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A Tax Superhero

September 01, 2010 | Written by: Mark D. Olander, EA, USTCP
Model House on desk next to coin and person writing
Many folks have purchased new homes in the past couple of years to take advantage of the First-Time Homebuyer Credit. After uncovering widespread homebuyer credit fraud and losing millions of dollars to erroneous claims, the IRS now examines all requests for the credit to verify eligibility. In their vigilance, however, IRS examiners have been known to disallow legitimate claims. That is exactly what happened in this month’s case, which clearly shows how valuable it is to have an audit representative who understands the intricacies of tax law and is willing to fight for your position.

The IRS disallowed the First-Time Homebuyer Credit for a new home purchased in 2009 because the members owned a fifth-wheel trailer and had deducted the interest paid as home mortgage interest for the year in question, as well as the previous year. When the Audit Representative reviewed the IRS letter, which showed an $8,000 difference in the taxpayer’s refund, he did not simply accept that an ownership interest in a fifth-wheel trailer disqualified the members from claiming credit. Instead, he referred to IRS Code section 36(c)(2), which says that for purposes of the credit, “the term "principal residence" has the same meaning as when used in section 121.” He looked for the definition of “principal residence” in IRS Code section 121, which deals with the exclusion of gain from the sale of a principal residence, but he could not find it there.

He found the information he needed in Treasury Regulation section 1.121. The regulation says that “a property used by the taxpayer as the taxpayer's residence may include a houseboat, a house trailer, or the house or apartment that the taxpayer is entitled to occupy as a tenant-stockholder in a cooperative housing corporation. Property used by the taxpayer as the taxpayer’s residence does not include personal property that is not a fixture under local law.”

Armed with these facts, the Audit Representative supposed it would be easy to prove that the trailer was not a permanent fixture by researching the local law in Alabama, where the members were living. If the trailer was registered as a motor vehicle, he thought, it would not be considered a residence according to the definition. The Audit Representative looked up travel trailers in the state Code of Alabama and discovered that property taxes for travel trailers are assessed in the same manner as for motor vehicles, and therefore, under local law, a fifth-wheel is not considered a permanent fixture.

The Audit Representative filed an IRS protest for the disallowed claim for refund, citing the regulation’s definition of primary residence and the local Alabama law. Within three weeks the IRS reversed its position and allowed the credit. Shortly thereafter the full refund, including the $8,000 first-time homebuyer credit, was issued. The taxpayers told their audit representative that they were jumping up and down for joy. Here is the thank you email the Audit Representative received:

You are our HERO! Thanks very much for the great work and also for keeping us informed during this IRS mess.

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