MauledAgain

My March 2020 commentary addressed an experience reader Morris had when he went to his “regular Chinese restaurant,” and found in his fortune cookie a message, “Tax tip # 8 Travel could be considered a business expense. Even that island vacay. TaxAct Surprisingly legal. Start for Free: TaxAct.com” Doing some research, I discovered that marketing firms are purchasing space on the flip side of fortune cookie slips to print their messages.

The story that reader Morris shared with me explained that the IRS Director of Stakeholder Liaison announced at a conference that the IRS would be using space on the flip side of fortune cookie slips for messages to taxpayers. Fortune companies are making the space available to the IRS without charge. The IRS plans to provide tax advice, including reminders about deadlines. I suppose the last thing someone wants to put into their brain at mealtime is taxation, though I am confident that some people are thinking about deductions when they pay for a meal.

As for the suggestion from reader Morris that perhaps the IRS reads my blog posts, maybe that happens. But I doubt that my post in March of 2020 generated the IRS fortune cookie plan. My guess is that a professional marketing/PR type of company approached the IRS or was approached by the IRS Tax Outreach, Partnership, and Education Team, and someone suggested making use of the fortune cookie messaging approach.

Now if links to this blog or posts on this blog begin to show up on fortune cookie slips carrying the IRS logo, I will want to know. Then I can revisit the question that I asked in the title to this post.

From time to time, the two topics meet. Thanks to reader Morris, I’ve learned of this sort of situation in a People’s Court case from several years ago. The facts are simple. The plaintiffs returned to the tax return preparer they had used the preceding year with no issues. The preparer told the plaintiffs to save all their receipts, though it was not clear that the plaintiffs understood that the preparer would go through the receipts to identify those that were relevant for income tax purposes. Though there had been no deductions on the previous year’s return prepared by the preparer, deductions were claimed on the return in question that amounted to 50 percent of the husband-plaintiff’s W-2 income. The deductions in question consisted of employee business expenses. The husband-plaintiff worked for a railroad and so deductions were taken for meals, lodging, uniforms, and similar expenses. The IRS determined that there was a deficiency, which with interest, amounted to about $5,000. The plaintiffs sued the preparer, asserting that the preparer should pay the taxes and interest, in effect blaming the preparer for the problem. When the IRS audited the return, it asked for a letter from the husband-plaintiff’s employer stating the employer’s reimbursement policy and details about its reimbursement plan, a letter that in theory could substantiate some or all of the deductions. The plaintiffs failed to request the letter because by the time the IRS asked for it the husband-plaintiff no longer worked for the railroad. The judge found that response to be questionable, and proposed that the husband-plaintiff did not ask for the letter because he knew that the return was claiming excessive amounts of deductions.

The judge concluded that the preparer was not responsible for the taxes owed by the plaintiffs. She also concluded that the preparer was not responsible for the interest, stating that the plaintiffs would otherwise have obtained an interest-free loan for several years.

The judge then admonished the defendant, telling the preparer that she was aggressive. The judge also told her that she had an obligation to manage her clients’ expectations. The judge told the preparer that she knew what she was doing. I interpret that as a warning to the preparer to do something more than simply prepare a return with deductions so high that it would be, in the judge’s words, a “red flag” for the IRS.

When a preparer prepares a return that shows “red flags,” which may or may not turn out to be an indication that something is wrong, the preparer should asked clients for evidence. In this case, the preparer, after seeing the amount of the deductions, should have asked the plaintiffs for the letter from the employer at that point. Then, if the IRS did audit, which in fact it did, the supporting evidence would be at hand. Of course, in this case, it is highly unlikely that the letter from the employer, if obtained, would have supported the deductions in question. And, as the judge told the plaintiffs, when a client looks at a return and sees something extraordinary, such as deductions amounting to 50 percent of income, the clients should know something isn’t quite right.