How $563 Cost a Taxpayer $6,320

In an US Tax Court case released today, a taxpayer (who was not a farmer thankfully) had a very small issue with the IRS.  The couple earned well in excess of $200,000 during 2009 and deducted $11,000 for an IRA for him and his spouse.  Since the spouse was covered by a pension plan, this IRA deduction was disallowed after the IRS pulled the return for audit.  Additionally, the taxpayer had exchanged 50,000 “thank you” points from Citibank for an airplane ticket worth $668.

The IRS increased the taxpayers’ tax liability by $563 due to these adjustments.  The taxpayers thought this was a great injustice (and against the constitution to boot) and decided to take this matter to the US Tax Court and represented themselves (I think you know where this is going).

When the IRS did their original calculations, they reduced the AMT liability from $2,775 to zero.  This resulted in tax only going up by $563 instead of about an $4,000 increase that would normally be owed on an additional $11,668 of income.

If the taxpayers had simply paid the $563 of additional tax owed on the original assessment, that is all they would have been out-of-pocket.  However, when they went to court, the IRS determined that they had made a math error in their original calculation of AMT and reassessed the tax owed from $563 to $6,883 or an increase of $6,320.  Since this calculation was now correct, the Tax Court honored the IRS calculation and suddenly the taxpayers suddenly owed another $6,320 just for going to court.

The amounts and facts of this case are extremely minor, however, the Tax Court issued a regular opinion on this case to prove a point.  My suggestion is whenever you get a letter like this make sure to share it with your tax advisor.  I see way too many of these letters where the client pays the tax even though the IRS is wrong.  In this case, the IRS was wrong, but it cost the taxpayer $6,320 to prove the IRS “correct”.

Cite: Shankar & Trivedi v. Commissioner 143 TC 5

Paul Neiffer, CPA