Tax Law I common mistakes
Tax Law I · Understand the traps and how to avoid them.
Applying a Code section from memory without running it through the prescribed authority hierarchy, so a Treasury Regulation, revenue ruling, or IRS publication is cited as if it carried the same weight as the statute itself.
Candidates memorize substantive rules but skip the procedural step of ranking authority, and IRS publications and FAQs read like authoritative statements, so they get quoted as binding law in research answers.
What to do instead
Force every research answer through a fixed ranking: Constitution, then Internal Revenue Code, then final Treasury Regulations (with legislative history as persuasive support), then court decisions (Supreme Court, circuit courts of appeals, Tax Court, district courts, with Golsen applied for Tax Court), then IRS guidance (revenue rulings and procedures, notices, private letter rulings which bind only the taxpayer addressed), then secondary sources. State the tier of each citation explicitly in the answer.
Treating a private letter ruling or a Chief Counsel advice memorandum as precedent that governs other taxpayers, or treating a Tax Court regular opinion as controlling in a circuit that has reversed it.
These documents are easy to find and are written in plain, quotable language, and candidates rarely check the document's stated precedential status or the Golsen rule before relying on it.
What to do instead
Before citing any IRS document, check its stated effect: PLRs and CCMs under section 6110(k)(3) may not be used or cited as precedent. For litigation, check whether the taxpayer's circuit has spoken; the Tax Court follows the law of the circuit to which an appeal would lie (Golsen v. Commissioner). Flag any citation that is merely persuasive.
Computing gross income by adding up cash received and stopping there, omitting noncash benefits, employer-provided premiums, below-market loans, bargain purchases, and discharge of indebtedness.
Candidates equate income with deposits and receipts, and the inclusion rules for fringe benefits and debt forgiveness are scattered across many sections rather than stated in one definition.
What to do instead
Build a checklist for every fact pattern: cash, property and services at fair market value, employer-provided insurance and fringe benefits, imputed interest and below-market loans, bargain purchases from an employer, prizes and awards, and cancellation of debt. Then test each item against an exclusion (sections 101 through 139) and document why it is excluded if it is.
Classifying a deduction as trade or business, production of income, or personal without identifying the activity that generated the expense, then deducting personal or capital expenditures as ordinary business expenses.
The three categories share the same expense types, and candidates reach for the most favorable category rather than tracing the expense to the activity that produced it.
What to do instead
For each expense, write the activity it relates to and its classification before applying a limitation. Apply the ordering rules: capitalize under section 263 where the expense creates or enhances a separate asset or has a useful life beyond the year, then test for section 162 trade or business, section 212 production of income, or section 262 personal (nondeductible). Personal expenses are deductible only where a specific provision allows it.
Computing realized gain correctly but then failing to adjust basis for prior depreciation, capital improvements, or nondividend distributions before determining recognized gain and character.
Candidates focus on the sale price and original cost and treat the basis computation as a single subtraction, forgetting the adjustments in sections 1016 and 1012 that accumulate over the holding period.
What to do instead
Use a standing basis worksheet: original cost or other basis, plus capital additions and improvements, minus allowed or allowable depreciation, minus nontaxable distributions and casualty recoveries. Compute realized amount realized minus adjusted basis, then separately determine the amount recognized and its character. Always check whether depreciation taken was 'allowed or allowable' rather than only what was claimed.
Characterizing every gain on a sale as capital gain without testing the holding period, the nature of the asset, and whether depreciation recapture recharacterizes part of the gain as ordinary.
Candidates learn capital gain as the default favorable outcome and do not systematically run the section 1221 and 1231 screens or the recapture provisions in sections 1245 and 1250.
What to do instead
Run a fixed sequence: is the asset a capital asset under section 1221, is it property used in a trade or business under section 1231, has it been held more than one year, and does section 1245 or 1250 recapture apply. Compute section 1245 ordinary income as the lesser of gain realized or depreciation taken, then apply the section 1231 netting rules to what remains.
Mixing cash-method and accrual-method concepts in one computation, such as deducting an accrued but unpaid expense for a cash-basis taxpayer or recognizing income on an accrual-basis taxpayer only when cash is received.
Exam fact patterns include both methods, and candidates default to the cash method because it matches everyday intuition about paying and receiving money.
What to do instead
State the taxpayer's method at the top of every computation. Under the cash method, recognize income when actually or constructively received and deduct when paid, applying economic performance under section 461(h). Under the accrual method, apply the all-events test and the matching requirement, and remember the section 448 limits and the section 451 rules on advance payments. Check inventory and section 263A capitalization separately.
Selecting filing status based only on marital status at year end without testing the qualifying person requirements for head of household or the special rules for married filing separately and qualifying surviving spouse.
Candidates remember the 'married on December 31' rule and apply it as the whole analysis, then overlook the support test, the household maintenance test, and the requirement that the qualifying person be closely related.
What to do instead
For each status, list and confirm every statutory element: for head of household, unmarried or considered unmarried, a qualifying person, and more than half the cost of maintaining the household; for qualifying surviving spouse, the dependent child and the joint return in the year of death. Check the married filing separately restrictions on credits and deductions before recommending that status.
Ignoring Circular 230 obligations in a practice scenario, such as failing to advise on the accuracy of a return position, signing a return without a reasonable basis, or missing the requirement to submit information and cooperate with an IRS request.
Candidates treat Circular 230 as background reading and do not connect its duties to concrete client situations presented in the exam.
What to do instead
Map the scenario to the specific Circular 230 duty: section 10.21 requires advising the client of the consequences of an error or omission; section 10.34 addresses standards for signing and advising on positions; section 10.22 requires reasonable diligence; section 10.20 requires prompt submission of requested information. State the duty, the conduct, and the consequence in each answer.
Missing deadlines and procedural steps in a controversy scenario, such as the 30-day period to petition the Tax Court after a notice of deficiency, the 90-day period where the notice is addressed outside the United States, or the 3-year assessment period under section 6501.
Candidates focus on the substantive tax issue and treat procedure as a formality, so they answer the merits without noting that the taxpayer's remedy has already lapsed.
What to do instead
Keep a deadline table and apply it before analyzing the merits: notice of deficiency petition period, assessment statute of limitations and its exceptions, collection due process hearing rights, and the refund claim period under section 6511. In every controversy answer, state the deadline, whether it has run, and the remaining remedy.