Tax Court Ruling Highlights Impact of Non-Filing on Itemized Deductions

May 05, 2022

By Daniel Gibson

Recently, a U.S. Tax Court case, Salter, T.C. Memo 2022-029, highlighted the importance of filing a timely return and the effects that non-filing can have on itemizing deductions.

According to the IRS, the taxpayer (Mr. Salter), failed to file his 2013 tax return. Salter insisted that he filed the return using third-party software, though he could not provide evidence that the return was sent nor received by the IRS. Nonetheless, the IRS had no record of the filing and eventually filed a substitute return, which meant the IRS prepared a return from third-party reporting and took the standard deduction. Eventually, the taxpayer filed a return to override the return filed by the IRS, which now included itemized deductions instead of the standard deduction. The IRS rejected the return due to the itemized deductions. The standard deduction for the year of the filing was $6,100.  Salter claimed to have approximately $25,000 of itemized deductions and took his case to the Tax Court.

To file a return that includes itemized deductions, Internal Revenue Code Sections 63(e)(1) and 63(e)(2) specify that:

  • Unless an individual makes an election under this subsection for the taxable year, no itemized deduction shall be allowed for the taxable year.
  • Any election under this subsection shall be made on the taxpayer’s return, and the IRS Secretary shall prescribe the manner of signifying such election on the return.

In other words, the election to itemize deductions on a return hinges on the action taken by the taxpayer to file a return and then include itemized deductions, which is the election.

The Tax Court ruled that if no return is filed and, as a result, the IRS prepares a substitute return, then the individual has made no election and may not claim itemized deductions.

This case effects non-filers who have allowed their delinquency to cause the IRS to file a substitute return for them. Once that happens, the taxpayer has no other choice than to use the standard deduction.

 

About Daniel Gibson

Daniel Gibson provides accounting, tax planning and consulting services to real estate and services industries and is a member of the AICPA and New Jersey Society of Certified Public Accountants.