About two weeks ago, one of my oldest clients had read another article about the increase in IRS audits. It prompted a simple but important question:
“How do you base your position in my tax plan, and how would you defend it in an audit?”
It got me thinking… this is something every business owner should understand. A solid tax strategy isn’t just about saving money – it’s about having a well-supported position that can withstand IRS scrutiny.
This also ties into two other articles I’ve written previously:
1. Picking The Right Professional!
2. What Is Tax-Planning?
So, why not break it down? That’s exactly what I’m doing here.
How Tax Strategists Defend Their Position Using the IRS Playbook
The difference between a tax strategy that saves you thousands and one that lands you in hot water? Knowing the IRS’s playbook. The tax code is full of opportunities, but not all of them are clear-cut. Understanding how the IRS interprets tax law can mean the difference between keeping your money and writing a check to the government.
Would you walk into a courtroom without knowing the judge’s rulings on similar cases? Then why would you take a tax position without knowing how the IRS has ruled before? The truth is, every deduction you take has been tested, challenged, and defined… if you know where to look.
Some business owners think tax law is black and white. Those who save the most money know it’s all about the shades of gray. The tax code isn’t just about what’s written – it’s about how it’s interpreted. That’s why tax strategists don’t just follow the law; they study how the IRS enforces it.
Disclaimer: I am not an attorney, and this article reflects my personal views and approach to tax strategy. Tax laws are complex and subject to change. Before implementing any tax strategy, consult with a qualified tax professional or attorney to ensure compliance with current laws and regulations.
The Statutory Foundation: What the Law Says
Every tax position starts with the statute. The Internal Revenue Code (IRC) is the foundation of all tax law, and understanding it is step one. For instance, IRC §280A(c)(1) outlines the conditions for deducting a home office. It states that in order to qualify, the space must be used exclusively and regularly as either:
- The principal place of business, or
- A place where the taxpayer meets clients, customers, or patients in the normal course of business.
That’s the rule. But tax strategists know the law isn’t just about what’s written – It’s about how it’s interpreted.
Treasury Regulations: The IRS’s Rulebook
Once we establish the statutory basis, we dig into the Treasury regulations. These regulations explain how the IRS enforces tax laws and provide clarity where the statutes might be vague. For home offices, Treas. Reg. §1.280A-2 expands on what “exclusive and regular use” means.
This is where many people stop. They think, “Great, I meet the statutory requirements, and the regulations support it. That’s enough.” But a tax strategist knows that the next step is where the real defense comes into play.
Tax Court Cases: Precedents That Shape the Rules
Statutes and regulations tell us what the law should mean, but tax court cases tell us what it actually does mean in practice. The IRS challenges taxpayers all the time, and when those cases go to court, they create precedent.
For example, in Soliman v. Commissioner (1993), the Supreme Court ruled against a doctor who claimed a home office deduction because he spent more time working at hospitals than at home. The IRS used this case to argue that a home office isn’t the “principal place of business” unless it’s where the most significant work is performed.
However, Congress later amended the law, making it clear that administrative work done at home can qualify if the taxpayer has no other fixed location for those activities.
This shows why strategists don’t just stop at the law… they look at how the law has been applied. Every deduction or tax-saving strategy has likely been tested in Tax Court, and knowing these cases strengthens our position.
IRS Guidance: How the Agency Views the Issue
The IRS doesn’t leave taxpayers guessing. They issue guidance in the form of Revenue Rulings, Revenue Procedures, Notices, and Announcements. These documents help explain how the agency interprets the law and can provide insight into which positions they’re likely to challenge.
For instance, Rev. Proc. 2013-13 introduced the simplified home office deduction, allowing business owners to claim $5 per square foot (up to 300 square feet) instead of tracking actual expenses. This guidance showed that while the IRS allows the deduction, they want it to be easy to verify and less prone to abuse.
Tax strategists reference these documents to understand the IRS’s stance on an issue before a return is even filed.
Private Letter Rulings: The Last Resort
Even after examining statutes, regulations, case law, and IRS guidance, sometimes a situation is unique. When a business owner faces uncertainty, there’s one more option: requesting a Private Letter Ruling (PLR).
A PLR is an official response from the IRS on how they would apply the law to a taxpayer’s specific set of facts. But it’s not a cheap or quick option. The filing fee alone is at least $20,000, and it can take six months or longer to receive a response. Plus, PLRs apply only to the taxpayer who requested them – they don’t serve as precedent for others.
However, previous PLRs are publicly available, and reviewing them can provide valuable insight into the IRS’s thinking on complex tax matters.
The Bottom Line: Building an Ironclad Defense
When tax strategists take a position, they don’t rely on gut feelings or guesswork. They start with the law, confirm it with regulations, test it against Tax Court cases, check IRS guidance, and, if necessary, look at private rulings. This process ensures that their clients’ tax-saving strategies are backed by a solid defense, reducing the risk of an audit and increasing the likelihood of success if challenged.
For business owners looking to maximize tax benefits while staying compliant, this is the kind of expertise that makes all the difference. If you want to see how I can potentially save you thousands of dollars… book a consultation today.
Welcome to the New Age of Accounting. Let’s begin.
Chris is the Managing Partner at Weston Tax Associates, a best-selling author, and a renowned tax strategist. With over 20 years of expertise in tax and corporate finance, he simplifies complex tax concepts into actionable strategies that drive business growth. Originally from Sweden, he now lives in Florida with his wife and two sons.
