Document Summaries for the week of July 25, 2022

INDIVIDUALS

Lawyer's illness in 2019 did not excuse late filings of 2011–2013 tax returns

The Tax Court held that a taxpayer, who was a partner at a law firm until an illness in 2019 required him to be placed on involuntary inactive status, was liable for penalties for the late filings of his 2011–2013 tax returns. Although sympathetic to the taxpayer's condition, the court said that the taxpayer failed to introduce any evidence showing how his illness in 2019 could be reasonable cause for filing his 2011, 2012, and 2013 returns late. Elstein, T.C. Summ. 2022-14 (7/28/22).

Taxpayer failed to meet business expense substantiation requirements

The Tax Court held that a former lawyer, who had been declared a vexatious litigant by other courts and who reported his principal business in 2016 as providing consulting, teaching, and technical services, was not entitled to deduct on Schedule C, Profit or Loss From Business (Sole Proprietorship), of his 2016 tax return (1) other expenses of $12,522, and (2) car and truck expenses of $16,201. The court agreed with the IRS that the taxpayer failed to meet the strict substantiation requirements under Sec. 274(d) with respect to his vehicle expenses and also failed to establish that he engaged in any business activities for profit during 2016. Kinney, T.C. Memo. 2022-81 (7/28/22).

Taxpayer found liable for penalties for failing to report trust income

The Tax Court agreed with the IRS that a taxpayer (1) failed to report dividend income from a trust in the amounts of $3,066 and $1,667 on her 2016 and 2017 income tax returns, and (2) failed to report capital gain income from the same trust of $71,960 and $83,518 on her 2016 and 2017 income tax returns, respectively. As a result, the court also agreed with the IRS that the taxpayer was liable for Sec. 6651(a)(1) additions to tax for failure to timely file income tax returns for the 2016 and 2017 tax years and was liable for Sec. 6654(a) additions to tax for underpayments of estimated tax for the 2016 and 2017 tax years. Hall, T.C. Memo. 2022-82 (7/28/22).

IRS PROCEDURE

Some balance-due notices were issued in error

The IRS announced on its website that some taxpayers who filed tax returns for 2021 using the married-filing-jointly filing status may receive or have already received an IRS notice CP14 erroneously demanding a remaining tax balance owed or an incorrect amount owed. IRS Statement on Balance Due Notices (CP-14) (7/27/22) (see related news story).

IRS notices of third-party contacts must list tax periods involved

In answer to a question about a notice involving IRS third-party contacts, the IRS Office of Chief Counsel advised that, because of the flush language in Sec. 7602(c), notices of third-party contacts must contain the tax periods involved. As a result, in the situation asked about, the Chief Counsel’s Office stated that an IRS revenue agent should issue a new Letter 3164, Third-Party Contact, listing the two periods at issue if the revenue agent is going to pursue summons enforcement in the case. CCA 202230008 (7/29/22).