Here at Double Taxation, we tend to highlight the lighter side of the Tax Court, with topics ranging from the application of the hobby loss rules to drag racing to trophy wife-related theft losses to charitable contributions for crazy cat ladies.
But tax trials are serious business; and if you’d like to stay out of the court room, it’s helpful to know the most frequently litigated issues. To that end, the IRS Taxpayer Advocate’s annual report has you covered:
|Most Frequently Litigated Tax Issues: June 1, 2010 – May 31, 2011|
|2.||Trade or Business Expenses||107|
|3.||Collection Due Process||89|
|4.||Failure to File and Estimated Tax Penalties||74|
|6.||Accuracy Related Penalties||55|
|7.||Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax||48|
|8.||Joint and Several Liability||44|
|9.||Frivolous Issues Penalty||44|
|1,045.||Medical Expense Deductions for Visits to Prostitutes||1|
So how does one leverage that information to increase their chances of a Tax Court victory? Dean Zerbe over at Forbes offers some advice:
Trade or business expenses. For individuals the problem continues to be having good books and records to support the deduction of expenses – especially for travel and entertainment expenses.
A number of cases in this area also get into the question of whether the taxpayer is deducting expenses (and claiming losses) for a legitimate “for profit” activity. As a general rule, I’ve found the IRS takes a dim view of businesses that involve animals – horse training, cat raising, etc. If you aren’t making a profit in your animal business, be ready for an IRS letter, particularly if you are claiming a loss from the activity and deducting as a business expense your subscription to “Cat Fancy” or “Horse and Hound” magazines, as well as the cost of kitty litter, oats, etc. Don’t be surprised if the IRS deems your animal fancy a hobby.
Gross income – What counts as income. Damage awards top the list here. While payments due to physical injury or sickness are not subject to tax, other damage payments are (ex. payments for emotional distress). The effort to avoid this issue should start by having a tax attorney involved with the final settlement agreement. Always a big help if you ensure that a settlement makes clear what the payments are for.
Charitable Deductions. This is a new one for the list of litigated issues. Congress and the IRS have cracked hard on taxpayers taking an expansive view of the value of certain charitable deductions. If you think your Yugo that goes only in reverse is worth 20k as an antique – think again. Good valuation is the key to success – and keeping your feet on the ground in what you claim especially in areas such as conservation easements.
Zerbe saves his best advice for last; recommending how to make nice with the IRS before things ever escalate to the point of litigation:
Of course the best way to win in court is never to end up there in the first place. So if you’re audited, first, when the IRS is knocking on your door – this is not the time to be a spendthrift – get your tax professional involved early in the process as positioning is everything. Second, listen closely and understand fully the IRS’ concerns. Third, provide the IRS documentation and legal support justifying your positions and addressing the IRS issues. Fourth, exercise your rights for review at IRS appeals and mediation. Finally, I am a big believer that you need to be on offense when dealing with an IRS audit.