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IRS Audits Tax Procedure

Recent Texas Tax Case is an Example of why Taxpayers Should Hire a Tax Attorney

Taxpayers often ask me why they should hire a tax attorney. My response is always that hiring a tax attorney to review and structure your financial affairs can give you some certainty that things are done right, in many cases it can save you significant amounts of tax and later IRS problems, and it can reduce the chances that your neighbors and creditors will find out about your financial and tax affairs. The recent tax court case of Guerrero v. Commissioner highlights each of these points.

Facts & Procedural History On Guerrero’s Case

Orlando and Christina Guerrero were residents of Continental, Texas (which is not too far from my office by the way). They opted to withdraw about $174,000 dollars from their pension plan and 401(k) retirement plan and they used those funds to purchase a house in Houston, Texas and to invest in the stock market. Orlando and Christina opted to only report approximately $90,000 of these distributions as taxable income on their federal income tax return and they erroneously claimed an approximate $12,000 IRA contribution deduction.

Apparently Orlando and Christina thought that submitting a letter with their timely filed federal income tax returns asking the IRS to recomputed their tax liability would be sufficient (even then, they failed to keep a copy of the letter).

Six years after Orlando and Christina filed their tax return, they had no doubt spoken with several IRS employees, written numerous letters and sent other correspondence to the IRS, were subject to an IRS wage garnishment, had to negotiate with the IRS to release the wage garnishment, had to file an IRS penalty and interest abatement request, and they even had to file multiple tax court petitions and attend a tax court hearing.

What was the result of all of this time and energy?

A tax penalty of over $8,000 and interest on the tax of over $3,700 – – in addition to having to pay the tax that they failed to property report and timely pay and having their financial and tax information made public.

An experienced tax lawyer in Texas would probably have only charged Orlando and Christina a few hundred dollars (if even that) to structure and correctly report this type of transaction. That advice might have consisted of trying to borrow money from their retirement plans as a loan or possibly even trying to qualify part of the distributions under the “hardship” rules.

Even if Orlando and Christina had opted to not follow the tax lawyer’s advice, they would have at least known now to correctly account for the retirement distributions – – saving the approximate $12,000 dollars in IRS tax penalties and interest that they had to pay. In addition that would have saved the taxpayers from having their wages garnished and their having to come up with $40,000 to have the wage garnishment released.

Even if they opted not to follow the tax attorney’s advice on how to report the transactions, they could have hired a tax lawyer to resolve the tax matter with the IRS. The tax lawyer could have raised additional arguments as to why the tax interest should be abated. For example, the tax attorney might have been able to argue that the IRS sending the taxpayers a tax refund and a notice in 2001 constituted written advice from the IRS sufficient to qualify for mandatory interest abatement under IRC § 6404(f).

The tax attorney may have also been able to head off the future adjustments by arguing that the same tax year could not be reopened pursuant to IRC § 7605(b). If those options were not successful, the tax lawyer could have prevented the tax wage garnishment and/or negotiated more favorable terms to get the wage garnishment released. A Texas tax lawyer would probably only charge a couple of hundred dollars for this type of service.

The Takeaway 

At the end of the day Orlando and Christina spent several thousand dollars, their tax plight has been made public, and they have wasted considerable amounts of their time, the IRS’s time and the court’s time. They should have hired an experienced tax attorney.