IRS Held Liable for Fees When Agent Failed to Consult IRS Copy of Return

A failure of the IRS to consult their own copy of the tax returns filed by the taxpayer for prior years was held sufficient in Burgess v. Commissioner, TC Summary Opinion 2010-98, to grant the taxpayer a partial award of fees.  The examination in question began in April 2007 and was concluded with the issuance of a notice of deficiency in September 2007.  The taxpayer had been delinquent in filing tax returns for a number of years.

The key issue that caused the IRS a problem in this case was the question of whether the taxpayer had reported income on their 2003 and 2004 returns that was reported on Forms 1099-MISC.  The IRS took the position that the taxpayers had not reported that income on their 2003 and 2004 returns, but the taxpayers contended that all of that income had been reported on the 2003 and 2004 returns they had filed in January 2007.

Because of the late filing of those returns the agent asked the taxpayers for a copy of each return, a request that the taxpayers turned down.  At the time of the initial request for copies of the returns the January filings had not yet been processed by the IRS, but the returns were processed and accepted by the IRS by June of 2007.  The agent did not consult those returns to determine if the income had been reported, but rather in September 2007 issued the notice of deficiency asserting that the amounts had not been reported in 2003 and 2004.

The Tax Court disagreed with the IRS’s claim that the taxpayer’s refusal to provide the returns on request was fatal to a request for fees, finding that while the IRS was entitled to some reasonable time after the January 2007 filing to take the information on the returns into account, by the time the notice of deficiency was issued in September 2007 that reasonable period of time had long passed.  When the filed returns were consulted by Appeals prior to trial, it became clear the income had been reported on returns filed in January 2007.  Thus the Tax Court awarded the taxpayer costs in this matter.

However the Court noted that such reimbursable costs did not include the claimed value of the taxpayer’s time in responding to the matter.

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