Unprepared TP Goes To Court

[Dr. Caligari]

However, how can you prove you didn't make income stated on a 1099 if the company issuing the 1099 is no longer available?

You file a Petition with the Tax Court. At the trial, you take the witness stand and swear under oath that you did not receive the income shown on the 1099. If the company is not available, there is no testimony the IRS can present to contradict your testimony (the 1099 is hearsay at a trial). You win. See, e.g., Portillo v. Comm'r, 932 F.2d 1128 (5th Cir. 1991), opp. after remand, 988 F.2d 27 (5th Cir. 1993).

[Lasagna]

First off, I don't see where the person identified at the start of this thread was a TP. There is nothing in the opinion stating he made TP style arguments claiming he wasn't liable for income taxes in general. It is a question whether or not he received a NoD, if he hadn't or their was a challenge to the collection action by law he was to receive a CDP hearing. Perhaps the issue would have been resolved prior to the IRS seizing his property.

Your reasoning is akin to saying, "The primary question is not whether the police conducted a lawful investigation, whether or not they had a legal search warrant, whether or not they entrapped him, if they mishandled, destroyed, planted or compromised evidence, failed to read him his Miranda rights, its whether or not he committed fraud."

Not sure where to start. First off, it says repeatedly that he was trying to bring up tax protester-style arguments.

As for your second paragraph, it isn't even slightly the same thing. As I stated in my previous post (which you quoted), we're talking about minor procedural errors. We aren't talking about planting evidence, Steve. As much as you would like to believe otherwise, if you owe taxes, then you owe taxes. That's the end of it. It isn't a game of "can the government prove that you owe taxes." You owe them. Pissing and moaning about that fact that it's possible that a NoD could conceivably not reach the intented recipient and that recipient may be unable to demonstrate that he didn't receive it is a joke; comparing that to planting evidence or the lack of a legal search warrant is pathetic.

[Quixote]

I agree he should have done something after receiving a notice that they were getting ready to place a lien on him and petitioned tax court.

No, he should have done something when he received the incorrect 1099 from the company, which was still in business at that time. If he did not receive the 1099, then his first clue that there was a problem was the CP 2000 the IRS mailed to propose an additional assessment based on the perceived unreported income. Had he contested the 1099 at that time, the burden was on the IRS to prove the 1099 was correct. The IRS would have tried to contact the company. If it was already out of business, the IRS would, of course, receive no response. They would then either close the case "no change" or, in an event so rare I've never heard of it happening, send the case out to the field to try to use indirect methods to prove he had received the income.

If he failed to respond to the CP 2000, the IRS would send the NOD. That would allow him to petition the Tax Court. Once he petitioned, Appeals would contact him for settlement. If they couldn't agree, he would make his case to the court. If he had supplied Appeals with all the records they asked for (e.g., bank statements for the year involved), the burden might have shifted to the IRS.

[Mr. Mephistopheles]

[...I'll tell you what, I sent you a letter stating you owe me money, all I have to have is a copy of it in my files to prove I sent it. Now, Its up to you to prove you never received it and if you can't you have no right to dispute the liability in a hearing. Good luck, trying to prove the impossible.

(bolding mine)

I'm no attorney but that doesn't provide proof that you sent anything. Seriously now, why do you think the IRS uses certified or registered mail in these situations? In real terms the IRS actually goes about collection in a rather business-like fashion. In our business, if we have a someone who refuses to pay what they owe then they are sent copies of outstanding invoices and statements via common carrier with signature required for delivery. Then they can make no claim of non-receipt. If they still don't pay, or make arrangements to pay over time, then we call the collection agency who is not nearly as nice about collecting debts as we are. This is directly analogous to the procedure followed by the IRS with the exception that possible criminal proceedings prison aren't typically involved in business collections.

[SteveSy]

As for your second paragraph, it isn't even slightly the same thing. As I stated in my previous post (which you quoted), we're talking about minor procedural errors.

Procedures that are required by law to protect the citizen against unlawful or erroneous collection actions.

We aren't talking about planting evidence, Steve. As much as you would like to believe otherwise, if you owe taxes, then you owe taxes. That's the end of it. It isn't a game of "can the government prove that you owe taxes."

And its no more of a game when the government commits procedural errors handling evidence related to a criminal investigation concerning fraud. So what they mishandled evidence or said they did something that they never really did, its just procedural. If he committed fraud then he committed fraud, that's the end of it.

Pissing and moaning about that fact that it's possible that a NoD could conceivably not reach the intented recipient and that recipient may be unable to demonstrate that he didn't receive it is a joke; comparing that to planting evidence or the lack of a legal search warrant is pathetic.

No its not...its the same exact thing. If someone was denied due process because the IRS said they did something that they didn't really do then its the same thing. Its amusing how important following procedures in the law is when it concerns someone paying taxes, and how unimportant it is when it concerns the collection of taxes by the authorities.

Why is it important that someone follow procedure appealing their tax notices, if they don't owe the tax then they don't owe the tax why should it matter that they failed to follow the procedural rules concerning the appeals process?

[Famspear]

I agree he should have done something after receiving a notice that they were getting ready to place a lien on him and petitioned tax court. However, how can you prove you didn't make income stated on a 1099 if the company issuing the 1099 is no longer available? That's like proving you didn't receive a NoD in the mail. I'll tell you what, I sent you a letter, all I have to have is a copy of it in my files to prove I sent it. It up to you to prove you never received it. Good luck, trying to prove the impossible.

On 1099 issues, sometimes taxpayers win and sometimes they lose. Proof means persuasion. It's a matter of persuading the IRS that the income amount shown on the Form 1099 is wrong.

If the IRS and the taxpayer do not agree and you litigate, it's a matter of the taxpayer persuading the trier of fact in court (in U.S. Tax Court, the trier of fact is the judge) that the taxpayer is correct and the IRS is wrong.

By the way, despite the fact that the burden of proof is on the taxpayer in U.S. Tax Court, taxpayers do win from time to time.

One stupid thing some taxpayers do when they receive an erroneous Form 1099 prior to filing their own income tax returns is to simply ignore the Form 1099. Where you receive an erroneous 1099 prior to filing your return, there is a stupendously easy way to avoid problems with the IRS in most cases. I'm gonna hide the ball for a while and not say (at least yet) what that "easy way" is.

On the other hand, if you never received the income and never received the 1099 until after you filed the return, it may be a little trickier. I had this happen to me about 30 years ago. The IRS sent me a notice with my name and social security number on it, saying that the IRS had Form 1099 information to the effect that I had received $5,000+ in "miscellaneous income" (for what I believe was the 1975 tax year) from some company I had never even heard of. I took the notice to the local IRS office. The lady said, "Yeah, we see about 30 of these a week. Just write an explanation on the notice and send it back to the IRS." I wrote on the notice that I had never heard of the company and had never received any money from them.

I never received another notice from the IRS on that matter.

I suspect that in my case, the IRS had received an incomplete Form 1099 with a name similar to mine -- but without a social security number on the Form 1099 itself -- and had found me (a person with the same name in the same state) and was just "fishing" to see if I was the person who had received the income. Under my theory, the IRS just stuck my address & social security number on the notice, and sent it to me. Of course, I have no way of knowing for sure that this is what really happened. At any rate, the problem went away immediately.

For another case where a taxpayer who never received the 1099 and filed his own tax return based on his own records before he found out about the erroneous Form 1099 -- and who did suffer some grief, but ultimately won on the erroneous 1099 issue -- see Portillo v. Commissioner, 91-2 U.S. Tax Cas. (CCH) ¶50,304 (5th Cir. 1991).

Portillo [the taxpayer] argues that if this court should find that the Commissioner did in fact make a substantive determination, the ensuing notice of deficiency was nevertheless arbitrary and erroneous. In addressing this argument, we begin with the well settled principle that the government's deficiency assessment is generally afforded a presumption of correctness. See United States v. Janis, 428 U.S. 433, 441, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Helvering v. Taylor, 293 U.S. 507, 515, 55 S.Ct. 287, 290, 79 L.Ed. 623 (1935). This presumption is a procedural device that places the burden of producing evidence to rebut the presumption on the taxpayer. See Janis, 428 U.S. at 441, 96 S.Ct. at 3025; Anastasato v. Commissioner, 794 F.2d 884, 886 (3d Cir.1986). In essence, the taxpayer's burden of proof and the presumption of correctness are for the most part merely opposite sides of a single coin; they combine to require the taxpayer to prove by a preponderance of the evidence that the Commissioner's determination was erroneous.

[ . . . ]

In a Tax Court deficiency proceeding, like this one, once the taxpayer has established that the assessment is arbitrary and erroneous, the burden shifts to the government to prove the correct amount of any taxes owed. In a refund suit, on the other hand, the taxpayer bears the burden of proving both the excessiveness of the assessment and the correct amount of any refund to which he is entitled.

[ . . . ]

The presumption of correctness generally prohibits a court from looking behind the Commissioner's determination even though it may be based on hearsay or other evidence inadmissible at trial. See Clapp v. Commissioner, 875 F.2d 1396, 1402-03 (9th Cir.1989); Zuhone v. Commissioner, 883 F.2d 1317, 1326 (7th Cir.1989); Dellacroce v. Commissioner, 83 T.C. 269, 280 (1984). Justification for the presumption of correctness lies in the government's strong need to accomplish swift collection of revenues and in the need to encourage taxpayer recordkeeping. Carson, 560 F.2d at 696. The need for tax collection does not serve to excuse the government, however, from providing some factual foundation for its assessments. Id. "The tax collector's presumption of correctness has a herculean muscularity of Goliathlike reach, but we strike an Achilles' heel when we find no muscles, no tendons, no ligaments of fact." Id.

In this case we find that the notice of deficiency lacks any "ligaments of fact." As the Supreme Court has held, the presumption of correctness does not apply when the government's assessment falls within a narrow but important category of a " 'naked' assessment without any foundation whatsoever. . . ." Janis, 428 U.S. at 442, 96 S.Ct. at 3026. Several courts, including this one, have noted that a court need not give effect to the presumption of correctness in a case involving unreported income if the Commissioner cannot present some predicate evidence supporting its determination.

[ . . . ]

Therefore, before we will give the Commissioner the benefit of the presumption of correctness, he must engage in one final foray for truth in order to provide the court with some indicia that the taxpayer received unreported income. The Commissioner would merely need to attempt to substantiate the charge of unreported income by some other means, such as by showing the taxpayer's net worth, bank deposits, cash expenditures, or source and application of funds. See Weimerskirch, 596 F.2d at 362. In these types of unreported income cases, the Commissioner would not be able to choose to rely solely upon the naked assertion that the taxpayer received a certain amount of unreported income for the tax period in question.

In this case the Commissioner's determination that Portillo had received unreported income of $24,505 from Navarro was arbitrary. The Commissioner's determination was based solely on a Form 1099 Navarro sent to the I.R.S. indicating that he paid Portillo $24,505 more than Portillo had reported on his return. The Commissioner merely matched Navarro's Form 1099 with Portillo's Form 1040 and arbitrarily decided to attribute veracity to Navarro and assume that Portillo's Form 1040 was false. Navarro, however, was not able to document $21,380 of cash payments he allegedly made to Portillo. In a situation like this, the Commissioner had some duty to investigate Navarro's bald assertion of payment and determine if Navarro's position was supported by his books, receipts, or other records.

In addition, the Commissioner failed to substantiate by any other means, such as analyzing Portillo's cash expenditures or his source and application of funds, his charge that Portillo received unreported income. Instead, the Commissioner merely chose to rely upon the presumption of correctness. We hold in situations like this involving unreported income, the presumption of correctness does not apply to the notice of deficiency.

In summary, we find that the Tax Court had jurisdiction to consider this case because the Commissioner did issue a valid deficiency notice. However, since the Commissioner failed to substantiate his charge that Portillo received cash payments from Navarro, the deficiency determination is clearly arbitrary and erroneous. Therefore, the judgment below regarding unreported income must be reversed.

(bolding added).

Difficult for the taxpayer to win.

Not impossible.

[Dr. Caligari]

I cited Portillo up above on this thread. Also the later opinion in the case, where Portillo was awarded his attorneys' fees for fighting the IRS.

[Famspear]

Dear SteveSy: Notice that in the Portillo case, the company issuing the erroneous 1099 was still around at the time the dispute was ongoing.

In some other case, if the company issuing an erroneous Form 1099 does not even exist any more, that just might create even more of a problem for the Internal Revenue Service than the IRS had in the Portillo case - especially in the Fifth Circuit (Texas, Louisiana, Mississippi), where the Portillo case is presumably still binding precedent (I haven't researched subsequent cases, but I don't recall seeing anything that would water down the Portillo decision).

[Famspear]

I cited Portillo up above on this thread. Also the later opinion in the case, where Portillo was awarded his attorneys' fees for fighting the IRS.

I gotta read these threads more carefully.

[Famspear]

Post-script to SteveSy: For what it's worth, regarding the incident that I had with the IRS back in the 1970s, with the Form 1099 information on income I had never received from a company I had never heard of -- this was before I ever became an accountant and attorney. At that time, I had no special training or expertise to work on that problem, and everything came out fine, with no real time or money lost by me.

In Mr. Portillo's case, of course, it took a long time and a lot of hassle.

Everyone has a different story.

[SteveSy]

However, how can you prove you didn't make income stated on a 1099 if the company issuing the 1099 is no longer available?

You file a Petition with the Tax Court. At the trial, you take the witness stand and swear under oath that you did not receive the income shown on the 1099. If the company is not available, there is no testimony the IRS can present to contradict your testimony (the 1099 is hearsay at a trial). You win. See, e.g., Portillo v. Comm'r, 932 F.2d 1128 (5th Cir. 1991), opp. after remand, 988 F.2d 27 (5th Cir. 1993).

At least Famspear was reasonable and admitted it could be, not that it will be for certain, very difficult to deal with an invalid 1099. A 1099 is presumptive proof of the receipt of income, its up to you to disprove you never made it. Simply taking an oath saying you didn't make it is like saying "I didn't make the money prove i did without using the 1099 IRS!" That will go far....

Come on Dr. you know as well as I do not all or even most cases end up like Portillo. I'm sure Portillo spent far more than $5000 dollars to resolve his issue, whether it was time, actual cost or both.

If need be I will take the time to find several cases showing its not as easy as you claim.

[Famspear]

At least Famspear was reasonable and admitted it could be, not that it will be for certain, very difficult to deal with an invalid 1099. A 1099 is presumptive proof of the receipt of income, its up to you to disprove you never made it. Simply taking an oath saying you didn't make it is like saying "I didn't make the money prove i did without using the 1099 IRS!" That will go far....

Actually, it's not the Form 1099 amount per se that is "presumptive proof." More specifically, the IRS determination of the deficiency - the amount of the proposed IRS assessment - is what is presumed to be correct. That's splitting hairs -- but I do that to point out that IRS personnel do not necessarily automatically take the 1099 as being "correct" and the taxpayer as being "incorrect." Indeed, I have been preparing federal income tax returns professionally for well over 20 years, and I have never personally seen the IRS contest an assertion by one of my taxpayers that a Form 1099 amount was incorrect. (Granted, the subject has probably come up less than a dozen times in over 20 years.)

And what I am saying is that it can be difficult in a case where the IRS decides to believe the erroneous Form 1099. The point is, in real life that does not seem to happen very often. My experience with IRS personnel over the years leads me to conclude that the vast majority of IRS people are honest; most are not trying to misuse the legal presumption of the correctness of the proposed assessment to "screw" taxpayers by arbitrarily accepting erroneous Form 1099 amounts and arbitrarily rejecting taxpayer's representations.

[Quixote]

Simply taking an oath saying you didn't make it is like saying "I didn't make the money prove i did without using the 1099 IRS!" That will go far....

You're right. It will. A careful reading* of IRM 4.19.3.20.7, which concerns the automated underreporter program, shows that IRS has worked the Portillo decision into its procedures. Telling the IRS "I did not make that money" will go very far.

Paragraph 19 (C):

If itcannot be determined that the income belongs to the taxpayer OR if the payer refuses to furnish the necessary information, AND the taxpayer disclaims knowledge of or denies receipt of the income ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . If the result is a no change closure, use normal no change PCs, not those designated for Stolen Identity.

Despite the redaction, it is clear from the second sentence that a no change result is a possibility.

[SteveSy]

And what I am saying is that it can be difficult in a case where the IRS decides to believe the erroneous Form 1099. The point is, in real life that does not seem to happen very often. My experience with IRS personnel over the years leads me to conclude that the vast majority of IRS people are honest; most are not trying to misuse the legal presumption of the correctness of the proposed assessment to "screw" taxpayers by arbitrarily accepting erroneous Form 1099 amounts and arbitrarily rejecting taxpayer's representations.

I don't think IRS personnel are out to screw taxpayers, for what purpose would they do that? I think they're like most civil servants they've heard the same sob story so many times you're just another name in a long list of names. They wouldn't lose any sleep if you had to pay more taxes than you owed, or experienced financial hardship because a company misreported your income. After all there are far, far, far more uncontested 1099's than there are contested. They have little incentive to believe you or put forth the effort help you resolve the issue, you're probably either trying to get out of paying taxes or you're mistaken, you made the money. Prove you didn't.

[Famspear]

I don't think IRS personnel are out to screw taxpayers, for what purpose would they do that? I think they're like most civil servants they've heard the same sob story so many times you're just another name in a long list of names. They wouldn't lose any sleep if you had to pay more taxes than you owed, or experienced financial hardship because a company misreported your income. After all there are far, far, far more uncontested 1099's than there are contested. They have little incentive to believe you or put forth the effort help you resolve the issue, you're probably either trying to get out of paying taxes or you're mistaken, you made the money. Prove you didn't.

(bolding added).

Steve, I am shocked, just shocked, to find you expressing this kind of cynical attitude about IRS employees!

[Famspear]

Steve, earlier you wrote to Dr. Caligari as follows:

Come on Dr. [Caligari,] you know as well as I do not all or even most cases end up like Portillo. I'm sure Portillo spent far more than $5000 dollars to resolve his issue, whether it was time, actual cost or both.

If need be I will take the time to find several cases showing its not as easy as you claim.

(bolding added).

No, Steve. You were wrong. Caligari was responding to something you said. Here’s what you said:

However, how can you [a taxpayer] prove you didn't make income stated on a 1099 if the company issuing the 1099 is no longer available?

You were talking about a specific situation – one where the payor company is no longer available and the IRS chooses to believe the Form 1099 instead of believing the taxpayer.

Caligari then responded:

You file a Petition with the Tax Court. At the trial, you take the witness stand and swear under oath that you did not receive the income shown on the 1099. If the company is not available, there is no testimony the IRS can present to contradict your testimony (the 1099 is hearsay at a trial). You win. See, e.g., Portillo v. Comm'r, 932 F.2d 1128 (5th Cir. 1991), opp. after remand, 988 F.2d 27 (5th Cir. 1993).

Caligari was talking about what YOU were talking about: cases where the payor is no longer available and yet the IRS believes the payor’s 1099 AND rejects the taxpayer’s position.

You were wrong. If the IRS proposes a “naked assessment” – i.e., one in which ALL THE IRS HAS is a Form 1099, with no records from the payor company issuing the 1099 and no IRS analysis of the taxpayer’s own records, receipts, net worth, etc., etc., as described by the Court of Appeals in Portillo, the IRS will almost surely lose. In the Portillo case, the payor was still available and yet could not come up with the documentation to support the 1099 it had issued. The IRS lost. If the payor is not even available, that’s going to make the IRS’s job even harder, not easier.

And Steve, your threat to “take the time to find several cases showing its [sic] not as easy as you [Caligari] claim” is an empty one. How many cases are you going to find where the IRS asserts that a 1099 is correct and the taxpayer disagrees AND the payor is no longer available? Five? Ten? Fifty? Where are you going to find this data?

You are in no position to rebut Caligari’s statement. Indeed, examples of five, or ten, or fifty actual cases supporting your argument would not be enough to rebut Caligari’s response. Why?

The kinds of records you would need are probably not available to you. You probably cannot “prove” your argument by searching the public database of published court opinions. And I doubt that the kind of data you would need is analyzed by the IRS in its published annual reports.

Probably, the only people who can make this kind of evaluation are the insiders: people who either work in the IRS or who have prepared tons of tax returns for a living over many years. In other words: people who have access to enough data to understand what percentage of the cases are “IRS abusive.” If you are not an experienced tax practitioner, you probably do not have access to sufficient data or “institutional memory” to make a convincing argument. Even if you somehow were to find 5 or 10 or 50 anecdotal examples of IRS abuse somewhere, you could not rationally conclude that somehow you are right and Caligari is wrong.

[SteveSy]

And Steve, your threat to “take the time to find several cases showing its [sic] not as easy as you [Caligari] claim” is an empty one. How many cases are you going to find where the IRS asserts that a 1099 is correct and the taxpayer disagrees AND the payor is no longer available? Five? Ten? Fifty? Where are you going to find this data?

I was talking about 1099's or W2's in general, doesn't have to be where the company no longer exists. I've seen so many court cases where the court has given the IRS such wide latitude on the presumption of correctness or just flat out allowing them to ignore the regs and their documented internal procedure (IRM) on a myriad of issues, NoD, Assessments etc., its almost impossible to win if the court thinks you're likely to owe the tax.

Anyway, I'll take some time and find some cases. It shouldn't be hard to find a few where the court put the onus on the taxpayer to prove he didn't make the income and all the IRS had was a 1099 or W2. I'll make sure there is no mention in the case of the IRS getting supporting documentation, other than the 1099 or W2, from the issuing company. I've let all my case subscriptions lapse because I wasn't posting here but I'll look around.

[Nikki]

While you're at it, make sure you look for cases where there was a cooperative taxpayer who followed all the rules, thereby putting the burden of proof on the Commissioner.

[SteveSy]

While you're at it, make sure you look for cases where there was a cooperative taxpayer who followed all the rules, thereby putting the burden of proof on the Commissioner.

Heh, I've looked at a lot, and I mean a lot, of cases. Unfortunately not many, probably in the less than one percentile category, "wins" for people challenging the IRS. Of course I mainly look at district and circuit court cases, it may be different in tax court but I doubt it.

[Mr. Mephistopheles]

While you're at it, make sure you look for cases where there was a cooperative taxpayer who followed all the rules, thereby putting the burden of proof on the Commissioner.

Heh, I've looked at a lot, and I mean a lot, of cases. Unfortunately not many, probably in the less than one percentile category, "wins" for people challenging the IRS. Of course I mainly look at district and circuit court cases, it may be different in tax court but I doubt it.

Which is most likely still an insignificant fraction of the number of cases that have been examined by the legal professionals here on Quatloos. Seriously Stevie it's pretty lame. It's like me saying that I've read a LOT, I mean a LOT about aircraft systems and operation and know as much about aircraft as pilots with 25 years of experience.