Don’t Complain To IRS If They Are Slow To Process Your Fraudulent Refund Claim

Taxes

Judge Juan Vasquez in TCM 2022-55 has given us an opinion that has the elements of a really good novel. It is an innocent spouse case. The innocent spouse aspect is rather interesting, but the story of what created the deficiency is even more intriguing. Everybody’s name is, of course, now public record, but it is my practice in cases like this to not make the taxpayers any more famous. So we will call the couple Joe and Mary. Also part of the story is Dick, one of their now adult children and Mary’s Mom, whom we will call Mom.

A Long Story

In his coverage of the case, Jason Freeman notes it as “an example of how a taxpayer’s entire life story may be relevant to a determination of innocent spouse relief under section 6015(f) of the Code. The fact-pattern in issue spanned from 1972 through 2017“. It is important to keep in mind that what we have is the story that Judge Vasquez ended up accepting.

Joe and Mary married in 1972 after Mary graduated from college with a degree in art education. Joe was a Vietnam veteran. In 2011 his primary care physician diagnosed him with PTSD. It is tragic that this was not picked up in the seventies. It is good to keep that in mind as you follow along as Joe is pretty much the villain in this narrative.

In the 1980s Joe started a roofing installation business with the help of Mary’s brother who owned a business that manufactured roofing materials. Joe was initially successful but fell behind on paying his bills which soured his relationship with his brother-in-law. Finding herself in the middle of the dispute, Mary confronted Joe about the situation. His response was to throw a cherished family heirloom vase at her. The vase missed Mary, but was itself shattered.

Mary realized that she could not ask Joe about finances without risking a violent reaction, but due to her religious beliefs divorce was not an option. After a move to Florida and two more businesses that collapsed, Joe left Mary. In 1992, though she took him back after he agreed to Christian counselling.

Not The Waltons

Mary thought a two parent home was better for the kids, but you have to wonder when you consider Dick’s testimony:

“You didn’t poke the bear. You learned how to avoid the situation.” When family members failed to abide by that strategy, “bad things would happen.” On several occasions, ———- suffered physical abuse at the hands of his father.

In 1997, Joe started to spend a lot of time on the home computer. He claimed that he had started a “money brokering business”. Mary understood that he was matching investors with medical professionals looking to sell or consolidate their practices. Joe resisted answering any questions about the business and if pressed would throw a tantrum including kicking household objects and throwing tools against the wall.

Mom moved in with them in 1999 which made things feel cramped so they pooled resources to buy a larger house.

The Real Business Of The Money Brokering Business

Joe kept tight control over his accounts and the joint accounts and took steps to make sure nobody else saw incoming mail. He also maintained control over the joint filing. Mary’s only participation in the joint tax returns was to give Joe her W-2 and other tax related information. It turned out that Joe was supporting the family by preparing returns in which he overstated withholding – dramatically.

In the decision there are eight refund check from 1997 to 2005. They total over a million dollars. It is actually absurd that someone can get away with this even once, but it is a weakness in the IRS systems that has been exploited by others. The fact that withholdings are not matched before refunds are issued was the basis for the OID fraud, which was popular for a while.

What takes the cake in absurd is how the IRS finally caught onto Joe. Joe filed the 2009 return claiming a refund of $108,253. The refund did not issue quickly enough, so Joe contacted a customer service office. They connected him to the Taxpayer Advocate Service which opened a case to investigate the status of the refund. That caught the attention of the Examination which looked at the 2006, 2007 and 2008. In short order Examinations reversed the overstated withholdings and issued assessments.

Criminal Investigation

Joe slipped up on controlling the mail one day in October 2010 and Mary learned about the liabilities from IRS mail. When she pressed Joe for answers on why the liabilities were so high, he slammed her against the wall. After he went to sleep that night, she hid his gun being afraid that he might use it.

They hired Taxpayer Resolution Services to represent them. TRS submitted a request for a collection due process hearing in a response to a levy notice on the 2008 deficiency. Then IRS Criminal Investigation got involved. CI agents spoke to Joe and Mary separately showing Mary copies of returns and refund she checks. She admitted to endorsing three of the refund checks but denied signing most of the returns.

CI decided not to go after Mary, but continued with Joe. The case went to a grand jury but the US Attorney declined to prosecute informing CI in October 2015.

Innocent Spouse

The opinion is about Mary’s entitlement to relief from joint and several liability under Section 6015(f). There are seven threshold requirements to be met. Mary and the IRS were arguing about three of them. Were there assets transferred between the spouses as part of a fraudulent scheme ? Did Mary knowingly participate in the filing of a fraudulent return ? Was the tax liability attributable to an item of Joe’s?

Overall Judge Vasquez found Mary credible. Although Joe’s story that large refund checks were related to his mysterious money brokering business strains credulity, Joe’s intimidating behavior made it impossible for Mary to look into things more closely. This was confirmed by son Dick’s testimony.

A tricky question is who the make-believe withholdings are attributable to since they were not real. Judge Vasquez assigned them to Joe, since they were his invention.

After passing the threshold requirements Mary met the requirements for streamlined relief. She and Joe were no longer married even though he still rents a room in her house. She would have economic hardship if held liable. And she did not have knowledge of the scheme. The lack of knowledge is supported by the abuse in the relationship.

Other Coverage

Emlyn Cameron had Tax Court Grants Fla. Woman Relief From Joint Tax Debton Law 360.

Lew Taishoff has Leo Tolstoy, Thou Should’s Be Living At This Hour. As you and I both know Mr. Taishoff is referring to the opening of Anna Karenina – Happy families are all alike; every unhappy family is unhappy in its own way – but you have to consider the other readers. Mr. Taishoff notes what is critical to Tax Court practitioners about this case:

Whatever you’d produce on a trial like this, produce it at the CDP. CDP is the new trial. If the SO or AO refuses to let in your evidence, note your proffer and their refusal with particularity and include your statement of objections in the admin record; and at Tax Court, demand that the admin record be resettled to put in what was excluded by the SO or AO. And if that happens to be testimony, well, let’s take it now.

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