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Gregory Bruce, a former Army Chief Warrant Officer was dealt a blow by the United States Tax Court earlier this month in a case involving the taxpayer’s failure to timely challenge an IRS Notice of Deficiency. This case along with many others like it, exemplify the need to consult with a tax defense attorney at the first sign of tax trouble. If you wait too long, you may find yourself out of luck and out of a lot of money.
According to the U.S. Tax Court opinion (Bruce, Gregory David v. Commissioner; No. 20817-15L; T.C. Memo 2017-172), Bruce retired from the U.S. Army after sustaining injuries that left him unable to work. Pursuant to Veterans Affairs protocol, Bruce’s disability rating (granting him 100% retirement compensation) was granted retroactive to the day after his retirement. Additionally, Bruce requested that the Army reclassify his retirement as “disability retirement”, which would not be taxable. The Army declined to reclassify his retirement and several court battles ensued over the reclassification. After being defeated at the District Court and Appellate Court levels, Bruce has vowed to petition the United States Supreme Court to hear his case.
Meanwhile, Bruce failed to file an income tax return for the 2011 tax year, taking the position that because his retirement was based on a disability, it should be tax-free. The IRS disagreed and issued a Notice of Deficiency (N.O.D.) against Bruce. He did not contest the Notice in a timely manner and the IRS issued a Final Notice of Intent to Levy. In an attempt to challenge his underlying tax liability, Bruce petitioned the U.S. Tax Court for review.
In ruling for the IRS, the Tax Court explained that when a taxpayer has the prior opportunity to challenge the underlying tax giving rise to a deficiency, they are not entitled to raise a challenge at the collections stage. In this case, the Court noted that Bruce had the opportunity (Limited to 90 days from the date of the receipt of the N.O.D.) to petition the Tax Court for review upon receipt of the Notice of Deficiency. At that point, he could have argued that his Army retirement was non-taxable. But because he ignored the N.O.D. he lost his ability to legally challenge the assessed tax liability, he did not have legal standing to challenge the substance of the tax liability when the IRS where the IRS was attempting to collect the tax owed.
There are certain circumstances where a taxpayer may challenge the underlying tax liability at the collections stage, but there are several strict requirements that must be met. The most important of which, the taxpayer must prove that he or she did not have an opportunity to challenge the underlying tax liability prior to the complained of enforcement or collection action.
If you are undergoing an IRS audit or have received a Notice of Deficiency, it is in your best interest to contact an experienced tax attorney as soon as possible. This is necessary to preserve your right to challenge the underlying tax assessment. If Mr. Bruce would have sought the guidance of a competent tax defense attorney, he would have been advised to file a protective petition with the U.S. Tax Court to maintain his rights.
The tax and accounting professionals at the Tax Law Offices of David W. Klasing have extensive experience in representing taxpayers from all walks of life with issues ranging from eggshell audits to FBAR compliance and more. Our team of zealous advocates is standing by to assist in the development of a plan of action based on your particular situation. Don’t lose sleep over an IRS or state tax audit. Contact the Tax Law Offices of David W. Klasing for a reduced-rate consultation today.
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