Our tax code is extremely complex with rules and regulations that can often catch a taxpayer by surprise. There is nothing sadder than informing a taxpayer of a large tax liability he or she has incurred that could have been avoided.

The tax code includes provisions for several types of “tax election” that can save a taxpayer money in the future. However, to take advantage of the election, the taxpayer ordinarily must declare the election on the current return and cite the appropriate code and regulations.

A divorce can create several tax traps. In many cases one spouse will buy out the other spouse’s share in the family home. However, when it comes time to sell the house, this owner cannot include the amount paid to his or her ex-spouse as part of the cost basis of the house.

Often a pension, or IRA, is split between the two spouses. Unless the distribution is done via a properly drafted QDRO (Qualified Domestic Relations Order) the entire amount will be taxable to the paying spouse, often with federal and state premature distribution penalties added on.

Many taxpayers are forming limited liability companies (LLC). As with partnerships and S-Corps, an $800 franchise fee is due for each year or fraction of a year. However, the franchise fee is due by April 15 of the current year, or when the business begins, if later.

The fee is due every year therefore, until a certificate of dissolution is filed with the California Secretary of State’s office.

Many taxpayers when facing a large liability decide to file late so the government won’t bother them for payment. Filing late will result in a penalty of 5 percent per month up till 5 months and then 1⁄2 percent per month thereafter. This is in addition to the 1⁄2 percent per month penalty for failure to pay, plus interest.

Sometimes retirees 70-1⁄2 years and older are tempted to skip an IRA distribution for a year in which they don’t really need the money. Doing so can result in a penalty of 50 percent of the required minimum distribution.

Often taxpayers don’t keep track of their business mileage because it is a bother and just estimate the mileage. Upon audit, this is one of the first things an auditor typically asks for. Without a log, the mileage deduction is normally disallowed.

Offices in the home are considered to be a red flag and an audit risk. Although they marginally increase the risk of audit, offices in the home are just one of several factors when selecting returns for audit. You may not want to forgo the potential saving due to the overinflated perception of audit risk.

Passive activities such as limited partnerships are subject to a dazzling array of complex regulations. Upon dissolution, taxpayers can be subject to tax on “phantom income” that they never even received.

When a partnership ceases, the entire history of the partnership and yearly tax reporting often must be analyzed. On the other hand, suspended losses are freed when a limited partnership or rental is sold or terminated.

Much like with quicksand, when treading through our tax codes you can suddenly find yourself in trouble.

The best defense is to be well-informed and have the benefit of the best professional advice.

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