June 28, 2007

Loans To Family Members – Watch Out For The Pitfalls

Many of my California clients make interest-free or low-interest loans to their children as part of a business transaction between them. Many business clients either forego interest altogether or miss collecting all the interest. In either case, foregone interest or missed payments must be imputed on loans between family members at the AFR (applicable federal rate).

Consider, for instance, that in January 2007 you loaned $500,000 to your child which was payable in 9 years. Also assume you are not charging interest. Loans three to nine years are considered mid-term loans. In January 2007, the AFR that the IRS publishes was 5.51%. The imputed interest is $27,550 each year which must be recognized on your income tax return. If your child doesn’t pay the interest, then you are deemed to have made a gift to your child. Your child does not get a tax deduction for the $27,550 since no payments were actually made.

Some of the tax consequences can be avoided if you qualify for either of two exceptions:

First, if the amount of below-market loans you make to a child doesn’t exceed $10,000, no interest will be imputed. To get this tax break, the loan can’t be used for income-producing investments.

Second, if the amount of below-market loans you make to a child doesn’t exceed $100,000, no income tax consequences will apply. That will be the case if the child’s net investment income is no more than $1,000 each year.

Try to keep loans below those levels, see that the other requirements are met, and put all intra-family loans in writing to minimize tax problems.

If you have to write a business contract, negotiate a business transaction, want to form a new entity, or have other questions related to your business you would like to discuss with an attorney, call Mitchell A. Port at (310) 559-5259.

June 23, 2007

Payroll Tax Fraud War Stories

Readers of my California tax attorney blog love war stories of those who have participated in and been convicted of tax fraud and tax evasion, both criminal tax offenses. The payroll tax problem that took place in California was particularly interesting to me. These tax controversies highlight the severity of the punishment when convicted of a crime. The Internal Revenue Service posts stories to site examples of employment tax fraud investigations that are excerpts from public record in the judicial district in which the cases were prosecuted. Here are a few of those stories:

Nursing Home Owner Convicted of Failing to Pay Over $9.6 Million in Payroll Taxes

In San Francisco, CA, Jack Easterday was convicted by a federal jury on 107 counts of willful failure to pay employment taxes owed to the government. Easterday, who is the owner of numerous nursing home facilities, was convicted of failing to pay more than $9.6 million in taxes. However, evidence at trial, which will be considered for sentencing purposes, showed that Easterday failed to pay more than $16 million in payroll taxes from 1998 to 2005. Evidence at trial also showed the IRS had attempted to collect the taxes from Easterday for years before the charges were filed. He thwarted the efforts of the IRS to collect the taxes by, among other things, paying himself and his wife exorbitant salaries and directors fees, while he was pleading poverty to the IRS collection agents.

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June 19, 2007

Your Tax Lawyer And The IRS - Powers Of Attorney

If you want a tax attorney to represent you on a federal tax problem, file Form 2848 Power of Attorney and Declaration of Representative with an IRS office. Signing Form 2848 allows the IRS tax attorney named by you to represent you before the IRS and to receive your tax information.

Your tax lawyer must be a person authorized to practice before the IRS. Tax lawyers have to apply to practice before the IRS and be granted permission to do so.

Generally, when you appoint a California tax lawyer on the Power of Attorney form, that tax attorney’s authority includes, among many things: signing a waiver agreeing to a tax assessment, extending the time for assessing and collecting tax, and waiving restrictions on the assessment and collection of deficiencies of tax. The tax attorney can also substitute another representative such as your CPA if you permit this on the power of attorney. In limited circumstances, a tax attorney can be authorized to sign an income tax return for you if you permit this on the power of attorney.

If you want to limit what the tax lawyers can do on your behalf, the power of attorney enables you to do that too.

When completing the Form 2848, you must show the name, taxpayer identification number (TIN), and address of the taxpayer, as well as, the name and address of the representative(s), the type of tax, the tax form number and the year(s) and/or period(s) for which the power is granted. You can list returns for any number of specified years and/or periods that have already ended and returns for years and/or periods that will end no later than three years from the date the form is signed.

For example, you may list income tax, Form 1040, for Calendar Year 2004 and employment tax, Form 941, for the third and fourth quarters of 2003. The Form 2848 will be returned to you for correction if you use a general reference to "all years", "all periods," or "all taxes".

If you and your spouse filed a joint return and the same tax lawyer will represent both of you, the power of attorney must be signed and dated by both husband and wife. If either one of you does not wish to be represented, only the spouse who wishes to be represented should sign and date the Form. If you and your spouse filed a joint return, but wish to be represented by different tax attorneys, each of you must complete your own Power of Attorney.

For additional information look at Publication 947, Practice Before the IRS and Power of Attorney.

Mitchell A. Port is authorized to practice before the IRS. He is also admitted to practice before the Ninth Circuit Court of Appeals and federal district court. To speak with a California tax attorney about tax problems, call Mitchell at 310.559.5259

June 16, 2007

Beware! New E-mail Tax Scams

The other day, the Internal Revenue Service today alerted us in California and elsewhere to the latest versions of an e-mail scam intended to fool us into believing we are under investigation by the agency’s Criminal Investigation division.

The latest versions appear aimed at business taxpayers as well as individual taxpayers.

The IRS’s news release states that the e-mail purports to be from IRS Criminal Investigation falsely states that we are under a criminal probe for submitting a false tax return to the California Franchise Tax Board. The e-mail entices us to click on a link or open an attachment to learn more about the complaint against us. The e-mail link and attachment is a Trojan Horse that can take over our computer hard drive and allow someone to have remote access to the computer.

The IRS urged us not to click the link in the e-mail or open the attachment. Similar e-mail variations suggest a customer has filed a complaint against a company and the IRS can act as an arbitrator.

Keep in mind that the IRS does not send out unsolicited e-mails or ask for detailed personal and financial information. Additionally, the IRS never asks people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

The IRS also sees other e-mail scams that involve tricking victims into revealing private personal and financial information over the Internet, a practice that is known as “phishing” for information.

Recipients of questionable e-mails claiming to come from the IRS should not open any attachments or click on any links contained in the e-mails. Instead, they should forward the e-mails to phishing@irs.gov (follow the instructions).

Since the establishment of the mail box last year, the IRS has received more than 17,700 e-mails from taxpayers reporting more than 240 separate phishing incidents. To date, investigations have identified host sites in at least 27 different countries, as well as in the United States.

Other widespread e-mail tells taxpayers the IRS is holding a refund (often $63.80) for them and seeks financial account information. Another fraudulent e-mail scams try to entice taxpayers to click their way to a fake IRS Web site and ask for bank account numbers. Still another email claims the IRS’s ‘anti-fraud commission’ is investigating their tax returns.

June 6, 2007

For Fun In The California Sun

When it comes to taxes, everyone (including us in Los Angeles, California) has an opinion – even when there isn’t a tax problem requiring tax help.

"Like mothers, taxes are often misunderstood, but seldom forgotten.'' — Lord Bramwell, 19th Century English jurist

“Income tax has made more liars out of the American people than golf.” — Will Rogers, humorist

"Few of us ever test our powers of deduction, except when filling out an income tax form.''
— Laurence J. Peter, author

"To tax and to please, no more than to love and to be wise, is not given to men." — Edmund Burke, 18th Century Irish political philosopher and British statesman

A tax loophole is "something that benefits the other guy. If it benefits you, it is tax reform.''
— Russell B. Long, U.S. Senator

“People who complain about taxes can be divided into two classes: men and women.”
— Unknown

"No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.'' — Frederick the Great, 18th Century Prussian king

"The best measure of a man's honesty isn't his income tax return. It's the zero adjust on his bathroom scale.'' — Arthur C. Clarke, author

"The power of taxing people and their property is essential to the very existence of government.'' — James Madison, U.S. President

“I am proud to be paying taxes in the United States. The only thing is – I could be just as proud for half the money.” — Arthur Godfrey, entertainer

"Next to being shot at and missed, nothing is really quite as satisfying as an income tax refund.” — F. J. Raymond, humorist

“The hardest thing in the world to understand is the income tax.” — Albert Einstein, physicist

“Taxation with representation ain’t so hot either.” — Gerald Barzan, humorist

“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.” — Plato

"Taxes are what we pay for civilized society.'' — Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice

June 4, 2007

Offer In Compromise Revised - Tax Help Made Easier

A few months ago, in March, the IRS announced the release of Form 656, Offer in Compromise. The Form 656 package was last revised in 2004 to help us correctly and completely prepare an offer and reduce the chances of an offer being returned for omissions. The IRS declares that the new form retains the taxpayer burden reduction features while adding significant changes as a result of the Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA). These changes include:

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June 1, 2007

Tax Problem: Are You In California Engaged In A Business Or In A Hobby?

According to IRS estimates, incorrect deduction of hobby expenses account for a portion of the overstated adjustments, deductions, exemptions and credits that add up to $30 billion per year in unpaid taxes. No doubt California contributes significantly to those billions. Tax help is available, however, to address this tax problem before it becomes a major controversy with the Internal Revenue Service.

The Internal Revenue Service provides guidelines to determine whether an activity is a business or a hobby (which is defined as an activity not engaged in for profit). Those of us living and working in Los Angeles County, Orange County, Santa Barbara County or Ventura County would benefit by reviewing those guidelines before a tax problem arises.

The rules for determining if an activity qualifies as a business and what limitations apply if the activity is not a business are explained by the Internal Revenue Service in Publication 535.

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business. An ordinary expense is an expense that is common and accepted in the taxpayer’s trade or business. A necessary expense is one that is appropriate for the business. Generally, an activity qualifies as a business if it is carried on with the reasonable expectation of earning a profit.

In order to make this determination, taxpayers should consider the following factors:

Does the activity make a profit in some years?

Does the time and effort put into the activity indicate an intention to make a profit?

Have you made a profit in similar activities in the past?

Can you expect to make a profit in the future from the appreciation of assets used in the activity?

If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

Has the taxpayer changed methods of operation to improve profitability?

Do you or your advisors have the knowledge needed to carry on the activity as a successful business?

Do you depend on income from the activity?

Continue reading "Tax Problem: Are You In California Engaged In A Business Or In A Hobby?" »