Tax Return Position
A “tax return position” refers to a stance or decision a taxpayer takes on a tax return with regard to the treatment of a particular income, deduction, or credit. Essentially, it’s an interpretation of tax law as it pertains to a specific situation on a taxpayer’s return.
A tax return position could involve:
- How to report income (e.g., whether a certain income is considered taxable or non-taxable).
- How to classify an expense (e.g., whether it’s a capital or ordinary expense).
- Whether a taxpayer qualifies for a particular tax credit or deduction.
- How to value a deduction or credit.
- How to interpret a specific tax law or ruling, especially in areas where the law may be ambiguous or open to interpretation.
Tax return positions are important because the interpretation or stance taken can significantly impact the amount of tax owed or the refund due. Furthermore, the validity of the tax position can determine if it withstands scrutiny should the tax return be audited by tax authorities.
In the world of tax preparation and auditing, there are often standards or thresholds for what constitutes a “reasonable” tax return position. For example, in the U.S., the Internal Revenue Service (IRS) and the American Institute of Certified Public Accountants (AICPA) have guidelines concerning the level of confidence (often referred to as the “confidence threshold”) a tax preparer should have in the legitimacy of a tax position before advising a client to take that position on a return.
Taxpayers and tax professionals must evaluate the risks and merits of various tax positions, especially in areas where the tax law might not be clear-cut. Taking aggressive tax positions can open up taxpayers to potential audits, penalties, and interest if the position is subsequently disallowed.
Example of a Tax Return Position
Let’s consider a hypothetical scenario to illustrate the concept of a tax return position.
Example: Deduction for Home Office Expenses
Background: Jane is a self-employed graphic designer who works primarily from her home. She has a dedicated room in her house where she does all her work. During the year, she incurs various expenses related to her home office, such as utilities, rent, and office supplies.
Tax Return Position: Jane believes she can deduct a portion of her home expenses as a home office deduction. The tax law allows for such deductions if specific criteria are met, one of which is that the space must be used exclusively and regularly for business.
Scenario: Jane occasionally uses her office space to entertain personal guests over the weekends, even though it’s rare.
Decision: Jane’s tax advisor reviews the situation and feels that because the room is not used “exclusively” for business purposes (given the occasional personal use), claiming the full home office deduction might be risky. This interpretation or stance on how to treat the home office deduction is the tax return position.
However, the advisor also notes that the personal use is infrequent. They could potentially argue that the primary and principal use of the space is for business, allowing Jane to claim the deduction with some level of confidence.
Outcome: After discussing the potential risks and benefits, Jane decides to claim the home office deduction but ensures she meticulously documents all her expenses and the business use of her home office in case of any future inquiries or audits.
This example highlights the importance of interpretation and judgment in determining a tax return position. Jane and her advisor had to weigh the potential tax benefits of claiming the deduction against the risk of it being disallowed if reviewed by tax authorities.