Business Law - If an IRS examination is not resolved

Business Law Question

Protest and Written Submissions to Appeals Division:

If an IRS examination is not resolved within the Examination Division, a thirty-day letter will be issued to set forth the proposed adjustments. The taxpayer has the right to request an administrative appeal to the Appeals Division of IRS within thirty days of the date of the receipt of Letter 525, general 30 day letter (“Protest letter”). During the Appeals process, the Appeals Division may request further factual and legal submissions.

Assignment: Draft a Protest Letter (See attachments including IRS Publication 5 attached). The general requirements in the preparation and submission of a protest letter are also attached.
FACTS:
Your client Robert Richards’ 2019 form 1040 was examined by Internal Revenue Agent Williams.
The only adjustment made was related to Robert having claimed a business bad debt deduction for a debt of his wholly owned company, “Robert’s Rulers, Inc.
Robert is an employee of Robert’s Rulers, Inc. (an S Corporation). In fact, the salary and distributions that Robert’s Rulers, Inc. pays to him are his primary source of income.
Robert’s Rulers, Inc. has had severe cash flow problems for some time and has fallen behind on paying suppliers of products that Robert’s Rulers, Inc. uses in its business. Inch by Inch, Inc., is Robert’s Rulers, Inc.’s most important supplier. Inch by Inch’s president,
Michael Meter has called Robert and told him that, unless prior invoices were paid, Inch by Inch would not sell any additional products to Robert’s Rulers, Inc. This would be an unmitigated disaster as Inch by Inch’s provides the primary component in Robert’s Rulers, Inc.’s products.
Not only that but Michael Meter has threatened to force Robert’s Rulers, Inc. into bankruptcy.
Not only would this result in the likely demise of Robert’s Rulers, Inc. but it would also destroy
Robert’s business reputation and basically ruin him.
In order to prevent this, Robert paid Robert’s Rulers, Inc.’s debt to Inch by Inch individually.
Unfortunately, this did not save Robert’s Rulers, Inc. which went out of business at the end of the year anyway. On his form 1040 for 2019 Robert claimed the business bad debt for personally paying the debt to Inch by Inch.
You have explained all this to the Revenue Agent Williams but to no avail. At the end of his examination, Williams issues a form 4549 (see attached 4549).
You discussed the issue with Robert and you both do not agree with the revenue agent’s adjustment. You mention the possibility of taking the matter to the Appeals division of the IRS.
Robert agrees to let you represent him before Appeals.

You have told Robert that you are required to prepare and submit a Protest Letter requesting a conference with the Appeals division. You have a template (attached) that the manager of the CPA firm you work for has provided to you to assist in properly structuring the protest letter.
Likewise, your manager provided you with a sample protest letter (attached).
You advised Revenue Agent Williams that the taxpayer does not agree with the adjustment. RA Williams writes the case up unagreed and assesses the Accuracy Related Penalty on top of the deficiency for the disallowed item.
In addition, even if the IRS was successful in finding that the payment was not a business bad debt, no accuracy related penalty should be assessed because you feel that your client had reasonable cause for the position taken on his 2019 tax return. Your protest letter will address these two
issues. Please note, Robert’s 2019 income tax return did not have a form 8275 Disclosure Statement attached.
You need some direction in doing your research so that you can properly describe why Robert should be entitle to the deduction. Your manager suggested that you research the topic of business bad debt, job preservation, and perhaps other searches, In order to determine the position you will take in your protest letter. You should also determine if Robert has reasonable cause as a defense for the accuracy related penalty. Your manager has also suggested that you consult the Internal
Revenue Manual (IRM) as she feels that if there was something helpful on point it would be very powerful in making your case. You understand that a protest doesn’t mean that you will win in Appeals. However, Robert wants you to appeal so you begin the job.
The following documents are attached:
1. From 4549-E Income Tax Discrepancy Adjustments.
2. Form 915 Letter 915 – Letter to Transmit Examination Report.
3. Explanation of proposed adjustment prepared by the Revenue Agent.
4. Preparing a written Protest Letter to the Appeals Office.
5. Appendix 22B Sample Protest Letter.
6. Publication 5, “Your Appeal Rights and How to Prepare a Protest If You Do Not Agree.”
You may use the information from item 3 above in lieu of the “How to Prepare” section of Publication 5