Tax Attic for 6-27-2019

The current Congress and President are on a mission to update and modernize the Internal Revenue Service.  Surprise of surprises, this is a bipartisan effort, too, as the Taxpayer First Act quickly passed through both the Senate and the House and was signed by President Trump. It seems that everyone wants to see the IRS brought up to date. As the saying goes, it only takes money. However, in this case, it also takes the joint will of both houses of Congress as well as the President.  The last few Congresses and Presidents have cut the IRS’ budget as a form of punishment for the IRS not following it’s own rules. That form of punishment might not have been too successful since the IRS is now behind the eight ball, so to speak, on the technology end of things as well as having lost a tremendous number of experienced staffers.  It’s a vicious circle that the IRS was caught up in. The Taxpayer First Act has the potential to be a  step forward.  What are the basic provisions of the Act? First, an independent IRS Office of Appeals will be established. Currently, the Office of Appeals is not independent but actually, in my experience, seems to function as well as possible given the fact that the appeals officers have the same boss as the auditors who made the decision that is being debated. Perhaps, nationwide, that same boss thing hasn’t worked all that well and a totally independent department is called for. Second, as a total, the IRS’ full organizational structure will be modernized.  Third, a single point of contact will be required and developed for all tax-related identity theft victims and issues. Currently, depending upon the issue, a variety of contacts are available.  Fourth, the IRS will develop an internet platform for Form 1099 filings. This will make compliance easier for filing 1099’s and perhaps remove an excuse for not timely filing those 1099’s. Fifth, the act will require the IRS to impose increased penalties on tax professionals for improper disclosure of taxpayer information or the improper use of that taxpayer information.  Sixth, the IRS will be given the funds to modernize it’s way of doing business.  This might take some organizational structure experts more than a day or two to work out the details. Finally, the IRS will be required to expand nationwide access to its IP PINS.  All of us wish the experts working on this IRS’ modernization program the best of luck.

From time to time, an audit goes south. The IRS makes their call to disallow deductions or credits and issues a final ruling. The taxpayer disagrees and decides to take the IRS to Tax Court.  The Tax Court Judge looks at the evidence submitted and agrees with the IRS or the taxpayer in whole or in part. Pertaining to Tax Court cases, there is no further appeal from the Judge’s findings. Sometimes these cases can take years to make it from filing to audit to appeals within the IRS’ system and then through the Tax Court to it’s final decision.  For example, on January 29, 2019, Judge Ashford issued Tax Court Summary  Opinion 2019-1 in favor of the IRS on all of the issues being debated.  The returns in question were filed by Christopher J. Totten for the 2009 and 2010 tax years. This seems to be a long, long time but they were complicated returns with a lot of moving parts, as the old tax saying goes. Mr. Totten had deductions and credits disallowed for 2009 that resulted in him owing $25,089 in tax, penalty and interest for and $47,613 in tax, penalty and interest for 2010. There are a few points of interest that all of us can pay attention to.  First, Mr. Totten claimed non-cash charitable contributions of $18,414 in 2009.  These were disallowed because he didn’t have the required receipts backing up the contribution nor had a realistic manner of documenting how he reached the $18,414. On that amount, the IRS required a certified appraisal.  Mr. Totten was woefully short of proof. Second, he claimed substantial automobile mileage and travel deductions. He had a log of miles driven with no dates, no contacts, no destination, and no business purpose for the miles claimed. The IRS actually allowed some of the mileage but disallowed most because of the strict substantiation rules. Mr. Totten, of course, wanted all of the miles driven. The Court agreed with the IRS that Mr. Totten needed more proof. Third, for the records that Mr. Totten did not have, he claimed that the Cohan Rule should be applied to allow the deductions. The Cohan Rule came from a 1930 Court Case, Cohan v. Commissioner, in which Cohan successfully argued that he had the right to reasonably estimate his expenses for deduction purposes.  However, the Court also found that the Cohan Rule could not be used for meals, lodging away from home, entertainment or automobile expense deductions.  As I noted above, these deductions have strict substantiation rules and Cohan has no bearing. Mr. Totten lost most of his deductions. The net result is if you take a deduction, you must be ready to prove that deduction.  This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent.

Action Tax Service is a part of Integrity Tax Group on Northland Dr in Rockford.

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