Arcane Advice for the Tax Practitioner
by Jay Starkman, CPA
Practitioners should remember sections 6201(d), 6212(c), and 6213(b)(2) when representing clients in IRS disputes.
To the Editor:
Robert W. Wood always provides such wonderful insights and advice in every article he writes. His article on Form 1099 was another great one (Wood, "Lawyers, Settlements, and Forms 1099-MISC and 1099-NEC,” Tax Notes Federal, Nov. 23, 2020, p. 1333).
I agree with the need to report on a tax return, the full amount of any Form 1099 received, with an extra line indicating an adjustment. I’d like to add some advice.
For a payer, failure to properly issue Forms 1099 results in the IRS assessing stacked multiple penalties without any reference to the code section upon which maximum penalties are based. It is puzzling to the practitioner assisting a client in mitigating penalties as he must first ascertain, or inquire from the IRS which code penalties are being applied. It would be very helpful if the IRS would cite code subsections and the amount of penalties assessed under each in its notices.
On the recipient’s side, Form 1099 information returns are not self-proving. Section 6201(d) places “the burden of producing reasonable and probative information concerning such deficiency in addition to such information return” on the IRS.
When my client receives an IRS notice regarding a Form 1099 that is erroneous or disputed, I send the IRS an explanation and demand that it fulfill its responsibility to prove to the taxpayer that the information return is correct.
Asserting section 6201(d) yields good results. In one case, a client insisted she had no U.S. treasury interest. A month later, in response to my letter, the IRS sent a package with photocopies of dozens of Series EE U.S. Savings Bonds that she had cashed the prior year. In most cases when my explanation is correct, the IRS drops the matter.
Sometimes the IRS doesn’t act on my correspondence contesting its proposed assessment. In due course, the IRS will send a 90-day letter deficiency notice for the unreported, disputed Form 1099 income. It’s often a nominal amount that might assess as little as $200 income tax, except perhaps for a taxpayer with a seven- or high six-figure income. I consider that really lucky because it affords me the opportunity for filing a Tax Court petition, using the simple Form 2, asserting section 6201(d). These always settle very satisfactorily without trial, although at great inefficiency to the IRS for its failure to resolve at the correspondence stage.
For a $60 filing fee and the risk of an often nominal tax, section 6212(c) generally precludes the IRS from issuing another Notice of Deficiency for the same year on a very substantial tax return. Clients are delighted for such cheap audit insurance.
The same method works for erroneous math error assessments, which must be disputed within 60 days. If properly notified, section 6213(b)(2) requires the IRS to abate the assessment, but it allows the IRS to issue a 30-day or 90-day letter. Further, the Tax Court has awarded administrative and litigation costs to a prevailing taxpayer when the IRS failed to abide by a Section 6213(b)(2) request (Swiggart v. Commissioner, T.C. Memo. 2014-172).
Practitioners should use, but not abuse, these defenses. Clients will be impressed by the adviser’s knowledge and assertion of them.
Jay Starkman is a sole practitioner in Atlanta. This article was originally published in Tax Notes Federal, Nov. 23, 2020, p. 1333.