In one of my many rioting, I complained that the IRS was introducing novel interpretations of tax law in instructions on forms.
For many of you, this may not be a concern. It should be.
The problem is that someone who works in taxation knows that many problems don’t have clear answers. For this reason, it is acceptable to challenge the IRS’s interpretation of the law, provided that the position you represent has “material authority”.
To make this a fair debate, it is best that the IRS view be expressed in a formal way that cites a specific authoritative source of the law and why the IRS believes that source supports their position . A tax advisor cannot then agree.
If instructions on a required tax form simply say you are reporting this way, there is no actual statement as to why the law requires that reporting. Often taxpayers only assume that they have to follow the instructions.
So the abuse I mentioned is reporting the qualified business income allowance (QBID). This is the 20% deduction allowed on qualified business income.
Instructions on the form used to report the QBID in 2019 stated that otherwise qualified income must be reduced through charitable contributions from a partnership or sub-company.
Charitable contributions will not be counted as corporate deductions. Hence, it was illogical and without authority to reduce the income qualifying for the QBID through charitable donations.
The 2020 instructions no longer provide for charitable deductions to reduce income. Now this is a proper guide.
Congratulations to the IRS for getting this right. But what happens to those who have followed instructions in the past?
I wrote an article last filing season that said the QBID shouldn’t be reduced through charitable giving. That’s how I reported for customers last season.
I’m sure many readers have thought that I am a mad rule breaker who boldly claims that IRS instructions should be ignored. Maybe even a tax fraud.
We are often asked to know your rights. If an airline wants to stop you from flying, you know your rights. Someone is improperly charging your credit card, knows your rights.
You also have the right not to pay more than a reasonable amount of tax that you owe. We have a law that sets out your tax obligations. We have judicial interpretations of this law.
IRS instructions are not the law. If they are plainly written in accordance with the law, they are to be celebrated for the support they give to taxpayers.
If you don’t already know, the IRS doesn’t make the law. Interpretations contained only in instructions on forms must be treated as they are.
Q: I recently refinanced my mortgage and paid $ 6,440 in points. Can this be deducted as interest in 2020?
A: It can be deducted as interest, but the deduction must be spread evenly over the life of the refinanced loan.
Points represent prepaid interest. Tax law generally dictates that otherwise deductible interest paid in advance must be spread over the term to which it relates.
The law allows an exception to this rule. If the points are paid on a loan used to purchase, build or improve the taxpayer’s primary residence, the prepaid interest may be deducted in the year paid.
This time-of-departure exemption is one of many benefits granted to a primary residence. This can help offset some of the cost of buying the home.
Congress has decided not to extend this time advantage to refinancing a primary home loan. The reason is that refinancing is viewed as a personal financial decision and is not tied to the purchase of the property.
It can be a challenge to remember to subtract some of your points each year. If you use tax software or a professional tax advisor, the software will remember 2020 points for years to come and deduct the correct amount each year.
If you later sell or refinance the home, the remaining points can be deducted in the year the 2020 loan is repaid.
James R. Hamill is the director of tax practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at [email protected].