We all know Section 7605(b) limits IRS to one go-through of a taxpayer’s books of account per tax year. But IRS changed the numbers four (count ‘em, four) times on Donald J. Planty and Miriam Alvarez, 2017 T. C. Memo. 240, filed 12/5/17 before assessing a fifth number, all in the $2K range.

Then Don and Mim filed a 1040X, which IRS processed, and said they were making no further changes. But, reversing course, IRS decided to treat the 1040X as an audit reconsideration and slugged Don & Mim with a $64K deficiency, up from $2K.

Turns out IRS bounced Don’s & Mim’s $147K real estate losses.

Don & Mim yell it’s a double audit for same year.

Nope, says Judge Halpern.

“Indeed, petitioners have presented no evidence that, in reconsidering his prior examination, respondent inspected petitioners’ books and records.  Nor can petitioners plausibly claim that an examination of the items reported on the Form 1040X was not necessary to evaluate their overpayment claim.  Respondent’s examination undertaken in response to the Form 1040X did not run afoul of section 7605(b).  See Jackson v. Commissioner, T.C. Memo. 1982-556, 44 T.C.M. (CCH) 1213, 1218-1219 (1982).” 2017 T. C. Memo. 240, at pp. 5-6.

And the increased tax shown on the 1040X Don & Mim sent in after the audit started isn’t a “qualified amended return,” per Reg. 1.6664-2(c)(3), so it doesn’t count to reduce the five-and-ten understatement chop.

Don’s & Mim’s tax attorney doesn’t testify, so her advice doesn’t mitigate the chop. And Don’s & Mim’s reliance on their tax preparer for deducting the real estate loss doesn’t help, as they don’t show what their preparer told them.

No second time around.

Takeaway- Sometimes it’s better just to pay the first time.