Taxation & Estate Planning

Tax Court - providing a level playing field in audits.

By howardlevy

I just settled an audit on behalf of a client that had to make its way to Tax Court to be resolved.  The audit was caused by significant losses my client claimed on rental real estate.  But it but morphed into an IRS investigation of her banking statements and deposits. 

Taking a case to Tax Court to resolve IRS audits is not appropriate in every case, but is very helpful when an impartial, outside Federal judge seems to be necessary.   In the audit, the IRS was focused on making changes to the return.  Once in Tax Court, the playing field leveled out, and the IRS became a little more introspective as to its position.  We had a good case, but we had to find the right venue on this one to get the right result. 

We chose to shut the audit down and take it to Tax Court when a receipt that was presented to the auditor for $1,000 in labor to paint an apartment unit was met with the auditor’s question of “How do I know this was not spent on the taxpayer’s personal residence?”   Based on that skepticism, we believed that other answers would only lead to more questions, including as to the investigation of the bank deposits.  Going to Tax Court meant that the IRS did a blanket disallowance of expenses and found $60,000 of unreported income, all issues we felt were better resolved by trial than by the IRS auditor’s subjective review.

The case resolved by negotiation with an IRS Appeals Officer before the Tax Court trial date.  The IRS conceded 100% of the unreported income issue  The IRS also conceded the real estate expenses that could be reasonably verified.   Right venue, right result.

Full post as published by IRS and the Law on May 13, 2008 (boomark / email).