(2009-2011) SIGNER FILES CLAIM FOR REFUND OF
TAXES PAID IN 2008 FOR SECOND IRS
AUDIT; IRS ADMITS 2008 AUDIT CONCLUSION
WAS WRONG, REFUNDS SIGNER $121,639 WITH INTEREST
As time went on after I reluctantly paid the $111,488 IRS assessment in July 2008, clues surfaced indicating that GM had instigated the second IRS audit as I believed it had done in the first audit in 2005. In light of these multiple revelations of GM/IRS conspiracy seemingly driving the suspicious conclusion in the second audit as well as the first, on April 14, 2009, my CPA filed a 1040X amended return refund claim for taxes I paid in July 2008 for the 2005 tax year.
I heard nothing from the IRS regarding my refund claim until nearly ten months after the IRS’s receipt of the documents. On February 8, 2010, I received a call from an IRS Revenue Agent who was responding to my filing of the 2005 Form 1040X amended return, which the Agent referred to as a “claim.” He asked me for some information and documentation concerning the funds I had loaned to the original corporation. I provided the information, which was added to a previously submitted rebuttal supporting the deductibility of the bad debt.
Over the months that followed the February 8 contact, I met with the Revenue Agent and his Acting Manager several times, and provided extensive documentation that the Agent requested. I had countless telephone discussions with him. Shortly after our discussions began, the Agent determined that the reason the IRS had used for disallowance of my deduction, the reclassification of the debt to capital contributions, was wrong. Under the oversight of his Acting Manager, the Agent then spent months of research (concurrent with other assignments he had) searching for other reasons to disallow my deduction. On June 11, 2010, I met with the Agent and the Acting Manager in the Oakland IRS office. Based on conversations with the Agent just prior to the meeting, I was under the impression that I would be presented with the conclusion in my favor which would then be processed for refund. Instead, at the meeting I was presented with a request for yet further documentation.
The Acting Manager informed me that at the last minute before the meeting, he had asked the Agent to research whether the bad debt was business or non-business, and yet another time about the timing of the deduction in 2005 versus 1995. The Agent had already researched the timing issue to death and found nothing that would prevent it from being deductible in 2005. We set a meeting for June 15 at my dealership, at which time I furnished the Agent the requested documentation relative to the business/non-business issue. As I furnished the requested documentation on the business/non-business question, I asked if, assuming that question was satisfied, there was anything else that would prevent me from getting my refund. He replied that there wasn’t. The Agent’s response confirmed what I had felt by the end of the June 11 meeting, that the Acting Manager had backed off the dead horse timing issue.
After multiple subsequent discussions with the Agent, finally, by mid-July 2010, he reached the conclusion that there was no basis to uphold disallowance, and was working on the “Lead Sheet,” which is a report of his research and conclusion. He also informed me that his Acting Manager had been replaced by a new Acting Manager. On July 27, the Agent finished the writing of his conclusion in my favor, which would result in my receiving the refund I had requested. When the Agent submitted his conclusion to his new Acting Manager he rejected it and, without the support of facts or law, took the position that the deduction should be disallowed based on timing. That theory had already been considered and rejected by the original auditing Agent in 2008, and then was revisited multiple times and similarly rejected by the Agent and his first Acting Manager in 2010 as noted above. Nevertheless, the new Acting Manager’s edict necessitated that the Agent to do further research (on top of the five months of exhaustive research he had already done) to attempt to find some kind of support for the Acting Manager’s pre-determined decision to disallow the deduction.
On August 4, the Agent contacted me to inform me that his new Acting Manager’s position was firm, and arranged an August 9 meeting between the three of us. I suggested that he have the Acting Manager read in advance of the meeting my March 1, 2010 letter, which detailed support for my position on the deduction as well as my observation of the GM/IRS collusion. On August 5, I asked the Agent to fax me a copy of the July 27 ten-page conclusion, which he did. Pages 1, 9, and 10 of the first “final” conclusion “Claim for Bad Debt” may be viewed here. (Pages 2-8 were primarily discussion of court cases supporthing the merits of my claim.) At the top of page 1, an adjustment of “(329,250.00)” is shown, which reflects the Agent’s conclusion to allow the amount of bad debt deduction applicable to the 2005 tax year as reflected in my claim.
Near the top of page 1 of the July 27 favorable final conclusion, the following statement appears: “Conclusion: (Reflects the final determination on the issue.) Per IRC 166 bad debt deductions have been allowed as claim has stated, as originally filed by the taxpayer.” Internal Revenue Code 166 (“IRC 166″) item (a)(1) states, “There shall be allowed as a deduction any debt which becomes worthless within the taxable year.” There is no language anywhere else in Section 166 that modifies this simple statement to incorporate any exceptions to the timing issue. In my case, the debt owed to me by my old corporation clearly became worthless in 2005 when the IRS disallowed the consulting agreement that had provided income that gave the ability to repay the debt. As it was previously a good debt, I could not possibly have deducted it as a bad debt while the consulting agreement existed from 1995 to 2005, and only did so in 2005 when the agreement ended as a result of the IRS audit. Near the end of the conclusion, the bottom of page 8 and top of page 9 summarize the Government’s position, which includes the determination of bad debt deduction in 2005. But, as stated above, this favorable conclusion was rejected by the new Acting Group Manager.
I met with the Agent and his new Acting Manager on August 9 as planned. The Acting Manager opened the meeting by explaining what he knew about the case, which wasn’t much beyond the Agent’s 10-page “Claim for Bad Debt” Lead Sheet in my favor. He held up an envelope containing my March 1 letter that the Agent had provided him, but informed me that he hadn’t read it. I asked him if he was familiar with the GM/IRS collusion issue, to which he responded that he was not. The Agent and prior Acting Manager were well aware of it.
The Acting Manager stated that the bad debt deduction should have been taken in 1995 and is not allowable in 2005. I responded that the Agent had researched the issue extensively for the last six months and found nothing that would prevent it from being deducted in 2005 per Internal Revenue Code 166. The Agent confirmed my statement. I then referred to IRS Publication 556, “Examination of Returns, Appeal Rights, and Claims for Refunds.” On page 4 of the Publication, it is stated, “The IRS must follow the tax laws set forth by Congress in the Internal Revenue Code. The IRS also follows Treasury Regulations, other rules, and procedures that were written to administer the tax laws. The IRS also follows court decisions.” I asked the Acting Manager if, in light of this statement, he had any basis for his theory of disallowance in 2005. He replied that they owe me that, and that the Agent will research it and let me know. This shocking response clearly acknowledged that he had no basis for his seemingly arbitrary, yet inflexible stance. I asked when they would have the case finally concluded, to which the Acting Manager replied that it would be no more than two weeks (August 23,) but hopefully by the end of the week (August 13.)
On August 17, the Agent told me that other priorities since the August 9 meeting had prevented him from working on my case, but he would do research to find something to support the new Acting Manager’s decision to disallow the deduction. Since the decision had already been made against me, I asked him to close the case as soon as possible so I could file for Appeals. On August 18, I sent an e-mail to the Agent and his Acting Manager confirming my request, and expressing my frustration at the lengthy and inconsistent process that was sabotaged at the last minute by the new Acting Manager. This e-mail can be viewed here. Despite the shameful chronology desribed in this e-mail that would seemingly cause an Appeals Officer to take a dim view of the Acting Manager’s last minute disallowance edict, the Acting Manager would hold firm to his decision.
August 23 arrived without the Agent’s completion of the conclusion as promised by the Acting Manager. After hearing nothing more, on August 26, I sent TIGTA an amendment to my June 21 GM/IRS collusion complaint, now asking that the bizarre events of 2010 be incorporated into the investigation.
On August 30, the Agent completed and mailed the second “final” conclusion, which showed full disallowance of my refund claim per the new Acting Manager’s instruction. This second “final” conclusion “Claim for Bad Debt” may be viewed here. The first two pages are the cover letter stating full disallowance of my claim, followed by three pages of the Lead Sheet. In contrast to the first “final” conclusion, the first Lead Sheet page shows .00 adjustment, and the Conclusion states that 1995 was determined to be the year of debt worthlessness. The second Lead Sheet page restates the Government’s Position as such, and the final Lead Sheet page states my position that the loans became worthless in 2005, and that I vehemently disagree with the Government’s position and would like to go to Appeals.
On September 14, I received a phone call from an IRS Territory Manager who informed me that TIGTA had assigned him the investigation of my June 21 GM/IRS collusion complaint. Among other things discussed, I told him that the IRS had recently disallowed my refund claim with which he was familiar, and that I need to file for Appeals within 30 days of the August 30 letter I received. He responded that he would put that deadline on hold pending the collusion investigation, and subsequently had a Group Manager write me a confirming letter. This letter, in part, refers to Territory Manager reassignments, which resulted in TIGTA reassigning the investigation to a different person as will be discussed in the GM/IRS collusion Expanded Details in a later section. Despite the fact that the Appeals filing deadline had been put on hold, just to be safe I sent my Appeals statement on September 27, 2010, with this cover letter.
On October 18, the Territory Manager informed me that he was conceding on my refund claim, and would reverse the August 30 disallowance I had received. Due to the fact that the Territory Manager reversed the disallowance of my claim, the case was resolved before it went to Appeals. On October 22, an IRS Group Manager faxed me a confirmation of the allowance for me to give to the California State Franchise Tax Board, yet another a related ordeal that is discussed elsewhere in this website.
On November 9, 2010, the Revenue Agent who performed the review of my refund claim throughout 2010 sent me notice of acceptance of my claim. This third “final” conclusion “Claim for Bad Debt” may be viewed here. Following the cover letter, the first page of the Lead Sheets shows the (329,250.00) adjustment, the Conclusion, and the Government’s Position, all of which revert back to the first “final” conclusion, and thus override the second “final” conclusion.
In mid-January 2011, I received a letter dated January 15 from the California Examination Area Director confirming the IRS’s acceptance of my claim. I subequently received two checks dated February 4, 2011, totalling $121,638.78 for refunds of the audit-induced taxes for the 2005 and 2006 tax years. The confirming letter and checks may be viewed here. As noted on the checks, included therein was interest totalling $12,578.90 for the time since I paid the wrongly assessed tax in July 2008, as well as a refund of the interest I had paid at the time.
Audit File obtained through Freedom of Information Act
Through the Freedom of Information Act (FOIA) I have obtained the Audit File for the Form 1040X review discussed above. Conspicuously absent from the 430 pages produced were my detailed March 1, 2010, letter to the Revenue Agent describing my observation of GM/IRS conclusion, as well as the 7/27/10 first “final” conclusion allowing the deduction. Some of the attachments to the March 1 letter were in the File, however.
Included in the FOIA File was the Examining Officer’s Activity Record, which details the Revenue Agent’s review of my refund claim from January 22 to November 10, 2010. I have added a page at the end of the Activity Record with notes about items appearing therein. In reviewing the Activity Record it is apparent that in the nearly 10 months from beginning to end, the Revenue Agent explored every conceivable reason that might support disallowance of my claim, including repeated research on the timing issue. This research bore the allow-disallow-allow results described above. Other confirming observations of the Activity Record can be made:
- 7/20/10 entry shows that Agent concluded that timing was 2005.
- 7/27/10 last entry shows “RA (Revenue Agent) wrote up lead sheets and provided it to AGM (Acting Group Manager) for review.” Those lead sheets comprise the first “final” conclusion allowing my claim, which was faxed to me at my request on 8/5/10 as discussed above.
- 7/28/10 and most 8/4/10 entries were redacted, with the next visible entry following the 7/27 entry quoted above is on 8/4: “RA called TP (Taxpayer) and informed him that the timing was the issue and that based on the facts we must disallow the claim.” So, from one entry to the next, my claim went from a 10-page well-supported written allowance to an unsupported, and final, disallowance. Thus, the previous 13 pages of entries in the Activity Record, constituting 6 months of the Revenue Agent’s research and preparation, were totally dismissed by a brand new participant in the review process. It should be noted that the RA informed me that the new AGM arrived on 7/15/10, although the Activity Record does not distinguish between the old and the new AGM’s.
- 8/9/10 entry describes the meeting between the RA, the AGM, and me.
- 8/10/10 entry describes the RA’s research to find something to support the decision the AGM had already made on or before 8/4. It is unconscionable that a conclusion would be finalized before finding anything to support it.
- 8/30/10 entry describes Revenue Agent Report containing second “final” conclusion referred to earlier, which reflects the AGM’s pre-determined disallowance of the bad debt deduction.
- 11/8/10 entry describes RA’s call to me informing me that my claim was being allowed.
- 11/9/10 entry describes Revenue Agent Report sent to me reflecting claim being allowed. This is the third (and last) “final” conclusion referred to earlier.
Also of note on the Activity Record are the number of hours spent by the RA. The handwritten numbers at the bottom of each page (written by IRS personnel) reflect either 175 man-hours (below 9/9/10 entry) or 171 man-hours (below 11/10/10 entry.) Below the 7/27/10 entry is printed “148″ time on activity to date. So, all of this time was wasted when the conclusion was disregarded by the new AGM, and more time was required to reverse the conclusion, which itself was later reversed. When the Territory Manager subsequently reversed it back to the original conclusion, more time was spent. This does not include unknown hours spent by managers and support people, nor the 63 hours spent by the original RA in 2008 crafting the original disallowance conclusion to conform to his Manager’s pre-determined conclusion. Thus, taxpayers paid for the time of multiple personnel, as well as the many associated costs such as benefits and facility space, to arrive at the proper conclusion of deductibility acknowledged by the original RA in 2005 at the time of the first audit of the 2003 corporate return.
Additional disturbing items
I asked the Revenue Agent who did months of research in 2010 how often his conclusions are overridden by his Manager. He responded that it had only happened twice before. I then asked him what percentage of cases that represented, to which he replied that it is about 5 percent. This rare occurrence is consistent with the similarly rare management override encountered by the original RA in 2008 when he wanted to accept my 2005 tax return as filed.
Adding further to the already bizarre nature of the second AGM’s overriding action is the fact that he is normally a Revenue Agent; the same as the RA he overrode. He was apparently temporarily made an Acting Manager for the short time my 1040X review was being finalized, and then returned to his RA position within days after the August 30, 2010 adverse conclusion was written. The fact that he was not even normally a manager makes it even less likely, and consequently more troubling, that he would make such a bold, unsupported, overriding conclusion regarding a large amount of money in such a sensitive case. It is thus reasonable to assume that he was acting on instruction from somebody above him. Additional information surfacing during the subsequent TIGTA GM/IRS collusion investigation raises further disturbing questions about the AGM’s action. This will be discussed later in the investigation section.
