IRS inquiry: Do incorrect 1099s need rebuttal?

[ManOntheLand]

David, I am not trying to make anybody doubt LMR. I am only trying to help improve the tactics used to make LMR work efficiently in dealing with IRS and to help people avoid missteps. Filing a 1040 and taking a deduction for LMR is unnecessarily exposing one to the risk of frivolous return hassles.

A better tactic might be to inquire in writing with IRS Chief Counsel BEFORE filing. They cannot penalize you for a letter making an inquiry! It is their stated mission to assist you in understanding your tax obligation. In such a letter you can state your position, that you believe LMR exempts you from tax and that you believe you have no filing requirement. Attach all your check copies etc. Let them tell you if they have any problem with your position ahead of time! If they say nothing, you could safely rely on their silence to justify not filing, or to file a statement or 1040 to claim a refund if you choose. They may even send you a determination letter that you are not required to file.

Having approached IRS before you file a LMR return, you could then rely on their response to defend against a frivolous return penalty if necessary. You would have a good case for an 843 abatement because you made a good faith effort not to file a frivolous return and relied on their agreement or tacit agreement with your position.