California Tax Attorney Blog

Next month, the Internal Revenue Service will begin its Employment Tax National Research Project (“ET NRP”). The last one was performed 25 years ago. The study is needed because business practices regarding employment tax issues may have changed significantly since the last IRS employment tax study.

Examinations comprising the study will be conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers.

The IRS will randomly select 2,000 taxpayers each year for the next three years. The examinations will be comprehensive in scope. Taxpayers will receive notices describing the ET NRP process.

When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements.

There are two main goals for the ET NRP:

To determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas, and

To secure statistically valid information for computing the Employment Tax Gap.

Records pertaining to employment tax returns and issues will be subject to review during these examinations. Employers should have all of their records available to expedite these examinations.

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Small business workshops on the topic of Federal and State Payroll Taxes are currently being offered throughout California.

Other workshop topics vary from a general overview of taxes to more specific topics such as recordkeeping and retirement plans.

These seminars are sponsored and presented by IRS partners who are Federal Tax specialists. The workshops are designed to help the small business owner understand and fulfill their federal tax responsibilities. Most are free but some workshops have fees associated with them. Any fees charged for a workshop are paid to the sponsoring organization, not the IRS.

If you have tax problems with the IRS or California, call a tax attorney. Call Mitchell A. Port at (310) 559-5259.

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In previous blog posts, I addressed California’s rules regarding a worker’s status as an independent contractor versus an employee. Click here and here to revisit those posts.

The Internal Revenue Service recently posted tips regarding federal rules that apply to a worker’s status. As an owner of a small business, whether you hire workers as independent contractors or as employees will impact the amount of taxes you withhold from their paychecks and how much taxes you pay. Additionally, it will affect what documents and information they must provide to you, what tax documents you must give to them and how much additional cost your business must bear.

Here are the top ten things every business owner should know about hiring people as independent contractors versus hiring them as employees.

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Attention California business owners: A Restricted LLC (limited liability company) and a Restricted LP (limited partnership) are special entities that will be allowed under Nevada law starting October 1, 2009. Nevada is the first and only state to allow these types of entities.

With a restricted LLC, the new statute imposes restrictions and limitations on the LLC's ability to make distributions. The statute provides, in part, that unless otherwise provided in the articles of organization, a restricted LLC shall not make any distributions to its members with respect to their membership interests until ten years after the date of formation of the LLC (or amendment of the articles of an existing LLC to become a restricted LLC), so long as the LLC has remained a restricted LLC.

Why set up an LLC which by its charter may not make any distributions to members for up to ten years? The reason is Internal Revenue Code Section 2704(b), which provides that when valuing an interest in an entity for gift tax purposes, the liquidation restrictions contained within the LLC operating agreement have to be disregarded by the appraiser if the LLC is owned by family members both before and after the transfer. Code Section 2704(b)(3)(B) provides however that a restriction that is imposed by state law cannot be ignored.

With these new entities, some appraisers provide a range of an additional 10% to 35% for the additional valuation discount. So, for example, if the valuation discount would have been 35% for a regular LLC, after adding the additional valuation discount, the valuation discount would instead be between 45% and 70%.

Remember that the new Nevada Restricted LLC and LP statutes only create a new ceiling on valuation discounts that no other state allows. This doesn't mean that you must lock the underlying assets in for ten years. Maybe five years is more appropriate. Maybe three years.

The Bill can be read online. The Restricted LLC language can be read in Sections 26 and 27 of the Bill. The Restricted LP language can be read in Sections 38, 39 and 49.2 of the Bill.

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Starting a new business? Be aware of your federal tax responsibilities. Here are the top six things the IRS wants you to know if you plan on opening a new business this year. Also be sure and look at the IRS website for more information.

1. Decide the type of business entity you are going to establish either in California or some other state (such as Nevada or Delaware). The most common types of business are the sole proprietorship, partnership, corporation and S corporation.

2. The type of business you operate in California determines which tax form you have to file, what taxes you must pay and how you pay them. The four general types of business taxes are income tax, self-employment tax, employment tax and excise tax.

3. Generally, businesses need an EIN. An Employer Identification Number is used to identify a business entity. You can also apply for an EIN online at IRS.gov.

4. Good records are necessary. Which recordkeeping system is suited to your business is up to you so long as it shows your income and expenses. Except in a few cases, the law does not require any special kind of records. However, the business you are in affects the type of records you need to keep for federal tax purposes.

5. As a business taxpayer, you must figure taxable income on an annual accounting period called a tax year. The calendar year and the fiscal year are the most common tax years used.

6. You must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses. The most commonly used accounting methods are the cash method and an accrual method. Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under an accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.

Want to incorporate? Create an LLC? Call a business attorney. Call Mitchell A. Port at (310) 559-5259.

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As of June 30, 2009, the IRS has updated the information it makes available concerning subchapter S corporations. Much of what you may need to know about California and federal subchapter S corporations can be found by clicking here.

If you want more information or help forming your California corporation, call Mitchell A. Port at (310) 559-5259.

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A request for an Offer in Compromise from the IRS or the California Franchise Tax Board can also be used by businesses to resolve outstanding corporate income and payroll taxes.

Similar to an Offer in Compromise for an individual, the offer for a business is computed based upon the business’s current assets and financial disclosure statement. The IRS uses the company’s reasonable collection potential to determine the Offer amount. The reasonable collection potential for a business is computed in a manner similar to that of an individual. However, unlike individual expenses, the IRS does not have “national standards” for business expenses. In most circumstances the IRS will allow all ordinary and necessary expenses of the business.

The IRS’s recent revisions to its Internal Revenue Manual make these types of Offers more difficult.

Offers submitted by an in-business taxpayer with payroll/trust fund recovery penalty liabilities will not be investigated unless the trust fund portion of the taxes are paid, the trust fund recovery penalties are assessed against all responsible persons, or the trust fund package has been forwarded for assessment.

To submit an Offer for an ongoing business, all of the responsible persons must either agree to be assessed with the trust fund recovery penalties, or pay the underlying trust fund amount.

Offers submitted by active businesses with trust fund liabilities no longer require that the Offer amount include the reasonable collection potential of both the entity and all responsible persons. Instead, the ongoing business is only required to offer an amount reflective of its reasonable collection potential.

This policy is likely due to the IRS’s renewed focus on the collection of the trust fund liabilities from all responsible persons, despite an Offer at the entity level.

The IRS will continue to collect the trust fund portion of the liability from the responsible persons despite the entity’s successful Offer; most responsible persons would not be motivated to file an Offer on behalf of the company due to their continued liability. The IRS’s interest in collecting from all responsible persons diminishes some of the benefits of an Offer for an ongoing business taxpayer.

These policies leave most responsible persons in a precarious situation because the Offer for the business will not alleviate their personal liabilities. Unless all of the responsible persons independently qualify for a personal Offer in Compromise, this might not be the best solution for the business. However, it may be the only solution available for the entity to remain in business.

For tax help on your unpaid payroll or income tax, call Mitchell A. Port at (310) 559-5259.

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The Franchise Tax Board (FTB) in California has written useful material to help explain the various types of business entities that can be formed in California. A business attorney with knowledge about the benefits and tax implications of these types of entities should be consulted before one is formed. But to give you some useful background information about choices that can be made when forming your business, please read the highlighted topics.

Sole Proprietorship

S corporation

C corporation

Partnership

Limited Liability Limited Partnership

Limited Liability Partnership

Series Limited Liability Company

Limited Liability Company

Consult with Mitchell A. Port, a business attorney in Los Angeles, for more assistance when selecting and forming an entity. Call (310) 559-5259.

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California's tax season means proper tax planning. A most important tool is the tax code. Access to the entire tax code for California is available by clicking here.

Here's a list of the tax code's table of contents.

CALIFORNIA REVENUE AND TAXATION CODE

TABLE OF CONTENTS

GENERAL PROVISIONS ................................................... 1-38
DIVISION 1. PROPERTY TAXATION
PART 0.5. IMPLEMENTATION OF ARTICLE XIIIA OF THE CALIFORNIA
CONSTITUTION

Continue reading "California Revenue and Taxation Code" »

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Generally, businesses and trusts and estates in Los Angeles County, Orange County, Santa Barbara County and Ventura County, California need a new employer identification number (“EIN”) when their ownership or structure has changed. Changing the name of your business does not require you to obtain a new EIN.

What follows are some general rules about when getting a new federal EIN may or may not be appropriate:

Trusts
You will be required to obtain a new EIN if any of the following statements are true.
• One person is the grantor/maker of many trusts.
• A trust changes to an estate.
• A living or intervivos trust changes to a testamentary trust.
• A living trust terminates by distributing its property to a residual trust.

You will not be required to obtain a new EIN if any of the following statements are true.
• The trustee changes.
• The grantor or beneficiary changes his/her name or address

Estates
You will be required to obtain a new EIN if any of the following statements are true.
• A trust is created with funds from the estate (not simply a continuation of the estate).
• You represent an estate that operates a business after the owner's death.

You will not be required to obtain a new EIN if any of the following statement is true.
• The administrator, personal representative, or executor changes his/her name or address.

Limited Liability Company (LLC)
An LLC is a new entity created by state statute. The IRS did not create a new tax classification for the LLC when it was created by the states; instead IRS uses the tax entity classifications it has always had for business taxpayers: corporation, partnership, or sole proprietor. An LLC is always classified by the IRS as one of these types of taxable entities.

Corporations
You will be required to obtain a new EIN if any of the following statements are true.
• A corporation receives a new charter from the secretary of state.
• You are a subsidiary of a corporation using the parent's EIN or you become a subsidiary of a corporation.
• You change to a partnership or a sole proprietorship.
• A new corporation is created after a statutory merger.

You will not be required to obtain a new EIN if any of the following statements are true.
• You are a division of a corporation.
• The surviving corporation uses the existing EIN after a corporate merger.
• A corporation declares bankruptcy.
• The corporate name or location changes.
• A corporation chooses to be taxed as an S corporation.
• Reorganization of a corporation changes only the identity or place.

Sole Proprietors
You will be required to obtain a new EIN if any of the following statements are true.
• You are subject to a bankruptcy proceeding.
• You incorporate.
• You take in partners and operate as a partnership.
• You purchase or inherit an existing business that you operate as a sole proprietorship.

You will not be required to obtain a new EIN if any of the following statements are true.
• You change the name of your business.
• You change your location and/or add other locations.
• You operate multiple businesses.

Partnerships
You will be required to obtain a new EIN if any of the following statements are true.
• You incorporate.
• Your partnership is taken over by one of the partners and is operated as a sole proprietorship.
• You end an old partnership and begin a new one.

You will not be required to obtain a new EIN if any of the following statements are true.
• The partnership declares bankruptcy.
• The partnership name changes.
• You change the location of the partnership or add other locations.
• A new partnership is formed as a result of the termination of a partnership under IRC section 708(b)(1)(B).
• 50 percent or more of the ownership of the partnership (measured by interests in capital and profits) changes hands within a twelve-month period (terminated partnerships under Reg. 301.6109-1).

Speak to a California tax attorney about this and other business, estate/trust and probate questions. Call Mitchell A. Port at 310.559.5259.

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California's business owners now have easy access to solutions made available by the Franchise Tax Board in response to errors made when trying to fulfill their California tax obligations. Here's a partial list of how business owners in the counties of Los Angeles, Santa Barbara, Orange and Ventura - and throughout the rest of California - can make unintended mistakes that delay processing those tax returns:

Incorrect math calculations, or incomplete or missing documents

Return account periods overlap

Omitting or using incorrect entity identification numbers

Incomplete entity name

One lump sum payment sent for multiple entities, or multiple payments sent in the same package/envelope

Incorrect payment amount claimed

Multiple tax returns filed for the same account period

Amended returns not clearly identified as amended

Limited Liability Companies (LLCs) filing incorrect forms

Using an incorrect form for the tax year account period indicated on the return

For tax help, speak with a tax lawyer. Mitchell A. Port is a tax attorney located in Los Angeles who can fix the problem. Call (310) 559-5259.

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The Taxpayer Advocate independently represents your interests and concerns within the Internal Revenue Service. The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who believe that an IRS system or procedure is not working as it should, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who are experiencing economic harm. The goals of the Taxpayer Advocate Service are to protect individual and business taxpayer rights and to reduce taxpayer burden. This is accomplished in two ways:

Identifying issues that increase burden or create problems for taxpayers: Bringing those issues to the attention of IRS management and making legislative proposals where necessary;

Ensuring that taxpayer problems which have not been resolved through normal channels, are promptly and fairly handled.

Need further help? Call a qualified California tax attorney - call Mitchell A. Port at (310) 559-5259.

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Simply not filing a federal tax return for your California business or for your income earned in California, be it a payroll tax return or a corporate tax return, or an individual income tax return doesn’t mean you or your California based business won’t be assessed a tax.

Internal Revenue Code Section 6020(b) is the authority given to the Commissioner of the Internal Revenue Service to prepare and process tax returns for non-filing business and individual taxpayers. If the tax returns prepared for you by the government are taxable, as they almost certainly will be, then a tax is assessed and collection efforts will be made.

Final regulations were recently issued by the Internal Revenue Service and they affect any person who fails to file a required federal tax return.

The final regulations relate to tax returns prepared or signed by the Commissioner or other Internal Revenue Officers or employees under Section 6020 of the Internal Revenue Code. The final regulations provide guidance for preparing a substitute for return under Section 6020(b).

IRC 6020(b) provides a way to prepare returns and secure assessments from non-filing taxpayers who:

Have an open filing requirement

Do not file a return as required

Speaking with the formality of final tax regulations, here’s what they say: “If any person required by the Internal Revenue Code or by the regulations to make a tax return, fails to make such return at the time prescribed for it, or makes, willfully or otherwise, a false, fraudulent or frivolous return, the Commissioner or other authorized Internal Revenue Officer or employee shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise. The Commissioner or other authorized Internal Revenue Officer or employee may make the tax return by gathering information and making computations through electronic, automated or other means to make a determination of the taxpayer’s tax liability.”

File your unfiled tax returns for your California business or for you personally. Negotiate with a tax attorney’s help how you can pay the tax and how much of it must be paid. Call Mitchell A. Port, an attorney formerly with the IRS, at (310) 559-5259.

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Attention California small business owners: The 2009 IRS Tax Calendar for Small Businesses and the Self-Employed (Publication 1518) is now available in English and Spanish. The Tax Calendar is a handy resource to help small business owners meet their tax obligations. The twelve month wall calendar is packed with useful information on retirement plans, common tax filing dates, general business taxes, electronic filing and paying options, business publications and forms and a lot more.

Each page highlights different tax issues and tips that may be relevant to small-business owners.

Tax problems may nevertheless still come up in California and elsewhere. Call a tax attorney for help. Call Mitchell A. Port at (310) 559-5259.

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New Section 19011.5 of the California Revenue & Taxation Code requires some taxpayers to make their tax payments using an electronic method which California calls “mandatory e-pay”.
There is a one percent penalty of the amount paid unless the failure to pay electronically was for reasonable cause and not willful neglect.

As a California tax attorney, I don’t know and the law remains unclear whether the penalty applies to those who are employees and who make regular tax payments by having employee withholding done by their employer.

In California, beginning January 1, 2009, personal income taxpayers whose tax liability is greater than $80,000 or who make an estimated tax or extension payment that exceeds $20,000 for taxable years beginning on or after January 1, 2009, must send the payment electronically. Once either of these conditions is met, all payments regardless of type, amount, or tax year must be remitted electronically by credit card, Electronic Funds Withdrawal (EFW), or web pay.

Taxpayers whose tax thresholds fall below the mandatory e-pay amounts may request to discontinue making electronic payments. In March 2009, the California Franchise Tax Board will provide a waiver form for taxpayers to file.

On December 1, the California Franchise Tax Board sent courtesy letters to taxpayers who made a payment in 2008 that could qualify them for mandatory e-pay. The letter informed these taxpayers of the law change, and that they may meet the mandatory e-pay threshold in 2009.

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When closing a business in California, there is much to do. Some of the following suggestions may require help from your tax attorney or CPA.

You must file an annual return for the year you go out of business. If you have employees, you must file the final employment tax returns, in addition to making final federal tax deposits of these taxes.

The annual tax return for a partnership, corporation, S corporation, limited liability company or trust includes check boxes near the top front page just below the entity information. For the tax year in which your business ceases to exist, check the box that indicates this tax return is a final return. If there are Schedule K-1s, repeat the same procedure on the Schedule K-1.

You will also need to file returns to report disposing of business property, reporting the exchange of like-kind property, and/or changing the form of your business. Below is a list of typical actions to take when closing a business, depending on your type of business structure:

Checklist

Make final federal tax deposits
Electronic Federal Tax Paying System (EFTPS)
OR
Form 8109-B

File final quarterly or annual employment tax form
Form 940, Employer's Annual Federal Unemployment (FUTA) Tax Return
Form 941, Employer's Quarterly Federal Tax Return
Form 943, Employer's Annual Tax Return for Agricultural Employees
Form 943-A, Agricultural Employer's Record of Federal Tax Liability

Issue final wage and withholding information to employees
Form W-2, Wage and Tax Statement

Report information from W-2s issued
Form W-3, Transmittal of Income and Tax Statements

File final tip income and allocated tips information return
Form 8027, Employer's Annual Information Return of Tip Income and Allocated Tips

Report capital gains or losses
Form 1040, U.S. Individual Income Tax Return
Form 1065, U.S. Partnership Return of Income
Form 1120 (Schedule D), Capital Gains and Losses

Report partner's/shareholder's shares
Form 1065 (Schedule K-1), Partner's Share of Income, Credits, Deductions, etc.
Form 1120S (Schedule K-1), Shareholder's Share of Income, Credits, Deductions, etc.

File final employee pension/benefit plan
Form 5500, Annual Return/Report of Employee Benefit Plan

Issue payment information to sub-contractors
Form 1099-MISC, Miscellaneous Income

Report information from 1099s issued
Form 1096, Annual Summary and Transmittal of U.S. Information Returns

Report corporate dissolution or liquidation
Form 966, Corporate Dissolution or Liquidation

Consider allowing S corporation election to terminate
Form 1120S, Instructions

Report business asset sales
Form 8594, Asset Acquisition Statement

Report the sale or exchange of property used in your trade or business
Form 4797, Sales of Business Property

Contact local and California state agencies.

Speak with a California business attorney about this and your other business questions. Call Mitchell A. Port.

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The IRS provided interim guidance with regard to the application of the 2-percent floor under Internal Revenue Code section 67 to certain investment advisory fees. Specifically, the IRS notice provides that, for taxable years beginning before January 1, 2009, non-grantor trusts and estates will not be required to “unbundled” a fiduciary fee into portions consisting of costs that are fully deductible and costs that are subject to the 2-percent floor.

On January 16, 2008, the Supreme Court of the United States issued its decision in Michael J. Knight, Trustee of William L. Rudkin Testamentary Trust v. Commissioner, 552 U.S. ___, 128 S. Ct. 782 (2008), holding that costs paid to an investment advisor by a nongrantor trust or estate generally are subject to the 2-percent floor for miscellaneous itemized deductions under § 67(a).

The IRS and the Treasury Department expect to issue regulations under § 1.67-4 of the Income Tax Regulations consistent with the Supreme Court’s holding in Knight. The regulations, however, will not be issued in time to be applicable to the 2008 taxable year.

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The ABA Journal is surveying lawyers about the job market and the current state of the economy. I am letting readers know about the Journal's survey with a mention on my blog. Here is the link.

Survey results will be published in the January ABA Journal.

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The Internal Revenue Bulletin (IRB) is the authoritative instrument of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service and for publishing Treasury Decisions, Executive Orders, Tax Conventions, legislation, court decisions, and other items of general interest. It is published weekly and may be obtained from the Superintendent of Documents on a subscription basis. Bulletin contents are compiled semiannually into Cumulative Bulletins, which are sold on a single-copy basis.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application of the tax laws, including all rulings that supersede, revoke, modify, or amend any of those previously published in the Bulletin.

All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of internal practices and procedures that affect the rights and duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service on the application of the law to the pivotal facts stated in the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices, identifying details and information of a confidential nature are deleted to prevent unwarranted invasions of privacy and to comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the force and effect of Treasury Department Regulations, but they may be used as precedents. Unpublished rulings will not be relied on, used, or cited as precedents by Service personnel in the disposition of other cases. In applying published rulings and procedures, the effect of subsequent legislation, regulations, court decisions, rulings, and procedures must be considered, and Service personnel and others concerned are cautioned against reaching the same conclusions in other cases unless the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

Part II.—Treaties and Tax Legislation.

Part III.—Administrative, Procedural, and Miscellaneous.

Part IV.—Items of General Interest.

Interested in knowing more about how the IRS works? Call a tax attorney with experience working with the IRS. Call Mitchell A. Port at 310.559.5259.

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The Government Accounting Office (GAO) was asked to review and report on the Internal Revenue Service's (IRS) processes and procedures to prevent and collect unpaid payroll taxes. Specifically, GAO was asked to determine (1) the magnitude of unpaid federal payroll tax debt, (2) the factors affecting IRS’s ability to enforce compliance or pursue collections, and (3) whether some businesses with unpaid payroll taxes are engaged in abusive or potentially criminal activities with regard to the federal tax system.Over 1.6 million businesses owed over $58 billion in unpaid federal payroll taxes, including interest and penalties as of September 30, 2007. Payroll taxes consist of your income tax withheld, social security and Medicare contributions, and the employer’s contributions.

Some of these businesses “abuse” the federal tax system and took advantage of the existing tax enforcement and administration system to avoid fulfilling or paying federal tax obligations. Over a quarter of payroll taxes are owed by businesses with more than 3 years (12 tax quarters) of unpaid payroll taxes. Some of these business owners repeatedly accumulated tax debt from multiple businesses. For example, the IRS found 18 individuals were responsible for not remitting payroll taxes for a dozen different businesses and over 1,500 individuals to be responsible for nonpayment of payroll taxes at three or more businesses.

IRS has not always promptly filed liens against businesses to protect the government's interests and has not always taken timely action to hold responsible parties personally liable for unpaid payroll taxes.

Although IRS has tools at its disposal to prevent the further accumulation of unpaid payroll taxes and to collect the taxes that are owed, IRS's current approach does not provide for their full, effective use. IRS's overall approach to collection focuses primarily on gaining voluntary compliance - even for egregious payroll tax offenders - a practice that can result in minimal or no actual collections for these offenders.

If your business has payroll tax problems you are at risk of the IRS putting you out of business, and assessing the trust fund recovery penalty resulting in owners, and officers having substantial personal tax liability. If you would like assistance in dealing with these, and other types of tax problems contact Los Angeles tax attorney Mitchell A. Port at 310.559.5259.

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Simply put:

"Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."

In carrying out its mission, the IRS creates tax problems for which you may need help from a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259 and discuss how to fix your tax trouble.

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Both California employers and California workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee by filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the IRS. To read other articles on the topic of independent contractor, see previous blog entries by clicking here and here.

Are your workers independent contractors or employees? For more information, see the IRS website by clicking here.

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California businesses often start out small. As a new business owner you need to know your federal tax responsibilities. Here are links to basic federal tax information for start-up businesses. Links are also provided to help in making certain business decisions. The list is not all-inclusive. Other steps may be appropriate for your specific type of business such as contacting a qualified California business attorney who can help.

Is it a Business or a Hobby?

Selecting a Business Structure

Employer Identification Number (EIN)

Business Taxes

Recordkeeping

When Do I Start My Tax Year?

Selecting an Accounting Method

Checklist for Starting a Business

Establishing a Retirement Plan

Small Business Publications

Call Mitchell A. Port at (310) 559-5259 to discuss your California-based business.

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About a year and a half ago, I asked: What are the consequences of treating an employee as an independent contractor? Now, I ask: Are your California workers independent contractors or employees?

Knowing the proper worker classification can be critical to your business. Don’t guess. Act now to make certain you know for sure.

How you answer that question can have a significant impact on how much tax you pay as a California business owner. Whether your workers who may be based in Los Angeles County, Santa Barbara County, Ventura County or Orange County are or are not independent contractors will affect the amount of taxes you must withhold from their pay. It will affect how much additional cost your business must bear to conform to California’s labor code and other laws, what documents and information those workers must provide to you, and what tax documents you must give to them.

California employers who erroneously classify workers as independent contractors can end up with large tax liabilities as well as penalties and interest for failing to pay employment taxes and failing to file required tax forms. Workers can avoid higher taxes and lost benefits if they know their proper status.

By filing a Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, with the Internal Revenue Service, both employers and workers can ask the IRS to make a determination on whether a specific individual is an independent contractor or an employee.

Generally, whether a worker is an independent contractor or an employee depends on how much control you have as the owner. Your California workers are most likely employees if you have the right to control or direct not only what is to be done but also how it is to be done. If you can direct or control only the result of the work done, and not the means and methods of accomplishing the result, then your workers are probably independent contractors.

Three broad characteristics are used by the IRS to determine the relationship between businesses and workers - Financial Control, Behavioral Control and the Type of Relationship. Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker's job. Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training, or other means. The Type of Relationship factor relates to how the workers and the business owner perceive their relationship.

Learn more about the determination of a worker’s status as an Independent Contractor or Employee at IRS.gov by selecting the Small Business link. Additional resources include IRS Publication 15-A, Employer's Supplemental Tax Guide, and Publication 1779, Independent Contractor or Employee.

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The IRS seems to be growing more effective with enforcement in a number of key areas. The IRS is improving in areas important to maintaining an efficient and fair tax system while collecting billions of additional tax dollars. At the same time, the IRS says it continues to improve service to you and me.

Enforcement by the IRS increased in fiscal year 2007. For example, during 2007 the IRS audited 84 percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $59.2 billion, up from $48.7 billion in 2006 and nearly $34.1 billion in 2002.

Highlights of the enforcement and services numbers for fiscal year 2007, which ended on September 30, include:

Individuals

The IRS filed 3.8 million levies and almost 700,000 tax liens during 2007, an increase from the previous year and a substantial increase from five years earlier.

Audit rates increased in 2007, both for overall individual rates and for higher-income taxpayers.

Overall, the total individual returns audited increased by 7 percent to 1,384,563 in 2007 from 1,293,681 in 2006. That’s the highest number since 1998.

One out of 11 individuals with incomes of $1 million or more faced an audit in 2007. Audits of individuals with incomes of $1 million or more increased from 17,015 during fiscal year 2006 to 31,382 during fiscal year 2007, an increase of 84 percent.

Audits of individuals with incomes over $200,000 reached 113,105 returns, up 29.2 percent from the prior year total of 87,885.

The IRS increased audits of individual returns with income of $100,000 or more, auditing 293,188 of these returns in 2007, up 13.7 percent from last year’s total of 257,851.

Businesses

With businesses, the IRS reviewed more tax returns of flow-through entities – S corporations and partnerships. Statistically, the IRS has placed more emphasis in the area of these flow-through returns. Though large corporate audits are slightly fewer, the Service has increased its focus on mid-market corporations – those with assets between $10 million and $50 million dollars.

Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year’s total of 52,223.

Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year’s total of 13,984.

Audits of partnerships increased to 12,195 during 2007, up almost 25 percent from the prior year’s total of 9,777.

Audits of mid-market corporations increased to 4,473, up 6 percent from last year’s total of 4,218.

Although the audits of large corporations declined slightly in 2007 to 9,644 audits, the number of audits is up 14 percent from the fiscal year 2002 level.

Taxpayer Services

More people visited the IRS internet site, IRS.gov. The IRS site was accessed more than 217 million times in 2007, up more than 10.5 percent from the same period in 2006.

The IRS helped more taxpayers find out about their refunds through the agency’s internet-based system ‘Where’s my Refund?’ The system was accessed 32.1 million times during 2007, up 30 percent from last year’s usage of 24.7 million.

The agency held a 94 percent customer satisfaction rating for its toll-free telephone service.

As in the prior year, the IRS accuracy was 91 percent on tax law questions answered through its toll-free telephone service.

More taxpayers chose to file electronically in 2007 than during the prior year, with 57 percent of individual tax filers choosing to e-file in 2007, up from 54 percent in 2006.

Have a problem with the Internal Revenue Service or California State tax agencies? Call a tax attorney - call Mitchell A. Port for tax help.

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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.

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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.

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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.

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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.

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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.

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There is now tax relief for homeowners. In a news brief issued by the IRS for the benefit of those with troubled loans, the government now says that if your mortgage debt is partly or entirely forgiven during 2007, 2008 or 2009 you may be able to claim special tax relief by filling out Form 982 and attaching it to your federal income tax return for that year. Usually, forgiveness of debt results in taxable income. However, under the Mortgage Forgiveness Debt Relief Act of 2007, you may be able to exclude from tax up to $2 million of debt forgiven on your primary residence. The limit is $1 million for a married person filing a separate return.

Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, may qualify for this relief. The debt must have been used to buy, build or substantially improve your principal residence and must have been secured by that residence. Debt used to refinance qualifying debt is also eligible for the exclusion, but only up to the amount of the old mortgage principal, just before the refinancing.

Debt forgiven on second homes, rental property, business property, credit cards or car loans does not qualify for the new tax-relief provision. In some cases, however, other kinds of tax relief, based on insolvency, for example, may be available.

If you have other federal or California state tax problems, speak with a qualified tax attorney about finding a solution. Call Mitchell A. Port at 310.559.5259.

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In May and June alone, taxpayers reported almost 700 separate phishing incidents to the IRS.

The most common scams involve tax refunds and, this year, economic stimulus payments. The Internal Revenue Service cautions taxpayers to be on the lookout for a new wave of scams using the IRS name in identity theft e-mails, or phishing, that have circulated during the last two months.

The IRS has an interesting news article where the full details are available.

Here is a part of the article:

How Scams Work

"To lure their victims, phishing scams use the name of a known institution, such as the IRS, to either offer a reward for taking a simple action, such as providing information, or threaten or imply an unpleasant consequence, such as losing a refund, for failing to take the requested action.

"The goal of the scams is to trick people into revealing personal and financial information, such as Social Security, bank account or credit card numbers, which the scammers can use to commit identity theft.

"Typically, identity thieves use a victim’s personal and financial data to empty the victim’s financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name, file fraudulent tax returns or even commit crimes. Most of these fraudulent activities can be committed electronically from a remote location, including overseas. Committing these activities in cyberspace allows scammers to act quickly and cover their tracks before the victim becomes aware of the theft.

"People whose identities have been stolen can spend months or years — and their hard-earned money — cleaning up the mess thieves have made of their reputations and credit records. In the meantime, victims may lose job opportunities or may be refused loans, education, housing or cars."

Topics in the article also include:

Refund e-Mail Scam

Tax Court Scam

Economic Stimulus Payments Scam

Company Report Scam

Substitute Form 1040 Fax Scam

What to Do

Do you have other tax problems with the IRS or California tax authorities? If so, speak with Mitchell A. Port, a tax attorney in Los Angeles, about your concerns.

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The Internal Revenue Service has a general questions and answers section you can read in detail here. Each year the IRS updates the answers to reflect the latest changes in tax regulations. These questions and answers came from taxpayers like you.

Frequently Asked Questions

1. IRS Procedures

1.1. General Procedural Questions

1.2. Address Changes

1.3. Amended Returns & Form 1040X

1.4. Code, Revenue Procedures, Regulations, Letter Rulings

1.5. Collection Procedural Questions

1.6. Copies & Transcripts

1.7. Extensions

1.8. Forms & Publications

1.9. Injured Spouse

1.10. Name Changes & Social Security Number Matching Issues

1.11. Notices & Letters

1.12. Refund Inquiries

1.13. Reporting Fraud

1.14. Signing the Return

1.15. W–2 - Additional, Incorrect, Lost, Non-receipt, Omitted

1.16. W–4 - Allowances, Excess FICA, Students, Withholding

2. Filing Requirements/Status/Dependents/Exemptions

2.1. Filing Requirements

2.2. Filing Status

2.3. Dependents & Exemptions

3. Itemized Deductions/Standard Deductions

3.1. Autos, Computers, Electronic Devices (Listed Property)

3.2. Education & Work-Related Expenses

3.3. Gifts & Charitable Contributions

3.4. Interest, Investment, Money Transactions (Alimony, Bad Debts, Applicable Federal Interest Rate, Gambling, Legal Fees, Loans, etc.)

3.5. 5. Medical, Nursing Home, Special Care Expenses

3.6. 6. Real Estate (Taxes, Mortgage Interest, Points, Other Property Expenses)

3.7. 7. Other Deduction Questions

4. Interest/Dividends/Other Types of Income

4.1. 1099–DIV Dividend Income

4.2. 1099–INT Interest Income

4.3. 1099–MISC, Independent Contractors, and Self-employed

4.4. 1099 Information Returns (All Other)

4.5. Alimony, Child Support, Court Awards, Damages

4.6. Employee Reimbursements, Form W–2, Wage Inquiries

4.7. Gifts & Inheritances

4.8. Grants, Scholarships, Student Loans, Work Study

4.9. Life Insurance & Disability Insurance Proceeds

4.10. Ministers' Compensation & Housing Allowance

4.11. Savings Bonds

4.12. Tips

5. Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.)

5.1. General/Taxability Issues including Distributions, Early Withdrawals, 10% Additional Tax, Defaulted Loans

5.2. Rollovers

5.3. Types of Plans

5.4. Plan Operations

5.5. Plan Design

5.6. Correcting Plan Errors

6. Social Security Income

6.1. Back Payments

6.2. Regular & Disability Benefits

6.3. Survivors' Benefits

7. Child Care Credit/Other Credits

7.1. Child and Dependent Care Credit & Flexible Benefit Plans

7.2. Child Tax Credit

7.3. Credit for the Elderly or the Disabled

7.4. Hope & Life Time Learning Educational Credits

7.5. Other Credits

8. Earned Income Tax Credit

8.1. Qualifying Child Rules

8.2. Taxable & Nontaxable Income

8.3. Other EITC Issues

9. Estimated Tax

9.1. Businesses

9.2. Farmers & Fishermen

9.3. Individuals

9.4. Large Gains, Lump-sum Distributions, etc.

9.5. Penalty Questions

10. Capital Gains, Losses/Sale of Home

10.1. Property (Basis, Sale of Home, etc.)

10.2. Stocks (Options, Splits, Traders)

10.3. Mutual Funds (Costs, Distributions, etc.)

10.4. Losses (Homes, Stocks, Other Property)

11. Sale or Trade of Business, Depreciation, Rentals

11.1. Depreciation & Recapture

11.2. Rental Expenses versus Passive Activity Losses (PALs)

11.3. Personal Use of Business Property (Condo, Timeshare, etc.)

11.4. Sales, Trades, Exchanges

12. Small Business/Self-Employed/Other Business

12.1. Entities: Sole Proprietor, Partnership, Limited Liability Company/Partnership (LLC/LLP), Corporation, Subchapter S Corporation

12.2. Form 1099–MISC & Independent Contractors

12.3. Form W–2, FICA, Medicare, Tips, Employee Benefits

12.4. Form W–4 & Wage Withholding

12.5. Form SS–4 & Employer Identification Number (EIN)

12.6. Forms 941, 940, Employment Taxes

12.7. Income & Expenses

12.8. Schedule C & Schedule SE

12.9. Starting or Ending a Business

13. Aliens and U.S. Citizens Living Abroad

13.1. Canadian & U.S. Tax Issues

13.2. Exchange Rate

13.3. Foreign Income & Foreign Income Exclusion

13.4. Nonresident Alien - General

13.5. Nonresident Alien - Tax Withholding

13.6. Nonresident Alien - Students

13.7. U.S. Citizens Overseas

13.8. Other

14. Electronic Filing (e-file)

14.1. Age/Name/SSN Rejects, Errors, Correction Procedures

14.2. Amended Returns

14.3. Due Dates & Extension Dates for e-file

14.4. Forms W–2 & Other Attachments

15. Magnetic Media Filers

16. Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries)

17. Individual Retirement Arrangements (IRAs)

17.1. Distributions, Early Withdrawals, 10% Additional Tax

17.2. Rollovers

17.3. Roth IRA

17.4. Traditional IRA

Are you in tax trouble with any of these federal compliance procedures? Talk to a professional: talk with tax attorney Mitchell A. Port at 310.559.5259.

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As a California business person, have you asked yourself any of the questions below concerning employees and their tax for which you may be responsible in part? The IRS has the answers to these question on its website at IRS.gov.

Here are the questions:

As an employee, what happens if the IRS determines that I do not have adequate withholding?

If an employer no longer has to submit Forms W-4 claiming complete exemption from withholding or claiming more than 10 allowances, how does the IRS determine adequate withholding?

If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?

As an employer who has received a modification letter (letter 2808C) from the WHC program, do I wait for another 60 days to change the marital status and/or number of allowances per the modification letter?

I have been directed to lock in an employee’s withholding. What happens if I do not lock in the employee’s withholding as directed?

As an employer, after I lock in withholding on an employee based on a lock-in letter from the IRS, what do I do if I receive a revised Form W-4 from the employee?

Our employees can submit or change their Forms W-4 on line. How can I prevent them from changing their Forms W-4 after they have been locked-in by the IRS?

What should I do if an employee submits a valid Form W-4 that appears to be claiming an incorrect withholding amount?

What do I do if an employee hands me a substitute Form W-4 developed by the employee?

I heard my employer no longer has to routinely submit Forms W-4 to the IRS. How will this affect me as an employee?

What if I don’t want to submit a Form W-4 to my employer?

What do I do if an employee hands me an official IRS Form W-4 that is clearly altered?

In the past, as an employer, I was required to submit all Forms W-4 that claimed complete exemption from withholding (when $200 or more in weekly wages were regularly expected) or claimed more than 10 allowances. What Forms W-4 do I now have to submit to the IRS?

Tax problems? Would you like tax help? Tax compliance a problem? Want to settle with the IRS? Call Los Angeles tax attorney Mitchell A. Port at 310.559.5259.

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In an announcement made on July 1, 2008, the Internal Revenue Service determined that the deadline for extension requests filed by partnerships, including those formed in California, will be shortened by one month. For partnerships whose year ends on or after September 30, 2008, a calendar-year partnership requesting an extension on Form 7004 to file a partnership tax return (Form 1065) will have an extension granted to September 15th instead of to October 15th as it used to be.

The reason is that partnerships must issue K-1 forms when their Form 1065 is filed. Until now, a partner (who needs the K-1 form to file his own individual income tax return) might get the K-1 form after his or her own extended deadline.

That problem is avoided by having the partnership deadline end a month earlier. Partners will now have at least a month before their own extended deadline in which to incorporate their K-1 forms.

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An unincorporated business jointly owned by a married couple is generally classified as a partnership for Federal tax purposes. For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are a husband and a wife filing a joint return, can elect not to be treated as a partnership for Federal tax purposes.

Reasons Why a Husband and Wife Might Want to Make the Election Not to be Treated as a Partnership

Because a business jointly owned and operated by a married couple is generally treated as a partnership for Federal tax purposes, the spouses must comply with filing and record keeping requirements imposed on partnerships and their partners. Married co-owners failing to file properly as a partnership may have been reporting on a Schedule C in the name of one spouse, so that only one spouse received credit for social security and Medicare coverage purposes. The election permits certain married co-owners to avoid filing partnership returns, if each spouse separately reports a share of all of the businesses’ items of income, gain, loss, deduction, and credit. Under the election, both spouses will receive credit for social security and Medicare coverage purposes.

The rest of this article is available at www.irs.gov. It continues with a discussion of these business topics:

Definition of a Qualified Joint Venture

How to Make the Election to be Treated as a Qualified Joint Venture

A Business Owned and Operated by the Spouses Through a Limited Liability Company Does not Qualify for the Election

How to Report Federal Income Tax as a Qualified Joint Venture (Including Self-employment Tax)

In General, Spouses Do NOT Need an Employer Identification Number (EIN) for the Qualified Joint Venture

What to do if the Spouses Already Have an EIN for the Partnership

How to Handle Requests From the IRS for a Partnership Return from the Spouses for Tax Years for Which the Election is in Effect

If the Spouses Elect to be Treated as a Qualified Joint Venture, How Do They Report and Pay Federal Employment Taxes?

Duration that the Election Remains in Effect

Also, take a look at Husband and Wife Business.

For help from a California business attorney on these and other topics, call Mitchell A. Port at (310) 559.5259.

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Due to rising gas prices, the mileage rate will increase by eight cents to 58.5 cents a mile for all business miles driven from July 1 through Dec. 31, 2008. The new rate for computing deductible medical or moving expenses will also increase by eight cents to 27 cents a mile. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile.

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Tax planning for family wealth transfers and California-based family owned businesses is complex and requires input from qualified advisors. Self-study may also be important: A resource for family business executives includes Fambiz.com.

That site covers topics in depth such as:

Asset Protection

Estate Planning

Family Business Trends

Inter-generational Issues

Shareholder Agreements

Strategic Planning

Succession

Tax Issues

Transfer of Ownership

Valuation

Women in Family Business

Use the Family Business Search engine to find a multitude of articles that can be searched by subject. A great resource for owners and executives of California's family businesses.

To talk to a California attorney about these and other business succession topics, call Mitchell A. Port at 310.559.5259.

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I read an ad and it went something like this:

"There's really no difference between law firms."

Many people believe that Los Angeles law firms are pretty much the same. I don't. I believe that what separates me from the pack is not what I do, but how I do it - aggressive not conservative, team player and not a one-man-band, problem solver not just a legal practitioner. My clients clearly understand and value this difference. How can I help you? Contact Mitchell A. Port at (310) 559-5259.

I liked this because it describes me and my practice. If you need help with probate, Wills, living trusts, powers of attorney, tax problems or business transactions, please call me for your consultation.

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In an article this California tax lawyer thinks is worth reading, Marjorie E. Kornhauser (Arizona State) has published A Tax Morale Approach to Compliance: Recommendations for the IRS, 8 Fla. Tax Rev. 599 (2007).

Here is the introduction:

If people hate taxes so much why do they pay them? The common, seemingly obvious, answer—fear of being caught cheating—is only a partial answer. In fact, this “obvious” answer—based on the rational cost/benefit analysis of traditional economic theory— explains so little of tax compliance that the puzzle of tax compliance is why people pay taxes instead of evading them. The key to this puzzle is “tax morale,” the collective name for all the non-rational factors and motivations—such as social norms, personal values and various cognitive processes—that strongly affect an individual’s voluntary compliance with laws. Higher tax morale correlates with higher tax compliance. Although the exact components of tax morale are not yet fully delineated, Congress and the IRS should begin now to shape and administer income tax laws in accordance with tax morale findings. Delay can only increase the chance that voluntary compliance will deteriorate given the interaction of an individual’s tax morale with elements of the external environment, such as other people and institutions. The tax gap, for example, is more than a problem of lost revenue; it is a visible sign of non-compliance that can create a downward spiral. Non-compliance among other taxpayers can decrease an individual’s own tax morale and compliance. Once tax morale dips, it is hard to restore it to prior levels. Ironically, then, the more the tax gap is publicized, the greater this danger becomes. Consequently, Congress and the IRS should act now to narrow the tax gap and to foster compliance generally. This Report offers the IRS several concrete suggestions for improving individual taxpayer compliance based on the tax morale literature.

Part II discusses methodology and the limitations of empirical research.

Part III briefly describes the tax morale literature, focusing on the main findings regarding: 1) cognitive and affective processes; 2) personal and social values/norms, especially procedural justice, legitimacy, reciprocity, and trust; 3) external activation and suppression of tax morale; 4) demographic factors; and 5) a new tax morale model for tax administration.

Part IV contains recommendations for the IRS. It presents three major recommendations and several more specific suggestions for the IRS to improve individual taxpayers’ voluntary compliance. First, the IRS should establish a department devoted solely to exploring tax morale issues and implementing the findings. Second, the IRS should adopt a tax morale approach to tax compliance that incorporates the findings of the research and responds to—and strengthens—taxpayers’ internal motivations to comply. Third, using tax morale research, the IRS should implement ongoing educational (long - and short term) programs and media campaigns. Although sticks as well as carrots are needed to ensure compliance, this Report examines only the carrots.

Part V provides a short conclusion.

Solutions to tax problems and California tax help from a qualified tax attorney is available by calling Mitchell A. Port at (310) 559-5259.

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Want to dissolve, surrender or cancel your California-based business whether you operate as a domestic corporation, foreign corporation, limited liability company or partnership? The California Franchise Tax Board has a helpful brochure to tell you how. Click here.

Winding-down your Los Angeles County, Orange County, Ventura County or Santa Barbara County business can be done with the help of a qualified attorney. Call Mitchell A. Port at (310) 559-5259 if you would like assistance.

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The California legislature is considering a bill that would allow the Franchise Tax Board (the FTB) to suspend occupational and professional licenses because of unpaid income tax liabilities and notify the applicable licensing agency of the suspension.

The bill would allow the FTB to suspend an individual’s occupational or professional license because of unpaid income tax liabilities. The FTB would suspend a license only after the following have been provided to the debtor:

Notice of State Income Tax Due,

Final Notice Before Levy,

Order To Withhold (OTW) is issued (if debtor’s bank information is available to the FTB),

Notice of State Tax Lien (issued when a state tax lien is recorded),

60-day preliminary suspension notice.

The FTB would be allowed The FTB to disclose to the licensing boards the reason for the suspension – unpaid taxes.

The FTB staff would provide a hearing, upon request, for license holders who would experience a financial hardship as a result of the suspension.

This bill would define the following:

“Hardship” means financial hardship, as determined by the FTB, where the licensee is financially unable to pay any part of their taxes including penalties, interest, and applicable fees and is unable to qualify for an installment payment arrangement pursuant to Section 19008 of the Revenue and Taxation Code.

“License” includes certificate, registration, or any other authorization to engage in a business or profession issued by a state governmental licensing entity.

“Licensee” means any individual authorized by a license, certificate, registration, or other authorization to engage in a business or profession issued by a state governmental licensing entity.

The bill would allow the Contractors State License Board and the FTB to have concurrent authority to suspend a contractor’s license.

This bill requires licensing boards to provide the FTB information at a time requested by the FTB.

This bill would allow a limited hearing for license holders with outstanding tax liabilities as of the date of enactment to substantiate that the license holder has paid the tax liability reflected in the notice of state tax lien.

ECONOMIC IMPACT

The revenue impact of this bill would depend on the number of delinquent taxpayers that possess an occupational or professional license. This estimate was calculated using the actual account balances of the department’s accounts receivables for the affected taxpayers, excluding accounts in bankruptcy and installment agreements. Taxpayers subject to this proposal are those with an outstanding liability of $1,000 or more and have owed that debt for one year or more.

It is estimated that 17,200 taxpayers with occupational and professional licenses will enter the collection process annually. Of the 17,200 taxpayers, it is estimated 38%, or 6,600, are expected to pay their delinquent debts upon notice from the FTB. Current departmental data indicates the average payment amount for compliant taxpayers would be approximately $2,000, resulting in an annual revenue increase of approximately $13 million (6,600 x $2,000 = $13.2 million). The average payment amount was calculated by the amount of payments made in response to filing enforcement notices.

Current departmental data also indicates unresolved cases of approximately 25,000 delinquent taxpayers with occupational and professional licenses in the collection process. Based on the 25,000 taxpayers, it is estimated that nearly 9,500 taxpayers would comply upon notice from the FTB resulting in a revenue increase of $19 million in the first year ($2,000 x 9,500 = $19 million). The revenue for fiscal year ending 2009-10 is estimated to total $32 million ($19 million + $13 million).

It is assumed that 50 percent of the $32 million would be collected in fiscal year 2009-2010, reducing revenue to $16 million. The remaining $16 million from fiscal year 2009-10 would be collected in 2010-11, in addition to the $13 million that is assessed annually, for a revenue impact of $29 million ($16 million + $13 million = $29 million) in 2010-11. Thereafter, the annual fiscal impact of $13 million would be collected. Because the revenue from this bill would be from tax liabilities from prior years, the estimates in the table are all accrued back one year.

If you are having an income tax collection problem with the FTB, call a tax attorney: call Mitchell A. Port at (310) 559-5259 for help.

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Like the IRS, California's Franchise Tax Board has its own taxpayer advocate. (See my earlier posting on August 27, 2007 entitled "What Has The IRS' Taxpayer Advocate Done Lately?"). It claims that "The Taxpayer Advocate's office is available to provide an independent review of your unresolved tax problems."

Your rights as a California taxpayer are described on the Franchise Tax Board's Advocate's website in English, Spanish, Chinese, Korean and Vietnamese.

There is also a comparison of California law with federal law concerning the taxpayers' bill of rights.

Common California Advocate Responsibilities Include:

Resolve problems when normal channels don’t work

Protect taxpayers’ rights

Determine whether to suspend collections while case is in review

Ensure courteous treatment of the public

Maintain independent status

Identify inequities

Provide independent review

Adhere to agency tax laws

Identify trends and issues

Encourage public suggestions

Propose changes

Promote understandable and simple:

Tax laws

Regulations

Policies

Procedures

Publications

Finally, there is a link to a list of taxpayer advocates in the California Board of Equalization (BOE), Employment Development Department (EDD), Franchise Tax Board (FTB) and the Internal Revenue Service (IRS).

If you continue to have tax problems even when dealing with the taxpayer advocate, call tax attorney Mitchell A. Port for tax help at 310.559.5259.

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Attention California business owners: here is a list of some useful sites and links to provide you with solutions to some of your questions about operating your business in the California counties of Los Angeles, Santa Barbara, Orange and Ventura.

U.S. Customs and Border Protection
U.S. Customs and Border Protection is the unified border agency within the Department of Homeland Security.

Environmental Protection Agency
The mission of the U.S. Environmental Protection Agency is to protect human health and to safeguard the natural environment--air, water and land--upon which life depends.

U.S. Tax Court
Congress created the Tax Court to provide a judicial forum in which affected persons could dispute tax deficiencies determined by the commissioner of Internal Revenue prior to payment of the disputed amounts.

Small Business Administration
The mission of the SBA is to maintain and to strengthen the nation’s economy by enabling the establishment and viability of small businesses and by assisting in the economic recovery of communities after disasters.

Business.gov
Business.gov guides you through the maze of government rules and regulations and provides access to services and resources to help you start, grow, and succeed in business.

USA.gov
The U.S. government's official Web portal.

Department of the Treasury
The mission of the Department of the Treasury is to promote the conditions for prosperity and stability in the United States and encourage prosperity and stability in the rest of the world.

Department of Commerce
The Commerce Department’s mission is to create the conditions for economic growth and opportunity by promoting innovation, entrepreneurship, competitiveness and stewardship.

Social Security Administration
The Social Security Administration is the nation's primary income security agency. It pays retirement, disability and survivors benefits to workers and their families, administers the Supplemental Security Income program, and issues Social Security numbers.

Department of Agriculture - Office of Small and Disadvantaged Business Utilization (OSDBU)
The mission of the OSDBU is to provide maximum opportunities for small businesses to participate in USDA contracting activities by establishing and attaining small disadvantaged business program goals.

Department of Labor: Occupational Safety & Health Administration (OSHA)
OSHA's mission is to assure the safety and health of America's workers by setting and enforcing standards; providing training, outreach, and education; establishing partnerships; and encouraging continual improvement in workplace safety and health.

Court Rulings
This page provides links to various federal, state and private sites that provide legal information for the small business owner.

Department of Education
The Education Department’s mission is to ensure equal access to education and to promote educational excellence throughout the nation.

State Links
A collection of links to State government Web sites with useful information for businesses. Whether you're already in business, just starting or expanding to a new state - there's something here for you!

State and Local Contacts
The State and Local Government on the Net directory provides convenient one-stop access to the Web sites of thousands of state agencies and city and county governments.

U.S. Census Bureau
The Census Bureau serves as the leading source of quality data about the nation’s people and economy.

U.S. Department of Labor
The department administers a variety of federal labor laws including those that guarantee workers’ rights to safe and healthful working conditions, a minimum hourly wage and overtime pay, freedom from employment discrimination, unemployment insurance and other income support.

U.S. Equal Employment Opportunity Commission
The mission of the EEOC is to eradicate employment discrimination at the workplace.

SBTV.com
SBTV.com is a television network on the Web devoted exclusively to providing engaging streaming video content to small businesses. It provides technical information on how to run your business, inspirational stories from entrepreneurs across the country, information about small business conferences and events, and resources to help solve day-to-day business challenges.

GobiernoUSA.gov
El portal oficial en español del Gobierno de los EE. UU (The U.S. government's official Spanish-language Web portal)

For tax and business help for your California based enterprise, call Mitchell A. Port at (310) 559.5259.

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Has your ex-spouse or former employee turned you in? Are you the victim of a false claim?

The Internal Revenue Service has a Whistleblower Office – it even has a director for it: he is Stephen Whitlock. Recently, the IRS outlined ways informants can report violations of the tax law and possibly claim a reward based on the amount of additional tax, penalties and interest that is owed.

If you earn a reward, you have to pay your own income tax on it. All awards will be subject to normal tax reporting and withholding requirements.

To be eligible for an award under the new procedures, the tax, penalties, interest, additions to tax, and additional amounts in dispute must exceed $2 million for any taxable year and, if the taxpayer is an individual, the individual’s gross income must exceed $200,000 for any taxable year in question.

The Whistleblower Office was created about a year ago, December. To make a claim, an informant must file new Form 211, Application for Award for Original Information, which asks informants for an explanation of how the informant obtained the information, to provide an estimate of the tax owed and the facts in the case.

The IRS’ Whistleblower Office will make the final determination about whether an award will be paid and the amount of the award for claims that it processes. Awards will be paid in proportion to the value of information furnished voluntarily with respect to proceeds collected.

Under the new procedures, the amount of award will be at least 15%, but no more than 30%, of the collected proceeds in cases in which the IRS determines that the information submitted by the informant substantially contributed to the collection of tax. The award percentage may be reduced in some circumstances, which are described in IRS guidance.

Has your ex-spouse or former employee turned you in? Are you the victim of a false claim? Call Mitchell A. Port at 310.559.5259 for tax help.

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The Internal Revenue Service has many forms and free publications on a wide variety of topics to help you understand and meet tax obligations, reporting and filing requirements. If you need IRS materials try one of these ways:

Walk-in: During the tax-filing season, many libraries and post offices offer free tax forms. Some libraries also have copies of commonly-requested publications. Braille materials may also be available. Many large grocery stores, copy centers, and office supply stores have forms you can photocopy or print from a CD.

Internet: You can access forms and publications on the IRS website 24 hours a day, 7 days a week, at IRS.gov.

Mail: Send your order for tax forms and publications to National Distribution Center, P.O. Box 8903, Bloomington, IL 61702-8903. You should receive your products within 10 days after we receive your order.

Phone: Call 800-TAX-FORM (800-829-3676) to order current year forms, instructions and publications and prior year forms and instructions. You should receive your order within 10 days.

Try these links:

Publication 2053A, Quick and Easy Access to IRS Tax Help and Forms (PDF 40K)

Publication 910, Guide to Free Tax Services (PDF 636K)

Need other tax help? Have other tax problems you wish to discuss with a California tax attorney? Call Mitchell A. Port at 310.559.5259.

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LLCs are subject to an $800 annual tax if they are doing business in California or have articles of organization accepted, or a certificate of registration issued by the California Secretary of State. The annual tax is prepaid for the privilege of doing business in California, and is due and payable on or before the 15th day of the 4th month after the beginning of the taxable year. The annual tax must be paid for each taxable year until the appropriate papers are filed.

In addition to the annual $800 tax, every California LLC must pay a fee based on total annual income. The LLC fee is due on or before the 15th day of the 4th month after the close of the LLC’s taxable year. The California Franchise Tax Board has a booklet containing much of what one needs to know about LLCs. For taxable years beginning on or after January 1, 2002, use the following chart to compute the fee:

If total annual income is equal to or over – but not over –

$250,000 to $499,999 the fee is $900
$500,000 to $999,999 the fee is $2,500
$1,000,000 to $4,999,999 the fee is $6,000
$5,000,000 and over the fee is $11,790

If the California Franchise Tax Board (FTB) determines multiple LLCs were formed for the primary purpose of reducing fees, the LLC’s total income from all sources that are reportable to California could include the aggregate total income of all commonly controlled LLC members. “Commonly controlled” means control of more than 50% of the capital interests or profit interests of the taxpayer and any other LLC or partnership by the same persons.

Strategic planning is necessary when working with LLCs. Expert tax advice is essential to accomplish business goals. Call Mitchell A. Port at 310.559.5259 to discuss your ideas.

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The IRS has a full discussion of offers in compromise on its website. Click here for the full article. Here is what the article says:

An offer in compromise (OIC) is an agreement between a taxpayer and the Internal Revenue Service that settles the taxpayer's tax liabilities for less than the full amount owed. If the liabilities can be fully paid through an installment agreement or other means, the taxpayer will in most cases not be eligible for an OIC. For information concerning installment agreements, refer to Topic 202.

In most cases, the IRS will not accept an offer unless the amount offered by the taxpayer is equal to or greater than the reasonable collection potential (the RCP). The RCP is how the IRS measures the taxpayer's ability to pay. The RCP includes the value that can be realized from the taxpayer's assets, such as real property, automobiles, bank accounts, and other property. In addition to property, the RCP also includes anticipated future income, less certain amounts allowed for basic living expenses.

The IRS may accept an OIC based on three grounds. First, acceptance is permitted if there is doubt as to liability. This ground is only met when genuine doubt exists that the IRS has correctly determined the amount owed. Second, acceptance is permitted if there is doubt that the amount owed is collectible. This means that doubt exists that the taxpayer could ever pay the full amount owed. Third, acceptance is permitted based on effective tax administration. An offer may be accepted based on effective tax administration when there is no doubt that the liabilities have been correctly determined and no doubt that the full amount owed can be collected, but requiring payment in full would either create an economic hardship or would be unfair and inequitable because of exceptional circumstances.

When submitting an OIC, taxpayers must....

Continue reading "Offer In Compromise" »

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Is your name on the list? Keep it off!

The California Franchise Tax Board is going after taxpayers who owe about $200,000 up to almost $27 million in back income taxes by listing their names and debts on the agency's website. California Revenue & Taxation Code Section 19195 directs the Franchise Tax Board to publish an annual list of the top 250 taxpayers with liened state income tax delinquencies greater than $100,000.

Of California's roughly 20 million taxpayers, about 250 owe huge debts. Before the FTB publishes the list, each taxpayer who may potentially be on the list gets a letter which provides them an opportunity to voluntarily settle their liability.

The notification letters, titled Notice of Public Disclosure, provide taxpayers 30 days to pay their debts or obtain FTB approval to make installment payments, pay the liability in full, enter into an Offer in Compromise, or substantiate a bankruptcy filing.

The California State Board of Equalization is also required by law to post similar information concerning back sales and use taxes every quarter, removing amounts that are being addressed through bankruptcy, payment arrangement, appeal or litigation.

Get tax help now! Call Mitchell A. Port, a California tax attorney experienced in resolving tax problems.

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While most tax return preparers are professional and honest, you can use the following tips to choose a preparer who will offer the best service for your tax preparation needs.

If you choose to use a paid tax preparer, it is important that you find a qualified tax professional. Taxpayers are ultimately responsible for everything on their return even when it’s prepared by someone else.

The most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and 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 later IRS contacts.

Get References. Ask questions and get references from clients who have used the tax professional before. Were they satisfied with the service received?

Plan Ahead. Choose a preparer you will be able to contact after the return is filed and one who will be responsive to your needs.

Ask about service fees. Avoid preparers who claim they can obtain larger refunds than other preparers, or those who guarantee a refund or base fees on a percentage of the amount of the refund.

Research. Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys. Find out if the preparer belongs to a professional organization that requires its members to pursue continuing education and also holds them accountable to a code of ethics.

Determine if the preparer’s credentials meet your needs. Does your state have licensing or registration requirements for paid preparers? Is he or she an Enrolled Agent, Certified Public Accountant, or Attorney? If so, the preparer can represent taxpayers before the IRS on all matters – including audits, collections, and appeals. Other return preparers can represent taxpayers only in audits regarding a return signed as a preparer.

Want a referral to a qualified tax return preparer from a California tax attorney? Call Mitchell A. Port at 310.559.5259.

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Did you believe you were an employee at your job rather than an independent contractor? Did your employer mistakenly treat you as an independent contractor perhaps because it was perceived as a way to save Social Security and Medicare Taxes on wages? If you were erroneously treated as an independent contractor, the Internal Revenue Service has developed a new form for employees who have been misclassified as independent contractors by an employer.

Form 8919, Uncollected Social Security and Medicare Tax on Wages, will now be used to figure and report the employee’s share of uncollected social security and Medicare taxes due on their compensation.

By using Form 8919, the worker’s social security and Medicare taxes will be credited to their social security record. To facilitate this process, the IRS will electronically share Form 8919 data with the Social Security Administration.

Generally, a worker who receives a Form 1099 for services provided as an independent contractor must report the income on Schedule C and pay self-employment tax on the net profit, using Schedule SE. However, sometimes the worker is incorrectly treated as an independent contractor when they are actually an employee. When this happens, Form 8919 will be used beginning for tax year 2007 by workers who performed services for an employer but the employer did not withhold the worker’s share of social security and Medicare taxes.

In addition, the worker must meet one of several criteria indicating they were an employee while performing the services. The criteria can be reviewed at this site:

In the past, misclassified workers often used Form 4137 to report their share of social security and Medicare taxes. Misclassified workers should no longer use this form. Instead, Form 4137 should now only be used by tipped employees to report social security and Medicare taxes on allocated tips and tips not reported to their employers.

Whether you are an employee or the employer, tax help is available to be sure you comply with the new rule. Call Mitchell A. Port at 310.559.5259 for tax help.

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The Truth about Frivolous Tax Arguments is the Internal Revenue Service’s response to anyone who contemplates arguing on legal grounds against paying their fair share of taxes. It discusses and rebuts many of the more common frivolous arguments made by individuals and groups that oppose compliance with federal tax laws.

This 74-page document is updated at least once a year by the IRS and is designed to help individuals and groups understand their responsibilities and not violate the law.

The document explains many of the common frivolous arguments made in recent years and it describes the legal responses that refute these claims. This document is available on IRS.gov and will help taxpayers avoid wasting their time with frivolous arguments and incurring penalties.

In 2006, Congress increased the amount of the penalty for frivolous tax returns from $500 to $5,000. The increased penalty amount applies when a person submits a tax return or other specified submission, and any portion of the submission is based on a position the IRS identifies as frivolous.

A section of this document explains the penalties that the courts may impose on those who pursue tax cases on frivolous grounds. It should be noted that the cases cited as relevant legal authority are illustrative and are not intended to provide an all-inclusive list relating to frivolous tax arguments.

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In November, 2007, the U.S. government sued the owners of a San Diego, California tax preparation firm, asking a federal court to shut them down and permanently bar them from preparing tax returns for others. The civil injunction suit was filed in San Diego, California against Roosevelt Kyle and Rebecca Tyree, both of San Diego, and their businesses—Century One Resorts Ltd., COA Financial Group LLC, and Eagle Financial Services LLC.

According to the government’s complaint, the defendants operate their business in National City, California, and have prepared more than 12,000 federal tax returns since 2000. The suit alleges that Kyle and Tyree understated their customers’ tax liabilities by preparing returns with fabricated business-expense and charitable deductions. The complaint alleges that the Internal Revenue Service estimates that the defendants’ misconduct has caused losses to the U.S. Treasury totaling $18 million.

According to the complaint, the IRS has penalized Kyle three times in the past for understating customers’ tax liabilities. In 2002 a federal jury found Kyle guilty of failing to file his own 1995-1998 tax returns.

Call Mitchell A. Port at 310.559.5259 if you would like a referral to a California tax return preparer who is fair, has integrity, is honest and helpful.

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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.

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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.

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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.

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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.

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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.

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The California State Bar has a very interesting pamphlet offering advice on finding the right lawyer for you in California.

The pamphlet asks about 16 different questions to help you find and hire the right attorney.

The California State Bar has other useful pamphlets on topics such as California Wills, whether you need estate planning and whether you need a living trust in California.

To speak with an attorney in Los Angeles, please call Mitchell A. Port at 310.559.5259.

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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.

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IRS Taxpayer Assistance Centers (TAC) are your source for personal tax help in Los Angeles County, Santa Barbara County, Orange County and Ventura County California when you believe your tax issue cannot be handled online or by phone, and you want face-to-face tax assistance. Taxpayer Assistance Centers are closed for all Federal Holidays.

To view a list of all Taxpayer Assistance Centers in your state, click on the map or state links below.

To search for the Taxpayer Assistance Center closest to you, enter your 5-digit ZIP Code into the Office Locator- Walk-In Site Search.

Tax problems? Tax trouble? Income taxes overdue? Have a tax debt? Unfiled tax returns? Want tax help? Call Mitchell A. Port at 310.559.5259.

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The following examples of employment tax fraud investigations are excerpts from public record documents on file in the court records in the judicial district in which the cases were prosecuted. Funny thing, though: as a tax attorney in California, only two of approximately twenty cases occurred in California despite its size and the number of businesses operating here.

Three People Sentenced in Tax and Insurance Fraud Scheme

Owner of Farm Labor Contracting Business Sentenced to 24 Months in Prison

Massachusetts Man Sentenced for Tax Evasion and Filing False Employment Tax Returns

Pennsylvania Businessman Sentenced to Prison for Tax Evasion

Oregon Woman to Serve 30 Months in Prison for Tax Evasion

Nursing Home Owner Sentenced to 30 Months in Prison for Failing to Pay Millions in Payroll Taxes

Chief Executive Officer of Company Sentenced for Failure to Pay Over Employment Taxes

Local Businesswoman Sentenced to More Than Five Years in Prison; Fined $1.2 Million for Tax Fraud

Owner of Altus Financial Sentenced to Federal Prison for Failing to Collect and Pay Employment Taxes

Ohio Attorney Sentenced for Tax Crimes

Landscaper Sentenced on Employment Tax Fraud Charges

Payroll Service Sentenced for Employment Tax Fraud

To read the entire story, as well as many other samples, click here.

If you believe you have a tax problem or simply want answers to your tax questions, call Mitchell A. Port at 310.559.5259.

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How To Report Abusive CPAs, Attorneys Or Enrolled Agents

Report suspicious actions by tax professionals - including California lawyers, CPAs or EAs - to the email address of the IRS Office of Professional Responsibility which is opr@irs.gov.

If you suspect or know of an individual or company that is not complying with the tax laws, you may report this activity on Form 3949-A and mail it to:

Internal Revenue Service
Fresno, CA 93888

If you do not want to use Form 3949-A, you may send a letter to that address. You should include the following information, if available:

Name and address of the person you are reporting

The taxpayer identification number (social security number for an individual or employer identification number for a business)

The estimated dollar amount of any unreported income

The years involved

A brief description of the alleged violation, including how you became aware of or obtained the information

Your name, address and daytime telephone number

Although you are not required to identify yourself, it is helpful to do so. Your identity can be kept confidential. You may also be entitled to a reward.

While a tax attorney may be unnecessary to help in this situation, you may wish to consult with Mitchell A. Port at 310.559.5259 nonetheless.

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Last month, the IRS announced that effective for tax years beginning after December 31, 2006, the U.S. Corporation Short-Form Income Tax Return, Form 1120-A, can no longer be filed. For the 2007 tax year, all domestic corporations must file Form 1120, U.S. Corporation Income Tax Return unless required to file a special return.

For this and other tax issues, call Mitchell A. Port at 310.559.5259.

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Earlier this month, the Internal Revenue Service and more than two dozen state workforce agencies - including California's - announced they have entered into agreements to share the results of employment tax examinations.

California, Michigan, New Jersey, New York and North Carolina all are part of the team that developed the strategy, and they were instrumental in helping make sure the agreements meet the needs of the participating states as well as the needs of the IRS.

The agreements, part of the Questionable Employment Tax Practice (QETP) initiative, provide a centralized, uniform means for the IRS and state employment officials to exchange information and data. As a result, they can leverage resources and encourage businesses to comply with federal and state employment tax requirements.

These agreements present a united front for the IRS and its state partners to improve compliance with filing tax returns and paying employment taxes. Combining resources will help IRS and the states uncover employment tax avoidance schemes, reduce fraudulent filings and ensure proper worker classification.

The state agencies, the U.S. Department of Labor, the National Association of State Workforce Agencies, the Federation of Tax Administrators and the IRS worked together on various facets of the exchange agreements.

So far, 29 states have entered into individual information-sharing agreements with the IRS. The states that have signed partnership agreements with the IRS thus far are:

Arizona, Arkansas, California, Colorado, Connecticut, Hawaii, Idaho, Kentucky, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Nebraska, New Hampshire, New Jersey, New York, North Dakota, Ohio, Oklahoma, Rhode Island, South Carolina, South Dakota, Texas, Utah, Vermont, Virginia, Washington and Wisconsin.

In addition to coordinating compliance activities, the agreements call for collaborative outreach and education activities designed to help businesses understand their employment and unemployment tax responsibilities.

The exchange agreements are the first result of the QETP initiative. The QETP team will use the results of the project to find new opportunities for collaboration and to work toward improved employment tax compliance.

Do you have federal or California state tax problems? Contact Mitchell A. Port for help at 310.559.5259.

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On March 30, 2005, the Tax Court ruled that a decedent’s transfer of real property to a family limited partnership (“FLP”) and later FLP gifts were includable in the decedent’s estate under Internal Revenue Code Section 2036(a)(1) which recaptures in a decedent’s gross estate certain assets transferred while alive. The Estate appealed. On September 14, 2007, the Ninth Circuit upheld the Tax Court’s decision. Read the Ninth Circuit opinion here.

Virginia Bigelow, the decedent, transferred her 98.3% interest in a single family residence to a trust (“Trust”). (The decedent’s children held the other undivided interests.) The trustees of the Trust were Virginia and her son. The following year, the parties exchanged the property held by the Trust for another rental residence (“Property”) and bought out the children’s undivided interests. Two years later, the Trust and the decedent’s children formed the FLP. The Trust contributed the Property to the FLP and the children each contributed $100. The Trust was the sole general partner. Over the next three years, numerous gifts of FLP interests occurred. At decedent’s death, the decedent owned a 44% limited partner interest in the FLP and her Trust held the sole one percent general partner interest. The 44% limited interest was valued at a 37% discount from the underlying appraised value and the one percent general partner interest was valued at a 35% premium.

In addition, the loans on the Property were retained as liabilities by the decedent. However, the Property served as the ultimate collateral for the loans. Because the decedent was left with insufficient funds to pay off the loans, the Partnership distributed funds necessary to service one of the two loans. No other distributions were made. After Ms. Bigelow’s death, a reduction in her Partnership capital account was made to reflect the loan payment distribution.

The Estate appealed the Tax Court’s decision arguing there was no “implied agreement” for the decedent to use, enjoy or have the right to the income of the Property and that the transfers were completed under the “bona fide sale” exemption of Internal Revenue Code Section 2036.

The Ninth Circuit affirmed the Tax Court’s deficiency determination, finding that Ms. Bigelow and the Bigelow children had an implied agreement that Ms. Bigelow would retain income and economic enjoyment from the transferred asset, and that the inter vivos transfer was not a bona fide sale for adequate and full consideration under Internal Revenue Code Section 2036(a).

To discuss putting an effective family limited partnership in place, please call Mitchell A. Port at 310.559.5259.

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Are you an employee of your own California corporation? How much are you paying yourself as salary? How much are you paying yourself as a year-end bonus? Are you unwittingly creating a tax problem for yourself?

An employer, including a California employer, is not entitled to deduct certain compensation paid if that compensation was not reasonable in amount. The excess monies paid are a disguised dividend which causes a tax problem for the employer who will have to pay tax on the amount deducted deduction that will be disallowed by the IRS.

Internal Revenue Code Section 162(a)(1) permits a corporation to deduct “a reasonable allowance for salaries or other compensation for personal services actually rendered.” The test for deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services.

A deduction for compensation that is, in fact, reasonable is an amount “as would ordinarily be paid for like services by like enterprises under like circumstances.”

The 9 Factor Test of Reasonableness

The reasonableness inquiry is governed by the nine - factor test based on a case called Owensby & Kritikos, Inc. v. Cmm'r., 819 F.2d 1315, 1323-24 (5th Cir. 1987).

These nine factors are:

1. The employee's qualifications;

2. The nature, extent and scope of the employee's work;

3. The size and complexities of the business;

4. A comparison of salaries paid with gross income and net income;

5. The prevailing general economic conditions;

6. Comparison of salaries with distributions to stockholders;

7. The prevailing rates of compensation for comparable positions in comparable concerns;

8. The salary policy of the taxpayer as to all employees; and

9. Compensation paid in prior years.

Courts will examine and weigh the totality of the facts and circumstances in determining reasonable compensation so that no one factor will be determinative of reasonableness.

The IRS's determination of reasonableness is presumptively correct which shifts the burden to the taxpayer to establish that he is entitled to a deduction larger than that allowed by the Service.

If you have been challenged by the IRS about your compensation deduction and would like to consult with a tax attorney, call Mitchell A. Port at (310) 559.5259.

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Under Internal Revenue Code section 6166, an estate that meets all of the requirements of the statute may elect to pay the estate tax attributable to the decedent’s interest in a closely held business in up to 10 equal, annual installments. The first of those annual payments must be made by the 5th anniversary of the due date of the estate tax liability that is not deferred under section 6166.

An estate qualifies for a section 6166 election if the value of the decedent’s interest in the closely held business exceeds 35 percent of the adjusted gross estate, the decedent was a United States citizen or resident at the time of his or her death, and the estate made the election by attaching a full and complete notice of election with a timely filed federal estate tax return.

If the estate qualifies for the election, the estate pays a reduced rate of interest on the portion of estate tax deferred under section 6166; that interest is payable annually during the entire deferral period, and in most instances, interest only is paid during the first four years of the deferral period. The deferred tax is payable in no more than ten equal annual installments, beginning on a date that is not more than five years after the due date of the Federal estate tax return, which is generally nine months from the date of death.

Continue reading "Estate Tax Installment Payments" »

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