Attorney Ronald Marini writes about a very recent Supreme Court decision that limits IRS’ audit powers in a way you’ll like. The IRS is limited to three years to audit you or your business when it comes to determining the basis of anything you have sold. Home Concrete & Supply, LLC, (Sup Ct4/25/2012) 109 AFTR 2d 2012-661
Why is this important to you?
When you sell your home or business assets, or even securities that you’ve held for a long time, you may not have proof of your purchase costs. This is especially true when you are gifted stocks from a relative who bought them decades ago. So you arrive at your best guesstimate. Suppose you’re waaaay off? Suppose your error is would result in more than a 25% change in your gross income? Generally, at times like that, IRS has the right to audit for six years. ( Code Sec. 6501(e)(1)(A) provides for a 6-year limitations period.)
What the Supreme Court just decided is – errors in basis don’t count when it comes to this 25% difference in taxable income or tax liability.
The second case comes from an article attorney Barbara Weltman wrote for BottomLine Personal. (Her article is too recent to be on the website yet.) A recent Tax Court case dealt with IRS disallowing the taxpayer’s home improvement costs of over $350,000, among other things. There were a variety of reasons for this, including the fact that taxpayer didn’t have all receipts. But he was able to list all the improvements and provide a decent estimate of the costs for each kind of project. The Tax Court allowed the taxpayer to use the Cohan Rule. This is a bit of a surprise, since this is usually just used to allow for business expenses. http://www.ustaxcourt.gov/InOpHistoric/greenwald.TCM.WPD.pdf
You may want to read these two cases. Links have been provided.
How do they affect you? Well, when your record-keeping isn’t perfect, or even adequate, these cases give protections from IRS tax assessments. Save this information.