It Was a Dark and Stormy Night

December 01, 2011 | Written by: Betsy Ramsey, EA
books, scale, and gavel


The member’s case arrived at TaxResources as an IRS Notice of Deficiency (NOD to TRI insiders and tax preparers). This is not the optimum form of “first contact” in dealing with a potential dispute with the IRS. In general, a Notice of Deficiency is the last letter sent to taxpayers by the IRS to address a tax balance due, which is also called a ”deficiency” in IRS speak. The NOD gives a final deadline of 90 days to resolve an issue or petition the U. S. Tax Court and present substantiation to prove a taxpayer has support showing the IRS position is in error. In this case we prepared the petition and submitted it to the Tax Court to protect our member’s right to prove they did not owe the proposed $58,000 balance due.

The basic tax issue was that the IRS had no record of the member filing a tax return four years prior. Therefore, the IRS prepared a Substitute For Return (SFR to tax professionals) by using the tax data available to them and reported by payers under the member’s social security number, such as W2s, Forms 1099-B and 1099-R, along with other forms. The SFR is not always a “bad” tax return, however, the IRS will take the path of least resistance as well as the path of most tax due in preparing a substitute return. The member was looking at a tax bill of over $58,000 based on the IRS’s calculations, mainly because the IRS used the Married Filing Separately filing status for the return (a status which is the least favorable in most cases) to compute the tax balance due.

The member thought he had successfully electronically filed the return in question on the original April due date and was mystified by the IRS prepared SFR and large balance due! The member mentioned the problems stemmed from a time in his life when recordkeeping was not a priority. Keep in mind, when dealing with tax return preparation, recordkeeping should be a main concern.

After filing the Tax Court petition, I worked with an exacting Appeals Officer to resolve the issues which included getting an extension of time from her to allow the member to submit a corrected tax return to replace the substitute return prepared by the IRS. The Appeals Officer was understandably impatient with the taxpayer’s problems in providing information that should have been submitted four years earlier!

It took nearly ten months to resolve the issues, and the corrected tax return was finally accepted as filed with the Appeals Officer. The “real” balance due was approximately $1,700 rather than the $58,000 noted in the original Notice of Deficiency. The end result was a member very happy to pay the revised balance due.
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