Monday, December 29, 2008

Tax Court case: you be the judge

A recent case from the Tax Court concerned a taxpayer in Texas who filed a tax return attempting to claim her two nieces as her qualifying child dependents.

The IRS disagreed with her claim and denied her the tax benefits she had claimed on her return (dependent exemption, child tax credit, Head of Household filing status, and Earned Income Tax Credit.)

But the IRS doesn't get the last word. A taxpayer who disagrees with an IRS ruling has the right to bring the case before tax court. The taxpayer has the option of hiring an attorney, but is not required to do so.

In this particular case, the taxpayer chose not to hire an attorney, but rather to represent herself ("pro se" is the legal term.)

Read the facts of the case on the first three pages of the judge's opinion, and decide if you agree with the taxpayer (referred to as the "Petitioner" in the judge's opinion) or with the IRS (referred to as the "Respondent" in the judge's opinion) before you read any further into the opinion.

It's a great way to try out your newly developing understanding of how to apply tax law. You may want have Tab C handy in your Pub 4012 Volunteer Resource Guide as you try to reason through to decide whether the taxpayer is right or the IRS is right.

Then read the judge's description of his reasoning about the case to see how he applied the law. Did your interpretation agree with his?

The Tax Court case is here at this link. After you read it, click on "comments" below to take a look at my comments on the case.


  1. I agree with the taxpayer and with the judge.

    Based on the facts presented in the judge's opinion, I do not understand why the IRS ever disallowed the taxpayer's claim in the first place.

    More often than not, tax court judges uphold the IRS in their decisions. (That's not because the IRS is always right, but usually when the IRS is wrong, they realize it before it goes all the way to tax court.)

    So I'm puzzled as to why the IRS didn't drop their claim against the taxpayer before the judge ruled.

    This looks like a very clear-cut case to me. I'm glad the taxpayer took the initiative to bring her case to court and that she prevailed there, but I'm sorry she had to take the trouble to do so.

    (In a possible defense of the IRS, it's possible that the taxpayer had not assembled all the supporting facts at the time of the initial IRS examination which originally led to the IRS disallowance of her claiming the children on her return. However, the IRS would have had a chance to see all the evidence presented by the taxpayer before the case went before the judge, and it certainly could have decided to drop its pursuit of the taxpayer once it saw that evidence.)

  2. It's also worth noting that the taxpayer in this case was apparently living on an income below the poverty level, so the IRS position denying her claim caused considerable hardship.

    You might want to try using the facts stated in the case to create a practice tax return in the training version of TaxWise to see how much additional refund she will be able to collect as a result of the judge's decision. It's a significant sum of money for the household. (And it would be even larger if they lived in New York, which has an EITC and Child Tax Credits of its own as well.)