Reminders: What’s reportable, deductible and punishable
Taxpayers are free to protest income tax laws, but the IRS and the United States Tax Court are just as clear about what the federal government is due from those who earn a living in this country as they are about what those workers are entitled to from the federal government. Here are a few reminders to that effect:
l Take all the withholding exemptions that you are entitled to on your W-4, instead of letting the IRS do the savings for you and then squandering it at tax-refund time.
l A taxpayer has reportable income, ruled the IRS, when a return preparer’s blunder causes the taxpayer to be slapped with an estimated tax penalty and the preparer pays the penalty.
l According to an IRS ruling, charitable contributions paid in lieu of fines imposed by government agencies or courts are not deductible as business expenses or as charitable contributions.
l The United States Tax Court readily upheld IRS imposition of a negligence penalty where payments to his children for home repairs were written off by, of all people, a tax attorney.
l The Tax Court agreed with the IRS that no casualty-loss deduction should be allowed for damages to a person’s lifestyle due to suspension of his driving license.
l No tax break for dismissed employees who receive severance pay from employers. Severance payments count as reportable income, just like regular salaries; they aren’t tax-free gifts.
l The Tax Court sustained exaction by the IRS of a fraud penalty against a taxpayer who deposited business receipts into two bank accounts, but reported income from only one.
l Author’s payments to “vanity” publisher (one of those outfits that publishes at the author’s expense, which is the reverse of the usual publisher-pays-author arrangement) to get a book published are not deductible as business expenses. They are nondeductible hobby expenses, says a Tax Court decision siding with the IRS.
l An IRS ruling concedes that a theft-loss deduction can be claimed by a corporation for ransom payments that it made to the kidnappers of a corporate officer and shareholder.
l You are not stuck if you take the standard deduction and later discover that itemizing would have been more advantageous. You can amend your return for 2005 and switch to itemizing.
l Just because you received a refund doesn’t mean you can forget about an audit. A refund merely means that IRS computers have checked arithmetic and other basic items. Keep your records at least until the statute of limitations runs out for an audit.
l If you sell stock at a loss and repurchase it within 30 days before or after the sale, the transaction is a “wash sale” and the loss is disallowed.
l Married couples cannot switch from joint to separate returns after the filing deadline expires, but can switch from separate to joint returns within three years after the deadline.
l Need a copy of an old tax return, but unable to find it? Use IRS Form 4506 (Request for Copy of Tax Return) to obtain it.
l You aren’t entitled to damages for harassment and humiliation by IRS agents just because they try to collect overdue taxes. That, predictably, was what a judge told an aggrieved taxpayer.
l Self-employment taxes, held the Tax Court, are due from a tax protestor on the fees he receives for a series of speeches urging a revolt against the income tax laws. Similarly, no relief from self-employment taxes just because a person thinks the Social Security system is unconstitutional. Unsurprisingly, that argument is routinely rejected by the courts.
l The IRS cautions that the cost of travel between home and work isn’t converted from nondeductible commuting to deductible medical travel merely because illness or disability rules out using public transportation.