Accounting 432/732
Handout A
Tax Controversy Problems
Chapter 1
2.Terry has received a “30-day letter” from the IRS Attached to the letter is a Revenue Agent’s Report explaining adjustments to income that result in a $20,000 underpayment of tax. What are Terry’s options in response to the 30-day letter?
3.Gina, who is single, has received a notice of deficiency in the amount of $4,000 from the IRS. What are Gina’s possible responses to the notice?
5.Is an attorney who prepares an initial tax return for a client and files it on behalf of the client engaged in “practice before the IRS?”
8.What policy rationale(s) might justify allowing non-attorneys to practice before the IRS and the Tax Court? Do those rationales counsel allowing the same individuals to practice before the District Courts and Court of Federal Claims in tax refund cases?
10.Carmen is a certified public accountant who was retained by Bill Billionaire. Would the “federally authorized tax practitioner privilege” of Code section 7525 apply to protect from disclosure to the IRS the following documents created by Carmen for Bill?
A.A worksheet used to prepare Bill’s complicated federal income tax return.
B.A memorandum providing tax advice on state income tax law to Bill to assist him in deciding where to locate the headquarters of his next business venture.
C.An investment plan for Bill’s billions.
D.A letter to Bill encouraging him to invest in a tax shelter that Carmen has developed.
E.A memorandum advising Bill of a possible strategy in a pending tax controversy with the IRS with respect to which Bill has received a notice of deficiency.
F.Oral advice to Bill in the presence of is girlfriend of a possible litigation strategy if Bill should decide to take the pending tax controversy to Tax Court.
G.Oral advice to Bill on how to handle various aspects of a criminal tax investigation of Bill by special agents of the IRS.
Chapter 2
2.Marc is the sole proprietor of a local bicycle repair shop in Los Angeles that has been in business for three years. During the previous year, Marc incurred a loss from the operation of the shop resulting primarily from a currently deductible repair expense he was forced to make on the building in which the shop is located. Marc also deducted other business-related expenses for the previous year, some of which he retained receipts for and some of which he did not.
A.Marc is concerned that the large repair expense will “red flag” his return and cause the IRS to select the return for audit. He asks you whether he might reduce his audit chances by attaching copies of receipts documenting the repair expense directly to is return. How would you advise Marc?
B.Assume that Marc has received a letter from the IRS questioning the deductibility of the repair expense. What are Marc’s options for responding to the letter? What advice can you provide him in order to limit the scope of the IRS’s examination?
4.Sid, a financial consultant with a large firm, has been married for 5 years to Jeanne. Jeanne has a two-year Associates degree in bookkeeping from a local junior college. The couple has two young children, and Jeanne stays home with them. Sid is highly successful, but he is known for his violent temper.
During 1995, Sid received several fees, amounting to $50,000, “under the table.” As in each year of their marriage, Sid prepared the couple’s joint return. The 1995 return reported $220,000 of gross income attributable to Sid’s salary plus $5,000 of interest and dividend income. Thus, the return reported $225,000 of gross income. On April 15, 1996, Sid handed Jeanne the return and told her that she had better sign it right away so he could send it in to the IRS on time. She questioned him about what was on the return, but he yelled at her to hurry up and sign it or she would be very sorry. Jeanne feared Sid’s temper because of previous occasions during which he had assaulted and injured her, so she signed the return without asking any more questions. Sid mailed the return in from the U.S. Post Office later that day. A week later, Sid gave Jeanne a diamond bracelet and apologized to her for his behavior.
On May 1, 1999, the IRS sent the couple a timely notice of deficiency based on unreported income. The deficiency amount is $3,000, which includes penalties. Sid and Jeanne divorced in 1997 and Sid fled the country. The IRS is thus seeking to collect the entire $30,000 from Jeanne. How might she defend against payment of the $30,000 deficiency? Will she likely be successful?
5.Bubba Ellis operates the Texas Flight Training Academy (the “Academy”), a flight instruction school in Boline, Texas. Since its opening 10 years ago, the Academy’s faculty has consisted solely of retired airline pilots. At all times, Bubba has treated the faculty members as independent contractors rather than employees, with the result that Bubba has not withheld on behalf of the faculty members federal income taxes, FICA (federal social security taxes) or FUTA (federal unemployment taxes). Instead, he has relied on the faculty members to comply with their tax law obligations. Bubba recently received a letter from the IRS contesting the classification of the faculty as independent contractors and requesting a meeting to discuss the issue. Contrary to your advice, Bubba has agreed to meet with the examining agent personally. How might you prepare Bubba for the meeting? Specifically, what types of questions should he be prepared to answer concerning the appropriate classification of the Academy’s faculty? See Form SS-8.
6.Rayanne owns a restaurant named Chez Ray in Coral Gables, Florida. Her 1998 tax return was recently audited and the examining agent seemed concerned about the Schedule C she filed for the restaurant business.
A.Rayanne has not kept very good books and records for the business. Given that fact, how might the IRS set about proving that Rayanne has unreported income from the restaurant?
B.Rayanne suspects that the examining agent’s concern about her Schedule C is actually a reflection of the high profile Rayanne has in the community. In order to promote her restaurant, Rayanne attends all the major local events, dressed in the latest designer fashions. She also routinely hosts large parties at her mansion. If Rayanne’s suspicion is correct, does this provide a possible defense to an assertion by the IRS of unreported income from the restaurant?
Chapter 3
1.Jared is representing a client who did not keep copies of his tax returns, and who is being audited by the IRS. Jared would like copies from the IRS of his client’s returns and any financial information about his client that the IRS is using for the audit. Can Jared get this information, and, if so, how?
4.Clara is requesting a letter ruling on behalf of a corporate client. Her client is concerned that the letter ruling will be made public under FOIA and that competitors will find out that the company is engaging in the transaction in question. How can Clara reassure her client?
7.Earlier this year, Blake Wright, who is single, sold a rental property he had owned and leased out for the past six years. Throughout the six-year period, he took depreciation deductions with respect to the property. Unfortunately, a fire destroyed all of his records relating to the property as well as his copies of his prior years’ tax returns. Blake cannot remember exactly what he paid for the property, and without any records, he is not certain of his current basis in it. In order to properly report his gain from the sale, Blake would like to obtain copies from the IRS of his tax returns for the past six years. He has retained you to make the request on his behalf. Blake’s social security number is
215-55-0955. He resides at 507 Oakwood Boulevard, Falls Church, Virginia 22043. Draft a FOIA request letter for him.
Chapter 4
2.Clara is negotiating a closing agreement with the IRS to reflect an agreed valuation of certain rare books that Clara donated to a charitable organization. Does the closing agreement need to reflect the IRS’s determination of Clara’s entire tax liability for the taxable year in question in order to be valid under section 7121?
3.Trina invested in a partnership that was marketed to her as a tax shelter. She and many other investors have been audited by the IRS. After Trina received a 30-day letter and filed a tax protest, the IRS offered Trina a settlement. The settlement, which would be recorded on Form 870-AD, would allow 10 percent of Trina’s deductions. Trina has heard that other investors in the partnership have filed Tax Court petitions, and she thinks a Tax Court judge might be sympathetic to allowing a larger share of the deductions. She asks you the following questions.
A.If she signs the 870-AD, can she preserve her right to petition the Tax Court?
B.If she signs the 870-AD, can she preserve her right to pursue a refund claim for the amounts she will pay over to the IRS with the 870-AD?
C.If she signs the 870-AD and does not petition the Tax Court or file a refund claim, and the Tax Court issues favorable decisions to other investors, will the IRS be required to modify the 870-AD to reflect the favorable Tax Court decisions?
Chapter 5
1.During 1996, Margaret received from her employer, in addition to her annual salary of $50,000, an antique work of art as additional compensation.
A.Assume that Margaret properly reported the artwork as gross income on her 1996 return, which she filed on April 15, 1997. Her return reflected her valuation of $10,000. The IRS audited Margaret’s return. On February 1, 2000, the IRS mailed to her a notice of deficiency reflecting its determination that the correct value of the artwork, includible in her gross income, was $20,000. Margaret has not responded to the notice of deficiency.
i.When is the last day that the IRS can assess additional tax with respect to Margaret’s 1996 return?
ii.What would be the last day for the IRS to assess additional tax with respect to Margaret’s 1996 return if Margaret had filed her return on March 1, 1997 instead of April 15?
iii.What would be the last day for the IRS to assess additional tax with respect to Margaret’s 1996 return if Margaret had filed her return on June 2, 1997 instead? Does it matter whether Margaret had obtained an extension of time to file her 1996 return?
iv.What would be the last day for the IRS to assess additional tax with respect to Margaret’s 1996 return if Margaret’s annual salary were $25,000 instead of $50,000?
B.Assume instead that Margaret did not report the receipt of the artwork on her 1997 return, which she filed on April 15, 1997. On February 1, 2000, the IRS mailed to her a notice of deficiency reflecting its determination that Margaret has $20,000 of additional gross income, attributable to the artwork.
i.Assume Margaret was unaware that the artwork constitutes gross income to her, and that is why she did not report it on her return.
a.If Margaret does not respond to the notice of deficiency, when is the last day the IRS may assess additional tax with respect to Margaret’s 1996 return?
b.If Margaret responds to the notice of deficiency on March 10, 2002 by signing a Form 870 waiving restrictions on assessment of tax, when is the last day the IRS may assess additional tax with respect to Margaret’s 1996 return?
c.Assume that Margaret responds to the notice of deficiency by filing a Tax Court petition on April 3, 2000. The Tax Court hears the case on May 4, 2001, and its decision, which is adverse to Margaret, becomes final on June 3, 2002. When is the last day the IRS may assess additional tax with respect to Margaret’s 1996 return?
ii.If Margaret had instead intentionally failed to report the value of the artwork as gross income, and she does not respond to the notice of deficiency, when is the last day the IRS may assess additional tax with respect to Margaret’s 1996 return? How would your answer change if Margaret had filed an amended return on June 16, 1997, reporting $20,000 of gross income from the receipt of the artwork?
C.Assume that Margaret fraudulently failed to file a return for 1996. She subsequently filed the return on June 1, 2000. When is the last day the IRS may assess tax with respect to Margaret’s 1996 tax year?
2.Assume that the statute of limitations on José’s return will expire in three months. José is currently negotiating a settlement with the IRS Appeals Division. The Appeals Officer has requested that José extend the statute of limitations on assessment for an additional six-month period.
A.What factors should José consider in deciding whether to agree to extend the statute of limitations?
B.If José does agree to extend the statute, should the extension be made on Form 872 or Form 872-A?
Chapter 7
1.On March 3, 2000, the IRS mailed to Peter at his home in San Diego, California a notice of deficiency dated the same day. Peter received the notice on March 8, 2000. When is the last day on which Peter can file a timely Tax Court petition?
2.Kyle recently received a notice of deficiency from the IRS. The asserted deficiency amount was $25,000, and the only explanation was “unreported income.” Kyle claims that all of his income was from wages, interest, and dividends, which he duly reported on his return. Kyle timely petitioned the Tax Court in response to the notice. Under current law, who will bear the burden of going forward? Who will bear the burden of persuasion?
4.On April 20, 2000, Sheila received a notice of deficiency from the IRS with respect to her 1996 taxable year. The notice was dated December 1, 1999. It had been mailed to her prior address, where her former roommate still resides. Sheila filed her 1997 and 1998 returns after moving to her current address, and that address was on those returns. Sheila also has a forwarding order in with the Post Office, but they delivered the notice to her old address anyway. Her former roommate apparently received the envelope but did not open it. She finally put it in the mail to Sheila with some other documents; Sheila received it yesterday and brought it to you to ask what to do. She is concerned because the notice reflects an asserted deficiency of $50,000, which she cannot afford to pay in
full. What do you advise?
Chapter 8
1.Joanne filed her 1998 return on April 1, 1999. She owed $500, which she mailed with her return. The rest of her tax liability, $7,000, was covered by withholding. After examining her return a few months later, she realized that she had made an error that may entitle her to a refund of $1,000.
A.How can Joanne claim a refund of the $1,000?
B.When is the last day she can claim a refund?
C.How, if at all, would your answer to B. change if Joanne had filed her return on April 15, 1999 instead?
D.How, if at all, would your answer to B. change if Joanne had granted the IRS a one-year extension of the statute of limitations on assessment with respect to her 1998 tax year?
E.Assume that Joanne filed a timely refund claim on July 8, 1999.
i.If the IRS does not ever respond to her claim, when is the first day she can file a refund suit? When is the last day?
ii.Assume the IRS denied Joanne’s refund claim on January 3, 2000. When is the first day she can file a refund suit? When is the last day?
2.Adrian has received a notice of deficiency from the IRS in the amount of $5,000 with respect to his 1998 tax year. After receiving the notice, and within 45 days of the date on the notice, Adrian mailed the IRS a $5,000 with only the notation “1998 tax year” on the memo line of the check.
A.Is Adrian still entitled to petition the Tax Court in response to the notice of deficiency?
B.How would it affect Adrian’s rights if instead he had printed “deposit – 1998 taxes” on the memo line of his check?
C.Would your answer to A. differ if Adrian had mailed in $5,000 after receiving a 30-day letter before receiving the notice of deficiency?
5.June is a recovering addict who, over the past few years, has been through several outpatient treatment programs designed to help those with substance abuse problems. She has refrained from using illegal drugs since January 1 of this year. June recently realized that she had neglected to file her tax returns for 1995-1998, although she was employed for portions of each year and is owed a refund for each year. She explains that she was unable to timely file those returns because she was incapacitated by her drug addiction. No one was authorized to act on her behalf with respect to her financial matters. June has never been contacted by the IRS. Can she claim a refund for any of those years, or has the statute of limitations expired on all of them?
7.Tara Green asks your assistance in claiming a refund from the IRS. After timely filing her 1998 Form 1040 by mail in March 1999, she realized that she had forgotten to deduct $6,000 in home mortgage interest, real property taxes of $2,000, and state income taxes of $4,000 she had paid in 1998. (She had not itemized her deductions on her original return, but instead took the standard deduction of $4,250. She also took her personal exemption in the correct amount of $2,700). She has no other deductions or income items. Tara is single, has no dependents, and had adjusted gross income of $60,000 in 1998, consisting entirely of salary. $10,000 had been withheld from Tara’s wages for federal income tax purposes, and she had paid the remainder of her tax liability ($1,566) with her return. She still resides at 125 Main St., Wayne, NJ 07470, where she lived when she filed the return in question. Her Social Security number is 222-33-4444 and her telephone number is (973) 264-9872. She did not and does not wish to make a Presidential Election Campaign Fund designation. Assume that Tara’s refund claim will be timely; draft the claim for her.