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Judge: Taxpayers get advice from IRS 'at their own peril'

In a tax case, a US judge ruled that the agency's published guidelines don't hold up in court.

By Money Staff Mon 2:05 PM

This post comes from Janet Novack at partner site Forbes.com.


Forbes.com on MSN MoneyBefore filing your 2013 tax return, did you  consult an Internal Revenue Service publication for clarification of some confusing point?


That's living dangerously.


Or so a U.S.  Tax Court Judge declared this week. "Taxpayers rely on IRS guidance at their own peril," Judge Joseph W. Nega wrote in an order entered  on April 15th  -- an order denying a motion that he reconsider his earlier decision to penalize tax lawyer Alvan L. Bobrow for making an IRA rollover move that IRS Publication 590,  Individual Retirement Arrangements (IRAs), says is allowed.


Tax form © Brian Hagiwara/Brand X/CorbisTechnically, Nega denied the motion as moot, since Bobrow and his wife Elisa had reached a settlement with the government. But the judge wrote in his order that IRS guidance isn't "binding precedent" or even sufficient "substantial authority" to get a taxpayer excused from penalties if he follows that guidance and the IRS’s interpretation of the tax law turns out to be wrong.


Huh? Sound unfair? Some of the nation’s most prominent tax lawyers sure think so.


In a friend of the court brief urging Nega to reconsider his original decision, the Board of Regents of the American College of Tax Counsel had argued that it undermines public confidence in the tax system to tell taxpayers who have followed the IRS's own guidance that they "have made an error with potentially catastrophic financial consequences."


Nega was unimpressed. He cited in his order Tax Court and Appeals Court decisions holding that IRS published guidance doesn’t count in court and added that he had been well aware of what Pub 590 said before his original ruling.


At issue in the Bobrows’ case is a decades old provision of the tax code -- 408(d)(3) -- that allows IRA owners, once a year, to withdraw funds from an IRA without having the money taxed or subjected to the 10 percent early withdrawal penalty so long as they redeposit the cash, or roll it over to a different IRA, within 60 days after the date of withdrawal.


In proposed (but never finalized) regulations issued in 1981 and in editions of Publication 590 since 1984, the IRS has told taxpayers that the one-a-year restriction applies separately to each IRA.  (The restriction doesn’t apply at all to IRA rollovers done in an IRA custodian to IRA custodian transfer—say, when JPMorgan Chase JPM transfers money directly to Fidelity Investments , only to those transfers in which the  taxpayer takes possession of the funds, however briefly.)


Alvan Bobrow, a leader of Mayer Brown’s tax practice and former General Tax Counsel for CBS Inc., took $65,064 out of two separate IRAs in 2008 and redeposited the same sum in each IRA within the 60 day window. On the Bobrows' joint 2008 1040,  Alvan treated both withdrawals as qualified rollovers and not taxable distributions. (A fuller explanation of the case is here.)


In his original January decision, Nega ruled that Alva Bobrow's second 2008 withdrawal wasn't a qualified rollover because the “plain language” of the law makes it clear that the once a-year rollover restriction applies to all of a taxpayer’s IRAs combined. He also found the Bobrows liable for a 20 percent substantial underpayment penalty on the extra taxes that resulted from the failed second rollover.


Last month, the IRS issued a notice stating that it intends to adopt Nega's  Bobrow decision and limit 60-day rollovers to one per taxpayer a year, but only beginning on Jan. 1, 2015, to give IRA custodians (and presumably the IRS itself) time to change their materials. In settling the case with the Bobrows, the government agreed to give them the same benefit of a prospective (rather than retrospective) policy change, and to treat both of Alvan’s 2008 rollovers as qualified.


The Bobrows, for their part, agreed to pay an extra $28,681 in taxes (including a 10 percent penalty for an early withdrawal before age 59 1/2) and  a 20 percent substantial underpayment penalty of  $5,736 for not treating as taxable income yet another2008 $65,064 distribution from Elisa Bobrow’s IRA -- one the IRS alleged they failed to repay within 60 days. According to Nega's original decision, the couple put some of the money back in Elisa’s IRA, but on day 61.


More from Forbes.com

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25Comments
Mon 2:26 PM
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This ruling will only reinforce the general feeling that the IRS operates at the whims of their political masters.
Mon 2:46 PM
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Once again, no one at the federal government has to take responsibility for their actions.
Mon 3:28 PM
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They wouldn't have had this problem if they would have made a donation to the correct political candidate.
Mon 2:27 PM
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There are better and less costly ways of handling taxes for the government but it would be a change for them and they don't know how to handle change.. they preach it but won't make it.
Mon 2:55 PM
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If Congress allows this Tax Court judge's comment to stand--and they probably will, since anything important is beyond their ken--this will erode any remaining remnant of the idea of tax fairness. What it says is a huge boon for tax lawyers everywhere, since just reading and following the published documents is useless. And of course Congress will never do anything to rein in lawyers, one of their biggest cash cows.

Yeah, I know the guy was doing all kind of stupid and unnecessary shenanigans, but the judge's comment is still potentially explosive. They should have changed the documents and said that the new rules apply from the day the changes were published.

Mon 2:52 PM
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Anybody involved in advanced tax issues could have told you the IRS's material is just the IRS's interpretation of the law.  The problem is most people are too poor, so they are just best doing what the IRS says. Meaning you would spend more money on an attorney fighting the IRS than you would save in taxes.
Mon 3:49 PM
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My personal philosophy towards government is:

While businessman may be evil manipulative greedy people, I know what position they will take. That is, they will take the position that will make them the most money. Since I know this is the position they will take, I can plan for that and forecast outcomes.

With government I do not know what drives decisions.  I have no way to forecast what will happen or why someone will do what they do.  Some make decisions to help others, some make decisions because they personally benefit from them, while others make decisions for power. As an individual I cannot tell the difference.  That to me is the biggest problem with government.

And as we can see here, no one knows why the IRS originally  took the position it did in the publication.  Nor, can we know why it decided to throw that aside and take this issue to court.  We are in the dark, and cannot anticipate the next action.

This is why I have a distrust of government and why I am against big government.
Mon 4:18 PM
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Flaws in the IRS's publications may not except one from tax penalties under the law, but after penalties that are a result of the IRS's faulty publications are paid, is the penalty payer not entitled to sue the IRS for reimbursement? 
Mon 7:17 PM
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I have given up on calling the IRS. LaQuisha, Chante', and  their cohorts "ain't got no" correct answers.
Mon 4:32 PM
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I wonder if I did business that way, how long I'd survive....

 

Mon 6:46 PM
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This is precisely why "BIG BROTHER"  absolutely, positively cannot be trusted.  When we do what they say in writing, they can always say "well, that's what we said but not what we meant to say". This is what is known as SELECTIVE ENFORCEMENT, meaning it can and will be used to punish those who don't "play ball", or are not cozy with politicians. We got rid of King George for this kind of crap in 1776. We seem to have become a Government of the government, by the government, for the government !  Disgusting!

Mon 4:00 PM
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Everything here is irrelevant since the IRS and the Federal Reserve are bogus entities.  Just more arguing about how you'd like the masters to violate you, instead of stating that you're being violated.
Mon 4:45 PM
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This judge has obviously been smoking too much funny stuff.  If one cannot rely on guidance from the official source, who or what can we rely on--especially as "the law is a ****", and especially lawyers and judges, also lawyers.  Another proof that our society is totally effed up.
Mon 2:38 PM
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For years even fools have known it is playing with weird fire to ever, ever, ever take actual receipt of IRA funds. Even 401(k)-to-an-IRA funds need to be done via custodial transfer ONLY. Period!

 

But that aside, reread what the Bobrows were doing. What the heck were they doing!? The best I can make of it is, the guy thought he was a sharp operator: Transfer large IRA funds into very short-term cash instruments such as CDs, perhaps at a special teaser rate, and then stuff the funds back into the IRA(s).

 

It seems obvious his game was strange -- witness his failure on one of the takes-possession-of-IRA funds plays -- he tried to keep it out not for 59 days, but for the full 60 . . . and blew it. My verdict on the guy? Too clever by half.

Tue 7:46 AM
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You can not trust anyone in government. Elected or hired. If they had a brain they would not be in government.
Mon 9:52 PM
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