Articles Tagged with Tax return audit

In a 2019 U.S. Tax Court case, Palmolive Building Investors, LLC v. Commissioner, 152 T.C. No. 4, (2019) (Palmolive II), the Tax Court held that both penalties determined by the Revenue Agent in a tax audit and additional penalties later determined  by an Appeals Officer in the IRS Independent Office of Appeals met the written approval requirements of I.R.C. § 6751; thus making Palmolive Building Investors, LLC (Palmolive) a two-time loser. Palmolive was initially in Tax Court in 2017 (Palmolive I) over a disallowed charitable deduction for a façade easement.  As the owner of a historical building in Chicago, it had donated a façade easement to a conservation organization and took a large charitable deduction for the easement. In addition to questioning the $33,410,000 valuation of the easement, the IRS argued that the mortgages on the building limited the easement’s protection in perpetuity. The Tax Court agreed and concluded that the façade easement was not protected in perpetuity and therefore failed to qualify for a charitable deduction under I.R.C. § 170(h)(5)(A).

Following the disallowance in Palmolive I, the taxpayer returned to the Tax Court to dispute whether the penalties assessed by the IRS complied with the provisions of IRC Section 6751(b)(1).  During a tax audit, a Revenue Agent had asserted in a 30-day letter that Palmolive was responsible for a 40% penalty for a gross valuation misstatement and a 20% negligence penalty. These two penalties were approved on Form 5701 by the Revenue Agent’s supervisor. Subsequently, a 60-day letter was issued. The taxpayer took its case to the IRS Office of Appeals. The Appeals Officer assigned to the case proposed four penalties: the two assessed by the Revenue Agent and the Substantial Understatement and Substantial Valuation Misstatement penalties. The Appeals Officer’s immediate supervisor approved all of these penalties on Form 5402-c. In Tax Court, Palmolive argued that the initial determination of penalties was made by the Revenue Agent who did not assert the Substantial Understatement and Substantial Valuation Misstatement penalties; therefore the penalties asserted by the Appeals Officer were not approved as part of the first determination of the penalties.

In examining the validity of the penalty assessments, the court cited I.R.C. § 6751(b)(1) which states that penalties can only be assessed when the initial determination of such penalties are approved in writing by the immediate supervisor of the person making the determination. The court also pointed out that the Congressional motive behind enacting this provision was to make sure penalties were not used as bargaining chips. The court first noted that all penalties were approved in writing. The next issue was what defines an “initial determination” for the purposes if I.R.C. § 6751(b)(1). The court held that the initial determination is when the penalties were first communicated to the taxpayer. The court stated that the Revenue Agent’s 2008 mailing of the 30-day letter was the date of the initial determination and the Appeals Officer’s 2014 issuance of the Notice of Final Partnership Administrate Adjustment are both initial determinations. Since the IRS forms were signed by the respective supervisors prior to the time of the initial determinations, the penalties met the requirements of Section 6751(b) (1).

What Causes an IRS Tax Audit?
The IRS has several methods of selecting returns for a tax audit. First, returns are identified that may possibly contain incorrect amounts, causing a review of the return by an auditor. If everything on your return checks out, the auditor can accept your return as submitted. If the auditor suspects that something is amiss, your return can be selected for an examination.

How Returns Are Selected for Audit

The IRS can select your return for an audit if any of the following happens:

How to Resolve a Payroll Tax Dispute
Payroll tax disputes often arise when a worker is paid as an independent contractor, but the IRS or California Employment Development Department (EDD) believes that the worker is an employee. There are some differences between federal and state requirements, but a business will often have to deal with both the IRS and EDD when a worker misclassification problem arises.

The 20-Factor Test

Many employers believe that as long as they have a contract stating that a worker is an independent contractor, they are covered. This is not true. A worker is legally classified as an employee or independent contractor based on the circumstances of the employment relationship.

How Many Years Does a Tax Audit Cover
The IRS generally will look at returns filed during the last three years during a tax audit. The Assessment Statute Expiration Date (ASED) places a limit for the time period the IRS has to make a tax assessment. The ASED is three years from the day the return was filed, but there are a number of exceptions to this three-year limit.

How Failing to File Affects a Tax Audit

If you do not file a tax return, the IRS has an unlimited amount of time to assess the tax. The IRS usually does not look back more than six years, but they can if they choose to. Once you file a delinquent return, the three-year ASED begins to run.

Do I Need a Tax Lawyer If I’m Being Audited
Whether you should consult with a tax lawyer depends on the specific facts relating to your tax audit. However, there are some circumstances where it is vital that you retain the services of a tax lawyer to make strategic decisions and negotiate with the IRS or state tax authority.

Types of Tax Audits

There are many different types of tax audits. You may be facing any of the following types of tax audits: