Taxes and the Bar Exam

Let’s talk about taxes today.

If you forgot to file your taxes during the early days of the Covid-19 pandemic in 2020, you have until Monday to do so. Hopefully, you haven’t forgotten, as failure to pay taxes is usually a reportable conduct on many jurisdictions' character and fitness bar applications.

Nearly 1.5 million taxpayers may still be eligible for a tax refund from tax year 2019, according to the Internal Revenue Service. This means that almost $1.5 billion in refunds remain unclaimed.

By law, taxpayers normally have three years to file and claim their tax refunds. But the 2019 filing season, which fell early during the Covid-19 pandemic, was pushed back 90 days.

Hence, Monday, July 17, is the three-year deadline.

There is no penalty for filing late if a taxpayer is owed a refund, according to the IRS.

Here are some ways you might see taxes on the bar exam:

Constitutional Law

To have standing, a person needs to show an injury in fact, which requires both: (1) a particularized injury—an injury that affects the plaintiff in a personal and individual way; and (2) a concrete injury—one that actually exists. People have no standing merely as “citizens” or “taxpayers” to claim that government action violates federal law or the Constitution because the injury is too generalized. However, taxpayers have standing to challenge their tax bill.

Family Law

What are taxable events when a marriage ends? Property division and child support payments are not considered taxable events. Also, under current law, spousal support is not a taxable event. However, for divorce or separation instruments executed before 2019, spousal support payments are deductible by the payor and are income to the recipient unless the instrument is modified to follow the current rule.

Business Associations

Partnerships and LLCs are taxed on a “pass-through” basis. There is no entity-level tax; instead, business income is passed-through to the owners and reported on the owners’ individual tax returns (regardless of whether that business income is actually distributed to the partners). By contrast, a corporation is subject to “double taxation.” The corporation pays taxes on its income, and the shareholders pay taxes on that income again when and if it is distributed to them. Pass-through treatment usually results in less taxes paid.

Wills

A will beneficiary cannot be forced to accept an inheritance or gift under a will. The heir or beneficiary can disclaim an interest. Why would a beneficiary forego free property? To avoid taxes on the receipt of the potential gift.