Upcoming tax season is an ideal time to examine recent court cases that illuminate accurate tax preparer procedures. Many details contested in Tax Court deliver context to subjects in tax continuing education courses. Confusion among taxpayers may lead to unfortunate ends for them, but enlightening benefits for tax preparers.
A commonly awkward issue in the tax preparation business entails the claim of a child exemption for divorced parents. Although the parent with whom the child resides most often is entitled to claim the dependent, the parents may agree to an alternative arrangement.
That’s what happened in the Santana case. Although the child resided with Mr. Santana’s ex-wife, he obtained a mediation agreement to claim the exemption in alternative years. In 2008, Mr. Santana claimed his child as he had done in all even-numbered years since the divorce. Unfortunately, Mr. Santana did not obtain a signed From 8332 from his ex-wife. The court also pointed out that the mediation agreement is not an acceptable substitute because it is silent about which parent goes first in claiming the dependency exemption or which years Mr. Santana is entitled to the exemption.
Despite acknowledging the unfairness to Mr. Santana of denying him the exemption claim, the court was bound by exact language of the tax statute. This ruling delivers a warning for every tax preparer job involving a dependent child not residing with the taxpayer. Informing the taxpayer about Form 8332 is crucial to conducting a thorough tax preparation service.
The Tax Court ruled in the Sewards case about the subject of taxable compensation for workplace injuries. Payments to the taxpayer were part of a disability retirement plan. Sewards claimed they were nontaxable disability. But, the court held that a portion of the payments comprised taxable income to the extent that they were increased based upon length of service. Tax preparers are therefore cautioned to inquire about specific factors related to retirement caused by occupational injury.
Housing allowances to religious ministers are important situations described in a tax preparer training course. Within certain limits, amounts provided for a parsonage are nontaxable. In an earlier ruling, the Tax Court decided that such instances apply to only one home. Driscoll claimed income exclusions on parsonages for a primary residence plus a vacation home. The appellate court ruled in the taxpayer’s favor, pointing out that the Tax Court often too narrowly construes income exclusions.
Moving expenses were the issue in the Olagunju case, where a married couple was denied the tax deduction when the IRS claimed the move was not job related. Although the couple could support the $8,600 amount spent for moving, the court found that no credible evidence was provided to show the move occurred in connection with employment. An imperative step explained in tax preparer CE courses is obtaining assurance that a move was work related before claiming a tax deduction for the costs.
IRS Circular 230 Disclosure
Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.
