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Tuesday, June 14, 2011

Maybe There is Too Much Process - Guest Post

I'm pleased to publish a guest post from Peter Reilly, CPA, who blogs at Passive Activities and Other Oxymorons. Peter always provides insights into current tax cases and IRS rulings. His guest post here is about a recent case that indicates weaknesses in our tax system and the need for change. The case deals with a procedural issue and is 45 pages long - that alone should indicate a problem with our law; read on to learn more. Thanks, Peter.

There is a great anecdote in Mark Twain’s Innocents Abroad. As the group is visiting the Holy Land there is an interaction between an older man deeply versed in Scripture and a young man totally free of any biblical education. The young man, however, had been deeply impressed by the rapid stage coaches of Ben Holiday which had people “flying” from St. Louis to San Francisco in a matter of fifteen days (a journey that only a few years before had taken at least three months). The older man mentions Moses and the young man says “Moses who”. The older man than points to the desert and explains how Moses led the people of Israel out of Egypt over 300 miles of difficult desert in a period of 40 years. The young man sniffs and says “300 miles- 40 years. Ben Holliday would have fetched them through in 36 hours” (The full text is my bizzaro blog).

One of the tropes of the tax protester movement is that the income tax is voluntary. When they bring their nonsense to court they are often slammed, but I really think the amount of process involved in determining and collecting federal income tax can make it, as a practical matter, voluntary. A recent Tax Court decision, Joan Thomassen, TC Memo 2011-88. drives this point home. It was an innocent spouse case. Purely as an innocent spouse case it is of some interest.

Dr. Thomassen was a devout Catholic who attended Mass almost daily. Petitioner converted to Catholicism in connection with her marriage. The Thomassens had 10 children.

During the years at issue Dr. Thomassen maintained a successful practice as an orthopedic surgeon. Petitioner was a homemaker and part-time professional cellist. Petitioner was not involved in any way with her husband’s medical practice.

Dr. Thomassen controlled the family’s finances. He made the decisions with respect to major purchases and investments. His office nurse paid the Thomassens’ principal household bills. Dr. Thomassen gave petitioner money to pay miscellaneous household and family expenses, but the amounts he gave her were often insufficient. Rather than ask Dr. Thomassen for additional funds and risk his ire, petitioner would borrow money from her mother or sell personal items to meet the shortfall.

During the years at issue petitioner was psychologically abused by Dr. Thomassen. Dr. Thomassen was subject to fits of rage and extremely controlling behavior, which worsened as he came under increasing scrutiny from the Internal Revenue Service.

Dr. Thomassen experienced almost weekly outbursts. At some point he was diagnosed with bipolar disorder. Petitioner tried to please her husband to avoid triggering his outbursts.
As a consequence of his difficulties with the IRS, Dr.Thomassen was often sought out by process servers. He instructed the children not to answer the telephone or the door, so as to avoid process servers. One teenaged daughter, who was eventually diagnosed with bipolar disorder, inadvertently answered the door, contrary to Dr. Thomassen’s instructions, resulting in the successful service of papers on her father. Faced with the prospect of his ire, she attempted suicide.

Petitioner at one point sought counseling from her priest concerning Dr. Thomassen’s behavior towards her. The priest counseled petitioner that she needed to be patient.

The process servers must have finally caught up with the good doctor. He prepared or had prepared 6 years worth of returns which showed 0 gross incomes. Mrs. Thomassen signed the returns as instructed.

The IRS did not agree with the returns and Dr. Thomassen ended up arguing with them in Tax Court. It did not go well:

During the proceedings Dr. Thomassen repeatedly advanced frivolous tax-protester arguments. The central dispute in the litigation concerned Dr. Thomassen’s refusal to provide substantiation of claimed expenses for his medical practice and other business activities because he contended that providing financial records and information to the Government violated his constitutional rights and religious beliefs. On June 2, 1975, in the face of Dr. Thomassen’s refusal to put on any evidence, the Court dismissed the cases for lack of prosecution and entered separate decisions in each of the three docketed cases sustaining the determined deficiencies and additions to tax in their entirety.

All in there was about $250,000 in tax and of course a good bit of penalties.

Then the collection guys swung into action. They put liens on real estate and the court ordered that it be sold. There was an order directing that Mr. Thomassen be evicted from their Newport Beach home. In response to the public sale and eviction order on May 10,2006 Mrs. Thomassen filed Form 8857, Request for Innocent Spouse Relief.

By the time the decision was rendered in this case, Mrs. Thomassen had passed away. Her estate won the case and was granted the innocent spouse relief with the abuse factor weighing heavily in her favor. They of course lost on the financial hardship factor, with her being dead and all.

Normally I would applaud this decision, but here is what troubles me about this case. You may have noticed that I left out what the return years involved were. That is because they are the punch line. The returns involved were 1964 to 1971. The IRS has taken over 40 years to try to collect from Dr. Thomassen (who is also deceased) and they couldn’t get it done. This is the most egregious case I have seen. Another example would be In Re: Bryen, 106 AFTR 2d 2010-5835 decided August 2010 and concerning taxes from the early eighties.

I don’t know what the reform is that would solve this problem. I think it might be to better integrate the tax determination and collection process. As it is now you can appeal a deficiency to tax court. After the tax court has decided that you owe the money you can file an offer in compromise. It the IRS does not accept your offer; you can appeal that to Tax Court. Susan Fay Mostafa made it for 14 years doing it that way. There is a great fear of the IRS and a desire to constrain abuses, but for those of us who think you should do as accurate as possible a return every year and organize your life so that you live on your after tax income, this type of thing is very annoying.
-- Guest blogger - Peter Reilly, Passive Activities and Other Oxymorons,

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