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Overly Aggressive Tax Planning Strategies

The Internal Revenue Service enforces existing tax laws against not only listed tax shelter transactions but also against all tax planning strategies they consider overly aggressive.

Offers in Compromise

In certain situations, the Internal Revenue Service may be willing to accept less than the full amount owed by a taxpayer for federal income taxes. The IRS is willing to compromise with a taxpayer under four circumstances: first, there is doubt as to whether the taxpayer actually owes the taxes; second, there is doubt that the assessed tax is correct; third, there is doubt as to the actual collectibility of the amount owed; and fourth, for effective tax administration. In the last category, the IRS will consider less than full payment even the tax is owed, the amount is correct, and it is collectible but to do so would create a severe economic hardship on the taxpayer and would be unfair and inequitable.

Partnership Tax Year

Generally, a partnership is required to use the same tax year as a majority of its owners. If one or more of the partners having the same tax year owns a majority interest in the business, the partnership must use the tax year of those partners. A majority interest is defined as an interest in more than half of the partnership's profits and capital. When the owners are individuals, their tax year is usually the calendar year.

Expenses of Producing Income

If you hold property for the production of income, you know that these investments generate not only income but also expenses. Fortunately, the Internal Revenue Code permits you to deduct those expenses (with certain limitations) if they are ordinary and necessary for the production or collection of income or for the management of property held for the purpose of producing income. In order to be deductible, the expenses must be directly related to the income or income-producing property, and the income must be taxable to you. In addition, you must itemize deductions on your tax return. In general, these deductible expenses of producing income will be subject to the 2 percent limit applicable to all miscellaneous deductions. In other words, you will be able to deduct only those investment expenses (other than interest, which is handled separately) that exceed 2 percent of your adjusted gross income.

Veterans' Organizations Exempt under IRC 501c19

Prior to the enactment of Internal Revenue Code Section 501(c)(19) in 1972, war veterans' organizations were grouped together with all other veterans' organizations and recognized as tax-exempt under the social welfare and social club sections of the Code. Under the original version of the statute, an organization formed under Section 501(c)(19) could carry on programs involving Americanism, youth activities, community activities, and educational programs on issues of national security and foreign affairs. In addition, veterans' organizations could receive exempt income by providing certain insurance benefits for members or their dependents.