Several Things You Should Avoid With Your Taxes: Designated Orders 2/18/19 to 2/22/19

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Designated Orders:  Several Things You Should Avoid With Your Taxes (2/18/19 to 2/22/19)

While there was a flood of designated orders immediately after the government shutdown ended, that was the height of the wave.  This week is at low tide for the number of designated orders because there are only four orders to discuss.  While there aren’t too many items of substance to discuss, each order has some interesting points on what to avoid with the IRS or Tax Court.


There’s a Limit on Tax Benefits for Education

Docket No. 2805-18S, Tanisha Laquel Saunders v. C.I.R., available here.

In the past, one of my jobs involved taking questions from tax professionals, doing research, and providing written responses concerning their tax situation.  During that time, I answered several questions concerning tax situations for students.  I grew familiar with IRS Publication 970, Tax Benefits for Education, and used that as a starting point to answer several questions for what would be allowed on particular tax returns.

If you were to read through IRS Publication 970, a theme that you would find is that the IRS does not allow an individual to use the same qualified education expenses to claim multiple tax benefits.

That is the background for the case in question, which comes to us by a bench opinion from Judge Carluzzo.  The petitioner was a full-time student at Los Angeles Pierce College.  She received a Pell Grant to pay tuition and related educational expenses, with the remainder going to personal and living expenses.  The petitioner chose to exclude from her income the portion of the Pell Grant used for qualified education expenses.  This is a correct tax treatment of a Pell Grant with regard to qualified education expenses.

Where the petitioner went wrong is that she also decided to use those expenses for an education credit.  The bench opinion only refers to the education credits allowed under Internal Revenue Code (IRC) section 25A.  While the type of credit is not named, it was likely an American Opportunity Credit since the petitioner claimed both a nonrefundable and a refundable portion of the credit.

The judge does “congratulate and commend petitioner on pursuing her formal education”, but that does not prevent him from applying the law to the case.  The judge sustains the IRS disallowance of the section 25A education credit, deciding in favor of respondent.

Takeaway:  You are not allowed to double-dip when it comes to education-related tax benefits on the same expenses.  Perhaps the petitioner could have used better tax planning by making the Pell Grant full taxable and then taking an American Opportunity Credit.  Where she got caught by the IRS was where she excluded the Pell Grant from income, but also claimed the education credit.  A taxpayer just cannot get two or more tax benefits from the same education expenses.


The Petitioner’s Representative

Docket No. 14578-18SL, Barry J. Smith v. C.I.R., available here.

I don’t have too much to say on this case.  It is another example of a petitioner with a Collection Due Process (CDP) case who did not do much before the IRS filed a motion for summary judgment, leading to a decision for the IRS.

What caught my eye was a paragraph on the petitioner’s history.  It stated that the petitioner’s representative asked for additional time to provide financial materials on the date that they were due (and got an extension).  Next, when the settlement officer attempted to contact the representative for the scheduled telephone conference, there was no answer.  The settlement officer left a message, stating no information had been received and a notice of determination would be issued sustaining the proposed levy.  Later that day, the representative called back, explaining that his paralegal had been out.  The representative indicated he planned to speak with petitioner the next day and hoped promptly to get back to the settlement officer with the required information.  Nothing further was heard from the petitioner or his representative and no materials for consideration were submitted.

Takeaway:  While we do not have the full story, my read on the situation is that the petitioner’s representative might also have been at fault.  Whether that is the case or not, it is best if a petitioner’s representative helps the petitioner instead of adding to the case history of non-responsiveness to the IRS.


How Not to Deal With Tax Fraud

Docket No. 1395-16 L, Harjit Bhambra v. C.I.R., available here.

The IRS issued a Collection Due Process determination to sustain the filing of a notice of federal tax lien for restitution-based assessments and fraud penalties related to tax years 2003 and 2004.  Petitioner appealed to the Tax Court. The Tax Court granted an IRS motion for summary judgment with respect to the restitution so what was at issue in this order was petitioner’s liability for the fraud penalties (the petitioner was able to have a CDP hearing regarding his liability because the liability was not subject to deficiency procedures).  The Court issued an order remanding the case to IRS Appeals for a supplemental hearing where the petitioner could raise a challenge to the determination of the fraud penalties.

The Appeals Officer then sent a letter scheduling a telephone conference and the petitioner replied with his own letter.  That letter demanded an in-person hearing that he would record, plus he also made inflammatory statements, such as “that the IRS agents are well qualified liars that cannot be trusted for any reason” and the District Court judge in his criminal trial is a “reckless buffoon”.  Again, he submitted no evidence against the civil fraud penalties.  After a telephone conference, the petitioner again did not submit anything to refute the penalties.

In the IRS supplemental notice of determination, Appeals found the Examiner was correct to assert IRC section 6663 penalties because all or part of the underpayment was due to fraud, the petitioner was criminally convicted per IRC section 7206(1) and 7206(2) for making a false tax return, and he presented no new evidence why he is not liable for the penalties.

After receiving the parties’ status reports and the supplemental notice of determination, the Tax Court tried to reach out to the parties to see how to proceed.  They were unsuccessful in December 2018, which was followed by the government shutdown, with no success reaching the petitioner at the beginning of February 2019.  On February 11, petitioner did not answer his phone at the agreed-upon time.  In response to attempts to reschedule the call on February 13, petitioner responded:  “I’m working on February 13, 2019, and vacationing from 2-14-19 to March 8, 2019, please send me in writing whatever the [judge] has for this case.”

In this order, the judge’s response is:  “We will take petitioner up on his invitation.  We assume that, in asking for us to send whatever we have in writing, petitioner seeks no further hearing and has no argument to make.”  The judge sees no reason why decision should not be entered for the IRS to continue with collection of the restitution amount and the civil fraud penalties for 2003 and 2004.  The petitioner is ordered to show cause on or before March 19, 2019, why there should not be a decision entered as described.

Takeaway:  I always find that politeness and responsiveness go a long way to helping a court case.  The petitioner might not have avoided a decision against him, but it would not have hurt.


“No Trade or Business” or Cause for Alarm

Docket No. 8724-18 L, Jeffrey P. Heist v. C.I.R., available here.

Mr. Heist owned and operated US Alarm Systems, an alarm system installation and servicing business.  For 2013 and 2014, he worked as a sole proprietor and filed a Schedule C on his tax returns to report his income.  For 2015, Mr. Heist conducted his business through an S corporation and reported that income on Part II of Schedule E on his tax return.  He had no other source of income than that alarm system business during those years.  During those years, his customers used forms 1099-MISC to report payments they made to the business.

Mr. Heist filed tax returns for those years with a CPA on September 1, 2016.  He reported either net profit on Schedule C or S corporation income on Schedule E, respectively, along with tax and penalties (including self-reported estimated tax penalties).  He did not make estimated tax payments, had no payments as offsets against the tax or penalties and did not submit payment with the returns.

The IRS processed the returns and the amounts owing went unsatisfied, so the IRS sent a notice of intent to levy and notice of lien filing.  This prompted him to amend his tax returns for the years in question.

How did Mr. Heist choose to amend those returns?  He reduced his income, tax and penalties to zero for all three tax years.  In support, he attached “corrected” Forms 1099-MISC he created, purporting to “correct” to zero the amounts of income paid by the customers of his alarm system business.

What is Mr. Heist’s justification for these amendments? His main argument is that he and US Alarm Systems performed no “trade or business” activities as defined in USC Title 26 Section 7701(a)(26).  That defines the term “trade or business” to include performance of the functions of a public office, which Mr. Heist reads to exclude any other activities. The order cites multiple Tax Court Memorandum Opinions that have found this argument to be baseless and frivolous.

Not surprisingly, the IRS deemed the amended returns frivolous and invalid, eventually assessing frivolous return penalties under IRC 6702(a).  The IRS sent new notices of intent to levy and of filing a federal tax lien, and Mr. Heist requested a CDP hearing.  In the request, he states:  “I submitted simple arithmetic and sworn rebuttals to erroneous information returns and bad ‘payer’ data sent to IRS by those I contracted with for the years in question.  I made no claims for refund, overpayment or credit.  I simply require the record be corrected.”

Mr. Heist was not asking for money from the IRS, so what’s the harm, right?  Mr. Heist maintained at the telephone hearing and throughout the administrative process that he did not submit a frivolous return justifying any penalties.  Other things he did not do were request any collection alternatives, provide any documents in support of alternatives, or argue that the tax lien should be withdrawn.

On April 25, 2018, the IRS issued a Notice of Determination sustaining the penalty assessments, the notice of lien, and the proposed levy.  Mr. Heist timely appealed to the Tax Court, maintaining the same arguments.  The IRS filed a motion for summary judgment which the petitioner opposed.

The Court analyzed the case and found that the frivolous return penalties were justified and the settlement officer did not abuse her discretion.  The IRC 6702 penalties are $5,000 for each of the three tax years at issue.  The IRS’s motion for summary judgment was granted because there was no genuine dispute of material fact.

In addition, the Court advised the petitioner of IRC section 6673(a)(1), which authorizes the Tax Court to impose a penalty up to $25,000 when it appears proceedings have been instituted or maintained primarily for delay or that a position is frivolous or groundless.  The IRS did not seek such a penalty and the Court decided not to impose it sua sponte.  However, the Court warns Mr. Heist that they may not be so forgiving if he returns in the future to advance frivolous and groundless arguments.

Takeaway:  Mr. Heist originally had a tax liability over $20,000.  For some reason, he got it in his head to amend those returns and change the Forms 1099-MISC as if everything filed with the IRS for 2013 to 2015 related to his business did not exist.  This bright idea didn’t quite double his IRS debt, but brought $15,000 more in IRS penalties and a stern warning from the Tax Court about further penalty if he returned there again with frivolous arguments.  Let this serve as an example of actions to avoid with the IRS and the Tax Court.

William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the 3 Kansas City metro area Low Income Taxpayer Clinics. He records and edits a tax podcast called Tax Justice Warriors and is now an adjunct professor for Washburn University School of Law.


  1. Others may object to your use of IRS publications for answering tax questions, but they are almost always reliable and useful in convincing clients.

    Long before your time, the major question about deductions for educational expenses paid with tax-free benefits involved pilots who left the military and enrolled in flight schools to be certified for commercial aircraft. Accumulating the required hours could cost $40,000 or more, but VA benefits paid the tuition. Many recipients would then also deduct the “expense” as a miscellaneous itemized deduction (remember those?). They were successful until either a court decision or legislation made it clear that this was not allowed. This was back in the late 70s or early 80s – you could look it up.

  2. Norman Diamond says

    “You are not allowed to double-dip when it comes to education-related tax benefits on the same expenses.”

    IRS forms and publications state in at least 4 places that you are not allowed to double-dip when it comes to Foreign Earned Income Exemption and Foreign Tax Credit. On Form 1116 line 1 you are required to exclude the amount of income that was excluded by Form 2555, so this applies to Form 1116 General category but not to Form 1116 Passive category. I used to write notes such as on line 1 of General writing “excluding Form 2555 excluded amount” and on line 1 of Passive “interest + dividends + capital gains minus losses” and other notes to avoid repeating errors that I belatedly caught myself making in earlier years.

    For around 30 years the IRS never complained. Only in years where I had US withholding reported on Form 1099 the IRS accused me of being frivolous. In Tax Court the IRS finally gave reasons for the accusation, among which was my obedience of IRS instructions for Form 1116 General line 1. I presented copies of 4 pages of IRS instructions. The judge commented that these exhibits were copies of IRS publications and the IRS lawyer looked sheepish. (However, other illegally honest declarations made me frivolous and I never told the truth again on a US return.)

    In Court of Federal Claims the DOJ made the same accusation. This time I did not object. If the US wants people to double-dip, I would sacrifice my stolen withholdings for the benefit of other people whose salary would have to be at least three times mine in order to benefit from it. As far as I can tell, double-dipping is now mandatory, Form 2555 and Form 1116 General for the same income. IRS instructions are overruled.

    (I still have a chance of getting my stolen withholdings credited someday because courts have not ruled on the uncredited withholdings but dismissed for lack of jurisdiction.)

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