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Hey there, fellow real estate investors, FIRE enthusiasts, and tax aficionados! Welcome to "Real Estate is Taxing" – your go-to weekly podcast for all things real estate taxes, hosted by Natalie Kolodij, EA- Real Estate Tax Strategist and dry humor extraordinaire.
Each week, we're breaking down complex tax topics into bite-sized, understandable explanations, with no regard for how many obscure references it takes to get there.
Speaker: Welcome to Real Estate is Taxing,
where we talk about all things real estate
tax and break down complex concepts into
understandable, entertaining tax topics.
My name is Natalie Kalady, I'm
your host, and I am so excited
that you've decided to join me.
Microphone (Shure MV7): Hello.
Hello everyone.
Welcome to today's episode.
I would like to start by
taking you guys with me.
On a little journey.
Into Facebook.
I've been in a Facebook group
before for tax professionals.
Where in response to a question.
A another tax professional will
provide something from the IRS website.
Or I have been in Facebook
groups for real estate investors.
Where someone will ask
a tax question that is.
Incredibly complicated.
Only to be met with multiple
responses of how easy this is and
it walks you right through it.
In an IRS publication.
Well, these are both
some type of guidance.
Neither of these.
Our authority.
So in today's episode.
I'm going to walk you guys through.
What the various levels of authority
are when it comes to taxes.
And what you can rely on.
When you're looking at all of these
different forms of information.
It's kind of like a game
of rock, paper, scissors.
There's always something
that trumps something else.
So just because it might
be easier to find a rock.
Doesn't mean it's going to be paper.
Microphone (Shure MV7)-3: So now that
we've established that there is very much
a hierarchy when it comes to guidance.
Let's start at the top.
When it comes to who
creates these tax laws?
It's the same people who
create all of our laws.
This all has to come from Congress.
The IRS is not who writes
or creates tax laws.
All of the tax laws are combined.
Into what we call the
internal revenue code.
The IRC.
When you see part of the internal
revenue code sighted, it's going to
start with two little squiggly SS.
This is typically called a
section mark or silk Crow mark.
So it looks like two
overlapped squiggly SS.
And then it'll have a code
section and some subsections.
So it might be Silkroad,
mark squigglies, 4 69.
E three.
Whatever those section is,
and that's going to be.
Your top, most authority on a tax matter.
Is that literal code?
Now.
I don't know if you've ever tried
to just read through laws as they're
written, but it's not very intuitive.
And it's a learned skill.
So even though the internal revenue
code is your top source for proof.
It's hard to interpret and read.
And just apply to any
normal day-to-day situation.
That's why we then have
these lower sources.
Of guidance that while
they're less authoritative.
Break things down, farther and
farther into everyday English.
Microphone (Shure MV7)-5: The first
source of this interpretation is going
to be the U S treasury regulations.
This is where the treasury department and
the IRS goes in and they provide guidance.
For this new legislation or for things
that are passed in the tax code.
They're typically published
in the federal register.
And opened up for public input
first as a proposed regulation.
And then eventually.
They will lead to a final regulation
or sometimes a temporary regulation.
And then they republish that as well.
Treasury regulation is still
considered authoritative.
When it comes to something you
can use to form a tax position.
When you see a treasury regulation,
it's going to look really similar to a
citation from the internal revenue code,
but it'll typically have a one dot.
And then a code section.
So instead of the double squiggle yes.
That Silkroad symbol.
And then.
Code section 4 69 E three.
It would be something like one dot 4 69.
B seven.
Microphone (Shure MV7)-6: These treasury
regulations are going to give you
a good place to read more expanded
information on that code section.
And they typically have several
examples that walk through applications
of that tax code section as well.
when I'm saying whether
something is authority or not,
or if it can be relied upon.
Anything you're putting on a tax return
is a position you are taking a stance
that you are allowed to do something.
And something that is authority is
what you are basing that position on.
So once we get past the internal revenue
code, the treasury regulations that
further expand on it, give some examples,
explain it a little more clearly.
We then have a lot of different courts.
That we can use for some guidance.
So historical authority from different
court rulings, judicial authority.
Gives us multiple areas that we can see.
How the courts have interpreted
these laws historically.
And depending on how similar the facts
are and if it is in the same circuit.
We can have different levels of
reliability of the, those decisions.
Obviously the highest court
we have is the Supreme court.
But more often what you're typically
going to seek guidance come from.
We'll be the U S tax court.
you'll also see quite a bit come
through in some district courts, but
also through the court of appeals.
So being able to look
back at these court cases.
And correctly apply
facts and circumstances.
And the specifics of the case that led
that court to rule one way or another,
what facts they specifically focused on.
What code sections, they referenced
back to what earlier cases they
referenced back to is going to help
you substantiate and really define
your position on something tax wise.
Because it is based on judicial history,
it is based on something that has been
looked at and interpreted by the courts.
And you have some guidance
on how they feel about it.
Once we've looked at all of these options.
Now we're down to the area where
the IRS really comes into play.
And I've seen more than once.
Where someone will post an
internal revenue code section.
Defining a matter and someone's rebuttal.
Is like the IRS FAQ or
the IRS publication on it.
Again, it's a rock paper
scissors scenario here.
And if the internal revenue code is paper.
An IRS publication is a rock.
So you could not use it to argue
against the highest guidance.
It's an interpretation of that.
And it's pretty well
watered down at that point.
When you consider.
That the us tax code is over 70,000 pages.
There's obviously a dwindling
down of the information.
This is its purpose is to summarize.
So taking the spark notes
version of something.
And using it to argue a very specific
sentence from the actual book.
Doesn't work.
It doesn't work here either.
Once we get into the layers
of what the IRS provides.
And their levels of authority.
At the top, we have revenue rulings.
These are an official IRS interpretation
of an internal revenue code.
And these we can use as authority.
Below that is a rev
proc revenue procedure.
And this is also an interpretation.
But this is more on the how to, so
this is how to comply with that law.
And you can also use this as authority.
So these are your two.
Highest and best uses of IRS guidance
that can still be relied upon.
Once we get below that.
We start to get a little hazier.
The IRS can also issue
private letter rulings.
And this is basically a written statement
by the IRS to interpret a facts and
circumstances of the law ahead of time.
As it relates to a specific
taxpayer it's something, a specific
taxpayer submits to have done.
And it is not something that
you can rely on as authority.
For any other person.
they are made public after.
Everything was issued.
But it's just for informative purposes.
It's not something you can base your
own position on your tax return about.
So even if you find a private letter
ruling online, that is the exact same
circumstances as your tax situation.
You can not rely on that for authority.
Microphone (Shure MV7)-7:
In kind of the same bucket.
We also have technical advice memorandums.
So these are provided by the office of
chief counsel and it's of request or
based on a request from an IRS director or
something related to appeals in response
to a specific technical issue where
their deans to be more in depth guidance.
So a very similar thing here.
it's just overall guidance.
So any of the items in this
category, Like your private letter
rulings, your technical advice,
memos, your chief counsel memos.
These can't be leaned on
as substantial authority.
They're more just provided to give you
insight to certain issues and they might
reference back to items or court cases
that could be substantial authority.
So there are a great starting point.
But you can't hang your hat
on one of these IRS positions.
It's not going to be authoritative
for the position you are
taking on your tax return.
Then at the very, very,
very bottom of the list.
Is what we see most often referenced.
This area is going to be IRS forms.
The form instructions.
IRS publications.
The FAQ's.
Information that is
provided on the IRS website.
So any of this is only for guidance
and it should not be your sole piece.
Of information.
Any of these items are a clarifying
simplified spark notes version.
Of multiple levels of specific law and
higher interpretation and court cases.
And once it is all pulled together.
Into the recap.
That's what the sources are.
So IRS publications are something
that get referenced incredibly often
and they are a great starting point.
Or a great place to understand
the basics of something.
If it is a cut and dry,
very standard scenario.
It will not have coverage of every
nuance of that tax code section.
It won't even cover most of them.
It's going to break out the simplest
forms of each of these things.
And it's going to highlight the
steps to find out how to apply it.
And often there will be worksheets
or graphics and things to really help
someone who is not a legal expert.
Figure out.
The general.
Intention of this code, what
you generally can and can't do.
So, well, IRS publications are fantastic
and they are a great place to understand
the big picture of what you're facing or a
great starting place for your information.
It is not substantial authority.
So if you are audited, And there have
been multiple things, multiple situations
I've come across where something in
the tax code versus what's in the
publication or what is on an IRS form.
Instruction are different.
Where something is outdated or
where it oversimplified something.
And if you say under audit
that, well, I did it because
this publication said I could.
That's not going to be.
Authority, you can base your position
on, so that can be disallowed.
Because again.
These publications are really just.
The super simplified
interpretation of the actual law.
And so it's not your encompassing guide.
Microphone (Shure MV7)-8: If you are
a tax professional, listening to this.
And you weren't aware at all of
these various levels of authority.
No shame.
It is not common at all for this to be
taught or emphasized at a lot of firms.
And if you are a solo practitioner,
you're someone who went out on your own.
And you're new in the industry.
You wouldn't know this
without someone telling you.
So consider this your starting point
that if going to the IRS website or
going to publications to find your
answers is your current standard.
That that is not what you can
actually base the tax returns on.
And do you need to start being able to
trace your way up the fact sheet going
from those publications up into some of
the court cases that interpret something.
Reading the treasury regulations
and even going to the actual tax
code, because those are going to be
your substantial authority pieces.
You need to be able to say.
If a client's return is questioned.
We took this position.
I felt I could do this because of
this code section says this, this and
this, and in a similar court case,
this court felt this way about it.
Another case felt this.
And this is all of my proof.
Well, the publications and IRS website
are great for simplified quick reference.
I understand that a lot of tax prepares
focus on getting through a lot of tax
returns during season, but this is
the downside to that volume model.
Is that you don't have time
to do actual research without
going deeper than the summary.
And summaries are just that.
And they easily miss unique situations.
And you're always going to
run into unique situations.
We've worked our way from the top down.
Congress makes the laws, those laws
are in the internal revenue code.
That is your holy grail of tax guidance.
From there, we have the
treasury regulations.
This is where the treasury
department and IRS directly
interprets that code expands on.
It gives you examples.
That is a fantastic place
to get more guidance.
We go down into court cases and how courts
have looked at these issues historically.
And then we go into that
IRS simplified information.
that is very broad and can't
be relied on for proof.
But we'll help guide you
through how to handle things.
basically the spark notes version.
Of that classic novel.
So it is helpful and it
gets you through the class.
But you are missing a lot of
the important information.
At the very, very, very
bottom that I shouldn't even
have to mention, but I will.
It's going to be things.
Like.
Blogs, YouTube videos, social media posts.
Even CE classes, if you're a tax
professional and you take a CE class to
get your continuing education credits.
That's not authority.
It's a great way to learn.
But I have come across plenty of
classes with mistakes in them.
So you are best served to find classes
that have actual citations in them.
Or where the instructor provides a
good supplement with citations, because
that's what you need to rely on.
So if you come across, an article from,
even if it's an accounting publication,
or if you're an investor listening to
this, and there's something posted on
an investor website related to taxes,
even if it is published by someone
you would consider to be reputable,
you can't lean on that at all.
So a great starting point.
If you come across a video, Where
they say something interesting
or it's something that tax wise
you're like, oh, I didn't know.
I could do that.
Wonderful.
It's whole purpose should be to
spark that piece of interest.
And then you have to go find the
actual sources that either prove or
disprove what that person is saying.
Remember that everyone making content.
Has a motive.
It's not always to put out the most
clear, concise and accurate information.
Sometimes it's to put out the
most exciting 3%, even if it
might be a little misleading.
Because you're more likely to click on it.
So those things should only be
your starting point to lead you
back up these levels of actual
authority for tax matters.
And I will end this episode with
just a note to tax professionals
who might still be listening.
That if you have a client come in.
And they send you one of those
videos or they bring in an article.
Or they open their phone
and show you a tick talk.
I know a lot of professionals
who blame everything on that.
Bad social media advice.
They heard this crazy thing on Tik TOK.
They need to stop Googling things
and looking on the internet.
They're just finding stuff on Instagram.
And while some of that might be justified.
Most of that bad information
stems from something.
So even if what they've shown you.
Sounds so obscure.
That you want to just dismiss it.
There's a good chance that there's
some amount of truth in that tax
strategy or that creative thing,
or whatever was said in that video.
The idea of why they could
do that came from somewhere.
So try to find out what that is.
It might be something you don't know.
Or it might be something where, what
the video is saying, isn't quite right.
But what it really means is this.
And they could maybe use this tax
strategy if they also did a, B and C.
So just my final note, if you're
a tax professional, don't be
so quick to dismiss things.
Clients find on social media.
It all comes with some
little tidbit of truth.
And I think it is our job to hunt
it and figure out what that is
so we can best help our clients.
As always, I hope you
guys found this helpful.
If you can think of a nother tax
professional who could benefit from
this episode, someone who is new
in their career, maybe, and they're
trying to learn how to better research.
Please share this with them.
If you liked it, please subscribe.
Give it a thumbs up, share it with
people you think would also enjoy it.
And as always.
I will talk to you guys next week.
Mhm.