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MILLER S-CORP BASIS CASE - A WINDOW TO THE IRS EXAM PROCESS?

June 19, 2006

Tax Attorney Kreig Mitchell says last week's Miller Tax Court Case provides a window to the IRS approach to audits. The case involved an S corporation shareholder who deducted losses based on amounts he loaned to the corporation. Mr. Mitchell writes:

Based on the court opinion, it is apparent that the IRS agent undertook the tax audit with the sole aim of disallowing the losses. Ultimately the IRS logic is that Miller paid too little in tax in relation to other somewhat similar situated taxpayers - even though he was well within the law - therefore it is the IRS agent's job to collect tax revenues from Miller. I have seen this numerous times (so much so that I can almost see the look on the agents facial expressions as he or she is interviewing the taxpayer).

Mr. Miller won his tax case, but Mr. Mitchell says some taxpayers get buffaloed into conceding unwarranted tax adjustments.

This case presents such a common scenario, that it is worth pointing out to taxpayers. The Miller case highlights the IRS audit process and it shows that the IRS can and do take unsupportable positions and file frivolous lawsuits. It also shows some of the tactics IRS agents employ to encourage taxpayers to accept IRS determinations.

I've been fortunate (knock wood) in not having had to deal with many really bad IRS agents. They do exist, though, and the best way to fend them off is to be well-advised, as Mr. Miller was.

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