The IRS’s budget constraints have made it more difficult for taxpayers to resolve IRS tax debt problems. This is especially true for the work that it has shifted to IRS service centers to be worked remotely. The Wang v. Commissioner, T.C. Memo. 2016-123, case provides an example of this.
Facts & Procedural History
Mr. Wang is a real estate agent for Century 21. Century 21 issued him a Form 1099-MISC, Miscellaneous Income, for the real estate commission he earned. Mr. Wang hired a paid tax return preparer. The preparer included the Form 1099-MISC income on Mr. Wang’s Schedule C, Profit and Loss from Business. Mr. Wang’s income tax return did not include a Schedule SE, Self-Employment Tax, and he did not pay self-employment tax.
The IRS sent notices to Mr. Wang proposing to adjust his account to reflect additional tax debt that was due. According to Mr. Wang, none of the notices indicated that the adjustment was for self-employment taxes. The IRS then sent Mr. Wang a notice of deficiency for the additional tax that was due. The IRS also proposed substantial understatement penalties.
Mr. Wang petitioned the U.S. Tax Court, arguing that the IRS “had sent other notices before the final notice of deficiency that did not indicate that he owed self-employment tax.” Mr. Wang explained that if the first notice had required him to pay the self-employment tax he would have done so.
From Mr. Wang’s perspective, he would no doubt say that he did everything right. He hired a tax return preparer. He apparently provided the tax return preparer all of the information needed to report his income tax liability. He probably felt that he should not be subject to a penalty.
IRS Agents Not Doing Their Job Properly
The court repeated the common refrain that it does not look behind the IRS’s notice of deficiency to examine the IRS’s motives or conduct. This is the court’s way of explaining that it focuses on the issue, not the difficulties experienced in working with the IRS.
IRS agent often cite this rule on audit when taxpayers question whether they are following the rules. This is almost always an indication that the IRS employee is not following the rules. It is also an indication that IRS management needs to be asked to review the agent’s actions. This is often not practical when the matter is being worked remotely by an IRS agent in one of the IRS service centers, which appears to be the case here.
Will The IRS Concede The Penalty?
While the court agreed with the IRS that Mr. Wang owed self-employment tax, it did not uphold the proposed penalty. The tax penalty does not apply absent negligence. The IRS attorney did not argue that Mr. Wang acted negligently. Presumably the IRS attorney did not make this argument as there was no evidence that Mr. Wang acted negligently. If this was the case, the IRS attorney could not make this argument given the attorney ethics rules. This leaves one wondering why the IRS did not simply concede the penalty. It is just a guess, but one reason is that the attorney had too many cases.
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