In traditional civil and criminal court proceedings, the preferred type of evidence for proving any fact is direct evidence, e.g., eyewitness accounts, video recording, lab test results. But when direct evidence is not available, the parties must rely upon circumstantial evidence to prove the fact.
In tax proceedings, when it comes to proving business deductions or tax basis in property, direct evidence is the precise documentation the IRS regulations require to prove entitlement to the deduction or increase to basis. But when that precise documentation is missing or inadequate, a taxpayer may be entitled to reply upon circumstantial evidence using the Cohan rule.
That was the situation in a recently-decided United States Tax Court case, Pak v. Commissioner, T.C. Memo. 2024-86. There, Mr. Pak owned and operated a high-end Japanese hibachi and sushi restaurant in leased space in a shopping mall. Before opening the restaurant, Mr. Pak spent more than $1.5MM to build out the space and to purchase/install the hibachi tables. Unfortunately, Mr. Pak’s records supporting these expenditures were lost in a tornado, and by the time Mr. Pak got audited by the IRS, the construction company that did the build-out work had gone out of business.
To make matters worse, Mr. Pak routinely paid wages and bonuses to his chefs in cash, but he didn’t keep any records of the who/what/when of the cash payments.
Not surprisingly, at the conclusion of his Mr. Pak’s audit, the IRS disallowed all depreciation deductions related to the unsubstantiated build-out costs, and also disallowed all payroll deductions related to the undocumented cash payments to the chefs.
Fortunately for Mr. Pak, the U.S. Tax Court was not nearly as harsh and invoked the Cohan rule to allow approximately half of the depreciation deductions based on the objective facts that the restaurant was undisputedly “high-end” and had substantial annual gross receipts. For the payroll deductions, Mr. Pak submitted evidence of negotiated checks from his bank account that he wrote to “CASH” to obtain the cash necessary to pay the chefs. Based on this evidence, the Tax Court allowed the payroll deductions related to the cash payments in full.
If you have missing or inadequate tax records similar to the taxpayer in Pak, contact your trusted tax professional to see if making an argument using the Cohan rule can also help you.
In divorces where the couple amassed unpaid tax debt from jointly field returns, it is common for their divorce decree (i.e., marital settlement agreement or order of divorce) to allocate the tax liability to one or both spouses. Once properly entered on the divorce docket, this allocation is legally binding on the former spouses. But is it binding on the IRS?
To quote the IRS itself: “Many taxpayers are apparently surprised to learn that under current law their divorce decree’s allocation of liabilities is not binding on creditors (including the IRS) who do not participate in the divorce proceedings.” Stated differently, for joint tax debt, the IRS is legally permitted to collect the entire tax debt from either (or both) former spouses regardless of what their divorce decree says. If the IRS were to collect the tax debt from the spouse who is not responsible under the divorce decree, that spouse’s only recourse would be against the spouse who is responsible for the tax debt.
So to answer the opening question, when it comes to which spouse the IRS can go after for a joint tax debt, the IRS does not care what the divorce decree says.
However, the same is not true in the context of a request for innocent spouse relief based on equitable grounds. As background, Section 6015 of the Internal Revenue Code provides for three avenues to innocent spouse relief. The third, most common avenue is under subsection (f) which allows relief when it would be “inequitable” to hold the requesting spouse liable.
To ensure uniform application of the “inequitable” standard, the IRS issued a Revenue Procedure which contains a list of factors to be considered. See Rev. Proc. 2013-34. One factor on the list is whether the requesting spouse has a “legal obligation to pay the outstanding Federal income tax liability.” In this context, the term “legal obligation” is defined as “an obligation arising from a divorce decree or other legally binding agreement.”
So going back to the opening question, when it comes to a request for innocent spouse relief based on equitable grounds, the IRS does care what the divorce decree says.
If you’re navigating the complexities of divorce and facing tax liabilities, it’s crucial to have knowledgeable legal guidance. Our experienced team at Eyet is here to ensure that your rights are protected and your financial interests are safeguarded.
With the recent explosion in popularity of online sports and casino gambling, we have seen an uptick in questions from those who have received Forms 1099-MISC and/or W-2G from DraftKings, FanDuel, and the like. Here’s what you need to know about each:
Form 1099-Misc
For those lucky (or skilled) enough to have received this, it means your net winnings for the year with the issuing sportsbook/casino exceeded $600. You report the amount shown in Box 3 of the 1099-MISC as other income on your tax return. Easy enough.
But what if you place wagers at multiple sportsbooks/casinos and have a good year with one, but a bad year with another? Are you not allowed to offset your overall gambling winnings with gambling losses?
The short answer is, yes, you are, but with a big caveat: under the tax code, gambling losses do not directly offset gambling winnings; instead, gambling losses must be claimed as an itemized deduction on your tax return. However, you can only claim your losses up to the amount of your winnings. So in the scenario above where you receive a 1099-MISC from DraftKings (because you were up on the year) but do not receive one from FanDuel (because you were down on the year), you must report the net winnings with DraftKings as income, and claim the net losses with FanDuel as an itemized deduction. If your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you essentially lose the tax benefit of your gambling losses. This is why we say gambling losses do not directly offset gambling winnings.
Form W-2G
This is typically only issued to those who receive big payouts from casino slot games, but it can also be issued on sportsbook payouts greater than $600 with long shot odds (+30000 or longer). Unlike Form 1099-MISC which is issued based on your yearly net winnings, Form W-2G is issued based on individual payouts you receive during the year, regardless of what your net winnings are for the year.
In other words, you could be down $2,000 for the year with FanDuel (and therefore not receive a 1099-MISC), but if you won a slot payout of $1,250 you will receive a Form W-2G. In that scenario, you are essentially in the same position discussed above where you must report the $1,250 as other income on your tax return and then claim an itemized deduction (up to $1,250) for your gambling losses. Once again, if your allowable gambling losses + other itemized deductions do not exceed the amount of the standard deduction, you will essentially lose the tax benefit of your gambling losses.
To help you keep track of how much you’ve won or lost over the course of a year, it is best to keep a record of your gambling activities. These records should include the dates and types of specific wagers or gambling activities, the name of each casino/sportsbook or other gambling establishment, and the amounts you won or lost.
It may come as no surprise that during its fiscal year 2022, the IRS assessed a whopping $73.6 billion in civil penalties against taxpayers. But what may surprise you is during that same time period, the IRS also removed, i.e. abated, $50.9 billion in civil penalties that had been previously-assessed against taxpayers.
Given how rigid and technical the IRS can be in applying its rules, coupled with how aggressive it can be in collecting its money, an annual abatement rate of more than two-thirds of all penalties assessed almost seems excessively gratuitous on the part of the IRS. However, the reason for the high abatement rate is not at all attributable to the IRS’s generosity; instead, it is attributable solely to the IRS’s official policy that the purpose of assessing civil penalties is to “enhance voluntary compliance.” See IRS Policy Statement 20-1.
Stated differently, the IRS does not assess civil penalties for the purpose of generating revenue. This explains why the abatement rate is so high.
So how exactly does one obtain abatement of a civil penalty assessed by the IRS? There are four main avenues to civil penalty relief: (1) statutory/regulatory exceptions; (2) administrative waivers; (3) correction of IRS errors; and (4) reasonable cause. As with many things under the law, which avenue or avenues may be available to argue for abatement depends on the facts and circumstances of the penalty that was assessed.
So if you have been assessed a civil penalty by the IRS, we recommend contacting a qualified tax professional with experience working with the IRS to achieve positive outcomes for their clients, such as Eyet Law. We can efficiently analyze and assess the unique facts and circumstances surrounding your case to determine whether a penalty abatement request is right for you, and the various options for resolution.
Anyone who listens to the radio or watches late-night cable TV has heard or seen the seemingly endless stream of advertisements from tax debt companies promising to settle anyone and everyone’s tax debt for pennies on the dollar. And the aggressive marketing tactics of these tax debt companies—aptly labeled offer in compromise (OIC) “mills” by the IRS—don’t stop at just radio and TV waves. Anyone who has had a federal or state tax lien filed against them or their business has also likely been inundated with similar direct mail and telephone solicitations.
Given the sheer number of OIC mills and the apparent size of their marketing budgets, it begs the question: Is it really possible to settle a massive federal tax debt for pennies on the dollar?
The short answer is yes, it’s possible, but only under the right set of circumstances. Take for example, a recent client of Eyet Law who owed over $900,000.00 in back taxes that we successfully settled via an OIC based on doubt as to collectability for a one-time payment of approximately $6,000.00. Percentage-wise, that’s less than one percent, or stated differently, less than one full penny on the dollar.
Unfortunately, this astounding result is definitely the exception, not the rule, because in reality most taxpayers do not qualify for an OIC based on doubt as to collectability, and any seasoned tax defense practitioner can accurately predict the chances of success under those grounds after asking only a handful of questions. A reputable practitioner will first obtain key financial data from potential customers before giving them a realistic assessment of what their options may be.
The good news is that even if your circumstances preclude you from qualifying for an OIC based on doubt as to collectability, you still may qualify under one of the other two lesser-known and harder to achieve OIC grounds or you may even be eligible for other forms of mitigating relief.
If you have any amount of tax debt and have been contemplating calling one of the OIC mills, we recommend contacting a local CPA firm, or tax attorney, like Eyet Law, where instead you will be able to speak directly with a tax professional and receive an honest, professional assessment of your available options. Even if you have already tried using an OIC mill and did not receive the favorable result that was promised to you, we have successfully found ways to allow our clients to achieve favorable results under other available options.
Matt Eyet, Esq., founder of Eyet Law, was recently interviewed on Lawyers Who Care, the video show and podcast that highlights attorneys that go above and beyond for their clients.
You can check out the full video here, but keep reading for a recap of what you’ll get to see!
In the interview, Andrew Samalin, CFP of Samalin Wealth, spoke with Matt about his journey to becoming a tax lawyer. Because of the sheer volume of potentially applicable code sections, case law, and administration guidance surrounding tax, Matt sees every matter as being similar to a puzzle. Figuring out what applies, which code section does or doesn’t affect the case, and how best to move forward while adhering to the myriad of tax rules is all part of that strategy and solution.
In one instance, Matt represented someone who had Google searched for a tax lawyer. The client, having undergone a divorce, agreed to be solely responsible for the joint tax liability that was owed for several years leading up to the divorce. The client’s wife had been under the impression these taxes had been taken care of and hadn’t known about the owed taxes.
Given the situation, Matt worked with the wife to first request administrative relief, and ultimately to file a petition to absolve the wife of the tax liability. With this type of case, there are seven main factors that the IRS seeks to check in order to determine if the relief should be granted.
During the time the petition was pending, the wife attempted to purchase the condo she was currently renting and couldn’t get a loan because of the tax lien against her. But when Matt got a plea for help from her, he couldn’t say no, even though this task was outside the scope of what he was retained for. He drafted a letter to the bank. Given the compelling nature of the carefully crafted letter, the bank disregarded the tax liens and granted the loan.
Though the IRS wound up denying the initial request for administrative relief, Matt remained dedicated to the case and took it to the IRS Office of Appeals. After the appeal, the court only dismissed one of the three years of taxes owed, which still totaled over $160,000. Ever-committed to helping and serving his clients’ best interests, Matt took things one step further by filing a petition in U.S. Tax Court to resolve the remaining tax years. After Matt provided discovery and helped prepare both the client and ex-wife to testify, Chief Counsel’s Office at the IRS gave all the relief they requested for the wife.
While tax law can be black and white in many ways, these are the types of cases where the practical application of the tax rules and legal process make all the difference in the lives of clients.
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