IRS Visits Marina and Discovers Lots About Taxpayer’s “Business Deductions”
Carlos and Pamela Langston (taxpayers) (TC Memo 2019-19) purchased a marina. The marina’s primary location had 100 covered dock slips and multiple structures. Its secondary location was a sailboat cove with 50 uncovered boat slips. The taxpayers purchased a Meridian 580 (yacht) for $246,920 to use as a sales office and a Raptor RV for $69,092 to use as a boat sales office and a place for nighttime security to use during their shift.
The taxpayer’s assets generated significant depreciation deductions for their LLC. They also claimed a significant loss from the sale of a former residence that they claimed was no longer a personal residence and had been converted to a rental property. The significant LLC depreciation deductions and the loss on the sale of the home prompted the IRS to conduct an audit examination.
Standard IRS Audit Procedure
Generally, when a taxpayer has significant assets and claims significant depreciation deductions, the IRS will want to verify that the assets exist. One such way to verify that the assets exist is to visit the premises of the taxpayer.
The IRS Visit to Taxpayer’s Place of Business
During the IRS agent’s tour of the yacht, the agent had the impression that the yacht was not used as a sales office. There were no placards, banners, or other identifying signage that would typically be found in a sales office. It was also discovered that the taxpayers did not maintain and business records or logs of boat sales on the yacht. The agent observed that the yacht contained numerous personal items.
During the IRS agent’s tour of the RV, the agent observed a suitcase, clothing, and a pot on the stove, again indicating it was being used for personal use.
The IRS accordingly denied the taxpayer’s claimed depreciation deductions for the yacht and RV because of the perceived personal use of these assets.
Loss on Sale of “Rental Property”
The taxpayer did not present any evidence to the court to show that the residence had been converted to a rental property with the intent to generate a profit. The Tax Court found the arguments made by the taxpayer not to be credible and lacked substance. Accordingly, the loss was denied because it was deemed personal-use property.
Tax Planning Tip #1:
The best and easiest way to prevail in an IRS audit exam is to have substantiation for the income and expense items shown in your tax return.
Tax Planning Tip #2:
This case is an example of a taxpayer not consulting with an experienced tax professional before filing their tax returns. Experienced tax professionals know what the IRS will request should the taxpayer be audited. By understanding IRS substantiation requirements and rules for claiming a business deduction, proactive tax planning may have adverted this audit examination. The taxpayers in this case were hogs and tried to claim business deductions on their personal assets . . . Never a good idea.
Tax Planning Tip #3:
Seek an experienced tax professional if a tax jurisdiction notifies you that an audit exam will be conducted on your return. While the cost of representation may seem expensive, it is not when compared to the taxes, interest and penalty assessments. An experienced tax pro knows how auditors work, the minimum substantiation they will accept, and how to negotiate with them in your best interests.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
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About F. Bryan Haarlander, EA, CTRS:
Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.
A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.