They did and he did. They ended up owing him about $50. I asked him "Didn't you lose more than $50 over the years by foregoing deductions to which you were entitled?"
He told me he probably did, but that wasn't the point. The point was to make one of their greedy agents go home owing him money at the end of the day. He did and they never bothered him with an audit again.
Now, they avoid such face to face contact just by arbitrary recalculations. In my case, every refund except one over the last 10 years has been whittled away by about $200 even though I've used a highly acclaimed tax software program to prepare everything.
It is bullsh*t and I, and the IRS, knows it. But they also know few people will fight them over $200.
This man has a sum well worth fighting them for; it would be worth his while to at least call one of those tax services which advertise on Hannity and other shows.
I have gotten dunned for 1099s that were actually in my business Schedule C but IRS was looking for them in my individual income. Wrote a letter, they went away.
Demand reasoning, support for their claim....and move all your money out of your bank accounts as the IRS will seize it without warning. If they continue, engage a registered agent to contest their claim.
It's helpful for taxpayers to know what kind of formal documentation is sent to the IRS from third parties like vendors, clients, etc. that needs to cross-check correctly with your own tax return. If you earn $1,000 in interest in a bank account, for example, and forget to report it IRS, the income is reported to the IRS through a 1099-INT form that's been filed by the bank. The IRS will cross-check these different forms against each other and flag any discrepancies. There are probably hundreds of thousands of cases like this every year.