Tax Short Subjects, 7/5/18

Topics: IRS Audit Strategy, “D-I-V-O-R-C-E,” Fraud, Hobby Losses


IRS Audit Strategy

The IRS added five new targets to its campaign audit strategy. They include going after those who use virtual currency worldwide and don’t pay any tax due. The IRS’s Large Business and International division (LB&I) announced these additional compliance areas: restoration of sequestered AMT credit carryforwards; S corporation distributions; repatriation via foreign triangular reorganizations; and the Sec. 965 transition tax owed on the untaxed foreign earnings of certain specified foreign corporations. For details:


A taxpayer wasn’t entitled to deduct legal fees incurred in divorce proceedings. Businesses may be able to deduct legal fees if they’re “ordinary and necessary” expenses of the operation. In this case, the legal fees were incurred defending an ex-wife’s claims for profits earned from an investment advisory LLC in which the husband was a co-owner. The U.S. Tax Court ruled the fees were clearly nondeductible personal expenses, not ordinary and necessary business expenses, since the ex-wife’s claim arose solely from her marriage to the taxpayer. (TC Memo 2018-80)


Underpaying your taxes results in penalties. If fraud is involved, the penalty can equal 75% of the underpayment. After one taxpayer was under criminal investigation by the IRS, he filed amended returns and paid $100,000 more in tax. The IRS assessed fraud penalties based on the difference between his returns. The taxpayer argued they should be based on the amended returns. The U.S. Tax Court disagreed. It stated that “courts at every level” have ruled that taxpayers who file fraudulent returns can’t avoid penalties by amending the returns. (TC Memo 2018-89)

Hobby Losses

Taxpayers that show losses from business activities can generally deduct the losses against other income, such as wages. But if the activity appears to be a hobby or if the taxpayer doesn’t materially participate in it, the losses may be limited. One high-income couple ran a money-losing cattle ranch. The U.S. Tax Court found their businesslike operation of the ranch proved it wasn’t a hobby, but their lack of material participation caused their losses to be passive. Passive activity losses can only be claimed against passive income. (TC Memo 2018-88)



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