The Tax Court case of Ferm v. IRS demonstrates the old adage that “timing is everything.” There, the cash-method taxpayer (money is earned as it’s actually received, expended as it’s actually paid) paid tuition for Spring 2011 semester on December 28, 2010. Following this payment, the Ferms attempted to deduct their qualified tuition expenses on their 2011 tax return. Like most lay individuals, these taxpayers probably assumed that the expenses were incurred for 2011, so their deduction should be taken that year. However, cash-method taxpayers (which all of us are) may only take deductions for expenditures in tax years when that money was actually paid. This is true regardless of when the benefits from that debt are actually received. Unfortunately for the Ferms, only about $150 of the qualified expenses were actually paid in 2010. If these expenses had been paid four days later, the deduction would have been proper on the 2011 return. See Ferm at p. 9. This “harsh result” perfectly demonstrates that, when it comes to individual income taxes, “timing is everything.”
Cf. Mottahedeh v. IRS, T.C. Memo. 2014-258 (Dec. 29, 2014).
Yesterday’s Mottahedeh v. IRS, T.C. Memo. 2014-258 (Dec. 29, 2014) perfectly demonstrates the importance of finding a competent, ethical legal advisor. There, the litigants earned a decent living by selling questionable tax planning and reporting advice. That is, they advised dealing in cash, avoiding the paper trail, and refusing to deal with the IRS and California tax authorities. They even offered courses and packages through their “Freedom Law School” in which they taught such strategies.
This factual scenario (in which incompetent tax advisors are facing IRS scrutiny and losing before the Tax Court with their own advice) is actually rather common in Tax Court cases. They illustrate the importance of finding a competent, qualified, and ethical advisor to assist with a taxpayer’s planning and reporting needs. Common indicators include patience, extensive training, a license to practice, and (more than anything else) common sense. No degree certificate or badge of recognition can guarantee such quality, which is why good help is so hard to find. But be sure that if your tax professional’s advice sounds too good to be true, it probably is.
Filzer v. IRS, T.C. Memo. 2014-241 (Nov. 25, 2014).
The taxpayer in this case had a judgment entered against him last week after about 20 years of his failing to pay taxes or participate with the IRS as the Service attempted to collect on his tax debts. Although this is unethical behavior (Mr. Filzer was an attorney) that should never be seriously contemplated by a client, there are advantages when it is viewed as a strategy. That is, Filzer didn't pay taxes or penalties for nearly 20 years while he enjoyed hundreds of thousands of dollars of income a year. Based on his record of absenteeism, my guess is that he and his money are somewhere beyond the reach of federal prosecutors and the IRS. Despite the audacity of such behavior, one must admire the simplicity and effectiveness of his refusal to play the game while possibly escaping with the spoils.
See Full Disclaimer Below.
Copyright © 2014 E.F.M. Law Company, P.C.
All Rights Reserved.