Thursday, February 22, 2024

Does Anyone at the IRS Read This Blog? 

Reader Morris contacted me with this message, “Maybe the IRS reads your blog posts.” He reminded me of a commentary on this blog from March of 2020, Fortune Cookies and Taxes and pointed me in the direction of a story on Bloomberg Tax from December of last year.

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.

Wednesday, February 07, 2024

Is the Tax Return Preparer or the Client Responsible For Unjustified Deductions? 

Sometimes I write about tax (and now and then, other) issues popping up in television court shows, in posts such as Judge Judy and Tax Law, Judge Judy and Tax Law Part II, TV Judge Gets Tax Observation Correct, The (Tax) Fraud Epidemic, Tax Re-Visits Judge Judy, Foolish Tax Filing Decisions Disclosed to Judge Judy, So Does Anyone Pay Taxes?, Learning About Tax from the Judge. Judy, That Is, Tax Fraud in the People’s Court, More Tax Fraud, This Time in Judge Judy’s Court, You Mean That Tax Refund Isn’t for Me? Really?, Law and Genealogy Meeting In An Interesting Way, How Is This Not Tax Fraud?, A Court Case in Which All of Them Miss The Tax Point, Judge Judy Almost Eliminates the National Debt, Judge Judy Tells Litigant to Contact the IRS, People’s Court: So Who Did the Tax Cheating?, “I’ll Pay You (Back) When I Get My Tax Refund”, Be Careful When Paying Another Person’s Tax Preparation Fee, Gross Income from Dating?, Preparing Someone’s Tax Return Without Permission, When Someone Else Claims You as a Dependent on Their Tax Return and You Disagree, Does Refusal to Provide a Receipt Suggest Tax Fraud Underway?, When Tax Scammers Sue Each Other, One of the Reasons Tax Law Is Complicated, An Easy Tax Issue for Judge Judy, Another Easy Tax Issue for Judge Judy, Yet Another Easy Tax Issue for Judge Judy, Be Careful When Selecting and Dealing with a Tax Return Preparer, Fighting Over a Tax Refund, Another Tax Return Preparer Meets Judge Judy, Judge Judy Identifies Breach of a Tax Return Contract, When Tax Return Preparation Just Isn’t Enough, Fighting Over Tax Dependents When There Is No Evidence, If It’s Not Your Tax Refund, You Cannot Keep the Money, Contracts With Respect to Tax Refunds Should Be In Writing, Admitting to Tax Fraud When Litigating Something Else, When the Tax Software Goes Awry. How Not to Handle a Tax Refund, Car Purchase Case Delivers Surprise Tax Stunt, Wider Consequences of a Cash Only Tax Technique, Was Tax Avoidance the Reason for This Bizarre Transaction?, Was It Tax Fraud?, Need Money to Pay Taxes? How Not To Get It, When Needing Tax Advice, Don’t Just “Google It”, Re-examining Damages When Tax Software Goes Awry, How Is Tax Relevant in This Contract Case?, Does Failure to Pay Real Property Taxes Make the Owner a Squatter?, Beware of the Partner’s Tax Lien, Trying to Make Sense of a “Conspiracy to Commit Tax Fraud”, Tax Payment Failure Exposes Auto Registration and Identity Fraud, A Taxing WhatAboutIsm Attempt, When Establishing A Business Relationship, Be Consistent, as the Alternative Can Be Unpleasant Litigation, Sadness on Multiple Levels: Financial Literacy, Factual Understanding, Legal Comprehension, and When the Lack of Facts Produces “Rough Justice” in a Tax-Related Case.

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.

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