January 30, 2008

Tax Avoidance Or Tax Evasion?

Employment Tax Evasion Schemes

California employers: be careful! Employment tax evasion schemes can take a variety of forms. Los Angeles County, Santa Barbara County, Orange County and Ventura County employers use a few of the most common techniques. Some of the more prevalent methods of evasion include pyramiding, employee leasing, paying employees in cash, filing false payroll tax returns or failing to file payroll tax returns.

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

Preparing false payroll tax returns understating the amount of wages on which taxes are owed, or failing to file employment tax returns are methods commonly used to evade employment taxes.

Employment Leasing

Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over 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 company dissolves, leaving millions in employment taxes unpaid.

Pyramiding

"Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. Businesses involved in pyramiding frequently file for bankruptcy to discharge the liabilities accrued and then start a new business under a different name and begin a new scheme.

Paying Employees in Cash

Paying employees, whole or partially, in cash is a common method of evading income and employment taxes resulting in lost tax revenue to the government and the loss or reduction of future social security or Medicare benefits for the employee.

Other schemes include:

Unreliable Third Party Payers.

Frivolous Arguments.

Offshore Employee Leasing.

Misclassifying worker status.

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

S Corporation Officers Compensation Treated as Corporate Distributions.

For further reading, look at IR-2004-47, titled "IRS Warns Businesses, Individuals to Watch for Questionable Employment Tax Practices."

To resolve and fix these and other tax problems, call Mitchell A. Port at 310. 559.5259.

January 28, 2008

This Tax Season, Select A Professional Tax Preparer

It’s important for you to find qualified tax professionals if they need help preparing and filing you income tax returns. You are legally responsible for what’s on your own individual income tax returns even if prepared by someone else. It is important to choose carefully when hiring an individual or firm to prepare personal income tax returns. If you pay someone to prepare your tax return, choose that preparer wisely. Here are some points to keep in mind when someone else prepares your return:

Never sign a blank tax return, and do not sign in pencil.

Review and ensure you understand the entries and are comfortable with the accuracy of the return before you sign.

A Paid Preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include their appropriate identifying number on the return. Although the Preparer signs the return, you are responsible for the accuracy of every item on your return. In addition, the preparer must give you a copy of the return.

Review the completed return to ensure all tax information, your name, address and Social Security number(s) are correct. Make sure that none of these spaces is left blank.

A Third Party Authorization Check Box on Form 1040 allows you to designate your Paid Preparer to speak to the IRS concerning how your return was prepared, payment and refund issues and mathematical errors.

If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check.

Unqualified tax preparers may overlook legitimate deductions or credits that could cause you to pay more tax than you should. Unqualified preparers may also make costly mistakes causing their clients to incur assessed deficiencies, penalties, and interest. Here are some suggestions to consider when hiring a tax professional:

Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.

Understand that the most reputable preparers will request to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.

A paid preparer must sign the return as required by law.

Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.

Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all times and how to contact him or her; after all, you are paying for it. Determine if the preparer is exporting your return to a foreign country for preparation. Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.

Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.

Investigate whether the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents or the oversight agency in states that license or register tax preparers.

Determine if the preparer’s credentials meet your needs or if your state mandates licensing or registration requirements for paid preparers. Is he or she an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer.

Check IRS.gov for information regarding abusive shelters and other tax schemes and scams.

The IRS can help you prepare your own returns without the assistance of a paid preparer. Before seeking a paid preparer, you might consider how much information is available directly from the IRS through the IRS Web site. Check these links:

Free Tax Return Preparation For You by Volunteers

e-file for Individual Taxpayers

Free File

Tax evasion is both risky and a crime, punishable by up to five years imprisonment and a $250,000 fine. Remember, no matter who prepares a tax return, you are legally responsible for all of the information on that tax return.

Unfortunately, unscrupulous tax return preparers do exist and can cause financial and legal problems for their clients. Examples of improper actions by unscrupulous preparers include the preparation and filing of false paper or electronic income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Report suspected tax fraud and abusive return preparers by completing Form 3949-A and mailing it or a letter with similar information to:

Internal Revenue Service
Fresno, CA 93888

Call Mitchell A. Port, a California tax attorney at 310.559.5259, for a referral to a tax professional who will work together with you this tax season and going-forward on your tax planning needs.

January 25, 2008

California Business Resources

In California, what other agencies will a business entity need to contact to ensure proper compliance? The following is a list of business resources and of agencies for your reference. In addition, I have included several links to websites that may assist you in your business endeavors.

The California Department of Corporations is responsible for the regulation of securities, franchises, off-exchange commodities, investment and financial services, independent escrows, consumer and commercial finance lending, and residential mortgage lending.

The California Department of Justice, Registry of Charitable Trusts has information relating to charitable trusts and public benefit corporations.

The California Department of Financial Institutions provides information relating to credit unions, industrial loan companies, banks, savings and loan associations or savings banks.

The California Employment Development Department provides information relating to unemployment insurance, disability insurance and employment tax.

The California Department of Industrial Relations, Division of Workers' Compensation provides information relating to worker's compensation requirements.

The California Department of Insurance has information relating to requirements for insurance companies, agents and brokers.

The State Bar of California Office of Certification provides information relating to registration of law corporations and limited liability partnerships.

The California Department of Consumer Affairs has information relating to licensing requirements at the state level for specific business entities.

The California Tax Information Center has information relating to income, payroll, sales and use tax for businesses.

The California Business Investment Services provides tailored site selection and investment counseling services for businesses, real-estate executives, and site selection consultants considering California for new business investment and expansion.

The California Chambers of Commerce provides links to the websites of California Chambers of Commerce.

The California Small Business Fairs offers free seminars for small business owners sponsored by several tax agencies to assist with the tax aspects of a business.

The California State Association of Counties has information relating to city/county business licenses, fictitious business name requirements, zoning, building permits, etc., dependent on business entity activities.

CalGOLD provides detailed information on the business permit, license and registration requirements from all levels of government.

The Small Business Administration provides information regarding starting and managing small businesses.

The U.S. Customs has information regarding importing and exporting issues related to the U.S. Customs Service.

The U.S. Department of Commerce promotes American businesses, keeps a vast array of economic statistics, conducts the census, issues patents and trademarks, sets industrial standards.

The U.S. Business Advisor has information and services provided by the government for the business community.

January 23, 2008

California's State Tax Agencies

In the State of California there are several agencies that administer a variety of taxes. The following is a list of state agencies that can assist you in determining your tax obligations and provide you with information about tax reporting and taxpayer rights. Other state and local agencies may issue California permits and assess fees or taxes; they are not listed here.

The Employment Development Department (EDD) issues employer account numbers (sometimes called state employer identification numbers, SEINs, state ID numbers, or reserve account numbers) and administers California's payroll taxes, including State Disability Insurance, Employment Training Tax, Unemployment Insurance, and California Personal Income Tax withholding.

The Franchise Tax Board (FTB) administers corporate and personal income and franchise taxes for the State of California. For questions, you can contact the Franchise Tax Board from inside the U.S. at (800) 852-5711 or from outside the U. S. at (916) 845-6500 (not toll-free).

The State Board of Equalization (BOE) is responsible for the administration and collection of the states sales and use, fuel, alcohol, tobacco, and other special taxes and fees, and issues seller's permits. The BOE is involved in California property tax assessment and administration. The BOE also acts as the appellate body for personal income and franchise tax appeals. For more information call 1-800-400-7115.

The California Tax Service Center provides information relating to income, payroll, sales and use tax for businesses in one handy location.

The Internal Revenue Service (IRS) administers federal payroll taxes, including social security, Medicare, federal unemployment insurance and federal income tax withholding, and issues federal employer identification numbers.

Need help dealing with any of these tax authorities for tax problems you or your California based business have? Please call Mitchell A. Port at 310.559.5259.

January 21, 2008

Taxable Income, Tax Credits, And Tax Deductions And Exclusions Q&A

The Internal Revenue Service implemented a Q&A called Tax Trails which is available to anyone, including my clients in Los Angeles County, Santa Barbara County, Orange County and Ventura County, California. It is an interactive session which poses questions that you can answer by selecting Yes or No. It's designed to be very simple. Your choice then brings about a hypertext link to the next appropriate question until an answer is possible.

Q&A topics cover these areas:

Continue reading "Taxable Income, Tax Credits, And Tax Deductions And Exclusions Q&A" »

January 18, 2008

Can The IRS File A Federal Tax Lien On Property Not Belonging To The Taxpayer?

After the IRS filed a notice of federal tax lien for a plaintiff’s husband's unpaid employment taxes on certain real property, to which plaintiff and her husband's friend held legal title, the plaintiff brought a quiet title action against the U.S. Last month, the 10th Circuit Court of Appeals vacated and remanded the District Court’s holding (read the case here) that the lien was enforceable only as to the half-interest held by the friend. The reason for vacating the District Court’s decision and sending the case back to that Court was because: 1) a formal transfer of legal title from plaintiff's husband to plaintiff is not required in order to enforce the lien; but 2) a remand was needed to determine whether the IRS could establish that the husband held an interest in the property under Utah law.

Continue reading "Can The IRS File A Federal Tax Lien On Property Not Belonging To The Taxpayer?" »

January 16, 2008

Need Information From The IRS About Your Tax Return?

For individuals requesting transcripts:

You have two options for getting copies of your federal tax return information--tax return transcripts and tax account transcripts--by phone or by mail.

Request transcripts by calling 1-800-829-1040, or order by mail using IRS Form 4506T (Request for Transcript of Tax Return). There is no charge or fee for transcripts. Allow two weeks for delivery.

A tax return transcript shows most line items from your tax return (Form 1040EZ, 1040A or 1040) as it was originally filed, including any forms and schedules you attached to your return. It does not reflect any changes your representative, the IRS or you made after the return was filed. In many cases, a return transcript will meet the requirements for those applying for student loans and lending institutions offering mortgages.

A tax account transcript shows any later adjustments either the IRS or you made after the tax return was filed. This transcript shows basic data, including type of return filed, adjusted gross income, taxable income and marital status.

Tax problems, tax controversy, tax help, tax consulting? Please call Mitchell A. Port at (310) 559-5259.

January 11, 2008

California LLCs: Common Questions

What is an LLC?

Is there an annual tax?

What is the annual fee and filing requirements?

Can a California LLC have nonresident members?

What are an LLC's California filing requirements?

Do I have to file a California Schedule K-1 (568) to report a Member’s Shares of Income, Deductions, Credits, Etc.?

Can I get an extension of time to file?

What does "Doing business in California" mean?

How does the California Franchise Tax Board handle it's LLC billings and notices?

How do I cancel my LLC’s registration?

What is a "Short Form Cancellation"?

Where can I get forms and where do I mail them?

How do I organize or register an LLC?

I never did any business or even opened a door, bank account or anything. Why do I owe the $800 annual tax?

I stopped doing business in California; what do I need to do to stop the requirement to pay the annual tax?

How are the fees calculated?

How do I complete the LLC Income Worksheet?

What is a protective claim?

What are the procedures for filing an LLC fee protective claim?

I'm a corporation that converted to an LLC during the current year. Am I liable for the tax as a corporation and as an LLC in the same year?

If I'm classified as a partnership for federal purposes and file federal Form 1065 U.S. Partnership Return of Income, why am I required to file Form 568 Limited Liability Company Return of Income, instead of Form 565 Partnership Return of Income, for state purposes? And, do I still have to pay the fees?

If I have nonresident members, and cannot get all their signatures on the consent release form, can I still file the return?

What is a Series LLC and how does it file in California?

For answers to these and other questions, please contact Mitchell A. Port at 310.559.5259. You can also look at the California Franchise Tax Board site for answers by clicking here.

January 9, 2008

Who Is An Innocent Spouse In California?

As a California tax attorney located in Los Angeles, I have posted other blogs on the topic of innocent spouse. This particular posting covers Q&A for California income tax. My other postings include: "Innocent Spouse Made Easier" posted on July 9, 2007 and "California Taxpayers: Innocent Spouse Relief" posted February 14, 2007.

1. Who is an innocent spouse in California and can I get relief of tax?

Generally in California, when a joint tax return is filed, each spouse is equally liable for all the tax, penalties, and interest for the particular joint tax year. This means the entire amount of tax, penalties, and interest may be collected from either spouse, even if only one spouse earned all of the income.

If certain legal requirements are met, a spouse may be fully or partially relieved of the joint tax, penalties, and interest. Six categories of relief are available:

Relief by court order.

Equitable relief.

Complete or partial innocent spouse relief.

Relief by separate allocation of liability.

Relief from the tax due amount on return(s) that have been filed.

Relief from community income.

2. Under what conditions is relief by court order allowed?

You may qualify for relief by court order if:

You have obtained a divorce from your spouse, and the court issued an order relieving you of the unpaid tax due from a joint liability.

You are in the process of obtaining a divorce and your joint gross income exceeds $150,000 or you owe more then $7,500 for the tax year(s) for which you are seeking relief, send the California Franchise Tax Board ("FTB") a letter requesting a Tax Revision Clearance Certificate, which you will provide to the court. After the court issues its order, you will need to provide the California FTB with a copy of the court order and it will determine the amount of your relief. In your letter requesting a Tax Revision Clearance Certificate be sure to include your name, address, telephone number and social security number.

However, note that the court is limited in the relief that it can provide. The court cannot:

Relieve you of your responsibility to pay tax on your own income.

Provide relief on taxes already paid.

3. Under what conditions is equitable relief allowed?

If you filed a joint return, and you do not qualify for traditional innocent spouse or separate allocation of liability relief, you may still be considered for equitable relief from tax that results from an audit or the underpayment of tax on your return. The following are some of the factors considered:

Continue reading "Who Is An Innocent Spouse In California?" »

January 3, 2008

Favorite Urban Tax Legends

My clients, including those in Ventura County, Los Angeles County, Santa Barbara County and Orange County, are creative when explaining how they ended up with an IRS tax problem including unpaid income tax, unpaid payroll tax and unfiled tax returns. Here are some examples:

I don't have to claim the cash I received, only the checks.

Putting it on the corporate credit card automatically makes it deductible.

It's the accountant's job to figure out how to write that off.

If I'm in a California probate, I won't have to pay estate tax and income tax.

Filing late in the filing season near April 15 decreased your audit risk.

If you show you owe at least $1 instead of getting a refund, you are less likely to be audited.

The Amish don't pay income tax.

There is a Slavery Reparation tax credit for African Americans who never received their '40 acres and a mule'.

There are loopholes to benefit the rich which your tax professional doesn't even know.

I only have to claim the income for which I received a 1099.

I can deduct the cost of keeping my dog as a security system.

I can avoid estate tax at death if I give away all of my property right before I die.

Because the IRS didn't audit me, the deduction I have been taking all these years must be legal.

Filing an extension and filing near Oct 15 decreases your audit risk.

Taxpayers over age 65 who are still working don't have to pay Social Security tax.

Taxing labor/services is unconstitutional.

Attorneys can deduct their cable bill because Court TV is educational.

AMT is only for high income taxpayers.

"Only the little people pay taxes." - Leona Helmsley, Federal Inmate

The federal income tax is unconstitutional because the 16th Amendment was never properly ratified by the states.

The federal income tax is voluntary and applies only to those who volunteer to pay it.

You can incorporate your business in Nevada and pay no state income taxes, even though the corporation does business in your home state and other states.

Filing on extension and claiming a large refund increases your audit risk.

Life insurance proceeds are not taxable.

Nurses/police/EMTs on call can deduct the cost of their monthly phone bill since they need to have a phone to keep their job.

Firefighters can deduct the cost of their lunch since they are on duty 24 hours a shift.

Claiming an office in the home increases your audit risk.

S corp owners don't have to claim a salary.

You can claim your live-n girlfriend as a dependent.

Someone has to win the Irish Lottery.

The Internet Tax Fairness Act forbids states from imposing sales or use taxes on goods ordered over the internet and shipped from outside the buyer's state.

Newly arrived legal immigrants or refugees get a seven-year federal income tax holiday.

You can deduct the cost of your car and all its operating expenses (or mileage) as a business expense if you put advertising on the car.

You can deduct the cost of your vacation if you go on a job interview (keep that business card of the interviewer) while away.

Showing $495 as a non cash donation has less audit risk than showing $500.

Most IRS agents/officers are mean and hard to deal with.

I can deduct a gift of up to $12,000 given to my child.

Police officers can deduct $5 a day as Walking Around Money (WAM).

Criminals (i.e. drug dealers, etc.) are not required to pay taxes on their illegal business income.

If I don't file my return, I don't owe any tax.

Receiving a 1099 increases your audit risk.

Using the pre-printed IRS label increases your audit risk.

My tax at year end is determined by how I fill out my W-4.

If I go to one of those "pennies on the dollar" places, I will only owe them and the government "pennies on the dollar."

I don't pay taxes. I got a refund.

My return is easy, it'll only take you about 5 minutes to do.

For help dealing with the IRS, call an experienced tax attorney. Call Mitchell A. Port at (310) 559-5259.