Failure to File - Income Proving

There was an interesting Tax Court case, Barrion v. Commissioner that was recently released. Barrion did not file his 2012 tax return. The IRS received a W-2 for $204,805 and a 1099-INT for $73.


The IRS properly filed an SFR for the taxpayer, which allowed the standard deduction and one personal exemption. The taxpayer filed in Tax Court challenging the SFR on the grounds of,
"I had a hard drive failure and lost data. I would like to file my own return for 2012."


The IRS requested the taxpayer respond to admissions of 1) having received the income, 2) having failed to file a return, 3) provide documents for any deductions, credits, and exemptions he would be entitled, and 4) show anything that he is not liable for any penalties. The taxpayer did not respond. Under Rule 90(c), that means all matters were deemed admitted.


Since the taxpayer failed to assign error in his petition that the income was not his, the income was proven to be the taxpayers. The failure to respond and support any deductions was also upheld.


This is a good case to point out to potential clients. Under competent representation, the taxpayer could have 1) avoided Tax Court all together and 2) reduced the amount of tax due through proper submissions of deductions, credits and exemptions.


Relevant Citations: TC Memo 2016-153

60 Day IRA Rollover Waiver

In Rev Proc 2016-47, the IRS has made it much easier for people seeking a waiver for missing their 60 days required to make an IRA rollover contribution.


Under the Rev Proc, they can fail to miss the 60 day window due to: an error committed by the financial institution either getting or sending the contribution, a misplaced check, deposit into an account that was thought to be an eligible retirement plan, client's principal residence was damaged, a death in the family, a serious illness in the family, incarceration, restrictions imposed by foreign country, postal errors, IRS levy that is returned, or taxpayer made a reasonable effort but the contribution was delayed by the financial institution.


The contributions must be made 30 days after the event above stops occurring.


This is a good place to remind people that if the IRS wishes a client to make a distribution out of an IRA to pay past due taxes, its often better to request the IRS to levy the account so the taxpayer will not need to pay the 10% penalty. Even though the money goes to the same place, an exception only applies to IRS levies on these accounts.


Relevant Citations: Rev Proc 2016-47

Early Election of New Partnership Audit Rules

With everyone happy that TEFRA is going away, the IRS has decided to try to implement these new rules earlier. Now, starting with partnerships with a tax year of Nov. 2, 2015 or later, if the IRS sends an audit notice for the partnership, the partnership has 30 days to file an election to fall under the new partnership audit guidelines.


The details on the election can be found in Temp Reg 301.9100-22T. This is a great tool for the future to get out of TEFRA procedures.

Deductions in Prior Years Relating to Audit Items in Current Years

One often question I get is if an adjustment in one year will affect future tax returns. In the case Tanzi v. IRS, TC Memo 2016-148, the taxpayer took $12,332 of depreciation. In court, the taxpayer argued the IRS, "allowed substantially similar depreciation deductions for prior years and that it would therefore be logically preposterous to deny the deductions for 2011."


The court brings up Pekar v. Commissions, 113 TC 157, 166 (1999), which states, "Each tax year stands by itself, and the Commissioner is not bound by his treatment of an item for a previous year."


The Pekar case is a great case to cite to Revenue Agents. Often, a Revenue Agent will say that he needs to make an adjustment in the current year since it will set precedence in a future year. Under Pekar, this is not true. The main item that usually will have precedence is in an employment tax audit where a practitioner seeks 530 relief, but for all other cases, this is not the case.


As an example, a Revenue Agent audited a return and got substantially all of the adjustments. The 80/20 rule should have applied. However, the Revenue Agent wanted to keep auditing more issues because it could set a precedent for future years. After a discussion with the group manager, we were able to get the case closed under the 80/20 rule using Pekar as a justification as to why the Revenue Agent was incorrect.


Relevant Citation: Tanzi v. IRS, TC Memo 2016-148

CDP Hearing - Statute of Limitations Error

In CJ Weiss, 147 TC -, No. 6, an attorney filed a request for a Collection Due Process Hearing (CDP) one day late. Filing late will typically make the practitioner only eligible for an equivalent hearing. The good aspect of the equivalent hearing is the statute of limitations does not freeze like it does for a CDP Hearing.


After levy notice is mailed, practitioners have 30 days to respond in order to get a CDP Hearing. If it is after the 30 days, they will receive an equivalent hearing.


In this case, the levy notice used a date that was earlier than the date of mailing. The attorney filing his request for a CDP Hearing used the date of the levy notice when calculating the 30 days. However, when the levy notice is prior to the date of mailing, it is the mailing date that practitioners need to use when calculating the 30 days to respond. This means his CDP request was actually timely filed, which then suspended the statute of limitations for the CDP Hearing.

Material Participation - Proving Hours

A very practitioner friendly case just came out in Hailstock v. Commissioner, TC Memo 2016-146. In the case, the taxpayer never kept contemporaneous records of her hours worked on rental properties. This is one area the IRS has been very particular about. Frequently, auditors asks for contemporaneous logs of the activities and when none is given, they will classify the activity as a rental (or deny real estate pro status).


This case gives practitioners a good citation to fight this, "Although we caution petitioner to construct contemporaneous time logs for her future real estate endeavors, we find her detailed and credible testimony to be a 'reasonable means of proof.'" The reasonable means of proof test comes from Reg. 1.469-5T(f)(4), which states: "The extent of an individual's participation in an activity may be established by any reasonable means. Cotemporaneous daily time reports, logs, or similar documents are not to be required if the extent of such participation may be established by other reasonable means. Reasonable means for purposes of this paragraph may include but are not limited to the identification of services performed over a period of time and the approximate number of hours spent performing such services during a period, based on appointment books, calendars, or narrative summaries."


These rules are good to keep in mind whenever going into an audit with a real estate professional or if material participation may be an issue in the case.


Relevant Citations:
Reg 1.469-5T
Hailstock v. Commissioner, TC Memo 2016-146

IRS PTIN Updates - New Fees and Court Case Challenging Fees

The IRS has dropped the fees for PTINs to $33. However, practitioners should watch for a case in DC District Court called Steele v. US. The other day, the court certified a class action challenge to the authority the IRS has to charge a fee for PTINs.


It should be noted that not all forms requiring a PTIN have a spot for the preparer's PTIN. For example, a practitioner must have a PTIN if they prepare any of the Form 433s. However, the IRS does not have a space on the form for the practitioner to put the PTIN, so some practitioners assume one is not needed.


These are the only forms a practitioner can submit to the IRS without needing a PTIN:


Form SS-4, Application for Employer Identification Number;
Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding;
Form SS-16, Certificate of Election of Coverage under FICA;
Form W-2 series of returns;
Form W-7, Application for IRS Individual Taxpayer Identification Number;
Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding;
Form 870, Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment;
Form 872, Consent to Extend the Time to Assess Tax;
Form 906, Closing Agreement On Final Determination Covering Specific Matters;
Form 1098 series;
Form 1099 series;
Form 2848, Power of Attorney and Declaration of Representative;
Form 3115, Application for Change in Accounting Method;
Form 4029, Application for Exemption From Social Security and Medicare Taxes and Waiver of Benefits;
Form 4361, Application for Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders and Christian Science Practitioners;
Form 4419, Application for Filing Information Returns Electronically;
Form 5300, Application for Determination for Employee Benefit Plan;
Form 5307, Application for Determination for Adopters of Master or Prototype or Volume Submitter Plans;
Form 5310, Application for Determination for Terminating Plan;
Form 5500 series;
Form 8027, Employer’s Annual Information Return of Tip Income and Allocated Tips;
Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests;
Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests;
Form 8508, Request for Waiver From Filing Information Returns Electronically;
Form 8717, User Fee for Employee Plan Determination, Opinion, and Advisory Letter Request;
Form 8809, Application for Extension of Time to File Information Return;
Form 8821, Tax Information Authorization;
Form 8942, Application for Certification of Qualified Investments Eligible for Credits and Grants Under the Qualifying Therapeutic Discovery Project Program

Deducting MBA Costs - New Taxpayer Friendly Case

Typically, the IRS looks down at people trying to deduct MBA costs. In Kopaigora v. Commissioner (TC Summary Opinion 2016-35), the taxpayer attempted to deduct his MBA costs as unreimbursed employee expenses.


The taxpayer was an accounting and finance manager with Marriott LAX. While working at Marriott, he also pursued his MBA and took deductions as unreimbursed employee expenses. Eventually, the taxpayer was fired from Marriott and still continued to take the deductions. The IRS audited his return and disallowed these deductions.


The first step in analyzing education deductions is it meets the ordinary and necessary test of IRC 162. Also under IRC 162, the taxpayer must be engaged in a trade or business. The court points out an interesting case where, "A taxpayer may be engaged in a trade or business, although unemployed, if the taxpayer was previously involved in and actively sought to continue in that trade or business while pursuing a defined degree program related to his or her line of work. Furner v. Commissioner 393 F.2d 292, 294 (7th Cir. 1968).


So, while the taxpayer was unemployed, he could still meet the requirements under IRC 162 of being in a trade or business.


Education cannot be deducted if 1) it is required to meet minimum requirements of a taxpayer's trade or business, or 2) the study leads to qualification for a new trade or business. If the taxpayer shows neither apply, then he can deduct the costs required by his employment or trade or business. The court here held that he was improving his skills as a accounting and finance manager.


This is an interesting look at the education deduction and the rules applied. The biggest take away from the case is further reassurance that the taxpayer does not need to be employed in order to take a deduction for unreimbursed employee expenses.


Relevant Citations: TC Summary Opinion 2016-35

Check Your PTIN for Suspicious Activity

The IRS released a new security awareness tip today for practitioners. Most practitioners can go on the IRS PTIN renewal site and check how many returns have been filed under their PTIN. This is really important for practitioners to be doing and not enough people do it.


For example, if you normally prepare 80 Form 1040s each year and when you check your PTIN status it shows 500 PTINs, there is suspicious activity on the account. This has been happening very frequently.


With tax fraud becoming harder to get away with, one way criminals are finding a way around IRS roadblocks is by stealing PTINs.


If you do have issues, you can file Form 14157 with the IRS and they can help get the matter cleared.


All you need to do:
Visit http://www.irs.gov/ptin and log into your PTIN account.

1. From the Main Menu, find “Additional Activities.”
2. Under Additional Activities, select “View Returns Filed Per PTIN.”
3. A chart labeled Returns Per PTIN should appear.
4. A count of individual income tax returns filed and processed in the current year will be displayed.

Relevant Cites:

Form 14157

IRS Security Awareness Tax Tip 2016-11

New IRS ITIN Rules - Some Clients Will Need to Renew Their ITIN

If your client has an ITIN and 1) has not used it in the last three years or 2) the ITIN was issued before 2013 (these have a middle digit of 78 or 79), then they will need to renew their ITIN starting October 1, 2016.

In order to renew, the taxpayer must file Form W-7. Note, it does not need to be attached to their 2016 tax return.

The IRS provides three ways to renew:

1. Mail the W-7 along with the original identification documents or certified copies to the IRS
2. Use an IRS authorized Certified Acceptance Agents
3. Call and make an appointment with an IRS Taxpayer Assistance Center in lieu of mailing.

I recommend going through a Certified Acceptance Agent. It allows clients to keep their passports or other identifying documents instead of putting them in the hands of the IRS. This allows for a quicker turnaround too on everything with the process.

Here is a list of Certified Acceptance Agents. I also am in the process of becoming a Certified Acceptance Agent too if anyone in the Virginia area needs any help.

Relevant Citations: IRS ITIN News Release

Mortage Indebtedness - Unmarried Owning Same Property

Typically, there is a limitation on mortgage interest deduction if the mortgage indebtedness is more than $1,000,000 of acquisition indebtedness plus $100,000 of home equity indebtedness under IRC 163(h)(2)(D). In Voss v. Commissioner, 796 F.3d 1051 (9th Cir. 2015), two unmarried individuals jointly held a property where the limitations would typically apply if they were married. The combined acquisition indebtedness was in excess of $2.2 million. The IRS had disallowed portions of the mortgage interest on each return.


The court ruled that the mortgage indebtedness limitations apply on a per person basis, not on a per residence basis, thus allowing the extra mortgage interest for the taxpayers.


The IRS released AOD 2016-02 stating they will follow this analysis by the court.


Relevant Cites: AOD 2016-02

IRS Frivolous Tax Argument

As most practitioners know using a frivolous argument against the IRS is not always the best idea. In TC Memo 2016-140, Batsch v. Commissioner presents one of the best:

"And let me make a couple of more comments just to get them on the record, Your Honor. And basically the point that we’re getting at is we are not subject to the jurisdiction of the United States. I don’t know how that’s even possible. We was not born--the United States as described in the law and according to that, be it right or wrong, these laws are what we based the (inaudible) that we are not subject to. And we can’t find one where we are subject to because according to this and--and according to what we are as people that is a citizen of the several states, not of what we see as being defined as the United States or the state--the term United States when you used in a geographical sense includes the state of--I mean it--it’s just the-- where Congress has its exclusive jurisdiction. Congress does not have exclusive jurisdiction within the States."

For the record, the taxpayers were born in Missouri and Texas. Unsurprisingly, the court upheld the IRS 6020(b) substitute for returns.


Relevant Cite: TC Memo 2016-140