Federal Income Tax Update: Part II
By I. IRS Continues to Crack Down on S Corporation Disguised Wages.
In Ward & Ward Company v. Commissioner, T.C. Memo. 2021-32, the Tax Court held payments from an S corporation law firm to its owner/shareholder were wages subject to self-employment tax rather than a Subchapter S distributions of profit.
II. Court Rules Taxpayers Adequately Notified the IRS of Address Change: Direct Communication of Address Change to IRS Agent Was Sufficient Notice to IRS.
In Gregory v. Commissioner, No. 19-2229 (3d Cir. 2020), the Third Circuit held a couple’s filing of two IRS tax forms that used their new address along with direct communication of the address change to an IRS agent was sufficient notification to the IRS of the change of address. The Tax Court previously held the IRS sent a valid 90-day notice of deficiency to the couple’s last known address, and the couple had not provided the IRS with clear and concise notification of the address change.
In June 2015, Mr. and Mrs. Gregory relocated but failed to file a Form 8822, Change of Address, to inform the IRS of their new address. Based on the Fifth Circuit’s decision in Terrell, 625 F.3d 254 (5th Cir. 2010), the Third Circuit held that “in determining whether the IRS had clear and concise notice of an address change, the proper inquiry is what the IRS knew or should have known.” The court held the CPA’s communication to the IRS provided the IRS with actual notice of the address change. Also, the IRS had received two tax forms with an updated address. According to the court, these two factors were sufficient notice to the IRS, such that the IRS knew, or should have known, of the address change.
III. No Reasonable Cause Penalty Relief for Corporation’s Late Filing, Late Deposit and Late Payment Penalties.
In All Stacked Up Masonry, (Ct. Fed. C1. 2020) 126 AFTR 2d 2020-5399, the Court of Federal Claims held a corporation could not meet the “reasonable cause” relief from penalty assessments for failure to timely file returns and to timely deposit and pay payroll taxes. A taxpayer seeking relief from penalty assessments for failure to timely file, pay or deposit taxes must show its failure was not the result of carelessness, reckless indifference, or intentional failure. In numerous cases, courts have held a taxpayer’s duty to pay taxes or file returns cannot be delegated. The failure to timely file a tax return is not excused by a taxpayer’s reliance on an agent, and such reliance is not reasonable cause for late filing. Similarly, the duties to make deposits and payments also cannot be delegated.
Also, using tax preparation software does not alleviate the taxpayer’s duty to be aware of, and comply with, filing deadlines. See In re Craddock, 82 AFTR 2d 98-5439 (CA 10 1998).
IV. Spouse’s Knowledge That Taxes Were Not Paid Did Not Preclude Equitable Innocent Spouse Relief.
In Grady, T.C. Summary Opinion 2021-29, the Tax Court granted Mrs. Grady equitable innocent spouse relief even though she knew joint return taxes were not being paid by her husband when their joint returns were filed. Ms. Grady and her husband filed joint tax returns, which reflected an unpaid balance owed. However, Ms. Grady’s husband assured her he would secure an installment payment arrangement with the IRS. Based on applying equitable relief factors under Section 6015(f), the court held Ms. Grady qualified for equitable innocent spouse relief even though she knew taxes were not paid when the joint returns were filed.
V. One Examination Rule.
In Kelly vs. U.S., 128 AFTR 2d 2021-5425 (2021), the District Court discussed the limited application of the one examination rule under Section 7605(b), which provides:
No taxpayer shall be subjected to unnecessary examination or investigations, and only one inspection of a taxpayer’s books of account shall be made for each taxable year unless the taxpayer requests otherwise or unless the Secretary, after investigation, notifies the taxpayer in writing that an additional inspection is necessary.
Section 7605(b) both (a) prohibits the IRS from conducting an unnecessary examination or investigation and (b) restricts the IRS to one inspection of a taxpayer’s books unless the IRS, after investigation, notifies the taxpayer additional inspection is necessary. In the past, various courts have narrowly construed Section 7605(b) to apply only if the IRS has completed a full audit of the taxpayer’s return. See, for example, United States v. Giordano, 419 F.2d 564, 567 (8th Cir. 1969).
VI. District Court Allows the IRS to Foreclose on Jointly-Owned Property.
In U.S. v. Dase, 125 AFTR 2d 2020-1079, Mr. Dase and his sister each owned a one-half interest in property they inherited from their father. Although each owned a one-half interest, only Mr. Dase and his wife lived on the property. The sister had not lived on the property since she was a child. Mr. Dase had made all of the mortgage payments since 2004 and paid off the mortgage in July 2018. The court allowed the IRS to move forward with a foreclosure sale. The court found, notwithstanding the sister’s one-half ownership interest, a forced sale was appropriate because under Alabama law and partition rights, the sister could not have had a legally recognized expectation that the property would not be subject to forced sale. Also, the sister would be compensated for her interest, and she would not suffer any personal dislocation costs as result of the forced sale.
Keith A. Wood is an attorney with Carruthers & Roth, P.A. in Greensboro.