California Tax Attorney Blog

California employers can outsource some of their payroll and related tax duties to a third-party payroll service. They can help assure deposit requirements with federal and California state authorities and filing deadlines are met.

Los Angeles County, Santa Barbara County, Ventura County and Orange County California employers who outsource some or all of their payroll responsibilities should consider the following:

For the employer’s protection, employers should ask the payroll service provider if they have a fiduciary bond in place. This could protect the employer in the event of default.

If there are issues with an account, the IRS will send correspondence to the employer at the address of record. The IRS suggests that the employer does not change their address of record to that of the payroll service provider as it may significantly limit the employer’s ability to be informed of tax matters involving their business.

The employer is ultimately responsible for the deposit and payment of federal and California tax liabilities. Even though the third-party is making the deposits, the employer is the responsible party. If the third-party fails to make the federal tax payments, the IRS may assess penalties and interest on the employer’s account. The employer is liable for all taxes, penalties and interest due. The employer may also be held personally liable for certain unpaid federal taxes.

Employers should ensure that their service providers are using EFTPS (Electronic Federal Tax Payment System) so the employer can confirm payments made on their behalf. Everyone should use EFTPS and Treasury regulations require electronic payment for payroll taxes over $200,000 in a calendar year. EFTPS maintains a business’s payment history for 16 months and can be viewed on-line after enrollment. In addition, EFTPS allows employers to make any additional tax payments that their third-party provider is not making on their behalf such as estimated tax payments. The IRS recommends employers verify EFTPS payments as part of their bank account reconciliation process.

For payroll and other tax problems, contact Mitchell A. Port at (310) 559.5259.

A recently decided court case, Baccei v. United States, highlights the adverse consequences when an estate fails to follow instructions in obtaining an extension of time to pay.

The decedent died in September, 2005. Her estate consisted mainly of real estate. Her nephew was the executor of her estate and the trustee of her revocable trust.

The executor, through his attorney, retained an accountant to prepare the Federal estate tax return.

In June, 2006, the accountant filed Form 4768, requesting an automatic 6-month extension of time to file the estate tax return.

Form 4768 consists of four parts:

Part I, "Identification," requests information identifying the estate. The accountant completed Part I.

Part II, "Extension of Time to File Form 706, 706-A, 706-NA, or 706-QDT (Section 6081)" contains boxes to check to show for which return the estate is claiming an extension of time to file. The accountant completed Part II.

Part III is captioned "Extension of Time to Pay (Section 6161)," and requests a written statement explaining why the estate cannot pay the tax in full, and the extension date requested (not more than 12 months). The accountant did not complete Part III.

Part IV, "Payment to Accompany Extension Request," contains three lines. Line 1 is for the estimated amount of tax due. Line 2 is for the cash shortage (with an instruction to complete Part III.) Line 3 is for the balance due (with an instruction to subtract line 2 from line 1). The accountant completed Part IV.

The accountant filed the extension with a cover letter. The estate timely filed the estate tax return on extension. The return showed estate tax of over one and a half million dollars, which the estate paid with the return. The IRS asserted a sizeable late payment penalty which the estate paid and then sought a refund claiming that it had timely applied for an extension of time to pay the estate tax, and had established reasonable cause.

The court held for the government, saying that the estate did not request an extension of time to pay because Part III was not completed, and that neither the Form 4768 nor the cover letter specified the date to which an extension of time to pay the tax was requested.

The court noted that the statutes and regulations make a clear distinction between extensions of time to file and extensions of time to pay.

A 6-month extension of time to file is automatic - provided the Form 4768 is timely filed.

An extension of time to pay is discretionary, and can be requested for up to 12 months at a time. While the same Form 4768 can be used to request both extensions, they are nevertheless separate extensions.

The Difference Between Legal Tax Avoidance and Illegal Tax Evasion

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands: Taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”

The IRS has a very interesting and detailed description of the types of tax problems people often either intentionally or negligently get involved with. You can read the entire article here but you can see the topics that are discussed below.

Nonfiler Enforcement

Money Laundering

Corporate Fraud

General Tax Fraud

Employment Tax Enforcement

Abusive Tax Schemes

Abusive Return Preparer

Tax Scams - How to Recognize and Avoid Them

All About Criminal Investigation (CI)

Program and Emphasis Areas for Criminal Investigation

Report Suspected Tax Fraud Activity

IRS Wants You to Know About Schemes, Scams and Cons

Civil tax problems? Speak with Mitchell A. Port at (310) 559-5259.

Northern Trust has a brochure entitled: "Estate Planning: Strategic Wealth Transfers During Life and at Death". It contains an estate planning overview worth looking at. The topics include:

Fundamental Questions

Who Should Receive Your Assets?
Which Assets Should They Receive?
When and How Should You Transfer Wealth?

Basic Estate Planning Documents

Will
Living Trust

Recruiting the Right Team

Who Should Draft Your Estate Plan?
Who Should be Your Executors and Trustees?
Who Should be the Guardian for Your Children?

Estate Settlement

Transferring Property After Death
Receiving Benefits After Death
The Probate Process

Determining Potential Estate Taxes

How Much is Your Estate Worth?
How the Federal Estate Tax System Works
State Estate Tax
Step-up or Step-down in Basis At Death

SELECTED TRANSFER TAX SAVINGS STRATEGIES

Strategy #1: Using The Marital Deduction Wisely

Plan to Use Both The Marital Deduction and Your Estate Tax Exemption
Control Wealth With a QTIP Trust
Give Your Spouse Control with General Power of Appointment Trust
Create a Qualified Domestic Trusts

Strategy #2: Lifetime Wealth Transfers

Gift Tax Exclusion
Uniform Transfers to Minors Act (UTMA) Accounts
Qualified Trusts for Minors
Crummey Trusts
Irrevocable Life Insurance Trusts

Strategy #3: Using the Gift Tax Exemption Wisely

Grantor Retained Annuity Trust (GRAT)
Family Limited Partnerships (FLP)

Strategy #4: Consider Carryover Basis

General Rule: “Carryover Basis” for Gifts
Don’t Transfer Assets With a Built-In Loss
What about Step-Up At Death?

Strategy #5: Trusts That Benefit Both Individuals and Charity During .

Life or At Death
Charitable Remainder Trust: Cash Flow and Flexibility
Charitable Lead Trusts: Passing Wealth to Future Generations

Strategy #6: Private Foundations and Donor Advised Funds

Grant Making: Private Foundations
Donor Advised Funds

Strategy #7: Focusing on the Family-Owned Business

Who Will Manage the Business?
Who Should Own Your Business?
How Will the IRS Value Your Company?

Strategy #8: Planning to Avoid Generation Skipping Transfer Tax

Allocating GST Exemption
Tax Strategies

Strategy #9: Evaluating Your Need For Life Insurance

Is Lost Earning Power an Issue?
Is Liquidity an Issue?
Choose the Best Owner
Consider an ILIT

Strategy #10: Understanding Community Property Issues

Remember, Marital Rights Are Expanded
Plan Carefully When Using a Living Trust
Community Property and Tax Cost

IMPLEMENTING AND UPDATING YOUR PLAN

Where Do You Go From Here? No endorsement of Northern Trust or its agents is intended. So, call a qualified California estate planning attorney for help with your tax planning. Call Mitchell A. Port at (310) 559-5259.

The California Executor, Administrator or Trustee works on behalf of the estate (sometimes in probate) to minimize taxes, resolve administrative problems and provide prompt, proper distribution of assets. If you are naming an individual as Executor or Trustee, or if someone has asked you to serve as one, keep in mind that the responsibilities can include some or all of the following:

1. Make sure that desired funeral arrangements have been carried out.

2. Locate the will and file with the California Probate Court.

3. Petition Court for appointment as Executor/Personal Representative of estate.

4. For estates, publish legal Notice of Hearing in a newspaper acceptable to the Court.

5. Obtain death certificate or doctor's statement for insurance claims (sometimes birth and marriage certificates also are necessary).

6. Notify all heirs, legatees, devisees and next of kin of their interest in the estate.

7. Arrange for inventory of safe deposit box contents.

8. Obtain life insurance claim forms, fill out and submit with policy (or policies). Obtain proceeds for beneficiary and Form 712 for estate tax return.

9. File claims for final medical bills with Medicare and other medical insurance carriers.

10. Assemble necessary documents for each parcel of real estate or mineral interest, including deeds, leases, tax receipts, abstracts and insurance policies.

11. If necessary, oppose in Court all incorrect or invalid claims against the estate.

12. Check on Veteran's Administration benefits.

13. Check On possible pension, or other employee benefits.

14. Check on Social Security benefits for survivors.

15. Check on Social Security lump-sum death benefit.

16. Locate bank accounts and transfer funds to estate account.

17. Obtain from Court permission for allowance for support of family.

18. Collect and take possession of all assets (stocks and bonds, etc.)

19. Invest surplus cash.

20. Execute appropriate purchases and sales. Value marketable securities and closely held assets.

21. Collect dividends and interest on estate's assets.

22. Arrange for appraisals of real estate, jewelry, stamp and coin collections, etc., to determine fair market value for tax and accounting purposes.

23. Prepare an inventory of all estate assets including bank accounts, real estate, automobiles, furniture, jewelry and other possessions; file original with estate account. Court (as required) and send copies to beneficiaries.

24. Examine all real estate and mineral interests. Determine insurance, status of taxes, bills, leases and assessments. If necessary, screen for environmental contamination.

25. Determine what debts exist. Mortgages? Life insurance loans? Bank loans? Auto loans? Settle these debts.

26. Investigate status of any business interest owned, including closely held stock and partnership interests.

27. Supervise operation of family-owned business until either sold or distributed.

28. For income-producing real estate, collect rents, make repairs, pay real estate taxes, maintain insurance, arrange for utility services and handle all tenant-related issues.

29. For estates, pay claims after claim period has expired. Obtain receipts and/or vouchers for all bills and claims paid.

30. Communicate regularly with co-fiduciaries and interested parties.

31. Maintain complete records for all transactions in the account and provide statements for all receipts and disbursements.

32. Ascertain cash requirements for debts, taxes and expenses, and review all assets to see how necessary funds can best be raised.

33. Prepare court accountings as required.

34. Select valuation date for federal estate tax return. (This selection can often provide substantial savings.)

35. Prepare final federal (1040) and state income tax returns for the deceased.

36. Prepare federal and state estate tax returns as required. Determine charitable, marital or other deductions and elections.

37. Compute estimate of any state and federal death taxes. Prepare preliminary tax notices required by law. Analyze tax planning options.

38. Determine whether administrative expenses should be used as fiduciary income tax or estate tax deductions.

39. Prepare gift tax or generation-skipping tax returns as required.

40. Prepare federal and state income tax returns for the estate and related trusts.

41. Pay final administration expenses.

42. Obtain Estate Tax Closing Letter from Internal Revenue Service.

43. Prepare final federal and state income tax returns for the estate and/or trust and give Internal Revenue Service notice of termination of fiduciary relationship.

44. If the estate is audited by a government agency and a tax deficiency is levied, determine whether to negotiate, appeal or accept the ruling.

45. Prepare detailed final accounting that is acceptable to the Court and send copies to beneficiaries as required.

46. Prepare Report of Final Distribution and send original to Court with copies to beneficiaries as required.

47. Arrange for transfer and registration of securities with transfer agent. Execute and file deeds.

48. Prepare a Plan of Division and Cash Accounting to divide the residue of the estate.

49. Distribute estate assets to beneficiaries in accordance with the Plan of Division and Cash Accounting.

50. Petition Court for discharge of Executor/Personal Representative.

California probates can sometimes be very complex. Speak with a probate attorney about your concerns. Call Mitchell A. Port at (310) 559-5259.

IRS Taxpayer Assistance Centers (TAC) in California are your source for personal tax help when you believe your tax issue cannot be handled online or by phone, and you want face-to-face tax assistance.

The local California Taxpayer Assistance Center is a place where you can spread out your records and talk with an IRS representative across the counter. No appointment is necessary - just walk in. If you prefer, you may call a local number (see chart, below) to learn about available and alternate services, and to reschedule appointments with IRS personnel. If you have an ongoing, complex tax account problem or a special need, such as a disability, an appointment may be requested. All other issues will be handled without an appointment.

Continue reading "Fix Your Tax Problem By Meeting With The IRS" »

Complaints Against Enrolled Professionals

California's taxpayers who have a complaint against their attorney, accountant, enrolled agent or other practitioners who are specifically permitted to practice before the IRS can submit their complaints in writing in a letter format. The letter should include the tax practitioner's name, address, telephone number, designation (i.e., attorney, certified public accountant, enrolled agent, enrolled actuary, etc.), a detailed description of the allegations, and any documents that support those allegations.

Direct all referrals to:

Internal Revenue Service
Office of Professional Responsibility
SE:OPR, Room 7238/IR
1111 Constitution Avenue NW
Washington, DC 20224

You can send it by facsimile at 202-622-2207

Complaints Against Unenrolled Tax Return Preparers

Complaints against unenrolled tax return preparers can be reported by completing Form 3949-A and mailing it or a letter with similar information to Internal Revenue Service, Fresno, CA 93888.

For additional information, you may refer to Complaints Against Tax Professionals Frequently Asked Questions.

If you have questions concerning an allegation, you may email the IRS at OPR@irs.gov.

California small business owners now have access to reliable and authoritative information provided by the IRS by simply clicking here.

Select business topics using the IRS' A-Z listing, or by business type such as sole proprietor, corporation, etc. The IRS also provides links to major business subjects, such as Business Expenses, which provides a gateway to all related information on that subject.

Here is a list of some of the topics available to business entrepreneurs:

Business-related News
Keep abreast of the latest tax-related news that could affect your business.

Self-Employed Individuals
The basics on self-employment, filing requirements, and reporting responsibilities for independent contractors.

Business Expenses
Find out what qualifies as a deductible business expense, including depreciation.

Businesses with Employees
Guidance on tax-related responsibilities for an employer.

Small Business Forms and Publications
Download multiple small business and self-employed forms and publications.

Online Learning and Educational Products
Learn about business taxes on your own time, and at your own pace.

Employer ID Numbers (EINs)
Find out more on EINs or apply for one online.

Industries/Professions
Industry-specific information

Starting, Operating, or Closing a Business
Deductions, recordkeeping, accounting methods...

Filing and Paying Your Business Taxes
Information about how to pay your business taxes.

Electronic IRS: File, Pay.... and More
The IRS is making it easier than ever for you to conduct business with us electronically.

Filing Late and/or Paying Late
Before you decide not to file your tax return on time or not pay all of your taxes when they are due, consider this.

Independent Contractor (Self-Employed) or Employee?
It is critical that you, the employer, correctly determine whether the individuals providing services are employees or independent contractors. Generally, you must withhold income taxes, withhold and pay Social Security and Medicare taxes, and pay unemployment tax on wages paid to an employee. You do not generally have to withhold or pay any taxes on payments to independent contractors.

IRS Non-Retaliation Policy
IRS has a zero-tolerance policy for retaliation and has had a written non-retaliation policy in place since 1998.

Private Debt Collection Program
You've been contacted by a private collection agency concerning your overdue taxes. Now what? Click here for more.

Recursos para Pequeñas Empresas
Información y recursos para dueños de pequeños negocios. Infórmese sobre sus obligaciones tributarias.

Small Business Resources
This section offers links to a broad range of resources across federal and state agencies.

The Tax Gap
This page provides information on the tax gap and efforts to reduce it as outlined in news releases, statistics and technical fact sheets.

To discuss these and other topics with a business attorney in Los Angeles, call Mitchell A. Port at (310) 559-5259.

The answer to the question “What structure makes the most sense?” depends on the individual circumstances of each California business owner.

The IRS provides a handy fact sheet giving business men and women in Los Angeles County, Orange County, Ventura County and Santa Barbara County a quick look at the differences between the most common forms of business entities.

The most common forms of businesses are:

Sole Proprietorships

Partnerships

Corporations

Limited Liability Companies (LLC)

Of all the choices you make when starting a California-based business, one of the most important is the type of legal organization you select for your company. This decision can affect how much you pay in taxes, the amount of paperwork your business is required to do, the personal liability you face and your ability to borrow money. Business formation is controlled by the law of the state where your business is organized.

While state law controls the formation of your business, federal tax law controls how your business is taxed. Federal tax law recognizes an additional business form, the Subchapter S Corporation.

All businesses must file an annual return. The form you use depends on how your business is organized. Sole proprietorships and corporations file an income tax return. Partnerships and S Corporations file an information return. For an LLC with at least two members, except for some businesses that are automatically classified as a corporation, it can choose to be classified for tax purposes as either a corporation or a partnership. A business with a single member can choose to be classified as either a corporation or disregarded as an entity separate from its owner, that is, a “disregarded entity.” As a disregarded entity the LLC will not file a separate return instead all the income or loss is reported by the single member/owner on its annual return.

The type of business entity you choose will depend on:

Liability

Taxation

Recordkeeping

For more on the IRS fact sheet, click here.

To discuss this with a business attorney, call Mitchell A. Port at (310) 559-5259.

A conviction for willful failure to pay over employee payroll taxes is affirmed where “willfulness” does not require the government to prove that a defendant had the ability to meet his tax obligations.

In a decision made on August 22, 2008 by the federal court of appeals covering California (the U.S. 9th Circuit Court of Appeals), the court stated:

This case illustrates the enduring truth of Ben Franklin’s sage observation that “nothing is certain but death and taxes.” It is an appeal from a conviction for willful failure to pay over employee payroll taxes, in violation of 26 U.S.C. § 7202. The defendant-appellant, Jack Easterday, sought an “ability to pay instruction” in order to contend to the jury that his failure to pay over the taxes he owed was not “willful,” because he had spent the money on other business expenses and therefore could not pay it to the government when it was due. The district court refused to give the instruction, and Easterday subsequently was convicted and sentenced to thirty months in prison.

Payroll tax problems can have serious consequences. Consult with a qualified tax attorney about your tax problem. Call Mitchell A. Port at (310) 559-5259.