Folks, if
you wind up before the Tax Court, please do not say the following:
… petitioner testified that allocating some of the expenses between his personal and business use required more time than he was willing to spend on the activity.”
Our
protagonist this time is Ivan Levine, a retired CPA who was trying to get a
financial service as well as a marketing business going. He worked from home.
He used personal credit cards and bank accounts, as well as a family cellular
plan. He also drove two vehicles – a Porsche 911 and a Chevrolet Suburban – for
both personal and business reasons. All pretty standard stuff.
The IRS came
down like a sack of bricks on his 2011 return. They challenged the following:
(1) Advertising
(2) Vehicle expenses
(3) Depreciation, including the vehicles
(4) Insurance (other than health)
(5) Professional fees
(6) Office expenses
(7) Supplies
(8) Utilities
(9) Cell phone
(10) Office-in-home
Whoa! It
seems to me that some of these expenses are straight-forward – advertising, for
example. You show a check, hopefully an invoice and you are done. Same for
professional fees, office expenses and supplies. How hard can it be?
It turns out
that he was deducting the same expense in two categories. He was also confusing
tax years – currently deducting payments made in the preceding year.
The
office-in-home brings some strict requirements. One of them is that an
office-in-home deduction cannot cause or increase an operating loss. If that
happens, the offending deductions carryover to the subsequent year. It happens
a lot.
It happened
to Mr. Irvine. He had a carryover from 2010 to 2011, the year under audit. The
IRS requested a copy of Form 8829 (that is, the office-in-home form) from 2010.
They also requested documentation for the 2010 expenses.
COMMENT: Why would the IRS request a copy of a form? They have your complete tax return already, right? This occurs because the IRS machinery is awkward and cumbersome and it is easier for the revenue agent to get a copy from you.
Mr. Irvine
refused to do either. The decision does not state why, but I suspect he thought
the carryover was safe, as the IRS was auditing 2011 and not 2010. That is not so.
Since the carryover is “live” in 2011, the IRS can lookback to the year the
carryover was created. Dig in your heels and the IRS will disallow the
carryover altogether.
The vehicles
introduce a different tax technicality. There are certain expenses that
Congress felt were too easily subject to abuse. For those, Congress required a
certain level of documentation before allowing any deduction. Meals and
entertainment are one of those, as are vehicle expenses.
Trust me on
this, go into audit without backup for vehicle expenses and the IRS will just goose-egg
you. You do not need to keep a meticulous log, but you need something. I have gotten
the IRS to allow vehicle expenses when the taxpayer drives a repeating route;
all we had to do was document one route. I have gotten the IRS to accept
reconstructions from Outlook or Google calendar. The calendar itself is “contemporaneous,”
a requirement for this type of deduction.
BTW the
tricky thing about using Outlook this way is remembering to back-up Outlook at
year-end. I am just saying.
You know Mr.
Irvine did not do any of this.
Why?
Because it
would have required “… more time than he was willing to spend on the activity.”
This from a
CPA?
Being a CPA
does not mean that one practices tax, or practices it extensively. I work tax
exclusively, but down the hall is a CPA who has careered in auditing. He can exclaim
about myriad issues surrounding financial statements, but do not ask him to do
a tax return. There are also nouveau practice niches, such as forensic accountants
or valuation specialists. One is still within the CPA tent, but likely far away
from its tax corner.
Although a
CPA, Mr. Irvine could have used a good tax practitioner.
