July 17, 2012

Tax Statistics

The IRS "Data Book" for the most recent period ending September 30, 2011 is available online at this link.

In that Book is information about the following:

List of Statistical Tables

Statistical Tables

Data Sources, by Subject Area and Table Number

Principal Officers of the Internal Revenue Service

Principal Officers of the Internal Revenue Service

Office of Chief Counsel

Commissioners of Internal Revenue

Chief Counsels for the Internal Revenue Service

One of the more interesting parts of the Book concern:

Enforcement: Collections, Penalties, and Criminal Investigation

Table 16. Delinquent Collection Activities, Fiscal Years 2010 and 2011

Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2011

Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2011

During Fiscal Year (FY) 2011, the IRS collected, net of credit transfers, $31 billion in unpaid assessments on returns filed with additional tax due.

Fifty nine thousand Offers in Compromise were submitted. Only 20,000 were accepted.

Get tax advice and tax help to solve your federal or state tax problem by calling an experienced attorney. Call Mitchell A. Port at (310) 559-5259.

July 11, 2012

Pennies On The Dollar

The California Franchise Tax Board says that if you qualify, your delinquent taxes, penalties and interest can be "compromised" so that your payment of an agreed-upon portion will be treated as if you paid the full amount. Here's what you need to do to pay pennies on the dollar when you owe income taxes in California:

What you should know before preparing an Offer in Compromise

Are you an Offer in Compromise candidate?

If you are an individual or business taxpayer that does not have the income, assets, or means to pay your tax liability now or in the foreseeable future, you may be a candidate. The Offer in Compromise program allows you to offer a lesser amount for payment of a non-disputed final tax liability.

Generally, we approve an Offer in Compromise when the amount offered represents the most we can expect to collect within a reasonable period of time.

Although we evaluate each case based on its own unique set of facts and circumstances, we give the following factors strong consideration:

• The taxpayer's ability to pay.
• The amount of equity in the taxpayer's assets.
• The taxpayer's present and future income.
• The taxpayer's present and future expenses.
• The potential for changed circumstances.
• Whether the offer is in the best interest of the state.

Can we process your application?

We will only process your Offer in Compromise application if you have done all of the following:

• You have filed all of the required tax returns. If you have no filing requirement, note it on the application.
• You have fully completed the Offer in Compromise application, and provided all supporting documentation.
• You agreed with the Franchise Tax Board on the amount of tax that you owe.
• You authorized the Franchise Tax board to obtain your consumer credit report and to investigate and verify the information you provided on the application.

Will a collateral agreement be required?

Upon approval, we may require you to enter into a collateral agreement for a term of five years. Generally, a collateral agreement will be required if you have significant potential for increased earnings. A collateral agreement requires you to:

• Pay us a percentage of your future earnings that exceed an agreed upon threshold.

Are collections suspended?

Collection activity is not automatically suspended. If delaying collection activity jeopardizes our ability to collect the tax, we may continue with collection efforts. Interest will continue to accrue.

When should offered funds be submitted?

You should not submit the offered funds until we request them. When we do ask for the funds, submit them by cashiers check or money order.

What documentation is required with the application?

For a check list of required items:
• Personal Income Tax - see page 3 of FTB 4905PIT
• Business Income Tax - see page 4 of FTB 4905BE

You have questions? The Franchise Tax Board has these answers:

1. What does the Franchise Tax Board consider a fair offer in relation to the amount due?
Generally, an offer will be accepted when the amount offered is the most the Franchise Tax Board can expect to collect within a reasonable period of time.

2. How long will it take to get a decision on my Offer in Compromise?
Generally, if we accept your offer for processing, we will have a decision to you within 90 days after receiving your offer. If your account is more complex, it may take longer than 90 days.

3. Can I make payments on the offered amount?
No. We require a lump sum payment of the offered amount.

4. Can I apply prior payments to the offered amount?
We cannot apply prior payments toward the offered amount. However, we will consider prior payments and the offered amount compared to the total liability when evaluating your offer.

5. My Internal Revenue Service Offer in Compromise has been accepted. Will the Franchise Tax Board automatically approve my offer?
No. We will evaluate your Franchise Tax Board offer separately from your Internal Revenue Service offer.

6. If the Franchise Tax Board determines that my offer is not acceptable, will I be contacted?
Yes. We will contact you to discuss your account and to determine the most appropriate resolution. For example, if it is determined that you will have the ability to make monthly payments that will exceed the amount offered, we will work with you to establish an installment agreement.

7. Will state tax liens be released if the Franchise Tax Board accepts my offer?
Generally, we release state tax liens upon final approval of your Offer in Compromise.

8. Do I need to have someone represent me?
Representation is not required. The Offer in Compromise program is available to all taxpayers, whether or not they are represented.

9. Can I get relief from the tax liability by filing bankruptcy?
Part or all of your taxes may be dischargeable under the bankruptcy code. If this is a consideration, you may want to seek legal advice.

10. Can I apply for an Offer in Compromise if I have no funds to offer?
No. We will not accept a zero dollar offer. Your offer must represent the most the Franchise Tax Board can expect to collect over a reasonable period of time.

11. What is a collateral agreement?
A collateral agreement is a contractual agreement between you and the Franchise Tax Board. By signing the agreement, you agree to pledge to us a percentage of income that exceeds an agreed upon threshold. Generally, the collateral agreement period is five years.

12. If my offer is approved, will I have to sign a collateral agreement?
If you are on a fixed income or have limited potential for increased earnings, a collateral agreement will generally not be required.

13. I am single now. If I marry while the collateral agreement is in effect, how will this affect me?
If you marry or enter into a Registered Domestic Partnership (RDP) while the collateral agreement is in effect, we will review any joint tax returns you are required to file. Generally, we consider your joint annual income in the collateral agreement. If you are married or a RDP filing separately, the evaluation will be based on your separate income.

14. Can I complete one application if I owe the Employment Development Department, the Board of Equalization, or the Franchise Tax Board?
To relieve some of the paperwork burden for taxpayers or their representatives, the State's three taxing agencies developed a single offer in compromise application. Individual taxpayers can use DE 999CA (OIC Multi-Agency Application) to apply with any or all of the three agencies.

For tax help on obtaining your offer in compromise, contact a tax attorney who has the experience you can rely on - call Mitchell A. Port at 310.559.5259.

July 2, 2012

Business Entities

When beginning a business in California, you must decide what form of business structure to create. For federal tax reporting purposes, your form of business determines which income tax return form you have to file with the IRS. The most common forms of business are the sole proprietorship, partnership, corporation, and S corporation. Tax and legal considerations enter into selecting a business structure.

LLCs - limited liability companies - are also available in California. The federal government does not recognize an LLC as a classification for federal tax purposes. An LLC business entity must file a corporation, partnership or sole proprietorship tax return. A Limited Liability Company (LLC) is a business structure allowed by state statute. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. Other features of LLCs are more like a partnership, providing management flexibility and the benefit of pass-through taxation.

A California LLC generally offers liability protection similar to that of a corporation but is taxed differently. Domestic LLCs may be managed by one or more managers or one or more members. In addition to filing the applicable documents with the Secretary of State, an operating agreement among the members as to the affairs of the LLC and the conduct of its business is required. The LLC does not file the operating agreement with the Secretary of State but maintains it at the office where the LLC’s records are kept.

A sole proprietor is someone who owns an unincorporated business by himself or herself. However, if you are the sole member of a domestic limited liability company (LLC), you are not a sole proprietor if you elect to treat the LLC as a corporation.

A California general partnership must have two or more persons engaged in a business for profit. Except as otherwise provided by law, all partners are liable jointly and severally for all obligations of the partnership unless agreed by the claimant. Profits are taxed as personal income for the partners. A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.

A California limited partnership (LP) may provide limited liability for some partners. There must be at least one general partner that acts as the controlling partner and one limited partner whose liability is normally limited to the amount of control or participation of the limited partner. General partners of an LP have unlimited personal liability for the LP’s debts and obligations.

S corporations are corporations that elect to pass corporate income, losses, deductions and credit through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income.

To qualify for S corporation status, the corporation must meet various requirements.

A California corporation generally is a legal entity which exists separately from its owners. While normally limiting the owners from personal liability, taxes are levied on the corporation as well as on the shareholders. The sale of stocks or bonds can generate additional capital and the longevity of the corporation can continue past the death of the owners. Legal Counsel should be consulted regarding the variety of options available.

To form a corporation in California, Articles of Incorporation must be filed with the California Secretary of State’s office.

Effective January 1, 2012, there are two new subtypes of stock corporations in California — a "flexible purpose corporation" and a "benefit corporation." The new corporation subtypes allow entrepreneurs and investors to organize stock corporations that can pursue both economic and social objectives.

In forming a corporation, prospective shareholders exchange money, property, or both, for the corporation's capital stock. A corporation generally takes the same deductions as a sole proprietorship to figure its taxable income. A corporation can also take special deductions. For federal income tax purposes, a C corporation is recognized as a separate taxpaying entity. A corporation conducts business, realizes net income or loss, pays taxes and distributes profits to shareholders.

The profit of a corporation is taxed to the corporation when earned, and then is taxed to the shareholders when distributed as dividends. This creates a double tax. The corporation does not get a tax deduction when it distributes dividends to shareholders. Shareholders cannot deduct any loss of the corporation.

Useful links on this topic include:

Business Structures

Starting a Business - Entity Types

Call business attorney Mitchell A. Port to form a new entity.