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The Year in Taxes: Sleepwalking Through 2011

Posted on by Joe Kristan

 

In January, the tax world was still reeling from the extension of the Bush-era tax rate cuts signed into law in December.  It also allowed rich people who died in 2010 to go to their rest without paying estate taxes, making George Steinbrenner a happy ghost.  It also allowed living taxpayers to make tax-free lifetime gifts up to $5 million per year, thrilling kids everywhere until they found out their parents didn’t have $5 million.
 
February saw Ohio TV newscaster Aneitra Hamper learn from the Tax Court that thong underwear purchased for work was not a deductible business expense.  That’s too bad, because that’s a format that could save local journalism.
 
In March, the Tax Court clarified that the casualty loss deduction is available only for casualties you suffer, not casualties you inflict, disallowing the deduction of a $250,000 payment by a taxpayer-driver to the family of a pedestrian he ran over and killed.  Meanwhile, Wesley Snipes appealed to the Supreme Court to try to get his 3-year tax crime sentence overturned. Audit personnel everywhere went on spring break, while the tax people got into serious tax season personal hygiene neglect.
 
In April, the tax world lost a giant with the death of James Eustice.  Thousands of tax people blinked at the sight of the sun after weeks of toil in the cubicle galleys.   TV Tax Lady Roni Deutch was sued by the California Attorney General for allegedly fraudulent practices, after the California explained that “pennies on the dollar” was for state bondholders, not taxpayers.
 
May saw a Florida man learn a valuable lesson: if you finance your girlfriends to the tune of hundreds of thousands of dollars and attempt to deduct the costs, it’s unwise to leave your tax records where your wife can find them.  The IRS might be very interested.  In unrelated news, it came out that the Iowa film credit helped finance a film company owned partially by the third son of the now-late Muammer Gaddafi.  
 
June saw taxpayers strain to file their foreign account disclosure forms, while the Tax Lady entered a not-guilty plea to California contempt of court charges.  The Supreme Court told Wesley Snipes he had to stay in jail.  Meanwhile, Caleb asked whether Anthony Weiner’s deductions might have been as enhanced as his briefs.
 
July saw the IRS show it’s compassionate side when by attempting to disallow caregiver deductions for a dementia patient.  Going Concern meanwhile exposed tax enemy Grover Norquist’s secret links with Elmo.
 
While Congress was mercifully quiet in August, the courts were busy.  An accountant was disallowed deductions for his bathroom, while a real estate developer who shared a home with his wife and his girlfriend was rescued from this terrible situation by a 22-year prison sentence.  Meanwhile, former Enron executive Ken Lay won his Tax Court case, a victory tarnished by his continuing to be dead.
September saw the President propose a new stimulating tax plan, which Congress swiftly ignored.  Meanwhile, Caleb at Going Concern was named one of accounting’s 100 most influential people.  Adrienne is still laughing.
 
In October, Commissioner Shulman said the IRS needs every dime it has to finance it’s puppy-torturing and preparer regulation initiatives, though it might back off on the preparers.  Come November, the first preparer competency exams were scheduled.  They will be open-book, so they are really preparer literacy tests.  Members of Congress and the Cabinet are obviously exempt.
 
Like in 2010, December saw a year-end showdown over expiring provisions, this time the 2 percentage-point reduction in employer social security taxes.  The impasse was resolved when Congress agreed to pretend to solve the problem for two months.   That prepares us for next December, when the Bush-era tax cuts pretend to expire again.  And Richard Hatch finally finished his tax sentence for failing to report his “Survivor” income, long after anyone else cared.
 
I don’t know about you, but this makes me just crave 2012.

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Will JK Harris and TaxMasters Join the Tax Lady in the Late-Night-Tax-Problem-Solver Body Count?

“Pennies on the dollar” may be a great pitch on cable television, but it’s not a surefire business plan. Desperate taxpayers who have paid money up front to JK Harris to resolve their tax debts at a discount are joining the IRS as potential “pennies on the dollar” creditors now that this leader in the tax settlement industry is filing for bankruptcy protection.

This is the second major blow this year to cable TV ad revenues. Earlier this year “Tax Lady” Roni Deutch gave up her law license in the face of charges that she took fees up front to resolve tax debts and failed to follow through.

Tax nerds see the late night ads when we get home and wonder how these outfits manage to get such great deals out of the IRS when getting the Service to actually forgive tax debts is like pulling teeth from a grumpy rhino for the rest of us.


TaxMasters now stands as the biggest remaining player in the TV tax settlement business, but they have their own problems. They were de-listed last month from the OTC Bulletin Board to the pink sheets for failing to file their 10-Q due August 15. The last reported trade for Taxs.pk is at 13 cents. They have also been sued by the Minnesota Attorney General for allegedly deceptive practices. ABC News reported on the suit:

The Minnesota attorney general says many of the company’s employees are skilled tele-marketers who have little knowledge of the complicated tax issues faced by people who have fallen behind in filing their returns or making tax payments. “When you call, you think you’re talking to a tax professional,” said Swanson. “You’re really talking to just a salesperson who’s trying to get you to sign up.”

So maybe the secret is that the late night settlement outfits are staffed by telemarketers who just happen to be awesome at selling pennies-on-the-dollar deals to the IRS. If that’s true, though, they seem to be having a lot of trouble turning what would truly be a remarkable and valuable skill into profits.

Just So You’re Aware: The IRS Won’t Allow You to Deduct Your Pot as a Medical Expense

Apparently there’s been a bit of unnecessary confusion out there about the deductibility of marijuana for medical purposes. The Wall St. Journal article that we linked to this morning discusses the problems employers are encountering wie.g. can’t use HSA funds; they don’t care if you’ve got a card, if you test positive you’re fired).

But the question of deducting the cost of your White Widow et al. that you legally purchase in states like California and Colorado has been making the rounds. After a little discussion, it’s pretty clear that the IRS is not going allow you deduct your pot for tax purposes simply because it’s still illegal at the Federal level. Doctor’s note be damned.


The confusion arose due to the following letter that was sent to New York Senator Chuck Schumer, who had sent a letter to the IRS inquiring about a constituent using a “herb” to treat migraine headaches:

Pot

Talk about a vague response from the IRS. Tax Girl explains:

As with many facets of how to treat medical marijuana for tax and other purposes, it appears that those in charge are merely tiptoeing around the question. In the letter, the term “marijuana” is never used explicitly – the term used is “herb”. While it’s my understanding that the specifics of the case involved medical marijuana used for the treatment of migraines, that isn’t specifically stated in the sanitized version of the letter. No use of “marijuana”, just the term “herb.” That could be St. Johns Wort or milk thistle as far as the IRS is concerned.

Fortunately TaxProf Paul Caron clears up for us in a couple of updates from his latest post on this issue:

Update #2: Rev. Rul. 97-9, 1997-1 CB 77, specifically precludes a medical expense deduction for medical marijuana:

An amount paid to obtain a controlled substance (such as marijuana) for medical purposes, in violation of federal law, is not a deductible expense for medical care under § 213. This holding applies even if the state law requires a prescription of a physician to obtain and use the controlled substance and the taxpayer obtains a prescription.

So the IRS in Info. 2010-0080 either was (1) signalling a retreat from its position in Rev. Rul. 97-9 by not mentioning the federal legality of the substance; (2) implicitly referring only to legal herbs (and hence not covering marijuana).

Update #3: I am told by an enterprising reporter that the herb in question in Info. 2010-0080 is Petadolex, so it appears that interpretation #2 above controls and the conclusion in Rev. Rul. 97-9 denying a medical expense deduction for medicial marijuana still obtains.

So there you have it. Regardless if you have glaucoma, cancer, HIV, chronic pain, high anxiety or any ailment that marijuana can effectively alleviate, don’t bother trying to include it on Schedule A. We’d ask the IRS to implore a little common sense here but legally, as long as marijuana remains illegal at the federal level that’s not going to happen. And from a more practical standpoint, we’re still talking about the IRS.

Don’t Bogart That Deduction: Is Medical Marijuana a Medical Expense? [TaxProf Blog]
Just Say No: Pot Not Allowed as Medical Expense [Tax Girl]