My chronicle of how the IRS and Tax Court affect taxpayers' daily lives.

See below for important disclosures.

Friday, December 11, 2009

Drunk Driving & Casualty Losses

Decided and published yesterday, we have an amazing case (hat tip to Art Larson, E.A.) which deals with the difference between negligence and gross or willful negligence in regards to a casualty loss incurred - and caused - by the taxpayer.

Justin Rohrs, representing himself, petitioned the tax court to allow a $33,629 casualty loss for damage to his 3 month old Ford F-350. The deduction resulted in a $6,230 tax savings, which the IRS disallowed, and added a $1,246 accuracy related penalty.

Mr. Rohrs purchased the vehicle in August 2005. He attended a gathering at a friend’s house in October 2005, where he consumed alcohol. He had arranged for transportation to and from the party, but subsequent to returning home, he drove to his parents’ house. On the way, he skidded off of the road, rolling his truck over and damaging it severely. He was cited for DUI with a blood alcohol content of .09.

A casualty loss can be claimed for the "damage, destruction or loss of property resulting from an identifiable event that is sudden, unexpected or unusual." (Quickfinder 5-15). The deduction is limited to 10% of your adjusted gross income, less a $100 deductible, and is an itemized deduction. The loss must be reduced by any insurance claim. Nondeductible losses include accidental breakage or damage by a pet, disease or insect damage to plants, termite or moth damage, or car accident if caused by willful negligence or willful act.

The taxpayer did not dispute that he was negligent for driving while intoxicated. But the court notes, that there is no prohibition against taking a loss when the taxpayer is negligent, but only willfully negligent. People v. Olivas explains that "the state of mind of a person who acts with conscious indifferences to the consequences is simply 'I don't care what happens;." This is also called conscious indifference. The argued the differentiation between these two concepts.

The taxpayer showed due care by arranging for transportation to and from the party. Additionally, he argued that because he allowed time for his body to process the alcohol before leaving for his parents, he exercised some care. If he "willfully" negligent, he would not have gone to any of this trouble. Additionally, he argued that there was no way to note what the true cause of the accident was, as the weather conditions were very windy.

The court noted that, although contrary to public policy, the taxpayer's drunken driving does not automatically disqualify the taxpayer from claiming a casualty loss. The tax court is not "empowered to judge petitioner's action from a criminal perspective or to punish him for his actions." They can only interpret whether his actions were considered "willful."

The court agreed with the pro-se taxpayer's argument, and a decision was entered for the taxpayer.

Aaron's Take: I am very impressed with the argument made by this taxpayer. I also abhor his behavior. But, just like the judges in this case, it is not my place to make a judgment about the taxpayer's ethics or sense of personal responsibility. I am sure he has already been subject to the punishment allowed by criminal and civil courts. All clients deserve good quality representation and to be treated fairly and with due process. This is a taxpayer whose patience truly was rewarded. Hopefully his judgement has improved, and he now knows what his limitations are.

Wednesday, December 9, 2009

Ex-IRS Criminal Investigations employee turned Tax Preparer convicted!

John J. Poltonowicz was convicted on one count of consipiracy to defraud the United States, 12 counts of aiding, assisting, and counseling the filing of false tax returns, four counts of mail fraud, three counts of wire fraud, five counts of making fals statements on loan applications, and two counts of making false statements to the IRS. 

John started his career as an analyst for the CI division.  in 1992 he left the IRS and began preparing tax returns for other people.  In 2003, the IRS suspected fraud and sent undercover agents with recording devices.  John was recorded telling the undercover agent that he would include business expenses and other deductions for which no substantiation was shown in the agents return, even though the agent insisted she did not have a business.  As a part of the investigation, the agent then received an "audit notice" and brought it into John, to which he admitted to causing the problem, and was simply playing the odds that an audit would not occur.  John pleaded guilty to one count of filing false tax returns and his e-file authorization was revoked.

Soon after, he opened a new tax office in the name of his roomate and housekeeper.  He filed e-file paperwork listing her as the responsible party, and began preparing taxes once again.  At trial, several employees testified that they observed John preparing false returns and that they were instructed to claim nonexistent deductions. 

His fraud was not limited to preparing taxes for others, as he prepared false returns for his own use, overstating his income, and using them to procure loans for his home and an auto lease. 

The jury convicted him of all charges.  He was sentenced to 48 months of imprisonment, a $10,000 fine, $2,700 special assessment, and $400,000 in restitution. 

Aaron's Take:  Know who your practitioner is.  If he mentions things that you aren't comfortable with, than GET OUT or GET A SECOND OPINION.  You would do nothing less for your medical health.  Your financial health is no different!

Thursday, December 3, 2009

Recovering Attorney Fees for IRS Actions

James & Tiffany Manning, who prevailed in Tax Court, recently sued the IRS to recover the attorney fees necessary for their defense.  The mannings participated in an alleged abusive tax shelter, for which the IRS investigated and issued a deficiency notice (assessed tax) which included a significant accuracy related penalty.

Upon further review, the taxpayers did admit to mistakenly deducting $100,000 of commissions, but  prevailed with the most significant issues.  The prevailing party may be awarded reasonable costs if they establish:
  1. They have exhausted the administrative remidies available
  2. The party has substantially prevailed
  3. The party satisfies net worth requirements
  4. The party has not unreasonably protracted the proceedings
  5. The amount is reasonable
(The details of these requiremens can be found in §7430(b))

The IRS did admit that the taxpayer did prevail in the proceedings, but that damages should not be awarded because the IRS had reasonable positions and that their actions were substantially justified.  The court disagreed.  Additionally, they did not satisfy the net worth requirements, as they had enough wealth to spend over $250,000 in their own defense. 

The taxpayers also attempted recovery under §6673(a)(2) which allows the court to award attorney's fees if the Government has unduly and unreasonbly delayed the case.  The court judged that the Government did not, and therefore decided against the taxpayer.

Aaron's Take:  Most people don't know about this provision, which allows for the reimbursement of court costs.  This provision is part of the tax code to prevent punitive, irrational, or unjustified actions by the Internal Revenue Service.  Legitimate arguments, especially those which deal with complicated tax shelter transactions, must be legitimately defended.  THE BURDEN OF PROOF ALWAYS RESTS ON THE TAXPAYER.  If it costs you 250k to defend your position, that's life!  You must factor the potential for litigation with the risk that the position you are taking may be challeneged.
Aaron Blau, E.A. is the Vice President of the Central Arizona Chapter of Enrolled Agents and a member of the Government Relations Committee of the National Association of Enrolled Agents. The opinions and ideas expressed here are in no way representative of the official position of the National Association of Enrolled Agents, Arizona Society of Enrolled Agents or the Central Arizona Chapter of Enrolled Agents.

For official comments, please e-mail NAEA Director of Communications at or Arizona Society president

"To ensure compliance with the requirements imposed by the IRS, we inform you that, to the extent this communication (or any attachment) addresses any tax matter, it was not written to be (and may not be) relied upon to (i) avoid tax-related penalties imposed under the Internal Revenue Code, or (ii) promote, market or recommend to another party any transaction or matter addressed herein (or in any such attachment). In addition, nothing herein is intended to convey an expression of an opinion as to the likelihood a tax position would ultimately prevail if challenged by the IRS. This communication is intended solely for the person to whom it is addressed; no one else should rely on the tax advice provided herein. The person to whom this advice is addressed is under no obligation to keep the advice or matters related to the advice confidential."