File A Return, Especially If You Have Carryovers

 

Please file a tax return when you have significant carryovers.

Let’s look at the Mosley case.

In 2003 Sonji Mosley bought four residential properties in North Carolina.

In 2007 she bought undeveloped land in South Carolina.

In 2009 all the properties were foreclosed.

On her 2009 return she reported approximately $20 grand of net rental expenses and a capital loss of approximately $182 grand.

On her 2014 return she claimed an (approximately) $17 thousand loss from one of the 2009 foreclosures.

On her 2015 return she claimed an (approximately) $28 thousand loss from one of the 2009 foreclosures.

On to n 2018.

It seemed an ordinary year. She worked for the city of Charlotte. She also broke two retirement accounts. The numbers were as follows: 

            Wages                                                $ 40,656

            Retirement plan distributions              $216,871

The retirement plan distributions were going to hurt as she was under 59 ½ years of age. There would be a 10% penalty for early distribution on top of ordinary income taxes.

Well, there would have been - had she filed a return.

The IRS prepared one for her. The IRS already had her W-2 and 1099s through computer matching, so they prepared something called a Substitute for Return (SFR). Taxes, penalties, and interest added to almost $60 grand. The implicit bias in the SFR is transparent: everything is taxable, nothing is deductible. The IRS wants you to see the SFR, clutch your chest and file an actual return.

To her credit, she did reply. She did not file a return, though; she replied with a letter.

COMMENT: She should have sent a return.

She explained that - yes – she should have filed a return, but the IRS was not giving her credit for prior year carryovers. If anything, she still had a credit with the IRS. She also requested the IRS to remove all penalties and interest.

COMMENT: She definitely should have sent a return.

The IRS could not understand her letter any more than you or I. They sent a Notice of Deficiency, also called a “NOD,” “SNOD,” or “90-day letter.” It is the ticket to Tax Court, as we have discussed before.

Off to Court they went.

Mosley next submitted four handwritten calculations to the IRS.

• The first showed a net operating loss (NOL) of $444,600 and a capital loss of $206,494, both originating in 2009.
• The second and third ones broke down those numbers between South and North Carolina.
• The fourth one was an updated calculation of her 2018 taxes. According to her numbers, she had a remaining NOL of $211,308 going into 2018. Since the total of her 2019 income was approximately $257 grand, she had very much separated the thorn from the stalk.

The IRS had questions. The tax impact of a foreclosure can be nonintuitive, but – in general – there are two tax pieces to a foreclosure:

(1)  The borrower may have income from the cancellation of income. That part makes sense: if the bank settles a $150,000 debt for $100 grand, one can see the $50 grand entering the conversation. Then follows a bramble of tax possibilities – one is insolvent, for example – which might further affect the final tax answer but which we will leave alone for this discussion.

(2)   Believe it or not, the foreclosure is also considered a sale of the property. There might be gain or loss, and the gain might be taxable (or not), and the loss might be deductible (or not). Again, we will avoid this bramble for this discussion.

The IRS looked at her calculations. She had calculated a 2009 NOL of $444,600 and $78,025 capital loss from her North Carolina properties. The IRS recalculated North Carolina and arrived at taxable gain of $55,575.

Not even close.

You can anticipate the skepticism the Tax Court brought to bear:

(1)  She did not file a 2009 return, yet she asserted that there were carryovers from 2009 that affected her 2018 return.

(2)  She reported the same transactions in 2009, 2014 and 2019.

(3)  The tax reporting for foreclosures can be complicated enough, but her situation was further complicated by involving rental properties. Rentals allow for depreciation, which would affect her basis in the property and thereby her gain or loss on the foreclosure of the property.

(4)  The IRS recalculations were brutal.

The Court pointed out the obvious: Mosley had to prove it. The Court did not necessarily want her to recreate the wheel, but it did want to see a wheel.

Here is the Court’s sniff at the net operating loss carryover:

It is apparent that the record is devoid of evidence to properly establish both the existence and the amount of petitioner’s NOLs in 2009.”

Here is the Court on the capital loss carryover:

“ … petitioner initially reported the foreclosure on the South Carolina land resulted in $182,343 of net long-term capital losses, and for each of 2009-17, she claimed $3,000 of that amount as a long-term capital loss deduction pursuant to section 1211(b). But on the 2015 return … petitioner also improperly claimed an ordinary loss deduction of 110,257 from the sale or exchange of the South Carolina land despite the foreclosure on that land in 2009. Thus, petitioner effectively double counted the loss …."

Mosley lost on every count, She owed tax, penalty, and interest.

And there is a lesson. If you have significant tax carryovers spilling over several years, you should file even if the result is no taxable income. The IRS wants to see the numbers play out. Get yourself in hot water and the Tax Court will want to see them play out also.

You might even catch mistakes, like double-counting things.

Our case this time was Mosely v Commissioner, T.C. Memo 2025-7.  

Is This Reasonable?

 

I have long maintained that the IRS is unreasonable by repeatedly disallowing reasonable cause exception to its numerous penalties. Their standard appears to allow little to no room for real-world variables – someone got sick, someone misunderstood the requirements (wow, how could that happen?), technology broke down, and so on.

Mind you, I say this after contacting the IRS – AGAIN – about returns we filed for two clients. In each case the IRS has misplaced the returns, failing its mission, causing needless (and incorrect) notices, and embarrassing us as practitioners. One of these returns will soon celebrate its one-year anniversary. The IRS has had plenty of time to investigate and resolve the matter. I have, and I am just one guy.

However, have a practitioner send a tax return two minutes after midnight on an extended due date and the IRS will penalize his/her tax practice to near bankruptcy. It may be that there was no electricity in the office until that very moment. No matter: there is no reasonable cause for things not functioning perfectly every time every place all the time.

The hypocrisy is almost suffocating. Let’s make the relationship reciprocal – for example, let me send the IRS an invoice for wasting my time – and see how quickly the IRS recoils in terror.

Let’s talk about RSBCO’s recent shout-out to the Supreme Court.

RSBCO was a wealth management company headquartered in Louisiana. It hired someone (let’s call him Smith) with a background in accounting to spearhead its IRS information reporting.

Smith took RSBCO successfully through one filing season.

Unbeknownst to anyone, however, Smith was fighting some dark demons, and the second filing season did not go as well.

Smith unfortunately waited until the final day to electronically file approximately 20,000 information returns using the IRS FIRE system. FIRE sent an automated e-mail that certain files had errors preventing them from being processed and RSBCO should send replacement files. The e-mail went only to Smith, so no one else at RSBCO knew.

Smith – approximately four months later – was able to resume work. He had been diagnosed with clinical depression, having suicidal ideation, and struggling to focus and complete tasks at work.

COMMENT: I am thinking Reg 301.6724-1(c):

(c) Events beyond the filer's control

(1) In general. In order to establish reasonable cause under this paragraph (c)(1), the filer must satisfy paragraph (d) of this section and must show that the failure was due to events beyond the filer's control. Events which are generally considered beyond the filer's control include but are not limited to—

(iv) Certain actions of an agent (as described in paragraph (c)(5) of this section),

Smith saw the e-mails. He corrected the information returns.

QUESTION: What were the errors about? About dashes, that’s what. The IRS wanted dashes added or removed. Approximately 99% of the problem was little more than a spelling bee.

Smith had a successful third filing season.

Except for the $579,198 penalty notice the IRS sent for the information returns from season two.

COMMENT: Methinks that is a bit harsh for not winning a spelling bee.

Smith was still battling his health issues. He hid the penalty notice in his desk.

A few months later RSBCO let Smith go.

The new hire soon found the notice and tried to contact the IRS. The contact number provided was entirely automated, so the hire could never speak with a human being.

COMMENT: Been there, pal.

The IRS – thinking they had been ignored – sent a Final Notice. RSBCO requested a Due Process Hearing.

The Hearing Officer for the CDP hearing mostly waived off RSBCO’s side of the story. After a Solomonic 15-minute reflection, the Officer did offer to abate 25% of the penalty amount.

COMMENT: It’s something.

RSBCO had to decide how to proceed. They decided to pay the IRS $579 grand and pursue the refund administratively.

In December 2018 RSBCO filed a Claim for Refund.

The IRS received it. And then lost it.

Uh huh.

In August 2019 RSBCO filed a lawsuit.

In June 2020 – after irritating the court – the IRS promised RSBCO that it would play fair if they refiled the claim.

RSBCO agreed and withdrew the lawsuit.

In September it filed its Claim for Refund … again.

And the IRS lost it … again.

COMMENT: You see what is going on here, don’t you?

In May 2021 RSBCO filed a second lawsuit in district court.

In September 2022, the jury decided that RSBCO had reasonable cause for penalty abatement.

COMMENT: Will this ever end?

The IRS processed the refund … wait … no, no … that’s wrong. The IRS appealed the district court decision to the Fifth Circuit.

The Fifth Circuit found that jury instructions were flawed. The district court stated that an employee’s mental health - by itself - did not give rise to reasonable cause. The jury was not properly instructed.

QUESTION: I guess the following by the district court judge was unclear to the IRS, which DID NOT object:

Anything else? Anybody want to put your objection [to jury charges] on the record if you’d like objecting to them?”

COMMENT: I can see the confusion. Making out this question is like trying to plumb the metaphysics of James Joyce’s Ulysses. No wonder the IRS failed to object.

In October 2023 RSBCO petitioned the Supreme Court.

Which just declined the petition.

Meaning the Fifth Circuit has the final word.

The Fifth Circuit wants a new trial.

Will this nightmare ever end?

It is … unreasonable.

Our case this time was RSBCO v U.S., US Supreme Court Docket 24-561.

Filing A Zero-Income Tax Return

Here’s a question:

Would you file a tax return if you have no income – or minimal income - to report?

I would if there was a refund.

I also lean to filing if one has a history of tax filings.

The former is obvious, unless the incremental cost of filing the return is more than the refund.

The latter is because of my skepticism. I do not want a letter from the IRS stating they have not received a tax return for name-a-year. Granted, the issue should be easily resolved, but I have lost track of how many should-be’s have turned out to not-be.

Another reason is a rerun of Congress’ decision to automatically send advance payments back in 2021 – specifically, the child tax credit.       

You were ahead of the game by having filed a prior year return.

Ruben Varela filed a 1040EZ for 2017. It showed a refund of $1,373.

OK.

Ruben attached four Forms 4852 Substitute for Form W-2.

This form is used when an employer fails to send a W-2, among other situations. It happens and I see one every few years. But four …? That is odd.

The 4852’s that Ruben prepared showed zero wages.

And the $1,373 included Social Security and Medicare taxes., taxes which are not refundable.

Ruben, stop that yesterday. This is common tax protestor nonsense.

Let’s read on. There was third party reporting (think computer matching) for wages of $11,311 and cancellation of indebtedness income of $1,436.

Not surprisingly, the IRS considered it a protest filing and assessed a Section 6702(a) penalty.

§ 6702 Frivolous tax submissions.

(a)  Civil penalty for frivolous tax returns.

A person shall pay a penalty of $5,000 if-

(1)  such person files what purports to be a return of a tax imposed by this title but which-

(A)  does not contain information on which the substantial correctness of the self-assessment may be judged, or

(B)  contains information that on its face indicates that the self-assessment is substantially incorrect, and

(2)  the conduct referred to in paragraph (1) -

(A)  is based on a position which the Secretary has identified as frivolous under subsection (c) , or

(B)  reflects a desire to delay or impede the administration of Federal tax laws. 

That caught Ruben’s attention, and he disputed the penalty. On to Tax Court they went.

How can I owe a penalty if there was NO TAX, argued Ruben.

On first impression, it seems a reasonable argument.

But this is tax. Let’s look at that Code section again. 

              Such person files ….                                                      OK

              What purports to be a tax return …                                OK

      Does not contain information on

   which the substantial correctness …                             ?

 

Let’s talk about this last one. The Tax Court has a history of characterizing “zero” W-2s as both substantially incorrect and not containing sufficient information allowing one to judge the self-assessment of tax.

We have a third “OK.”

Back to Section 6702.

Is there any reference in Section 6702 to whether the return did or did not show tax due?

I am not seeing it.

The Court did not see it either.

They upheld the Section 6702 penalty.

The IRS wanted more, of course. They also wanted the Section 6673 penalty.

§ 6673 Sanctions and costs awarded by court

This penalty can be imposed when somebody clogs the Court in order to impede tax administration. The penalty can be harsh.

How harsh?

Up to $25 grand of fresh-brewed harsh.

The Court noted they had not seen Ruben Varela before nor was it aware of him previously pursuing similar arguments. They declined to impose the Section 6673 penalty, but …

We caution petitioner that a penalty may be imposed in future cases before this Court should he continue to pursue these misguided positions.”

The Court was warning him in the strongest legalese it could muster.

Our case this time was Ruben Varela v Commissioner, T.C. Memo 2024-92.

 

A Real Estate Course – And Dave

 

The case made me think of Dave, a friend from long ago – one of those relationships that sometimes surrenders to time, moving and distance.

Dave was going to become a real investor.

That was not his day job, of course. By day he was a sales rep for a medical technology company. And he was good at sales. He almost persuaded me to join his incipient real estate empire.

He had come across one of those real estate gurus – I cannot remember which one – who lectured about making money with other people’s money.

There was even a  3-ring binder or two which Dave gave me to read.

I was looking over a recent case decided by the Tax Court.

The case involved an engineer (Eason) and a nurse (Leisner).

At the start of 2016 they owned two residential properties. One was held for rent; the other was sold during 2016.

COMMENT: Seems to me they were already in the real estate business. It was not a primary gig, but it was a gig.

Eason lost his job during 2016.

A real estate course came to his attention, and he signed up – for the tidy amount of $41,934.

COMMENT: Say what?

In July 2016 the two formed Ashley & Makai Homes (Homes), an S corporation. Homes was formed to provide advice and guidance to real estate owners and investors.  They had business cards and stationary made and started attending some of those $40 grand-plus courses. Not too many, though, as the outfit that sponsored the courses went out of business.

COMMENT: This is my shocked face.

By 2018 Eason and Leisner abandoned whatever hopes they had for Homes. They never made a dime of income.

You know that $40 grand-plus showed up on the S corporation tax return.

The IRS disallowed the deduction.

And tacked on penalties for the affront.

This is the way, said the IRS.

And so we have a pro se case in the Tax Court.

Respondent advances various reasons why petitioners are not entitled to any deductions …”

The respondent will almost always be the IRS in these cases, as the it is the taxpayer who petitions the Court.

And we have discussed “pro se” many times. It generally means that a taxpayer is representing himself/herself, but that is not fully accurate. A taxpayer can be advised by a professional, but if that professional has not taken and passed the exam to practice before the Tax Court the matter is still considered pro se.

Back to the Court:

          … we need to focus on only one [reason].”

That reason is whether a business had started.

Neither Homes nor petitioners reported any income from a business activity related to the disputed deductions, presumably because none was earned.”

This is not necessarily fatal, though.

The absence of income, in and of itself, does not compel a finding that a business has not yet started if other activities show that it has.”

This seems a reasonably low bar to me: take steps to market the business, whatever those words mean in context. If the context is to acquire clients, then perhaps a website or targeted advertising in the local real estate association newsletter.

Here, however, the absence of income coupled with the absence of any activity that shows that services were offered or provided to clients or customers […] supports respondent’s position that the business had not yet started by the close of the year.”

Yeah, no. The Court noted that a business deduction requires a business. Since a business had not started, no business deduction was available.

The Court disagreed with any penalties, though. There was enough there that a reasonable person could have decided either way.

I agree with the Court, but I also think that just a slight change could have changed the outcome in the taxpayers’ favor.

How?

Here’s one:  remember that Eason and Leisner owned a rental property together?

What if they had broadened Homes’ principal activity to include real estate rental and transferred the property to the S corporation? Homes would have been in business at that point. The tax issue then would have been expansion of the business, not the start of one.

Our case this time was Eason and Leisner v Commissioner, T.C. Summary Opinion 2024-17.

No Hiding Behind Preparer’s Error

 

Practitioners sometimes call it “falling on the sword.”

There is likely a phone call to the insurance company beforehand.

Something went wrong. The client now owes tax, interest, maybe penalties.

Just because that happens does not mean the practitioner was wrong. It can happen any number of ways.

·      The classic: the client does not provide all paperwork to the practitioner.

Mind you, sometimes the practitioner can tell:

… hey, you have had this account for years, but I am not seeing it this year. Do you still have the account?

And sometimes … you can’t tell. Perhaps it is a one-off. You never saw it before and you never will again, but it is there for that one year.

All the while, IRS computers are whirring and matching. They will let you know if you leave something out.

·       The tax answer is uncertain.

How can that happen?

New tax law is one way. It takes a while to get guidance out there. We saw this recently with the employee retention credit. Congress passed a law, and the IRS did its best interpreting it in real time. Its best was problematic, and the IRS subsequently paused ERC processing because of the number of fraudulent filings.    

·       The client goes to audit but does not have the documentation necessary to support a tax position. 

I think of real estate professional status, especially if one has a job outside real estate. The IRS is going to hammer on the hours worked, and you better have something other than stories to support your position. 

A variation on the above is that the IRS disagrees with your documentation. 

     Conservation easements are a current example of these. 

·       The audit from hell 

One cannot do representation work and not have stories to tell. 

     I was hired by another CPA for a research credit audit.  

The IRS agent had visited the CPA’s office, at which time he reviewed interim (think monthly or quarterly) accountings. The interims were prepared on an accrual basis, meaning that the accounting included accounts receivable and payable. 

The tax return, however, was cash basis, meaning that no receivables or payables were recorded. 

This is extremely common. Depending upon, I might consider the failure to do so to be malpractice. 

The agent considered this to be two sets of books. 

Translation: he thought indices of fraud. 

I thought that the IRS should tighten up its hiring standards. Having someone work business tax without having an adequate background in accounting is insane. 

It cost time. It cost goodwill. And it had nothing to do with the audit of a research tax credit. 

I am looking at a case that went sideways. I also see that neither the taxpayers nor the IRS appeared at the Tax Court hearing. 

The taxpayer was a teacher, and his wife was a nurse. They had a joint real estate business, and the wife had previously owned a nursing business. Although the nursing business had closed, it still showed deductions for the tax year under issue. 

The IRS had proposed adjustments, and the taxpayers had acceded. 

The taxpayers did not agree to a substantial understatement penalty, though. 

COMMENT: Think of this as a super penalty. It can flat-out hurt.

I’ve got the lay of the land now. Taxpayers wanted reasonable cause for abatement of the penalty. That reasonable cause would be reliance on a tax professional. There are requisites:         

(1)  The issue must be one of professional judgement and more than the routine processing of a tax return.

(2)  The tax preparer must be competent.

(3)  The taxpayers must have provided the preparer all relevant facts.

(4)  The taxpayers must have relied on the preparer’s judgment.

(5)  The taxpayers were injured by such reliance.

 Here is what the Court saw:         

(1)  The taxpayers did not testify.

(2)  The tax preparer did not testify.

(3)  The tax preparer deducted expenses for a business no longer in operation during the year in question.

(4)  The tax preparer reported business expenses on incorrect schedules.

(5)  The preparer did not sign the return.

The preparer had no intention of falling on the sword, it seems. The taxpayers had every intention of holding him responsible, though. They had to if they wanted penalty abatement.

It wasn’t going to happen.

Why?

The preparer did not sign the return, considered a big no-no in practice.

The Court was swift: taxpayers had not proven that the preparer was even competent.

Our case this time was Hall v Commissioner, U.S. Tax Court, docket No. 3467-23.

Paying Personal Expenses Through A Business

I am looking at a tax case.

It reminds me of something.

There is a too-common belief that paying an expense through a business can somehow transmute an otherwise personal expenditure into a tax deduction.

Here are common ways I have heard the question:

(1)  My spouse is going to replace her car. Should we buy it through the business?

(2)  I run my business from my home. That makes my home a “headquarters,” right? Can’t I deduct all the expenses related to my business headquarters?

(3)  I am going to borrow money to [go on vacation/pay college tuition/buy a boat I’ve been wanting]. Should I have the business borrow the money to make it deductible?

Do not misunderstand, many times there is a more tax-efficient way to accomplish something. There may still be some tax though, and the goal is to minimize the tax. Making it disappear may not be an option, at least for a responsible practitioner.

Let’s look at the above questions.

(1) Realistically, if there is no business use of the vehicle, you are not allowed to deduct any of the ownership or operating expenses of a vehicle. Despite that, does it happen routinely? Of course. Practitioners do what they can, but it is like fighting the tide.

(2)  I consider this quackery, but it is a true story. No, working from home does not make your house fully deductible. You might get a home office deduction out of it, but that is a fraction of some – and not all – expenses. No, your house is not Proctor and Gamble. Get over it.

(3) This one might have traction, but in general the answer is no. Even if the interest is deductible, how is the company getting you the money? Is it going to lend it to you? If so, you will have to pay interest to the company, although you may be able to arbitrage the rate. Will the company bonus you the money? If so, I see FICA and income taxes in your future. Explain to me the win condition here.

Let’s look at Justin Maderia (JM).

JM lived in Florida and owned 50% of Lindy Inc (Lindy).

Lindy must be a C corporation, which is the type that pays its own taxes. I say this because the Court refers to earnings and profits (E&P), which is a C corporation concept. The purpose of E&P is to track a corporation’s ability to pay dividends. When it pays dividends, a corporation is sharing its accumulated profits with its shareholders. The corporation has already paid taxes on these profits (remember: a C corporation pays taxes). When it pays dividends, you are personally taxed on that previously taxed profit. This is the reason for “qualified dividends” in the tax Code: to cut you a break on that second round of taxation.

The IRS was looking at JM’s 2018 personal return. It was also looking at Lindy’s 2018 business return.

COMMENT: It is not unusual to include a closely held company with the audit of an individual tax return.

The IRS wanted to increase JM’s 2018 income by $192 grand of “stuff” that Lindy paid on his behalf.

COMMENT:  Sounds to me like Lindy was paying for EVERYTHING.

Let’s talk procedure here.

The IRS identified personal transactions in Lindy. Lindy was the type of corporation that could pay dividends, and the IRS argument was – to the extent Lindy paid for personal stuff – that such payments represented constructive dividends to JM.

Fair. Consider that the serve.

JM gets to return.

He would argue that the payments were not personal because … well, who knows why.

JM did nothing.

Huh?

JM did nothing because he had a previous audit, and the IRS never pursued the issue of Lindy payments. JM believed he was immunized.

Mind you, there is a kernel of truth here, but JM has googled the concept beyond all recognition.

IF the IRS looks at an issue AND makes no change to your tax return for that issue, you can challenge a later proposed assessment based on that same issue. You might not win, mind you, but you have grounds for the challenge.

Is this what happened to JM?

Let’s look at it.

The IRS examined his prior year return.

Score one for JM.

The IRS never looked at Lindy.

We are done.

There is no immunity. JM cannot challenge a proposed 2018 assessment on an issue the IRS did not examine in a prior year.

JM had to return on different grounds. He did not. He - procedurally speaking - automatically lost.

JM had $192 grand of additional income.

The IRS next wanted the accuracy-related penalty.

Well, of course they did. If they were any more predictable, we could just put it on a calendar.

The Court said “no” to the penalty.

Why?

Because the IRS had looked at JM’s previous return. The IRS either did not bring up or dismissed the Lindy issue, so JM kept reporting the same way. While this would not protect him from a challenge of additional income, it did provide a “reasonable basis” defense against penalties.

Our case this time was Maderia v Commissioner, T.C. Summary 2024-5.

Embezzlement And A Payroll Tax Penalty

It has been about a month since I last posted.

To (re)introduce myself, I am a practicing tax CPA. I like to think practice allows a certain reality check on topics we discuss here. I am hesitant to discuss topics I do not work with or have not worked with for a long time. On the other hand, I can be acerbic while bloviating within my wheelhouse. I have strong opinions, for example, with IRS administration of “reasonable cause” relief for certain penalties. Here is one: work someone 80, 90 or more hours per week, deprive him/her of adequate rest, maintain the stress meter at redline, and ... stuff ... just ... happens. Maybe - if we had a government union to drag high achievers down to the level of the common spongers - then stuff would stop happening.

The downside is that this blog is maintained by a practicing CPA, and we just finished busy season.

Let’s ease back into it.

Let’s talk about the big boy penalty - the BBP.

There are penalties when someone fails to remit withheld payroll taxes to the IRS. It makes sense when you think about it. Your employer withholds 6.2% of your gross paycheck for social security and another 1.45% for Medicare. Your employer is also withholding federal income tax. All that is your money - your employer is acting only as a go-between - and not remitting the tax to the IRS is tantamount to stealing from you. And from the IRS.

I have seen it many times over the years. Sometimes still do. Not grievous stuff like Madoff, but nonetheless happening when a business is laboring.

I get it: the business is doing the best it can. I am not saying it is right, but growing up includes acknowledging that a lot of things are not right.

The BBP is a 100% penalty on the withheld employee taxes.

You read that right: 100 percent.

It applies if you are a “responsible person.” That makes sense to me if you are the big cheese at the Provolone factory, but the IRS has been known to consider ordinary Joe’s – somebody stuck at a miserable job for a needed paycheck before another job allows an escape – to be responsible persons. A common thread is that someone has the authority to write checks, meaning the person can decide where the money (however limited) goes. Sounds great in a classroom, but it can lead to stupid in the real world.

Let’s look at Rodney Taylor.

He has degrees in political science, speech, and theater. He is multilingual. He has worked domestically and internationally. He now owns a management company called Taylor & Co.

He says that he suffers from a limited learning disability, one involving mathematics.

Couldn’t tell, but I believe him.

Over the years he delegated much of his financial stuff to professionals such as Robert Gard, his CPA.

OK.

Gard embezzled between one and two million dollars from Taylor. Some of those monies were earmarked as payroll tax deposits.

Gard had a heart attack during a meeting when his fraud was unearthed. It appears that Taylor is a good sort, as Gard survived and attributed his survival to actions Taylor immediately took in response to the heart attack.

And next we read about the lawsuits. And the insurance companies. And banks. And insurance reimbursements. You know the storyline.

While all of this was happening, Taylor paid himself a $77 thousand bonus.

STOP! Pay it back. Immediately. Not Kidding.

Taylor transferred funds from the company’s bank account to a new something he was launching.

DID YOU NOT HEAR STOP???

You know the IRS had a BBP issue here.

Taylor argued that he could not be a responsible person, as he was embezzled. He had difficulties with mathematical concepts. He hired people to do stuff.

I do not know who was advising Taylor - if anyone - but he lost the plot.

• Taylor owed the IRS.
• Taylor was CEO, hired and fired, controlled the financial affairs of the company, and made the decision to sue Gard. He couldn’t be any more responsible if he tried.
• Meanwhile, Taylor diverted money to himself while still owing the IRS.

The IRS gets snarky when you prioritize yourself when you still owe back payroll taxes.

Bam! Big boy penalty.

Yeah, and rain is wet.

Sometimes it … is … just … obvious.

Our case this time was Taylor v Commissioner, T.C. Memo 2024-33.