Seriously Incompetent Auditor

[MsTabbyKats]

OK...listen to this:

Taxpayer:

2011

On the "Wage & Income Statement"

1. W-2

2. Tuition

On return...the tuition was a deduction...because it was for an MBA to improve his skills. He was already working in the field and had a bachelors.

Auditor:

Somehow adds a $25,000 scholarship to income ....and says MBA was for minimum requirements of job (although taxpayer submitted a letter from employer stating it wasn't)

My question to you:

1. Is there a supervisory auditor? (I mean...the agent cannot just decide to add in a scholarship from a prior year that was used directly by the school to cover tuition...not a penny was given to the client...from 2010!)

2. Time for the taxpayer advocate?

3. Any other thoughts?

Also...the auditor is not familiar with what an MBA is.

I haven't spoken to the auditor yet (waiting for POA to be posted).

[Jack from Ohio]

Wait for the letter that says you have the option to go to tax court. File for a court date. It will be sent to the appeals department where (hopefully) there will be someone with more experience.

We have had to do this three times in the past 4 years to get past an incompetent auditor.

One situation, the auditor insisted that state refunds be added as income, despite the fact that the taxpayer had taken standard deduction for the past 3 years.

I feel your pain.

[GeneInAlabama]

Every auditor has to do their first audit, every doctor has to perform his first operation, every lawyer has to work their first trial. Just hope you aren't the first in any of those cases. Remember the first income tax you did for pay?

[jainen]

>>He was already working in the field<<

You might win this, but I wouldn't take that for granted. It doesn't matter that the education is appropriate for the field he is already in and he won't use it for a new job, if he COULD use it for a new job. Tax Topic 513 (http://www.irs.gov/taxtopics/tc513.html) explains, "To be deductible, your expenses must be for education that (1) maintains or improves your job skills, or (2) is required by your employer or by law to keep your salary, status or job. However, even if the education meets either of these tests, the education cannot be part of a program that will qualify you for a new trade or business."

Before you run to Appeals or Tax Court whining about somebody else's incompetence, you'd better do your own job. This case will take technical research--you have to prove a negative. Generally an advanced degree qualifies a person for a better job. Please explain why this is not true for your particular client.

[ILLMAS]

If I am reading your post correctly, did your client represent himself at the beginning? Might of put his foot in his mouth as they say, anyway, FYI you don't need to wait for the POA to be processed, all you have to do is contact the auditor and tell him/her you are now representing the client and fax over the POA, they will forward a copy to appropriated department and in the mean time they can talk to you.

MAS

[MsTabbyKats]

I'm having "fax issues"....my dedicated line won't be fixed until Monday...so I can't fax & talk at the same time right now.

The client sent in 19 pages, including a letter from his employer...stating that the education improved his skills.

But...the main issue...is the auditor added $15,000 (prior post had a typo) scholarship as income. The "Wage & Income Transcript" doesn't have "scholarship income" on it. In addition...any aide he was given was from the school...used to credit his tuition directly. But....none of it for 2011 anyway.

He got a BA...worked in the field. He is still in the field. He got an MBA in the field. He intends to stay in the field. The MBA was 1,000,000% to improve his skills in his current occupation.

[Lion EA]

There was that nurse working in hospital administration who represented herself and got her MBA deducted. And, obviously, my memory is full of holes re the details, especially her name. Someone will jump in re that court case. I agree that you have to research to argue this one.

[ILLMAS]

read it this morning

http://bucks.blogs.nytimes.com/2010/01/20/when-you-can-deduct-the-cost-of-your-mba/

[jainen]

>>The MBA was 1,000,000% to improve his skills in his current occupation.<<

I doubt Tax Court will be impressed by your math, especially since it's irrelevant anyway. Basically the IRS position is that an MBA automatically qualifies the taxpayer for a new profession. You will need to show, for example, that graduate study in THIS field don't usually lead to promotion into management, or that management is not a different profession. Or maybe your client was extra smart, already working at a level that typically does utilize an MBA. This is a well-litigated issue, so there ARE good arguments and precedents out there.

Knock off the hyperbole and the ad hominem attacks (not to mention the typos), and get real.

[MsTabbyKats]

Real?

How does the auditor just add in $15,000 to his income?

She just decided....

Anyway...even if there was a scholarship in 2011...it was used to pay tuition. Last time I checked...scholarships used for tuition are not taxable.

[jainen]

>>She just decided..<<

Yep, that's her job.

>>Last time I checked...scholarships used for tuition are not taxable.<<

Better check again. If paid by an employer (that is, a benefit for service as an employee) it is taxable compensation. And as I read your original post, it was never claimed as excluded income anyway, but rather as a deduction. In disallowing a deduction, the auditor is not required to find a new tax break to replace it. That's YOUR job. Really..

[MsTabbyKats]

>>She just decided..<<

Yep, that's her job.

>>Last time I checked...scholarships used for tuition are not taxable.<<

Better check again. If paid by an employer (that is, a benefit for service as an employee) it is taxable compensation. And as I read your original post, it was never claimed as excluded income anyway, but rather as a deduction. In disallowing a deduction, the auditor is not required to find a new tax break to replace it. That's YOUR job. Really..

Listen...argue all you want....and read REALLY carefully!

In 2010 the taxpayer received financial aide from NYU (the school)....to help in his $50,000+ tuition.

NYU never reported this financial aide anywhere. It was used to adjust his tuition. The taxpayer has his 2010 statements from NYU showing this.

The taxpayer did not file a 2010 tax return, because he had no income. He was in school full time.

The year being audited is 2011.

His employer did not pay tuition for him. He did not receive financial aide or any scholarships in 2011.

In 2011 he paid $54,000 out of pocket. He has his canceled checks.

He also has the tuition statement from NYU showing these payments.

The $54,000 out of pocket expense was his deduction.

He had:

Wages & the educational expense as a deduction. That was the entire tax return. Basically....2 entries.

I did my job.

This is not a tax court case. This is just someone with an average IQ "looking at the return issue".

It's pretty much the same caliber as Jack's client...and the auditor kept adding in state tax refunds.

Poor training at the IRS...coupled with functioning agents who cannot read their own publications.

[ILLMAS]

"The taxpayer did not file a 2010 tax return, because he had no income. He was in school full time."

This has me scratching my head, he is improving his job skills without a job? So in 2011 he became employed and decided to use his MBA for a job he had just started?

[MsTabbyKats]

"The taxpayer did not file a 2010 tax return, because he had no income. He was in school full time."

This has me scratching my head, he is improving his job skills without a job? So in 2011 he became employed and decided to use his MBA for a job he had just started?

You can stop scratching your head....he worked before 2010....in the same field.

MBA at NYU is full time school...not night school or every other Saturday.

[jainen]

>>read REALLY carefully<<

I did put a disclaimer in my response, "as I read your original post." Your presentation is not very clear. You said tuition was on the wage and income statement, so I guess I misunderstood that to refer to the employer rather than a worksheet in your software. I also misunderstood that the taxpayer was working on the MBA to improve job skills, although I admit all you actually said was that the employer had declared it was not a requirement for the job.

Anyway, if the audit has been closed then you can appeal. But the first thing I would do with the power of attorney is pull this client's transcripts, so you can see what the auditor saw. What difference does it make if the auditor IS incompetent? The only thing that matters is whether she is right.

[joanmcq]

There is one case where a taxpayer won who took a leave to get an MBA and was able to take a miscellaneous itemized deduction for the tuition. You'll need to study the few cases where taxpayers won on the MBA deduction and study them carefully. As jainen has said, it's not an easy case to make and win, and I'll add that it's even harder when there is a break in employment. Was the taxpayer with the same employer before and after? If not, what type of job was the taxpayer doing before taking the time off to get the MBA?

And what exactly did the taxpayer originally submit for the audit? Where could the auditor have come up with the scholarship number? Most 1098-Ts have an area for tuition billed & scholarships received; did the 1098-T show more scholarship than tuition? The 'billed' vs. 'paid' can be an issue with these stupid forms.

[Guest Taxed]

Better make sure you got all the facts correct (especially if your client has a tendency to blow smoke!) before challenging the IRS.

You don't want to have egg on your face if the auditor produces documentation that directly contradict your client's assertions.

[SaraEA]

jainen is correct that it is very hard to prove that an MBA does not qualify a person for a new job. There is a lot of case law on this issue, most of it supporting the auditor's argument that tuition for an MBA is not deductible as an employee business expense. Read it before you try to defend this deduction. The fact that your client left work to pursue his degree will make your argument less plausible.

And the validity of the deduction, I think, is the only real issue in this situation. It is just stupid to add a scholarship from a previous year to a different year's income--UNLESS the 2011 1098T showed adjustments in boxes 4 and 6 (to prior year information). In this case, 2010 has to be recalculated and the adjustment made in 2011 as a "recovery." Have you seen the 2010 and 2011Ts? The auditor may be right.

You are obviously well-trained in what tax pros are supposed to do--protect their client's best interests. Sometimes, however, it pays to play devil's advocate. See what the other side is seeing. They may have a point. If they don't, you're a hero. If they do, you just made a fool out of yourself.

[MsTabbyKats]

OK...more details

The taxpayer is from Colombia on an F-1.

Let's put aside whether or not the tuition is a deduction.

The auditor included, in her audit (although a minimal amount), dividends and interest. Non-resident aliens do not pay tax on dividends and interest.

He was in this field in Colombia and came here specifically to improve his skills and work in this field. (He worked in Colombia in early 2010...then came here...did not work here...but studied for the rest of 2010)

The 2011 1098-T showed only tuition from 2011...no adjustments from other years. There is nothing "hidden" in any 2011 forms.

In any case...she wants him to prove he paid the tuition for 2011. So, if it not a deduction...then why is she asking for "proof" of payment? Sounds rather contradictory.

This auditor is not familiar with non-resident alien issues and MBAs.

The client is very "above board"......probably gave her too much info....which overwhelmed her.

One other thing......

He submitted 19 pages on 5/30....and got a letter dated 6/4. To me that sounded "auto generated". Did anyone ever get such a fast letter from an audit?????

[MsTabbyKats]

One other thing......

His 2011 refund was delayed because the return was "examined" at the time it was submitted....and "passed" whatever they looked for at that time.

[Guest Taxed]

>>His 2011 refund was delayed because the return was "examined" at the time it was submitted....and "passed" whatever they looked for at that time.<<

I would not consider a delayed refund from a prior year as a return being examined. There may have been other causes for that delay.

Now that you mention that this client is a Columbian on a F-1 visa, filing 1040NR; may have to do with extra scrutiny?? Just my take on it.

[jainen]

>>taxpayer is from Colombia on an F-1<<

So your position is that an American MBA will not qualify your client for a new job, because years ago he did related work in a developing country? So far you have't posted a single fact to support that, and have taken offense at our suggestions for what needs to be proven and how to research it.

[i recommend you present the whole story at once when you go to Appeals. And focus on the taxpayer, not the auditor.]

[ILLMAS]

Real? How does the auditor just add in $15,000 to his income? She just decided.... Anyway...even if there was a scholarship in 2011...it was used to pay tuition. Last time I checked...scholarships used for tuition are not taxable.

Do you happened to have a copy of the finding? Not a bad idea to share the auditors position as to why the 15K as added, there has to be an explanation. I know once you post it, others can help you. MAS

[MsTabbyKats]

This client is very good in that he responds to things quickly. And he is very well documented.

I have told him to let the dust settle.

IMHO...if the auditor received 19 pages on 5/30....she could not have sent a response on 6/4. These things generally take "much longer". Any opinions on this?

Maybe being Colombian has something to do with it....that I don't know.

>>His 2011 refund was delayed because the return was "examined" at the time it was submitted....and "passed" whatever they looked for at that time.<<

I would not consider a delayed refund from a prior year as a return being examined. There may have been other causes for that delay.

Now that you mention that this client is a Columbian on a F-1 visa, filing 1040NR; may have to do with extra scrutiny?? Just my take on it.

Maybe....the majority of my clients aren't American, but I think he's my only Colombian. I did a Mexican (his friend) for the same year...exact same scenario. But, the Mexican hasn't had a problem (yet).

Any opinion on the fact that he faxed in his papers on 5/30....and got a letter dated 6/4. I go for "auto-generated"...but the auditor said it was her response. Since when is the IRS so fast???

And lastly....the tax payer was "well employed" in his "developing country". He got into NYU for an MBA (not easy to do) and paid over $100,000 for his education. Let's not make this like he was "working the fields".

I'm going to post my clients' e-mail to me in the next post.

[MsTabbyKats]

Clients e-mail to me (scholarship he refers to was paid prior to 2011)

I spoke with Cherry yesterday. I told her you were going to call her after the form you sent me was filed, so later this week. She is a cordial woman and she is willing to explain, but sometimes I get the sense that she doesn’t have a lot of experience. It has been hard for me to explain why a master’s degree education is useful for my career. She doesn’t seem very familiarized with the MBA degrees. We had a conversation and this is what she told me…

- She said she did review the documents I sent her initially and that the second request was generated by her. (However, I don’t think she reviewed them carefully because of the following points on our conversation…)

- When I asked her where did the $15,000 scholarship came from, she said she had seen in my 2010 return that I had stated $10,000 and so she was claiming the remaining $15,000 as the total scholarship was $25,000.

o To this I responded that I didn’t recall ever filing 2010 taxes!...because I arrived to the US on August 2010. The first tax return I had prepared was with you for 2011.

o She looked into her system again to find where she had seen that… and she didn’t find it!… so she said I was right.

o Therefore we went over the NYU receipts and I showed and explained how in 2011, only $12,500 was granted (for Spring semester 2011).

o Finally she said she was going to change the $15,000 to $12,500, but that anyhow scholarships were taxable even if I didn’t receive the money directly, it was considered as income.

- Besides the scholarship, she said that it seemed that she still needed to disallow the tuitition. I asked her if she had seen the letters I sent her from my company, as her first request asked for a letter from my employer explaining whether the education was necessary for my job, and how the education helped me improve or maintain the skills needed for my job. (I’m attaching both, this request and the letter I sent her complying with the request).

o It seemed that she had not read it, as she looked for it on her computer and went over it while we were on the phone.

o Then she said the letter showed that the MBA was a minimum education requeriment for my job, and that in this case tuition is not tax deductible.

o To me, this seems contradictory to the first request…. first I need to show that my degree was useful to advance my career, and then this goes against me...

Finally, she wants me to send her proof that the rest of my tuition was paid by me, and not somebody else or a company. So I told her I was going to get proof of all the checks, wire-transfers, etc, to show her that I payed it myself.

She said she would be glad to speak with you when you called her, and in the meantime I would recollect the checks and proof that I paid for my tuition (except the scholarship)