November 01, 2011 | Written by: Michael Crowther, Audit Representative
A Schedule C for self-employment with no income and a $16,000 loss will easily draw the attention of the IRS. This was exactly the scenario for this member in this particular situation. After being audited several times before, with painful results as a result of handling the audits on her own, and faced with a 2008 audit, she contacted TaxResources for help to see if things could turn out differently this time around. They sure did.
I was the lucky tax professional assigned to this case. I reviewed the notice and tax return and called the member to discuss the situation. Upon a careful review and discussion, it was determined that the member had inadvertently duplicated employee business expenses by also claiming them on a Schedule C. The Schedule C, with no income and a large loss, was under attack. The IRS had already sent the member a proposed assessment for over $4,000. However, in reviewing the Schedule C, it was apparent that the member had claimed that she did not materially participate in the “business,” thus the large loss of almost $16,000 was not allowed to be taken on the return. In short, the member was not receiving any tax benefit by duplicating these expenses. The IRS had erred by proposing to assess the member over $4,000 of additional tax for her 2008 return.
I gave the member the great news that this was an error and we could respond to the IRS to get this fixed. The next step was to prepare and send a response letter to the IRS service center to explain this calculation error and ask for the proposed assessment to be removed. After doing this I advised the member that she still might receive a Notice of Deficiency because the exam report was overdue when we started working the case. “Be on the lookout for this Notice of Deficiency,” I explained. “Please forward this to me as soon as you receive it.”
Two weeks later the Notice of Deficiency arrived via a certified letter. The member forwarded it to me and I told her that we would need to file a petition to the tax court if our response from the IRS was not favorable.
A couple more months went by and when we still had not received a reply from the IRS, we filed a petition to the Tax Court to protect the taxpayer’s interest in this case. The same week we filed the petition, we received a response from the IRS in which they denied our claim to fix the error and remove the proposed assessment. The member called and expressed her frustrations but I reminded her that we filed the petition to the Tax Court and that we would do whatever it took to get this resolved.
Six weeks later we got more bad news when we received a notice from the IRS that the 2008 case was closed and as a result the taxpayer now owed over $4,000. This was a mistake because we had timely filed a petition to appeal this decision, yet the notice meant the issue was closed and the tax was no longer a proposedassessment: it had been assessed!
Things went from bad to worse. Two weeks later the member called in a frantic panic because she had filed her 2010 return and the IRS had taken over $4,000 of her expected refund from 2010 and applied it to the 2008 balance from the premature assessment of tax. I told her I would contact the IRS immediately to get this reversed.
I first left a message with the Associate Area Counsel for the Appeals Office, explaining that we had filed a petition and the tax was prematurely assessed and requesting that this please be reversed right away. I did not hear back from that office so I called the IRS Practitioner Priority line to once again inquire about getting this situation reversed. Finally the persistence paid off and the tide turned. When I got off the phone, the 2008 tax assessment had been reversed and the member was due to receive the rest of her 2010 refund that had been unfairly applied to the 2008 year.
Two days later we received more good news as a decision arrived from the Appeals Officer in charge of the 2008 case. She had agreed with our position and removed the proposed assessment for 2010, resulting in no balance due.
I called the member to inform her of the good news, that her 2010 refund was forthcoming and the 2008 case had been resolved. She was so happy; she let out a scream of delight. She then took several minutes to express her gratitude for my help and the great work TaxResources did for her. “I hope I never need your help again, but if I do I will ask for you again. I will be sure to purchase audit defense every year I do my taxes.” This was certainly a happy ending to a stressful situation.
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