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Tax Blawg

Tax Talk for Tax Pros

Introduction

Welcome to TaxBlawg, a resource from Chamberlain Hrdlicka for news and analysis of current legal issues facing tax practitioners. Although blawg.com identifies nearly 1,400 active “blawgs,” including 20+ blawgs related to taxation and estate planning, the needs of tax professionals have received surprisingly little attention.

The Wall Street Journal's Tax Blog gives “tips and advice for filers,” and Paul Caron’s legendary TaxProf Blog is an excellent clearinghouse for academic and policy-oriented news. Yet, tax practitioners still lack a dedicated resource to call their own. For those intrepid souls, we offer TaxBlawg, a forum of tax talk for tax pros.

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Hardly a day goes by when some politician or editorial person doesn’t suggest that we don’t need the IRS or should simply do away with it. Most of them come in connection with suggestions for changing the tax system to something like a national retail sales tax. What these people fail to understand, and this writer is not challenging the sincerity of their views, is that without the IRS, our tax gap would explode geometrically.

We call our system a “voluntary” one, but we remain short of “volunteers”: there are simply too many people and businesses who don’t get around to ...

Well for starters, the IRS won’t be very happy!  Beyond that, the IRS has several avenues it can pursue. 

In extreme situations, such as where a taxpayer owes a considerable sum of money and has not filed for several years, the IRS may consider pursuing criminal liability under I.R.C. § 7203, which makes it a misdemeanor to “willfully” fail to file a Federal Income Tax Return.  This is rarely applied unless a pattern of three consecutive non-filing years are present, but potentially any single willful failure to file could result in this prosecution.  There is a six-year statue of ...

In an article published in Pennsylvania CPA Journal / CPA Now on November 16, 2020, Chamberlain Hrdlicka Philadelphia-based Shareholder Phil Karter discusses what you need to know about the IRS audit process.

“Despite the generally low rates of audits, the IRS tends to gravitate toward certain hot button issues that can increase the chances of instigating an examination,” explains Karter. “These include unreported income (especially where there is nondisclosure of foreign assets), excessive business tax deductions (particularly for Schedule C businesses), loss ...

People are always asking how long the IRS can wait from the time you file your return to conduct an audit of your income and expenses.  The simple, most definitive answer is "it all depends," so let's take a look at the rules. 

The time in which the IRS must conduct its audit is governed by what's known as a "statute of limitations."  That statute doesn't begin to run until you actually file a return.  Once you file a return, the IRS has three years from the time the return was filed (or, April 15th of the year in which you file, if it is filed early) to conduct and complete an audit.  That means that the IRS has to select your return for examination, conduct whatever level of audit it is going to perform, and either get an agreement from you to an additional amount of tax or a refund, secure an extension of limitations period from you, or issue you a document known as a "Notice of Deficiency" (indicating what it has determined your correct tax liability to be and giving you ninety days to file a case in the United States Tax Court).  If it fails to complete one of these actions within three years, in most situations the proverbial “ballgame” is over and it will be too late for the IRS to assert an additional tax liability for that year.  The filing of an amended return does not extend the period in which an audit must take place.  As you might expect, however, there are exceptions.

The first exception involves a situation where a taxpayer, or a husband and wife on a joint return, fail to report 25% of their correct gross income.  If the IRS can prove that such an amount of income was omitted, then a six-year period – running from the time the return was filed – applies.  Fortunately, merely overstating deductions, or being unable to prove up the expenses that are deducted, does not in most instances constitute an "omission" from income.  If you're in a business, and if you overstate or claim too many or too large an amount of cost of goods sold, that could result in an omission of gross income.  In tax shelter cases, the IRS has taken the position that overstating a basis of an asset which is sold, so that either the amount of gain is reduced or an excessive amount of loss is produced, can also constitute an “omission of income,” but the Courts have rejected this theory.  Keep in mind that the IRS must "prove" the omission, and that one's good faith has nothing to do with whether this exception applies. 

The other major exception relates to the presence of fraud – a knowing and willful attempt to evade tax.  In order to rely on this exception, the IRS must prove such fraud by clear and convincing evidence with respect to every tax year for which it seeks to extend the limitations period.  When fraud is proven, the statute of limitations is indefinite.  Moreover, in the case of Foxworthy, Inc. v. Commissioner, T.C. Memo 2009-203, the United States Tax Court ruled that in the case of a joint return, fraud by one spouse is sufficient to extend the limitations period for that return for both spouses (actually, it followed a series of prior opinions).  Thus, if your spouse is not properly reporting income and expenses, it's worth being vigilant, because the limitations period could be open for both of you if the Internal Revenue Service ever looks into the facts and conducts an examination, even if you were not part of the fraud.

There is one other exception, and it relates only to people involved in what's called a "TEFRA partnership."  Since 1982, certain partnerships are subject to the unified audit and litigation procedures that were made a part of the Tax Equity and Fiscal Responsibility Act of 1982, and they provide that in the case of an audit of such an entity, a separate period of limitations may apply to the examination of that entity, and such a period would also extend the limitations period for the IRS to make an adjustment to the member's returns, but only with respect to adjustments relating to that entity. 

Does this mean that after three years or six years or whenever, one should throw out all her records?  Absolutely not!  There are going to be situations where one has to establish the basis of an asset (for which depreciation or a capital loss is claimed), or the existence of a loss carryforward from well before the normal, three year limitations period.  Thus, before you take your old tax records to the incinerator or the shredder, it's important to go through them and make sure that any documentary material that relates to a transaction that is or will be the subject of a later years’ return be saved, just in case.  In most audits, the burden of proving a deduction is on the taxpayer, and that includes proving the basis of an asset for which even capital gain is reported. 

The foregoing is of course not intended as legal advice, but just as a summary of the pertinent periods after which the IRS may no longer examine your returns.  If you are notified of an examination, or know of errors in the tax returns you filed, you should discuss these rules with your personal tax advisor.

Categories: Tax Procedure

Chamberlain Hrdlicka's Annual Tax and Business Planning Seminar is going VIRTUAL for 2020!

Our three-day webinar will feature attorneys from our Atlanta, Houston, Philadelphia, and San Antonio offices presenting today's most timely Tax and Business Planning topics.

Dates and Times:

  • Tuesday, November 10 from 1:00-4:30 p.m. CST
  • Wednesday, November 11 and Thursday, November 12 from 12:00 - 4:30 p.m. CST

Cost: $20 per day or $50/3 days

To request a financial hardship discount, a written request should be sent by email to Chamberlain Hrdlicka at firm@chamberlainlaw.com.

CLE and ...

As we enter the final stretch of 2020, certain windows of opportunity are closing for many clients to lawfully reduce their taxes or obtain cash refunds of taxes paid.  Here we focus on a big and soon-expiring opportunity for clients with heavily distressed assets or investments, and in net loss situations for 2020, which is all-too-common in the midst of Covid-19. 

The opportunity, which is unique to 2020 and thus requires immediate attention, involves triggering losses in a manner to achieve ordinary loss treatment.  Triggering losses at year-end is an annual ritual for many ...

The IRS wants you to be entertained – in a twisted sort of way. The deductibility of employer expenses around entertainment, amusement, recreation, or qualified transportation fringes has a long history that most people would not find very entertaining. Just when many of us thought we understood what an employer could or could not deduct under Internal Revenue Code Section 274, the Tax Jobs and Creations Act of 2017, made the entertainment’s plot change dramatically. The boring documentary suddenly became a bit of a horror picture.

With those caveats, if you read no further ...

Categories: Tax Legislation

The Tax Cuts & Jobs Act (TCJA) includes Internal Revenue Code Section 67(g) which on its face suspends all miscellaneous itemized deductions for any taxable year beginning after December 31, 2017, and before January 1, 2026. But not all deductions are “miscellaneous itemized deductions” and thus some deductions are unaffected by new Section 67(g). When Congress enacted the TCJA in December 2017, many practitioners urged Treasury to clarify that the Act’s suspension of miscellaneous itemized deductions did not impact the ability of trusts and estates to deduct ...

As discussed in an earlier Chamberlain Tax Blawg, on August 28 Treasury issued Notice 2020-65 which defers the due date for withholding, deposit and payment of employee-side taxes imposed under Section 3101(a) (FICA) and corresponding taxes under Section 3201 (RRT).  Since the issuance of this Notice, there has been much commentary – in addition to consternation and hand-wringing on the part of clients – about a multitude of issues the Notice implicates. 

On September 8, the Texas Society of Certified Public Accountants added to this chorus with a comment letter to Treasury and ...

Categories: Tax Legislation

National law firm, Chamberlain Hrdlicka, has launched its Paycheck Protection Program (PPP) Audits and Investigations Practice. The interdisciplinary practice will leverage its extensive experience to protect PPP loan borrowers as they navigate the civil audit and review as well as PPP criminal investigations and enforcement processes.

Millions of businesses, sole proprietors, and independent contractors have obtained Paycheck Protection Program (PPP) loans. While these loans have provided vital funding to recipients impacted by the COVID-19 pandemic ...