If you argue the IRS audit was unfair but never actually dispute the numbers, you’re probably going to lose. That’s just how the system works.
Holding
The Tax Court sided with the IRS on every front. Dieffenbach, a Connecticut attorney, got hit with tax bills, late-filing penalties, and accuracy penalties for five years straight. The IRS had the paperwork—W-2s, 1099s, Social Security statements. Dieffenbach had... nothing. No evidence, no counter-numbers, just arguments. The court wasn’t impressed.
Why It Matters
This is basic burden-of-proof territory. The IRS showed Dieffenbach got paid. After that, it was his job to prove the numbers were wrong. He didn’t.
Procedural nitpicking is not a defense to owing tax. Dieffenbach spent his time arguing about the notice and whether the IRS ran two audits instead of one. None of that changed the fact that he never challenged the actual income numbers.
As for the business expenses, Dieffenbach claimed a lot but proved nothing. He filed unsigned or amended returns with big Schedule C deductions, but didn’t back them up in court. The Tax Court gave him nothing.
This case is a reminder: the Tax Court cares about evidence, not how the IRS ran the audit. If you want to win, bring receipts. Complaints about process won’t get you far.
Key Facts
Jeffery Dieffenbach is a licensed attorney in Connecticut who also performed bookkeeping work.
The IRS examined his federal income tax liabilities for 2015 through 2019.
From 2015 through 2017, the IRS treated Dieffenbach as a nonfiler and prepared substitute returns under §6020(b). Those returns relied on information reported by third parties.
Dieffenbach later submitted unsigned returns for 2015 through 2017 containing Schedule C deductions. The IRS did not accept those returns.
He filed a return for 2018 after the IRS examination began and timely filed his 2019 return. He later submitted amended returns for 2018 and 2019, but the IRS did not process them.
The IRS issued a notice of deficiency on October 24, 2023.
The notice determined the following deficiencies:
2015: $7,620
2016: $19,499
2017: $12,212
2018: $16,124
2019: $16,948
The notice also determined failure-to-file and failure-to-pay additions, an estimated tax addition for 2016, and accuracy-related penalties of $3,225 for 2018 and $3,390 for 2019.
Third-party information returns showed that Dieffenbach received income from several sources.
For 2015, he received:
$3,927 of unemployment compensation from Rhode Island
$9,093 of wages from Network and Simulation Technologies
Social Security benefits
$14,610 of independent contractor income from Greenleaf Compassionate Care Center
$6,562 of independent contractor income from Malcom Company
In later years, he received additional wages, Social Security benefits, and compensation as an independent contractor.
Greenleaf reported payments of $14,610, $24,855, $37,870, and $50,575 for 2015 through 2018, respectively.
Dieffenbach also claimed substantial Schedule C expenses. He reported approximately:
$22,101 for 2015
$32,558 for 2016
$38,011 for 2017
$62,844 for 2018
Those claimed expenses included advertising, vehicles and equipment, taxes and licenses, interest, office expenses, utilities, and self-employed health insurance.
He also claimed a $75,000 net operating loss carryforward deduction on his 2019 return.
Statutory and Regulatory Framework
Section 61 generally includes all income from whatever source derived in gross income.
The IRS is ordinarily presumed to have the amounts in a notice of deficiency correct. The taxpayer bears the burden of proving otherwise under Tax Court Rule 142(a).
For unreported income, however, the IRS must first establish an evidentiary connection between the taxpayer and the income. Third-party Forms W-2 and 1099 can satisfy that threshold requirement.
Section 6020(b) allows the IRS to prepare a substitute for return when a taxpayer fails to file.
Section 6651(a)(1) imposes an addition to tax for failing to file a required return on time unless the taxpayer establishes reasonable cause.
Section 6651(a)(2) imposes an addition for failing to pay tax shown on a return. A substitute for return prepared under §6020(b) can constitute a return for purposes of that provision.
Section 6654 generally imposes an addition to tax when an individual fails to make required estimated tax payments.
Section 6662 imposes a 20% accuracy-related penalty on certain underpayments, including those attributable to negligence or a substantial understatement of income tax. A substantial understatement generally exists when the understatement exceeds the greater of 10% of the tax required to be shown or $5,000.
Arguments
Taxpayer argued:
The notice of deficiency was invalid.
He had filed returns on time for 2015 through 2017.
The IRS improperly subjected him to multiple examinations.
The IRS’s actions were unconstitutional.
Res judicata barred the IRS from proceeding because it had previously filed a Tax Court case covering the same years.
Government argued:
Third-party information establishes Dieffenbach’s receipt of taxable income.
IRS records showed that he did not file valid returns for 2015 through 2017.
The examination remained a single examination even though a second revenue agent took over after the first agent retired.
The statutory period for assessing 2017 remained open because Dieffenbach executed Form 872, extending the period.
The earlier Tax Court proceeding did not create res judicata because the case was dismissed for lack of jurisdiction and no judgment on the merits was rendered.
Dieffenbach remained liable for the additions to tax and accuracy-related penalties because he failed to establish reasonable cause or otherwise rebut the IRS’s determinations.
Court’s Reasoning
The IRS established the required evidentiary connection to the unreported income through Forms W-2, Forms 1099, Forms SSA-1099, and Form 1099-G.
Once the IRS met that threshold burden, Dieffenbach had to show that the deficiency determinations were arbitrary or incorrect.
Dieffenbach did not offer testimony or other evidence disputing the income amounts. When the Court asked whether he had evidence addressing the deficiency determinations, he continued to argue only that the notice was invalid.
IRS records showed no valid returns for 2015 through 2017. Dieffenbach produced no persuasive evidence to overcome those records.
The limitation period for 2017 had not expired. Dieffenbach signed Form 872 extending the assessment deadline to December 31, 2023, and the IRS issued the notice on October 24, 2023.
The assignment of a second revenue agent after the first agent retired did not establish that the IRS conducted a prohibited second examination. Dieffenbach failed to prove that more than one examination occurred.
The prior Tax Court proceeding did not bar the case under res judicata because it was dismissed for lack of jurisdiction. The earlier case therefore produced no final judgment on the merits.
The Court found no substantial evidence of unconstitutional conduct by the IRS that would justify looking behind the notice of deficiency.
IRS account transcripts established that Dieffenbach failed to file timely returns for 2015 through 2018. He did not show reasonable cause, so the Court sustained the §6651(a)(1) additions.
Certified substitutes for returns established the basis for the §6651(a)(2) failure-to-pay additions for 2015 through 2017.
Dieffenbach filed no 2015 or 2016 return and made no required estimated payments for 2016, supporting the §6654 addition.
The 2018 and 2019 understatements exceeded $5,000 and qualified as substantial understatements. Dieffenbach did not establish reasonable cause and good faith, so the Court sustained the §6662 penalties.
Result
The Tax Court sustained the IRS’s deficiency, addition-to-tax, and penalty determinations, with the final amounts to be calculated under Tax Court Rule 155.
The Takeaway
Here’s the real takeaway: you can complain about IRS procedures all day, but if you don’t actually dispute the numbers, you’re out of luck. The Tax Court wants evidence, not just arguments.
List of Citations
IRC §61(a): Defines gross income broadly as income from whatever source derived.
IRC §6020(b): Authorizes the IRS to prepare substitutes for returns for nonfilers.
IRC §6651(a)(1): Imposes the failure-to-file addition to tax.
IRC §6651(a)(2): Imposes the failure-to-pay addition to tax.
IRC §6651(g): Treats certain §6020(b) substitutes for returns as returns for failure-to-pay purposes.
IRC §6654: Governs additions to tax for underpayment of estimated tax.
IRC §6662: Imposes the 20% accuracy-related penalty.
IRC §6664(c)(1): Provides the reasonable-cause and good-faith exception to the accuracy-related penalty.
IRC §6751(b)(1): Requires written supervisory approval for the initial determination of certain penalties.
IRC §7491(c): Places the burden of production on the IRS for individual penalties and additions to tax.
IRC §7605(b): Limits unnecessary examinations and multiple inspections of a taxpayer’s books.
Welch v. Helvering, 290 U.S. 111 (1933): Establishes the general presumption of correctness for deficiency determinations.
INDOPCO, Inc. v. Commissioner, 503 U.S. 79 (1992): Confirms that taxpayers must establish entitlement to deductions.
New Colonial Ice Co. v. Helvering, 292 U.S. 435 (1934): Treats deductions as matters of legislative grace.
Weimerskirch v. Commissioner, 596 F.2d 358 (9th Cir. 1979): Requires an evidentiary foundation connecting a taxpayer to alleged unreported income.
Petzoldt v. Commissioner, 92 T.C. 661 (1989): Applies the evidentiary foundation requirement in unreported-income cases.
Silver v. Commissioner, T.C. Memo. 2021-98: Recognizes third-party information returns as sufficient evidence of income.
Walquist v. Commissioner, 152 T.C. 61 (2019): Explains the taxpayer’s burden after the IRS establishes receipt of unreported income.
Greenberg’s Express, Inc. v. Commissioner, 62 T.C. 324 (1974): Limits Tax Court review of the IRS’s administrative examination process.
United States v. Powell, 379 U.S. 48 (1964): Interprets §7605(b) as imposing no severe restriction on IRS investigative authority.
Hough v. Commissioner, 882 F.2d 1271 (7th Cir. 1989): Addresses claims involving prohibited second examinations.
Estate of Sower v. Commissioner, 149 T.C. 279 (2017): Addresses the taxpayer’s burden to establish an improper second examination.
Federated Department Stores, Inc. v. Moitie, 452 U.S. 394 (1981): States principles governing res judicata.
Monge v. Commissioner, 93 T.C. 22 (1989): Addresses jurisdiction and the effect of a prior Tax Court dismissal.
Higbee v. Commissioner, 116 T.C. 438 (2001): Explains the IRS’s burden of production for penalties.
Wheeler v. Commissioner, 127 T.C. 200 (2006), aff’d, 521 F.3d 1289 (10th Cir. 2008): Addresses the IRS’s evidentiary burden for failure-to-pay and estimated-tax additions.
Dieffenbach v. Commissioner, No. 3921-22 (T.C. May 4, 2023): Earlier proceeding dismissed for lack of jurisdiction and therefore not a judgment on the merits.