Self Defense

For decades, I have been advising people that, even if you won't owe any taxes, or if your income is below the mandatory filing requirement, it is still a good idea to file a tax return as a self defense measure. Whoever told this woman that she didn't need to file a tax return to report a break-even real estate sale was dead wrong. If the advice was from a tax professional, there is a good malpractice case. If it was from an IRS employee, there's nothing that can be done because they are not legally bound by their advice and it is well known that they are wrong around two-thirds of the time anyway. Anybody stupid enough to rely on IRS advice deserves what they get.

To refresh the point. When real estate and stocks are sold, IRS is provided with a 1099 form showing the gross sales price. Taxes are computed on the net profit or loss after subtracting the asset's cost basis. IRS has no information on the cost basis. Providing that information to the IRS on an income tax return is the responsibility of the taxpayer. IRS computers, although 1960s generation dinosaurs, are very efficient at matching up gross income amounts from 1099s with the gross sales prices on 1040s. If a sale is not shown on a tax return, or if a tax return has not been filed, IRS assumes that this was unreported income and that the gross sales price also represents the net profit (cost basis = zero). A bill for taxes, interest and penalties is automatically generated, starting a chain reaction collection nightmare.

I have been accused of advocating filing tax returns where no tax was due just to generate revenue. Nothing could be further from the truth. I have never been at a loss for work and have always had far more projects than I could handle. It is simply to help clients avoid the kind of problem the lady in this story encountered when she failed to report the property sale. The truth of her story may be that she was either too lazy or too cheap to prepare a tax return for the year of that sale and she paid the price. Penny wise, pound foolish fits that situation.

KMK
- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 10/16/2002 03:08:00 PM Send this post: