Why Taxpayers Need Representation in Tax Court

The few people who read this, my blog, may remember my blogpost “A Book and a Modest Proposal”, 5/22/12. I said that Tax Court is a minefield, that even experienced practitioners have taken nasty falls there, and that the current “closed shop” of a virtually unpassable admission examination restricts effective representation to all but those able to afford expensive and experienced counsel.

The taxpayer with a small claim (small to others but not to the taxpayer) is left to advance his or her claim unaided, while IRS has battalions of attorneys who do nothing but Tax Court practice.

Case in point, as usual a Section 7463 small claim, little noted nor long remembered, William L. Weaver and Dorothy J. Weaver, 2012 T. C. Sum. Op. 52, filed 6/7/12. This was a Rule 122 stipulated facts case, so there was no hearing and no oral testimony.

The tax is not at issue, so I’ll summarize quickly. Dottie was a US person employed by the Consulate of the True North Strong and Free to drum up business for the Canadians. Dottie got sick, and finally resigned due to sickness. Canada generously gave her a final payment based upon seniority and tenure under the Maple Leaf flag.

Dottie had her joint return with Willie the Weaver (Civil War buffs will remember the original words to “Dixie” featured Willie the Weaver, who was a gay deceiver, but no deceit here) done by an unnamed tax pro, who reported the Canadian Farewell as “other income”, and didn’t file a Form 1040SE or tell Dottie and Willie to pay self-employment tax thereon.

No question Dottie was an employee, and employees don’t usually pay self-employment tax, but (a) Dottie worked for a foreign government (see Section 3121 and my blogpost “Not An Employee For Tax Purposes?”, 5/24/11), and (b) the Canadian payment was based on tenure and seniority, and was not payment for bodily injury (see Section 104 and my blogposts “No Hurt, No Foul”, 11/1/11, and “Don’t Do It, Litigator”, 12/5/11).

So it’s severance pay, not disability pay, and therefore it’s ordinary income, not damages for bodily injury. So only self-employment tax is due, because Dottie paid income tax on the payment already.

So far, no big thing.

Now for the Section 6662(a) substantial underpayment penalty. No question there was substantial underpayment due to the SE, but Dottie claims she used a tax pro to prepare the return. Of course, the stipulated facts say nothing about what Dottie told the pro.

That’s enough to sink Dottie. Judge Kroupa: “Petitioners have not established that their reliance on their return preparer was reasonable and in good faith. This case was fully stipulated. That does not relieve petitioners, however, of their burden. Petitioners failed to demonstrate that they provided all the necessary and accurate information to the return preparer. We cannot turn a blind eye to this oversight and simply accept petitioners’ assertion alone that they relied upon the return preparer as a defense against the accuracy related penalty. See Peacock v. Commissioner, T.C. Memo. 2002-122. Moreover, petitioners failed to otherwise show that their failure to report the payment as selfemployment income was due to reasonable cause and was in good faith.” 2012 T. C. Sum. Op.at p. 10. Penalty sustained.

Now if there had been a trial, and Dottie had had a chance to call as a witness the tax pro she used, put him or her on the stand and have the tax pro tell Judge Kroupa what Dottie told him, or get on the stand herself and tell Judge Kroupa what she told the tax pro, she maybe would have had a chance to knock out the penalty ($1782.00).

But how could Dottie know that was what she had to do? And if she was disabled so she couldn’t work, presumably so that she couldn’t personally appear at a hearing, what choice had she but to stipulate? And how could she afford a representative, be that representative an attorney or a Tax Court Practitioner who had passed through the eye of a needle that is Tax Court admission for other than attorneys, who could tell her what to stipulate, and prepare an appropriate affidavit either from Dottie or from the tax pro for a Rule 122, much less brief and try a case, for a $1782 penalty?

Now this is not a political blog; I’m bored with saying I grind no axes here. And I don’t fault Judge Kroupa; she is bound by the record she has, not by the record Dottie maybe should have presented.

But this just isn’t right.