Jainen - or other Practice & Procedure Guru

[BulldogTom]

History first, then the question. I have a client in a real mess going back to 2003. Young kid, been living with his girlfriend since 2002. She brought 2 kids to the relationship. They have since had 2 more. They married in 2006. (please - no moral comments, it is what it is and I have taken the engagement)

In 2003, she filed single with EIC for 2 kids and no dependents, IRS did not challenge. He filed HOH, 4 dep, CTC for 3 kids (1 his and hers, 2 hers only) EIC for 1 child (his and hers). IRS audited and disallowed dependency, CTC and EIC citing duplicate numbers on another tax return (hers). He should have fought, but did not know how, and preparer (local independent) was not willing to help.

In 2004, she files HOH with 2 dep (hers), CTC and EIC. IRS does not challenge. He files single, 2 dependents (his and hers) CTC, and EIC. IRS audits and disallows dependency exemption, CTC, and EIC. Kudos to HRB for at least trying to help by writing a letter, but there was no follow up and the IRS did not change the result of the audit because they did not provide sufficient evidence.

In 2005, she files single but claimed as dependent on another return. IRS does not challenge. He files HOH, 5 dependents, 4 CTC, EIC. IRS audits and disallows HOH, dependents, CTC and EIC. Taxpayer again gets a letter written by HRB challenging the audit, but did not provide proper documentation and IRS did not change the audit.

In 2006 they go to JH and file her HOH, 2 dependents, CTC, EIC. IRS does not challenge. He files single, 2 dependents, CTC, EIC. IRS audits. They married in September of 2006.

(this is the point where I enter the scene) 2006 audit is not complete. I have made contact with the auditor. I am being polite when I say she is not the sharpest knife in the drawer. Because of this, and the fact that I need to amend the 2 returns to a MFJ, I have asked for the audit to be moved to the local office and be conducted in person rather than by correspondence.

What I understand so far, and this is very hazy from the auditor, is that what remained of 2004 refund was used to pay 2003. 2004 still has a balance due, and 2005 is 0 balance (refund never paid). Taxpayer claims he did not get anything but $867 from IRS for 2003. IRS showed 3600 balance due (but the auditor could not tell me if he was paid the refund - she kept saying 2004 was taken for either back child support or college loans - both of which are absoluty not true). My request to move the audit to the local office seems to have ticked her off (I swear I was very polite, and it is a legitimate request to want to work face to face because of the documentation that I want to provide and explain).

So, here is my question. How do I go about getting the prior 3 years reopened for audit, as well as consolidating them with the 2006. The issues are exactly the same in every year except 2006 (where I have the 2006 MFJ amend to broach with the auditor). 2003 and 2005 were handled in Atlanta, and 2006 is there right now. 2004 was handled in KC.

My plan is to write a letter to Atlanta and to KC and ask for audit reconsideration. Once that is done, I will ask to move the audit to the local office (or should I include that in the letter and ask to open and move to the local office all in the same letter?) If the service is not willing to re-open, what are my options for tax court? I don't have a valid 90 day letter on 2003, 2004, or 2005. Because the IRS applied payments to 2003 in 2005, does that leave the statute open (2 years from the date the tax was paid) for 2003? Would I have to file claims for refund for each year, make the IRS deny, and then file the claims?

BTW, I believe that I have all the evidence to establish dependency and all the credits that go with it for 2006 and 2005. It gets slimmer in 2004 and 2003, but I do have the lease agreement listing each child in 2004. They lived in another home in 2003 and are trying to get the landlord to confirm that all three kids were in the home the entire year in 2003. We have immunization and doctor records also.

Thanks in advance for your comments, recommendations, and thoughts on how to proceed.

Tom

Lodi, CA

[kcjenkins]

Write the letters, then if that does not get the desired result, call TAS and ask them to help you. You might as well ask for the transfer at the same time as you ask for the reconsideration. The very fact that you want to deal with several years, that were handled in different offices, is one good reason for the transfer.

[jainen]

>>History first<<

No Sir, put the history last. Or leave it out completely. Tom, the audits are closed. Tax court is closed. IRS Examination doesn't have enough subtlety to figure this out. All they are going to see is that your client repeatedly used false filing status and dependency claims to get EIC. You're dealing with Collections now, and those guys aren't into "polite" at all.

Maybe you'll get lucky with amendments--it happens sometimes. But you'll probably do better with an Offer in Compromise based on doubt as to liability. That's always a long shot, but at least it would put all the years on a single page. With a sadly contrite story, the IRS might agree to drop the penalties and split the difference.

My advice is to nail down the 2006 audit immediately. They will accept MFJ without a problem. Sign off agreeably and request a copy of the workpapers to help you word your offer.

[Pacun]

I think you will have a hard time for previous years. I understand your willingness to pursue something that H & R block left hanging but it could be difficult and expensive to your clients. At the end of the day, not only will they owe the IRS, but they will have invested on your services.

I would amend 2006 and leave the other years alone.

If you decide to pursue, I would follow KC's advice.

[jainen]

>>comments, recommendations, and thoughts<<

Okay, so far we've got:

Politely request a different auditor (already tried, ticks 'em off)

Request audit reconsideration (your own idea)

Call Taxpayer Advocate (for when "an IRS system or procedure is not working as it should")

Amend the returns (you might get lucky)

File an Offer in Compromise (a long shot)

Forget about it (too hard and expensive anyway)

Anybody have anything else?

[BulldogTom]

>>comments, recommendations, and thoughts<<

Okay, so far we've got:

Politely request a different auditor (already tried, ticks 'em off)

Request audit reconsideration (your own idea)

Call Taxpayer Advocate (for when "an IRS system or procedure is not working as it should")

Amend the returns (you might get lucky)

File an Offer in Compromise (a long shot)

Forget about it (too hard and expensive anyway)

Anybody have anything else?

Jainen,

There is an IRS publication 3598 on Audit Reconsideration. I read it, and I am still thinking of going that way. It says in part "IRS Accepts an Audit Reconsideration Request if: (1) You have information that we have not considered previously which might change the amount of tax you owe, or credit you believe you are entitled to."

I have never gone down this road before, so I am hoping someone else has. Since the IRS did not have all the information when they made the determination, I think this is my best shot. A very detailed, comprehensive letter attempting to prove that the taxpayer is in fact eligible for the denied credits, complete with supporting documentation, will hopefully get me an audience with the auditor.

If any of you have ever tried audit reconsideration, please post your experiences.

Tom

Lodi, CA

[jainen]

>>A very detailed, comprehensive letter attempting to prove that the taxpayer is in fact eligible for the denied credits, complete with supporting documentation<<

I've never done an audit reconsideration, but I think I would approach it like a normal appeal. Do NOT give them a bunch of detail in the request--save that for the audit itself. Keep your letter to a SINGLE page with lots of white space so they can understand it in ten seconds, which is all they'll give you.

Make your point to the IRS point of view--effective tax administration and maybe a little public image. Don't bother appealing to fairness. The taxpayer already had the same chance as everybody else, and the IRS doesn't care about that anyway. Stick to the technical facts.

A very small dig at the poor service of national companies might fit in, but don't get into the blame game. Just explain that the taxpayer realizes his past mistakes and has engaged a competent professional to ensure future compliance now that he is married, and he just needs to clear up this old mess as simply as possible. Describe the key new records that you have organized and how they will show that the previous audit result was not adequate. Do not run on to a second page.

[TAXBILLY]

Agree with jainen. Keep it short and sweet and simple for them to follow.

taxbilly

[So and So]

It seems to me that the T/P is responsible for this situation. You stated that for each audit, he was unable to provide the documentation needed. The IRS has to have the info to decide in his favor.

I have had so many clients that do not take this seriously. They think that ultimately the IRS will just take their word for it.

So, they think the IRS should keep taking time to go over and over their situation. No wonder they get so backed up.

[jainen]

>>the T/P is responsible for this situation<<

Like I said, I never did a reconsideration. I don't know anybody who has. There is sort of an assumption that the IRS is not very keen on reopening an audit that wasn't even appealed.

This case doesn't really appear to have new information. There is nothing that wasn't originally available to the IRS through the taxpayer, although you might make a narrow claim that the documentation was not specifically considered. That doesn't seem to fit with the purpose of audit reconsideration, so I don't know how the IRS would look at it.

My overall impression is that the taxpayer decided filing status and dependency in tandem with his girlfriend to maximize the various credits and exemptions. The impression is stronger when you consider all the years together. You may not want to push the IRS too hard about this--the taxpayer could be disqualified from EIC for reckless disregard of the rules, or the IRS could decide to take a look at the girlfriend's returns too. That hint about child support suggests the IRS has information YOU have not considered.

Anyway, since 2003 has already been paid it is not eligible for audit reconsideration, which makes your work even less worthwhile.

[BJM]

I will just add a little information from when I worked for the darkside. I had my manager bring me a few audit reconsiderations, never once did I open one. Took me all of 10 minutes to send it back. Never had any new information that was of any value, in most cases the taxpayer had plenty of time and many document requests in the file to resolve the issue during the original examination. Unless there was over whelming new information, which there never was in what I received, I just denied the request. I had enough of my own cases in inventory to resolve. Just as an example, I do remember one that involved travel and entertainment, the issue everybody hated but was mandetory to look into, the person submitted a log with dates, names and business purposes of the expenses for a year, no receipts or back up information. To fool us of course, every other day or week was in a different color ink or from ink to pencil so that you wouldn't think it was just recontructed in one sitting. This never appeared during the course of the intitial audit. When I would hand the file back to the manager with the request denied, they would also smile, they didn't want this in the group either.

[BulldogTom]

>>the T/P is responsible for this situation<<

Like I said, I never did a reconsideration. I don't know anybody who has. There is sort of an assumption that the IRS is not very keen on reopening an audit that wasn't even appealed.

This case doesn't really appear to have new information. There is nothing that wasn't originally available to the IRS through the taxpayer, although you might make a narrow claim that the documentation was not specifically considered. That doesn't seem to fit with the purpose of audit reconsideration, so I don't know how the IRS would look at it.

My overall impression is that the taxpayer decided filing status and dependency in tandem with his girlfriend to maximize the various credits and exemptions. The impression is stronger when you consider all the years together. You may not want to push the IRS too hard about this--the taxpayer could be disqualified from EIC for reckless disregard of the rules, or the IRS could decide to take a look at the girlfriend's returns too. That hint about child support suggests the IRS has information YOU have not considered.

Anyway, since 2003 has already been paid it is not eligible for audit reconsideration, which makes your work even less worthwhile.

The problem is, every tax return is properly filed. In 2003, it was proper to "Play King David and split kids" and we all did it to maximize the tax returns for our clients. To not do so would constitute malpractice in my opinion. While the practice was legal, there was a great cry of outrage (I wish we had the ATX archives to go back to right now). That is why the rules changed in 2004. They were further changed in 2005 with the Uniform definition of a Child. The taxpayer has never taken an improper position on his tax return, except for in 2006 when they should have filed MFJ, they just did not know it.

The way you are portraying my client is not correct. They went to tax professionals for tax advice and followed the professionals advice in filing their tax returns. This couple did not intentionally file false returns. They were all properly filed. They IRS has denied the taxpayer to claim dependency for his natural born child that lived in his home that he provided since the day the child was born. Show me a form where the IRS lays out the exact proof that they will accept when making a dependency determination? They give a taxpayer 15 DAYS to respond to a letter saying prove this child lived in your house for the entire year or we will deny the dependency exemption and all that goes with it. Have you ever tried to prove a child lived with you all year to the published standard of the IRS? (oh yeah, there is no exact guidance on that, just some "suggestions").

The clients are not the sharpest individuals, but he works hard, and he does what he can to support his wife and 4 kids, one of which is special needs.

As for new information, 2003 is hard to get any information, but we will be providing birth certificates showing the the couple as mother and father of one child. I will also present the mother's testimony in writing under penalty of perjury that her other children lived in the home with her and the now step father. In 2004, I have the lease from the landlord listing the children, along with the birth certificates (second child born to both of them in this year) and a local government services agency report listing all income by month for the family unit which names all of them. I have the same information for 2005 and 2006, and medical records showing shots and checkups for the kids. None of this was given to the IRS because the client did not get adequate representation.

So please, the clients are not bad people, they just don't know how to prove to the IRS that they have children living with them.

Tom

Lodi, CA

[jainen]

>>The way you are portraying my client is not correct.<<

That may well be. I'm only trying to suggest how the IRS will see it. The client has the burden of proof, and failed to meet it in the ordinary way.

>>Show me a form where the IRS lays out the exact proof that they will accept when making a dependency determination?<<

How about starting with the Worksheet for Determining Support (Worksheet 1 in Pub 501)? For years prior to 2006, dependency requires SUPPORT, which in all your long descriptions of new documentation you have hardly referred to at all. Head of Household status, which your client also traded off year to year, depends on similar elements of expense. Lay out who wrote what checks, and maybe that will convince an auditor that your client indeed "has never taken an improper position on his tax return."

By the way, don't get distracted by the request to prove household composition. That's just the IRS being lazy -- they know it doesn't matter except for the girlfriend, and her exemption is small compared to the other tax benefits in question.

>>2003 is hard to get any information<<

That year is a done deal. It isn't even in Collections any more.

[BulldogTom]

Head of Household status, which your client also traded off year to year, depends on similar elements of expense. Lay out who wrote what checks, and maybe that will convince an auditor that your client indeed "has never taken an improper position on his tax return."

You are right, the Filing Status was incorrect, but that is small potatoes in this, which is why I am overlooking it. The income is so low that HOH versus Single makes nearly no difference.

Thanks for pointing that out.

Tom

Lodi, CA

[Pacun]

I think a taxpayer cannot reopen returns after an audit was not favorable. It does not make sense for the government and they are laws that will prevent a taxpayer from:

1.- The year it is audited, goes to H&R Block. Then, since results are not favorable to him/her...

2.- two years later he comes to me. If he does not get favorable results, he

3.- Finds a good tax lawyer and tries to win.

Imagine that the IRS reopens each time the audit. Don't you think that the law will say... "why didn't he go to the tax lawyer to begin with"?

Now, after each audit, you have 30 days to challenge the results within the IRS and 90 to challenge it in court. I know his statue of limitations is over based on the letters the IRS provided him with.

I am going back to my original suggestion, I would amend 2006 and forget about the other years.

[jainen]

>>HOH versus Single makes nearly no difference<<

Tom, it makes ALL the difference. It is the key to this whole engagement. The simple FACT is that your client tried to run a little game, but he got caught. The IRS gave him every normal opportunity to come clean about it, but he just shined them on. Seriously, you say his whole defense was a letter from Block?

Now, years later, he wants to play another hand. Well, if this were my client, I would still accept the engagement. With a $2500 non-refundable retainer, that is. That's a conservative estimate for the amount of your time this is going to take, digging a hole in the ocean.

[kcjenkins]

Sad to say, Tom, I have to agree with Jainen's last paragraph, at least the last two sentences. Good luck.

[Jack from Ohio]

History first, then the question. I have a client in a real mess...

Thanks in advance for your comments, recommendations, and thoughts on how to proceed.

Tom

Lodi, CA

While your intentions to help your client are honorable, and your aproach very professional and thorough, I make this next comment based on experiences at the firm I work for dealing with audits this calendar year so far.

I truly believe that you will have a better chance of winning the lotto than getting the IRS to reconsider any of the closed audits. We have seen a very cold and hard line taken by auditors and even by appeals officers.

This is just my opinion, and I wonder if all the expense for your services would not eat away any benefit you may get for them. You have many hours of frustrating work ahead trying to crack the shell of apathy that has become the hallmark of IRS auditors.

We have had auditors (more than one) simply ignore 2lb packages of documentation (follow up inofrmation they requested) sent to them, and simply send the 90 day letter, with no explanation.

Again, just my opinion, but based on real life experiences over the past 8 months.

[jainen]

>>I have to agree<<

Hmmm, KC doesn't agree with me all that often, so I'll have to reconsider. Actually, as soon as I posted I immediately regretted that I had been too harsh.

In fact, there is plenty a professional can do for this client. For one thing, the 2006 audit needs to be closed. Amended returns might still make sense, especially since we haven't heard from California yet. You need to make sure the client isn't being sanctioned for EIC errors. You need to recalculate penalty and interest--IRS is notoriously wrong about that, and you can appeal it by mail without opening the whole file. You need to stop collection enforcement by setting up an installment plan they can afford. And you need to explain why this all happened, what you can and can't do about it, and why it won't happen again.

There is no harm in trying an audit reconsideration or an OIC. I just think the chance of success and the total tax bill is not in proportion to the professional fees for that kind of work.

[BulldogTom]

>>I have to agree<<

Hmmm, KC doesn't agree with me all that often, so I'll have to reconsider. Actually, as soon as I posted I immediately regretted that I had been too harsh.

In fact, there is plenty a professional can do for this client. For one thing, the 2006 audit needs to be closed. Amended returns might still make sense, especially since we haven't heard from California yet. You need to make sure the client isn't being sanctioned for EIC errors. You need to recalculate penalty and interest--IRS is notoriously wrong about that, and you can appeal it by mail without opening the whole file. You need to stop collection enforcement by setting up an installment plan they can afford. And you need to explain why this all happened, what you can and can't do about it, and why it won't happen again.

There is no harm in trying an audit reconsideration or an OIC. I just think the chance of success and the total tax bill is not in proportion to the professional fees for that kind of work.

Jainen,

I really appreciate your input, and don't worry about being too harsh. I know that our "friends" at the IRS are not always going to see things the way we do through our clients eyes. You have helped me more on this than you know, by poking holes into my thought process, and I thank you very much for that. It should be the same process with the IRS, and that is why I put your name on the post specifically. After being poked at by the mighty Jainen, what will a little IRS auditor be able to do to me?

Thanks again,

Tom

Lodi, CA

PS, I am under no illusions about this case. But it is significant to the client for a couple of reasons. We need to get 2006 correct so we won't be in the "every year audit and deny any child related credits" mode at the IRS. Second, if I can get any years reopened and the IRS allows what is proper, it will mean about 4K per year in his pocket.

[jainen]

>>After being poked at by the mighty Jainen, what will a little IRS auditor be able to do to me?<<

It doesn't matter how much you flatter me, I'm still not going to trade you my Willie Mays baseball cards.

A little IRS auditor can do plenty if she gets vindictive. I already mentioned the risk of EIC sanctions and calling in the girlfriend's returns. She can also refuse to budge on 2006, forcing you into appeals which is a big nuisance. She can run up more hours than the client will pay for, and drag the whole thing out (by, for example, going on vacation or a training assignment) until your client begins to question your abilities and you begin to question your own sanity.

I'm telling you again. I'm warning you. Do whatever you want for those past years; you have nothing to lose there. But get that 2006 closed this week.

[kcjenkins]

Once they are filing as MFJ, all those old child deduction issues will go away, Tom. That's the good part. And it's always worth it to try an amendment for open years. Although, as you know, the IRS does not HAVE to accept any amendment, they often do. The basic problem, IME, is that the Service seems to have almost a pathological bias against fathers who claim their children on separate or HOH returns. Good luck to you.

And let us know how it all comes out.

[BulldogTom]

I'm telling you again. I'm warning you. Do whatever you want for those past years; you have nothing to lose there. But get that 2006 closed this week.

Jainen,

I finally was able to talk to someone at the audit reconsideration office in Kansas City about the 2005 return. She told me they never got my letter (I have proof, but oh well) and that even if they got it, they probably would not open a prior year audit on a point of law, only on new evidence. Then she said they take up to 6 months to decide if they are going to open the audit, and about a year to process the second audit if it gets that far.

So much for that idea, we will look for a new strategy.

As for your warning above about 2006, we have been waiting for 4 months for the return to be transferred to the local office. Practioner priority line operator gave me a number in the local office and I got in touch with them. The return is still not there. No one knows for sure where the tax return is. The Atlanta office sent it out and it is not there anymore. That is the only thing they know for sure. So we wait.

Please send me an e-mail with your mailing address. I would like to get something in the mail to you (it won't be a Jeroboam - but I hope you like it).

Tom

Lodi, CA

[jainen]

>>they never got my letter<<

Thanks for the interesting update on audit recons. I assumed they would deny it, for exactly the reason she gave, but it didn't occur to me they would just throw it in the trash without even reading. I hope you took my advice about not writing "a very detailed, comprehensive letter."

I'll send you my location, and thank you very much, but I recommend you drive over to the coast in person. The waves are just awesome from that big storm up in Oregon!

[BulldogTom]

>>they never got my letter<<

Thanks for the interesting update on audit recons. I assumed they would deny it, for exactly the reason she gave, but it didn't occur to me they would just throw it in the trash without even reading. I hope you took my advice about not writing "a very detailed, comprehensive letter."

I'll send you my location, and thank you very much, but I recommend you drive over to the coast in person. The waves are just awesome from that big storm up in Oregon!

Jainen,

I did take your advice and wrote a 1 page letter asking for the reconsideration based on IRS misapplication of the 2005 Working Families Tax Relief Act. I assumed they would just deny (which is what I expected) via a form letter. It is possible that the letter "got lost" in the office, but I think you are on the right track about the "round filing" of it.

Don't think I will be getting over the hill anytime soon. 2 boys active in sports, a full time job, and a tax practice keep me pretty busy. I may be that way next summer when our church takes the youth group to the boardwalk.

Merry Christmas.

Tom

Lodi, CA