The IRS was recently caught backdating a signature on a valuation penalty document—and then trying to talk their way out of trouble—in a giant conservation easement case. Legal experts wonder whether the IRS has backdated penalty documents in other similar cases, “hinting at a troubling picture of potentially systemic issues within the IRS.”
This recent case, Lakepoint Land II, LLC v. Commissioner, is in trial at a special Tax Court session this month. A currently standing Memorandum Opinion concluded that the IRS counsel acted in “bad faith” and knew or should have known that his representations to Tax Court were less than accurate while failing to timely advise the Court of an erroneous declaration.
The backstory, in a nutshell, goes like this (thanks to Darryll K. Jones and the Law Professors Blog for their summary and colorful commentary):
“It seems some young gun revenue agents were hot on the trail of a massive—$38 million—conservation easement deduction they correctly thought was entirely overvalued. Not only were they intent on disallowing the deduction, but they [were] determined to impose significant penalties. The only problem, apparently, is that you gotta get a sign-off on penalties before sending the notice. Well, the lead young gun forgot that requirement. She didn’t realize the mistake for almost a year and when she explained the mistake to the Top Gun, Top responded cryptically by noting the omission was a ‘HUGE oversight.’ She didn’t say ‘fix it,’ exactly, or ‘hey, we all make mistakes.’ Just that it was a ‘HUGE oversight.’”
So what do you do when your boss says you made a mistake and, perhaps, insinuates it needs to be fixed? That’s right, you try to fix it and move on. It appears the manager added the penalty to the lead sheet but, as Winston and Strawn LLP attorneys explain, did not sign her name with the digital timestamp to acknowledge that the document was signed much later.
“While the IRS may have informed the taxpayer of the penalties after they were approved, the fact that a managing IRS revenue agent had intentionally backdated a document and then IRS counsel subsequently refused to provide a clear answer to both the taxpayer and the Court as to when IRS personnel became aware of the backdated document is concerning,” the attorneys state.
This case has tens of millions of tax dollars at stake, so how does it relate to the rest of us? It’s a reminder that the IRS isn’t perfect. Their staff, just like yours, aren’t immune to making mistakes or potentially trying to sweep those mistakes under the rug.
The IRS upholds a Taxpayer Bill of Rights, giving you the right to quality service, to pay no more than the correct amount of taxes, to challenge the IRS and have those objections be heard, and to expect a fair and just tax system. When you receive a letter from the IRS, immediately share it with your CPA (timing is critical). Even if you don’t entirely dispute the recalculations or disallowed deductions, issues like these could bring hefty penalties and fines into question. Only it may take a professional eye to catch the subtle clues. Feel free to contact us with questions.