Transitional relief has been granted through the end of the year for changes to the tax return preparer penalty under IRC § 6694(a) that were enacted as part of the Small Business and Work Opportunity Tax Act of 2007. The changes originally were to take effect May 26. The act
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TOPICS / TAX
IRS practice & procedure
Stakes Raised on Oversized Refund Claims
Taxpayers who receive “excessive” refunds can now be tagged with a 20% penalty on the overpayment. The provision is one of several revenue enhancers included in the recently passed Small Business and Work Opportunity Tax Act of 2007. The change to IRC § 6676(a) assesses the penalty on any claim
Securities Basis Reporting Aired
Requiring securities brokers to report basis on their customers’ transactions has received renewed attention in Congress as a way to help bridge the “tax gap.” Senate Finance Committee Chairman Max Baucus, D-Mont., and ranking minority member Chuck Grassley, R-Iowa, presented draft legislation in late May. Bills also have been introduced
Is It Alimony?
In a ruling against the IRS, the Tax Court underscored that while alimony must be made under a divorce or separation instrument to be deductible, the payer doesn’t have to be legally obligated to make the payments. Under IRC § 71, cash payments made under a divorce or separation agreement
Put the Proof on Paper
A pair of recent Tax Court memos emphasized the longstanding rule of Welch v. Helvering, 290 U.S. 111 (1933), that taxpayers have the burden of proof when challenging an IRS determination. If the IRS audits a return, it is entitled to not take the taxpayer’s word on expenses, deductions and
IRS Issues Guidance on Monetary Penalties
The IRS published guidance in Notice 2007-39 to outline how it will wield its new statutory authority to impose monetary penalties on taxpayer representatives for violations of Circular 230. The amendment to 31 USC §330 empowers the Service to levy monetary penalties for violations occurring after Oct. 22, 2004. The
Counting Escrows
The First Circuit Court of Appeals has upheld the Tax Court in Burke v. Commissioner , 99 AFTR 2d 2007-941. In so doing, the courts underscored the IRS’s position that distributed income from a partnership must be recognized as taxable income even when it is held in escrow by the
No Gain, Some Pain for Another Lottery Winner
The Second Circuit Court of Appeals joined other courts holding that a taxpayer’s sale of rights to future installments of lottery winnings is ordinary income and not capital gain. Shirley Prebola won $17.5 million in the New York State Lottery. The winnings were to be paid in 26 annual installments.
Look to Audit Bottom Line, Says IRS
Experience from its expanded number of audits of corporate returns will allow the IRS to work smarter in the future, the agency said, as it acknowledged spending more time on audits that came up empty of additional tax. The IRS rebutted a report in April by a research organization associated
Service Boosts Number of Correspondence Examinations
The IRS is increasingly relying on correspondence examinations, rather than face-to-face office or field examinations, to audit taxpayers’ returns. In a correspondence examination, the Service asks the taxpayer to explain questionable items and send supporting evidence by mail. Correspondence examinations increased by 170% during fiscal years 2002–2005
Rollover Ruling
The IRS ruled a nonspouse beneficiary of an inherited IRA may spread required minimum distributions (RMDs) from the IRA over his or her life expectancy so long as a rollover is completed before the end of the year following the year in which the plan participant died. The rule, which
Disallowed Idemnity Deduction Blues
From time to time, corporate officers and shareholders agree to indemnify their corporations for certain expenses and losses. The taxpayer would prefer to claim an ordinary loss deduction instead of a capital loss or, worse, a nondeductible payment. The Sixth Circuit Court of Appeals recently denied such a claim. Isaac
Bills Target Contractor Scofflaws; Fed Workers Delinquent
U.S. Rep. Ed Towns, D-N.Y., in April introduced the Contractor Tax Enforcement Act, HR 1870, to bar federal tax debtors from contracting with the government. Another bill, introduced by Brad Ellsworth, D-Ind., would require contractors to certify they don’t owe a federal tax debt. The proposed legislation followed by a
No Penalty for BLIPS
In the widely reported case Klamath Strategic Investment Fund (see “Tax Matters,” JofA, March 07, page 72), the district court disallowed claimed losses on a finding that the transactions were shams and lacked economic substance. An important but less widely known aspect of the case was the court’s refusal to
Determining Basis for Gambling Losses
With the proliferation of legal types of gambling (lotteries, casinos, horse and dog racing, jai alai, bingo, etc.), many more taxpayers are in the (enviable) position of having to report winnings on their tax returns. While many taxpayers may generally know that they can deduct their losses
Stakes Increase as High-Profile Bills Move Through
The new House and Senate Democratic majorities started the year with aggressive agendas, passing several pieces of legislation in the first 100 hours. However, as the burden of being in the majority takes its toll, they are finding it increasingly difficult to reconcile the differing House and Senate versions of
In the Line of Duty
The Second Circuit Court of Appeals ruled against a military veteran’s income-exclusion claim, affirming the Tax Court’s distinction of taxable disability benefits versus exempt benefits paid for a service-connected injury. William D. Reimels was exposed to Agent Orange during service in Vietnam in the 1970s. He then worked in the
IRS, B&D Tool Up for Trial
By reversing a district court’s grant of summary judgment that originally favored the taxpayer (see “Tax Matters,” JofA, March 05, page 88), the Fourth Circuit Court of Appeals opened the door for further interpretation of the “sham transaction” rule as it relates to contingent liability transactions. The case, involving Black
Horse Sense Applied to Startup
In its first ruling of 2007, the Tax Court concluded that a woman could deduct expenses of for-profit horse boarding and training that later grew into a business. Had the IRS prevailed, taxpayers who engaged in a for-profit activity with the hope it would grow into a full-fledged trade or
IRS Directors “Own” Shelters
With the new Industry Issue Focus initiative of its Large and Mid-Size Business Division, the IRS is poised to concentrate more resources on its top enforcement priorities, which are weighted toward business and industry. The new strategy gives IRS directors compliance “ownership” of each of 14 Tier 1 issues, plus
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From The Tax Adviser
March 31, 2026
Current developments in taxation of individuals: Part 1
March 31, 2026
Current Developments in Taxation of Individuals: Part 1
March 6, 2026
