April 30, 2007

Stepping Up Tax Collection Enforcement In California

The tax man is poised to gain more clout. So said The Wall Street Journal earlier this month. Tax help may become necessary more than ever especially for those who are near my office who live and work in Los Angeles County, Santa Barbara County, Ventura County and Orange County. Using a tax attorney, even a Los Angeles based tax attorney for enforcement issues arising anywhere in the country, may become more ubiquitous.

The tax gap must be reduced if Congress is to fund programs and reduce the budget deficit without significant tax increases. Tax law enforcement is the clarion call once again. The tax collector wants to close the annual $290 billion tax gap.

The IRS will have new tools to track under-reported income. “The primary focus would be requiring certain business middlemen, such as credit-card processors, to provide more data about other businesses’ transactions” said The Wall Street Journal. The data would be used to report to the IRS each year on the aggregate amounts charged at a variety of businesses, such as restaurants and dry cleaners. The IRS could use the data to cross-check income that businesses report on their tax returns.

Congress is looking at whether to apply new reporting requirements to processors of online transactions. Congress may also require stock brokers to report the initial purchase price of stocks sold rather than just the sales price as the law now requires; this will provide better data on investment gains.

An underfunded IRS may also see an increase in its budget to enhance operations.

Field audits, office examinations and tax collection actions will reduce tax avoidance activities followed by the 17% of taxpayers who are not paying their full tax burden. Improving tax collection and compliance by one percent brings in another $25 billion a year.

Taxpayer rights will be protected, says the IRS, even in the face of new collection efforts.

When faced with enforced collection, using a tax attorney with Internal Revenue Service tax experience, a master’s degree in tax law, and an employment history with the Internal Revenue Service, is an option available now. Call Mitchell A. Port at (310) 559-5259.

April 27, 2007

Is Your Work A Hobby Or A Business?

Tax Court litigation arose in Los Angeles County, California which surprised my client who currently conducts his business in West Los Angeles. The IRS issued a Notice of Deficiency (the so-called “90 day letter”) disallowing business expenses my client knew were legitimate. The earlier IRS audit claimed my client was engaged in a hobby and hobby losses are not deductible. Through his accountant, my client retained me as his tax attorney to fight the IRS to contest the proposed income tax, penalty and interest assessment.

My client sold his former business in Orange County years before he began a new phase of his career when we met. My client’s new business was to seek out ideas in the technology field for the purpose of identifying exploitable opportunities around which he could assemble a team of experts to build another going-concern to deploy to the public and later sell at a profit.

To uncover profitable business opportunities and as one of several methods methodically employed, my client did what other early-stage investors did by forming a private equity firm specializing in advising, investing in and acquiring middle market companies. The private equity firm was a sole proprietorship and not an entity in California such as an LLC, partnership, subchapter C or S corporation.

He looked for opportunity in corporate divestitures, succession planning of family-owned businesses, entrepreneurial exits and restructurings of public and private entities. He sought to make investments or acquisitions providing them with control so as to be able to drive a business in the manner he thought would have been in the interest of making a profit. He focused on continually building value in his companies by partnering with strong management teams, adding experienced leadership and developing growth strategies.

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April 24, 2007

Avoiding Employment Taxes

Most California employers are conscientious about collecting and paying over their employment taxes. Some of my clients is Los Angeles County, Orange County, Ventura County and Santa Barbara County have problems with access to capital and cannot help it when they become unable to pay the FICA tax. But for other California employers, federal employment tax avoidance is intentional and takes various forms. Some of the more common methods of avoidance include paying employees in cash, employee leasing, filing false payroll tax returns or failing to file payroll tax returns, and pyramiding.

Paying Employees in Cash

The loss or reduction of future social security or Medicare benefits for the employee is one of the consequences when paying employees in whole or partially in cash. Cash payments are a common method of avoiding income and employment taxes.

Employment Leasing

Employee leasing is commonly used by employers who contract with outside businesses to handle all personnel, administrative, and payroll duties for employees. Employee leasing is a legal business practice which is sometimes abused. At times, employee-leasing companies fail to pay to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the employee-leasing company dissolves and leaves unpaid millions in employment taxes. The company owners are likely to become personally liable for a large portion of the unpaid tax which the IRS diligently works to collect.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns

Employment taxes are avoided when employers prepare and file false payroll tax returns which understate the amount of wages on which taxes are owed. Employers also fail to file employment tax returns to avoid employment taxes.

Pyramiding

Pyramiding of employment taxes is where a business withholds taxes from its employees quarter after quarter but intentionally fails to pay them to the IRS. Often, a business involved in pyramiding will file for bankruptcy to discharge the non-trust fund portion of the liabilities accrued and then start a new business under a new name and begin a new scheme. Despite the bankruptcy, the company owners are likely to become personally liable for a large portion of the unpaid trust fund portion of the tax which the IRS diligently works to collect.

In each of these situations, the employer is bound to be contacted by the IRS. At the time of contact, if not sooner, the employer ought to reach his California tax attorney who is knowledgeable about resolving tax controversies. For tax help, call Mitchell A. Port at 310.559.5259.

April 21, 2007

California Tax Help - Employee or Independent Contractor

What are the consequences of treating an employee as an independent contractor?

If you as a California employer classify an employee as an independent contractor and you have no reasonable basis for doing that, you will be held liable for employment taxes for that worker. Internal Revenue Code section 3509 has additional information about the consequences to the California employer as that section discusses several onerous penalties applied against the employer.

If you do not pay those employment taxes, re-read my blog posting on February 16, 2007 regarding the application of the 100% penalty assessment to California employers which is a technique used by the IRS to convert the payroll tax, employee social security tax and Medicare tax from a deductible tax payable by your business to a non-deductible tax that is owed by you personally.

To determine how to treat payments you make for services, knowing about the business relationship that exists between you and the worker performing the services is important. The worker performing the services may be:

An independent contractor

A common-law employee

A statutory employee

A statutory nonemployee

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April 18, 2007

Proving That A Tax Return Was Timely Filed

Just filed your income tax return in California?

New reasons continue to crop up to use a California tax attorney for tax help in potential tax controversy situations. I have heard that the IRS may no longer be accepting certified mail return receipts as proof of timely filing of a return. The reason is that some taxpayers have been mailing empty envelopes to the IRS and I guess accusing them of losing the returns and then showing their mailing receipt as proof of mailing.

However, I think the Treasury Regulations are still in place to the effect that an officially postmarked certified mail receipt is still good evidence of mailing, as long as the postmark on the receipt was actually placed on the receipt by the post office, not by a private party.

There seems to be two issues: (i) What was mailed to the IRS? and (ii) When was it mailed? (Under the "mailbox rule", a return is timely filed if it is placed in the mail on or before the due date, even if it delivered thereafter.)

To prove that more than an empty envelope was delivered, perhaps printing the certified mail number on the first two pages (including signature page) of a return and copying the package in which it's sent which would show a certified mail number that matched the one on the return pages.

A more elaborate procedure could involve having a witness (unrelated to the taxpayer) watch the taxpayer putting the tax return into the envelope. Then copy the face of the envelope as the witness watches. The witness then accompanies the taxpayer to the post office to see that adequate postage was purchased and attached to the envelope. Then have the witness prepare a memo reflecting their observations.

Maybe you can send a "packing slip" listing the contents of the envelope and ask the IRS to return the packing slip as an "Acknowledgement of Receipt Only".

Another approach might involve including a small check with the tax return whether or not tax is due. The cashing of the check (which is done immediately upon receipt and which he can verify online with his bank) confirms that the return was received.

As for the issue of timing, the IRS can claim it will no longer accept certified mail, return receipt requested as proof of filing, but until the Treasury Regulations are changed, and the Courts hold the Regs are correct, there is no basis for the IRS to win such an argument. It is still case law as well as statutory law.

If you have concerns about this issue and other tax controversies and tax problems, please call Mitchell A. Port at (310) 559-5259 to discuss the tax help you need.

April 15, 2007

Who’s Not Paying Their Federal Income Tax?

You’ve heard it before: all the uncollected taxes owed to the IRS are almost enough to eliminate the federal deficit. That would make additional money available to California taxpayers who pay more to the federal government than they receive in return. All of us in Los Angeles County, Santa Barbara County, Orange County and Ventura County might see improved infrastructure and services.

How much uncollected federal tax is there? To answer this, the Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations.

The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. I have not seen a state-by-state breakdown to tell you how much we in California underpay our federal income tax.

The IRS released preliminary results from a major research project assessing compliance with the tax laws. The study shows a majority of American taxpayers pay their taxes timely and accurately, but the U.S. still has a large tax gap.

Not surprisingly, individual income tax accounts for about half of all tax liabilities.

The preliminary findings show the gross tax gap — which is the difference between what taxpayers should pay and what they actually pay on a timely basis — exceeds $300 billion per year.

The tax gap can be divided into three components: underreporting, underpayment and nonfiling.

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April 11, 2007

California Dentist Sentenced To Prison For Tax Fraud

A dentist from Danville, California, was sentenced today by San Francisco U.S. District Court to serve 24 months in prison, followed by a term of three years of supervised release after being convicted by a federal jury of conspiring to defraud the United States and evading his income taxes from 1998 through 2001.

According to the indictment and evidence introduced at trial, in approximately 1995, the California dentist became a client of Tower Executive Resources, a Denver organization that promoted a tax evasion scheme involving the use of false invoices and secret offshore bank accounts. The dentist’s medical practice paid bogus expenses to Tower to generate false tax deductions. Tower then deposited the bulk of the funds into a secret offshore bank account that the dentist controlled.

Over a 10-year period, the dentist sent approximately $300,000 to a secret offshore bank account through the Tower system. In addition, when the IRS learned of the Tower scheme and audited the dentist’s tax liabilities, he stopped filing income tax returns and falsely claimed that he believed the law did not require him to file returns.

The dentist's father, an oral surgeon in California, was also charged in the same indictment with conspiracy to defraud the United States and attempting to evade tax on income he earned from his medical practice through his participation in the Tower program. He is currently awaiting trial.

The Department of Justice made the announcement in a news release today.