Question # 5: Is anything else relevant?

a. The special agent should review any loan applications that Jack and Janet submitted to the bank. For example, did they buy their home with borrowed funds or outright in cash?

b. The special agent should investigate transactions that Jack and Janet had with their customers and suppliers. That might help make unreported business income a special items method as opposed to an indirect methods item. Because courts are more cynical of the indirect method, it usually draws more scrutiny from courts than the direct method.

See Part I, Part II, Part III and Part IV Read More

Question # 4: What affirmative defenses might Jack and Janet assert?

See Part I, Part II, Part III, and Part V

a. Cash hoard defense: Jack and Janet had $ 16,000 lying around, which presumably funded some of their expenditures.

i. The government would counter that by asking, “When did you acquire that $ 16,000? Did you have such great years prior to 2004 that you wound up saving $ 16,000?”

ii. The government would want to look at what was going on with Jack and Janet financially. Did they have unpaid debts or did they file for bankruptcy? Both are inconsistent Read More

Question # 3: What holes do you perceive in the case and how should they be filled?

See Part I and Part II.

a. The government should check to see if the IRS issued Jack and Janet a 1099 for the dividends and for the sale of stock. If so, the special agent would need to determine who the 1099s were issued to and at what address. Were Jack and Janet living at that address at the time the 1099s were sent? There is a presumption of receipt if the government establishes that the 1099s were mailed to the correct address. What is that important? The receipt of 1099s by Jack and Janet would help the government prove willfulness. In Read More

Question #2: What theories of proof should be pursued?

Continued… See Part I, Part III, Part IV and Part V

a. This would be a case in which the government uses specific items or the direct method in some instances and indirect methods in other instances. For example, Jack received $ 2,000 in dividends in 2004, none of which he reported on his 2004 tax return. That is a specific item. The government’s argument is quite simple: “Got dividends? We see that you do. Were they reported on the return? It appears that they weren’t. That’s all we have to prove.” Of course, that is a bit of an exaggeration because the government must prove willfulness. Read More

While reading can aid in learning, there is no substitute for doing. Reading about what steps should be taken to solve a tax problem is no different than reading about how to ride a bicycle. In the same way that the only way to learn how to ride a bicycle is by experiencing it firsthand – i.e., by physically getting on it (and perhaps falling off it more than once) – the only way to become proficient at solving tax problems is by trudging through a multitude of hypotheticals. Therefore, my motto is, “Learning by doing.”

So why not test your problem solving skills out on a true-to-life hypothetical? Below is a fact pattern based upon a real case. While the analysis is quite detailed, it is nonetheless very practical in the sense that it covers issues that come up with the greatest frequency for tax preparers who are “on the front lines.” In fact, if I had to venture a guess, I’d say that Read More