Overstated Basis Causes Understated Income However …..

The lesson I learned today is that an overstatement of basis (cost of an asset) could result in an understatement of income in the future when the asset is sold but is not necessarily the same as under reported income that, if in excess of 25% of reported income, would subject your tax return to a six-year statute of limitations for assessment of taxes, penalties + interest under §6501(e)(1).

The IRS’s position on overstating basis is that when the asset is sold the gain on the sale would be understated resulting in an omission of income. The Tax Court’s position as far as I can tell generally disagrees with the IRS and not all district courts seem to be on the same page either.

As such because of this confusion in the judicial system it is always best to keep precise records on the purchase of assets along with any adjustments that may affect the basis of the assets (ie improvements, depreciation expense). These records will provide tremendous support when determining the gain or loss after disposing or selling the asset.

Another reasonable report worth considering is disclosing the transaction and attaching supporting documents that provide a record of basis and adjustments to the basis. These documents will support the assessment period of the regular three-year statute of limitations.

John R. Dundon, EA [720-234-1177, John@JohnRDundon.com]. John is a lifelong student of the US Tax Code; enrolled with the United States Treasury Department to practice before the IRS (Enrolled Agent # 00085353); under contract with the IRS as a Certified Individual Taxpayer Identification Number (ITIN) Acceptance Agent; regulated under USC 31 Section 330 & USC 26 Section 7525a.3.A; governed under US Treasury Cir. 230.

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Posted in Asset Classification, Basis, Business Expense, Rental Real Estate

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