IRS Denies Theft Loss Write-off for Daughter's Abduction

In his latest column, Julian Block discusses the Tax Court's ruling on what constitutes an "item" that can be covered by a tax loss write-off, as well as deadlines for IRS audits and taxpayers' refund claims.

Feb 14th 2020
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Tax tidbits
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In twenty-one previous columns, I discussed my use of “tax tidbits” to enliven conversations when talking taxes with clients or speaking to groups like business owners, retirees, investors and home sellers. The tidbits discuss, among other things, IRS rulings and other announcements, law changes, court decisions and tactics that trim taxes for this year and even future ones.

I'd like to share more of my favorites with you here.

Theft-loss write-offs. The Tax Court sided with the IRS and refused to allow a theft-loss deduction for costs incurred by a father trying to find a daughter who had been abducted by a former wife. The deduction is allowed only for a loss of property. Moreover, the item stolen must have an adjusted cost basis and a fair market value at the time of the theft.

The court displayed its fondness for one-liners. The daughter can’t be considered property; “the ownership, purchase and sale of human beings, commonly known as slavery, has been barred since the adoption in 1865 of the Thirteenth Amendment to the Constitution.”

Deadlines for IRS audits and taxpayers’ refund claims. Keep records that support income, deductions and other items on federal and state returns at least until the statute of limitations runs out for audits or for submitting refund claims, should you find errors after filing.

Generally, the statute of limitations for audits or refunds expires three years after a return’s filing deadline. April 15, 2023 is the cut-off date for the government to begin examinations of returns for 2019, with a filing due date of April 15, 2020, for most persons.

The three-year rule is subject to two exceptions. First, the audit deadline doubles from three to six years if the amount of income you fail to report is more than 25 percent of the amount you show on a Form 1040. To illustrate, the six-year deadline expires in middle April of 2025 for most returns for 2018 that were submitted in 2019.

Second, no time limits on the start of examinations of individuals who fail to file returns or submit returns that are deemed false or fraudulent. The law authorizes the IRS to begin those audits “at any time.”

The Firm, John Grisham’s best-selling thriller, became a 1993 film that starred Tom Cruise as a young lawyer seduced into working for a snazzy law firm that launders money for the Mafia. In the movie version, a mob mouthpiece describes tax law as “a game we teach the rich how to play so they can stay rich. The IRS keeps changing the rules so we can keep getting rich teaching them.”

While George Herbert Walker Bush was vice president, he had sewn up the nomination for president when delegates at the Republican convention in 1988 cheered his famous pledge of “Read my lips—no new taxes!” However, as president, the elder George Bush had to deal with a Democratic Congress and to be more conciliatory, unlike his son. So despite his vow and because he knew it was helpful for the economy, President Bush crafted a deal with Congressional Democrats to raise new taxes in 1990, a decision that contributed to his re-election defeat in 1992 by William Jefferson Clinton.

President Clinton easily won again in 1996, notwithstanding tax increases in 1993, becoming the first Democrat to be re-elected since Franklin Delano Roosevelt. As Mr. Clinton recalled, “There’s a lot of evidence you can sell people on tax increases if they think it’s an investment.” Of course, tremendous growth in the 1990’s also made it easier to sell increases.

Look for more tidbits in subsequent columns.

Additional articles. A reminder for accountants who would welcome advice on how to alert clients to tactics that trim taxes for this year and even give a head start for next year: Delve into the archive of my articles (more than 300 and counting). 

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