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Tip Income & Reporting to the IRS – Paul Gaulkin CPA

Tip Jar

The IRS considered any tip income received as income by a taxpayer to be compensation for services rendered and must be included in the taxpayer’s gross income. The most important part of tip income is the recording of the tips by the taxpayer throughout the year. This is a requirement by the IRS and cannot be avoided. In the event the taxpayer does not record their tip income throughout the year, the IRS will use measures to reconstruct the income … Read more

Real Estate Professional Passive Loss Rules Exception – Paul Gaulkin CPA

a woman real estate professional

When it comes to passive loss rules that deal with real estate, a real estate professional may elect to treat all interest in real property trades and businesses as one activity. The IRS defines a real estate professional as a person who derives more than one half of all their personal services from real property trades or businesses in which they materially participate. A real estate professional must have rendered a total of more than 750 hours of personal services … Read more

Involuntary Conversion Defined – Paul Gaulkin CPA

In a store shopping with cart

An involuntary conversion takes place when property is converted as a result of its destruction, in whole or in part, theft, seizure, requisition or condemnation. Involuntary Conversion Condemnation Usually a condemnation occurs when a governmental body takes private property for public use and pays the owner the fair value of the property. A property transfer due to threat or imminence of condemnation also qualifies as an involuntary conversion. In general, for involuntary conversion to apply, there needs to be confirmation … Read more

IRS Penalties for Inability to Obtain Records – Paul Gaulkin CPA


In the event that a taxpayer is unable to obtain records to comply with tax obligations, they may or may not be subject to penalties. This will depend on whether the taxpayer can establish reasonable cause for not being able to obtain those records. Reasonable cause may be established if the taxpayer exercised ordinary business care and prudence, but due to circumstances beyond his or her control, was unable to comply with the tax obligation. Establishing Reasonable Cause When establishing … Read more

Civil Penalty for Tax Fraud – Paul Gaulkin CPA


Section 6663 covers the information dealing with the civil fraud penalty and how it is administered. The penalty is equal to 75% of the underpayment of tax that is directly or indirectly due to fraud. The burden of proof rests with the IRS on proving that the underpayment was due to fraudulent activity. Defining Underpayment In this situation, underpayment means the difference between the correct tax liability and the amount of tax reported on the return plus the amount of … Read more

Material Advisor & Form 8918 – Paul Gaulkin CPA


A material advisor in regard to a tax shelter is any person who: 1. Has provided any material aid or advice in order to help with the organizing, promoting, selling, implementing, insuring, or carrying out any reasonable transaction and 2. Derives gross income in excess of a threshold amount determined by the IRS for the assistance or advice. All material advisors are required to register with the IRS and receive a reportable transaction number. The advisor must provide this number … Read more

TEFRA Partnership Exception – Paul Gaulkin CPA

Strength in Numbers

The TEFRA rules do not apply to certain entities called small partnerships. These small partnerships have two requirements that must be met for the exception to disallow TEFRA rules. These requirements include: 1. The partnership must have 10 or less partners. 2. All partners are natural persons who are U.S. citizens or resident aliens, C corporations, or estates of deceased partners. These two requirements are generally viewed as mandatory and must be present to waiver the TEFRA rules. Thus, a … Read more

S Corporation Basis – Paul Gaulkin CPA

lady walking on rope

S corporations have been growing in popularity over the years, and for this reason the IRS has been keeping a close eye on taxpayers that use their S corporation to take advantage of their benefits. According to the National Research Program study, an estimated 68% of S corporation returns filed for years 2003 and 2004 misreported at least one item affecting net income. Of noncompliant S corporations, 80% underreported net income by understating income and/or overstating deductions. Calculating Basis Lack … Read more

Constructive Dividend IRS – Paul Gaukin CPA


In some situations, a corporation may enter into a transaction that is not typically considered a dividend, but may be considered a dividend by the IRS. Constructive dividends do not need to be formally declared by the corporation or designated as a dividend. All that is required according to the IRS is that a shareholder received some benefit from the corporation that was not paid for or reported on a Form W-2 or 1099. Since any benefit that was given … Read more

TurboTax Error Defense – Paul Gaukin CPA

Court room

The Tax Court has determined that relying on commercial tax software to prepare a tax return is not a viable defense against any negligence penalty. Therefore, if a taxpayer is negligent on their tax return, they cannot simple blame commercial tax software for their own errors. TurboTax Error Defense The Tax Court has ruled that tax software is only as good as the information that is being inputted into it. A taxpayer is fully responsible for any material misstatements that … Read more