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October 22, 2006

Texas Tax Attorney Contests IRS Bypass Letter

IRS Audits

Houston Tax Attorney

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In People’s Source International, LLC v. United States, the IRS issued an Aurora, Texas tax attorney a bypass letter. A bypass letter is a letter that the IRS sends to a taxpayer when the IRS believes that the taxpayer’s tax attorney has failed to respond to IRS requests. The Texas tax attorney contested the bypass letter.

Facts & Procedural History

As outlined in People Source, the IRS apparently believed that the Aurora, Texas tax attorney had failed to respond to the IRS request for information and meetings. Upon receipt of the bypass letter, the taxpayers sent notice to the IRS that they would bring suit against the IRS if the IRS failed to retract the bypass letter. The next day the taxpayers filed suit against the IRS in the United States District Court for the District of Texas, seeking a temporary restraining order and a permanent injunction to prevent the IRS from contacting the taxpayers directly. The taxpayers amended their complaint to ask for injunctive relief and up to $1 million for damages caused by the bypass letter. Two months later the IRS informed the taxpayer that it had determined it to be in the best interests of the agency to withdraw the bypass letter.

The taxpayers then agreed to withdraw the complaint for damages and the motion for injunctive relief, leaving only their claim for attorney fees. The District Court denied the request for attorneys fees. On appeal, the Tenth Circuit Court of Appeals essentially held that the taxpayers would have been entitled to attorneys fees had the taxpayers merely exhausted their administrative remedies prior bringing suit. In this case, the administrative remedies would have been exhausted if the taxpayers had attended one conference with the IRS Appeals Office.

The IRS often does not respond in a timely fashion (if ever) to taxpayer requests for information or meetings, yet the taxpayer or his tax attorney cannot issue a bypass letter to the IRS. For example, I as a tax attorney cannot simply send a letter to the IRS Commissioner to tell it that I will be interacting directly with the IRS Commissioner because the IRS Revenue Agent has failed to respond to my request for information or meetings. Instead, I, and my clients, have to wait months (and in some cases, years) for the IRS to respond. The IRS should not have this right if taxpayers and their appointed counsel do not have this right.

Even though the taxpayer was not awarded attorneys fees, this Aurora, Texas tax attorney probably did the right thing. He put the IRS on notice that issuing a bypass letter to the attorney was not appropriate and that this type of behavior has consequences.

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