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How Long Can The IRS Audit?

Most taxpayers are familiar with the three-year statute of limitations on IRS audits. Filing an amended return does not extend that three-year limit. However, there are times when the time is greatly extended. Tax attorney Rob Wood discusses the rule and the exceptions in this report, based on his Forbes article “How Long Can IRS Audit? It All Depends On You.” The subject is also discussed in an earlier report by Wood.

Wood points out that the time deadline for audits is a matter of concern for all taxpayers, who dread getting mail from the IRS. The good news, Wood says, is that the three-year statute applies in most cases. If it has been three years since you filed your return and paid your taxes, “it’s usually too late for the IRS to collect” if they send a notice wanting to perform an audit.

Wood notes that there are times when the IRS will ask a taxpayer for more time to complete an audit, and he is inclined to grant those requests. “It’s a little counter-intuitive” to grant such a request. The reason to grant the request, Wood explains, is that failure to agree will probably cause the IRS to send the taxpayer a bill, which will escalate the dispute. The taxpayer would then have the burden of proving that the bill was unreasonable.

Wood says that the income is more than three years in certain specific circumstances. For example, a taxpayer omits more than 25% of income or has certain types of foreign accounts, the statute of limitations is more than three years. If a taxpayer has a foreign company and does not file the right kind of form, there is an unlimited amount of time for the audit.

And a separate issue taxpayers should be aware of is the statute of limitations for collections. If the IRS has sent a bill, they have ten years in which to collect. For more by Rob Wood on the subject, see his Forbes article “IRS Can Audit For Three Years, Six...Or Forever.”

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.



Claiming Tax Deductions For Clothing? San Francisco Tax Lawyer-Robert Wood

No, I’m not talking about those well-used suits and ties you give to Goodwill, although you can deduct the cost of used clothing given to charity at its market value—which usually isn’t much.  See contributions of used clothing and household items.

I’m talking about the full-price business attire, suit or party dress you buy for “business” purposes.  Well?

This tax gambit is tried more often than you might think.  Long before the dot.com and casual era made “business attire” a confusing term, lawyers and others have argued their suits are just like uniforms and therefore ought to be tax deductible.  Did they win?  Nope, no deduction.

Even more defensible, you might think, would be a salesman or TV personality told to look just so. After all, the tax code does allow deducting the cost and upkeep of work clothes that meet two requirements:

  • You must wear them as a condition of your employment.

  • The clothes must not be suitable for everyday wear.

It is not enough that you wear distinctive clothing. The clothing must be specifically required by your employer.  Nor is it enough that you do not, in fact, wear your work clothes away from work. The clothing must not be suitable for taking the place of your regular clothing.  

Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc.).  Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear.

How about a white cap, white shirt or white jacket, white bib overalls, and standard work shoes a painter is required by his union to wear on the job?  Nope, it is not distinctive.  Similarly, blue work clothes worn by a welder are not deductible even if the foreman requires them.  However, required protective clothing like safety boots, safety glasses, hard hats, and work gloves are OK.   

Military Uniforms?  You generally cannot deduct uniforms if you are on full-time active duty in the armed forces.  See Deductions for Military Uniforms.   However, reservists can deduct the unreimbursed cost of uniforms if military regulations restrict wearing it except on duty.  Still, you must reduce your deduction by any nontaxable allowance you receive.  If local military rules don’t allow wearing fatigues off duty, you can deduct the amount by which your uniform cost exceeds your uniform allowance.  For more, see 2010 Publication 3, Armed Forces Tax Guide.

TV is Different!  While these tax rules are pretty circumscribed, they are also intensively factual.  Someone is always pushing the tax envelope.  The latest example was a TV news anchor.  The IRS and Tax Court said no to her wardrobe deductions.  And they added penalties.

In Hamper v. Commissioner, the anchor claimed approximately $20,000 a year in 2005, 2006, 2007 and 2008.  Her argument was that as a TV anchor she was required to maintain a specified appearance described in the Women’s Wardrobe Guidelines.  These guidelines say the “ideal in selecting an outfit for on-air use should be the selection of ’standard business wear’, typical of that which one might wear on any business day in a normal office setting anywhere in the USA.”

Was that enough?  No.  Where business clothes are suitable for general wear, there’s no deduction even if these particular clothes would not have been purchased but for the employment.  There are exceptions where clothing was useful only in the business environment, where:

  1. The clothing is required or essential in the taxpayer’s employment;

  2. The clothing is not suitable for general or personal wear; and

  3. The clothing is not so worn.

For this TV anchor, that was no help.  She claimed the requirement to dress conservatively made the clothing unsuitable for everyday, and that’s how she treated it.  She wore the business clothing only at work and even kept it separate from her personal clothing.  But the IRS and Tax Court said no. 

Besides, she deducted lounge wear, a robe, sportswear, lingerie, thong underwear, an Ohio State jersey, jewelry, running shoes, dry cleaning, business gifts, cable TV, contact lenses, cosmetics, gym memberships, haircuts, Internet access, self-defense classes, and her subscriptions to Cosmo, Glamour, Newsweek, and Nickelodeon.  You get the idea.

For more, see Work Clothes and Uniforms.

Robert W. Wood practices law with Wood & Porter, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at wood@woodporter.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.


When IRS Calls Pay “Unreasonable” San Francisco, California Tax Lawyer Robert Wood

Long before the huge executive pay packages of the last few decades, the IRS labeled some pay unreasonable and levied extra taxes as a result.  Sometimes pay that is too low is also attacked with–once again–extra taxes as a result.  That means pay that’s too low or too high can trigger extra taxes.  It sounds maddening, but winnowing down the reason pay must be not too low or too high turns primarily on the type of business entity paying the compensation.  I’ll address pay that is too low in a future column.

Beware Lavish Pay.  With most corporations, all pay (to executives as well as rank and file workers) is deducted by the corporation as a business expense.  That means no corporate tax is paid on the money.  It is deducted, and tax is paid by the recipients.  What happens if the corporation pays out $10 million for the CEO when he’s really only worth $3 million?  

The answer is complicated and depends on many variables.  Public companies are subject to rules governing pay over $1 million that must generally be performance-based, but often the corporation can still deduct the payment.  See IRC § 162(m).  But the situation is trickier if the business is closely-held. 

To take an extreme example, what if Joe owns 100% of the corporation’s stock and is the CEO?  If Joe will receive all the money in any event, Joe might have the company pay him deductible salary and bonus so he only pays tax as an individual–the corporation would deduct all that compensation as a business expense. 

If the company paid Joe a more modest salary and bonus, the company could have paid him the rest of the money as a dividend.  The corporation receives no tax deduction for dividends, so the corporation would first have to pay tax on it.  Then Joe would pay personal income tax.

For that reason, the IRS monitors compensation by closely-held companies.  With closely-held (especially family) companies, the IRS has a keen eye for who is getting paid too much.  The assumption is that some of the money being paid out and called “compensation” is probably a disguised dividend.  See Funny Money: Deducting “Reasonable” Compensation.

Some compensation may be labeled as unreasonable and therefore ruled nondeductible by the corporation.  In closely-held businesses, these steps can help to support treating pay as deductible pay:

  • Document compensation arrangements prospectively, not retroactively.

  • In setting compensation, take a historical perspective; inadequate compensation in the past may support higher pay now.

  • Gather comparative data about similarly situated companies and similarly situated executives, what they do, how much they work, and how much they are paid.

  • Consider dividend history and be alert for ‘‘disguised dividend’’ arguments where no dividends are paid.

  • Consider criteria an independent investor would consider if investing in the company.

  • Keep good records and be ready to produce documents if you have to.

For more, see:

Ten Things You Need To Know About ‘Reasonable’ Compensation

When The Service Claims Compensation Is Unreasonable

Robert W. Wood practices law with Wood & Porter, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009, Tax Institute), he can be reached at wood@woodporter.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional


Tax Lawyer Rob Wood Discusses Home Worker Employee Status

Rob Wood's article in Tax Notes covers the employee status of the "Home Worker"...sometimes referred to as a "Statutory Employee."