Could You Beat the IRS in Tax Court?

I started receiving mail this weekend with those ominous words on the outside of the envelope… “Important Tax Documents Enclosed.”

Which means, it’s almost tax season again.

And here at the “Slap in the Face” Award, we’ll be looking at the funnier side of taxes, taxpayers and the IRS – as we always do – because, contrary to what most retired people think, we do pay taxes in retirement, too!

[ad#Google Adsense 336×280-IA]This week’s slap come compliments of Nina Olson, the National Taxpayer Advocate who represents taxpayers before the IRS and Congress.

Advocate? That’s an interesting choice of words. Anyway…

Her report lists some entertaining and informative cases of taxpayer wins and losses over the past year.

In the 12 months that ended on May 31, the IRS won about 75% of all arguments in Tax Court – outright. Taxpayers won 10% outright, and the rest were split decisions.

The little guy won one-third of all the cases involving business expense write-offs and 20% of cases involving penalties for negligence and underpayment. But that’s about it.

In the cases we – the taxpayers – won, it was because we had good records and clear, logical arguments, according to Olson.

And of the 60% of cases where taxpayers represented themselves in Tax Court, they won 17% of the time. The folks who hired a lawyer won 22% of the time.

I’m not sure the extra expense justifies an increase of just 5%.

One of the entertaining losing cases involved a couple with their own business (and two kids under the age of 12) that presented receipts from vendors like Macy’s, Toys “R” Us and Hair Cuttery as “business” expenses.

Unfortunately, that was not funny to the judge!

And on that note, here’s something I didn’t know before…

If you present a frivolous argument to the IRS, you can be hit with a fine of up to $25,000 in addition to your existing tax bill, interest and penalty charges.

And the best frivolous argument this past year came from a man who argued that he didn’t owe the IRS $3,840 in taxes and penalties because he was a “citizen of California” rather than a U.S. citizen. And he had his own definition of what constitutes income…

When the judge asked him to explain it, he said, “It’s a cat with a pink ribbon.”

Well, the judge wasn’t impressed and hit him with an additional $3,500 fine.

The law says this argument qualifies as “frivolous”… I say it was delusional.

Oh, and if you think you’ll get a break from the tax folks because you’re retired and living on a fixed income, forget about it!

Their attitude toward the boomers? We should know better at our age.

Pay your taxes, or at least keep really good, convincing records for your legitimate expenses… not for haircuts, toys or cats with ribbons.

— Steve McDonald

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Source: Wealthy Retirement