This is the kind of story you get to tell when you're gathered around with other CPA firm partners - how you got out of $40,000,000. It sounds cool now that it's done, but everyone hearing it knows all the brain damage that must have gone along with it.

But here's how it all went down (see last week's edition for Company background).

Problem #2

"Roger, it's [junior accountant] at [client]. I just got these notices and haven't shown them to [CFO] because I wanted to check with you that they are wrong. I have like 6 notices totaling $30,000,000 for excise taxes. That's wild right?"

Me: "We didn't file those for you right?"

Jr. Accountant: "No, we filed these in house."

Me: *exhaling* "Oh bless thank goodness. That's a big number, so send them over and I'll take a look. But it may be time to let CFO know as this will be billed."

When Problem #2 Began

Jr. Accountant was responsible for the accounting and tax compliance - something way over his head as a young CPA with 3 years of experience prior to this position. But one thing he did right was document conversations with the IRS.

Client had begun purchasing commodities and shipping them across the border - a transaction not subject to excise tax based on Jr.'s research. But to double check that, he called into the IRS and got a hold of someone in the excise tax team who confirmed that was not subject to excise tax and no return was necessary - which was wrong.

A few months later, another excise tax auditor with the IRS came into their office for an onsite audit. [The client withheld and remitted excise tax for applicable trades and had an auditor come in once or twice a year to audit those transactions.] During this visit, Jr. asked her what her opinion was of the requirement to file Form 720 (excise tax filing) for these export sales.

She told them (correctly) that they DID HAVE TO FILE those returns BUT they were eligible to claim the export credit - so still no tax was due - also kinda wrong.

And even though several quarters had passed, they were better off filing the late 720s with the credit.

The Blow-up

Here's the thing about Form 720. It's due by the end of the month following the end of the quarter - so Q1 720 was due April 30. But what they didn't tell Jr. was that ANY CREDIT CLAIMED FOR EXPORT MUST BE CLAIMED ON A TIMELY FILED RETURN.

And if you've ever seen how excise tax is calculated, it's based on the gallon for fuels.

So Jr. sent in these late 720s claiming the export credit. And you can guess it, when they were processed, the export credit was disallowed - resulting in $30,000,000 of excise tax due.

The notices were legit. The tax was owed. And we were about to go to war with the IRS to keep my client's business open.

The Stakes

By this time, the client had switched audit firms to BDO as their credit facility was 9 figures and they needed a national firm to sign the audit report. And this was all happening right as the audit report for the prior year was being finalized.

The CFO had no choice but to tell the audit partner about this. They immediately insisted that we accrue for it - which would put them drastically out of compliance with their covenants with their lenders.

The CFO then called the lenders and asked for a waiver of covenant compliance while they sorted this out - that was rejected. The only way through was to avoid accrual.

The client called a meeting with his executive team, the BDO partner, and me. After explaining how it all happened and how we were going to resolve (keep reading), we were able to land on disclosure as a contingent liability and keep them in compliance.

While this was a huge win, we now had our work cut out for us to actually resolve it.

The Plan

There was nothing we could do about the 720s - they were filed as they should have been. And there was nothing we could do about the interest accruing. We just had to keep calling in and working to get the account on another hold to prevent tax liens from kicking in and out client getting their name published in the papers.

Instead, we were going to have to amend the federal returns to claim a credit via Form 4136 in the same amount as the notices for each year and that credit would offset the amount due.

While we were preparing the amended returns and reviewing prior years, we discovered that our client had actually never made a 475f election - an election that permitted them to recognize trading gains and losses as ordinary income. To continue this treatment, we were going to have to file a Private Letter Ruling and request approval from the IRS. And if you know anything about the 475f late election request PLR saga, they are almost never approved - usually because people try to claim it after they realize they had a really bad year and the IRS would be injured by taxpayer owing less tax.

But our facts were different. Our client would actually be worse off by having the election in place - but it was just how they had treated the accounting since inception. Our controversy team had a call with three of the smartest people at the IRS that deal with traders (Chief Counsel) - and the IRS asked "what are you worried about if you get audited? This is not something, if I were in your shoes, I'd spend energy and time on requesting a PLR." We read between the lines. They mentioned that while this had a likely favorable fact pattern, the IRS strongly prefers not to issue such PLRs that embolden people with different fact patterns and waste the IRS' time.

Resolution

That side quest resolved, we carried on amending three years of returns and pushing them through the IRS' system with the help of our Taxpayer Advocate. It took several months to go through special review because of the size of the credits - but it was eventually all approved and all penalties and associated interest were removed.

This consumed entire weeks of my time - and weeks of time for a lot of people at the firm. But it's also one of the proudest accomplishments I have as coordinating all the moving parts and keeping them on time helped save my client's business.

Next week, we'll talk about lessons learned.

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