Multiple Question Based on Taxation

73

Requirement

Question 1

Although she left her job in Nov of Year 1, Patrice was entitled to a year-end bonus. On Dec 31, her former boss called her to let her know the check was available. Patrice
did not pick up the check until Jan 3, Year 2. Her W2 for Year 1 did not include the bonus, so Patrice did not include it in gross income for her Year 1 tax year which she filed the return on April 15, Year 2. In Year 2, she received a @2 in the amount of the bonus, but Patrice decided that she should have included it in her Year 1 gross income because she was “constructively received” it in Year 1. Therefore she did not include it in her Year 2 return, which she filed on April 15, Year 3. On May 1, Year 5, the IRS mailed Patrice a NOD for her Year 2 tax year based on the unreported bonus. Patrice petitioned the Tax Court, and on June 1, Year 6, the Tax Court’s decision in Patrice’s favor became final. The decision was made on the ground that the bonus should have been income for Patrice’s Year 1 tax year. The statute of limitations on assessment for Year 1 expired in Year 5. 
A. What record does the IRS have?
B. If the IRS has an option under Part A, what action would it have to take, and by what deadline?

Answer:

Statute of limitation is the time limit that IRS possesses to solve any of the issues related to tax accounts of taxpayers. Unreported incomes are those incomes which are not included in the gross income in return filed. Here, Patrice did not include the bonus income in her year 1 as well as year 2 return as she thought in year 1 the income was not to be included because in W2 the income was not shown. In year 2, the income was not included because Patrice thought the income was to be included in year 1 return. Patrice has unreported bonus as the bonus was not included in any of the years either year 1 or 2. 

• A.    The IRS has here in the given case the record named W2. W2 is the document which is also filed by the employers with the IRS and IRS compares the document which the return of income filed. Generally, the statute of limitation for unreported income is 3 years from the date the return was filed or the due date for filling return, whichever is later. Hence, in the given case the statute of limitation has expired and the record that IRS has is W2 but as in W2 form also the income is not reported it can be said that IRS does not have any relevant records for assessing bonus.

• B.    If the IRS has option under part A, IRS has three years for assessing the unreported income. However, if the intention of the taxpayer to evade tax was fraudulent, the IRS has no statute of limitation and assessment can be made any time. If the unreported income is significant that is more than 25% of the gross income, statute of limitation is six years of statute of limitation. This way, IRS can assess the unreported income based on the records and intentions of the taxpayer.

Question 2

Gail filed her Year 1 return on April 15, Year 2. On march 3, year 5, the IRS asked Gail to agree to extend the SOL. On March 5, year 5, Gail signed a form 872 specifying an extension of the statute until April 15, year 6. Subsequently, Gail signed additional Forms 872, on April 1, Year 6 and May 1, Year 7, each providing an additional 1 year extension. When is the last day that the IRS and send Gail a NOD as a prerequisite to assessing tax with respect to Gail’s year 1 tax year?

Answer:

There are different forms that are to be agreed to by the taxpayer for allowing the IRS with some more time for assessment of the case of the taxpayer signing the form. Form 872 is the general form which is used for the purpose of deciding target tax assessment date on either one tax return or returns of multiple years. Simply, a specific date is decided mutually to complete the assessment procedure by IRS. The date agreed upon may also be a date after the statute of limitation. 
This way, there are other forms which are 872-A and 872-T. Every form is for different purposes.
Here, we are given that Gail filed the year 1 return on 15th April, year 2. On 3rd March of year 5, IRS asked Gail for extending the SOL. On 5th March of year 5, Gail signed the form for extending the date of SOL till 15th April of year 6. After that, Gail signed other two forms providing the extension of 1 more year on 1st April and 1st May of year 6 and 7 respectively. 
In the given case, the date of completing the assessment to IRS would be 15th April of year 7 because after providing extension till 15th April of year, another extension was given on 1st April of year 6 till 15th April of year 7. The extension given on 1st May of year 7 would not be considered because the extension was given after completion of the second extension till 15th April of year 7.

Question 3

Sabrina Brown, who is single, has just received a NOD from the IRS, and she is not sure how to respond to it. Sabrina would like to know the deadline, if any, for petitioning the US Tax Court, and the likelihood that she will be able to convince the court to dismiss the case on procedural grounds. Following are alternative scenarios:
A. The NOD was erroneously mailed to Sabrina’s mother’s house in another state. Sabrina has not lived there for several years and has used her own address on her tax returns since she moved out of her mother’s house. Her mother received the notice, which was dated and postmarked Jan 3 of the year, on Jan 7. On Feb 1, her mother put the notice in the mail, and, Sabrina received it on Feb 4.
B. The notice was mailed to Sabrina where she currently resides, but instead of reflecting her correct apt number, 204, the address listed is 403. The error resulted in a delivery delay of several days so that although the notice was dated Jan 3, Sabrina received it on Jan 12.
C. The notice was mailed to Sabrina’s current residence and her address and SSN were correct. She received the notice, which was mailed on Jan 3, on Jan 6. However, the notice was addressed to “Mr. and Mrs. Gerald and Sabrina Brown” although Sabrina has never been married and does not even know a Gerald Brown. The notice reflects a deficiency of 20k, based on unreported income from a job as a financial consultant. Sabrina informs you that she is an electrical engineer, with no background or skill in finance. She worked full-time for a single employer during the year in question, as reflected in the sole W-2 she attached to her tax return, and did no consulting work.

Answer:

• A.  A petition is to be filled within 90 days after the date the notice of deficiency or notice of determination is mailed to the taxpayer. That date of NOD is usually stamped on the notice. Moreover, the last date for filling petition may also be written in the notice. If the notice is sent outside US the days within which petition to be filled are 150 days instead of 90 days. Here, notice to Sabrina was mailed on 3rd Jan and it was received by her mother on 7th Jan. Hence, other details are not relevant for determining the date of filling petition. If the date of filling petition is given in the notice then that date would be the date up to which the petition can be filled. If the date of petition is not specified in the notice then it can be filled within 90 days form 3rd Jan.

• B.  In the second case also, the time limit for filling petition to US tax court would be within 90 days from the date the NOD was mailed to the taxpayer. Hence, the deadline would be within 90 days from the date of mailing NOD which is 3rd Jan.

• C.  Here, Sabrina would not be liable for the NOD issued to hr as there are clear records available which indicates that there is no liability on the part of Sabrina and the records were clear on the part of liability of Sabrina from form W2. Hence, there would be no liability on the part of Sabrina for the NOD issued to her.

Question 4

On May 31, Year 3, the IRS mailed Gloria a notice of deficiency with respect to her Year 1 tax year. Gloria had filed her Year 1 return on April 1, Year 2. The IRS erroneously did not send the notice of deficiency to Gloria's last know address. It was ultimately forwarded to Gloria, and she received it on August 15, Year 3. Subsequently, an IRS employee who was working on Gloria's case realized that the notice had not been sent to Gloria's last know address. April 20, Year4, the IRS mailed a duplicate copy of the notice to Gloria's last know address. She received it on April 25, Year 4. On June 1, Year 4. Gloria petitioned the tax Court. In her petition, Gloria moved to dismiss the case for lack of jurisdiction on the ground that no notice of deficiency was mailed to her within the time period required by the statute of limitations on assessment.
A. Is the Year 3 notice of deficiency invalid?
B. Would your answer to Part A differ if Gloria had petitioned the tax Court on August 20, Year 3 instead of June 1, Year 4?
C. Assume that the Year 3 notice of deficiency was invalid.
i. Is the notice of deficiency that the IRS mailed in Year 4 invalid as a "second notice" under Code section 6212 (c)?
ii. Assume that the notice of deficiency mailed to Gloria in Year 4 is not a prohibited second notice and does not suffer from any other infirmities. Under what circumstances, if any, would the notice be timely?

Answer:

The IRS is given a right to issue second notice in case first notice is an erroneous one. However, second notice should be issued before any petition is filed by the taxpayer. The issuance of second notice before expiration of the time period of filling petition gives the taxpayer a right to file petition against any of the notices issued. 

• A.    The second notice should be issued before the time limit for filling petition which is 90 or 150 days of mailing the NOD to the taxpayer. Here, the notice was mailed on 31st May, year. If we consider maximum time limit for filling petition, the date would be around 31st October, year 3. The second notice has been issued on 20th April, year 4. The notice should have been issued till 31st October of year 3 and it is issued on 20th April of year 4. Hence, in this case the NOD is invalid.

• B.    The answer in the given case would have been similar as part A because whether petition is filed or not by the taxpayer, the notice was completely invalid as it was issued after the deadline of filling petition to the court.

• C. i.    Assuming that the notice of year 3 was invalid, the second notice sent in year 4 would definitely be invalid under section 6212(c).

• ii.  If it is assumed that the notice sent Gloria in year 4 is not a prohibited second notice and it does not even contain any infirmities, the notice would be timely only if the year 3 notice is a valid notice and second notice is issued within the time limit prescribed under US tax laws.

Question 5

Tara Green asks your assistance in claiming a refund from the IRS. After timely filing her Year 1 Form 1040 by mail in March 1999, she realized that she had forgotten to deduct $6,000 in home mortgage interest, real property taxes of $2,000, and state income taxes of $4,000 she had paid in Year 1. (She had not itemized her deductions on her original return, but instead took the standard deduction. She also took her personal exemption of 1). She has no other deductions or income items. Tara is single, has no dependents, and had adjusted gross income of $60,000 in Year 1, consisting entirely of salary. $10,000 had been withheld from Tara’s wages for federal income tax purposes, and she had paid the remainder of her tax liability with her return. She still resides at 125 Main St., Wayne, NJ 07470, where she lived when she filed the return in question. Her Social Security number is 222-33-4444 and her telephone number is (973) 264-9872. She did not and does not wish to make a Presidential Election Campaign Fund designation. Assume that Tara’s refund claim will be timely; draft the claim for her.

Answer:

Date: 17th February, 2016
Internal Revenue Service
Street Address
City, State, Zip Code
Tara Green
SSN: 222-33-4444
125 Main St.
Wayne
NJ 07470
Tax Period Ending: Year 1
To whom it may concern:
I filled my return of year 1 and filled form number 1040 by mail in March 1999. After filling written, I realised that I forgot to deduct 6,000$ in home mortgage interest, real property taxes of 2,000$ and state income taxes of 4,000$. I took the standards deduction but I did not itemized the deduction in my original return. I have adjusted gross income of 60,000$ in year 1 which entirely consist of salary. 10,000$ were paid for federal income tax purposes and remaining tax liability is paid by me with the return. I request you to adjust the records accordingly and grant me refund of the excess taxes paid by me. I can also be reached by phone at (973) 264-9872. Many thanks for paying your attention to this matter. 
Sincerely, 
Tara Green

References

• Geeksonfinance.com, n.d., Statutes of Limitations on Tax Records, [Online], Available at: http://www.geeksonfinance.com/info_12077498_statutes-limitations-tax-records.html [Accessed date: February 16, 2016]

• Journal ofaccountancy.com, February.2015., Gross Income Omissions and the 6-year Tax Assessment Period, [Online], Available at: http://www.journalofaccountancy.com/issues/2015/feb/gross-income-omissions-assessment-period.html [Accessed date: February 16, 2016]

• Ehow.com, n.d., IRS Statute of Limitations on Unreported Income, [Online], Available at: http://www.ehow.com/info_7755290_irs-statute-limitations-unreported-income.html [Accessed date: February 16, 2016]

• Opposingviews.com, n.d., IRS Statute of Limitations on Unreported Income, [Online], Available at: http://people.opposingviews.com/irs-statute-limitations-unreported-income-5867.html [Accessed date: February 16, 2016]

• Findlaw.com, n.d., What is the IRS statute of Limitations or Deadline for Action on Back Taxes?, [Online], Available at: http://tax.findlaw.com/tax-problems-audits/what-is-the-irs-statute-of-limitations-or-deadline-for-action-on-.html [Accessed date: February 16, 2016]

• Ustaxcourt.gov, n.d., When Should I File My Petition?, [Online], Available at: https://www.ustaxcourt.gov/taxpayer_info_start.htm#START14 [Accessed date: February 16, 2016]

• Irs.gov, n.d., Should a New Notice of Deficiency Be Issued?, [Online], Available at: https://www.irs.gov/irm/part4/irm_04-008-009-cont03.html [Accessed date: February 16, 2016]