Lydia Ramirez

Lydia Ramirez was an industrious woman who ran two business and managed a large real estate portfolio, but her businesses tended to be profitable while her real estate ventures did not. And in 2008 and 2009, she filed tax returns showing business income that was largely offset by real estate losses.

However, the Internal Revenue Code makes a distinction between “active” and “passive,” and you cannot use passive losses to offset active income. So on these returns, she claimed that she was passive in both ventures, but when she was audited by the IRS, they determined that she was active in her businesses and disallowed the offsetting real estate losses.

As a result, the IRS sent her a deficiency notice for taxes owed and accuracy-related penalties, to which she responded by petitioning the tax court. Unfortunately, Ramirez died before the case went to trial, and the IRS tried to use that to its advantage. In order to successfully uphold the IRC §6662 penalty against an individual, the IRS must prove that it was initially approved by a supervisor.

Apparently, they did not have evidence to support approval, so the IRS tried to claim that it was no longer trying to impose the penalty on an individual since Ramirez’s case was taken up by her estate. That would have been a cute trick, but the tax court didn’t buy it, holding that the estate was not liable for the accuracy-related penalties and proving that even the IRS cannot always reach beyond the grave to collect.

Josh Norris