Reference no: EM133389262

Case Study: Roger was employed by an investment banking and consulting firm. His job was to provide investment advice to customers of the firm who were assigned to him. He also arranged purchases and sales of securities for his customers through the firm. His compensation consisted of a base salary plus commissions. The firm paid Roger on a monthly basis, and withheld income tax from his compensation as required by law.

Roger was married. His spouse, Sherry, was not employed and had no income. She continued to use her maiden name, Smith, during their marriage. They had filed joint returns for the all years prior to 20x2.

Roger also engaged in frequent purchases and sales of securities for his own account. He often made substantial profits from those transactions. He paid the estimated taxes on a quarterly basis as required. He was having a good year in 20x2, but incurred significant unanticipated losses during the fourth quarter. These losses have the effect of reducing his taxable income for the year, as a result of which he had an overpayment for the year in the amount of $100,000.

For the years prior to 20x2, Roger and Sherry had prepared their own returns using commercial tax preparation software and had filed the returns timely. In February 20x3, the area in which Roger and Sherry lived experienced some very bad storms that resulted in severe flooding. Their home was completely flooded, and they lost all their furniture and most of their possessions. Their computers were damaged beyond repair. All the data, including their income tax data, was lost. As a result, it was not possible for them to file their tax return for 20x2 on a timely basis. So Roger filed for an extension of time to file the return. Roger knew that they would not owe any tax, so he felt confident that obtaining an extension of time to file would be safe.

He and Sherry were in the process of rebuilding their home and reconstructing their records, including their tax records, when in June 20x3 Roger's firm received notice that it was being investigated for numerous violations of securities laws. Roger was interviewed extensively by law enforcement personnel. The preparation and meetings consumed much of his time. Soon the firm went out of business. Fortunately, Roger avoided any personal problems, but he had to find a new job. He was hired by another firm in December 20x3. He immediately went to work rebuilding his client base. Roger's hard work paid off and, by June 20x4, he and Sherry had their home and their cash flow back on track. They filed their 20x3 return timely, but still had not filed their 20x2 return. Roger knew that they would not be subject to penalties because the tax had been overpaid.

Roger experienced good success in his new job. In addition to salary and commissions, his investments were quite profitable. Their tax returns for 20x4 and later years became substantially more complicated than for prior years. So they decided to have their 20x4 and future returns prepared by an accountant. In early 20x5, when the accountant was working on the 20x4 return, Roger told the accountant that they had a big overpayment from the year 20x2 that could be used towards a future tax liability. Roger's new accountant told them that the overpayment would not be needed for 20x4, but that he would keep it in mind for future years.

Sherry's mother, Sally, was experiencing problems taking care of her personal financial matters, so Sherry's name was added to Sally's account at Big Bank. Although all the deposits were made by Sally, either Sherry or Sally could draw on the account at any time.

Roger and Sherry had their accounts at Big Bank as well. Big Bank also had a mortgage on Roger and Sherry's home.

Sherry's sister, Susan, owned a car, which she was not using. Sherry did not have a car, so with Susan's permission, Sherry gladly took over that car. It was titled in the name of "S. Smith," the same name that Sherry used. So she left it titled in the name.

Sherry's father, Steve, had passed away a few years ago. He had owned some property in his name (S. Smith) on a lake a few hundred miles from the city. He left the property to Sherry and Susan on his death. There had not been any probate proceedings, so the property was still in the name of S. Smith.

Roger had a very good year 20x7, but he underpaid his tax for that year. So, after consulting with the accountant, he decided to apply the 20x2 overpayment to the 20x7 tax liability. The joint return was filed timely on October 15, 20x8, after an extension of time to file had been obtained.

Roger received a letter from the IRS in early 20x8 informing them that they could not use the $100,000 overpayment from 20x2 for their 20x7 tax liability because of IRC section 6511(b)(2). Soon thereafter, they received a notice and demand for payment in the amount of $100,000 plus interest and penalties for the year 20x7.

The IRS conducted a search of the public records to determine whether Roger or Sherry owned any property. The IRS discovered an automobile titled in the name of "S. Smith." The IRS knew from tax returns that Sally use that name. A Revenue Officer came to Roger and Sherry's home (the address had been on their last few returns) and saw the car in the driveway. So the IRS issued a notice of levy on the car and seized it right away.

The IRS also discovered the property in the name of "S. Smith" that had been left to Sherry and Susan a few years earlier.

Roger hired a lawyer to commence a malpractice action against the accountant for failing to advise them to take action on a timely basis with respect to the 20x2 overpayment.

Questions:

1. What actions do you expect the IRS to take to collect the amount due for the year 20x7? What action should Roger and Sherry take?

2. What action should be taken by Sally, Sherry's mother?

3. What action should be taken by Susan, Sherry sister?

4. Big Bank has learned that the IRS has taken collection actions against Roger and Sherry, although the IRS has not yet issued a notice of levy to Big Bank. The bank is concerned that the collection actions might weaken Roger and Sherry's financial position and jeopardize the bank's ability to get paid on its mortgage. What action should the bank take?