Don’t Inflate Your Deductions, Warns the IRS! Rob Wood Explains What Can Happen
April is here, and the filing date for tax returns is coming shortly. This year, April 17 is the magic date. And once again, the IRS has published a news release cautioning taxpayers to avoid what the Service calls the “Dirty Dozen” tax scams. In this report, tax lawyer Rob Wood explains what the IRS will be looking for. He also discusses the IRS’s warning in his article, “IRS Warns Not To Inflate Your Tax Deductions.”
Wood points out that, every year, the IRS and the Department of Justice publicize cases where taxpayers are caught committing fraud and suffer heavy penalties, even jail time. This year, the IRS has highlighted inflating deductions as something taxpayers should avoid. Wood says this translates as a caution that you should have records to back up any deduction you claim on your tax return.
Most taxpayers are aware that the rules for tax deductions were changed in the tax law enacted last December. Of course, Wood says, the changes will affect taxes in 2018, so taxpayers won’t have to contend with those changes when preparing their 2017 returns. Business-related meals are a good example of something that will be treated differently in 2018. However, the old rules apply to the 2017 tax returns that will be due very shortly.
As for business-related meals, Wood suggests that some taxpayers have fallen into the habit of approximating how much they spent on meals when figuring out deductions. This is not a good idea. You don’t necessarily need a receipt for everything, but you may have to battle the IRS in court if you don’t have back-up records for deductions. So, don’t inflate your deductions, and don’t make them up!
What happens if you make a mistake on your return and are facing a penalty? Wood says the most common penalty is 20% of the amount of the understatement. This is the accuracy-related penalty from 26 U.S. Code § 6662. Example: If you understate the amount of your taxes by $100, the IRS will want the $100 plus a $20 penalty. Wood adds that the IRS will also want to collect interest on the amount due. Wood points out that there are a number of penalties, including a 75% penalty for fraud (26 U.S. Code § 6663.)
If the IRS comes after you for an accuracy-related problem, one of your best defenses is that you relied on the advice of a tax advisor. So, if you get the tax advice from a CPA or a tax lawyer, get the advice in writing. Having that advice will ordinarily get a taxpayer out of any penalty claim by the IRS. But, as Wood points out, the worst position to be in is to have “guesstimated” the date and amount of a business-related meal. You will probably lose that argument with the IRS.
If a taxpayer is claiming a charitable deduction, it would be well to have some good records to substantiate that the contribution was in fact made. A tax return is filed under penalty of perjury. Taxpayers who claim deductions on their returns should be in a position to prove that any mistakes they made were not intentional, not willful. The mistake should be a reasonable mistake.
Robert W. Wood is the Managing Partner of Wood LLP, San Francisco. Often listed among the best tax lawyers in America, Wood has broad experience in corporate, partnership and individual tax matters. Concerning the tax treatment of litigation settlements and judgments, he is perhaps the preeminent tax lawyer in the United States. He is also an authority on merger and acquisition tax matters, tax opinions, offshore account and entity disclosures, and many types of tax controversies. The Legal Broadcast Network is a featured network of Sequence Media Group.