Tax Smart Real Estate Investors Podcast

Episode 366: AI vs. The IRS – What Every Investor Must Learn from This Tax Court Case

Release Date: February 24, 2026
Hosts: Hall CPA team (Tom Wheelwright, Nate)

Episode Overview

This episode centers on a cautionary tale emerging from a recent tax court case (Clinko v. Commissioner), where a real estate investor (also an attorney and restaurant owner) found themselves in hot water after self-preparing tax returns, underreporting income, and, notably, referencing AI-generated (hallucinated) case law in court. The hosts draw out practical lessons for real estate investors around tax compliance, the dangers of AI “hallucinations” in legal research, the paramount importance of good bookkeeping, and why specialist CPAs matter in real estate investing.

Key Discussion Points & Insights

Podcast Updates & Announcements

[01:41]–[04:08]

• The show celebrates reaching 36,715 downloads per month, qualifying as a top 1% podcast globally—remarkable for a niche real estate-tax program.
• Hall CPA team announces upcoming mailbag-style live Q&A sessions and a new podcast: Major League Real Estate.
• Emphasis on providing value: “Our goal is to save you thousands of dollars per episode.”

The Tax Case: Clinko v. Commissioner

Case Background
[07:56]–[09:40]

• The subject: an attorney, entrepreneur & restaurant owner who self-prepared late tax returns (often 3+ years late) from 2015–2019.
• As a result, he was audited—”a recipe…for disaster” (Host 1, [08:57]).
• The taxpayer had two rental properties and managed both a restaurant and an attorney’s practice—multiple activities, increased reporting complexity.
• IRS flagged underreported income, focusing on both 1065 partnership (restaurant) and Schedule C/E filings.

Key Errors Found:

• Late Filings: Submissions were years overdue, raising audit likelihood.
• Bank Statement Mismatch: IRS discovered major discrepancies between reported and actual income (over $228,000 in unreported cash receipts for the restaurant).
• Documentation Lapses: The taxpayer failed to provide requested paperwork (closing statements, invoices, etc.) to substantiate losses and depreciation claims.

IRS Audit & Bank Deposits
[09:40]–[12:22]

• IRS reconstructed income based on 1099s, bank records, and taxpayer claims that only 10% of restaurant receipts were in cash—a claim the IRS proved false.
• “If you get selected for audit…you could potentially have a substantial underpayment penalty coming into play here.” (Nate, [09:40])
• Taxpayer attempted to classify a gap of $600,000 as a capital contribution, but documentation only supported $80,000.

AI Hallucinations in Tax Research

[12:49]–[16:30]

• Facing the audit, the taxpayer (an attorney) cited several tax court cases to defend their position, but “a few of these…were actually fake. They didn’t exist. That’s what they found.” (Host 1, [12:49])

  • Quote: “It was a classic hallucination item where this attorney clearly used AI to help him try to fight the IRS... and it did not go well because someone’s doing due diligence… and this attorney did not do that.” (Nate, [13:11])

• Loss of credibility was immediate: “Once they realized that this was hallucinated…how are they going to take anything you’re saying seriously?” (Host 1, [13:35])

• AI tools like ChatGPT or Gemini can fabricate plausible-sounding but fictional case law or IRS guidance.

  • Example: Host tested AI with a query about “Patterson vs. Commissioner”—AI cited a case that didn’t exist. Similarly, “IRS guidance” cited by AI was nowhere to be found.

• Takeaway: Verification and professional skepticism are vital. Even “professionals” (like attorneys) can be misled. AI is not a substitute for actual research and experience.

Core Lessons for Investors

[17:07]–[22:11]

• Recordkeeping & Documentation:

  • IRS requests for depreciation documentation were ignored—no closing statements, no invoices. “If you have paper copies – great. Save it someplace you will remember or save it digitally.” (Nate, [17:07])
  • In tax court, burden of proof shifts: “You are guilty until you prove yourself innocent or you could substantiate your positions.” (Host 1, [18:49])

• Bookkeeping:

  • “Bookkeeping is everything. Recordkeeping is everything. Rather, that’s key.” (Host 1, [23:28])
  • Many business owners underestimate the IRS’s access to third-party info (e.g., 1099s, 1099Ks). Poor bookkeeping leads to underreported income, overpaid tax, or disastrous audits.
  • Amateurs “get cooked by the IRS… they don’t know how much money they’re spending… grow up. As a business owner, grow up. You need bookkeeping.” (Host 1, [21:06])
  • QuickBooks (or comparable software) increases your audit survival odds compared to spreadsheets or nothing.

• Specialist vs. Generalist Tax Preparation:

  • Generalist preparers often make basic mistakes (e.g., handling short-term rental income classification, 1031 exchange reporting, bonus depreciation elections).
  • “Not all tax preparation is created equal, especially when you’re getting into the real estate space. It usually makes sense to work with a specialist.” (Host 1, [05:10])

• AI Limits:

  • “AI is not there yet contextually to be your own CPA. You need to verify the information there. If you’re not a CPA or tax attorney… you need to work with a professional who can verify that.” (Host 1, [15:10])

Notable Quotes & Memorable Moments

• On self-preparation & late filing:

  • “You’re not a runaway rogue maverick who’s going to change the tax landscape… file your tax returns, do it the right way, do it on time.”
    (Host 1, [08:57])

• On tax preparation as a commodity:

  • “A lot of people…think, ‘Oh you’re just filling out forms, right?’ And…that’s just not the case. There is value to working with a specialist, especially as you get into more sophisticated strategies like real estate.”
    (Host 1, [05:10])

• On AI in tax/legal research:

  • “…clearly used AI to help him try to fight the IRS…someone’s doing due diligence and looked over their references…they wound up losing almost everything.”
    (Nate, [13:11])
  • “Here’s another use case of this risk [AI hallucinations] right here in a tax court case.”
    (Host 1, [13:35])

• On documentation:

  • “You are guilty until you prove yourself innocent or you could substantiate your positions…simply an argument, ‘I got away with it last year’ is not going to cut it.”
    (Host 1, [18:49])

Timestamps for Key Segments

| Segment | Timestamps | | ----------------------------------------------| ----------------- | | Podcast & Major League REI Updates | 01:41 – 04:08 | | Tax Prep as a Commodity – What’s at Stake? | 04:28 – 07:26 | | Clinko v. Commissioner: Case Facts | 07:56 – 09:40 | | IRS Audit Process & Bank Deposits | 09:40 – 12:22 | | AI Hallucinations & Legal Research Failures | 12:49 – 16:30 | | Recordkeeping, Documentation, Bookkeeping | 17:07 – 22:11 | | Importance of Specialists in Real Estate Tax | 05:10 – 07:26, 23:28 | | Closing Takeaways & Calls to Action | 23:28 – 25:14 |

Core Takeaways

• Bookkeeping and documentation are foundational for audit defense and business success.
• The IRS knows more than you expect—third-party data often exposes misreporting.
• AI is a dangerous shortcut for tax/legal research—never rely on AI-generated citations without verification.
• Specialist tax preparers save investors (potentially tens of thousands of dollars) and drastically reduce risk.
• Treat your real estate activities as a real business: professionalize your records and your advisory team.

Final Advice

• Never rely solely on AI for tax/legal research or court case citations—always verify with original sources.
• File tax returns on time and keep impeccable records.
• Use proper bookkeeping systems; QuickBooks or reputable alternatives are vastly superior to spreadsheets.
• If audited, retain a competent professional experienced in real estate and tax representation.
• For those scaling beyond 6+ rental units, consider outsourcing your bookkeeping to a specialist firm.

“Are you a sophisticated business owner? Or are you an amateur? Amateurs get cooked by the IRS, as we’re seeing here.”
(Host 1, [21:06])

This episode distills concrete, real-world lessons for every investor—and should serve as a wake-up call on the costs of shortcuts, ignorance, and over-reliance on unverified technology in tax compliance.