Lately in Tax Court

The Tax Court ruled that a couple omitted a large sum of money from their tax returns for 2006, 2007, and 2008. The couple came from China and began a successful fish importing business. They also got into rental properties and managed to win at gambling consistently.

Their accounting was proper to start out with. They used QuickBooks and had an accountant. All was proper. They then started taking out “loans” from the company. The first loan was a legitimate loan to purchase a property. It then lead to small personal loans on checks they would write to themselves without paying taxes.

The IRS examined the three tax years in question and determined this deficiency and assessed penalties on reconstructed income. They went to the Tax Court to iron out their differences and they IRS won.

Editor’s Comment: There are two lessons in this:

1) Report your income and pay your taxes. Here the taxpayer, petitioner in the case got into a mentality that they could get away with what they wanted because they kept getting away with it. They had no loan document, their CPA harped on them for years to have a loan document and MAKE PAYMENTS. They also had consistent gambling winnings of over $1,000,000. Add in rental income and their taxes were deviated to the point where the IRS had to reconstruct them.

The IRS did eventually catch them upon audit. Keep in mind, this case is from tax years that ended 10, 9, and 8 years ago respectively!

2) Loans to Shareholders! If you have an outstanding loan to a shareholder, no document to support the loan, and or no repayments made, the IRS will almost automatically reclassify the equity for income. They have years to make this assessment and time is not on your side.

If you have IRS issues, do not let them snowball like this. In this electronic world, being caught cheating by the IRS is easy, so take tax matters serious.