Waiting Too Long For Refund Of Excess Withholdings

It happens when someone fails to file with the IRS. It might be a “sleeping dog” rationalization, but people will allow a string of tax years to go unfiled, even if some of those years have refunds rather than tax due.

This is a trap, and I saw it sprung earlier this year on a widow. It was unfortunate, as she still has kids at home and could use the money.

The trap is that tax refunds are not payable after a period of time. The Code wants closure on tax matters. The IRS has three years to audit you. You in turn have three years to request a refund. These are general rules, and there are relief valves for the unusual situation: the IRS can request you to voluntarily extend the statute, for example, or you can file a protective claim if your three years are running out.

Let’s look at the Golden case.

Michael Golden did not file his 2015 tax return. In fact, he waited so long that the IRS prepared a return for him (called a substitute for return or SFR). The IRS does not spot a taxpayer any breaks when they do this (no itemized deductions or head of household status, for example). The IRS instead is trying to get a taxpayer’s attention, prompting them to file a return and opt back into the system. In April 2021 (five years after the return was actually due) the IRS issued its notice of deficiency (NOD, sometimes referred to as SNOD). The SNOD is the IRS trying to perfect its assessment prior to sending the account to Collections for their tender mercies. The SNOD showed tax due.

A few days after receiving the SNOD, Golden filed his 2015 tax return. It showed a refund.

Of course.

Golden wanted his refund. The IRS said it could not issue a refund.

There is a technical rule.  

Here it is:

         Section 6511(a)  Period of limitation on filing claim.

Claim for credit or refund of an overpayment of any tax imposed by this title in respect of which tax the taxpayer is required to file a return shall be filed by the taxpayer within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever of such periods expires the later, or if no return was filed by the taxpayer, within 2 years from the time the tax was paid. Claim for credit or refund of an overpayment of any tax imposed by this title which is required to be paid by means of a stamp shall be filed by the taxpayer within 3 years from the time the tax was paid.

Tax law can be tricky, but there are two rules here:

(1) The default period is three years (to coincide with the statute of limitations). The period starts on April 15 (when the return is due) and ends 3 years later, unless one requested an extension, in which case the default period also includes the extension (normally to October 15).

(2) Refuse to go along with the default rule and you might trigger the second rule: only taxes paid within two years of filing can be refunded.

As a generalization, you do not want the second rule. Why limit yourself to taxes paid within two years when you can have taxes paid within three years (and the extension period, if an extension was requested).

The IRS was also looking at this shiny:

Section 6511(b) Limitation on allowance of credits and refunds.

(1)  Filing of claim within prescribed period.

No credit or refund shall be allowed or made after the expiration of the period of limitation prescribed in subsection (a) for the filing of a claim for credit or refund, unless a claim for credit or refund is filed by the taxpayer within such period.

Notice that Congress included the phrase “shall be allowed.” Another way to say this is that – if you do not fit within the three-year test or the two-year test – your refund claim “shall” not be allowed. This was the IRS position: hey, we do not have much discretion here.

Let’s review the dates for Golden.

We are talking about his 2015 return. The return was due April 15, 2016. Add three years. Let’s be kind and add three years plus the extension. His three years clock-out on October 15, 2019. Three years will not get you to a refund.

The two year rule is even worse.

Golden argued fairness. He was working in the private sector as well as the Navy Reserve, and the demands therefrom made his life “extremely difficult.” In tax terms, this argument is referred to as “equity.” Some courts can consider equitable arguments, but the Tax Court is not one of them.

Here is the Court:

          We sympathize with petitioner’s predicament.

The Supreme Court has made clear that the limitations on refunds of overpayments prescribed in section 6512(b)(3) shall be given effect, consistent with Congress’s intent as expressed in the plain text of the statute, regardless of any perceived harshness to the taxpayer. See Commissioner v. Lundy, 516 U.S. at 250–53. Because Congress has not given us authority to award refunds based solely on equitable factors, we are compelled to grant respondent’s Motion for Summary Judgment.”

It was not a total loss for Golden, however. Since he did file a return, the IRS reduced his 2015 tax due to zero. He did not owe anything. He could not, however, recover any overpayment. He left that 2015 refund on the table.

What do you do if you are caught in a work situation like Golden? It is not a perfect answer, but file with the information you can readily assemble. Pay someone to prepare the return (within reason, of course). Hey, maybe you missed interest on a small money market account or took the standard deduction when itemized deductions would have given you a smidgeon more. The IRS will let you know about the first one (computer matching), and if there is enough money there you can amend later (the second one). At least you will get your basic refund claim in.

Our case this time was Golden v Commissioner, T.C. Memo 023-103.

The Augusta Rule And Renting To Yourself

I came across the Augusta rule recently.

This is Code section 280A(g), the tax provision that allows one to rent their home for less than 15 days per year without paying tax on the income. It got its name from the famous Augusta National Golf Club in Georgia. There would not be sufficient housing during the Masters without participation by local homeowners. The section has been with us since the 1970s.

There are requirements, of course:

(1)  The property must be in the U.S.

(2)  The property needs to be a residence. Mind you, it does not need to be your primary residence. It can be a second home. Or a third home, if you are so fortunate.

(3)  The house cannot be a place of business.

a.    The Augusta rule does not work well with an office-in-home, for example.

(4)  Rental expenses (excluding expenses such as mortgage interest and taxes which are deductible irrespective of any rental) become nondeductible.

(5)  A proprietorship (or disregarded single-member LLC) does not qualify. Mind you, a corporation you wholly own will qualify, but your proprietorship will not.

a.    Another way to say this is that both the rental income and expense cannot show up on the same tax return.

(6)  The rent must be reasonable.

(7)  There must be a business purpose for the rental.

Tax advisors long ago realized that they could leverage the Augusta rule if the homeowner also owned a business. How? Have the business rent the house from the homeowner for less than 15 days over a rolling 12-month period.

Can it work?

Sure.

Will the IRS challenge it?

Let’s look at a recent case to see a common IRS challenge to Augusta-rule rentals.

Two anesthesiologists and an orthopedic representative owned Planet LA, LLC (Planet). Planet in turn owned several Planet Fitness franchises in Louisiana. It opened its first one in 2013 and was up to five by 2017 when it sold all its franchises.

The three shareholders had issues with regular business meetings because of work schedules and distance. Beginning in 2015 they decided to have regular meetings at their residences. Planet would pay rent (of course), which varied in amount until it eventually settled on $3,000 per month to each shareholder.

One of the advantages of having three shareholders was being able to apply the Augusta rule to three houses. If you think about it, this allowed Planet to have up to 42 meetings annually without voiding the day count for any one residence.

Let’s do some quick math.

$3,000 x 3 shareholders x 14 meetings = $126,000

Planet could deduct up to $126,000 and the shareholders would report no rental income.

Sweet.

The IRS wanted to look at this.

Of course.

The first IRS challenge: show us agendas and notes for each meeting.

Here is the Court:

Petitioners failed to produce any credible evidence of what business was conducted at such meetings, and their testimony was vague and unconvincing regarding the meetings.”

Oh, oh.

The second challenge: the revenue agent researched local rental rates for meeting space. He determined that one could rent space accommodating up to 1,200 people for $500 per day.

The shareholders could not prove otherwise.

Here is the Court:

While petitioners argue that the $500 rent determined by … was not reasonable, we disagree and find to the contrary that $500 allowed per month is actually generous.”

This was almost too easy for the IRS.

·      Prove the number of meetings.

·      Multiply that number by $500.

The IRS allowed Planet rent deductions as follows:

          2017           none, as no meetings were proven

          2018           12 meetings times $500 = $6,000

          2019           9 meetings times $500 = $4,500

The shareholders had deducted $290,900 over three years.

The IRS allowed $10,500.

Yep, that is an IRS adjustment of over $280 grand over three years, with minimal effort by the IRS.

And that is how the IRS goes after the Augusta rule in a self-rental context.

The takeaway?

The Augusta rule can work, but you want to document and substantiate everything.

You want to have agendas for every meeting, perhaps followed up with minutes of the same.

Be careful (and reasonable) with the rental rate. This is not VRBO. You are renting a portion of a house, not the full house. You are renting for a portion of a day, not for days or weeks. You cannot just look up weekly house rentals online and divide them by seven. Those rental rates are for a different use and not necessarily comparable to business use of the residence.

You may want to formally invoice the business.

You want to pay the rent from the business bank account.

Our case this time was Sinopoli et al v Commissioner, T.C. Memo 2023-105.

Why You Always Use Certified-Mail For A Paper-Filed Return

Just about all tax returns are moving to electronic filing.

It makes sense. Our server sends a return to the government server, starting the automated processing of the return. Minimal manpower, highly automated, more efficient.

COMMENT: Electronic filing however does allow states and other filing authorities to include filing “bombs,” which can be very frustrating. We had a bomb recently with the District of Columbia. It could have been resolved – should have, in fact – but that would have required someone in D.C.  to answer our e-mail request or telephone call. Belatedly realizing this was a bar too high, we called the client to inform them of a change in plans. We would be paper filing instead.

Sometimes a state will say they never received a return. Our software maintains log events, such as electronic transmission of returns and their acceptance by the taxing authority. Tennessee has done this over the last few years as they updated some of their systems. Fortunately, the matter generally resolves when we present proof of electronic filing.

Do you remember when – not too many years ago – standard professional advice was to send tax returns using either certified or registered mail? That was that era’s equivalent of today’s electronic filing. We used to, back in the Stone Age, send our April 15^th individual extensions as follows:

·      Include multiple extensions per envelope. There could be several envelopes depending on the number of extensions.

·      Include a cover sheet detailing the extensions included in the envelope.

·      Certify the mailing of the envelope.

The problem with this procedure is that it could be abused. One could mail an empty envelope to the IRS, certifying the same. If any question came up, one could point to that envelope as “proof” of whatever. I do not know how often this happened in practice, but I recall having this very conversation with IRS representatives.

This reminds me of a recent case dealing with an issue arising from putting a paper-filed return in the mail. As we move exclusively to electronic filing, this issue will transition to history – along with rotary phones and rolodexes.

Let’s talk about the Pond case.

The IRS audited Stephen Pond’s return and made a mistake, concluding that Pond had underpaid his taxes. Pond paid the notice for tax due and interest on the 2012 tax year. The matter also affected 2013, so Pond overpaid his taxes for that year also. Pond’s accountant caught the mistake and filed for a refund for both years.

The accountant did the following:

(1)  He mailed the 2012 and 2013 tax refund claims in the same envelope to Holtsville, New York.

(2) He mailed a claim for refund of overpaid 2012 interest to Covington, Kentucky, which in turn forwarded the matter to Andover, Massachusetts.

Andover responded first. It wanted proof of the underlying 2012 filing (as the overpaid interest was for 2012). It took a while, but Pond eventually received his 2012 refund, including interest.

Time passed. There was no word about 2013. Pond contacted the IRS and was told the IRS never received the 2013 amended return.

COMMENT: While not said, I have a very good guess what happened. The IRS has had a penchant for stapling together whatever arrives in a single envelope. For years I have recommended separate envelopes for separate returns, as I was concerned about this possibility. It raised the cost of mailing, but I was trying to avoid the staple-everything-together scenario.

Pond sent a duplicate copy of his 2013 amended return.

Months went by. Crickets.

Pond contacted Holtsville and was informed that the IRS had closed the 2013 file.

Oh, oh.

A couple of weeks later Pond received the formal notice that the IRS was denying 2013 because it had been filed after statute of limitations had run.

Pond filed a formal protest. He filed with Appeals. He eventually brought suit in district court. The district court held against Pond, so he is now in Appeals Court.

This is tax arcana here that we will summarize.

     (1)  The general way to satisfy a statutory filing requirement is physical delivery.

(2)  Mail can constitute physical delivery.

a.    However, things can happen after one drops an envelope into the mailbox. The post office can lose it, for example. It would be unfair to hold someone responsible for a post office error, so physical delivery has a “mailbox” subrule:

If one can prove that an item was mailed, the subrule presumes that the item was timely delivered.

NOTE: Mind you, one still must prove that one timely put the item in the mail.

(3)  Congress codified the mailbox rule in 1954 via Section 7502. That section first included certified and registered mail as acceptable proof of filing, and the rule has been expanded over the years to include private delivery services and electronic filing.

(4) The question before the Court was whether Section 7502 supplanted prior common law (physical delivery, mailbox rule) or rather was supplementary to it.

a.    Believe it or not, the courts have split on this issue.

b.    What difference does it make? Let me give an example.      

There is an envelope bearing a postmark date of October 5, 20XX (that is, before the October 15^th extension deadline). The mail was not certified, registered, or delivered by an approved private delivery service.

If Section 7502 supplanted common law, then one could not point to that October 5 date as proof of timely filing. The only protected filings are certified or registered mail, private delivery service or electronic filing.

If Section 7502 supplemented but did not override common law, then that October 5 date would suffice as proof of timely mailing.

Let’s fast forward. The Appeals Court determined that Pond did not qualify under the safe harbors of Section 7502, as he did not use certified or registered mail. He could still prove his case under common law, however. Appeals remanded the case to the District Court, and Pond will have his opportunity to prove physical delivery.

My thoughts?

If you are paper filing – especially for a refund - always, always certify the mailing. Mind you, electronic filing is better, but let’s assume that electronic filing is not available for your unique filing situation. Pond did not do this and look at the nightmare he is going through.

Our case this time was Stephen K Pond v U.S., Docket No 22-1537, CA4, May 26, 2023.

 

Can You Have Income From Life Insurance?

 

I was looking at a recent case wondering: why did this even get to court?

Let’s talk about life insurance.

The tax consequences of life insurance are mostly straightforward:

(1) Receiving life insurance proceeds (that is, someone dies) is generally not an income-taxable event.

(2) Permanent insurance accumulates reserves (that is, cash value) inside the policy. The accumulation is generally not an income-taxable event.

(3) Borrowing against the cash value of a (permanent) insurance policy is generally not an income-taxable event.

Did you notice the word “generally?” This is tax, and almost everything has an exception, if not also an exception to the exception.

Let’s talk about an exception having to do with permanent life insurance.

Let’s time travel back to 1980. Believe it or not, the prime interest rate reached 21.5% late that year. It was one of the issues that brought Ronald Reagan into the White House.

Some clever people at life insurance companies thought they found a way to leverage those rates to help them market insurance:

(1)  Peg the accumulation of cash value to that interest rate somehow.

(2)  Hyperdrive the buildup of cash value by overfunding the policy, meaning that one pays in more than needed to cover the actual life insurance risk. The excess would spill over into cash value, which of course would earn that crazy interest rate.

(3)  Remind customers that they could borrow against the cash value. Money makes money, and they could borrow that money tax-free. Sweet.

(4)  Educate customers that – if one were to die with loans against the policy – there generally would be no income tax consequence. There may be a smaller insurance check (because the insurance is diverted to pay off the loan), but the customer had the use of the cash while alive. All in all, not a bad result – except for the dying thing, of course.

You know who also reads these ads?

The IRS.

And Congress.

Neither were amused by this. The insurance whiz kids were using insurance to mimic a tax shelter.

Congress introduced “modified endowment contracts” into the tax Code. The acronym is pronounced “meck.”

The definition of a MEC can be confusing, so let’s try an example:

(1)  You are age 48 and in good health.

(2)  You buy $4,000,000 of permanent life insurance.  

(3)  You anticipate working seven more years.

(4)  You ask the insurance company what your annual premiums would be to pay off the policy over your seven-year window.

(5)  The company gives you that number.

(6)  You put more than that into the policy over the first seven years.

I used seven years intentionally, as a MEC has something called a “7 pay test.” Congress did not want insurance to morph into an investment, which one could do by stuffing extra dollars into the policy. To combat that, Congress introduced a mathematical hurdle, and the number seven is baked into that hurdle.     

If you have a MEC, then the following bad things happen:

(1) Any distributions or loans on the policy will be immediately taxable to the extent of accumulated earnings in the policy.

(2) That taxable amount will also be subject to a 10% penalty if one is younger than age 59 ½.

Congress is not saying you cannot MEC. What it is saying is that you will have to pay income tax when you take monies (distribution, loan, whatever) out of that MEC.

Let’s get back to normal, vanilla life insurance.

Let’s talk about Robert Doggart.

Doggart had two life insurance contracts with Prudential Insurance. He took out loans against the two policies, using their cash value as collateral.

Yep. Happens every day.

In 2017 he stopped paying premiums.

This might work if the earnings on the cash value can cover the premiums, at least for a while. Most of the time that does not happen, and the policy soon burns out.

Doggart’s policies burned out.

But there was a tax problem. Doggart had borrowed against the policies. The insurance company now had loans with no collateral, and those loans were uncollectible.   

You know there is a 1099 form for this.

Doggart did not report these 1099s in his 2017 income. The IRS easily caught this via computer matching.

Doggart argued that he did not have income. He had not received any cash, for example.

The Court reminded him that he received cash when he took out the loans.

Doggart then argued that income – if income there be - should have been reported in the year he took out the loans.

The Court reminded him that loans are not considered income, as one is obligated to repay. Good thing, too, as any other answer would immediately shut down the mortgage industry.  

The Court found that Doggart had income.

The outcome was never in doubt.

But why did Doggart allow the policies to lapse in 2017?

Because Doggart was in prison.

Our case this time was Doggart v Commissioner, T.C. Summary Opinion 2023-25.

An IRS Payment Plan And Tax Evasion

 

Let’s talk today about IRS payment plans. More specifically, let’s talk about common paperwork in requesting a payment plan.

A common one is Form 433-A, and it is used by W-2 workers and self-employeds.

The IRS is trying to figure out how much you earn, own, and owe.

There are questions about whether you (or your spouse) own a business, are a beneficiary of a trust or have gifted property worth more than $10,000 over the last 10 years. Yes, they wanna know stuff.

You will have to list your bank accounts, as well as other investments, real estate and other assets.

You will have to provide an accounting of your monthly income and expenses.

There is also expanded disclosure if you are self-employed (that is, a sole proprietor).

There are other ways to own a business than as a proprietor (for example, a shareholder in a C corporation). The IRS will want to know about that, too.

Part of tax practice is avoiding this series, if possible. For example, if you have personal tax debt of $50,000 or less, you can bypass the 433 series and request a “streamlined” payment plan. You are still entering into a contract with the IRS (you must stay current with your filings, make all payments as required, and so on), but in exchange the IRS lifts some of the paperwork requirements. Sometimes advisors recommend hybrid arrangements (taking out a second mortgage, for example), leaving the IRS debt at $50 grand or less. And sometimes you are simply into the IRS for more than $50 grand, leaving no choice but to run the 433 gauntlet. This can be a rude awakening, as the IRS uses standards for certain expense categories (for example, housing and utilities). You might google that you can request an increase from these standards. You can request; don’t expect to receive, though. Barring significant factors (think care for chronic medical conditions), it is unlikely to happen. Depending on the numbers, you might be forced to downgrade a vehicle or pull the kids from a private school. This is not a friendly loan.  

And you do not want to be … sly … when running the 433 hurdles.

Let’s look at someone who was too clever by half.

Kevin Crandell is a medical doctor. He contracted with two hospitals, one in Mississippi and another in Alabama, for $30 to $40 grand per month.

From 2006 through 2012 he did not file returns or pay taxes.

The IRS started garnishing his wages in 2010.

COMMENT: I find it remarkable that he still did not file or pay even when garnished.

The doctor racked up close to a million dollars in taxes, penalties, and interest.

Somewhere in there he formed a couple of corporations. He used one to receive monies earned as a contractor. The second appeared to serve as asset protection.

He finally hired someone (Blue Tax) to help out with tax returns and attendant debt.

Blue Tax drafted a 433. The first draft showed Crandell’s salary as $17 grand per month (I don’t know where the rest of the money went either). The doctor howled that the number was much too high and should be closer to $12 grand.

Oh, the 433 also left out bank accounts for those two corporations (which he controlled). And a $50,000 gun collection. And the $40 grand he drew from the corporations shortly after submitting a 433 stating that his salary was around $12 grand.

Doc, you have to know when to stop. Lying, and then lying about the lying is called something in tax.

Crandell was indicted for fraud.

That pattern of non-file and non-pay looked bad now. That “creative” 433 also gleamed like a badge of fraud, leaving off income, assets and so on.

Crandell argued that he relied on Blue Tax.

It is a good argument - an excellent argument, in fact - except that he did not fully disclose to Blue Tax. If you want to show reliance on an advisor, you have to … you know … actually rely on the advisor.

Crandell was convicted for tax evasion.

Our case this time was US v Crandell, 2023 PTC 178 (5^th Cir. 2023).

The IRS Changes An In - Person Visit Policy

 

This afternoon I was reading the following:

As part of a larger transformation effort, the Internal Revenue Service today announced a major policy change that will end most unannounced visits to taxpayers by agency revenue officers to reduce public confusion and enhance overall safety measures for taxpayers and employees.”

One can spend a lifetime and never interact with a Revenue Officer. We are more familiar with Revenue Agents, who examine or audit tax returns and filings. Revenue Officers, on the other hand, are more specialized: they collect money.

I deal with ROs often enough, but – then again – consider what I do. I rarely meet with one in person, though. The last time I met an RO was one late afternoon at northern Galactic Command. I was the only person in the office, until I realized that I was not. I encountered someone who claimed to be an RO, which I immediately and expressly disbelieved. He presented identification, which gave me pause. He then asked about a specific client, giving me grounds to believe him. The IRS could not contact a taxpayer, so the next step was to contact the last preparer associated with that taxpayer.

I was – BTW – not amused.

I wonder if the above IRS policy change has something to do with an event that occurred recently in Marion, Ohio. The following is cited from a recent House Judiciary Committee letter to IRS Commissioner Danny Werfel:

On April 25, 2023, an IRS agent—who identified himself as 'Bill Haus' with the IRS’s Criminal Division—visited the home of a taxpayer in Marion, Ohio. Agent 'Haus' informed the taxpayer he was at her home to discuss issues concerning an estate for which the taxpayer was the fiduciary. After Agent 'Haus' shared details about the estate only the IRS would know, the taxpayer let him in. Agent 'Haus' told the taxpayer that she did not properly complete the filings for the estate and that she owed the IRS 'a substantial amount.' Prior to the visit, however, the taxpayer had not received any notice from the IRS of an outstanding balance on the estate.
 
"During the visit, the taxpayer told Agent 'Haus' that the estate was resolved in January 2023, and provided him with proof that she had paid all taxes for the decedent's estate. At this point, Agent 'Haus' revealed that the true purpose of his visit was not due to any issue with the decedent’s estate, but rather because the decedent allegedly had several delinquent tax return filings. Agent 'Haus' provided several documents to the taxpayer for her to fill out, which included sensitive information about the decedent.
 
"The taxpayer called her attorney who immediately and repeatedly asked Agent 'Haus' to leave the taxpayer's home. Agent 'Haus' responded aggressively, insisting: 'I am an IRS agent, I can be at and go into anyone's house at any time I want to be.' Before finally leaving the taxpayer’s property, Agent 'Haus' said he would mail paperwork to the taxpayer, and threatened that she had one week to satisfy the remaining balance or he would freeze all her assets and put a lean [sic] on her house.
 
"On May 4, 2023, the taxpayer spoke with the supervisor of Agent 'Haus,' who clarified nothing was owed on the estate. The supervisor even admitted to the taxpayer that 'things never should have gotten this far.' On May 5, 2023, however, the taxpayer received a letter from the IRS— the first and only written notice the taxpayer received of the decedent’s delinquent tax filings—addressed to the decedent, which stated the decedent was delinquent on several 1040 filings. On May 15, 2023, the taxpayer spoke again with supervisor of Agent 'Haus,' who told the taxpayer to disregard the May 5 letter because nothing was due. On May 30, 2023, the taxpayer received a letter from the IRS that the case had been closed.”

Yeah, someone needs to be fired.

The IRS did point out the following in today’s release:

For IRS revenue officers, these unannounced visits to homes and businesses presented risks.

No doubt, especially for those who think they can go into “anyone’s house at any time.”

What will the IRS do instead?

In place of the unannounced visits, revenue officers will instead make contact with taxpayers through an appointment letter, known as a 725-B, and schedule a follow-up meeting. This will help taxpayers feel more prepared when it is time to meet.

Taxpayers whose cases are assigned to a revenue officer will now be able to schedule face-to-face meetings at a set place and time, with the necessary information and documents in hand to reach resolution of their cases more quickly and eliminate the burden of multiple future meetings.

There will be situations where the IRS simply must appear in person, of course:

The IRS noted there will still be extremely limited situations where unannounced visits will occur. These rare instances include service of summonses and subpoenas; and also sensitive enforcement activities involving seizure of assets, especially those at risk of being placed beyond the reach of the government.

These situations should be a fraction of the number under the previous policy, however.

There Is No Tax Relief If You Are Robbed

 

Some tax items have been around for so long that perhaps it would be best to leave them alone.

I’ll give you an example: employees deducting business mileage on their car.

Seems sensible. You tax someone on their work income. That someone incurs expenses to perform that work. Fairness and equity tell you that one should be able to offset the expenses of generating the income against such income.

The Tax Cut and Jobs Act of 2017 (TCJA) did away with that deduction, however. Mind you, the TCJA itself expires in 2025, so we may see this deduction return for 2026.

There are reasons why Congress eliminated the deduction, we are told. They increased the standard deduction, for example, and one could not claim the mileage anyway if one’s itemized deductions were less than the standard deduction. True statement.

Still, it seems to me that Congress could have left the deduction intact. Many if not most would not use it (because of the larger standard deduction), but the high-mileage warriors would still have the deduction if they needed it.

Here’s another:  a tree falls on your house. Or you get robbed.

This has been a tax break since Carter had liver pills.

Used to be.

Back to the TCJA. Personal casualty and theft losses are deductible only if the loss results from a federally declared disaster.

Reread what I just said.

What does theft have to do with a federally declared disaster?

Nothing, of course.

I would make more sense to simply say that the TCJA did away with theft loss deductions.

Let’s talk about the Gomas case.

Dennis and Suzanne Gomas were retired and living their best life in Florida. Mr. G’s brother died, and in 2010 he inherited a business called Feline’s Pride. The business sold pet food online.

OK.

The business was in New York.

We are now talking about remote management. There are any numbers of ways this can go south.

His business manager in New York must have binged The Sopranos, as she was stealing inventory, selling customer lists, not supervising employees, and on and on.

Mr. G moved the business to Florida. His stepdaughter (Anderson) started helping him.

Good, it seems.

By 2015 Mr. G was thinking about closing the business but Anderson persuaded him to keep it open. He turned operations over to Anderson, although the next year (2016) he formally dissolved the company. Anderson kept whatever remained of the business.

In 2017 Anderson prevailed on the G’s to give her $20,000 to (supposedly) better run the business.

I get it. I too am a parent.

Anderson next told the Gs that their crooked New York business manager and others had opened merchant sub-accounts using Mr. G’s personal information. These reprobates were defrauding customers, and the bank wanted to hold the merchant account holder (read: Mr. G) responsible.

          COMMENT: Nope. Sounds wrong. Time to lawyer up.

Anderson convinced the G’s that she had found an attorney (Rickman), and he needed $125,000 at once to prevent Mr. G’s arrest.

COMMENT: For $125 grand, I am meeting with Rickman.

The G’s gave Anderson the $125,000.

But the story kept on.

There were more business subaccounts. Troubles and tribulations were afoot and abounding. It was all Rickman could do to keep Mr. G out of prison. Fortunately, the G’s had Anderson to help sail these treacherous and deadly shoals.

The G’s never met Rickman. They were tapping all their assets, however, including retirement accounts. They were going broke.

Anderson was going after that Academy award. She managed to drag in friends of the family for another $200 grand or so. That proved to be her downfall, as the friends were not as inclined as her parents to believe. In fact, they came to disbelieve. She had pushed too far.

The friends reached out to Rickman. Sure enough, there was an attorney named Rickman, but he did not know and was not representing the G’s. He had no idea about the made-up e-mail address or merchant bank or legal documents or other hot air.

Anderson was convicted to 25 years in prison.

Good.

The G’s tried to salvage some tax relief out of this. For example, in 2017 they had withdrawn almost $1.2 million from their retirement accounts, paying about $410 grand in tax.

Idea: let’s file an amended return and get that $410 grand back.

Next: we need a tax Code-related reason. How about this: we send Anderson a 1099 for $1.1 million, saying that the monies were sent to her for expenses supposedly belonging to a prior business.

I get it. Try to show a business hook. There is a gigantic problem as the business had been closed, but you have to swing the bat you are given.

The IRS of course bounced the amended return.

Off to Court they went.

You might be asking: why didn’t the G’s just say what really happened – that they were robbed?

Because the TCJA had done away with the personal theft deduction. Unless it was presidentially-declared, I suppose.

So, the G’s were left bobbing in the water with much weaker and ultimately non-persuasive arguments to power their amended return and its refund claim.

Even the judge was aghast:

Plaintiffs were the undisputed victims of a complicated theft spanning around two years, resulting in the loss of nearly $2 million dollars. The thief — Mrs. Gomas’s own daughter and Mr. Gomas’s stepdaughter — was rightly convicted and is serving a lengthy prison sentence. The fact that these elderly Plaintiffs are now required to pay tax on monies that were stolen from them seems unjust.

Here is Court shade at the IRS:

In view of the egregious and undisputed facts presented here, it is unfortunate that the IRS is unwilling — or believes it lacks the authority — to exercise its discretion and excuse payment of taxes on the stolen funds.

There is even some shade for Congress:

It is highly unlikely that Congress, when it eliminated the theft loss deduction beginning in 2018, envisioned injustices like the case before this Court. Be that as it may, the law is clear here and it favors the IRS. Seeking to avoid an unjust outcome, Plaintiffs have attempted to recharacterize the facts from what they really are — a theft loss — to something else. Established law does not support this effort. The Court is bound to follow the law, even where, as here, the outcome seems unjust.

To be fair, Congress changed the law. The change was unfair to the G’s, but the Court could not substitute penumbral law over actual law.

The G’s were hosed.

Seriously, Congress should have left theft losses alone. The reason is the same as for employee mileage. The Code as revised for TCJA would make most of the provision superfluous, but at least the provision would exist for the most extreme or egregious situations.

COMMENT: I for one am hopeful that the IRS and G's will resolve this matter administratively. This is not a complementary tale for the IRS, and – frankly – they have other potentially disastrous issues at the moment. It is not too late, for example, for the IRS and G’s to work out an offer in compromise, a partial pay or a do-not-collect status. This would allow the IRS to resolve the matter quietly. Truthfully, they should have already done this and avoided the possible shockwaves from this case.

Our case this time was Gomas v United States, District Court for the Middle District of Florida, Case 8:22-CV-01271.