Wednesday, February 22, 2012

Interpretation Inclusionary Tax Benefit Rule by IRS

Inclusionary Tax Benefit Rule

What happens when taxpayer has a tax benefit that is based on an incorrect assumption and later finds out that assumption is fundamentally inconsistent with the taxpayers current tax position?

The Tax Benefit Rule is often a completed transaction that will reopen unexpectedly in a subsequent tax year, rendering the initial reporting by the taxpayer improper.

The policy behind making an adjustment is recognizing and seeking to avoid the possible distortions of income. Courts and the Internal Revenue Service require  the taxpayer to recognize the repayment as income in the current tax year to fix the anomaly

The basic purpose of the tax benefit rule is to achieve rough transactional parity in tax, and to protect the Government and the taxpayer from the adverse effects of reporting a transaction on the basis of assumptions that an event in a subsequent year proves to have been erroneous.

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