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PDtax
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1919
Experience:  32 years tax experience, including four years at a Big 4 firm.
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I am A duty disabled State Police officer

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I am A duty disabled State Police officer and have been exempt from State and Federal Taxes for 25 years and was also founf exempt from taxes on my Social Security three years ago and this year I was told I owed taxes on My disability Retirement. I have had two personal aduits and it was also founf non-taxable. What must I do? This happens about every three years and this was the first time it was not upheld non taxable. This also happened on US23 a federal Highway
Submitted: 2 years ago.
Category: Tax
Expert:  PDtax replied 2 years ago.

PDtax :

Hi from Just Answer. The issue you are involved in is called "repetitive audits".

PDtax :

Internal Revenue Manual 4.10.2.8.5 guides IRS behavior in continued pursuit of a recurring tax inquiry. Generally, the IRS position is that they are supposed to discontinue an audit about an issue if examined in the prior two years. A third year, well, that is the magic test for the IRS to examine again.
Repetitive Examinations (08-01-2007)
(1) If a taxpayer (individual) responds to the initial contact by stating that an examination of
the same issue(s) in either of the two preceding years resulted in no-change or a small tax
change (deficiency or overassessment), the following action will be taken:
a. Ask the taxpayer for information which may help to determine if repetitive
examination procedures apply, such as the prior year(s) audit reports, where the
return(s) were filed and where the examination(s) were completed.
b. If an appointment has been set, advise the taxpayer that the appointment is
postponed pending a review of our files to determine if the examination should be
continued.
c. Secure an IDRS command code I/BMFOLZ print of the taxpayer's accounts. All
individual returns closed as a no-change, require entry of an IMF no change issue
code to allow AIMS to record the issues considered during the examination and
no-changed. This print will display the no change issue(s). Classifiers will review
this print if available during classification. See IRM 4.4.12 and visit
http://sbse.web.irs.gov/aims/docs/IMFissuecode.xls for a list of IMF Issue Codes.
(2) When the taxpayer provides records identifying the issues examined in prior years:
a. If the issues are the same as in the current year examination, and the I/BMFOLZ
print indicates either no change or a small change to the taxpayer's liability, then
the current examination can be closed. Send Letter 2684 (DO) to close the
examination.
b. If a substantive tax change is shown for either year, the taxpayer will be informed
that repetitive audit procedures do not apply and the examination will be
continued. Letter 2685 (DO), Repetitive Exam Letter, will be used to notify the
taxpayer and reschedule the appointment.
(3) When the taxpayer does not furnish records to identify the issues examined in prior years,
the examiner should pull a MFTRA and I/BMFOLZ print. The examiner should use the
following techniques to determine whether repetitive audit procedures apply:
a. If the MFTRA print indicates a no-change or small tax change for both years, or
for one of the years and no examination activity for the other year and the no
change issue codes on I/BMFOLZ print do not provide adequate information, then
the return(s) and related files for the year(s) examined should be requisitioned.
The requisitioned files should be reviewed to determine if the issues currently
under examination are similar enough to the issues in the prior no change/small
liability year(s) to warrant concluding the current examination.
b. If a substantive tax change is shown for either year the taxpayer will be informed
that repetitive audit procedures do not apply and the examination will be
continued. Letter 2685 (DO) will be used to notify the taxpayer and reschedule
the appointment.
(4) In office examination, group manager approval must be obtained and documented on
Form 9984-D before applying repetitive audit procedures. In field examination,
managerial approval is not required on repetitive audit cases.
(5) Cases qualifying for repetitive audit should be closed as follows:
a. If the taxpayer's records were not examined, even though contact was made, the
case may be closed using "survey after assignment" procedures. See IRM
4.10.2.5.2.
b. If the taxpayer's records were examined, the case will be closed using regular nochange
procedures.

PDtax :

The excerpt from the Internal Revenue Manual came from the following website: http://www.bradfordtaxinstitute.com/Endnotes/IRM_410285.pdf.

PDtax :

going to Q and A now...

PDtax41091.6745454051
Customer:

thank you for your responce, I was advised by the IRS 25 years ago about New Jersey State Police officer injured and was found that his disablity was non-taxable, Reasons give if Killed on federal land or Highways, he would have received the purple heart and his family the military death benifits, and this still aplies today. I worked with two Troopers that were killed on federal Highway abd received both benifit..... Thank you

Expert:  PDtax replied 2 years ago.
First of all, sorry about the repeat inquiries. But, there are steps you can take to fight back.

I would first engage a tax pro to handle your Appeal, since you report you have lost at audit. The insertion of a quality representative is often the best first step in tax defense.

Since you report no tax was due in those prior audits, you would be seen as complying with the tax law. Since IRS waited to get to year 3, they appear to be trying to circumvent that standard in their own Internal Revenue Manual guidelines. Now, how to help you build your case:

I would then suggest requesting a copy of your previous audit files using the Freedom of Information Act (FOIA). The application will force IRS to produce its prior audit workpapers, which could produce the best evidence against their audit. Their workpapers will have excerpts of the appropriate case law, and perhaps references to the Internal Revenue Manual referring to the scheduling of these repeat audits.

I would then citate the law used in your favor in previous audit periods, to insure there were no changes in the law that might actually make some of your benefits taxable.

Once I had those items, I would think I could go to Appeals and win. IRS has to assess its risks at Appeals, and if they believe you would go to Tax Court, they may acquiesce at Appeals, abate the taxes, and note your file not to keep coming to you. The risk they run in court is not only a loss, but they could be found having to pay your legal fees, and having an adverse published opinion other taxpayers could use to fight similar pursuits.

I suggest a tax pro to handle this. make sure the pro you hire can represent you in Tax Court (CPAs and tax attorneys can, enrolled agents might). I hope this gives you some of the tools you will need in your fight. Thanks for asking at Just Answer.
Expert:  PDtax replied 2 years ago.
Terrence, please review the additional steps I recommend to build your defense against this audit, and ask any questions you may have.
PDtax, CPA firm owner
Category: Tax
Satisfied Customers: 1919
Experience: 32 years tax experience, including four years at a Big 4 firm.
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