Expected-Cost Analysis as a Tool for Optimizing Tax Planning and Reporting
Real Estate Taxation, Vol. 44, pg. 21, (4th Quarter 2016)
53 Pages Posted: 19 Jan 2017
Date Written: January 17, 2017
This article applies an expected-cost analysis to the type of tax-planning and reporting decisions that taxpayers often face. Expected cost considers the probability of paying an unreported tax and the amount of the possible future payment of the unreported tax. The article demonstrates that from an expected-cost standpoint, financial incentives will often motivate taxpayers to take positions that may be more aggressive than other reporting alternatives. Such decisions result even with a potentially higher probability of later paying the tax related to an aggressive position because the amount of tax at issue can offset the higher probability. The article demonstrates how the amount of tax issue and risk could affect reporting positions. The risk of penalties for understatements of tax often may not be sufficient to deter such reporting tendencies. Nonetheless, an integral part of conducting expected-cost analyses of multiple reporting positions is determining the probability that reporting positions will be respected. With the inability to accurately predict the outcome of an aggressive reporting position, taxpayers may choose to be relatively conservative in their use of the expected-cost analysis, reducing its effectiveness. Thus, any movement toward broader use of expected-cost analysis requires efforts to refine probability analysis and prediction models of tax outcomes.
Keywords: Partnership, Bramblett, Substantial Understatement Penalty, Condominium Conversion, Dealer Property, Capital Gains
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