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City settles IRS tax dispute to save its credit rating

Even a municipality can get into trouble with the Internal Revenue Service. In a recent example, the city of Scottsdale agreed to a $750,000 settlement to resolve a tax dispute.

The tax relates to the city’s bond holdings. The city used a portion of its proceeds from those bonds to refinance a lease on a municipal parking garage near a shopping center. The IRS viewed that allocation as a taxable event, making the interest on the portion of allocated bonds taxable.

City officials disagreed with the IRS' position, citing federal law as support that the bonds were excluded from gross income. Unfortunately, a dispute with the IRS can have collateral consequences to one’s credit rating. In this instance, a city official said that the settlement partly reflected the desire to avoid any damage to the city’s bond rating.

As a law firm that has helped many clients in Washington, D.C., Maryland and Virginia with tax issues, we understand how intimidating it can be to take a position against the IRS. For starters, the IRS is a large organization with substantial resources and personnel. To make matters worse, the Internal Revenue Code is complex and burdensome, with language that sometimes can be confusing or ambiguous. Related provisions of the I.R.C. are not necessarily organized in an intuitive manner, yet the IRS typically imposes tax penalties and interest on any overdue tax, even for innocent mistakes.

In order to even the playing field, anyone involved in a tax controversy, audit or collection dispute with the IRS should consult with a tax attorney. Our law firm has such experience, both in federal tax controversies and state tax matters.

Source: Scottsdale Independent, “Scottsdale to pay IRS $750,000 in taxable bond dispute,” Sept. 1, 2016

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