How to Audit Proof A Tax Return

An article has appeared in Forbes on "Ten Ways to Audit Proof Your Tax Return". The articles advises one way is not to file electronically.

Taxpayer Cannot Rely on Google to Prove Reasonable Cause

Good-faith reliance on advice from an independent, competent professional as to the tax treatment of an item may meet the reasonable cause requirement for abatement of penalties. The Tax Court in Woodard v. Commissioner did not accept Mr. Woodard's argument that his research on the Internet using the Google search engine provided him with reasonable cause for the position he took when filing his 2004 tax return.

Tax Court Rules Cancellation of Debt Not Income

In the recent case of McCormick v Commissioner, the Tax Court held for the IRS to determine the amount of cancellation of indebtedness income properly attributed to the taxpayers, the Tax Court must determine the amount of the CitiFinancial and Chase debt that was definite and liquidated.


In this case, the Tax Court found that the IRS could not rely on the Forms 1099-C submitted by CitiFinancial and Chase as evidence of the amount of debt that was definite and liquidated. Section 6201(d) provides that in any court proceeding, if a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return and has fully cooperated, the IRS shall have the burden of producing reasonable and probative information concerning the deficiency in addition to the information return. In this case the taxpyaers asserted reasonable disputes with respect to the amounts reported by CitiFinancial and Chase. The IRSfailed to produce reasonable and probative information independent of the third-party information returns. Thus, the Tax Court held for the taxpayers.

Who Is Being Convicted of Tax Crimes

For those of you who may have an interest in who is being prosecuted for tax crimes here is a link from TIGTA with some interesting information.

Commissioner's Advice to Corporate Directors

IRS Commissioner Doug Shulman addressed the National Associaton of Corporate Directors Governance Conference and gave them certain advice. You can see the Commissioner's remarks here.

Annual Report to Congress on the Whistleblower Statute

The Department of the Treasury has published its annual report on the Whistleblower statute. The report can be found here.

Whistleblower Guidance from the IRS

The IRS has published guidance to provide procedures for processing and examining referrals received from the Whistleblower’s Office (WBO) regarding IRC 7623(b). Due to a change to IRC 7623, there are now two types of Whistleblower informant claim cases:

IRC 7623(a) discretionary award cases, “A” cases, and
IRC 7623(b) mandatory award cases, “B” cases.

The guidance can be found here.

IRS Statistics of Income

The IRS has published it 2009 Statistics of Income (SOI) Bulletin. This publication has a wide range of tables, articles, and data that describe and measure elements of the U.S. tax system. This publication is available here.

Tax Court Rejects Everyone is Doing It As Reasonable Cause Penalty Defense In Son-of-Boss case

In 3k Investment Partners v. Commissioner; 133 T.C. No. 6 (9/3/09), the taxpayer, an "investor" in a Daugerdas / Jenkens deal, sought to assert this defense to a penalty and, in support of the defense, sought discovery from the IRS of all the Son-of-Boss opinions in its bowels or wherever. In his typical straight-forward fashion, Judge Thornton opined:

Petitioner alleges and respondent does not dispute that in connection with many Son-of-BOSS transactions, one or more law firms or accounting firms wrote opinion letters to the investors supporting the claimed tax treatment. Petitioner alleges, and respondent does not dispute, that respondent has a large number of these tax opinion letters. Petitioner contends: "The availability of a large number of law firms and accounting firms issuing tax opinion letters determining that so-called 'Son of Boss' transactions * * * would produce the tax results as reported by Petitioner on its subject tax return would bolster Petitioner's position that it had reasonable cause and that Petitioner acted in good faith." Similarly, at the hearing petitioner's counsel argued that "based upon the general consensus of national law firms across the country that were issuing tax opinion letters that were taking the same position as the Petitioner in my case was taking, I wanted to show that reasonable cause does exist to take the position that we took on the tax return."

Petitioner's argument appears to be a variant of the refrain, familiar to parents of teenagers, that "Everyone's doing it." For the same reason that this does not constitute reasonable cause for teenagers, it would not constitute reasonable cause for petitioner. Petitioner must establish the reasonableness of its position on the basis of the facts and merits of its own case. n6 See Avedisian v. Commissioner, supra ("each individual must rest on the validity of his own position under the applicable taxing provisions, independently of others"). The legal analysis, conclusions, and recommendations that some tax advisers may have given other taxpayers are irrelevant to the reasonableness of the positions the partnership took on its return. See P.T. & L. Constr. Co. v. Commissioner, 63 T.C. 404, 414 (1974).

n6 We also reject any suggestion that the requested information, which appears to involve only a small subset of tax advisers, shows any "general consensus" of tax advisers regarding Son-of-BOSS transactions.

With a follow-up punch, the Court held that the opinions were not relevant or likely to lead to the discover of admissible evidence, as required by the discovery rules.

Finally, the court held that the opinions sought were in any event tax return information prohibited from disclosure under § 6103. The court held that redaction of taxpayer identifying information did not make it any the less tax return information subject to the strictures of § 6103. Reliance on cases dealing with § 6110 is misplaced because that code section specifically lifts the veil if § 6103, with appropriate redactions, for the types of IRS general legal interpretation documents that Congress said should be in the public domain once shorn, by redaction, of taxpayer identification information.

IRS Expands Use of Reported Interest on Mortgage Payments

Banks and other mortgage lenders provide annual statements to the borrowers and the IRS of the mortgage interest they paid. The IRS can use the data to confirm the amount of an interest deduction claimed by the borrower. The data can also be used to identify potential nonfilers. The Wall Street Journal reports here that the IRS is now poised to use the data to identify discrepancies between the reported interest paid and a taxpayer's income.