pilla talks taxes

Vol. E3 Issue 50

Pilla Talks Taxes

C o n t e n t s

August 2014

MY NEW BOOK IS COMING SOON! – Here’s Your Chance to Order Now...................................................1

ESSENTIAL TAX AUDIT RIGHTS – The Assessment Statute of Limitations...................................................2-5

ORDER DAN PILLA’S NEW BOOK NOW! ...................................................4

THE TEN MOST IMPORTANT TAX CASES – (In My Humble Opinion) by Paul R. Tom...................................................5-11

THE 2014 TAXPAYERS’ DEFENSE CONFERENCE...................................................10

ASK THE EXPERT – Dan Pilla Answers Readers Questions...................................................11

Dan Pilla’s Monthly Tax and Financial Bulletin

“Dan Pilla probably knows more about the IRS than the commissioner of the IRS.” Associated Press.

Pilla Talks Taxes

MY NEW BOOK IS COMING SOON!

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What follows where is an excerpt from the book, which deals with the assessment statute of limitations. This except is taken from chapter 8 of the book, which is entitled “Understanding Essential Tax

Audit Rights.” What you see here is just a small taste of the mountain of hard, timely and effective

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Pilla Talks Taxes page 2

ESSENTIAL TAX AUDIT RIGHTSThe Assessment Statute of Limitations

The assessment statute of limitations may be suspended if both you and the IRS agree in writing to a suspension. The agreement is formalized on Form

872, Consent to Extend Time to Assess Tax, otherwise known as an assessment statute waiver. Once executed, the waiver extends the assessment statute until the date shown on the form.

It is common for the IRS to ask a person to sign Form 872 while an audit is pending in order for the agency to have more time to assess the tax. The statements agents make when asking for this waiver are almost always wrong and intended to mislead. Let me give you some background.

Suppose you are under audit for tax year 2011. The return was filed on time in April 2012 so the IRS has until April 15, 2015 (three years from the due date) to complete the audit and make an assessment. At some point during the fall of 2014, the agent asks you sign an assessment statute waiver, Form 872. The agent states that the IRS needs at least ninety days to process a closed audit case and since the statute is coming up in April 2015 and the audit is still not complete, they need more time. A signed Form 872 gives them the time needed.

This statement is accurate so far as it goes. The IRS does require a window of time for a completed audit to be reviewed and all the closing paperwork to be processed. The ninety-day timeframe for doing so is common. However, it is the next part of the agent’s presentation that is false and misleading.

In order to pressure you to sign Form 872, the agent tells you that unless you sign it, the IRS must: 1) make its decision based upon the information already in the file, 2) that you will have no further opportunity to present information and arguments, and 3) you will lose your appeal rights. Each element of this statement is flat wrong. Let me explain why.

As to the claim that you lose your appeal rights, the fact is the IRS cannot assess any additional tax without first mailing a Notice of Deficiency. I discussed this earlier, explaining that an NOD is required before any income tax assessment can be made and that the NOD gives you the opportunity to appeal your case to the Tax Court. The Tax Court, not some auditor, then makes the determination as to what you owe, if anything.

Upon filing a petition with the Tax Court, the IRS then

involves the Office of Appeals in an attempt to resolve the case without the need of a trial. In 100 percent of the audit cases before the Tax Court, the file is sent back to Appeals with instructions to work with the taxpayer to negotiate a settlement. Moreover, while your case is in Tax Court, you have every right to provide whatever additional information, documents, evidence and arguments are necessary to support your case. There is no limitation on your right to do so. The reality is that 97 percent of all Tax Court audit appeals are settled without a trial. So it is flat not true that you will lose your rights to appeal and to provide more information if you do not sign the assessment statue waiver.

What is true (but not explained) is that the audit appeal path changes if you do not sign the waiver. The usual appeal path is this: IRS issues the final audit determination. You then have thirty days to appeal by filing a protest letter, which causes the case to be sent to the Office of Appeals. If you reach agreement there, the case is closed. If not, the Appeals Office mails a Notice of Deficiency, which then gives you ninety days to file a Tax Court Petition. By filing the petition, the case is resolved through the Tax Court process. Signing Form 872 at the audit level means this appeals path will be followed.

But if you do not sign the Form 872 at the audit level, the IRS will simply mail the Notice of Deficiency to keep the statute of limitations from expiring. Thus, there is no thirty-day letter and there is no intermediate trip to the Appeals Office. However, by timely filing a petition with the Tax Court, your case is sent back to Appeals for full consideration and settlement negotiations, and as stated above, the likely full settlement of the case. While working with the Appeals Office, you have every right to provide all the information, documents, evidence and arguments necessary to support your case. There is simply no restriction on this. Thus, you get an appeal but follow a different route to get there.

So question becomes, “Do I sign Form 872 or not?” I am asked this regularly. The answer is, “It depends.” I have put together a list of factors to consider in determining whether to sign the waiver or not. Let me discuss them here.

Consider signing the waiver if:


ESSENTIAL TAX AUDIT RIGHTS – The Assessment Statute of Limitations, Cont.

Tax Freedom Institute Consulting Members

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Phone800-BEAT IRS800-BEAT IRS(661) 837-1100(209) 543-0490(860) 225-2867(800) 219-1118(813) 229-7100(888) 364-4496(815) 282-0411(978) 454-1145(651) 481-7933(417) 623-2505(314) 993-4000(252) 355-0605(603) 749-4434(918) 743-2000(267) 419-1622(662) 470-4132(713) 781-8892(832) 391-3600(432) 687-1175(703) 527-2660

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• Your auditor is reasonable, understanding, appears to be—or in fact is— willing to work with you to arrive at the correct tax liability in your case, rather than simply trying to get more money;

• You are dealing with simple issues and you have solid evidence to support your case. In that situation, you can expect to resolve the case without having to go to Tax Court or even the Office of Appeals. If you can avoid both of these steps, you considerably shorten the time it takes to ultimately resolve the problem; or

• You are under audit for multiple years but the IRS wants a wavier on just the earliest year. In that case, you might want to maintain continuity of the audit so that one tax year is not following a different path from the other tax years.

• Even if you decide to sign a waiver, understand the dif-ference between Form 872 and Form 872-A. Form 872 is a fixed date waiver. It expires on the date expressed

in the form itself. Form 872-A is an open-ended waiver. It remains in effect until you revoke it by submitting Form 872-T, Notice of Termination of Special Consent to Extend Time to Assess Tax. Form 872-A has an advantage in that you can terminate it at any time, whereas Form 872 is good until the date stated in the form.

• Signing a waiver does not have to be a “take-it-or-leave-it” proposition. You might consider negotiating the terms of the waiver. For example, suppose there is one year left on the assessment statute and the IRS asks for a waiver. At that point, I would suggest to the agent that we work hard for the next six months to get the audit completed so there would be no need for either a waiver or an appeal. Point out that you are willing to provide whatever documents, etc., are necessary to get the matter resolved. If, after six months, the matter is still not resolved, you will consider signing a waiver at that time. As another example, suppose the IRS asks for a one-year waiver at a time when there are just four

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ESSENTIAL TAX AUDIT RIGHTS – The Assessment Statute of Limitations, Cont.

months left on the statute. You might suggest that you waive the statue for just six months because you do not want the matter to linger for another year. You want to get it resolved. You can also suggest using Form 872-A rather than Form 872. Recall that with an 872-A, you have the right to terminate the waiver at any time.

Consider not signing the waiver if:

• The assessment statute expiration date is very close. If there are fewer than six months left on the statute, it is possible the IRS simply cannot get the paperwork done in time to beat the expiration date. And if even they do beat it, you still have your appeal rights as explained above;

• You are dealing with an auditor that is unreasonable, does not know the law, repeatedly demands documents already provided, or otherwise makes it clear that she is just working to get more money. By not signing a waiver, the case will be taken from the auditor when you file your Tax Court petition;

• You wish to pressure the IRS to settle the case. Most

people cringe at the idea of filing a case with the Tax Court, believing that the IRS will go harder on them for filing an appeal then otherwise might be the case. The opposite is true. In the typical audit scenario, the more you fight, the better deal you will likely make for yourself. Once the case is in Tax Court, the pressure is on the IRS to settle. Because there are tens of thou-sands of cases filed with the Tax Court each year, the IRS simply cannot litigate each one fully through the trial process. They have to settle these cases and they work hard to do it;

• You wish to speed up the process. Often, the IRS asks for at least an additional year on an assessment stat-ute waiver. By not signing, the case will end up in Tax Court. It is then assigned to an Appeals Officer who must make the case a priority precisely because it is a Tax Court case. This can often speed the process of settlement because you bypass the one-year extension the IRS asks for, the additional time spent with the auditor, and you skip the intermediate appeals step.

THE TEN MOST IMPORTANT TAX CASES(In My Humble Opinion)

by Paul R. Tom *

In 2003, University of Cincinnati Tax Law Professor Paul Caron published a book named Tax Stories. In his book, Professor Caron and his co-authors discuss ten Federal

Court tax decisions that had (in Professor Caron’s view) the most profound effect on federal income tax law in the United States. The premise of Tax Stories intrigued me, because I am sort of a tax law nerd at heart. Unlike Professor Caron, however, I’m not overly concerned with how United States’ tax policy affects multinational corporations or mega-rich individuals. I’m much more concerned with upholding the rights of individuals and small businesses and making sure my clients are treated fairly by the IRS.

Therefore, I have come up with my own list of ten federal tax law decisions that I think are important. The decisions marked with an asterisk (*) are also on

Professor Caron’s list:

1. Eisner v. Macomber, 252 U.S. 189 (1920)* - This case was decided by the United States Supreme Court when the Sixteenth Amendment to the Constitution – the amendment that made taxation of your income and mine constitutional – was barely seven years old. Mrs. Macomber owned stock in Standard Oil Company of California. In 1916, Standard Oil paid a dividend on its stock. The tricky part was that the dividend wasn’t paid in cash. It was paid in stock. Eisner, the tax collection officer for the area of New York where Macomber lived, called on Macomber and said: “Hey, lady, you owe the feds 2% of the value of the stock dividend you received from Standard Oil. Hand over the money.” Macomber dutifully handed over a few hundred dollars in payment of the tax


THE TEN MOST IMPORTANT TAX CASES – (In My Humble Opinion), Cont.

and then sued Eisner for a refund. The case eventually landed in the United States Supreme Court. The Court held that a pro rata stock dividend is not income because there is no “realization” of income. There’s certainly an increase in wealth, but is that increase in wealth income? The Supremes said no. This decision is important because, had it been decided the other way, we might get a tax bill every year the stuff we own increases in value, even if the increase is merely due to inflation. OUCH! The Supreme Court wisely held that it’s the realization of income by sale, exchange, etc. that triggers the tax. It’s not the increase in value. It’s called income tax, not a wealth tax.

2. Lucas v. Earl, 281 U.S. 111 (1930)* - Guy Chafee Earl was a wealthy and successful California lawyer, land owner and businessman. Guy and his brother Edwin, who invented the refrigerated rail car, bought land and water rights and founded the Great Western Power Company which was later purchased by Pacific Gas and Electric. In 1901, Guy and his wife Ella entered into a contract providing that all of Guy’s income would be owned by Guy and Ella as joint tenants with right of survivorship the moment Guy’s income was earned. The Earls’ contract wasn’t done to avoid income tax, because in 1901, there was no federal or California State income tax. The contract was done to avoid probate. But when the federal income tax became effective in 1913, the Earls’ contract turned out to be an effective device to avoid the steeply progressive federal income tax rates. By splitting Guy’s large income into two smaller piles and filing separate income tax returns (joint returns hadn’t been invented yet), the Earls saved about $4,850 on their 1920 - 1921 income taxes. That’s more than $57,000 in today’s dollars. The feds disregarded the Earls’ contract and assessed the entire tax against Guy alone. Guy sued Lucas, the IRS Commissioner, and was successful in keeping his money until the case went to the United States Supreme Court. The Supreme Court opinion authored by Oliver Wendell Holmes is short and to the point. The Supremes decided that Guy couldn’t avoid progressive rates on his income by assigning half of it to Ella. Holmes’ conclusion, which has been quoted in thousands of judicial opinions, was: “the import of the statute before us [is] that no distinction can be taken according to the motives leading to the arrangement by which the fruits are attributed to a different tree from that on which they grew.” The tax law doesn’t prevent you from assigning your income to your spouse and kids, but if you earned it, you still have to pay tax on it.

3. Cheek v. United States, 498 U.S. 192 (1991) - Sometime in 1980, American Airlines pilot John Cheek decided that the income tax was unconstitutional and that his wages were not income. Armed with these seriously held beliefs, Cheek stopped filing tax returns, began claiming up to 60 dependent exemptions on his form W-4 in order to stop withholding on his pay check, in turn leading to his paying no federal income tax. IRS took exception and Cheek was eventually charged and convicted of willful failure to file a tax return (a federal felony). Cheek’s conviction was affirmed by the United States Court of Appeals for the Seventh Circuit, so Cheek appealed his conviction to the United States Supreme Court. The Supremes voted to acquit Cheek because he established that his firmly held beliefs – wages are not income; not required to file income tax returns – negated the element of willfulness, even though Cheek’s beliefs were not objectively reasonable. The Cheek decision surprised a lot of people. Before the Cheek case, a belief about what the Internal Revenue Code does or doesn’t require would not result in acquittal unless the trial judge found that the belief was “objectively reasonable.” In describing Cheek’s beliefs in his dissent, Justice Blackmun said:

It is incomprehensible to me . . . how any taxpayer of competent mentality can assert as his defense to charges of statutory willfulness the proposition that the wage he receives for his labor is not income. One might note in passing that this particular taxpayer, after all, was a licensed pilot for one of our major commercial airlines; he presumably was a person of at least minimum intellectual competence.

But Cheek had the last laugh. When you’re the defendant in the Supreme Court, it’s better to have them call you stupid than guilty. Tax protesters around the country have trumpeted the Cheek decision claiming it stands for the proposition that bizarre and even downright stupid beliefs about federal income tax, as long as those beliefs are genuine and firmly held, can get the taxpayer out of having to file returns and pay taxes, but that is not what the Cheek case held. Rather, the decision stands for the proposition that genuine but idiotic beliefs about our income tax system may be sufficient to acquit you in a criminal case, but you will still owe the tax, penalty and interest to IRS.

4. Brushaber v. Union Pacific Railroad Company, 240 U.S. 1 (1916) – In 1913, Union Pacific Railroad (UPRR) paid its corporate income tax pursuant to the Revenue Act of 1913. Earlier in 1913, the United States had adopted the Sixteenth


Amendment to the Constitution which states:

The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration.

Frank Brushaber, a resident of Brooklyn, New York owned shares of stock in UPRR, and he sued to enjoin the company from paying corporate income tax in the future. In 1916, the Brushaber case was argued before the United States Supreme Court. This was the first case that squarely presented the question whether the income tax amendment was compatible with the direct tax/apportionment provision of the Constitution (Art I, §9, Clause 4). The Brushaber Court held that the Sixteenth Amendment was compatible with the direct tax/apportionment clause. It would have been pretty ironic if the Supremes decided that a legally adopted and certified Amendment to the Constitution was unconstitutional. Despite its holding that the Sixteenth Amendment is constitutional, tax protesters still claim that Brushaber was wrong and that income taxes are unconstitutional. Protesters still argue in civil cases that the income tax is unconstitutional, but in federal civil cases claiming that the income tax is unconstitutional, the tax protesters are 0 for forever. That’s not a good batting average.

5. United States v. Davis, 370 U.S. 65 (1962)* – Thomas Crawley Davis got a really bum deal. Pursuant to his divorce settlement, Davis transferred appreciated shares of DuPont stock to his ex-wife. The IRS claimed that the transfer was taxable and Davis was liable for income tax on the gain – the difference between what Davis paid for the shares (his basis) and the value of what he received from his ex-wife in exchange for the shares. Davis sued IRS in Tax Court claiming that (1) the transfer to his ex-wife was not really a “taxable transfer” (this was a very weak argument), and (2) there is no way to measure the gain because the value of what the ex-wife “paid” for the shares cannot be determined. The Court quickly demolished Davis’ weak first argument, but the second argument was not so easy. How do you value the marital rights that Davis’ ex-wife “paid” for the DuPont stock? The IRS argued that it’s really quite simple: In an arms-length transaction such as a divorce where both parties are represented by counsel, it is reasonable to assume that the value “paid” for the property is exactly equal to the value of the shares on the date the shares are transferred. Pay the tax, Mr. Davis! The Davis

case was routinely criticized as unfair: “You mean she gets the stock, pays no cash and I have to pay income tax on the gain? How is that fair?” The hue and cry became loud enough that Congress carved out a specific exception in the Internal Revenue Code so that appreciated property transferred in divorce is not taxable. I wonder how many Congressmen were likewise taken advantage of by an ex such as to force this law change? Davis is still applicable today in non-divorce situations. However, if you transfer appreciated property in satisfaction of a claim, you pay income tax on the gain, even though you get no money to pay the tax.

6. United States v. Sullivan, 274 U.S. 259 (1927) – Most people know that the infamous Al Capone was imprisoned for tax evasion because he didn’t pay federal tax on his bootlegging income, but not many people know that Al wasn’t the first such person. Al was preceded by a forgotten-by-history bootlegger from South Carolina named Manley Sullivan. Sullivan was charged with tax evasion because he earned about 10,000 in 1921 from selling homemade hooch. It’s interesting to note that before tax year 1921, the federal income tax applied to “gains, profits and income *** derived from the transaction of any lawful business carried on for gain or profit . . .” No doubt the righteous men of Congress (there were no women in Congress in 1921) were jealous because Capone and even South Carolina good ol’ boy Sullivan earned more than they did. And the bootleggers’ income was statutorily tax-free. What a country! In the trial court, Sullivan was convicted, but the United States Court of Appeals for the Fourth Circuit reversed and ruled that requiring a criminal to report his income earned from crime would violate the Fifth Amendment protection against self-incrimination. When the case got to the United States Supreme Court, Justice Holmes ruled that the Court of Appeals had taken the Fifth Amendment protection too far. In reversing the Court of Appeals and reinstating the District Court’s conviction, Holmes wrote another poetic line of legal wit:

It would be an extreme if not an extravagant application of the Fifth Amendment to say that it authorized a man to refuse to state the amount of his income because it had been made in crime. But if the defendant desired to test that or any other point he should have tested it in the return so that it could be passed upon. He could not draw a conjurer’s circle



around the whole matter by his own declaration that to write any word upon the government blank would bring him into danger of the law.

Justice Holmes sure had a way with words, and congratulations to Mr. Sullivan. He paved the way for his arch-villain protégé, Al Capone.

7. Vinatieri v. Commissioner of Internal Revenue, 133 T.C. No. 16 (2009) – Kathleen Vinatieri was a poor but very articulate woman from the Tennessee hills outside Knoxville. Sometime in 2008, the IRS went after Ms. Vinatieri’s employer to collect delinquent 2002 taxes. Vinatieri timely filed for a Collection Due Process Hearing and that halted the IRS’s collection efforts until after the hearing. At the hearing, Ms. Vinatieri told the IRS that she was a single mom who left a physically and emotionally abusive relationship and that if her $800 per month janitorial wage was garnished, she and her daughter would be rendered homeless and hungry. During the course of the investigation, the IRS discovered that Ms. Vinatieri failed to file her 2005 or 2007 return. Therefore, in accordance with longstanding IRS policy – if you’re not current in filing your returns, no mercy – the IRS sustained the levy action even while acknowledging that Ms. Vinatieri was clearly otherwise uncollectible under the IRS’s financial standards and guidelines. Vinatieri timely appealed the IRS’s harsh judgment to the United States Tax Court by filing a beautifully elegant essay regarding the impoverished plight of her small family. You can tell from the way the opinion begins that no matter how strong the IRS’s argument was, Judge Hodges was not going to let Kathleen Vinatieri and her daughter suffer the ravages of an IRS levy. Judge Hodges held that the statutory provision in the Internal Revenue Code that requires IRS to release a levy that doesn’t allow the taxpayer enough money to meet basic living expenses (IRC §6343) trumps the IRS’s policy of “no mercy unless you’re current with all return filings.” Kathleen Vinatieri is a hero because she was able to prove that even bureaucratic IRS employees sometimes have a heart.

8. Beard v. Commissioner of Internal Revenue, 82 T.C. 766 (1984) – Believe it or not, the income tax was around for seventy years before any federal court attempted a comprehensive yet simple answer to the question: What constitutes a “tax return” for Federal income tax purposes? To be fair, the question was probably never raised as clearly as it was in the Beard case. Robert Beard was a tax protester

who altered the Form 1040 tax return he filed for 1981 “by modifying margin and item captions in order to categorize his wages as ‘Non-taxable receipts’ that [Beard claimed were] not gross income subject to tax.” Beard’s non-taxability theory was based on the claim that his wages were not income, because “the fair market value of the labor transferred is equivalent to the amount of wages received. [Therefore, Beard had] no excess gain to be reported as taxable income.” Beard claimed to have “arrived at his conclusions [that his wages were not taxable income] by lengthy study and research of the rules and regulations.” Apparently Beard was unaware that his “wages are not income/equal exchange” argument had been raised many times in the past without success. Beard wasn’t the only taxpayer to make the wages are not income/equal exchange argument in the Tax Court. There were twenty-two virtually identical pending cases on Judge Whitaker’s docket alone. Judge Whitaker decided he had enough of his time wasted responding to frivolous tax protester BS, so he decided to settle all twenty-two pending cases by ruling that the altered returns are not returns at all. His ruling, which is based on several U.S. Supreme Court cases, establishes a four-part test to determine whether the document filed with IRS is a return for federal tax purposes:

First, there must be sufficient data to calculate tax liability; second, the document must purport to be a return; third, there must be an honest and reasonable attempt to satisfy the requirements of the tax law; and fourth, the taxpayer must execute the return under penalties of perjury.

That simple definition has been quoted in hundreds of cases since 1984. Beard’s altered “return” met three out of the four parts, but Beard couldn’t get over that pesky third element, because his return wasn’t “an honest and reasonable attempt to satisfy the requirements of the tax law.” Beard lost his case on summary judgment, but true-believer tax protesters carry on “unencumbered by the thought process.”

9. Brafman v. United States, 384 F.2d 863 (5th. Cir. 1967) – In Brafman, the trial court held that Mrs. Brafman was liable as a “transferee” for the estate tax owed by her father’s insolvent estate. In her appeal to the United States Court of Appeals for the Fifth Circuit, Mrs. Brafman argued that she was not liable for the tax because, even though an estate tax return was filed, the IRS never “assessed” the tax. You mean if the IRS doesn’t “assess” the tax shown on your tax return, you don’t owe it? Indeed, that’s exactly what it means. For more



than fifty years, the IRS has had simple statutory procedures for assessing the tax that you and I and millions of Americans show on our tax returns. The assessment statute (IRC §6203) states that an assessment is “made by recording the liability of the taxpayer in the office of the Secretary [of the Treasury] in accordance with rules or regulations prescribed by the Secretary.” The Treasury Regulations further provide that “the District Director shall appoint one or more assessment officers, and the assessment shall be made by an assessment officer signing the summary record of assessment.” Well that seems pretty simple. The IRS just prepares a multi-page record containing all of the assessments made for hundreds or thousands of taxpayers at a certain IRS Service Center for some daily or weekly period (the assessment record used to be on Form 23C; the more modern form is called RACS 006), sends the assessment certificate to the assessment officer and the assessment officer signs it. And that’s the way it’s supposed to work. But the form 23C presented in the Brafman case wasn’t signed. OOPS! The IRS argued in Brafman that the IRS’s records, which were certified as being correct by the Secretary of the Treasury’s Seal, proved that the tax was in fact assessed. The Court of Appeals rejected the IRS argument stating:

We are not moved by the Government’s argument that the assessment was valid and effective on July 23rd because it is certified for authenticity under the seal of the United States Treasury. There is no question as to the authenticity of the document or its admissibility into evidence. But authenticity of the certificate cannot be equated with validity of the assessment on the alleged date: a seal establishes the former, a signature of the assessment officer—as required by the Treasury Regulations—establishes the latter.

I know you’re probably tempted to argue, as the IRS did in Brafman, “That’s just a technicality. You can’t win a tax case on a technicality.” But the Court of Appeals didn’t buy that argument either.

Any procedural defense is in a sense “technical.” The procedures set forth in the Internal Revenue Code were prescribed for the protection of both Government and taxpayer. Neglect to comply with those procedures may entail consequences which the neglecting party must be prepared to face, whether such party be the taxpayer or the Government.

There may never be another case like Brafman because the IRS is extremely reluctant to give the taxpayer a copy of the RACS 006. The Internal Revenue Code provides that “Upon request of the taxpayer, the Secretary shall furnish the taxpayer a copy of the record of the assessment.” But ever since Brafman was decided, all you get when you ask for your “record of assessment” is an unsigned computer printout, which if you’re lucky, contains the Treasury Secretary’s Seal of Authenticity.

10. Portillo v. Commissioner of Internal Revenue, 932 F.2d 1128 (5th Cir. 1991) – Ramon Portillo was a self-employed painting subcontractor who lived and worked in El Paso, Texas. Portillo didn’t have a bank account, so he cashed the checks he received weekly from the general contractor and paid his workers in cash. Operating on a cash basis is usually a prescription for disaster if you’re audited by the IRS, but Portillo was smart. He kept accurate ledgers on which he recorded what each of the general contractors paid him and what he paid each of his painting crewmembers. Shortly after the end of each year, Portillo would meet with his bookkeeper, Mrs. Rosales, to get his annual income tax return prepared. Portillo would use the 1099s he received to confirm the amount shown on his ledger. However, Portillo didn’t receive a 1099 for 1984 from Navarro, one of the general contractors he worked for. Because of that, he told Mrs. Rosales to use the amount of $10,800, which he showed as received from Navarro based on Portillo’s gross receipts ledger. Sometime in mid-1985, Navarro filed a Form 1099 with the IRS claiming that Navarro paid Portillo $35,305 in 1984. That discrepancy tripped an alarm in the IRS’s under-reporter office, and it was audit time for Portillo. Because Portillo’s truck containing the income ledger was stolen just before the audit, the auditor contacted Navarro and asked how much Navarro paid Portillo in 1984. Navarro produced checks to Portillo totaling $13,925 and claimed he paid the other $21,380 to Portillo in cash. Portillo admitted that he had inadvertently neglected to include a $3,125 check from Navarro on his return, but he adamantly denied that Navarro ever paid Portillo any cash. Even though Navarro couldn’t prove that he paid Portillo any more than $13,925 in 1984, the IRS wouldn’t budge from the 1099 amount Navarro claimed he paid. The IRS argued that Navarro’s 1099 was “presumed correct” and Portillo did not prove that it was incorrect. Portillo protested the assessment in Tax Court and lost. He then appealed to the Fifth Circuit Court of Appeals. Since the Notice of Deficiency the IRS sent Portillo is presumed correct, it seemed at first that Portillo would not be able to prevail,



4

The 2014 Taxpayers Defense Conference is set! Make plans to attend this exciting and informative conference. Here are the details:

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but God and the Fifth Circuit must have been on his side. The Fifth Circuit Court said that the IRS can’t just rely on a presumption that a 1099 is correct and prevail in its claim that the taxpayer failed to report income. “In a situation like this, the Commissioner had some duty to investigate Navarro’s bald assertion of payment and determine if Navarro’s position was supported by his books, receipts, or other records.” The Court of Appeals held for Portillo and stated that: “in situations like this involving unreported income, the presumption of correctness does not apply to the notice of deficiency.” The lesson to be learned from this case is that 1099s aren’t necessarily correct. The person who sends the 1099 may have a grudge against the taxpayer or he may simply want to boost his deductions by claiming to have paid the subcontractors a few thousand dollars more than was actually paid. When determining whether the taxpayer correctly reported his income, the IRS is allowed to presume that the income reporting records it receives (W-2s, 1099s, etc.) are correct. However, Portillo holds that the IRS cannot use that presumption as a substitute for the facts.

Editor’s Note: I discuss the Portillo case at length in my new book, How to Win Your Tax Audit. In fact, subsequent to the Fifth Circuit’s decision in Portillo, Congress passed a law amending the burden of proof rules in cases where the taxpayer disputes an information return as Portillo did. Under the law now in effect, which I discuss in my new book, the IRS has the burden to prove that the information return is correct. It cannot merely rely on the “presumption of correctness,” as the IRS tried to do in Portillo. See the ad above for ordering information on my new book.

* Paul Tom is an attorney in Tulsa, OK. He is a long-time friend and Consulting Member of the Tax Freedom Institute. He practices both tax and bankruptcy law and has been a featured speaker at our Taxpayers Defense Conference on several occasions. Paul is a very knowledgeable and highly skilled tax practitioner. He can be contacted as follows:

Paul R. Tom, Attorney at Law, P.C.2727 E. 21st Street, Suite 604Tulsa, Oklahoma 74114Phone: (918) [email protected]

ASK THE EXPERT — Dan Pilla Answers Readers

Jim writes a testimonial about my presentation on tax reform to the Rochester Tea Party Patriots group.

Dan, once again I want to thank you for the truly outstanding presentation you gave in Rochester this evening. You helped our members (and me) really understand the deficiencies in our current tax system and the benefits of a consumption tax compared to it as well as compared to a flat tax. My wife was so excited about what you had to say, she repeatedly told me we need to find a way to get your message in front of more people. I am sure that the majority of our members felt the same way.

Jim, thank you for your kind remarks. I am happy to make my tax reform presentation anywhere and everywhere. Anybody interested just needs to contact me to work out the arrangements.

Kevin recently resolved his long-standing IRS problem by filing an Offer in Compromise. He wrote the following letter:

Dan knew more about solving my tax problem than any of the other so-called tax experts I hired that messed things up in the first place. Without Dan, I would have six-figure tax debt today.

Kevin, I’m pleased it all worked out.

George writes a letter in response to my article in the July 2014 issue of PTT, entitled “Beware of the ‘I’m From the IRS’ Scam: Hustler’s are using the IRS to Steal Financial Information.” George says:

I had a similar situation last month. Someone who called himself “Carl Davis” left a message telling me to call a certain number in area code 253, which is for Tacoma, Washington. When I called that number, the person told me I had a tax that was overdue. When I asked him what agency he worked for, he told me “the United States Treasury Department.” I responded to him by saying, “I don’t know you.” He then yelled about a lien being filed and more collection action as I hung up the phone. Several days later, I received another call from “Carl Davis.” I simply told him, “Oh, shut up” and hung up the phone. He called back and I simply let the phone ring until I got tired of it and disconnected the ringer.

I’ve had a couple more experiences with this scam even after writing the article last month. I say again what I said there: if you experience this, report it to the Treasury Inspector General for Tax Administration. The web site to report this activity to TIGTA is:

http://www.treasury.gov/tigta/contact_report_scam.shtml



How You Can Ask Dan Pilla a Question

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