Persistence Pays Off

Giving up isn’t an option when you know you’re right. This month’s case demonstrates the importance of sticking with your story and knowing how to prove your position. It helps, too, to have an Audit Representative who won’t take “no” for an answer.

The member received a bill for over $21,000. The notice claimed he’d omitted $50,000 in income from his tax return. After speaking with the member, the Audit Representative decided it was an easy case that he could resolve quickly. The member said the $50,000 was the gross amount he received from a discrimination law suit settlement. The rest of the money went to the attorney for fees and costs. He had netted out the income on his tax return, which was not correct, but he claimed to have all of the documents showing the amount that should be taxable.

The Audit Representative sent a copy of the legal bills and lawsuit documents to the IRS along with an explanation and a tax return worksheet showing that when the income was reported correctly there would be no balance due. This should have cleared things up, but six weeks later the IRS sent a letter back disallowing more than $11,000 of the legal fees the member had paid.

At this point the Audit Representative got on the phone and called the IRS agent. The agent explained that he had only credited some of the attorney’s fees and deducted them on Schedule A, subject to the 2% limitation. The Audit Representative pointed out to the IRS agent that what he was doing was not correct: the member’s issue was not the standard example of a lawsuit settlement. Because it was a discrimination lawsuit, the full amount of the fees was deductible as an adjustment to income. The Audit Representative referred the agent to the specific Internal Revenue Code section where he could look to verify this information. The IRS agent advised the Audit Representative to resubmit the file for “reconsideration.” A few more weeks went by before the case finally closed in our member’s favor.

When he received the closing letter showing no balance due, the member called to tell the Audit Representative how happy he was that the case was finally closed. Here is an excerpt from a letter he sent to TaxResources about his Audit Representative:

I'm very pleased with my Rep's services defending my 2008 IRS audit. I had reported the correct net number, but omitted the gross number and the related deductions. The IRS was trying to tie the gross number to a 1099. My Rep quickly sent appropriate documents to the IRS. The IRS accepted the gross number, but questioned some deductions. My Rep provided proper citations that the deductions were fully proper. IRS accepted return as filed, no changes, no penalties, no interest.

He was always prompt, courteous, and professional. He kept me informed. He always got to the basic issue: was I going to owe Uncle Sam any money. Thanks to his help, I do not.