A hearing is scheduled for September 11, 2023 for interested persons and organizations to provide testimony on proposed regulations on the timing and approval process for penalties. Section 6751(b) provides that:

No penalty under this title shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate. 

The timing of when the approval is required by Section 6751(b) has been the subject of significant litigation. The Second Circuit in Chai v. Commissioner concluded that Congress enacted section 6751(b) to “prevent IRS agents from threatening unjustified penalties to encourage taxpayers to settle.” This has caused a lot of litigation in both the Tax Court and U.S. District Courts such that there are currently two different standards on timing of when such supervisory approval is required. If supervisory approval is to meet the goal of not being used as an unfair “bargaining chip” it must be required before such unwanted behavior can occur. Many groups have submitted comments asking for supervisory approval to be done earlier in the examination process than the proposed regulations require and that approval be done by a direct supervisor and not just anyone with penalty approval rights within the IRS.Continue Reading IRS Sanctioned for Bad Faith on Supervisory Approval of Penalties While Proposed Regulations on the Same Issue are Pending

Starting any business has risk, and most businesses take time to become profitable. Unfortunately, the IRS sees multiple years of losses from a business as a red-flag that usually results in further scrutiny. That scrutiny can result in disallowance of legitimate business losses and potential penalties for the underreporting. However, with the proper documentation and testimony, legitimate losses over multiple years can be taken and upheld. A recent Tax Court case on a miniature donkey businesses, Huff v. Comm’r, T.C. Memo 2021-140, outlines the factors needed to defend multiple years of losses in a business.
Continue Reading Taxpayer’s Testimony on Businesses Losses Defeats IRS Arguments and Penalties

Wooden drawer is open.

There is a wealth of information available from the IRS that is not generally made available to the public.  Most of this information can be obtained by asking.  This information includes files the IRS assembles about a taxpayer, and various training manuals used by the IRS to train its employees.  In addition to training given to its employees, the IRS, like most professional organizations, conducts continuing education on an annual basis for its various divisions.  Most of the training manuals and annual training materials are available to the practitioner pursuant to the Freedom of Information Act (FOIA).
Continue Reading Obtaining Information from the IRS

The new Biden administration is clearly signaling that renewable energy will be a key focus of its plan going forward. For example, the Biden administration has set a goal to deploy 30 gigawatts of offshore wind generation capacity by the year 2030. Therefore, it can be expected that tax advisors will be seeing more questions

Close-up Of A Pink Piggybank With Eyeglasses And Calculator On Wooden DeskSeveral abusive tax shelters in the 1970s and 1980s caused Congress to enact rules to prevent taxpayers from deducting losses when a taxpayer doesn’t materially participate in the activity.  These passive loss rules apply to individuals (including partners and S Corp shareholders), trusts, estates, personal service corporations and sometimes closely held corporations. In short, these rules are a wide net that catches a lot of businesses and can impact a lot of taxpayers.  If an activity is determined to be a passive activity it may not only effect the losses claimed but could trigger a 3.8 percent increase from the net investment income tax. Knowing the passive activity rules, and how they apply, can help avoid a dispute or streamline arguments if the IRS questions business activities.  
Continue Reading Understanding IRS Rules on Passive Activity Losses

Expensive laboratory tests and analyzes. From pipette drops feces with symbol of money dollars into test tube.“No problem can withstand the assault of sustained thinking.”

— Voltaire

Businesses are started with good ideas and a lot of hard work. Companies are sustained by applying that same hard work to the challenges and problems they face along the way.  The Internal Revenue Code benefits businesses for dedicating funds to the pursuit of new and improved business components. Section 41 of the Internal Revenue Code provides a tax credit of 20 percent of a taxpayer’s Qualified Research Expenses (QREs) over a base amount related to previous research expenses.  Essentially, it rewards taxpayers for increasing the amount of money they spend on research and development to improve of develop new business components that will benefit the economy and their customers. However, as with any tax benefit, there are strings attached.  In order to qualify, taxpayers must meet a four part test and certain identified expenses don’t count. Also, the IRS has scrutinized these credit claims regularly during audit and, if necessary, forced taxpayers into court to defend their claims. Preparation and documentation is key to surviving IRS scrutiny and, if necessary, prevailing in any subsequent litigation.
Continue Reading The Tax Benefits of Research and Development Expenses (IRC Section 41)

green palm trees covered with snow in unusually cold winterWhen Texas froze in February, I learned a couple of things: i) snow storms have names, and ii) people in my neighborhood aren’t great at covering plants. Those poor sago palms never had a chance.

Compared to the damages to homes and burst pipes throughout the state, clearing out the flower beds after Winter Storm Uri may be just a minor inconvenience, but there was a lot of dead foliage that needed to be replaced and removed all over Texas. Taxpayers should remember that those storm-induced landscaping expenses could qualify for a casualty loss deduction on their income tax returns. Because special tax rules apply to federally declared disaster area losses, potential deductions for property owners include the cost of removing the damaged plants, measures taken to preserve the shrubbery and any replanting costs necessary to restore the property to its approximate value before the casualty.
Continue Reading Deduct the Dogwoods: Tax Deductions for Winter Storm Uri Landscaping Expenses

USA patriotic American flag muscular arm flex adorned in red, white and blue stars and stripes, huge bicep, very cool symbol of fitness, pride, strength and motivation. Isolated vector illustration for easy editing.The battle outside ragin’

Will soon shake your windows

And rattle your walls

For the times they are a-changin’

-Bob Dylan

A change in presidential administrations brings with it the uncertainty of what the political, legal and tax landscape will look like in the future. Statements from the Commissioner of the Internal Revenue Service and the President of the United States are starting to provide clarity of what things will look like going forward.  Here’s what we know and what you, as a taxpayer, should be thinking about as you adjust your financial planning.
Continue Reading IRS Commissioner and President Biden Draw Battle Lines

Old axe standing against a piled pieces of firewood in wood“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”

― Abraham Lincoln

The Bipartisan Budget Act (BBA) was signed into law by President Barack Obama in 2015 and fundamentally changed the way partnerships are audited. Under the BBA, the IRS generally assesses and collects any understatement of tax (called an imputed underpayment) at the partnership level. The new rules were applicable to all entities starting on January 1, 2018, unless they are eligible to elect out. A significant uptick in BBA audits hasn’t, for the most part, occurred because of other demands on the IRS. However, a ramp up in BBA audits in 2021 is expected given IRS plans to increase audits on small businesses, usually operating as partnerships, by 50 percent.  Preparation prior to any audit is a good idea, but it is imperative for partnerships navigating new audit rules under BBA.  Here are some ways to sharpen your axe before the audit notice arrives.
Continue Reading Is Your Partnership IRS Audit Ready?

Magnifying glass in front of an open newspaper with paper houses. Concept of rent, search, purchase real estate.Even if you are not a tax professional, many people have heard of a 1031 exchange or like-kind exchange. This tax deferral provision has been a permanent part of the Internal Revenue Code for a long time. Usually, if a taxpayer swaps an asset for another asset it is usually a taxable sale.  However, if the exchange comes within Section 1031, then it can generate no tax or limited tax due.  Essentially, a taxpayer can change their investment without, according to the IRS, cashing out or recognizing capital gain.
Continue Reading IRS Issues New Rules for Gain Deferral in Business Exchanges of Real Property