Don’t Fall Into a Tax Trap / These Hidden Hazards Can Cost Taxpayers Money—or Get Them in Trouble With the IRS

Laura Saunders for the Wall St Journal writes: With taxes, what you don’t know can hurt you.

Consider the case of Joseph Mohamed, a real-estate developer in Sacramento, Calif. In 2012, Mr. Mohamed and his wife, Shirley, were denied a deduction for charitable donations of property worth $18.5 million by the U.S. Tax Court—on a technicality.

The loss still stings. “It left me with a very bad feeling about my country, although I served 32 years with the Army,” he says. “I followed their instructions explicitly, and we were penalized so heavily.”

The couple had contributed valuable properties to a trust for the benefit of charities such as Shriners Hospitals for Children, a Sacramento food bank and the Pacific Legal Foundation.

The judge said he had to side with the Internal Revenue Service and denied the Mohameds’ deduction because they didn’t secure independent appraisals for the gifts before filing their return—which the law requires for noncash donations greater than $5,000.

It didn’t matter that qualified appraisals later valued the properties at more than $20 million at the time of the donation, or that the instructions on the IRS form could be confusing to nonexperts like Mr. Mohamed, who prepared his own return. Despite these facts, the judge said, Congress put specific language in the law and he couldn’t undermine the rules, even though it was “a sympathetic case.”

Mr. Mohamed says he didn’t appeal the decision because of the time and money involved, even though he believes the IRS didn’t follow its own rules. “I’m 86 now, and they told me it could take years and at least $1 million,” he says.

With tax season in full swing, the Mohameds’ misfortune is a reminder of hazards that can trip up taxpayers—although, to be sure, fewer dollars typically are at stake.

These errors aren’t the obvious bloopers that cause trouble, such as entering income information incorrectly or misstating Social Security numbers. Instead, they are tricky issues that often confuse taxpayers who do their own returns—and even some paid preparers—and cause people either to overpay Uncle Sam or invite an IRS challenge.

Here are issues to be aware of, starting with those that are new this year. SNIP, the article continues @ the Wall St Journal, click here to continue reading...