Tax Litigation and Representation of Taxpayers Before the IRS and the Department of Revenue

Tax LitigationThe Tufts Law Firm fights for taxpayers who understand our country's voluntary tax system and why taxes are important. In our Potentially Abusive Tax Shelters--Detection and Analysis practice area, we are focused on coming to the aid of those who believe that they may have been victimized by what appears to be an abusive tax shelter or who may need assistance in understanding whether or not they should bear the responsibility of penalties being assessed against them for having participated in a potentially abusive tax shelter.  In our Tax Litigation & Representation Before IRS and Department of Revenue practice area, we stand ready to fight for taxpayers who have acted in good faith in trying to comply with our complex federal income tax system, many of whom are in a position to show that they reasonably relied on the advice of a tax advisor, only to later find, to their chagrin and consternation that they have been let down by this advice, or victimized by an apparently abusive tax shelter product.

Over the years, Scott Tufts has had the fortune and honor of representing many taxpayers before the IRS and before our Federal court system who have found themselves faced with assertions by the IRS that they owe more tax, if not penalties, despite having acted in good faith or with the belief that the tax law is on their side. Similarly, over the years, Mr. Tufts has represented taxpayers in disputes with the Department of Revenue, both here in Florida and previously, North Carolina.  With over 20 years of practice before the IRS and state tax authorities, Mr. Tufts brings the versatility of also having worked on a wide range of tax issues, including international, federal and state tax issues, tax-exempt organization issues (including formations, applications for exemption, and intermediate sanctions analysis), corporate governance, entity formations, mergers and acquisitions, family business planning, and extensive partnership, LLP, limited partnership, LLLP, and LLC work.  He has served as an expert witness on tax matters in state court litigation, and assisted taxpayers in all aspects of tax litigation or disputes at the administrative level.  He has worked on IRS estate tax audits, accountant and tax lawyer malpractice claims, breach of fiduciary claims, partnership tax disputes, TEFRA settlements, innocent spouse claims, offers in compromise, applications for discharge and release of federal tax lien releases, collection due process hearings, applications for private letter rulings on corporate and tax filing issues, and whistleblower claims arising out of reward agreements and/or I.R.C. § 7623.

Audits are difficult and time consuming, requiring coordination with the tax return preparers, the gathering of information, and due diligence on how information is to be presented.  The rights of the taxpayer must be respected and preserved. 
 
SECTION 7434 CLAIMS
 
The McCormack case shows how important it is for taxpayers and their practitioners to not fall prey to what appears on any 1099, and hold the IRS to "proving" that there is any substance behind it.  McCormack v. IRS, T.C.Memo 2009-239 (October, 2009).
 
While not at issue in the McCormack case, taxpayers and practitioners need to know that there is a provision in the tax law providing taxpayers with the right to be protected against the fraudulent issuance of information returns.  Under Section 7434 of the Internal Revenue Code, civil damages can be assessed if any person "willfully files a fraudulent information return with respect to payments purported to be made to any other person."  Damages recoverable are equal to the greater of $5,000 or the sum of any actual damages sustained by the taxpayer as the proximate result of the fraudulent information return, including any costs attributable to resolving the deficiencies asserted as a result of such filing, plus the costs of the action, and in the court's discretion, reasonable attorney's fees.  The statute of limitations for bringing any such action is within 6 years after the date such fraudulent information return was filed or within 1 year after the date such fraudulent information return would have been discovered by the exercise of reasonable care.  Any person bring an action under this law must provide a copy of the complaint to the IRS upon filing, and the court, when deciding the issue, is to decide the correct amount that should have been reported.

At the same time, taxpayers must be careful when considering whether or not they have a meritorious Section 7434 claim. See e.g., Cavoto v. Hayes, 634 F.3d 921 (7th Cir. 2011)(“whether or not the Form 1099-C was misleading is irrelevant, because the remedy created by I.R.C. Section 7434 is limited in scope; the types of false "information returns" for which an injured taxpayer may recover are limited to the nine listed in I.R.C. § 6724(d)(1)(A), under I.R.C. § 7434(f), and the nine identified do not include returns relating to the cancellation of indebtedness, i.e., a Form 1099-C). 

As noted recently by the United States District Court for the Southern District of Florida, in Watson v. Bank of America, 2015 U.S. Dist. LEXIS 113441 (S.D. Fla. 2015): “There are certain exceptions to this Form 1099-C filing requirement. For example, an IRS Form1099-C need not be filed by a bank or other applicable entity if the cancellation of debt relates to a guarantor of a debt or is the result of a debt cancellation in bankruptcy. See Defendants' Exhibit 5, IRS 2015 Instructions for Forms 1099-A and 1099- C.”

The court in Watson further noted the following:

“The Court notes that the mere fact that Defendants file an IRS Form 1099-A (Acquisition or Abandonment of Secured Property), or an IRS Form 1099-C (Cancellation of Debt) as to Plaintiffs does not necessarily mean that Plaintiffs will be subject to additional tax liability. Plaintiffs are free to challenge any tax deficiency that may be levied against them by the IRS. See generally Mylander v. IRS, T.C. Memo 2014-191. Moreover, although Internal Revenue Code § 61(a)(12) provides generally that income resulting from the cancellation of indebtedness constitutes gross income, an exception to this recognition rule exists for taxpayers who are insolvent. See I.R.C. § 108(a)(1)(B). Additionally, the Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence under certain circumstances. See Publication 4681 Cancelled Debts, Foreclosures, Repossessions, and Abandonments, 2014 WL 7665005 (2015). This is a complex area of the law and certain exclusions or exceptions may or may not apply to Plaintiffs. Plaintiffs may wish to consult a reputable tax professional to deal with the ramifications of Defendants' filing of a Form 1099-A or Form 1099-C with the IRS.”
 
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If you are a taxpayer who believes that you have acted in good faith, but are in need of representation in matters before the IRS or in our federal courts, please contact us.

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