The biggest lesson? Contracts, invoices, and good record-keeping are as important with family or related parties as anywhere else. In fact, perhaps there’s a bigger reason for being scrupulous with family and related parties: to save yourself headaches with the IRS.
Are you spending any time and money taking care of your parents? Do you intend to take any tax deductions for your assistance? If yes, then mind your recordkeeping or you may forego the deductions. The case of Estate of Olivo v. Commissioneris most instructive.
Forbes examined the Olivo case in an article titled “Mother’s Day? Son Claims $1.2M Tax Write-Off For Helping Mom.” From the title of the article, it is clear that the son may have been a bit generous in his claim. To make matters even more interesting, the son was a tax attorney.
Background: Anthony Olivo was the son/tax attorney. He took nearly ten years away from his law practice to care for his parents. Accordingly, Anthony lost his law practice income. However, he did collect fees from his parents for managing their estates. When Anthony’s mother died, he sought to deduct $44,200 in administrator’s fees, $55,000 in accountant’s and attorney’s fees, and a whopping $1,240,000 for a near-decade’s worth of lost wages (he did manage his own firm, after all).
The IRS raised an eyebrow, and then raised it further when they took a look at his documentation of all of these fees and amounts. Problem: there was no contract, no invoice, and no evidence. Not good. Even when Anthony was handling the estate and filing the tax return he didn’t keep track of his time and just estimated. Also, not good. In reality, not everything claimed may have been deductible. Nevertheless, the lack of recordkeeping killed any chance for success. If you and your loved ones are entering a period of caregiving, then a little forethought and planning can go a long way. In the end, a little recordkeeping can be the deciding factor in making your claim.
You can learn more about this topic as well as other strategies on our website under the tab entitled: elder law planning in Virginia. Be sure you also sign up for our complimentary e-newsletter so that you may be informed of all the latest issues that could affect you, your loved ones and your estate planning.