TWO AUDIT TIPS THAT COULD SAVE YOU A LOT OF STRESS

TWO AUDIT TIPS THAT COULD SAVE YOU A LOT OF STRESS

Here are two audit tips that could save you a lot of stress;

IRS CHIEF COUNSEL ADVICE (CCA) 200750016 RESTRICTS IRS ABILTY TO USE 20/20 HINDSIGHT AGAINST TAXPAYERS IN AUDITS OF DISASTER RETURNS

Near the end of 2007, the IRS issued CCA 200750016, (November 08, 2007). It deals with the issue of auditing taxpayers casualty losses. The IRS states that the rules that apply to taxpayers do not apply to the IRS. The rules that the IRS must comply with are more restrictive than what is expected of taxpayers. The question arises because of year-ends and time-lines. The CCA states the issue and its conclusion as follows:

ISSUE: Treatment of Gulf Hurricane casualty loss claims involving reimbursement, or a reasonable expectation of reimbursement, for the loss from federal or State grants.

CONCLUSION: The same rule does not apply under the I.R.C. §165 regulations to taxpayers claiming a casualty loss and to the IRS when it examines a claimed loss.

Taxpayers must reduce their casualty loss deduction by the amount of any reimbursements received or by the amount of reasonably expected prospective reimbursements as determined by the end of the taxable year of the casualty. Taxpayers may also reduce their casualty loss deduction, if they wish, by the amount of any reasonably expected prospective reimbursements, determined as of the time of the filing of the tax return claiming the loss ****

Examiners use the same criteria as the taxpayer, but must base their determination of the facts and circumstances as of the end of the tax year for which the casualty loss is claimed. ***** the IRS may not reduce casualty losses claimed for 2005 to reflect receipt of a Road Home grant (or of any other reimbursement) during 2006 (or 2007), or to reflect an expectation of reimbursement from such grants or other sources arising after the taxable year end and by the time the return was filed or of the examination.

This CCA indicates two important issues. one, the IRS is auditing losses, even in one of the most economically depressed disaster areas and; two; they cannot use 20/20 hindsight two years later after a good faith return has been filed. This is consistent with the theory that each tax year stands on its own merits based on the facts and circumstances that exist at the time. This is a two edged sword, in this case it may assist the taxpayer in avoiding penalties and interest costs that might arise in an examination of their tax return filed in connection with a disaster loss claim, but it reminds us of the taxpayers’ responsibility to be diligent in reporting the fact of the disaster.

While these CCAs are generally restricted to a single taxpayer or event, as in this case, the general application is worth mentioning to an agent, if your audit is going bad due to an examiner’s use of information that was not available to you at the time you prepared the tax return.

IRS ISSUED REVENUE PROCEDURE 2007-56:

COMPLIANCE DEFERRALS (§7508A): When a disaster occurs, the IRS will impose §7508A to provide relief from many filing deadlines. The section also creates suspensions of other periods, including many limitations on audit statute of limitation time constraints. Regulations issued during 2008 provide detail explanations of how the section would be applied in a disaster. The regulations (§301.7509A-1) include 8 examples that are very detail. The professional should match-up the regulations with the taxpayers’ situation at the time of the disaster to determine extensions that may apply. The current delineation of all postponements are contained in Rev. Proc. 2007-56.

Rev. Proc. 2007-56 includes a complete list of tax related deadlines that may be deferred by the IRS when a disaster strikes. Section .05 of the Procedure lists the types of deferrals that are included in the list.

.05 Significant Changes. When a Presidentially declared disaster occurs, the IRS guidance usually postpones the time to perform the acts in section 301.7508A-1(c)(1) as well as this revenue procedure.

Certain acts, such as filing Tax Court petitions in innocent spouse and other nondeficiency cases, and making certain distributions from, contributions to, recharacterizations of, and certain transactions involving qualified retirement plans (as defined in section 4974(c)), have been added to this revenue procedure even though they are also listed as acts postponed under section 301.7508A-1(c)(1).

The list is extensive and is updated periodically. If the IRS announces the imposition of the relief provisions related to an area that affects your clients, you, as tax professionals are advised to consult the IRS regarding the release covering the disaster of your concern and also Rev. Proc. 2007-56

© 2012, John Trapani, CPA,

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.

	JOHN TRAPANI
	Certified Public Accountant
	2975 E. Hillcrest Drive, #403
	Thousand Oaks, CA 91362
	(805) 497-4411       E-mail John@TrapaniCPA.com
	Website: www.TrapaniCPA.com
	Blog: www.AccountantForDisasteRrecovery.com
	It All Adds Up For You

Internal Revenue Service Circular 230 Disclosure

This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities

The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.

This material was completed on the date of the posting