The experience of the taxpayer in Beach v. Comr., T.C. Summ. Op. 2012-81, demonstrates how easy it is for a taxpayer to make errors when filing a federal income tax return. Compounding the situation was an error made by the IRS.

The taxpayer owns a 2001 Saleen Ford Mustang. On February 6, 2007, it was damaged in an accident caused by an uninsured motorist who was at fault. The taxpayer’s adjusted basis in the ImageMustang was $25,482. It was worth $28,500 immediately before the accident and $2,250 immediately after the accident. The auto body shop determined that the cost of repairs would be $18,772.79, and taxpayer’s insurance company, after subtracting the $250 deductible, paid $18,522.79 to the auto body shop. The insurance company then initiated attempts to recover $18,772.70 from the uninsured motorist. The auto body shop returned the repaired Mustang to the taxpayer on June 29, 2007.

The taxpayer claimed a $17,287 casualty loss on his 2008 federal income tax return. The taxpayer did not enter any amount on the line for insurance or other reimbursement.

On December 10, 2010, the IRS issued a notice of deficiency for 2008, because of the taxpayer’s failure to subtract the insurance reimbursement. After the taxpayer filed his Tax Court petition and the IRS filed its answer, the IRS moved to amend its answer in order to add a second reason for its determination of a deficiency, specifically, that the casualty occurred in 2007 and should not be reported on the 2008 return.

The Tax Court concluded that any casualty deduction should be deducted in 2007. In fact, at trial, the taxpayer admitted that he “filed in the wrong year.” In addition, the Tax Court concluded that even if the deduction was proper in 2008, it would amount to zero, because the $250 remaining after subtracting the $18,522.79 reimbursement did not exceed 10 percent of the taxpayer’s adjusted gross income.

The IRS also determined that the taxpayer was liable for the 20 percent accuracy-related penalty. The IRS, having the burden of proof, argued that the taxpayer was negligent or disregarded rules or regulations. The Court concluded that the taxpayer was liable for the penalty because the taxpayer failed to subtract the reimbursement, thus failing to exercise ordinary and reasonable care in the preparation of the return. Petitioner’s attempt to avoid the penalty by arguing that he had not received a reimbursement because the insurance company had not paid him anything failed, because reimbursement can occur when payment is made to a third party on behalf of the taxpayer, as happened in this instance when payment was made to the auto body shop.

It is not merely a tax law proposition that a person who is out of pocket $250 does not suffer a $17,287 loss. It is not merely a tax law proposition that a person does not suffer a $17,287 loss if an insurance company pays all but $250 of an $18,772.79 accident repair bill. Even if there had been a deduction, reporting the transaction on the wrong return compounds the error. It is unclear why the taxpayer waited until early 2009 to report a 2007 transaction. And yet the taxpayer was not alone. The IRS did not pick up on the improper year issue until after it had filed its answer in the Tax Court. The IRS, however, was not subject to any sort of accuracy penalty. It pays to be careful.