Boxing With The IRS

“They’re baaaaack!” squealed the little girl in the 1986 movie (Poltergeist II) about evil spirits invading a suburban home. Her cry — the follow-up to her original “Poltergeist” announcement of “They’re heeeere!” — became the crux of the movie’s marketing campaign. Taxpayers who have been the subject of multiple IRS examinations might well share the little girl’s sentiments regarding their ongoing battles with the federal tax authority.

Round #1

Privately owned farm and ranch operations are frequently the target of IRS examinations. The deductibility of current year operating losses which are often reported for tax purposes are typically the subject of challenge under the hobby loss provisions of the tax law. Thus, it was not surprising to find a family’s partnership that owned and operated such an enterprise subject to IRS examination. The look on the agent’s face in the initial interview clearly indicated that he believed he was about to conduct an audit resulting in the assessment of a significant underpaid tax liability plus penalties and interest. Prominent among the partners was a member of the Forbes 400.

Unfortunately for the agent, he was wrong. After carefully preparing an analysis of the farm’s operations over a period of ten plus years, it was clearly demonstrated that the farming operation had achieved profitability both cumulatively and in multiple individual years of its operation. Ultimately, much to his dismay, the agent issued a “no change” letter.

Rounds #2 and #3

Unsuccessful in its first attempt, the IRS moved on to challenge the tax returns as filed for a corporate entity related to a professional sports franchise as well as an S corporation that owned a leading regional middle market business. Each of the targeted entities was owned by the family of the Forbes 400 member. Complex tax accounting and reporting related to these entities were heavily scrutinized. Once again, the agents involved issued a “no change” letter.

Round #4

The ongoing title match with the IRS resumed with an examination of the personal tax return filed by the Forbes 400 member. As a partner and shareholder of numerous family owned passthrough entities, the tax return filed each year was exceptionally complex and required a deep understanding of the proper reporting methodology to favorably reflect decades of income tax planning designed to produce the greatest possible income tax savings over a multi-year horizon. Despite a heroic effort on the part of the agent, once again a “no change” letter was the result.

Round #5

After a life well lived, the now former Forbes 400 member (whose taxable estate had been significantly reduced after decades of ongoing multi-generational estate tax planning) was laid to rest. Years of preparation was now combined with months of consultation with the Executor and a trust and estates attorney as the estate tax return was carefully prepared for filing. Once again, the battle resumed as his estate became the subject of an IRS audit examination. Of course, you know how the story ended. The IRS once again went down in defeat and a “no change” letter was the result.