Thursday, August 18, 2016

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

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