IRS examiner lied to me!

[The Captain]

Jan 24, 2014 0:40:16 GMT -5 ryoungnh said:

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?

I won't address each point separately, but will make some comments in general.  

I've been involved with about a dozen personal audits, so mwcpa is hands down the absolute expert in this area.  On the corporate side I've been involved with/or managed audits for over 20 years.  On the individual side I've had to sit next to clients (who insisted on being at the opening conference) and work with the partner to try to do damage control as they demanded the IRS agent show them the code section and law where they had the right to intrude in their personal affairs and take up their time, then proceed to challenge every request for information on supposed constitutional grounds etc.  There is a reason I don't do individual work anymore.  IRS agents take all the public abuse and anger over the tax code, which  in reality should be directed at the congress which actually created it.


On the corporate side the agents do a reasonable job of explaining what the issues are.  There are numerous opportunities to discuss the facts and make sure both sides are in agreement as to the facts.  If there is a disagreement as to the law there are numerous steps in the process to have the disagreement reviewed and resolved.


In addition there is a special group in the IRS specifically created to assist taxpayers who believe they have been treated unfairly or not given proper guidance.  I have worked with this group twice, and have found them to be highly professional and very well trained.

www.irs.gov/Advocate


You do have rights and avenues to address any perceived abuse of those rights.  Yes it is complicated at times, which is why in some cases it makes sense to hire an expert.

[ryoungnh]

mwcpa, and taxref, @thecapitain, or anyone else out there....

I'm heartened to hear that I should expect the appeals office to be more skilled in following the law and more interested in following the law.

I've taken advantage of all the non-court options you mentioned, and some you didn't.  I'm in a queue, 7-10 months away having my appeal conference.  Meanwhile some threads via Exam management, TAS, congress, TIGTA, the IRS DC office, and the office of "Conduct and Compliance" are still in process. 

If I can communicate with them better than I have to you so far, I might improve my odds of resolution via those other avenues, prior to the appeal process.

I'm having trouble understanding why others are disagreeing with my argument that Exam has already violated my rights regardless of whether it turns out that the Exam decision is correct or incorrect.

I don't know which points of my argument is failing to be convincing.  Below I'm hoping you can help me narrow down where I need to focus more effort and help me better communicate my argument.

a) Would it be acceptable for the Examiner to leave the law-and-if-unagreed-provide-argument section of the report blank?

if not, then

b) Would be acceptable to include in the above section law but provide no other text (i.e. no attempt at an argument of any kind)?

if not then

c) If the examiner composes one or more sentences in to the above section, presumably to be the "argument" , what tests can we apply to determine if the those sentences satisfy the requirement to provide "argument?"

if you can't define a test other than "judgment", then

d)  In a many $10,000's of dollars dispute, is your judgment that the words “Date of Disposition is date of merger” are sufficient to meet the minimum work standards for providing an "argument" if the IRS position was that the holding period requirements for favorable taxation ended on the date of the merger, even though 1) in the facts section of the report the examiner concurred that the taxpayer still held the stock (not specified to mean only the certificates that represent the stock) for months after the merger, 2) the merger agreement, governing state statute, and governing state case law, concurred that the taxpayer still held stock (and not merely stock certificates), 4) the merger agreement and state corporate status document showed that the company the taxpayer held the stock in had survived the merger and continued to exist as a separate legal entity for 2 more years, 3) the 1099 showed the trade being months after the merger, 4)  none of the law and other authority cited provided an example of a disposition or any other taxable event having been found to occur at any point prior to the taxpayer exchanging the stock, and 5) the law-and-other-legal-authority excerpted in the report  took up over 5 pages including 4 very different areas of tax law covering 7 sections of IRC plus two journals cited plus a Rev Rule and a court case?


If yes to "d", then

e) isn't it the case that the more you take the position that the situation is complicated, the harder it becomes to accept the idea that the words "date of disposition is date of merger" met the minimum work standards for "argument" as defined in the lead sheet template and the examination report standards?

and

f) Doesn't the alleged "argument" provided by the examiner better fit the definition of merely "contradiction" rather than "argument" as defined in this classic Monte Python skit, "http://www.youtube.com/watch?v=kQFKtI6gn9Y ?  (if in a hurry, watch the first 36 seconds, then skip to 1:18, the relevant part ending at 3:50, although the whole skit up to 4:20 seems somehow similar to my experience with the IRS thus far.


Thanks to anyone who can help me make my point more convincingly to all those agencies that should, in theory, find the examiners work unacceptable completely separately from the question of whether or not the examiner happened to make the right decision or not!

[mwcpa]

without all of the facts surrounding your situation it is highly unlikely anyone can give you the answer you seek (and more than likely as the facts may be complex a general information blog is not going to point you to the exact answer you seek).  Negotiation and arguing a point to the IRS (or anyone) is an art, not a science, the answer won't be found in a book, delivery is the key.  Our tax law is not logical at times, so you cannot argue logic, as you seem to want to do with the if/then algebra above.

It may be time to seek professional representation in this matter, get someone who knows how to argue a case at the audit and appeals level to the IRS for you as you clearly are not able to make your specific case heard or understood effectively, based on your posts.

[ryoungnh]

mwcpa.  I think you are indeed getting to the root of the problem: When you say this: "Our tax law is not logical at times, so you cannot argue logic," does that mean that examiners are not required to apply logic in determining how to follow the internal revenue code?

[mwcpa]

the issue is not logic... you are looking for a textbook answer for something that is an art....

what may be logical to you may not be logical to another and the only way to have the other person understand what the heck you are talking about is to speak to them respectfully on terms they can understand... that is an art, not learned in a book and it is not in the Internal Revenue Code....

Get a professional, you cannot win this battle you are waging if you keep insisting that a person must understand your logic and accept your position or they are somehow they are doing you a wrong....

[ryoungnh]

Did you enjoy the Monte-Python skit?

I will engage a lawyer in the unlikely event that Appeals doesn't work.  If so, I'd expect to get reimbursed for those post-appeal legal bills when tax court finds the IRS should have known their position was wrong.

I still don't understand how you would draw the line between unacceptable examination work and acceptable work.

I think I might learn how to help improve treatment of myself and all taxpayers through a debate with you regarding whether there is a contradiction between what irs.gov implies is the standard of work by the examiner and what seemingly every current and former IRS employee agrees is the actual standard in practice.

To avoid potentially getting free advice regarding my case, let's take a simpler example: A hypothetical situation related to how vegasrealtor started this thread.

a) Suppose that the examiner agreed that vegasrealtor met part 2 of the 2 part test.  To make it very extreme, suppose the examiner concurred that vegasrealtor  had no income outside of realestate and spent no hours trying to make income outside of realestate.

b) Suppose that the examiner agreed as facts that vegasrealtor had exactly 3 projects, and that vegasrealtor had spent exactly 700 hours on each of the three projects.

c) Suppose that the examiner really did tell vegasrealtor that it was the examiner's professional opinion that these words from IRS publication 925 related to "real estate" professional status: "You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated" means that each project must exceed 750 hours, and that therefor Vegasrealtor failed part 1 of the test because none of the projects by themselves included more than 750 hours of work.

d) Suppose the the examiner really did offer no further explanation for how the examiner determined that the publication words meant "per project" rather than "per year" other than statements like "that's just what it means" and "hey, boss, doesn't it mean "per project?  See?  there you have it: my boss agrees, it's per project"

Would THAT be a violation of the taxpayer's rights or not?

[mwcpa]

A difference in opinion is not a violation of rights

the hypothetical taxpayer would have rights of appeal if he felt the decision of the auditor and manager was incorrect.

[ryoungnh]

The violation wasn't that there was a difference of opinion. 

The violation in this hypothetical example was failure to adhere to Publication 556., www.irs.gov/pub/irs-pdf/p556.pdf , particularly the 2nd and 3rd paragraphs under "The Examination" on page 4, left column, near the bottom. Also failure to follow other documented rights.

In my case the examiner's manager's manager said that in 28 years he's never been required to follow Publication 556. He wouldn't put that in writing. To me that indicates his intention is to not comply with it AND to answer "yes" if anyone asks him if he complied with it.

Do you believe that the taxpayer has a right that the examiner must follow Publication 556?

[mwcpa]

if you read the entire paragraph you quote... cut and pasted and emphasis added to keys...

"Any proposed changes to your return will be explained to you or your authorized representative. It is important that you understand the reasons for any proposed changes. You should not hesitate to ask about anything that is unclear to you."

In this case there appears to be a communication issue.

"The IRS must follow the tax laws set forth by Congress in the Internal Revenue Code. The IRS also follows Treasury Regulations, other rules, and procedures that were written to administer the tax laws and court decisions. However, the IRS can lose cases that involve taxpayers with the same issue and still apply its interpretation of the law to your situation."

The IRS is allowed and often relies on other rules, not just the law, especially when the law drafted by Congress is not clear.

If you read further...

"If you do not agree, you can appeal any proposed change by following the procedures provided to you by the IRS."

and further

"Because people sometimes disagree on tax matters, the IRS has an appeals system."

As one has not been denied the right of appeal, in any of the situations list by the recent poster rights are not violated. 

Soapbox time....

Seems to me there are two interpretation of a section of law here, the IRS has its and the poster has his... and I guess because the poster is not prevailing and because he does not understand the reasons presented for the denial of his position the IRS must be violating his rights... (sarcasm)... just because an audit does not go your way does not mean your rights are violated... just because you do not understand the reasons posted in an audit adjustment letter does not mean your rights were violated...

Soapbox over...

[ryoungnh]

Yes, those first two passages you quoted contained the very words I'm referring to.

I don't understand why you felt it was relevant to quote the later passages relating to appeals.  Is it your position that the fact that later passages indicate that there is a right to appeal mean that those first two passages you quoted are optional rather than mandatory upon the examiner?

It's pointless for me to address the soapbox comment if you're saying that the first two passages are optional rather than mandatory.

[TheOtherMe]

Jan 25, 2014 1:11:21 GMT -5 ryoungnh said:

mwcpa, and taxref, @thecapitain, or anyone else out there....

I'm heartened to hear that I should expect the appeals office to be more skilled in following the law and more interested in following the law.

I do not think it is correct to say that Appeals is more skilled in following the law and more interested in following the law.  Appeals officers have room to negotiate that IRS examiners do not have.  Appeals officers can negotiate to settle a case when they feel it would not be in the interest of the Service to take the case further.  An IRS examiner can not make that call.  

[ryoungnh]

TheOtherMe,

I agree that what you describe is the official difference between Appeals and Exam, and that officially Exam is every bit as skilled and interested in following the law as Appeals.

I believe that mwcpa was speaking instead of the practical reality and was intending to draw contrast between Appeals and Exam when he said, "These appeals officers are generally very seasoned professionals who have years of experience with the law (my experiences at this level have been fantastic).",

Two levels of manager in Exam told me that Exam does not need to interpret the law rigorously, but that Appeals will.  That contradicts the official policy -- which is part of what upsets me.

The Area Director for the Taxpayer Advocate Service (TAS) told me that I should expect Appeals to provide a higher level of work.  That also upsets me in that it is an excuse for not holding Exam accountable to follow the official policy.  But it heartens me that I shouldn't have to go to court to win.

Are you saying that the practical reality is that the skill in following the law and the interest in following the law is the same in Appeals as it is in Exam?

Can you provide me your opinion on whether in the hypothetical example in post #35, the hypothetical examiner was violating the combined effect of the first two paragraphs that mwcpa quoted in post #38.

If you don't see it as a violation, I'd like to understand why, and see if I can't find a way to be more convincing that it is a violation.

[TheOtherMe]

I am not going to take the type to post an answer as I do not know all the facts.  I am only reading your interpretation and have no way of knowing what the Examiner would say.  

I interviewed to be an Appeals Officer after I had several years of experience and I did not get the position because I did not know that they had the authority to do something as simple as split an exemption 50-50 between two parents.  I do know I did not have that authority.  

I worked for some managers who wanted the code strictly enforced and others who were more interested in agreed cases.  An examiner must also adapt because of who they report to.  That person does write their evaluation.

I would never say that everything the IRS does is right, because it isn't.  However, there are two sides to every story.

I have overheard co-workers say things on the phone that I would never have said when I worked there.  They had to live with their conscious.  I have no regrets about anything I ever did there--I am sure some of the people I audited would disagree.  

[ryoungnh]

My question at this point is not what an examiner did say or what an examiner would say.

My question is what COULD the examiner get away with saying without being considered by YOU, the reader of this post, to have violated the taxpayer rights that the examiner follow the law and regulation and provide an explanation.

My question is this specifically this: 
IF an examiner were to say the following: "Mr, taxpayer, the following condition excerpted directly from IRS publication 925 for determining if you qualify for 'real estate' professional status: 'You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated' MEANS that 'if you did not put over 750 hours into a SINGLE project, you do not qualify for being a real estate professional.'"
AND the only further explanation the examiner were willing to provide to justify their claim to the taxpayer about what the excerpted passage means is 'that's just what it means" and "hey, boss, doesn't it mean per project? See? there you have it: my boss agrees, it's per project"

WOULD that be sufficient to have satisfied the taxpayer's right that the examiner follow the law and explain the reasoning for the examiner's interpretation of the law?  

Alternatively, if you believe no such right to follow and explain exists, then please just say so -- no need to answer the question in that case.

My understanding is that mwcpa's position is that there is no such right because the appeals process is supposed to cover that so the examiner doesn't have to do it.  The examiner is entitled to their opinion as to what the law means -- and the opinion need not be justified using any explanation that starts with the words of the law or regulation and from that provides a reasonable explanation for how the examiner has interpreted the law.


Above I'm not asking for what the IRS would consider to be acceptable or not.  I'm asking for what you (theOthereE,  mwcpa or any other responder to this thread) would consider to be a rights violation rather than just reasonable judgment or human error.

My view is that in the example, if the examiner were to do that, it would a failure to make a good faith effort to be guided by the law and to explain the justification for the decision.  I believe that in the above example, the examiner has invented a new test (a per-project test) for which there is no evidence in the law.  Also it would be a stupid test because a person who did one 751 hour project would qualify as a professional but someone who did ten 300-hour projects (3,000 hours total) would not qualify as a real estate professional.  The fact that it would be stupid is not by itself a violation, but it is evidence to suggest the examiner should have a high burden of "reasonableness" (if not an actual burden of proof) as to why something not in the law and not particularly sensible should be considered a proper attempt to adhere to the spirit of the law.

I'm puzzled as to why others don't share that view.  

[mwcpa]

"My understanding is that mwcpa's position is that there is no such right because the appeals process is supposed to cover that so the examiner doesn't have to do it."

You do not understand my position.... the lack of knowledge of the IRS process in this circumstance is a big issue.  If one's rights are truly being violated, and the issue is not just misunderstood, there is a process within the IRS to resolve the matter.  Having a difference of opinion on the application of a rule or a law is not a violation of rights... it is common for on area to have position A and another to have position B, that's why we have a legal process including but not limited to taking your case to the Supreme Court.

I will no longer be adding to this thread as it seems to be going in a circle, some try to explain, the poster extracts excerpts and restates the same question trying to get an answer that will not be given....

[ryoungnh]

“If one's rights are truly being violated, and the issue is not just misunderstood, there is a process within the IRS to resolve the matter.”

What is that process?

[mwcpa]

"What is that process?"

www.irs.gov/irm/part13/irm_13-001-015.html

www.treasury.gov/tigta/

[ryoungnh]

RE: process to resolve the matter if one's rights are truly being violated, see: www.irs.gov/irm/part13/irm_13-001-015.html and www.treasury.gov/tigta/

The IRM link regarding the Taxpayer Advocate Service (TAS) was especially interesting. Thanks!

Unfortunately, the links show that neither TAS nor TIGTA resolve rights violations that fall in between the extreme, section-1203-grounds-for-immediate-employee-termination type (handled by TIGTA) and basic process-steps-being-skipped-or-ignored (handled by TAS).

For the in-between violations, TAS does not assess whether a violation occurred and does not act to resolve the violation. Instead TAS simply passes the complaint along to the chain of command for management to do with as they please. (Note the use of the word “refer” and the google definition of “refer: 1) mention, 2) pass a matter to (another body, typically one with more authority or expertise) for a decision.)

If you believe that either organization resolves in-between types of violations, please show me from what words you arrived at that conclusion.

TAS has the option (not not a requirement) to refer in-between matters to the Human Resources (known as "Human Capital").  Again, the word is "refer"; TAS does not make an assessment or a resolution.  

While TAS can "advocate" that ECCO or management look at a complaint, TAS cannot "advocate" that action be taken -- because TAS roles is defined only as to refer. (see above definition.)

Thus in matters other than simple procedural matters, the Taxpayer Advocate is not a advocate: they are not authorized to advocate for the taxpayer. Google: definition of Advocate (verb) publicly recommend or support.

Or did I miss something?  If so, what words did I miss?

[mwcpa]

You can contact your local representative in the house or one of your senators if you are not happy with taxpayer advocate, the us treasury inspector general and or others.... If your senators and representatives won't give you the answer you want you can always run for their job or write to the president....