Loopholes

January brought some new wrinkles. Even tax practitioners whose endeavors are far from Tax Court can find useful information there. My usual reminder: I cover Tax Court exclusively. Tax Court decisions get appealed routinely, and reversed sometimes, so check before citing as authority...

As you are in the heat of another tax season, probably without enough help, you don’t have time to study legislation especially proposed legislation prospectively effective in 2025 that is extremely unlikely to pass. But you may have clients or friends or relatives who expect you to know about this sort of thing. Fortunately, you have me who retired from active practice right at the end of 2018 and has time for this sort of nonsense. So here is more than you need to know about the proposed Fair Tax Act of 2023.

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.

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.”

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…

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.

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).

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!