No Thanks, Uncle Sam, You Can Keep Your Tax Break
James Edward Maule
Villanova University School of Law; TaxJem, Inc.
Seton Hall Legislative Journal, Vol. 31, No. 1, 2007
Villanova Law/Public Policy Research Paper No. 2006-18
This article examines the question of whether a taxpayer is permitted to forego a deduction or credit for which the taxpayer otherwise qualifies. There are many reasons why taxpayers might choose to ignore a deduction. In some situations, the alternative minimum tax computations cause a deduction to increase, rather than decrease, tax liability. A taxpayer whose non-business deductions exceed income has no use for additional deductions. There are instances when the tax cost of giving up a deduction is less than the tax benefit thereby made available to another taxpayer, or less than a non-tax financial benefit available to another person if the taxpayer does not claim that person as a dependent. Taxpayers may disregard deductions or credits because the benefit of the deduction or credit is less than the anticipated cost of an audit, or because they wish to keep private the information supporting the claim.
The question is important because the number of taxpayers facing it on account of the alternative minimum tax phenomenon is increasing rapidly. Similarly, Boeing's recent announcement that it would not deduct the amount it has agreed to pay in settlement of several charges brought by the Justice Department even though it considers it deductible has pushed the question into a brighter spotlight.
The article explores the statutory language, the few IRS issuances and judicial opinions that address the question in specific, narrow instances, the small bit of applicable legislative history, and concludes that by answering the question one way or the other, they require a more finessed answer to the question than yes or no. The article then explores specific instances in which deductions have been ignored by taxpayers, and identifies those situations in which the IRS and the courts has sanctioned failure to claim a deduction and those in which they have not. Careful analyis of the practical challenges to requiring taxpayers to claim all allowable deductions suggests that an all deductions are mandatory paradigm would be unworkable because it could easily be circumvented with techniques of which the IRS is aware and which the IRS has not sanctioned, such as deliberate failure to maintain requisite substantiation and other records supporting the deduction. Finally, the article considers policy arguments for and against the proposition that all deductions are mandatory.
The article concludes that deductions are not mandatory other than in the computation of self-employment tax, as to which the IRS and courts have concluded deductions cannot be ignored, and other than the earned income tax credit which incorporates the self-employment tax computation concept. This conclusion is based on ample statutory evidence that allowable deductions will go unclaimed, on the failure of courts, aside from the self-employment tax situation, to compel taxpayers to claim all allowable deductions, and on the explicit and implicit approval by the IRS of disregarded deductions. The article suggests that aside from the two situations in which specific authority requires taxpayers to claim deductions, there is no reason for taxpayers who wish to forego deductions to hesitate in doing so.
Number of Pages in PDF File: 53
Keywords: tax, taxation deduction, deductions, credit credits allowed, allowable mandatory optional elect, election AMT
Date posted: September 10, 2006