt from 469

"(i) more than one-half of the personal services performed in trades or businesses by the taxpayer during such taxable year are performed in real property trades or businesses in which the taxpayer materially participates,

and

(ii) such taxpayer performs more than 750 hours of services during the taxable year in real property trades or businesses in which the taxpayer materially participates. "


Please note that in the code the word AND appears.... so you need to meet both tests, not just one....

[TheOtherMe]

Please remember that IRS agents and managers are people and are human. They are not trained to lie to you.

I hope you understand that if you were behaving the way you are writing here, they will cut you off. That is the way we were trained 40 years ago. Once the taxpayer gets worked up, a rational discussion can no longer take place. We were told to cut it off and end the discussion.

My advice to you, as a retired IRS agent, is to have a professional represent you at appeals. It will take the emotion out of it and the appeals officer and your representative can work things out.

[vegasrealtor]

MWCPA,

I do not want to come across as a tax protester crackpot as I believe in the rule of law and I believe that we all have a duty to follow it as written by congress and approved by the president.

I know that naming the examiner and manager may seem inflammatory but I thought it may help others that may have similar experiences with the same individuals.

I was very calm and clear through out all three of the meetings that I have had so far. The two people on the other side of the desk were not. They both were irate when they realized that they could not just unjustifiably bully me into blindly paying up with no basis. I suppose they are used to people who are so afraid of their authority that they will just pay and go away.

I fully understand that you need both the 750 hour and the 50% personal services.

My issue is that I am appalled that the examiner felt the need to make up criteria (lie) rather than stick with the laws. If I would have lied to them I am sure that they would not have just looked the other way.

I can understand that it is the duty of a good manager to publicly stand behind his employee but once the manager repeated the same obvious lie, I lost confidence in anything he had to say. Like I said before, the manager became visibly upset when he saw me write down his quote. That to me shows that he knew that he was not doing the right thing. Then threatening me with the 90 day letter after he had previously indicated that he would send it to appeals was interesting. I have no fear of court. At least there I believe they would follow the rules of law.

My understanding is that I can be reimbursed reasonable legal fees if I prevail in court after I exhaust all internal appeals. At that point I will consult with legal counsel and determine the best course of action. I have not hired a professional CPA or enrolled agent as of yet because my bills for reasonable representation so far would have probably exceeded 6k. I think I would be better represented by someone like Jeff Schnepper than an enrolled agent.

When the facts are clear there is no reason to lie and make up deceptive disqualifying criteria except maybe through laziness to bother looking up the correct rules and procedures.

I had never been audited before so I was expecting it to be a fact finding experience where they would be looking for substantiation of my deductions. It turned out in this case to be an examiner that tried to bully me into paying more than required by law by making rules up as he went along.

I wrote an extensive letter detailing the unethical conduct I encountered during our initial interview and the two following meetings. I am at a loss on where to send it. I tried to find the name of a director or someone above the manager at the local office and even with the help of google and the IRS website. I could not locate any place to send a complaint letter.

[mwcpa]

Vegas, it would be helpful to know the supposed and alleged faulty methodology employed by the IRS agent and their manager to determine that you are not a real estate professional... given the dollars of tax you note a lot of other income is at play if your real estate losses are not being allowed (due to the passive loss rules).... you keep saying their method was a lie and not within the law.... the law does give the IRS the ability to come up with reasonable methods to determine matters when the facts presented do not appear consistent with the position made.

I would go back to the discussion you started on March 16th related to the question of whether or not your friend qualified as a real estate professional.... three or four of us said no, based on the facts presented at that time.... no one said yes..... is this case based on those facts, if so the IRS is probably correct in its determination....

if you have a real issue that cannot be resolved with the IRS through normal channels you can always reach out the the taxpayer advocate's office.... here is a link.... www.irs.gov/advocate/

[commentator]

I have to agree with mwcpa and theotherme. No IRS employee I've ever dealt with has lied to me. That is not to say they don't make errors but honest mistakes and deliberate lies are two different things.

[vegasrealtor]

Here is a list of the less than honest things that I noticed;

1. At the start of the interview when the examiner was reading the rights and responsibilities page he was rolling his eyes and stated "We do not share this information with anyone. So in case we uncover something we do not share it with the FBI."
This was an odd statement but only a small white lie.

2. He stated that I needed 750 hours per rental to qualify as a real estate professional. I replied that I believe he was mistaken an that the 750 hours is aggregate in all real estate activities. He replied that I would have had to elect to combine them on a previous return. I replied than again I believe he is mistaking the option to combine them all for material participation purposes and we had already gotten past that section because I do substantially all the work on my rentals and on the rare occasion that I hire someone to perform work I still qualify under the 100 hour and most of the services performed rule. He was adamant that I had to have 750 hours per rental so I told him we will just have to agree to disagree on this. At our second meeting I brought with me a printout of irc469 in its entirety and attempted to show him irc469(C)(7) but he refused to look at it and still stuck by his belief that I needed 750 hours per rental. I asked for a manager to clarify this and at the end of our meeting that day he set up an appointment a week later for a managers review.
At the managers review the manager said "you do need 750 hours per rental." After that statement I became distracted of the facts and rather than attempt to go over the other issues I made the mistake of pointing out that I believed that they were lying to me. I asked if they had any documentation to substantiate their claim and the manager said "I am not going to sit here and let you call my examiner a liar, I am going to send you the 90 day demand letter and this meeting is over.

3. At the first meeting after the 750 hour item he then said "well you made $74k driving a truck and you made $29k in real estate and 29 is not 50% of 74 so you do not qualify as a real estate professional"! I tried to inform him that this is a time based test and has nothing to do with income but his mind was made up.
There was another agent in a cube across the aisle who the first agent had previously casually mentioned was his boss that verified his method of determining my status was correct.

4. At the managers meeting I found out that the agent across the aisle was in fact not his boss.

[mwcpa]

vegas..... you noted you made 74K as a truck driver..... how many hours did you log to generate this.... can you support your position.... not to defend the IRS, but it seems to me highly unlikely that you worked an equal amount of time driving a truck and working the real estate. In addition, if you made 74K it also seems highly unlikely that your total loss would be disallowed and that the tax cost would be 35K as you noted in post 3.... you are not disclosing all of the facts here....

let's say you worked 1,000 hours in real estate....
that means you need to have worked 999 or less driving a truck, which means you get paid $74/hour as an employee.... I do not know the going rate for a truck driver in Nevada.... I did a search on the internet and found that the average rate of pay for a truck driver is 27-63K (full time) www.payscale.com/research/US/Job=Truck_Driver,_Heavy_%2F_Tractor-Trailer/Hourly_Rate

[mwcpa]

double post deleted by chiver78, per user request.

mwcpa - you can modify or delete your posts by clicking in the upper right corner of your message in the thread.

[commentator]

I don't know what the going mileage pay rate is for truck drivers today but let's say it's 60 cents a mile.

$74,000 / .60 = 123,333 miles.

123,333 / 65 miles per hour = 1,897 hours

Also:

I made the mistake of pointing out that I believed that they were lying to me.

That mistake is a perfect example of why tax pros generally do not allow their clients to be present at meetings with the IRS.

[TheOtherMe]

"I am not going to sit here and let you call my examiner a liar, I am going to send you the 90 day demand letter and this meeting is over.

I am a retired IRS agent. This is what every manager I ever had would have done and did do a few times during my career. That ends a discussion then and there. Agents do not have to take abuse from taxpayers.

This sounds like the other person may have been an acting manager. I often acted as a manager and was called in to talk to taxpayers, but I never held the title of manager. There was paperwork to appoint me acting manager.

You definitely need to hire a tax professional.

[mwcpa]

"Agents do not have to take abuse from taxpayers. "

Good point theo.....

In my career I have used the "this meeting is over" statement 2 times with, in my opinion, rogue IRS agents... both called me and my clients liars.... that's not the way to go through an audit.... honesty works best.... heck many times I find a mistake in my clients records during an audit and when the agent finds it we are prepared to deal with it, and in a few cases the mistake was so minor and because the agent and I had a good working relationship the matter was passed over.... and when it comes to big mistakes being nice to the agent can help in negotiating the actual adjustment and penalties.... IRS agents, for the most part, are decent hard working people.... just like you and me.... they just happen to work for the other side.... but in every business transaction there are two sides....

[vegasrealtor]

I am at a total loss on how my pointing out the law is somehow abusive to to IRS agent.

[commentator]

You admit you called the IRS auditor a liar. That was your fatal error.

[mwcpa]

exactly commentator..... once you call someone a liar then you lose the ability to argue your point effectively.... disagreeing on a matter should not result in calling a name or insult them.... remember, you get more bees with honey.... not vinegar....

as you should note in my post above, the minute the IRS representative accused my client of lying the meeting was over.... when you do it to the IRS the same thing happens.... when emotion takes over you lose.... time for professional help..... because if the entire appeal is based on the liar position you will lose....

[TheOtherMe]

What both commentator and mwcpa have said to you about calling the examiner a liar, the meeting is over and you were being abusive. You said you called the agent a liar. That ended the discussion.

I once did an audit where I found one partner was embezzling from the other. I was working with the person who was being embezzled from. When I showed him what I had found, he got angry at me and called me every name in the book. I ended the meeting. First telephone call I received the next morning was from him. When he confronted his partner, he admitted the embezzlement and took off. I wasn't so bad after all. Name calling does not and can not result in a professional discussion.

I know there are rogue agents and IRS employees out there. I also know they are the exception and not the norm. I also know there are bad cpas and preparers out there, who take deductions on returns they know are not correct. I worked for one and quit over it.

Like I've said before Vegas, you need to hire a tax pro to assist you. You are too emotionally involved in the tax return and the money. I realize it is a lot of money, but let somebody who can advocate for you without the emotion deal with it. You will come out ahead in the long run.

[mwcpa]

Good comments from theo and commentator.... I hope the casual reader reads these posts and heeds our warnings about how to deal with the IRS....the three of us are speaking from our actual experiences dealing with tax issue from both sides of the table....

Vegas... sometimes the facts presented do not match with the law.... your issue seems to be that you seem to be a full time truck driver (based on your stated salary) and you claim a full time real estate professional... so, if you drove the truck 2,000 hours you need to be engaged in real estate activities for at least 2,001 hours.... that means you work 4,000+ hour per year.... a year has 8,760 hours..... sleep is about 2,900.... let's say you take 2 weeks vacation another 350 hours, take off a few holidays 100 hours, so over the course of the year you have 1,500 hours of free time, to take a shower, eat, etc... seems really not likely....and in that case the IRS can develop a method to reasonably determine the hours, which is not against the law and seems they did.... you must not have been able to "prove" the hours (either the 750 or the 1/2 of all services).... and I do not see how you can based on the limited facts presented here by you.

[MN-Investor]

Like I've said before Vegas, you need to hire a tax pro to assist you. You are too emotionally involved in the tax return and the money. I realize it is a lot of money, but let somebody who can advocate for you without the emotion deal with it. You will come out ahead in the long run.

- Karma to you!

That's exactly what you have to do, Vegas.

You get absolutely nowhere telling someone they are a liar. You've immediately impugned their integrity and put them on the defensive personally. You've just made winning your argument much more difficult.

Now is the time to get a professional advocate on your side - one who both understands the law and understands the art of dealing with the IRS. You, personally, are now focused on proving that the IRS was lying. You're missing the goal. The goal is for the IRS to accept your position. You're allowing yourself to be sidetracked.

[verrip1]

This message has been deleted.

~moon mod

ETA: cheer up, verrip. At least this proves he's not ignoring you.

- Virgil

[commentator]

Verrip1, please read the sticky post, "Purpose of this Board." Then, please delete your off-topic attempt to hijack this thread.

[commentator]

Jun 23, 2011 20:14:10 GMT -5 verrip1 said:

This message has been deleted.

~moon mod

ETA: cheer up, verrip. At least this proves he's not ignoring you.

- Virgil

Actually, I un-ignored him long enough to see what he was posting on Tax Talk. I was not surprised at the tenor of what I found.

I un-ignored him again to see if any action had been taken by a moderator. Thanks.

[ryoungnh]

I'd like user MWCPA or TheOtherMe to comment on my hypothesis that a real taxpayer rights violations occurred -- but perhaps not the ones the founder of the thread had in mind.

It looks to me like the rights violations were
a) unwillingness of the examiner to use the words of the IRC as a guide
b) unwillingness of the examiner to produce an explanation for the examiner's position that connects the words of the law and the evidence to the determination.

From what I can read above, the examiner probably had a gut feel that the taxpayer was predominantly a truck driver and not a real estate professional, and if so, the decision was correct and the rights violation was failure to do a) and b) above and lying by claiming, implicitly, to have done a) and b) above when in reality it is the policy of the department not to do a) and b) above.  I believe the department is trying to avoid directly admitting that it is their policy to NOT do "a" and "b".  so they simply claim to be doing them when they are not doing them.

It seems that the examiner violated item a when they claimed 750 hours were needed per item, rather than in total per year, and was both unprepared and unwilling to show how that claim is supported by the words of the law.  That claim was obviously wrong.  No wonder the taxpayer was upset!  Failure to explain how the words of the law lead to the examiner's interpretation of the law is a violation of any reasonable reading of Publication 556 (examination....), which Publication 1 (taxpayer rights) says the IRS follows.  It's also a violation of report writing standards IRM section 4.10.8.10.2, and of the “lead sheet” template used for examination reports.

It seems that the examiner also violated item a when the examiner didn't feel obligated to apply the ">50% of hours worked" test and could instead just go off the gut feel based on the ratio of dollars earned.  To fulfill item b, the examiner should have said  "I believe you worked <50% of your work hours on real estate because I believe you made x $/hour on trucking and thus spent at least "y" hours total on trucking and that you spent less than "y" hours on real estate.  The taxpayer would then have a chance to provide evidence of having earned a much higher hourly rate on trucking, thus spent less hours, or otherwise proved how many hours were spent on real estate.  By failing to provide such an explanation and allow the taxpayer to provide more evidence, right "b" was violated.

I had two situations on my return (totally separate tax issues than what are in this thread) where the examiner had gut feels about the law that they were unwilling to substantiate based using words in law or regulation.  They ignored words in the IRC they had cited that, when combined with the facts they examiner agreed to in the facts section, cause the IRC to give the opposite conclusion to what the examiner claimed.

I found the comments in this thread about them being trained to cut off the taxpayer as being exactly how they react to the taxpayer raising legitimate issues that prevent the examiner from being able to claim to have met the requirements of Publication 556 and the other items I mentioned.

I'm puzzled as to why I haven't found violations of A) and B) called out clearly on the web.  There must be at least hundreds of examples per year of this kind of behavior.

Thoughts?

[The Captain]

It is not the duty of the IRS agent to educate the taxpayer as to how exactly x links to y and why it doesn't agree with their intrepretation of the law.  That is not how audits work.  If the taxpayer lacks knowledge then they should get competent representation.

If the IRS proposes changes, they have to issue a NOPA (Notice of Proposed adjustment) which will explain in detail the code section in dispute, and the reasoning behind the adjustment.  They do not simply "shove a $35,000 bill" at the taxpayer.  There is a process in place with cross checks which will prevent major errors from happening.  If the taxpayer still disagrees with the reasoning behind the adjustment they have the right to protest. 

In most cases the auditor has examined dozens if not hundreds of these types of returns.  I guarantee you their knowledge in this area far exceeds that of the taxpayer in a vast majority of the cases.  To say it is the responsibility of the IRS to sit down and explain every little nuance of why the taxpayer is wrong does not "violate rights", it's simply allows them to do their job as quickly and efficiently as possible.  The NOPA takes care of any explanation, and the lack of mention of it in the original post leads me to question the, umm, credibility of the "wronged" party.

To suggest otherwise would allow the IRS to become bogged down in all of the "Income taxation is not legal or explain to me exactly why I have to pay" arguments.  Remember, it is the responsibility of the taxpayer to be knowledgeable of the law, not the IRS to sit down and explain it to you.  If you can't or don't get it right, then hire a professional especially in more complex cases.

So no, I do not see a violation of any rights, just a disgruntled individual who may have misunderstood the code as it applied to their situation.

[taxref]

I would take a middle ground between the positions of ryoungnh and thecaptain.  

In instances where there is a disagreement over the meaning of the code, I think the auditors do need to be able to explain their position to the taxpayer.  I also think they should be able to show how their position fits in with authoritative sources, whether it be code, regulations, or court cases.  

In this thread, the taxpayer was pointing out that the code said ABC, while the auditors were pressing for XYZ.  That is something that does need to be explained.  Of course, an explanation does not mean the taxpayer will agree.  

Conversely, cutting off the taxpayer if the taxpayer becomes abusive is acceptable.  The fact that the taxpayer disagrees with the auditor is not a just cause for the taxpayer becoming abusive.  At the point the taxpayer felt an impasse was reached, he simply should have asked for it in writing.  After he got it in writing, he could then move up in the appeal process.

 

[mwcpa]

tax ref.... right on the money....

when you disagree with an agent there is a process to appeal.... yelling and name calling is not one of them.... and it is a two way street.... once I had (well, twice) an abusive IRS agent.... I followed the proper process, I contacted their supervisor and explained the issues, the matters were resolved (one though required going through the formal appeals process)

[ryoungnh]

Thanks for the thoughtful replies mwcpa, taxref, thecaptain.

I read thecaptain's second paragraph as contradicting his first paragraph: “It is not the duty of the IRS agent to educate the taxpayer as to how exactly x links to y and why it doesn't agree with their interpretation of the law. That is not how audits work" seems to be a contradiction to "they have to issue a NOPA (Notice of Proposed adjustment) which will explain in detail the code section in dispute, and the reasoning behind the adjustment"

I also believe that anything short of connecting the dots means a contradiction to the requirement to "follow the law". How can one be said to be following the law if there are clear gaps in the logic? "How audits work" in practice seems to be going on gut feeling for what the law means, or merely hoping that the decision is not unlawful rather than actively following (i.e. being guided by) the law.

I agree with the captain that "that is not how audits work" in practice but I believe that the IRS website indicates that audits are SUPPOSED to work as I described rather than how they actually do. Most specifically Publication 556 (page 4, last 3 paragraphs at bottom left) and 4.10.8.10.2 (06-10-2005) Explanation of Items, referenced here: www.irstaxattorney.com/irs-audits/10/4108_Report_Writing_(Cont.%201).html#d0e154491

While I understand that throughout the process, the taxpayer, not the IRS, has the burden of proof on matters of law, the examiner does have an obligation to have a reasonable explanation.

Alas, it's even to harder to define "what's reasonable although not necessarily true" than it is to define what "beyond a reasonable doubt" means or "a preponderance of evidence" means.  Someone needs to pass judgment on reasonableness, just like someone has to pass judgment on what constitutes pornography.  Some specifics are needed for the debate.

Here's a simple example:
Examiner claim: The statutory words: “INCOME TAX CREDIT IN LIEU OF PAYMENT.” , with no other context other than the section from which they came, are all the proof the auditor needs to assert that if the taxpayer wants to use form 4136 to get a rebate of highway diesel fuel excise tax paid on fuel used to drive the tractor around the fields (thus not on the highway), the taxpayer may not claim as a business expense on Schedule F the cost of the underlying diesel fuel upon which the excise tax was levied.  How can one possibly get such a complicated conclusion out of 7 words that could obviously be referring to a variety of things?  However the examiner got the idea that I couldn't take the underlying fuel cost as a business expense, it certainly wasn't from studying those 7 words.

Three times the examiner insisted those words were sufficient. On the third time she made that claim despite acknowledging that in other areas things work the way I describe (i.e. you can take the underlying fuel cost as an expense as long as you don't include the excise tax as an expense) but she re-asserted that in this case the words (in caps above) mean the way I described isn't how things work in this case.

Context: In my case, the excise tax was $34, the fuel was $597, and I had erroneously not subtracted the $34 from the $627 receipt total when I amended my return to file for the $34 credit on form 3146. The context is that there are two ways to get your $34 back: either separately from your income tax return via a separate rebate process, or included with your tax return as an income tax credit. Obviously you can’t get the same $34 back from the government twice. That’s all the heading is saying. While it’s true that you can’t claim the $34 as a credit and still include the $34 as part of your expense deduction, that passage doesn’t even prohibit that. The phrase only means that if you ask for a rebate separately from your income tax return, you can't get the same rebate a second time as a credit on your income tax. The examiner claimed that to get the $34 back, I would have to give up the expense for all $627. Thus in all situations the taxpayer is better off to not take the credit -- thus making the existence of the credit and the form for claiming it rather a moot point.

So yes, of course the examiner was wrong. But the question is, was this a good faith effort to a) be guided by the law and b) come to the meeting prepared to justify the IRS position? Where do you draw the line between acceptable human error and disregard for attempting to follow the law in the first place?

On the same return the examiner is denying my refund request amounting to several years’ worth of my disposable income. The basic concept: If someone offers you money for your asset 9 months from when you purchase the asset, if you first agree to accept the offer after 14 months, and the exchange is made after 15 months, you are taxed on the basis that that you only held the asset for 9 months because "the money was available to you -- all you had to do was accept the offer -- all you accomplished by not accepting the offer sooner was attempting to get long term capital gains treatment , etc" The examiner stated as a fact that I still held the stock but misconstrued "constructive receipt" to mean "constructive exchange of asset" . Various facts were misrepresented to make them, to the casual reader, better fit her story.  But again, she said that I still owned stock after 13 months.  Had she claimed I didn't hold the stock and then justified that claim, I wouldn't be on this forum tonight.

Her view violates publication 538 (constructive receipt), publication 550 (for a non-publicly traded security, the settlement date is the taxable date), the definition of long term gain, and the ISO laws related to taxation on the gain I realized when I purchased the stock by excising options. They also violate common sense (as was also the case on the excise tax).


For the majority of my gain, the only legal requirement is that my asset was a capital asset and that I held it.  For the rest of my gain the only legal requirement was to not have exchanged my stock for cash or cash equivalent (or gifted it or otherwise lost legal control of it).

There are many extraneous details.   Much use was made of those details in the massive smokescreen of a lead sheet I received, referencing irrelevant law, ignoring words in the law the examiner didn't like, misrepresenting the evidence, ignoring evidence she didn't like, passing off non sequiturs as "responses" to the taxpayer position, contradicting herself, etc. 

As long as the examiner has no more obligation to get the facts and law straight on this matter than she did on the excise tax matter, there's no possibility of a productive discussion.  On the excise tax she eventually reversed herself not because she realized she had not proved her point but because her common sense kicked in.  There was little hope of common sense kicking in on my capital gains issue.  I'd already provided, before the meeting, a detailed fax on the reasons for the  irrelevancy of the question of whether I "could have" turned in my stock earlier.  She told me it was "well presented."   Similar faxes covered other angles she said she was looking into.  She never pointed out any perceived fault with any of it.  She just ignored them.

My only hope for fair consideration in the exam was to force her to either follow the obvious words of the law (i.e., it was a long term gain) or find a reasonable justification in the law for her position of DQISO and short term gain.

Any calm but firm attempts to force explanations led to the same "cut you off" techniques that would have applied had I been yelling or sputtering gibberish. Three layers of management declined to require that the examiner follow Publication 556 in any meaningful way other than meeting with me and issuing a 30-day letter.

My very clear written proof of the issues with the report was ignored by Exam, by TIGTA, and by TAS.  I have yet to find any organization that responds to complaints about the issue of whether the work done in an exam report and an exam meeting and manager meeting was acceptable.  So far, as long as the meetings were held and any report written, no foul.  I do have a couple inquiries active. but I see no reason to expect them to work.

Yes, I'm in queue for appeal, but the queue is 12 months from when exam finished, and if there is some remotely plausible reason why her view is a valid legal exception to the wording of all those law and regulations, I have a right to know now -- rather than be caught off guard by it during appeal or in court.

Also I should not have to wait 12 months to either get my money back or get the right to have a court award me attorneys' fees in the event I have to take them to court.

Also I feel violated as a citizen that there is no mechanism to require fair treatment by the exam department itself.

So, do you folks see here evidence of violations of my rights?

Does what I describe sound like standard operating procedure by the IRS for any situation that the examiner isn't familiar with if also the examiner's gut feel is that the taxpayer was trying to get away with something?

[mwcpa]

Your facts and situation are very specific and in a forum like this, a general information forum, it is hard to go into every aspect of one's case.

If you feel you were wronged in a determination there are rights of appeal.  You have your opinion, the agent has his... the appeals officer in the appeals process looks at the evidence you presented at the time of the audit, looks at the agents notes and working papers, the agent will speak to you.  These appeals officers are generally very seasoned professionals who have years of experience with the law (my experiences at this level have been fantastic).  This is a long process and can take many months, even a year.

If the appeal fails to your liking you can sue in court.

In addition, if an agent is not getting it or is being difficult during the examination process you can request to speak to their manger.  From experience, and this is an art, explaining the tax laws and rules in a language that the other person understands is hard.  Our tax law is complex, many really smart people do not understand what Congress wrote or what they intended to write (and as recent history shows, they do not even read these laws before the sign them.... we could never expect them to understand, which is a problem)

After the examination you have a statutory rights of appeal, which can include going to court and you can go all the way to the Supreme Court if you desire.

If you feel that your issues are not able to be resolved, and you have exhausted all avenues you may contact the taxpayer advocates office in your area or your local Senators and Congressperson.