A Tax Preparer As A Witness

It is – once again – that time of year. Extensions. The business extensions came due last month. The individual extensions are due this month.

What a crazy thing to do for a living.

I have not had a lot of time to scan my normal sources, but I did see a case that caught my eye.

The taxpayers live in Illinois. They have an S corporation.

They rent a pole-barn garage to the S corporation. The corporation stores tractors, trailers and other equipment there.

Pretty normal.

They used a tax preparer for their 2012 and 2013 individual returns.

On their rental schedule, they deducted (among other expenses) the following:

·      Interest of $5,846 for 2012 and $4,336 for 2013

·      Taxes of $7,058 for 2012 and $10,395 for 2013

They also deducted the personal portion of their interest and taxes as itemized deductions.

I was anticipating that they double-counted the interest and taxes.

Nope.

They never could document the 2012 real estate taxes on their rental schedule.

Seriously?

Then we have 2013. The Court agreed that the taxes were paid, but they were paid by the S corporation.

Folks, to claim the taxes on a personal return one has to pay the taxes personally.

There went the rental real estate tax deduction for both years.

Onward to the 2012 mortgage interest.

Same answer as the 2013 real estate taxes.

Yeeessh.

The Court was a little more lenient in 2013, sort of. While they disallowed any interest on the rental schedule, the Court did allow substantiated mortgage interest in excess of claimed interest as an itemized deduction.

The IRS next went in to bayonet the wounded and dead: it wanted a 20% accuracy-related penalty.

Of course they did.

A common defense to this penalty is reliance on a tax professional.

Taxpayers used a tax preparer for 2013 and 2013.

Seems to me they have a potential defense.

The Court then drops this:

Although their returns were prepared by a paid income tax preparer, the return preparer used income and expense amounts petitioner provided. Apparently, no source documents underlying the deductions were provided to the return preparer; according to the return preparer, petitioners had ‘horrible books and records.’”

And this is a witness for the taxpayers?

Because petitioners did not furnish the return preparer with complete and accurate information, they failed to establish that their reliance upon the return preparer constitutes ‘reasonable cause’ and ‘good faith’ with respect to the underpayments of tax.”

Wow.

I get it. The preparer might have gotten them out of a penalty on a technical issue, but given the poor quality of the records the preparer could not get them out of a penalty for the numbers themselves.

The taxpayers probably would have done better by not bringing their preparer to testify.

And then I noticed: it was a “pro se” case.

Which means that the taxpayers represented themselves.

COMMENT: Pro se does not mean that your preparer is not there. I for example can appear before the Tax Court as part of a pro se. I would then be there as a witness, and I would not considered to be “practicing.”

In this case the taxpayers made a bad call by bringing in their preparer.

The case for the home gamers is Lawson v Commissioner.