Loopholes Archives - Think Outside the Tax Box

Loopholes

By Matt Metras, EA

Year End Tax Saving Tips for the Digital Currency Investor

As a financial expert, I know that 2022 has been a roller coaster year for investors. With only days left in the year, the Dow is down and the S&P 500 is down . On the high-risk crypto side, Bitcoin has fallen 64 percent and former Top 10 coin Solana has fallen more than 92 percent thanks to Sam Bankman-Fried and FTX.

While the markets may be down, taxpayers can still come out ahead through careful tax planning. By taking the time to assess your financial situation and make strategic decisions, you can minimize their tax burden and potentially save money.

It's important to consult with a tax planning professional to ensure that you’re taking advantage of all available tax savings opportunities. Here are a few of the things to do before the clock strikes midnight on New Year’s Eve.

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Don’t Forget the Cohan Rule but Try Not to Need It

We are creeping up to the centennial of the Cohan rule. Learned Hand’s opinion for the Second Circuit in Cohan v. Commissioner came out on March 3, 1930 . I love this rule so much that I've made it the Prime Directive in my own book, Reilly’s Laws of Tax Planning: “If you don’t have documentation, at least have a plausible story.” However, subsequent legislation, changes in societal expectations, and the passage of time have eroded the usefulness of the Cohan rule for taxpayers. In recent years, there have been more instances of courts refusing to apply it than allowing its use. That’s why in Reilly’s Sixteenth Law of Tax Planning, I advise people to “being right without substantiation can be as bad as being wrong.”

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Charlie Sheen Settles with IRS For $3.3 Million And A Possible Share in Future Earnings

Charlie Sheen’s tax woes seem to be at an end. I mainly remember Sheen as the star of Two and a Half Men, but there is a lot more to his career and fame than that. As I related back in January, IRS has been trying to collect on Mr. Sheen’s 2015, 2017 and 2018 returns. Many people have the impression that failure to send in the balance due with your return. will result in 87,000 agents willing to use deadly force knocking on your door, but it really doesn’t work that way. There is a lot of process. In some circles I think the return balance due is viewed as the sticker price on cars used to be or full tuition at a well-endowed university that wants to have a sprinkling of representation from the 99% attending…

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Tax Days of Our Lives: CPA Firm Contentious Breakup Ends in Tax Court Decision

I am going to nominate the Clark Raymond opinion as the best tax story of the year. At least, it is the best one for CPAs. You have to tease it out of the opinion, but there is a kind of rollicking story of troubled partner relationships. I did 40 years in large local and regional public accounting with a little bit of national icing on the cake and never encountered so much apparent dysfunction. Other commentary on the case has concluded that the lesson is about doing a good job maintaining your capital accounts, but I think the real lessons may be a little different. It is public record, but the guys in the conflict are still practicing so out of professional courtesy I will refer to them as Tom, Dick, and Harry. There is another partner who is part of the story that I will call Jane. Also, for simplicity, I will ignore the fact that they held their partnership interests through single member entities and in Tom’s case in an entity with his wife who did administrative work. And I will refer to the entity involved as “the firm.” The story is every accountant’s nightmare (and would make for a great tax-themed soap opera). Partners disagree. Partners walk out. Clients follow exiting partners to their new business leaving the old partner with debt. Here is the story.

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IRS MATH ERROR NOTICES – WHAT ARE THEY AND WHY DOES IT MATTER?

The Internal Revenue Service (IRS) mission statement is to "provide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all." The IRS provides forms and instructions, publications, robust web-based resources, and other tools to help taxpayers prepare and file their tax returns – an exercise relished by few. But what happens after you file your tax return? For many, the IRS accepts their tax returns as filed and processes them quickly, which is the end of the process. Others get "post-filing" correspondence from the IRS. The IRS may need additional information to process your tax return or, worse, may examine your tax return (asking you to document some or all parts of the return). There's a middle ground where the IRS adjusts your tax return without the "courtesy" of requesting documentation first. These are the math error notices. Read on to discover more (including that it's not always about math).

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Way Out of State Tax on Student Debt Forgiveness

There was some rain on the parade of celebration of the student loan debt forgiveness. The Tax Foundation, perhaps with a touch of schadenfreude, announced that the forgiveness, not federally taxable due to recent legislation, might be taxable in as many as thirteen states. They have taken a closer look and backpedaled quite a bit. It is now down to four states Minnesota, Mississippi, North Carolina and Wisconsin and those are not for sure. But, there is likely another way out for many of the recipients of this boon. Keep reading to learn more!

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Warning! Avoid the Latest “Dirty Dozen” Scams Identified By the IRS

Since at least 2001, the IRS has issued annual news releases warning taxpayers of scams they should be aware of and stay clear of. The release in 2001 included just eight scams but starting in 2002, the IRS expanded the list and dubbed these scams with the catchy moniker: the “Dirty Dozen.” In describing these lists, the IRS often warns taxpayers to “remain vigilant” against the scams, to not “fall prey” to them, and to “be on the lookout for” these dangerous activities. While the warnings seem to be directed to individual taxpayers, the lists sometimes include warnings of scams directed at return preparers and employers. Tax practitioners certainly need to be aware of these scams to exercise appropriate due diligence to know if any client is involved in a scam such as an abusive tax shelter, and to help educate clients about the numerous and growing number of scams many of which are designed to steal their personal and financial data and resources. This article covers the 2022 “Dirty Dozen” list. It also includes suggestions on how practitioners might use this information in tax compliance and planning and to help clients protect their identities and assets and avoid tax problems. Additional resources for dealing with the items on the list are provided. A chart listing the “Dirty Dozen” items from the start in 2001 through 2022 is included to show trends and the reality that some scams such as identity theft, phishing, return preparer fraud and frivolous tax arguments have made the list almost every year. Click here to continue reading.

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Why Many Tax Pros Want a Stronger IRS

Early last month Adam Markowitz faced a storm of criticism over a tweet that suggested that people upset about increased IRS funding should maybe just be compliant. It got rather ugly. #TaxTwitter came to his defense despite some of us disagreeing with details of his tweet. All of my GOP friends who are worried about 87,000 IRS enforcement agents coming after the little guy... How about just don't cheat on tax returns? A fully truthful and accurate tax return is bulletproof in an audit. I never understood the fear of an IRS audit. Don't lie. Period. For somebody whose return has more than a few moving parts there is a lot of effort in putting together information for an audit. And there will usually be some things that can be viewed differently. Further you can sometimes catch the agent from hell. AFH is sure that your client is a crook and it will be hard to convince them they should go fight crime someplace else. With all that said many tax pros would still like an IRS that audits more, although they might want them to fix some other things first. To learn more about what is expected in the coming months, learn more here.

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You Are Not Eligible for the Employee Retention Credit: Vague “Suspensions” Lead to Trouble

Far too many of these Employee Retention Credit (ERC) claims are nonsense. Now don’t get me wrong. I enjoy helping businesses claim the ERC. I have written in these pages about the unique ways a business may qualify and how to use startup eligibility even for existing employers. But let’s be honest: People are manipulating this program beyond belief. The refund dollars are too attractive and have created far too large an incentive for shops charging high commission fees (I have seen fees charged between 10 to 35 percent of the refund). In the coming years, numerous aggressive ERC shops may contact you if they haven’t already. How do you know whether a claim is legitimate or nonsense? Here, we will review the most prevalent bad arguments to help you avoid trouble.

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