Powerful. Always right. Intimidating.
These are some of the descriptions used to describe our nation's tax collection agency, the IRS. But believe it or not, the IRS is wrong more often than you think.
In this month's newsletter, read about several recent tax court cases, including one where the IRS was stopped by a judge from issuing an additional $420,000 in taxes and $84,000 in penalties.
Also find out why a letter you may receive from the IRS doesn't always have accurate information, along with some tips on how to respond.
In addition, there are 5 great money ideas and ways you can protect your personal information from being collected and used by companies.
As always, please pass this newsletter to anyone who may find it valuable and call if you have any questions or concerns.
Here’s a roundup of several recent tax court cases and what they mean for you.
(Thomas v. Commissioner of IRS, 160 T.C. No. 4)
The innocent spouse relief rule allows one spouse to avoid paying taxes caused by the other spouse due to their actions on a joint return. The spouse seeking relief can only discharge this tax liability if they had no prior knowledge of the error, and if it relates solely to their spouse’s income from employment or self-employment.
Facts: Sydney Thomas and her husband did not pay the full tax liability shown on their 2012, 2013, and 2014 tax returns. Following her husband’s death, Ms. Thomas sought to discharge the remaining tax liability using the innocent spouse relief rule.
The IRS argued that the innocent spouse relief rule didn’t apply, using as evidence posts from Ms. Thomas’s personal blog that contained information about Ms. Thomas’s assets, lifestyle, business, and her relationship with her husband. Ms. Thomas countered that these posts were inadmissible. The tax court agreed with the IRS and allowed the posts to serve as evidence.
Tax Tip: Be aware of what you post online. Remember that the IRS can use your social media posts as evidence against you.
(Craddock v. Comm’r, T.C. Summary Opin. 2023-4)
You can deduct business expenses if they are ordinary and necessary for the regular operation of your business. You must also, however, have proper evidence to support these expenses.
Facts: Matthew and Chasta Craddock filed a joint 2018 Form 1040 tax return, reporting $1,000 of income and a loss of $33,104 from Mr. Craddock’s business. Included in the business loss were car and truck expenses, along with other expenses.
After selecting the Craddock’s 1040 return for audit, the IRS subsequently disallowed all business expenses. All business miles were disallowed because Mr. Craddock’s mileage log for his truck did not break down personal miles vs. business miles. The IRS, supported by the court, also disallowed all other business expenses because Mr. Craddock could not produce proper documentation.
Tax Tip: It’s not enough to record your business expenses. You must also have appropriate substantiation as defined by the IRS. Pay attention to your recordkeeping or hire someone to help so you can defend your business expenses in the event of an IRS audit.
(Wondries v. Comm’r, T.C. Memo. 2023-5)
The IRS requires that you have a profit motive if you want to deduct business expenses on your tax return. If the IRS believes that you don’t have a genuine profit motive, it may reclassify your business as a hobby and disallow certain expenses in the future.
Facts: Paul and Patricia Wondries purchased a 1,100-acre ranch in California in 2004. While Paul had previously owned many successful businesses, this was the first foray into ranching for both Paul and Patricia.
In 2015, 2016 & 2017, the Wondries reported ranch losses of $473,901, $223,095, and $229,124, respectively, on their individual tax returns. Following an audit, the IRS assessed an additional $421,503 in taxes and $84,301 in penalties, claiming that the Wondries were not operating the ranch with a profit motive.
The tax court disagreed with the IRS, citing a full-time foreman the Wondries hired to run the ranch, and an official accounting and payroll system that was used to record transactions. So while never realizing a profit over 13 years, the tax court concluded that the Wondries did, indeed, operate the ranch with a profit motive.
Tax Tip: If you are trying to start and grow a business, consider creating a business plan that shows which year you anticipate first turning a profit. Also consider asking for help so you understand the specific details of what the IRS is looking for when determining whether you have a true profit motive.
Think twice about automatically paying the amount due on a notice
Here are several quotes from actual IRS correspondence that serves as evidence that our national tax collection agency is not always right:
It's pretty tough to pay a balance due of $0 on June 31st when June only has 30 days. The message should be clear. If you receive a notice from the IRS, do not automatically assume it is correct and submit payment to make it go away. Here are some suggestions for how to handle a letter you may receive from the IRS or other taxing authority:
Receiving a letter from the IRS is never fun. Please call if you have questions or need assistance.
Here are 5 great money ideas to help you get ahead or move into a better financial position.
These great money tips can provide a financial boost to you and your family, regardless of the economy's ups and downs.
Here's how companies use information about you and what you can do to protect it
One of the most valuable things you own is YOU.
Your identity and related information includes the basics - where you live, your age, and your gender. But it also includes your interests, who you know, and what you buy.
And while some companies are on record saying they don't sell collected information, your data can still be used to help advertisers and third parties push targeted information in your direction.
So, do you know who has data about you? Here’s the life cycle of your personal data and what to do to protect it.
It gets collected. Think about the organizations that legally collect information about your identity – your employer, government entities, insurance companies, banks, credit reporting agencies, and non-profit organizations. And then add those companies you give your identity to freely - like Google, Facebook, LinkedIn, X, and any other website or social media platform you visit.
It gets stored. Once your identity gets collected, it then needs to be stored somewhere. Storage is most often on servers or locally on a computer or mobile device. This is one of the core concerns with Tik-Tok, a Chinese-originated short video service. The concern is that a foreign entity will have stored U.S. citizen's interests and behaviors that can help identify potential targets that can be manipulated.
It gets analyzed. Once information related to your identity and interests are collected, it is analyzed. While many companies now say they don't sell your information to other companies, your data is still being monetized. Your viewing behavior can also be actively manipulated by the sites you view. So if you read articles about cats, you are going to get a lot more articles about cats and get ads that relate to cat-lover behavior. This is often so subtle, you do not realize it is happening.
It gets accessed. If your information is considered a public record, anybody can see it. Business licenses, property tax records and real estate ownership are just a few examples of personal information that anyone can access.
It gets stolen. Identity thieves are always looking for ways to access your information. Thieves either hack one of the organizations that collects your confidential information or find a way to trick you into giving them your information, with techniques such as phishing emails.
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