Taxable Talk

Today the Tax Court looked at a case that showed what happens when you use a tax preparer who (a) doesn't understand the software, (b) has little knowledge about your primary sources of income, and (c) has little tax knowledge. As you might expect the petitioners didn't fare well.

Our petitioners had their return audited for 2002, and a deficiency resulted from disallowing "(1) $12,000 deducted as an other miscellaneous deduction for “home winterization” on Schedule A, Itemized Deductions, and (2) the following expenses claimed on Schedule E, Supplemental Income and Loss, for rental Property B (identified as an “apartment building” located at 8314 South Green Street):

• Advertising $350
  
• Auto and travel 4,500
  
• Cleaning and maintenance 3,000
  
• Repairs 12,000
  
• Supplies 900
  
• Utilities 3,000"

When the parties met for the pre-trial conference the petitioners' accountant, when informed that it was required by the Tax Court that everything not in dispute be stipulated, made a remark that set the tone for the case: "Rules are made to be broken." I'm sure the Court appreciated that.

Things didn't get much better. "During the above meeting, [petitioner's accountant] redefined the properties listed on petitioners’ Schedule E...." Why wasn't this done before the audit? But I digress. These changes, which included one rental property included on the original return which shouldn't have, and another property that wasn't included suddenly appeared, resulted in additional deficiencies and an accuracy-related penalty:

"(1) Unreported rental income; (2) disallowance of five dependency exemption deductions; (3) unreported income from a State income tax refund; (4) disallowance, in total, of itemized Schedule A deductions for (a) medical and dental expenses, (b) real estate taxes, (c) personal property taxes, (d) home mortgage interest, (e) gifts to charity, and (f) unreimbursed employee business expenses; (5) disallowance in total of all Schedule E deductions; and (6) disallowance of rental and real estate loss because of passive activity loss limitations."

As for the actual case, just a few lines from the decision note the most important point of all.

"Petitioners provided no receipts to substantiate any of the expenses claimed for either Property A or B. For example, [Petitioner] admits that they did not spend $350 to advertise either Property A or B for rent and that, in the case of Property A, no advertising of any kind was necessary since their daughter took possession of that property immediately after they moved to Property B. [Petitioner] acknowledged that $700 claimed for auto and travel expenses was arbitrarily arrived at. [Petitioner] testified that the $2,000 claimed for cleaning expenses for Property A was paid to clean out the basement of that property in anticipation of their move.

"Our examination of the record convinces us that petitioners failed to maintain any records whatsoever with respect to the items claimed on the Schedule E attached to their 2002 return. Moreover, [petitioner] and their tax preparer...admit that some of the figures claimed for deductions taken on their 2002 return, including all of their Schedule E deductions, were false and/or arbitrarily contrived."

I could go on and on, but I think you get the flavor.

There are some morals to this story. First, not all tax preparers are equal. Obviously the petitioner's tax preparer comes from the Bozo side of tax preparation. He was unlicensed, untrained, and, had little knowledge of the tax software he was using. That's a problem with software—it will put the numbers exactly where you tell it to. As the cliche goes, garbage in, garbage out.

Second, get a tax preparer who understands your major areas of tax concern. For example, I had a potential client approach me about doing his return. I sent him to another professional I know because his return had a large amount of oil, gas, and mineral rights income, and that's an area I don't know well. He's much better off going to someone who understands that well as it's a specialized area. Sure, I could learn it, but he'd have to pay me to relearn the wheel, so to speak (and I have enough areas that I specialize in already).

Third, choose your preparer wisely. You are ultimately responsible for what's on your tax return, not your accountant. As the Tax Court noted,

"We further conclude that petitioners have failed to show that their reliance on Mr. Ingram’s tax return preparation was reasonable. Mr. Ingram admitted that he was not an accountant, that he was unfamiliar with the computer software that he used to prepare petitioners’ return, that he had made many errors with respect to petitioners’ 2002 return, and that his rush to complete the return also resulted in errors. Petitioners’ reliance on Mr. Ingram as their tax return preparer was clearly unreasonable."

And finally, keep your receipts! Today's petitioners invented numbers out of thin air and got the results they deserved. If you have rental property, you're supposed to treat it as a business. You can purchase a filing cabinet for under $100.

Case: Burkley v. Commissioner, T.C. Summary 2008-20

Fresh off the Wesley Snipes case two actors are having their own tax troubles. Joe Kristan found this story about Joe Pesci. Mr. Pesci besides appearing in movies has his own production company with employees. The regulation involved states, "You must make deposits using EFTPS for all depository tax liabilities for the current year if you made more than $200,000 in aggregate deposits for all types of Federal depository taxes in the year two years before the current year or if you were required to make electronic deposits in the previous year."

Mr. Pesci's production company didn't use EFTPS, and the penalties were upheld.

Meanwhile, actor Nicolas Cage will be fighting the IRS in Tax Court. The TaxProf Blog quotes a story in Forbes:

The IRS says movie star Nicolas Cage used a company he owns to wrongly write off $3.3 million in personal expenses, including limos, meals, gifts, travel and his Gulfstream 1159A turbojet. ... The feds hit Cage both ways, denying Saturn a deduction for the disputed expenses while taxing Cage individually on the perks as salary and "constructive dividends."

Cage's business manager, Samuel J. Levin, says in an e-mail that the expenses were proper as "customary in the entertainment industry" and were partly based on the actor's "security needs."

Mr. Cage's Tax Court case will probably not be heard for many months, with a decision possible in 2009.

You have a small dispute with the IRS. The IRS alleges that you owe $554 and $1142 for the two years in question. You elect to file a Tax Court petition. When most people go to Tax Court, they work with the Court and the IRS (the respondent in a Tax Court action) so that their case can be heard and the judge can determine who is right.

However, today we look at what happens when a bozo petitioner brings a Tax Court action. Would he: (a) allege that respondent's counsel has, "engaged in serious misconduct"; (b) allege that the "presiding judge has failed and failed again to show any semblance of impartiality"; (c) refuse to accept service of court documents (sent by certified mail); (d) send the IRS an ultimatum demanding settlement on his terms and not appear in any of the pre-trial hearings/motions; or (e) all of the above.

You already know the answer—we're dealing with a bozo here. All of the above happened and is documented in this case.

The IRS moved for dismissal because of lack of prosecution (the petitioner never brought the facts out on his case), and as the Tax Court noted, dismissal was a "relatively simple matter."

The IRS also asked that the petitioner face a penalty under section 6673. The Tax Court noted that in a different case the Fifth Circuit Court of Appeals held,

"it is difficult to imagine a lesser sanction that would vindicate the integrity of the court proceedings and deter * * * [taxpayers] from similar misconduct. Wasteful and dilatory appeals unjustifiably consume the limited resources of the judicial system: “While judges, staff and support personnel have expended energy to dispose of this meritless appeal, justice has been delayed for truly deserving litigants.” Foret v. S. Farm Bureau Life Ins. Co., 918 F.2d 534, 539 (5th Cir. 1990). [Id.; fn. ref. omitted.]"

As the Court concluded, "Petitioner’s attempts to delay and his belligerence must be sanctioned to vindicate the integrity of this Court’s proceedings and to deter petitioner from similar misconduct in the future." He received $1000 sanctions for each of the two cases heard.

Cases: Mack v. Commissioner, T.C. (two cases), T.C. Memo 2008-29

There are losing streaks and then there are really long losing streaks. Larry Harvey has not had a good year battling IRS attorney Randall Preheim. Yesterday, as Joe Kristan noted, Mr. Harvey lost his 64th and 65th cases. Today, that streak reached 67.

Look, the Washington Generals did win six games. (Well, they lost 13,000 games during that same time span....) And the Cubs are celebrating the 100th anniversary of their last World Series triumph so there is hope, Mr. Harvey.