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Be wary of relying on tax authorities

13 Nov 2014

According to a recent Tax Court decision, relying on certain IRS guidance may place you in an unexpected defenceless position. Taxand USA discusses this decision.

In this case the Tax Court addressed the ability of a taxpayer to effect multiple nontaxable “rollover contributions” from different traditional Individual Retirement Accounts (IRAs) within a 1 year period without being subject to taxation. The IRS has held in published guidance that the 1 year rule applicable to nontaxable rollover contributions applies on an IRA-by-IRA basis.

The Court came to a different conclusion by holding that the 1 year rule applied on an aggregate basis (not IRA-by-IRA) based on the plain language and history of the statute. Consequently, the Court upheld assessments for additional income tax and a substantial understatement penalty.

As would be expected, the taxpayer filed a motion for reconsideration with the Tax Court. Additionally, reputable industry groups and high-profile individuals from the tax community voiced concern in an effort to protect the public’s confidence in the tax system. The motion was ultimately ruled as moot as a result of a settlement reached by the IRS and the taxpayer.

Nevertheless, in its denial of the motion, the Tax Court took the opportunity to warn us of the dangers of relying on an IRS publication.

Discover more: Reliance on IRS guidance: Caveat utilitor

Your Taxand contact for further queries is: 
Sean Menendez
T. +1 305 704 6688

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Taxand's Take

There is a time and place for using less rigorous approaches to finding an answer, and certain guidance provided by the IRS may suffice. However, more often than not, correctly applying the tax law requires taking the time to corroborate the answer with other sources.

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