Docketed Cases. Hard Work (and a little luck!).

Our office has truly been blessed with good fortune over the past two weeks, both docketed cases before the United States Tax Court. The first came to us as a referral from a very talented estate planning attorney – a client having been audited resulting in a Revenue Agent’s Report reflecting $150,000 in additional tax and $30,000 in penalties. On appeal while pending litigation at the Tax Court level, we just concluded the matter in the form of a stipulated decision reflecting no tax and no penalty. Sweet.

The second one was all on us, from audit to tax court. That audit ended with additional taxes of $7,500, including penalties, and we just executed a stipulated decision reflecting $500 in tax.

While the first appears to be the “chest pounder,” it is not. Good facts, great fact assimilation by Alison Walsh here at the office, and then a presentation before the Appeals Officer. True persistence and not giving up is better reflected in Case #2. Bigger is not always better. Case #2 is better because we all learned from it, and this is why we are posting the generics here for the reading practitioner.

We had a client, with a day job, that developed a widget. He had this widget built in bulk in Asia, paid for the widgets, and attempted (and continues to) to sell them here in the United States (a widget primarily designed for high schools and colleges). A little background first, this client was examined for 2010, and was poorly represented (no appeal on great facts), the liability became set in stone, and my client paid the bill. This was a repeat IRS audit of the same facts (for 2011), except this time we were approached to represent.

This was conducted out of Cincinnati, Ohio by the ubiquitous (and probably fictitious) Cindy Morris. I think she is a fictitious IRS created employee…seriously (just like Betsy Rollins before her). You can’t reach her, and she never calls back. We did a detail summary of all disallowed expenses (which was all of them) and forwarded an “Excel” summary sheet with substantiation for all expenses. All done timely and within the unilateral due dates set forth by the Cincinnati IRS office (not coincidentally the home of the events leading to the Lois Lerner disaster).

In a nutshell, all our work went nowhere. A Revenue Agent Report was issued (reflecting $7,500 due, with penalties), and it was as if our package never got there. It was nothing short of amazing. And discouraging. Plus, the IRS used the hobby angle. A hobby. Who develops a product, has it built in bulk in China, and then tries to peddle it during his free time when not working – for fun? Apparently my client does, according to “Cindy Morris.”

Well, as much as it wasn’t financially prudent, our office took it on the chin and docketed the case before the United States Tax Court. No way were we going to let this go, even at our own expense. What’s right is right. Thinking we would spend a couple of days this summer preparing for appeals, just last week we got our results from the Office of Appeals in the form of a stipulated decision, settling for $500!! Keep in mind we never went to appeals. We never spoke to anyone, and never had to present a case. In fact, the letter “introducing” us to the Appeals process came after the decision!!! What happened? Well, the appeals officer must have seen our package and thought “what the heck are we doing here in Cincinnati?” and wrote up the case. The $500 wasn’t justified either, but no way were we letting this opportunity go. Just two hours of arguing would have cost my client more in professional fees.

So there you go. Bigger isn’t better. But for all practitioners handling correspondence cases out of Cincinnati, do NOT give up. It’s not over at the Revenue Agent Report level, take the case up to Appeals. Better yet, docket the case if you can, because it clearly gets a better second look. I think the IRS bets on people walking away from Cincinnati correspondence audits and we are advising the opposite. Don’t give it up.


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