Today’s issue of accountingTODAY included a story about a 22 year old taxpayer with 1 year of college education. After a protracted battle with the IRS, he took his battle to U.S. Tax Court — and won. All without documents. He won because the judge found his oral testimony to be credible. That’s good news for those trying to mount a successful audit defense without documents or written proof.
Many Americans are afraid of the IRS. Few things cause more anxiety and dread than receiving an IRS audit notice. But audits can be often be won. The alternative is simply “rolling over” and sending a check for whatever the IRS says is due.
Before going any further, we still recommend keeping good records. Although cases can be won simply be oral testimony, the process can drag out for years. The case behind today’s post involves the 2003 tax year. The case wasn’t resolved until the tax court’s decision last week.
Chad Hessing was a young man who wanted to enter the construction business. After a year of college, he left on a two year religious mission. When he returned he planned on working for his father’s construction company.
Dad had overextended his credit and asked to use his son’s good credit while his son was away. Dad purchased several properties in his son’s name. Although Chad was a earning a nominal salary from the business, all the profits from the business and the development of the properties were kept by the father.
Dad prepared Chad’s return and in the process, significantly underreported the income from the properties. Instead of a $1558 profit, the IRS says the properties generated net taxable income of $298,000. The IRS assessed taxes and penalties from those profits against Chad since all the paperwork showed he was the owner.
The deeds were in Chad’s name. Chad was an employee of the business and the checks all passed through his account. Slam dunk win for the IRS, right? No.
The tax court judge ruled in favor of Chad. The judge said, “Taken at face, the testimony presents a young man who acceded to his father’s request to lend his credit reputation to facilitate the acquisition of real estate to be used in his father’s construction businesses. Ultimately, we find petitioner’s and his father’s testimony to be credible and, on that basis, hold that petitioners did not have unreported gross income.”
The Hessing case is a victory for those trying to prepare a viable audit defense without records. Here the records supported the government, not the taxpayer.
Is this an isolated case? Actually, no. The IRS does lose cases to oral testimony. As noted above, however, it is still good to keep good records and documentation. Had there been some type of written agreement between Chad and his dad, this case probably would have been resolved at the auditor level and not required years of appeals.
Successful audit defense requires a good IRS attorney well versed in both tax law and trial skills. If the facts support your position, it is possible to win even though there is little hard evidence to support your position.
If you are the subject of an audit or criminal investigation, give us a call. Our IRS audit defense lawyers can help protect your rights and minimize the amounts you may have to pay. We can help with other tax matters as well such as state and local tax audit defense, penalty abatement, U.S. Tax Court appeals, and trust fund recovery penalty audits. All inquiries are protected by the attorney – client privilege and kept in strict confidence. For more information, contact attorney Brian Mahany at or by telephone at (414) 704-6731 (direct).
Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Minneapolis, Minnesota; Portland, Maine and San Francisco, California. IRS services available in all jurisdictions.
Want more information on specific income tax topics? Our Due Diligence blog has a search engine located in the upper right hand corner.
Posted by Brian Mahany, Esq