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Tax Notes – Getting Ready to Defend the Material Participation IRS Examination by LACEY STRAHAN

In this article, Lacey Strachan discusses how taxpayers can defend a claim of material participation during an IRS examination.

Although taxpayers are allowed deductions for some business and investment expenses under sections 162 and 212, section 469 generally prohibits an individual taxpayer from deducting any passive activity loss for the tax year in which the loss is sustained, suspending the loss until a subsequent tax year.1 A passive activity is defined generally as (1) any activity involving the conduct
of a trade or business in which the taxpayer doesn’t materially participate and (2) any rental activity, regardless of the extent the taxpayer participates in the rental activity.

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