Many tax
professionals believe that computerization has led to increasing complexity in
the tax Code. If one had to prepare returns by hand – or substantially by hand –
the current tax Code could not exist. Taxpayers would almost certainly need the
services of a professional, and professionals can only prepare so many returns in
the time available – despite any wishes otherwise.
COMMENT: There is, by the way, a practitioner in New Jersey who still prepares tax returns by hand. His name is Robert Flach, and he has a website (http://wanderingtaxpro.blogspot.com) which I visit every now and then. I do not share his aversion to tax software, but I respect his stance.
That complexity
has a dark side. It occurred to me as I was reading a recent case
concerning tax elections.
Tax elections
are no longer the province of the big wallets and the Fortune 500. You might be
surprised how many there are and further surprised with the hot water in which they
can land you.
Examples
include:
(1) If you are a small landlord there is an
election that will allow you to deduct repairs below a certain dollar limit
without second guessing by the IRS. It is called the “safe harbor small taxpayer”
election, and it is available as long as the cost of your property is $1
million or less. Mind you, you can have a collection of properties, but each property
has to be $1 million or less.
(2) There is an election if you want out of first-year
depreciation, which is now 100% of the cost of qualifying property. Why would
you do this? Perhaps you do not need that all 100%, or the 100% would be used more
tax-efficiently if spread over several years.
(3) You may have heard about the new “qualified
business income” deduction, which is 20% of certain business income that lands
on your individual tax return, perhaps via a Schedule K-1. The IRS has provided
an opportunity (a very limited opportunity, I would argue) to “aggregate” those
business together. To a tax nerd. “aggregate” means to treat as one, and there could
be compelling tax reasons one would want to do so. As you guessed, that too
requires an election.
The case I
am looking at involves an election to waive the carryback of a net operating
loss.
COMMENT: By definition, this is a pre-2018 tax year issue. The new tax law did away with NOL carrybacks altogether, except in selected and highly specialized circumstances.
The taxpayers
took a business bath and showed an overall loss on their individual return. The
tax preparer included an election saying that they were giving up their right
to carryback the loss and were electing instead to carryforward only.
COMMENT: There can be excellent reasons to do this. For example, it could be that the loss would rescue income taxed at very low rates, or perhaps the loss would be negated by the alternative minimum tax. One has to review this with an experienced eye, as it is not an automatic decision
Sure enough,
the IRS examined a couple of tax years prior to the one with the big loss. The
IRS came back with income, which meant the taxpayers owed tax.
You know
what would be sweet? If the taxpayers could carryback that NOL and offset the
income the IRS just found on audit.
Problem: the
election to waive the carryback period. An election that is irreversible.
What choice
did the taxpayers have? Their only argument was that the tax preparer put that
election in there and they did not notice it, much less understand what it
meant.
It was a
desperation play.
Here is the
Court:
Though it was the error of the [] return preparer that put
the [] in this undesirable tax position, the [] may not disavow the unambiguous
language of the irrevocable election they made on their signed 2014 tax return.
As the Code
accretes complexity, it keeps adding elections to opt-in or opt-out
of whatever is the tax accounting de jour. I suspect we will read more cases
like this in upcoming years.
Our case this
time was Bea v Commissioner.
