Simple, Yet Not So Simple

June 01, 2011 | Written by: Mark D. Olander, EA, USTCP
Man using a calculator


Before you decide to handle your own IRS audit, you should be alert to all that could go wrong if you do. This month’s case tells the story of an audit that should have been quick and easy to resolve, but we had to go all the way to a pre-trial Tax Court hearing before we found someone who was able to see our side.

The audit issue was a dependency exemption. The member and his ex-wife shared custody of their son, and the divorce decree stipulated that each parent could claim the exemption in alternating years. The year under examination was the member’s year to claim it, yet his ex-wife had violated the agreement and claimed the child. It seemed like a simple problem to resolve, so the member decided to handle it on his own, even though he had purchased audit defense for the year in question.

He sent a letter to the IRS explaining the situation, along with a copy of the divorce decree, but the IRS sent a letter back disallowing the exemption. Since the ex-wife had also claimed the child, the examiner wanted proof that the child had been with the member for more than six months during the tax year. Beyond the divorce decree, which he had followed faithfully, there were no records proving which parent had the child for more than half the year. At that point he realized he needed help. It was January of 2010 when he called TaxResources.

After hearing the story, the Audit Representative assigned to the case explained to the member that the dependency exemption should be allowed. Since the reason the IRS had given for the disallowance was that the taxpayer had not proven the six months of residency, the Audit Representative advised the taxpayer to recreate a calendar detailing the changes in possession of the child throughout the year.

In a phone call, the IRS examiner explained to the Audit Representative that she thought the divorce decree was unclear. She suggested that the mother’s address was the son’s address and said the member would need school or medical records to prove the child’s address. The Audit Representative advised the examiner that addresses were not relevant, that what mattered was where the child actually spent his time. He explained that there were no records to show that they were not at the taxpayer’s address. He asked her to refer once again to the divorce decree, which he believed clearly spelled out the custody arrangements. If the terms were followed during the year, he said, the child would have had the same principal place of abode as the member for more than half the year. The examiner did not concede, so the Audit Representative requested the records from the member, who agreed to obtain them from his son’s private school, doctor and dentist.

When the Notice of Deficiency was issued in March and the case was still not resolved, we decided it would be best to take the case to pre-litigation Appeals review prior to trial in Tax Court. The examiner was still disallowing the exemption, but she had failed to provide an adequate explanation. We disagreed with her interpretation of the documents submitted as well as her application of the dependency rules.

The case was assigned to Appeals in July, but it wasn’t until the following January that the Appeals Officer was ready to speak with the Audit Representative about the case. Meanwhile, a Tax Court date was set for April 25, 2011.

The Audit Representative had no luck with the Appeals Officer. She insisted that because the member had paid child support to his ex-wife, there was no way he could have been the custodial parent. The Audit Representative respectfully advised her that she was incorrect and offered to submit a research brief explaining how to apply the dependency rules. The Appeals Officer did not concede, so the Audit Representative arranged to settle the case with the attorney.

A paralegal from the attorney’s office called and requested additional support for the child’s schedule. The Audit Representative advised her that the member and his ex-wife’s separation had been a contentious one and that the schedule stipulated in the divorce decree had been followed to the letter. The paralegal asked if there was a third party who could corroborate the calendar.

The member provided the names of the parents of his son’s friends who had knowledge of the parenting schedule. The Audit Representative sent the names along, and the IRS attorney called each of the references.

On April 12th, the Audit Representative and I, along with IRS counsel and the Tax Court Judge, held a pre-trial conference call. The Judge instructed us to go back to the table and reach a settlement since, as he stated, "this issue will not go to trial." Shortly after, the Audit Representative received voice mails from both the paralegal and the IRS counsel requesting that they be able to speak with the member.

The Audit Representative set up the conference call and briefed the member beforehand on what the IRS would be asking. In response to the IRS attorney’s question about when the calendar was created, the taxpayer stated that he had created it in 2009, after receipt of the audit notice. When he was asked if he did, in fact, have the child over half the year, the member said he did and explained that he had not deviated from the decree due to the difficulty of dealing with the ex-wife. The attorney advised the member that, generally, it is better to have a daily contemporaneous calendar for any audit situation. In the end, though, he agreed to allow the dependency exemption.

As you can imagine, the member was thrilled with the result and relieved that the long ordeal was finally coming to a close. He immediately started a calendar to track the nights his son spends at his house. And he knows now to call TaxResources right away the next time he receives an audit letter.
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