At the Movies

We often hear stories about IRS examiners being unreasonable and difficult to deal with, but in my experience that’s not always how it goes. Here’s a story about an IRS agent who showed compassion for a taxpayer’s plight.

The case was assigned to me in late July. Our member was an octogenarian who lived alone. He’d invested almost the entire contents of his 401K − over $50,000 − into unregistered securities. The securities were movie production investments which were structured as loans with “back end” participation if the movie made money. The investment instruments were not publicly traded and were illiquid, so trying to sell them would be pretty difficult. The companies who sold these investments targeted retired persons at home watching TV during the daytime.

Our member had liquidated almost his entire 401K and rolled it over to an alternative investment IRA custodian to hold these “private placement” investments. During the period from 2004 to 2006, the taxpayer made investments in these products even though he did not meet the investment qualifications ($1,000,000 net worth and $100,000 liquid capital). In addition, he never received an interest payment or any other return on his investment. In October of 2010, he received a notification from the custodian that they were finally able to get a valuation from the issuer (as of 12/31/2009). Soon thereafter, the taxpayer was informed that the custodian was resigning and that he had to find a new one. The member ignored the letter. He determined he would never see any return and didn’t hear back from the custodian until in 2012 when they sent him a 1099-R showing the valuation as of December 31, 2009, as a taxable distribution amount.

The taxpayer, figuring the investments were worthless, did not show the distribution on his 2011 tax return. In late May of 2013, he received an AUR notice regarding the taxable distribution and a bill for $9,205. We responded to the notice by providing information about the different entities that he had invested in and articles describing them as a “scam.”

The IRS did not agree, and on October 3, 2013, the agency issued a Statutory Notice of Deficiency. Since the taxpayer’s documents were spotty, it did not seem to warrant filing an appeal, but we agreed to make another submission on his behalf. Rather than relying solely on documentation we’d submitted, we explained the situation in detail, hoping the IRS would understand. The available court cases for similar matters were not in our members’ favor, but I kept a positive attitude.

I contacted the IRS on December 27, 2013, and the agent said a stall letter had been issued earlier in the month. She would put in an action item for the examiner to call me.

The examiner called and said she was sympathetic to the taxpayer’s plight. If I could send her proof that there had been legal action against the principles of the companies, she would take that into consideration. I faxed over a copy of the Cease and Desist order from the State of Washington. After she reviewed it, she called back and said she had cleared the case and they would not make any changes to the taxpayer’s return.

We were thrilled. We were successful and we had another happy member!