August 30, 2013

For Federal Tax Purposes, All Legal Same-Sex Marriages Will Be Recognized

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) ruled yesterday that same-sex couples, legally married in jurisdictions that recognize their marriages, will be treated as married for federal tax purposes. The ruling applies regardless of whether the couple lives in a jurisdiction that recognizes same-sex marriage or a jurisdiction that does not recognize same-sex marriage.

The ruling implements federal tax aspects of the June 26th Supreme Court decision invalidating a key provision of the 1996 Defense of Marriage Act.

“Today’s ruling provides certainty and clear, coherent tax filing guidance for all legally married same-sex couples nationwide. It provides access to benefits, responsibilities and protections under federal tax law that all Americans deserve,” said Secretary Jacob J. Lew. “This ruling also assures legally married same-sex couples that they can move freely throughout the country knowing that their federal filing status will not change.”

Under the ruling, same sex couples will be treated as married for all federal tax purposes, including income and gift and estate taxes. The ruling applies to all federal tax provisions where marriage is a factor, including filing status, claiming personal and dependency exemptions, taking the standard deduction, employee benefits, contributing to an IRA, and claiming the earned income tax credit or child tax credit.

Any same-sex marriage legally entered into in one of the 50 states, the District of Columbia, a U.S. territory, or a foreign country will be covered by the ruling. However, the ruling does not apply to registered domestic partnerships, civil unions, or similar formal relationships recognized under state law.

Legally-married same-sex couples generally must file their 2013 federal income tax return using either the “married filing jointly” or “married filing separately” filing status.

Individuals who were in same-sex marriages may, but are not required to, file original or amended returns choosing to be treated as married for federal tax purposes for one or more prior tax years still open under the statute of limitations.

Generally, the statute of limitations for filing a refund claim is three years from the date the return was filed or two years from the date the tax was paid, whichever is later. As a result, refund claims can still be filed for tax years 2010, 2011, and 2012. Some taxpayers may have special circumstances (such as signing an agreement with the IRS to keep the statute of limitations open) that permit them to file refund claims for tax years 2009 and earlier.

Additionally, employees who purchased same-sex spouse health insurance coverage from their employers on an after-tax basis may treat the amounts paid for that coverage as pre-tax and excludable from income.

How to File a Claim for Refund
Taxpayers who wish to file a refund claim for income taxes should use Form 1040X, Amended U.S. Individual Income Tax Return.

Taxpayers who wish to file a refund claim for gift or estate taxes should file Form 843, Claim for Refund and Request for Abatement.

For information on filing an amended return, go to Tax Topic 308, Amended Returns at http://www.irs.gov/taxtopics/tc308.html or the Instructions to Forms 1040X and 843. Information on where to file your amended returns is available in the instructions to the form.

Future Guidance
Treasury and the IRS intend to issue streamlined procedures for employers who wish to file refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits provided to same-sex spouses. Treasury and IRS also intend to issue further guidance on cafeteria plans and on how qualified retirement plans and other tax-favored arrangements should treat same-sex spouses for periods before the effective date of this Revenue Ruling.

December 29, 2012

Gifts Made By Personal Check

A check written in 2012 that does not clear until 2013 is at risk of being a 2013 gift, not a 2012 gift, since the donor could have stopped payment in 2013 before it cleared. The issue with using checks to make gifts is that until the check clears the bank, the donor can revoke the gift by issuing a stop payment or by removing adequate funds from the bank account. A gift that can be revoked is not complete until revocability ends. The U.S. Supreme Court said as much in the case of Smith v. Shaughnessy, 318 U.S. 176 (1943).

The Tax Court and the Federal Court of Appeals (of the 4th Circuit) spell out when gifts by check will “good” gifts. Those cases are Gagliardi Est. v. Comr., 89 T.C. 1207 (1987); Metzger Est. v. Comr., 100 T.C. 204 (1993), aff’d 38 F.3d 118 (4th Cir. 1994).

The IRS in 1996 issued Revenue Ruling 96-56, 1996-2 C.B. 161 which provides a safe harbor mechanism to assure last minute 2012 gift tax treatment in the waning days of this year.

Under that ruling a gift by check delivered in 2012 will be a gift as of the date the check is deposited or presented for payment if:

1) the check was deposited, cashed, or presented in 2012 and within a reasonable time of issuance;

2) the donor intended to make a gift;

3) the check was paid by the drawee bank when first presented to the drawee bank for payment;

4) delivery of the check by the donor was unconditional; and

5) the donor was alive when the check was paid by the drawee bank.

So, to be certain your 2012 gift will be treated as made in 2012 and not 2013, you need to (a) deliver the check to the donee in 2012 (with adequate funds in the bank for it to clear), (b) assure the donee deposits it in 2012 and within a reasonable time of issuance, and (c) stay alive at least until after the check clears.

For more information about Death and Taxes, call Mitchell A. Port at 310.559.5259 for a free consultation.

November 22, 2012

Tax Humor

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

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

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

When it comes to taxes, everyone has an opinion. These quotes reflect the opinions of their authors; their inclusion here is not an official IRS endorsement of the sentiments expressed.

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

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

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

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

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

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

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

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

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

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

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

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

November 20, 2012

How Good Is Your Attorney?

Martindale-Hubbell Peer Review Ratings just came out with it's rating of me. I have been honored with an "AV Preeminent" rating which is a significant rating accomplishment- a testament to the fact that a lawyer's peers rank him or her at the highest level of professional excellence. My piers gave me a rating of 5 out of 5 in all possible areas analyzed: Legal Knowledge, Analytical Capabilities, Judgment, Communication Ability, Legal Experience. I'm pleased and honored. The Ratings are an objective indicator of a lawyer's high ethical standards and professional ability. Attorneys receive a Peer Review Ratings based on evaluations by other members of the bar and the judiciary in the United States.

August 21, 2012

Abusive Tax Scheme Investigations

The following examples of abusive tax scheme investigations are written from public record documents on file in the court records in the judicial district in which the cases were prosecuted.

Californian Sentenced for Evading More Than $150,000 in Taxes

On February 6, 2012, in Los Angeles, Calif., William H. Nurick, of Camarillo, was sentenced to 60 months in prison and ordered to pay $286,443 in restitution. Nurick was convicted in September 2011 of evading the payment of more than $150,000 in taxes. According to evidence presented at trial and court documents, the Genesis Fund was an investment fund that operated from approximately 1994 through 2002. Nurick received approximately $1.1 million in distributions from the Genesis Fund between 1995 and 2002. During this time, he used eight different entities to conceal his control over bank accounts, vehicles and real property. In May 2000, Nurick filed an amended 1995 individual income tax return admitting he owed $106,542 related to his investment in the Genesis Fund. Thereafter, Nurick deliberately and systematically attempted to conceal assets between May 2000 and April 2001 in order to evade payment of the balance owed to the IRS for his 1995 income taxes. Following a notice of balance due from the IRS, Nurick transferred approximately $133,000 from an offshore bank account that he controlled to a witness’s offshore bank account. Nurick also submitted a false “Offer in Compromise” to the IRS, offering to pay less than one tenth of his outstanding debt. Nurick’s Offer in Compromise, signed under penalties of perjury, falsely understated his net worth and income, and failed to indicate a bank account in Costa Rica with a balance in excess of $200,000. Nurick also falsely claimed on this document that he would receive no further distributions from the Genesis Fund, when in fact, he received over $350,000 from it through distributions to multiple entities that he controlled.

Certified Public Accountant Sentenced in Tax Evasion Case

On January 26, 2012, in Omaha, Neb., Lowell Baisden, formerly of Bakersfield, California, was sentenced to 37 months in prison and three years of supervised release for tax evasion. According to court documents, Baisden, as a Certified Public Accountant (CPA), provided accounting, tax preparation and consulting services to clients in California and Nebraska. An investigation by the Internal Revenue Service into various clients for whom Baisden prepared tax returns showed Baisden assisted his clients in setting up corporations in other states for the purpose of evading income and other taxes. These corporations enabled Baisden to prepare income tax returns that avoided the assessment and payment of over $2 million in taxes owed to the United States by Baisden’s clients.

California Return Preparer Sentenced for Promoting a $1.5 Million Fraudulent Tax Loss Scheme

On May 14, 2012, in Los Angeles, Calif., Richard Allen Edgar, owner of a Los Angeles tax preparation service, was sentenced to 15 months in prison. Edgar, a former certified public accountant, pleaded guilty late last year to two counts of aiding and assisting in the preparation of false tax returns. According to the plea agreement, from at least 2004 through 2009, Edgar sold false “tax losses” to his clients to offset his clients’ income, thereby eliminating or drastically reducing taxes otherwise owed by the clients to the IRS. Edgar typically charged clients approximately 12.5 percent of the losses purchased. The losses Edgar sold were purportedly non-passive partnership losses generated by Creative Financial Solutions, LLC and Why Not Entertainment, LLC, both of which Edgar managed and controlled. The clients whose returns included the losses were not partners of any kind in Creative Financial Solutions or Why Not Entertainment and were unaware of what the companies did. To encourage his clients to buy these sham tax losses, Edgar would prepare and send each client two versions of the client’s tax return, one without any claimed tax losses, showing a large tax liability owed to the IRS, and the other with tax losses offsetting all or virtually all of the client’s taxable income, showing either no taxes owed or refund due. After a client purchased the losses, Edgar would have the client execute a backdated “Membership Subscription Agreement,” purporting to show that the client had become a member of Creative Financial Solutions or Why Not Entertainment in the tax year at issue. According to documents filed with the court, for the tax years 2004 through 2007, Edgar sold over $1.5 million in fraudulent “tax losses” to his clients, causing losses to the IRS of $358,274.

North Carolina Business Owner Sentenced for Evading $1.5 Million in Taxes

On February 8, 2012, in Charlotte, N.C., Ricky Dean Hardee was sentenced to 21 months in prison and three years of supervised release. Hardee has made a full payment of $1,525,150 in restitution to the Internal Revenue Service (IRS). In June 2010, Hardee pleaded guilty to tax evasion in connection with his scheme to evade approximately $1.5 million in taxes. According to court documents, from about 1997 to 2007, Hardee operated a successful masonry contracting business in Charlotte. From 2002 to 2007, Hardee earned gross receipts of $4.2 million from his business but failed to file income tax returns and engaged in a sophisticated scheme to conceal his income and assets from the IRS. Specifically, Hardee purchased and utilized a system of nominee entities, sham trusts and related domestic and foreign bank accounts, including a bank account in Panama and ten different domestic bank accounts, to hide money from the IRS.

Three Men Sentenced in Investment/Tax Fraud Scheme

On December 21, 2011, in Newark, N.J., a principal of Mid-Atlantic Trustees and Administrators (MATA) and two of the company’s employees were sentenced to prison terms or home detention for conspiracy to defraud the United States through the marketing of two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. Michael Balice, of Metuchen, N.J., was sentenced to 48 months in prison; Angel Done, of Queens, N.Y., was sentenced to 12 months of home detention; and Wilson Calle, of Queens, was sentenced to three months of home detention. Balice and Done were convicted by a jury on June 20, 2011, of one count each of conspiracy to defraud the United States, mail fraud and wire fraud. Balice was also convicted of one count of tax evasion. Calle had pleaded guilty to one count of mail fraud during the trial. According to court documents and evidence at trial: Balice was a principal of MATA, a company formed in 2005, which marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). From the formation of MATA through July 2010, the defendants established several hundred PTOs for their customers, the express design of which was to conceal income and other assets from the IRS, thereby impeding the IRS in its tax collection efforts. In creating, marketing, and selling PTOs, the defendants made concerted efforts to make it appear that PTO customers had no control over the assets in the account and the trustees had complete control. The customers, however, always maintained unfettered access to their assets. In May 2007, MATA began to market and sell a second product, BIC, as a debt elimination program. For thousands of dollars per customer, MATA, its principals, and its employees manufactured false and fictitious bonds, often with face amounts of tens of millions of dollars, which were sent directly to the United States Treasury Department. According to MATA, once a customer’s bonds were sent to the Treasury Department and accepted, the customer was “bonded,” and, with MATA’s help, could draw down that bond to pay “public” debt, including mortgage debt, credit card debt, and tax obligations. As part of the BIC process, customers paid MATA to send hundreds of bonds to the U.S. Treasury, the IRS, and other government agencies in an attempt to discharge their tax and other debts. In total, MATA flooded the U.S. Treasury, IRS, and other government agencies with hundreds of billions of dollars in worthless paper. Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all.

Self-Proclaimed “Governor” of Alabama Sentenced for Tax Fraud

On May 29, 2012, in Montgomery, Ala., Monty and Patricia Ervin, of Dothan, Ala., were sentenced to prison for conspiring to defraud the United States and tax evasion. Patricia Ervin was also sentenced for structuring transactions to avoid bank reporting requirements. Monty Ervin was sentenced to 120 months in prison. Patricia Ervin was sentenced to five years of probation, with the condition that she spend 40 consecutive weekends in jail. The Ervins were also ordered to pay $1,436,508 in restitution to the IRS. The Ervins owned and managed Southern Realty, a property management company in Dothan, Alabama. Based on the evidence introduced at trial, the Ervins amassed hundreds of investment properties over the last decade, receiving more than $9 million in rental income. Despite receiving this income, the couple paid no federal income taxes. As the evidence showed at trial, the couple concealed their assets from the IRS by placing investment properties into the names of nominees. Patricia Ervin also structured deposits into Southern Realty’s bank account in an effort to evade federal currency reporting requirements.

Former Pennsylvania State Auditor Sentenced for Tax Evasion, Obstructing and Impeding IRS

On April 10, 2012, in Harrisburg, Pa., Troy A. Beam, of Shippensburg, was sentenced to 74 months in prison. Beam was convicted on May 4, 2011, by a federal jury of tax evasion, obstructing and impeding the due administration of the Internal Revenue laws, and willful failure to file federal income tax returns. According to evidence introduced at trial, Beam, a former certified public accountant and former state auditor in the Pennsylvania Auditor General’s Office, operated a home construction business known as “Sunbeam Builders,” as well as owned and operated two real estate businesses that purchased, rented and sold real estate. Despite earning substantial income from these businesses, as well as other activities, Beam failed to file any federal income tax returns since April 1996. In April 1996, Beam filed false amended federal income tax returns for 1992, 1993 and 1994, seeking tax refunds for taxes he previously had paid for those years. The evidence at trial proved that from 1999 to 2007, Beam earned more than $10.3 million in gross income from his various home construction and rental property businesses. Beam obstructed the IRS in its attempt to calculate and collect his taxes by using numerous sham trusts and other entities, including North Star Investment Holdings Ltd. to hide his income and assets. He used North Star to set up a bank account in the Cayman Islands into which he deposited nearly $3 million of income derived from his construction business.

Washington Abusive Trust Promoter Sentenced for Conspiracy and Tax Charges

On November 15, 2011, in Tacoma, Wash., Sharon D. Kukhahn, aka Sharon Stephenson, was sentenced to 84 months in prison, three years of supervised release, and ordered to pay $856,681 in restitution. Kukhahn was convicted by a trial jury in May 2011 on charges of conspiracy, tax evasion and corrupt interference with Internal Revenue Laws. At Kukhahn’s trial, prosecutors detailed the steps she took from 1999 to 2005 as part of a conspiracy to promote an abusive trust scheme designed to hide individual taxpayers’ income and assets from the IRS. Kukhahn and other conspirators referred clients to David Carroll Stephenson, who sold trust packages to more than 400 individuals. Purchasers used the trust packages to conceal income and assets from the IRS, and, as a result, failed to pay in excess of $7 million in income taxes. The jury found that through her own use of the trust packages, Kukhahn evaded paying income taxes in 2003 through 2006. The jury found that Kukhahn engaged in a business that attempted to thwart the efforts of the IRS to collect taxes owed by advising clients that they did not owe taxes. For a fee, Kukhahn helped clients obtain internal records from the IRS, claimed to “decode” them, and then mailed so-called “rebuttal packages” that supposedly would remove clients from the tax system. In reality, the packages were designed to stop audits and collection by harassing IRS employees, as well as to provide clients with a defense to tax evasion charges by creating evidence which the client could later use to dispute his or her criminal intent. Kukhahn also provided a frivolous letter-writing service for clients that was further designed to thwart IRS efforts to collect taxes owed. Kukhahn sold this scheme to more than 1,400 clients, helping them cheat the U.S. out of more than $4 million in income taxes. David Stephenson was sentenced in May 2006 to 96 months in prison and ordered to pay $8.5 million in restitution.

Honolulu Firearms Business Owner Sentenced on Tax Charges

On March 27, 2012, in Honolulu, Hawaii, Arthur Lee Ong was sentenced to 51 months in prison and ordered to pay $1 million in restitution to the Internal Revenue Service (IRS). Ong was convicted by a federal jury on November 7, 2011, of conspiracy to defraud the United States and six counts of tax evasion. According to evidence introduced at trial, Ong, the owner and operator of Thunder Bug Inc., dba Magnum Firearms, failed to report to the IRS millions of dollars of income he earned from the sale of firearms and related products to federal, state, county and military agencies, as well as to the general public. Ong, with the assistance of a Hawaiian attorney, created multiple sham trusts in 1990 to hide his income and assets. He stopped filing personal income tax returns beginning in 1994 and also filed false tax returns on behalf of the sham trusts that fraudulently reported to the IRS that the income from his businesses was attributable to these trusts and not to him. The evidence at trial showed that Ong evaded more than $600,000 in federal income taxes from 2000 to 2006.

Return Preparer and Client Sentenced for Roles in Offshore False Expense Scheme

On April 25, 2012, in Miami, Fla., Tom F. Castellanos, of Coral Gables, was sentenced to 12 months and a day in prison and one year of supervised release. Co-defendant Manuel Rivero, Jr., of Miami, was sentenced on April 20, 2012, to 30 months in prison and one year of supervised release. Each defendant pleaded guilty to conspiring to defraud the Internal Revenue Service. According to court documents, between 2001 and 2007, Castellanos operated a roofing business called East Coast Metals, Inc. (ECM) based in Hialeah, Fla. One of Castellanos’ return preparers arranged for the creation of a Panamanian corporation called National Steel Processors, Inc. (NSP) and arranged the opening of a bank account for that company in Panama. NSP was a shell corporation that provided no services and had no employees. Court documents state that for income tax purposes, Castellanos claimed that ECM purchased materials from NSP. Acting on instructions from Rivero, Castellanos initially created false invoices purporting to represent his company's purchases from NSP. Later, Castellanos stopped manufacturing false invoices, but continued entering falsified purchases from NSP on the books of ECM. For tax years 2002 to 2007, Castellanos used these fake purchases to claim expenses, or cost of goods sold, that falsely reduced the tax liability of ECM and himself. Rivero prepared tax returns on behalf of ECM and Castellanos with full knowledge that the claims relating to NSP expenses were false. The amount of false purchases claimed during the conspiracy exceeded $10 million. Rivero also knew that Castellanos wrote checks to NSP that were deposited in the Panamanian bank account and that Castellanos had access to these funds. Castellanos used the funds to make loans and to purchase a condominium and boat dock in Bimini.

Defendant Sentenced on Tax Charges; Failed to Report $8.8 Million in Stock Gains

On March 5, 2012, in San Jose, Calif., Gary Linn Packer, currently of Cheyenne, Wyo., was sentenced to 30 months in prison, three years of supervised release and ordered to pay $1,808,079 in restitution. Packer pleaded guilty on November 28, 2011, to one count of tax evasion. According to his plea agreement, between 1994 and 2001, Packer was employed by Network Appliance, Inc. (NA) in Sunnyvale, Calif. He received a portion of his income in NA stock options. In 2000, Packer liquidated his NA stock, which resulted in a taxable gain of $8,844,949. He did not file a tax return for the 2000 tax year and did not pay the IRS the $1,795,740 of income taxes owed. In order to evade the payment of the income taxes, Packer concealed his assets from the IRS by placing them in nominee names, including several trusts, and used false identification numbers.

Promoter of Abusive Trust Arrangements Sentenced on Tax Charges

On January 30, 2012, in Fresno, Calif., Michael S. Ioane, of Atwater, was sentenced to 108 months in prison and three years of supervised release for a tax fraud conspiracy. Ioane was convicted by a jury in October 2011 of conspiring to defraud the United States and four counts of presenting fictitious documents to the United States. According to the evidence presented at trial, Ioane, who operated under the name Acacia Corporate Management and First Amendment Publishers, promoted sham or abusive trusts that purported to allow people to put their assets and income into trusts that would shield them from the Internal Revenue Service (IRS). When the IRS disallowed various trusts set up by Ioane, he would instruct co-defendant Vincent Steven Booth to set up new trusts, file false liens against his own properties and present bogus “Bills of Exchange” to the IRS that Ioane said constituted full payment of Booth’s tax debt. Booth pleaded guilty in September 2010 and is awaiting sentencing. He is currently working to pay more than $1.3 million in back taxes that are owed to the IRS.

Diamond Merchant Sentenced for Conspiring to Hide $7.1 Million in Swiss Bank Accounts

On November 9, 2011, in Manhattan, N.Y., Richard Werdiger, a former client of Swiss bank UBS AG, was sentenced to 12 months and one day in prison, one year of supervised release, fined $50,000 and ordered to pay a $600 special assessment. Werdiger pleaded guilty in March 2011 to conspiring to defraud the Internal Revenue Service (IRS) by hiding more than $7.1 million at UBS, filing false federal income tax returns, and evading nearly $400,000 of taxes. Werdiger agreed to pay a civil penalty of more than $3.8 million for his failure to report his overseas accounts. Restitution will be determined at a later date. According to court documents and statements made in court, from 1986 to 1988, Werdiger opened multiple accounts at UBS under the name of sham Liechtenstein-based foundations in order to evade taxes on money that he had inherited from his father. To further conceal his ownership of these accounts, Werdiger instructed UBS to permit him to communicate with the bank using the code name “Trygon.” In late 2000, Werdiger opened up yet another account at UBS in the name of a sham Panamanian corporation. This allowed him to continue to invest in U.S. securities without having UBS notify the IRS of his identity or withhold taxes on income arising out of his holding U.S. securities. During the conspiracy, Werdiger used the funds hidden offshore to satisfy various business obligations, such as paying off business debts incurred by his companies, Michael Werdiger Inc. and Eloquence Corporation, which sell diamonds and other jewelry.

Promoter of Anti-Tax Scheme Sentenced for Tax Conspiracy

On January 26, 2012, in Erie, Pa., Donald Turner, aka Don Wood, was sentenced to 60 months in prison, three years of supervised release and ordered to pay $408,034 in restitution to the IRS. Turner was convicted following a jury trial of conspiring to defraud the United States. According to evidence at trial, Turner sold a book titled “Tax Free! How the Super Rich Do It,” which introduced readers to his organization, First American Research (FAR). Through FAR, Turner promoted an illegal scheme to reduce or eliminate an individual’s tax liability through the use of purported offshore entities. In 1991, Donald Turner had sold the program to Daniel Leveto, a Meadville, Pa., veterinarian. As part of the program, Leveto utilized various methods to conceal his income and assets from the IRS as directed by Turner. One of these methods included the purported sale of Leveto’s veterinary business to an alleged offshore entity called Center Company. Leveto actually retained dominion and control over the veterinary business. In 2005, a jury convicted Leveto of all counts, and he was subsequently sentenced to 46 months in prison.

Two People Sentenced in Multi-million Dollar Conspiracy to Defraud the Government

On December 15, 2011, Newark, N.J., Ronald Ottaviano, of Lewes, Del., was sentenced to 62 months in prison. Harriet Foster, of Tuckerton, N.J., was sentenced to 13 months in prison. Ottaviano, Foster and two other defendants were convicted by a jury on June 20, 2011, on charges of conspiracy to defraud the United States, mail fraud and wire fraud. Ottaviano was also convicted of two counts of tax evasion and one count of money laundering, and Foster was convicted of two counts of failing to file a tax return and one count of money laundering. The jury also returned a special verdict forfeiting a home in Lewes, which the jury found Ottaviano and Foster had purchased using the proceeds of the fraud. Ottaviano, a principal of Mid-Atlantic Trustees and Administrators (MATA), and one of the firm’s employees perpetrated a conspiracy to defraud the United States by marketing two fraudulent products designed to conceal assets from the IRS and fraudulently discharge debt. At no time did MATA conduct legitimate business. Instead, MATA marketed two products to its customers: Pure Trust Organizations (PTOs) and Beneficiaries in Common (BIC). Through the marketing and sale of PTOs and BIC, the defendants collectively made over $3.5 million in illicit gross receipts, most of which was hidden in PTOs controlled by the defendants. None of the defendants paid income taxes on the proceeds, and, in many cases, filed no federal income tax returns at all. Ottaviano and Foster spent a portion of their illicit proceeds, more than $500,000, to purchase the Lewes home – in cash.

New York Man Sentenced on Money Laundering and Tax Charges

On February 13, 2012, in Syracuse, N.Y., Charles L. Blomquist, of Skaneateles, N.Y., was sentenced to 87 months in prison and three years of supervised release. Blomquist was further ordered to forfeit his lakefront mansion, currently assessed at over $1.4 million, in addition to cash from foreign bank accounts. According to the plea agreement, Blomquist admitted that beginning in the 1980s and continuing up to 2009, he acquired a significant amount of revenue from ‘specified unlawful activity’ and used some of these monies to fund an overseas financial account with Union Bank of Switzerland (UBS) in Switzerland. Blomquist admitted that he had moved these illegal proceeds to an overseas bank account in Switzerland because it would be more difficult for the IRS and other federal law enforcement agencies to locate them. To further conceal his overseas bank accounts and avoid detection, Blomquist also admitted that he willfully failed to report his ownership of interest income earned from that Swiss Bank account.

Niagara Falls Financial Advisor Sentenced for Promoting and Using Abusive Tax Shelters

On October 4, 2011, in Buffalo, N.Y., Richard Muto was sentenced to 36 months in prison and one year of supervised release for corruptly endeavoring to obstruct and impede the due administration of the Internal Revenue laws. According to court documents, between February 1996 and March 2000, Muto was a financial advisor, owning and operating his own business called Tax and Investment Strategies in Niagara Falls, N.Y. Muto admitted that he sold and promoted multi-layered abusive trust schemes. The scheme required the user to purchase and create a series of domestic and foreign trusts and internal business corporations (IBCs). The user would subsequently divert personal income into, and place assets into, the purported independent trusts and IBCs to create the impression that the user was relinquishing control of the income and assets through a series of sham paper transactions. The trusts and IBCs, however, remained under the complete control of the user. Therefore, the income and assets diverted into the trusts remained the income and assets of the user. Muto admitted that he knew that the use of the multi-layered trust schemes would cause his clients to file false federal income tax returns with the IRS. Muto also admitted that he misrepresented to clients and potential clients that, by using the multi-layered abusive trust scheme the clients could legitimately reduce or eliminate their federal income taxes. Muto also counseled clients to submit frivolous correspondence to the IRS in response to audit notices as a way to intimidate IRS revenue agents and thwart IRS audits. In addition to promoting the trusts, Muto used the abusive trusts himself, which resulted in his filing of false individual income tax returns for the tax years 1996, 1997 and 1998. Muto’s scheme caused a tax loss to the United States of more than $1.7 million.

August 13, 2012

Same-Sex Couples

The following questions and answers provide information to same-sex domestic partners, same-sex individuals in civil unions and same-sex couples whose marriage is recognized by state law.

Publication 555, Community Property, provides general information for taxpayers, including registered domestic partners and same-sex spouses, who reside in community property states.

Q. Can a same-sex partner itemize deductions if his or her partner claims a standard deduction?

A. Yes. A same-sex partner may itemize or claim the standard deduction regardless of whether his or her partner itemizes or claims the standard deduction. Although the law prohibits one spouse from itemizing deductions if the other spouse claims the standard deduction (section 63(c)(6)(A)), same-sex partners are not spouses as defined by federal law, and this provision does not apply to them.

Q. Is a same-sex partner the stepparent of his or her partner’s child?

A. If a same-sex partner is the stepparent of his or her partner’s child under the laws of the state in which the partners reside, then the same-sex partner is the stepparent of the child for federal income tax purposes.

Q. Can same-sex partners who are legally married for state law purposes file federal tax returns using a married filing jointly or married filing separately status?

A. No. Same-sex partners may not file using a married filing separately or jointly filing status because federal law does not treat same-sex partners as married for federal tax purposes.

Q. Can a taxpayer use the head-of-household filing status if the taxpayer’s only dependent is his or her same-sex partner?

A. No. A taxpayer cannot file as head of household if the taxpayer’s only dependent is his or her same-sex partner. A taxpayer’s same-sex partner is not one of the related individuals described in the law that qualifies the taxpayer to file as head of household, even if the same-sex partner is the taxpayer’s dependent.

Q. If a same-sex couple adopts a child together, can one or both of the same-sex partners qualify for the adoption credit?

A. Yes. Each same-sex partner may qualify to claim the adoption credit on the amount of the qualified adoption expenses paid or incurred for the adoption. The same-sex partners may not both claim credit for the same qualified adoption expenses, and neither same-sex partner may claim more than the amount of expenses that he or she paid or incurred. The adoption credit is limited to $13,360 per child in 2011. Thus, if two same-sex partners each paid qualified adoption expenses to adopt the same child, and the total of those expenses exceeds $13,360, the maximum credit available for the adoption is $13,360. The same-sex partners may allocate this maximum between them in any way they agree, but the amount allocated to a same-sex partner may not be more than the amount of expenses he or she paid or incurred. The same rules generally apply in the case of a special needs adoption. The total credit for such an adoption is limited to $13,360, but the amount that each same-sex partner may claim is not limited by the amount of expenses paid or incurred.

Q. If a taxpayer adopts the child of his or her same-sex partner as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A. Yes. The adopting parent may claim an adoption credit to the extent provided under the law. The law does not allow taxpayers to claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse. However, this limitation does not apply to adoptions by same-sex partners because same-sex partners, even if married for state law purposes, are not treated as spouses under federal law.

Q. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) (passive loss rules for rental real estate activities) that apply to married taxpayers apply to same-sex partners?

A. No. Like other provisions of the federal tax law that apply only to spouses or married taxpayers, section 66 and section 469(i)(5) do not apply to same-sex partners because federal law does not treat same-sex partners as married for federal tax purposes.

Q. If a child is a qualifying child under section 152(c) of both parents who are same-sex partners, which parent may claim the child as a dependent?

A. If a child is a qualifying child under section 152(c) of both parents who are same-sex partners, either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.

August 8, 2012

Preparing Your Tax Return - Picking The Right Preparer

You are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. Choose your preparer wisely.

As a reminder, the IRS encourages you to use only preparers who sign the tax returns they prepare and enter their Preparer Tax Identification Numbers (PTINs).

Here are a few points to keep in mind when someone else prepares your return:

Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers. Also, always make sure any refund due is sent to you or deposited into an account in your name. Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

Check the person's qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number (PTIN). In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

Check the preparer's history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

Ask if they offer electronic filing. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990. Make sure your preparer offers IRS e-file.

Provide all records and receipts needed to prepare your return. 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. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

Make sure the preparer signs the form and includes his or her preparer tax identification number (PTIN). A paid preparer must sign the return and include his or her PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.

Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

Need a referral to a an excellent accountant? Call me for a few names and telephone numbers.

August 4, 2012

How To Get A Copy Of Your Tax Return From The IRS

How do I request a copy of my tax return for last year?

It is easy to get a copy of an old tax return.

If you need an exact copy of a previously filed and processed return and all attachments (including Form W-2 (PDF)), you must complete Form 4506 (PDF), Request for Copy of Tax Return, and mail it to the IRS. You will need to include a $57.00 check made payable to "U.S. Treasury". The fee may be waived if you reside in an official disaster area as declared by the President. It may take the IRS 60 days to process your request and mail your tax return copy or copies.

You can also order a transcript online at this link.

Or, you can simply call the Internal Revenue Service to place your order: 800.908.9946 or at 800-829-1040.

In cases where an exact copy of the return is not needed, tax return and transcripts may be ordered.

A transcript is a computer-generated printout which summarizes your old tax return and includes most of the line items from the return, including any accompanying forms and schedules. The transcript does not show any changes or amendments you or the IRS may have made after your return was accepted by the IRS.

There is no charge for the transcript and you should receive it in 10 business days from the time the Internal Revenue Service receives your request.

Tax return transcripts are generally available for the current and past three years.

In most cases, a tax return transcript will meet the requirements for lending institutions for mortgage verification purposes.

The tax return transcript shows most line items contained on the return as it was originally filed, including any accompanying forms and schedules.

If you need a statement of your tax account which shows changes that you or the IRS made after the original return was filed, you must request a "Tax Account Transcript."

This transcript shows basic data including marital status, type of return filed, adjusted gross income, taxable income, payments and adjustments made on your account.

As a tax attorney, I often get a copy of a transcript to have what the IRS has for my client. If you have a tax problem and want help fixing it, call Mitchell A. Port at 310.559.5259.

July 17, 2012

Tax Statistics

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

In that Book is information about the following:

List of Statistical Tables

Statistical Tables

Data Sources, by Subject Area and Table Number

Principal Officers of the Internal Revenue Service

Principal Officers of the Internal Revenue Service

Office of Chief Counsel

Commissioners of Internal Revenue

Chief Counsels for the Internal Revenue Service

One of the more interesting parts of the Book concern:

Enforcement: Collections, Penalties, and Criminal Investigation

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

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

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

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

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

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

July 11, 2012

Pennies On The Dollar

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

What you should know before preparing an Offer in Compromise

Are you an Offer in Compromise candidate?

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

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

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

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

Can we process your application?

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

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

Will a collateral agreement be required?

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

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

Are collections suspended?

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

When should offered funds be submitted?

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

What documentation is required with the application?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

June 26, 2012

Extension Of Time For Payment Of Estate Tax Where Estate Consists Largely Of Interest In Closely Held Business

Using a common estate planning device in California, Anna Smith created a pourover will which provided that all her property not already in her living trust would be transferred to her living trust to be distributed under the terms of her trust. Anna died in 1991 and the trust provided that after all expenses and taxes of the trust were paid, a residual distribution to certain named beneficiaries would occur. A significant asset of the estate was shares of stock in a corporation. Anna’s fiduciaries elected to defer a portion of her estate taxes under Internal Revenue Code §6166.

In 1992, the trustees of the trust distributed assets of the trust to the beneficiaries. Because of the deferral under §6166, the estate taxes were not yet paid in full and the beneficiaries agreed to be responsible for the unpaid estate taxes.

In 2002, the corporation went bankrupt. The beneficiaries received nothing on their shares beyond some minimal amounts received. The next year, after having paid only $5 million of the $6.871 million in taxes due, the estate defaulted on its unpaid estate taxes . The IRS then sought to collect the unpaid taxes from the personal representatives of Anna’s estate (who were also trustees of the Trust), and from the beneficiaries.

There is a lesson here for fiduciaries undertaking a Code §6166 election to defer payment of taxes. The lesson is that with the extension, the estate or trust with the subject assets should retain those assets until after full and eventual payment of the tax liability. Distributing early, unless there are other assets in the estate or trust to fully cover the tax liability, will expose the fiduciaries to personal liability such as that imposed in the Johnson case.

Perhaps if the fiduciaries can adequately secure the beneficiary obligations under the contribution agreement with a pledge and/or mortgage of assets that are unlikely to lose material value, the risk can be minimized.

For tax planning to avoid this type of problem and others like it, call tax lawyer Mitchell A. Port at (310) 559-5259.

June 18, 2012

How To Stop The IRS

I know that there is a lot of mediocre advice in California about how to stop the IRS collection process. So that’s why I am here. To provide real-world information based upon my years of experience.

How to stop the IRS from filing a tax lien

If you are looking for information on stopping or removing a tax lien, perhaps one of these links will be helpful:

Release of Lien Or Discharge Of Property

Withdrawal Of Notice Of Federal Tax Lien

Federal Tax Liens Are A Serious Problem

How to Stop the IRS from taking your home

It’s true: the IRS does not want to take your home. It doesn’t like the publicity and seizing a house is a lot of paperwork for them. But unfortunately many taxpayers who are avoiding the IRS are giving it no other option. So if you’re avoiding the IRS — I get it. You’re concerned.

Here are some worthwhile articles on the subject of seizures:

What The IRS Won't Seize Or Sell

Tax Collection Of Unpaid Taxes By The IRS

How to stop the IRS from levying your assets

The IRS will levy bank accounts, even IRAs that have your social security number listed. Think about this: If you have a joint account with anyone (even a dependent child), the IRS is free to levy that bank account completely if you have ignored them. If you are a co-owner of any account, the IRS will assume you have total access to all of the funds. Because your money is their money (or so they think) they will take it all. A bank levy is an emotional event. So if you are levied, do not delay. You will probably want to contact me immediately so I have an opportunity to get your (or someone else’s) money back.

Here is more information on levies:

My Bank Account Was Levied; The IRS Just Levied My Wages

How to stop the IRS with debt collection statutes

Did you know that the IRS only has a limited time to collect on a tax debt? There are ways to use this law to your advantage. Here's more information:

New Proposed Federal Budget Impacts IRS

How to stop the IRS from seizing property

The IRS doesn’t really want to seize property. It wants to work out a deal. But it is much more likely to seize personal property like cars, boats, investment property than take your primary residence. So what should you do? You don’t want to give up all your stuff, but you don’t want to be a pauper either. The solution to this dilemma is two fold. On one hand, you have to be realistic. Possessions can not buy piece of mind. But on the other hand, there are advantageous ways to structure your affairs to improve your negotiating position. Take a look at some posts:

Seizure and Sale

Conducting the Seizure

It may be time to call a tax professional. Mitchell A. Port is a tax attorney in Los Angeles and can be reached at (310) 559-5259.

June 12, 2012

Circular 230 To Promote Ethical Practice By Los Angeles Tax Professionals

The IRS has an Office of Professional Responsibility (OPR) said "To be the standard-bearer for integrity in tax practice" and whose mission is to “Interpret and apply the standards of practice for tax professionals in a fair and equitable manner”. Its strategic goals and objectives are to support effective tax administration by ensuring all tax practitioners, tax preparers, and other third parties in the tax system adhere to professional standards and follow the law.

To improve ethical standards for tax professionals and to curb abusive tax avoidance transactions, the Internal Revenue Service and Treasury Department issued regulations amending Treasury Department Circular 230.

Circular 230 is applicable to attorneys, accountants and other tax professionals who practice before the IRS. The August, 2011 revisions to Circular 230 provide standards of practice for written advice that reflect current best practices and are intended to restore and maintain public confidence in tax professionals. These revisions ensure that tax professionals do not provide inadequate advice, and increase transparency by requiring tax professionals to make disclosures if the advice is incomplete.

Overseeing enforcement of Circular 230 is the Office of Professional Responsibility. OPR is committed to:

Developing procedures that ensure timely case resolution.

Independent, fair and equitable treatment of all tax practitioners consistent with the principles of due process.

Strengthening partnerships with other parts of the IRS and with external practitioner organizations.

Educating/maintaining tax professionals’ knowledge of relevant Circular 230 provisions.

Developing and implementing proactive strategies for identifying violations of Circular 230

Providing guidance and feedback to field/agency sources regarding essential referral criteria for each relevant Circular 230 provision.

Developing policies and regulations that ensure fair and equitable disposition of Circular 230 cases.

Rendering fair and independent determinations regarding alleged misconduct in violation of Circular 230, Regulations Governing Practice before the Internal Revenue Service.

OPR investigates allegations of misconduct by tax practitioners and enforces the standards of practice in Circular 230.

Tax problems? Tax liens and levies? Wages garnished? Answers to these and other questions - including Circular 230 and OPR - call Mitchell A. Port at (310) 559-5259.

June 6, 2012

Record Keeping For Individuals

Now that tax season is over, what should you do? You would have lots of paper documents – bank and credit card statements, cancelled checks, check stub, invoices, receipts, dividend and bonus statements, payment slips, tax forms, mileage records etc – you would have used or referred to for your income tax filing.

The IRS provides answers to this question in one of its publications at this link. This publication does not discuss the records you should keep when operating a business. For information on business records, see Publication 583, Starting a Business and Keeping Records.

Some of the topics covered in the IRS's publication are about the following:

Why Keep Records?

Identify sources of income.
Keep track of expenses.
Keep track of the basis of property
Prepare tax returns
Support items reported on tax returns

Kinds of Records To Keep

Electronic records.
Copies of tax returns.

Basic Records

Income
Expenses
Home
Investments
Proof of Payment

Specific Records
Alimony
Business Use of Your Home
Casualty and Theft Losses
Child Care Credit
Contributions
Credit for the Elderly of the Disabled
Education Expenses
Exemptions
Employee Business Expenses
Energy Incentives
Gambling Winnings and Losses
Health Savings Account (HAS) and Medical Savings Account (MSA)
IRAs
Medical and Dental Expenses
Mortgage Interest
Moving Expenses
Pensions and Annuities
Taxes
Sales Tax on Vehicles
Tips

How Long To Keep Records

For tax help and problem solving, call tax attorney Mitchell A. Port at 310.559.5259.

May 30, 2012

The Federal Tax Gap

The federal tax gap imposes an unfair burden on many taxpayers, and the Department of the Treasury and the IRS are committed to narrowing the gap between what is owed and what is paid. The tax gap is defined as the aggregate amount of true tax liability imposed by law for a given tax year that is not paid voluntarily and timely. In a report prepared by the IRS, new initiatives to improve tax revenue collection, both through improved voluntary compliance and through effective enforcement were proposed.

The IRS collects 96 percent of the government’s total receipts, approximately $2.7 trillion in FY 2008. The vast majority of those revenues come from taxpayers who voluntarily report and pay the taxes that they owe. The IRS has estimated the overall voluntary compliance rate to be approximately 84 percent.

Despite the voluntary compliance rate and vigorous enforcement by the IRS, a significant amount of revenue remains unreported and unpaid. In 2005, the IRS estimated this gross tax gap to be approximately $345 billion. After subtracting revenue obtained through enforcement actions and other late payments, the IRS estimated the net tax gap to be approximately $290 billion. These estimates, which remain the most recent estimates available, were conducted using data collected in tax year 2001 and before.

Noncompliance takes three forms:

Underreporting (not reporting one’s full tax liability on a timely-filed return);

Underpayment (not timely paying the full amount of tax reported on a timely-filed return); and

Nonfiling (not filing required returns on time and not paying the full amount of tax that should have been shown on the required return).


Underreporting (in the form of unreported receipts and overstated expenses) constitutes over 82 percent of the gross tax gap. The single largest sub-component of underreporting involves the individual income tax, which represents more than 50 percent of the total tax gap. Underpayment constitutes nearly 10 percent, and nonfiling almost 8 percent of the gross tax gap.

The U.S. Treasury developed a seven-component strategy for reducing the tax gap. The components of that strategy are:

1. Reduce Opportunities for Evasion (Implement and Expand Information Reporting Authorities)

2. Make a Multi-Year Commitment to Research (Measuring the Tax Gap)

3. Continue Improvements in Information Technology

4. Improve Compliance Activities (Multi-Year Investment in IRS Enforcement)

5. Enhance Taxpayer Service (Providing Innovative Online Services, Streamline Written Communications with Taxpayers)

6. Reform and Simplify the Tax Law

7. Coordinate with Partners and Stakeholders (Tax Return Preparer Review, Enhanced Collaboration with Partners and Stakeholders)

Since the publication of the last tax gap report, the IRS published a new strategic plan for FY 2009-2013. The strategic plan outlines the service and enforcement goals of the IRS, along with the strategic foundations that underpin both. The plan recognizes that the IRS must excel at both service and enforcement. The plan also outlines five long-term measures for evaluating the IRS’s progress in achieving its goals, and which directly relate to the tax gap strategy.

Need help to resolve your tax problem? Call attorney Mitchell A. Port at (310) 559-5259 for a free phone consultation.

May 23, 2012

New Flexible Offer-in-Compromise Terms Help More Struggling Taxpayers

The IRS announced the other day that it is offering more flexible terms to its Offer in Compromise (OIC) program that will enable some of the most financially distressed taxpayers to clear up their tax problems and in many cases more quickly than in the past. In general, an OIC is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed.

The new guidelines are announced in a news release by the IRS (IR-2012-53, May 21, 2012). More details are available in Attachment 1 to Internal Revenue Manual (IRM) 5.8.5 Financial Analysis. The changes are extraordinary.

The IRS recognizes that many taxpayers are still struggling to pay their bills so it has been working to put in place common-sense changes to the OIC program to more closely reflect real-world situations.

An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through an installment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s reasonable collection potential.

The announcement focuses on the financial analysis used to determine which taxpayers qualify for an OIC. This announcement also enables some taxpayers to resolve their tax problems in as little as two years compared to four or five years in the past.

The new guidelines also include changes to the necessary living expenses:

Allowing taxpayers to repay their student loans.

Expanding the Allowable Living Expense allowance category and amount.

Revising the calculation for the taxpayer’s future income.

Allowing taxpayers to pay state and local delinquent taxes.

When the IRS calculates a taxpayer’s reasonable collection potential, it will now look at only one year of future income for offers paid in five or fewer months, down from four years, and two years of future income for offers paid in six to 24 months, down from five years. All offers must be fully paid within 24 months of the date the offer is accepted. The deferred payment option which allows payment over the life of the statute is no longer available.

Other changes to the program include narrowed parameters and clarification of when a dissipated asset will be included in the calculation of reasonable collection potential. In general assets which have been dissipated three years or more prior to the submission of the offer in compromise will not be included in the reasonable collection potential. For example, if the offer is submitted in 2012, any asset dissipated prior to 2010 should not be included.

In addition, equity in income producing assets generally will not be included in the calculation of reasonable collection potential for on-going businesses unless it is determined the assets are not critical to business operations.

Allowable Living Expenses

The Allowable Living Expense standards are used in cases requiring financial analysis to determine a taxpayer’s ability to pay. The standard allowances provide consistency and fairness in collection determinations by incorporating average expenditures for basic necessities for citizens in similar geographic areas. These standards are used when evaluating installment agreement and offer in compromise requests.

The National Standard miscellaneous allowance has been expanded to include additional items. Taxpayers can use the miscellaneous allowance for expenses such as credit card payments and bank fees and charges.

Guidance has also been clarified to allow payments for loans guaranteed by the federal government for the taxpayer's post-high school education. In addition, payments for delinquent state and local taxes may be allowed based on percentage basis of tax owed to the state and IRS.

If you have a tax problem, then have a tax attorney help. Call Mitchell A. Port at (310) 559-5259.

May 18, 2012

Early Withdrawal Penalty (The "Additional Tax") For Education Expenses Applies To Withdrawals From Rollover IRA

Withdrawals to pay education expenses from your employer's retirement plan before you turn age 59 1/2 are NOT subject to the 10% early withdrawal penalty. Withdrawals for the same reason before age 59 1/2 ARE subject to the 10% additional tax when taken out of your IRA which you funded with a rollover from your employer's retirement plan.

On May 9, 2012, the Seventh Circuit Court of Appeals in the case of Young Kim vs. Commissioner of Internal Revenue ruled in favor of the IRS that the taxpayer owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes.

Here's the opinion in its entirety:

At age 56, Young Kim left his position as a partner in a law firm and enrolled in the London School of Economics. Employees who depart at age 55 and up may withdraw money from the employer’s retirement plan. They must pay income tax (retirement plans contain pre-tax dollars), but they do not owe the 10% additional tax that the Internal Revenue Code imposes on most withdrawals before age 59½. 26 U.S.C. §72(t)(1), (2)(A)(v). During 2005 Kim moved the funds from the law firm’s retirement plan to an individual retirement account. A rollover is not a taxable event. 26 U.S.C. §402(c); 26 C.F.R. §1.402(c)–2. During 2006 Kim withdrew about $240,000 from the IRA. He paid the income tax but not the 10% additional tax. The Commissioner of Internal Revenue concluded that he owes the 10% tax and, because he had not paid it, also owes a penalty for substantial underpayment of taxes. 26 U.S.C. §6662.

Kim sought review by the Tax Court, which held a trial. The parties reduced the scope of the dispute because the money spent on tuition and other education expenses attending the London School of Economics— and the amount Kim paid for his daughter’s tuition and other education expenses at Bryn Mawr College—is not subject to the 10% tax. See 26 U.S.C. §72(t)(2)(E).

The Tax Court held that Kim owes the 10% tax on the withdrawn money that he had put to other uses and also owes the penalty for a substantially inaccurate return. The parties agreed that, if the Tax Court’s decision is correct, Kim owes $20,456.50 under §72(t)(1) and $4,091.30 under §6662. Judgment was entered to that effect. Kim asks us to hold that he owes nothing—or at least that he does not owe the accuracy-related penalty under §6662.

Kim relies on §72(t)(2)(A)(v), which provides that the 10% additional tax does not apply to a distribution from a pension plan “made to an employee after separation from service after attainment of age 55”. His immediate problem is that the distribution from the IRA was not “made to an employee”; he was not an employee of the IRA’s custodian. He had been an employee of the law firm and therefore could have taken a distribution from its pension plan, but that’s not what happened.

Just in case this point was unclear, the Internal Revenue Code adds: “Subparagraphs (A)(v) and (C) of paragraph (2) shall not apply to distributions from an individual retirement plan.” 26 U.S.C. §72(t)(3)(A). Kim withdrew money from an IRA, an individual plan; subparagraph 72(t)(2)(A)(v) therefore “shall not apply”.

Kim calls his account a “SEP IRA” (“simplified employee pension”, see 26 U.S.C. §408(k)) as opposed to a “traditional IRA,” but §72(t)(3)(A) does not distinguish among flavors of individual retirement plans. Before reaching 59½, Kim withdrew money from an individual retirement plan, rather than from his former employer’s plan, and therefore must pay the 10% additional tax. Kim insists that this makes no sense. He could have taken the money from the law firm’s pension plan without the 10% additional tax; why should it matter that the money went from the law firm’s plan to an IRA before being withdrawn? The answer is that the Internal Revenue Code says that it matters, and Kim does not contend that §72(t)(3)(A) violates the Constitution.

Many parts of the tax code are compromises, and all parts reflect the need for lines that can’t be deduced from first principles. Why can an employee withdraw money from an employer’s plan without the 10% addition at age 55 but not age 54? Why does the 10% additional tax apply to withdrawals at age 59 and 181 days, but not 59 and 183 days? These questions cannot be answered by logical analysis. The Code’s lines are arbitrary. The law firm’s pension plan put Kim to a choice between taking the money and moving part or all of it to an IRA. He chose to roll over the whole balance, because he did not want to pay any income tax immediately.

The Code allowed Kim to extend the tax deferral at the cost of the 10% additional tax if he later took some of the money before age 59½. Money deposited in pension plans and many IRAs is not subject to income tax until the funds (including interest and capital appreciation) are withdrawn. Tax deferral is expensive to the Treasury, so the Code makes resort to some tax-deferral opportunities costly. Hence someone who puts money in an IRA can’t take it out freely before age 59½; the prospect of the 10% additional tax on early withdrawal makes IRAs less attractive (and the 10% tax also compensates the Treasury for some of the revenue foregone from deferred payment of the income tax on sheltered funds). Subsection 72(t)(2)(A)(v) offers an opportunity for avoiding the 10% tax on withdrawals between age 55 and age 59½, but that opportunity is limited by the “to an employee” language and the proviso in §72(t)(3)(A), lest it effectively reduce the age of free withdrawal from 59½ to 55. The interaction of these provisions is bound to seem irrational to many affected persons, but Congress has concluded that some lines of this kind are appropriate. The judiciary is not authorized to redraw the boundaries. Fidelity Investments, which administers Kim’s IRA, sent him a statement in 2006 informing him that he owed both income tax and the 10% additional tax. But the accountant who prepared his tax return omitted the 10% additional tax, which, coupled with the fact that the deficiency exceeded $5,000, led to the substantial-understatement penalty.

Section 6662 excuses the taxpayer if “there is or was substantial authority for [the tax return’s] treatment” (§6662(d)(2)(B)(i)) or all relevant facts were disclosed on the return and “there is a reasonable basis for the tax treatment of such item by the taxpayer” (§6662(d)(2)(B)(ii)(II)). Kim contends that there was “substantial authority” for his return’s treatment of the withdrawal, but there was and is no authority at all for it. Kim does not contend that any court has accepted his argument that an IRA (SEP flavor or otherwise) is the same as an employer’s plan under §72(t)(2)(A)(v).

The Tax Court treats the “reasonable basis” exception in §6662(d)(2)(B)(ii)(II) as applicable when the taxpayer furnishes accurate information to, and then relies in good faith on, the opinion of a competent tax adviser. See Neonatology Associates, P.A. v. CIR, 115 T.C. 43, 98–99 (2000), affirmed, 299 F.3d 221, 233–35 (3d Cir. 2002); 26 C.F.R. §1.6664–4(c). See also United States v. Boyle, 469 U.S. 241, 251 (1985). The record does not show what information Kim furnished to his accountant or whether the accountant competently analyzed the situation under §72(t). The Tax Court accordingly concluded that Kim could not take advantage of §6662(d)(2)(B)(ii)(II).

Kim observes that the Tax Court lacked any evidence from the accountant, but the shortfall is Kim’s own responsibility. After the deadline for submitting expert evidence had passed, Kim filed a motion for a continuance, which the Tax Court denied. That decision was not an abuse of discretion. Kim might have asked the Commissioner to stipulate to what the accountant would have testified, but he did not make such a request. Nor did he make an offer of proof. So we have no idea what evidence the accountant would have provided. Kim testified at the trial but did not tell the Tax Court what information he had furnished to the accountant. With respect to the facts relevant under Neonatology Associates, the record is essentially empty. There is no warrant for upsetting the Tax Court’s decision. Finally, Kim asks us to order the Commissioner to abate interest on his underpayments. That subject was not before the Tax Court and therefore is not before us. CIR v. McCoy, 484 U.S. 3 (1987). Kim must ask for this relief from the Commissioner, and if he is dissatisfied with the Commissioner’s decision he can file a separate petition in the Tax Court. See 26 U.S.C. §6404(e)(1); Bourekis v. CIR, 110 T.C. 20, 25–26 (1998). AFFIRMED

May 17, 2012

Internal Revenue Service Guidance

Here are seven of the most common forms of guidance in the form of documents and publications that provide assistance to charitable groups, business firms and taxpayers.

Notice

A notice is a public pronouncement that may contain guidance that involves substantive interpretations of the Internal Revenue Code or other provisions of the law. For example, notices can be used to relate what regulations will say in situations where the regulations may not be published in the immediate future.

Announcement

An announcement is a public pronouncement that has only immediate or short-term value. For example, announcements can be used to summarize the law or regulations without making any substantive interpretation; to state what regulations will say when they are certain to be published in the immediate future; or to notify taxpayers of the existence of an approaching deadline.

Private Letter Ruling

A private letter ruling, or PLR, is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. A PLR may not be relied on as precedent by other taxpayers or IRS personnel. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued.

Technical Advice Memorandum

A technical advice memorandum, or TAM, is guidance furnished by the Office of Chief Counsel upon the request of an IRS director or an area director, appeals, in response to technical or procedural questions that develop during a proceeding. A request for a TAM generally stems from an examination of a taxpayer's return, a consideration of a taxpayer's claim for a refund or credit, or any other matter involving a specific taxpayer under the jurisdiction of the territory manager or the area director, appeals. Technical Advice Memoranda are issued only on closed transactions and provide the interpretation of proper application of tax laws, tax treaties, regulations, revenue rulings or other precedents. The advice rendered represents a final determination of the position of the IRS, but only with respect to the specific issue in the specific case in which the advice is issued. Technical Advice Memoranda are generally made public after all information has been removed that could identify the taxpayer whose circumstances triggered a specific memorandum.

Revenue Procedure

A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. It is also published in the Internal Revenue Bulletin. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how those entitled to deduct certain automobile expenses should compute them by applying a certain mileage rate in lieu of calculating actual operating expenses.

Revenue Ruling

A revenue ruling is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. It is the conclusion of the IRS on how the law is applied to a specific set of facts. Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Regulation

A regulation is issued by the Internal Revenue Service and Treasury Department to provide guidance for new legislation or to address issues that arise with respect to existing Internal Revenue Code sections. Regulations interpret and give directions on complying with the law. Regulations are published in the Federal Register. Generally, regulations are first published in proposed form in a Notice of Proposed Rulemaking (NPRM). After public input is fully considered through written comments and even a public hearing, a final regulation or a temporary regulation is published as a Treasury Decision (TD), again, in the Federal Register.

To consult with a qualified tax attorney on these or any other tax controversy, call Mitchell A. Port at (310) 559-5259

April 25, 2012

Backlog Of Offers In Compromise

The IRS faces a 28% increase in the number of requests for Offers In Compromise. The requests by Californians and others behind in their tax payments to pay "pennies on the dollar" has reached almost 60,000 for 2011 when the data was last analyzed.

Why are Offers up? In part the struggling U.S. economy is responsible, and in part it’s the IRS’ own doing. Since the National Taxpayer Advocate labeled the offers in compromise program as one of the most serious problems facing taxpayers from 2001 through 2009, the IRS has been trying to improve and promote the program. It made the OIC form (Form 656) simpler, created a YouTube informational video and began a “streamlined” process for taxpayers with incomes of $100,000 or less and liabilities of $50,000 or less to make deals. A “Fresh Start” initiative is also bringing in more taxpayers to the OIC program.

At the end of last month, the U.S. Treasury published a report entitled "Increasing Requests for Offers in Compromise Have Created Inventory Backlogs and Delayed Responses to Taxpayers" which is available by clicking here.

Forbes Online also has a good explanation of what's going on at the IRS with regard to the OICs which is available at this link.

Get help from a tax attorney. Call Mitchell A. Port at (310) 559-5259.

April 20, 2012

Power of Attorney

When Is a Power of Attorney Not Required?

A power of attorney is not required in some situations when dealing with the IRS. The following situations do not require a power of attorney.

Representing a taxpayer through a nonwritten consent.

Allowing the IRS to discuss return information with a third party designee.

Allowing a tax matters partner or person (TMP) to perform acts for the partnership.

Providing information to the IRS.

Allowing the IRS to discuss return information with a fiduciary.

Authorizing the disclosure of tax return information through Form 8821.

Providing information to the IRS. If you are merely providing information to the IRS at the request of the IRS, a power of attorney is not required.

Disclosure of tax return information. You do not have to file a power of attorney to authorize the IRS to discuss and provide specific confidential tax return information to any organization you designate through the use of Form 8821, partnership, corporation, firm, trust, or individual. You may file your own tax information authorization without using Form 8821, but it must include all the information that is requested on the form.

Form 8821 is strictly a disclosure authorization form and cannot be used to designate an individual to represent you. If you want to name a representative, you should use
Form 2848.

With a Federal tax matters, like income or payroll taxes, you have the right to represent yourself or have someone represent you before the IRS. If you want someone to represent you before the IRS file form 2848, Power of Attorney and Declaration of Representative, with the IRS office where you want your representative to act for you. The most recent form has been revised as of March, 2012. Your representative must be a person authorized to practice before the Internal Revenue Service; I am an authorized representative. Your signature on Form 2848 allows the individual or individuals named to represent you before the IRS and to receive your tax information.

Call for proper representation. Call for a free phone consultation. Speak with Mitchell A. Port at (310) 559-5259.

April 9, 2012

The Tax Court

The United States Tax Court is a court established by Congress under the Constitution. When the Internal Revenue Service has determined a tax deficiency and has sent the notorious 90-day letter, the so-called Notice of Deficiency, you may dispute the deficiency in the Tax Court before paying any disputed amount.

The Tax Court’s jurisdiction also includes the authority to order abatement of interest, award administrative and litigation costs, review certain collection actions, determine relief from joint and several liability on a joint return, redetermine worker classification, adjust partnership items, redetermine transferee liability, make certain types of declaratory judgments, and review awards to whistleblowers who provide information to the Commissioner of Internal Revenue.

The U.S. president appoints all 19 Tax Court judges. Trials are conducted and other work of the Court is performed by those judges. All of the judges have expertise in the tax laws and apply that expertise in a manner to ensure that you are assessed only what they owe, and no more. The main Court is in Washington, D.C., while the judges travel all over the country to conduct trials in various designated cities such as Los Angeles, San Francisco, San Diego and Fresno (where only small tax cases are heard).

DO NOT miss the filing deadline to start a case in the Tax Court. File your petition early. The Court cannot extend the time for filing which is set by law.

A $60 filing fee must be paid when the petition is filed. Once the petition is filed, payment of the underlying tax ordinarily is postponed until the case has been decided. Keep in mind that interest and some penalties continue to run while your Tax Court case is pending.

If you don’t think you’ll ever appeal your case beyond the Tax Court, then consider using the Court's simplified small tax case procedure. Trials in small tax cases generally are less formal and result in a speedier disposition. In certain tax disputes involving $50,000 or less, you may elect to have your case conducted using this procedure.

Cases are calendared for trial as soon as practicable (on a first in/ first out basis) after the case becomes at issue. When a case is calendared, the parties are notified by the Court of the date, time, and place of trial. Trials are conducted before one judge, without a jury, and you are permitted to represent yourself if you desire. Taxpayers may be represented by practitioners admitted to the bar of the Tax Court.

Most cases are settled by mutual agreement without the necessity of a trial. However, if a trial is conducted, a report is usually issued by the presiding judge laying out findings of fact and an opinion. The case is then closed.

Speak with a tax attorney about your rights in the Tax Court. Call Mitchell A. Port at (310) 559-5259.

March 9, 2012

Standards Clarifying When Federal Employment Taxes Are Paid By Employee Leasing Companies Or By The Employer

California’s employers as well as employers throughout the U.S. are required to withhold and pay Federal employment taxes (consisting of Federal Insurance Contribution Act –FICA- taxes and Federal Unemployment Tax Act –FUTA- taxes with respect to wages paid to their employees.

The one determined to be the employer under a multi-factor common law test or under specific statutory provisions generally has the obligation for Federal employment taxes. For example, a third party that is not the common law employer can be a statutory employer if the third party has control over the payment of wages.

In addition, certain designated agents who prepare and file employment tax returns using their own name and employer identification number are jointly and severally liable with their principals for employment taxes with respect to wages paid to the principals’ employees.

In comparison, reporting agents who prepare and file employment tax returns for their clients using the client’s name and employer identification number payroll service providers acting are usually not liable for the employment taxes reported on their clients’ returns.

Employee leasing companies often prepare and file employment tax returns for their clients using the leasing company’s employer identification number and name, often taking the position that the leasing company is the statutory or common law employer of their clients’ workers. Employee leasing is the practice of contracting with an outside business to handle certain administrative, personnel, and payroll matters for a taxpayer’s employees. Some employers use leasing companies to avoid employment taxes.

Reasons for Change

Is the employee leasing company or its client is liable for unpaid Federal employment taxes arising with respect to wages paid to the client’s workers? When an employee leasing company files employment tax returns using its own name and employer identification number, or when no returns are filed with respect to wages paid by a taxpayer that uses an employee leasing company or when no one pays the taxes due, there can be uncertainty as to how the Federal employment taxes are assessed and collected. Providing standards for when an employee leasing company and its clients will be held liable for Federal employment taxes will facilitate the assessment, payment and collection of those taxes and will preclude taxpayers who have control over withholding and payment of those taxes from denying liability when the taxes are not paid.

Proposal

The new budget proposal provides standards for holding employee leasing companies jointly and severally liable with their clients for Federal employment taxes. The proposal would also provide standards for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns required to be filed with respect to wages paid after December 31, 2011.

February 21, 2012

Classifying Workers: Independent Contractors Or Employees?

The Government Proposes To Increase Certainty With Respect To Worker Classification

Current Law

For both tax and nontax purposes, workers must be classified into one of two mutually exclusive categories: employees or self-employed (sometimes referred to as independent contractors).

Worker classification generally is based on a common-law test for determining whether an employment relationship exists. The main determinant is whether the service recipient (employer) has the right to control not only the result of the worker’s services but also the means by which the worker accomplishes that result. For classification purposes, it does not matter whether the service recipient exercises that control, only that he or she has the right to exercise it.

Even though it is generally recognized that more highly skilled workers may not require much guidance or direction from the service recipient, the underlying concept of the right to control is the same for them. In addition, only individuals can be employees. In determining worker status, the IRS looks to three categories of evidence that may be relevant in determining whether the requisite control exists under the common-law test:

(i) behavioral control, (ii) financial control, and (iii) the relationship of the parties.

For employees, employers are required to withhold income and Federal Insurance Contribution Act (FICA) taxes and to pay the employer’s share of FICA taxes. Employers are also required to pay Federal Unemployment Tax Act (FUTA) taxes and generally state unemployment compensation taxes. Liability for Federal employment taxes and the obligation to report the wages generally lie with the employer. For workers who are classified as independent contractors, service recipients engaged in a trade or business and that make payments totaling $600 or more in a calendar year to an independent contractor that is not a corporation are required to send an information return to the IRS and to the independent contractor stating the total payments made during the year. The service recipient generally does not need to withhold taxes from the payments reported unless the independent contractor has not provided its taxpayer identification number to the service recipient. Independent contractors pay Self-Employment Contributions Act (SECA) tax on their net earnings from self-employment (which generally is equivalent to both the employer and employee shares of FICA tax). Independent contractors generally are required to pay their income tax, including SECA liabilities, by making quarterly estimated tax payments.

For workers, whether employee or independent contractor status is more beneficial depends on many factors including the extent to which an independent contractor is able to negotiate for gross payments that include the value of nonwage costs that the service provider would have to incur in the case of an employee. In some circumstances, independent contractor status is more beneficial; in other circumstances, employee status is more advantageous.

Under a special provision (section 530 of the Revenue Act of 1978 which was not made part of the Internal Revenue Code), a service recipient may treat a worker as an independent contractor for Federal employment tax purposes even though the worker actually may be an employee under the common law rules if the service recipient has a reasonable basis for treating the worker as an independent contractor and certain other requirements are met. The special provision applies only if (1) the service recipient has not treated the worker (or any worker in a substantially similar position) as an employee for any period beginning after 1977 and (2) the service recipient has filed all Federal tax returns, including all required information returns, on a basis consistent with treating the worker as an independent contractor.

If an employer meets the requirements for the special provision with respect to a class of workers, the IRS is prohibited from reclassifying the workers as employees, even prospectively and even as to newly hired workers in the same class. Since 1996, the IRS has considered the availability of the special provision as the first part of any examination concerning worker classification. If the IRS determines that the special provision applies to a class of workers, it does not determine whether the workers are in fact employees or independent contractors. Thus, the worker classification continues indefinitely even if it is incorrect.

The special provision also prohibits the IRS from issuing generally applicable guidance addressing the proper classification of workers. Current law and procedures also provide for reduced penalties for misclassification where the special provision is not available but where, among other things, the employer agrees to prospective reclassification of the workers as employees.

Reasons for Change

Since 1978, the IRS has not been permitted to issue general guidance addressing worker classification, and in many instances has been precluded from reclassifying workers – even prospectively – who may have been misclassified. Since 1978 there have been many changes in working relationships between service providers and service recipients. As a result, there has been continued and growing uncertainty about the correct classification of some workers.

Many benefits and worker protections are available only for workers who are classified as employees. Incorrect classification as an independent contractor for tax purposes may spill over to other areas and, for example, lead to a worker not receiving benefits for unemployment (unemployment insurance) or on-the-job injuries (workers’ compensation), or not being protected by various on-the-job health and safety requirements.

The incorrect classification of workers also creates opportunities for competitive advantages over service recipients who properly classify their workers. Such misclassification may lower the service recipient’s total cost of labor by avoiding workers’ compensation and unemployment compensation premiums, and could also provide increased opportunities for noncompliance by service providers.

Workers, service recipients, and tax administrators would benefit from reducing uncertainty about worker classification, eliminating potential competitive advantages and incentives to misclassify workers associated with worker misclassification by competitors, and reducing opportunities for noncompliance by workers classified as self-employed, while maintaining the benefits and worker protections associated with an administrative and social policy system that is based on employee status.

Proposal

The proposal would permit the IRS to require prospective reclassification of workers who are currently misclassified and whose reclassification has been prohibited under current law. The reduced penalties for misclassification provided under current law would be retained, except that lower penalties would apply only if the service recipient voluntarily reclassifies its workers before being contacted by the IRS or another enforcement agency and if the service recipient had filed all required information returns (Forms 1099) reporting the payments to the independent contractors. For service recipients with only a small number of employees and a small number of misclassified workers, even reduced penalties would be waived if the service recipient (1) had consistently filed Forms 1099 reporting all payments to all misclassified workers and (2) agreed to prospective reclassification of misclassified workers. It is anticipated that, after enactment, new enforcement activity would focus mainly on obtaining the proper worker classification prospectively, since in many cases the proper classification of workers may not have been clear. (Statutory employee or nonemployee treatment as specified under current law would be retained.)

The Department of the Treasury and the IRS also would be permitted to issue generally applicable guidance on the proper classification of workers under common law standards. This would enable service recipients to properly classify workers with much less concern about future IRS examinations. Treasury and the IRS would be directed to issue guidance interpreting common law in a neutral manner recognizing that many workers are, in fact, not employees.

Further, Treasury and the IRS would develop guidance that would provide safe harbors and/or rebuttable presumptions, both narrowly defined. To make that guidance clearer and more useful for service recipients, it would generally be industry- or job-specific. Priority for the development of guidance would be given to industries and jobs in which application of the common law test has been particularly problematic, where there has been a history of worker misclassification, or where there have been failures to report compensation paid.

Service recipients would be required to give notice to independent contractors, when they first begin performing services for the service recipient, that explains how they will be classified and the consequences thereof, e.g., tax implications, workers’ compensation implications, wage and hour implications.

The IRS would be permitted to disclose to the Department of Labor information about service recipients whose workers are reclassified.

To ease compliance burdens for independent contractors, independent contractors receiving payments totaling $600 or more in a calendar year from a service recipient would be permitted to require the service recipient to withhold for Federal tax purposes a flat rate percentage of their gross payments, with the flat rate percentage being selected by the contractor. The proposal would be effective upon enactment, but prospective reclassification of those covered by the current special provision would not be effective until the first calendar year beginning at least one year after date of enactment. The transition period could be up to two years for independent contractors with existing written contracts establishing their status.

February 15, 2012

New Proposed Federal Budget Impacts IRS

REVISED OFFER IN COMPROMISE APPLICATION RULES

I would like to pay particular attention to the president’s recent budget proposals submitted to Congress that directly impact my clients who have IRS tax problems and disputes.

One proposal that would be effective for offers-in-compromise submitted after the date of enactment of the budget by Congress would eliminate the requirements that an initial offer-in-compromise include a nonrefundable payment of any portion of the taxpayer’s offer.

As explained in other blog articles, the offer-in-compromise program is designed to settle cases in which taxpayers have demonstrated an inability to pay the full amount of a tax liability. The program allows the IRS to collect the portion of a tax liability that the taxpayer has the ability to pay.

Current law provides that the IRS may compromise any civil or criminal tax case before a reference to the Department of Justice for prosecution or defense. In 2006, a new provision was enacted to require taxpayers to make nonrefundable payments with any initial offer-in-compromise of a tax case. In the case of an offer-in-compromise involving periodic payments, the initial offer must be accompanied by a nonrefundable payment of the first installment that would be due if the offer were accepted. When the offer involves one lump sum payment, the new provision requires taxpayers to include a nonrefundable payment of 20 percent of the lump-sum with the initial offer.

The president believes that by requiring nonrefundable payments with an offer-in-compromise, access to the offer-in-compromise program may be significantly reduced. Reducing access to the offer-in-compromise program makes it more difficult and costly to obtain the collectable portion of existing tax liabilities.

EXTEND STATUTE OF LIMITATIONS WHERE STATE ADJUSTMENT AFFECTS FEDERAL TAX LIABILITY

In general, additional tax, interest, penalties and additions to tax must be assessed by the IRS within three years after the date a tax return is filed. If an assessment is not made within those three years, the IRS cannot assess or collect additional liabilities at any future time.

Similarly, the statute of limitations with respect to claims for refund expires at the later of three years from the time the return was filed or two years from the time the tax was paid. There are exceptions to the general statute of limitations.

State and local authorities use a variety of statutes of limitations for State and local tax assessments.

Pursuant to an agreement, the IRS and State and local revenue agencies exchange reports of adjustments made through examination so that corresponding adjustments can be made by each taxing authority. In addition, States provide the IRS with reports of potential discrepancies between State returns and Federal returns.

The problem perceived by the current administration is that the general statute of limitations serves as a barrier to the effective use by the IRS of State and local tax adjustment reports when the reports are provided by the State or local revenue agency to the IRS with little time remaining for assessments to be made at the Federal level.

Under the current statute of limitations framework, taxpayers may seek to extend the State statute of limitations or postpone agreement to State proposed adjustments until such time as the Federal statute of limitations expires in order to preclude assessment at the Federal level. In addition, it is not always the case that a taxpayer that files an amended State or local return reporting additional liabilities at the State or local level that also affect Federal tax liability will file an amended return at the Federal level.

The budget proposal would create an additional exception to the general three-year statute of limitations for assessment of Federal tax liability resulting from adjustments to State or local tax liability. The statute of limitations would be extended to the greater of: (1) one year from the date the taxpayer first files an amended tax return with the IRS reflecting adjustments to the State or local tax return; or (2) two years from the date the IRS first receives information from the State or local revenue agency under an information sharing agreement in place between the IRS and a State or local revenue agency.

The statute of limitations would be extended only with respect to the increase in Federal tax attributable to the State or local tax adjustment. The statute of limitations would not be further extended if the taxpayer files additional amended returns for the same tax periods as the initial amended return or if the IRS receives additional information from the State or local revenue agency under an information sharing agreement. The statute of limitations on claims for refund would be extended correspondingly so that any overall increase in tax assessed by the IRS as a result of the State or local examination report would take into account agreed-upon tax decreases or reductions attributable to a refund or credit.

The proposal would be effective for returns required to be filed after December 31, 2011.

Have a tax dispute with the IRS? Call Mitchell A. Port at (310) 559-5259 to speak with a tax attorney for help.

February 7, 2012

Getting The IRS To Pay Your Legal Bills

Internal Revenue Code Section 7430(a) provides that the prevailing party in any administrative or court proceeding may be awarded a judgment for (1) reasonable administrative costs incurred in connection with such an administrative proceeding within the IRS, and (2) reasonable litigation costs incurred in connection with such a court proceeding.

In addition to being the prevailing party, to receive an award of reasonable litigation costs a taxpayer must have exhausted all administrative remedies, shows that the position of the United States is not "substantially justified," and must not have unreasonably protracted the court proceeding.

Section 7430(c)(4)(B)(i) makes it clear that the IRS bears the burden of proving that its position was “substantially justified” (i.e., the IRS’s position has a reasonable basis in both fact and law and is justified to a degree that could satisfy a reasonable person). "Reasonable litigation costs" include reasonable court costs, expert witness fees, the cost of any study, analysis or project which is determined by the court to be necessary for the preparation of a taxpayer's case, and reasonable attorneys' fees. IRC Section 7430(c)(1). The amount of reasonable attorneys' fees are limited. For an interesting Tax Court case deciding against the Internal Revenue Service and awarding fees to the taxpayer’s attorney, read Arthur Dalton, Jr. and Beverly Dalton, Petitioners vs. Commissioner Of Internal Revenue, Respondent.

I found a handy chart that may help determine whether your attorney's fees will be paid.

Do you qualify to have your attorney’s fees paid by the Internal Revenue Service? A tax litigation attorney can help. Call Mitchell A. Port at (310) 559-5259 to discuss it.

January 30, 2012

Late Filing Tax Penalties

For 2012, no late filing penalties apply when missing the April 15 tax filing deadline. That's because for this year, the federal tax filing deadline is April 17. Since April 15 falls on a Sunday, the deadline is moved to the following Monday; but because Monday is Emancipation Day in Washington, D.C., the filing deadline is moved to the following Tuesday, April 17. Here's an explanation from the IRS in one of it's "tax tips".

Help from a tax litigation attorney is at hand. Call Mitchell A. Port at (310) 559-5259.

January 27, 2012

New Guidelines For Innocent Spouse Relief

Right after the New Year, the Internal Revenue Service released new proposed guidelines designed to provide relief to more innocent spouses requesting equitable relief from income tax liability. In an earlier blog post, other rule changes were discussed.

A Notice proposing a new revenue procedure revises the threshold requirements for requesting equitable relief and revises the factors used by the IRS in evaluating these requests. The factors have been revised to ensure that requests for innocent spouse relief are granted under section 6015(f) when the facts and circumstances warrant and that, when appropriate, requests are granted in the initial stage of the administrative process. The new guidelines are available immediately and will remain available until the finalized revenue procedure is published. The IRS will immediately begin using these new guidelines when evaluating equitable relief requests.

"The IRS is significantly changing the way we determine innocent spouse relief," said IRS Commissioner Doug Shulman. "These improvements should dramatically enhance our process to make it fairer for victimized taxpayers facing difficult situations.”

This is the second major change made to the innocent spouse program. In July, the IRS extended help to more innocent spouses by eliminating the two-year time limit that previously applied to requests seeking equitable relief.

Need help? Call a qualified tax litigation attorney at (310) 559-5259.

January 18, 2012

Pennies On The Dollar - NOT!

JK Harris & Co. - "the nation's largest tax representation firm" - is in bankruptcy. It may stop trying to restructure its business to liquidating its business instead.

This case shows how hard it can be to settle tax disputes for “pennies on the dollar”. JK Harris advertised that it could resolve people's tax debts for "pennies on the dollar." It appears that it had its own problems: the cost of large settlements related to multiple claims that it misled consumers. In many cases, attorneys general complained that the company told consumers it could resolve their tax problems, and took their payments, when no such relief was possible for those particular clients.

Its own employees have now become creditors for unpaid wages. No doubt it has payroll tax problems with the Internal Revenue Service because if it didn’t pay wages, it probably didn’t pay payroll taxes. It probably won’t qualify for a settlement involving pennies on the dollar.

Company founder and Chief Executive Officer John K. Harris will likely be assessed by the IRS for all the unpaid trust fund taxes owed to the government if any are due and he's found to be both willful and responsible for nonpayment. His personal assets will probably be subject to tax claims made by the Internal Revenue Service.

Work with a reliable attorney to resolve your tax problems. Call Mitchell A. Port at (310) 559-5259.

January 13, 2012

Offshore Voluntary Disclosure Program Reopens

As of this past Monday, the Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs.

The IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The third offshore program comes as the IRS continues working on a wide range of international tax issues and follows ongoing efforts with the Justice Department to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

“Our focus on offshore tax evasion continues to produce strong, substantial results for the nation’s taxpayers,” said IRS Commissioner Doug Shulman. “We have billions of dollars in hand from our previous efforts, and we have more people wanting to come in and get right with the government. This new program makes good sense for taxpayers still hiding assets overseas and for the nation’s tax system.”

The program is similar to the 2011 program in many ways, but with a few key differences. Unlike last year, there is no set deadline for people to apply. However, the terms of the program could change at any time going forward. For example, the IRS may increase penalties in the program for all or some taxpayers or defined classes of taxpayers – or decide to end the program entirely at any point.

“As we’ve said all along, people need to come in and get right with us before we find you,” Shulman said. “We are following more leads and the risk for people who do not come in continues to increase.”

The third offshore effort comes as Shulman also announced today the IRS has collected $3.4 billion so far from people who participated in the 2009 offshore program, reflecting closures of about 95 percent of the cases from the 2009 program. On top of that, the IRS has collected an additional $1 billion from up front payments required under the 2011 program. That number will grow as the IRS processes the 2011 cases.

In all, the IRS has seen 33,000 voluntary disclosures from the 2009 and 2011 offshore initiatives. Since the 2011 program closed last September, hundreds of taxpayers have come forward to make voluntary disclosures. Those who have come in since the 2011 program closed last year will be able to be treated under the provisions of the new OVDP program.

The overall penalty structure for the new program is the same for 2011, except for taxpayers in the highest penalty category.

For the new program, the penalty framework requires individuals to pay a penalty of 27.5 percent of the highest aggregate balance in foreign bank accounts/entities or value of foreign assets during the eight full tax years prior to the disclosure. That is up from 25 percent in the 2011 program. Some taxpayers will be eligible for 5 or 12.5 percent penalties; these remain the same in the new program as in 2011.

Participants must file all original and amended tax returns and include payment for back-taxes and interest for up to eight years as well as paying accuracy-related and/or delinquency penalties.

Participants face a 27.5 percent penalty, but taxpayers in limited situations can qualify for a 5 percent penalty. Smaller offshore accounts will face a 12.5 percent penalty. People whose offshore accounts or assets did not surpass $75,000 in any calendar year covered by the new OVDP will qualify for this lower rate. As under the prior programs, taxpayers who feel that the penalty is disproportionate may opt instead to be examined.

The IRS recognizes that its success in offshore enforcement and in the disclosure programs has raised awareness related to tax filing obligations. This includes awareness by dual citizens and others who may be delinquent in filing, but owe no U.S. tax. The IRS is currently developing procedures by which these taxpayers may come into compliance with U.S. tax law. The IRS is also committed to educating all taxpayers so that they understand their U.S. tax responsibilities.

More details will be available within the next month on IRS.gov. In addition, the IRS will be updating key Frequently Asked Questions and providing additional specifics on the offshore program.

January 5, 2012

Collection Financial Standards: Guidelines For Repayment Of Delinquent Taxes

You may be familiar with the so-called "national standards" used by the Internal Revenue Service in calculating repayment of delinquent taxes. As of October 3, 2011, new "standards" were issued. Those standards are used so that all taxpayers located in a particular locale are treated the same as every other taxpayer in the same locale; no longer does the Service retain the same degree of discretion it used to have when evaluating one's ability to pay those taxes.

For instance, for Los Angeles County, the national standards for a family of 5 or more for housing and utilities is $2958 per month.

The maximum allowed for food, clothing and miscellaneous for a family of 5 is $1639 per month.

The maximum amount for vehicle ownership costs for 2 cars is $992 per month while the maximum operating costs for 2 cars is $590.

Separate from health insurance costs, the maximum allowed for out of pocket health care costs for those over age 65 is $144 per month and for those under age 65 is $60 per month.

To the extent the information on the form 433-A "Collection Information Statement" exceeds the maximum national standards for a category of expenditure, the Internal Revenue Service often simply treats the excess expenditure as if it was not incurred and thus the excess amount is counted as "available" to pay delinquent taxes. For example, $2958 is the maximum allowed for housing and utilities but you may actually spend $8389. The extra $5431 will likely be counted as "available" to pay taxes.

When the amount claimed on the form 433-A is more than the total allowed by the national standards, you must provide documentation to substantiate those expenses are necessary living expenses. The IRS won't simply allow a large mortgage obligation to be sufficient to demonstrate that the expense is "necessary" since that might allow an unlimited amount to be spent on a mortgage and leave nothing left with which to pay delinquent taxes. The IRS will not subsidize your standard of living by allowing a large mortgage while taxes remain unpaid.

I hope this casts the proper light on what lies ahead when negotiating an installment agreement.

For tax help, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.

November 30, 2011

Penalties And Interest Paid To The IRS

The total penalty for the failure to file your income tax return and for failing to pay your taxes can be 47.5% (22.5% late filing, 25% late payment) of the tax owed. On top of penalties, there’s interest charges.

Interest charges for filing and paying taxes late

Interest is compounded daily and charged on any unpaid tax from the due date of the return (without regard to any extension of time to file) until the date of payment.

The interest rate is the federal short-term rate plus 3 percent. That rate is determined every three months.

Penalty charges for filing and paying taxes late

In addition, if you didn't pay on time, you'll generally have to pay a late payment penalty.

Paying Late

The late payment penalty is one-half of one percent of the tax (0.5%) owed for each month, or part of a month, that the tax remains unpaid after the due date, not exceeding 25 percent.

The one-half of one percent rate increases to one percent if the tax remains unpaid after several bills have been sent to you and the IRS issues a notice of intent to levy.

Currently, if you filed a timely return and are paying your tax via an installment agreement, the penalty is one-quarter of one percent for each month, or part of a month, that the installment agreement is in effect.

Filing Late

If you did not file on time and owe tax, you may owe an additional penalty for failure to file unless you can show reasonable cause.

The combined penalty is 5 percent (4.5% late filing, 0.5% late payment) for each month, or part of a month, that your return was late, up to 25%.

The late filing penalty applies to the net amount due, which is the tax shown on your return and any additional tax found to be due, as reduced by any credits for withholding and estimated tax payments.

After five months, if you still have not paid, the 0.5% failure-to-pay penalty continues to run, up to 25%, until the tax is paid.

Ask for tax help from a qualified California tax attorney. Call Mitchell A. Port at (310) 559-5259.

November 17, 2011

What Can The IRS Do?

If you don't pay your taxes or file your income tax returns, what can the IRS do?

For not filing your income tax return, Internal Revenue Code Section 6020(b) provides that:

(b) Execution of return by Secretary
(1) Authority of Secretary to execute return
If any person fails to make any return required by any internal revenue law or regulation made thereunder at the time prescribed therefor, or makes, willfully or otherwise, a false or fraudulent return, the Secretary shall make such return from his own knowledge and from such information as he can obtain through testimony or otherwise.

In other words, the IRS will prepare and file your tax return for you using the best available information it has. No tax deductions reported on a Schedule A are included in the IRS's version of your tax return.

For non-payment of tax

What Can the IRS do if I Will Not File or Pay?

SELL YOUR PROPERTY

The IRS conducts several different types of property sales. For sales of seized property conducted under IRC sections 6335 and 6336 (applying to the sale of perishable goods) the following applies.

The IRS will post a public notice of a pending sale, usually in local newspapers. The original notice of sale will be delivered to you, or sent to you by certified mail.

After placing the notice, the IRS must wait at least ten days before conducting the sale, unless the property is perishable, and must be sold immediately.

Before the sale, a minimum bid price is computed. This bid is usually 80% or more of the forced sale value of the property, after subtracting any liens.

If you disagree with the Fair Market Value or forced sale value, you can appeal it; and ask that the price be computed again by either an IRS or private appraiser.

If the proceeds of the sale are less than the total of the tax bill and the expenses of levy and sale, you will still have to pay the unpaid tax.

If the proceeds of the sale are more than the total of the tax bill and the expenses of the levy and sale, the IRS will notify you about the surplus money and will tell you how to ask for a refund. However, if someone, such as a mortgagee or other lien holder, makes a claim that is superior to yours, the IRS will pay that claim before it refunds any money to you.

LEVY

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in. For instance,

It could seize and sell property that you hold (such as your car, boat, or house), or

It could levy property that is yours but is held by someone else (such as your state tax refund, wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions).

The IRS usually levies only after three requirements are met:

It assessed the tax and sent you a Notice and Demand for Payment;

You neglected or refused to pay the tax; and

It sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. It may give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address. If it levies your state tax refund, you may receive a Notice of Levy on Your State Tax Refund, Notice of Your Right to Hearing after the levy.

You may ask an IRS manager to review your case, or you may request a Collection Due Process hearing with the Office of Appeals by filing a request for a Collection Due Process hearing with the IRS office listed on your notice. You must file your request within 30 days of the date on your notice.

Levying your wages, federal payments, state refunds, or your bank account.

If the IRS levies your wages, salary, or federal payments, the levy will end when:

The levy is released,

You pay your tax debt, or

The time expires for legally collecting the tax.

If the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS.

FEDERAL TAX LIENS

Liens give the IRS a legal claim to your property as security or payment for your tax debt. A Notice of Federal Tax Lien may be filed only after:

It assesses the liability;

It sends you a Notice and Demand for Payment - a bill that tells you how much you owe in taxes; and

You neglect or refuse to fully pay the debt within 10 days after we notify you about it.

Once these requirements are met, a lien is created for the amount of your tax debt. By filing notice of this lien, your creditors are publicly notified that we have a claim against all your property, including property you acquire after the lien is filed. This notice is used by courts to establish priority in certain situations, such as bankruptcy proceedings or sales of real estate.

The lien attaches to all your property (such as your house or car) and to all your rights to property (such as your accounts receivable, if you are a business).

Once a lien is filed, your credit rating may be harmed. You may not be able to get a loan to buy a house or a car, get a new credit card, or sign a lease. Therefore it is important that you work to resolve your tax liability as quickly as possible, before lien filing becomes necessary.

SUMMONS

The power to summons held by the IRS applies to "Taxpayer Records and Testimony", specifically it applies to the "Taxpayer Records In Possession of Others" and to "Rights and Privileges of Person Summoned"

TRUST FUND RECOVER PENALTY (“100% PENALTY”)

For more information about the 100% penalty, see my other blog posts. To encourage prompt payment of withheld income and employment taxes, including social security taxes, railroad retirement taxes, or collected excise taxes, Congress passed a law that provides for the TFRP. These taxes are called trust fund taxes because you actually hold the employee's money in trust until you make a federal tax deposit in that amount. The TFRP may apply to you if these unpaid trust fund taxes cannot be immediately collected from the business. The business does not have to have stopped operating in order for the TFRP to be assessed.

Call a tax attorney for help resolving these tax problems.

September 21, 2011

Interest Charges On Tax Liabilities

Generally, interest on a tax liability accrues from the return due date until it is paid in full, but there are exceptions in the law as mentioned below that authorize the abatement (or the suspension) of interest, as well as exclude certain periods of time when computing interest.

In case these exceptions are overlooked, the taxpayer may file a request for interest abatement using Form 843, Claim for Refund and Request for Abatement. While Form 843 is the preferred form for the filing of an interest abatement claim, the IRS will consider written signed correspondence requests containing the required elements (e.g., name, taxpayer identification number, interest period in question, signature, and the reason(s) for the abatement, etc.) of an interest abatement claim.

Excessive, barred by statute, erroneously or illegally assessed;

Attributed to certain unreasonable errors or unreasonable delays by the IRS;

Assessed on an erroneous refund;

Due on an additional liability that was not identified by the IRS in a timely manner;

Disregarded for a period of time due to a taxpayer's participation in a combat zone;

Disregarded for a taxpayer qualifying for Military Deferment; and

Due on an account for a taxpayer located in a declared disaster area.

Reasonable cause is never the basis for abating interest.

September 17, 2011

Eliminating Penalties On Unpaid Taxes And Unfiled Tax Returns

The IRS has resources to help get relief from tax penalties. One source is the "Penalty Handbook" which is online at this link. The Handbook covers items such as:

Failure To File/Failure To Pay Penalties

Estimated Tax Penalties

Failure to Deposit Penalty

Return Related Penalties

Preparer, Promoter, Material Advisor Penalties

Information Return Penalties

Employee Plans and Exempt Organizations Miscellaneous Civil Penalties

International Penalties

Miscellaneous Penalties

Excise Tax and Estate and Gift Tax Penalties

Penalties Applicable to Incorrect Appraisals

Abatements on penalties and interest on unpaid tax is discussed in the Internal Revenue Manual at this link.

Get tax help from a qualified tax lawyer. Call Mitchell A. Port at (310) 559-5259.

September 2, 2011

Pennies On The Dollar

Congress passed legislation signed by the president years ago that requires the Internal Revenue Service to issue guidelines for determining when an Offer In Compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:

Hardship,

Public policy, and

Equity

Treasury Regulation § 301.7122-1 authorizes the IRS to consider OIC's raising these issues. These offers are called Effective Tax Administration (ETA) offers.

The availability of an ETA offer encourages taxpayers to comply with the tax laws because taxpayers will believe the tax laws are fair and equitable. The ETA offer allows for situations where tax liabilities should not be collected even though:

The tax is legally owed, and

The taxpayer has the ability to pay it in full

No compromise to promote ETA may be entered into if compromise of the liability would undermine compliance by taxpayers with the tax laws.

If a taxpayer submits an ETA offer, the IRS will first investigate the offer for:

Doubt as to liability (DATL), and/or

Doubt as to collectability (DATC)

An ETA offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under DATL and/or DATC.

The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under ETA.

Economic hardship standard of Treasury Regulation § 301.6343-1 specifically applies only to individuals.

For tax help, call Los Angeles tax attorney Mitchell A. Port at (310) 559-5259.

August 24, 2011

Ways To Appeal An IRS Tax Collection Decision

First, go to the Appeals homepage to decide if Appeals is the appropriate choice. Select the applicable appeal procedure for specific instructions on preparing your request for Appeals. If you decide you want to present your dispute to Appeals, you will need to prepare a request for Appeals and mail it to the office that sent you the decision letter.

Trust Fund Recovery Penalty (TFRP)
If you are a person responsible for collecting/withholding, accounting for, and depositing or paying specified withholding taxes, employment or excises taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the tax that was not paid, plus interest. A responsible person for this purpose can be an owner or officer of a corporation, a partner, a sole proprietor, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty. The assessment of the trust fund recovery penalty is applicable to the following tax forms: CT-1, 720, 941, 943, 944, 945, 1042, and 8288.

Collection Due Process (CDP)
Collection Due Process (CDP) is available if you receive one of the following notices:
Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (Lien Notice), a Final Notice - Notice of Intent to Levy and Notice of Your Right to A Hearing, a Notice of Jeopardy Levy and Right of Appeal, a Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing (Levy Notices), and a Notice of Levy and Notice of Your Right to a Hearing. If you disagree with the Appeals decision, you may be able to take your case to court.

Collection Appeals Program (CAP)
Collection Appeals Program (CAP) is generally quick and available for a broad range of collection actions. However, you can’t go to court if you disagree with the Appeals decision.

For tax help and solutions, call a qualified California tax attorney. Call Mitchell A. Port at (310) 559-5259.

August 2, 2011

IRS Rules Change About Innocent Spouse Requests

Available only to someone who files a joint return, innocent spouse relief is designed to help a taxpayer who did not know and did not have reason to know that his or her spouse understated or underpaid an income tax liability. Publication 971, Innocent Spouse Relief, has more information about the program.

Existing regulations require that innocent spouse requests seeking equitable relief be filed within two years after the IRS first takes collection action against the requesting spouse. The time limit was designed to encourage prompt resolution while evidence remained available. The IRS plans to issue regulations formally removing this time limit.

The Internal Revenue Service announced that it will extend help to more innocent spouses by eliminating the two-year time limit that now applies to certain relief requests.

The IRS will no longer apply the two-year limit to new equitable relief requests or requests currently being considered by the agency.

A taxpayer whose equitable relief request was previously denied solely due to the two-year limit may reapply using IRS Form 8857, Request for Innocent Spouse Relief, if the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will be automatically afforded the new rule and should not reapply.

The IRS will not apply the two-year limit in any pending litigation involving equitable relief, and where litigation is final, the agency will suspend collection action under certain circumstances.

The change to the two-year limit is effective immediately, and details are in Notice 2011-70.

Call a California tax lawyer for help solve hurdles when making your innocent spouse claim. Call Mitchell A. Port at (310) 559-5259.

July 21, 2011

Important Payroll Tax Information For Employers

Employment taxes for California business owners located in the county of Los Angeles, Orange, Santa Barbara, Ventura and San Diego consist of two separate parts:

• The amounts an employer should withhold from employees for income, social security, and Medicare taxes (also called withheld or trust fund taxes), plus
• The amount of social security tax and Medicare taxes an employer pays on behalf of each employee

The Trust Fund Recovery Penalty (TFRP) may be assessed against any person who:

• is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and
• willfully fails to collect or pay them.

A responsible person is a person or group of people who has the duty to perform and the power to direct the collecting, accounting, and paying of trust fund taxes. This person may be:

• an officer or an employee of a corporation,
• a member or employee of a partnership,
• a corporate director or shareholder,
• a member of a board of trustees of a nonprofit organization,
• another person with authority and control over funds to direct their disbursement, or
• another corporation.

For willfulness to exist, the responsible person:

• must have been, or should have been, aware of the outstanding taxes and
• either intentionally disregarded the law or was plainly indifferent to its requirements (no evil intent or bad motive is required).

Using available funds to pay other creditors when the business is unable to pay the employment taxes is an indication of willfulness.

Paying employment taxes late, or not including payment with a return if required, could result in additional penalties and interest on any unpaid balance. Failure to Deposit (FTD) penalties of up to 15 percent of the amount not deposited may be charged, depending on how many days the payment is late.

Unpaid employment taxes could cause additional collection action to be taken. IRS could require an employer to:

• File and pay employment taxes monthly, rather than quarterly, or
• Open a special bank account for the withheld amounts, under penalty of prosecution.

Enrolling in and making current tax deposits through the Electronic Federal Tax Payment System (EFTPS) can help employers stay up-to-date with their payment requirements.

Need tax help now? Call Mitchell A. Port at 310.559.5259.

July 11, 2011

Taxpayer Advocate

The National Taxpayer Advocate submitted its mid-year report to congress a couple of weeks ago. The report identifies priority challenges and issues for upcoming year. The entire report can be seen at this link.

The National Taxpayer Advocate has expressed concern about IRS collection practices in prior reports and has, in particular, made recommendations to reduce the harm that unproductive liens can inflict on taxpayers. The report expresses continuing concern about the IRS’s practice of automatically filing tax liens based on a dollar threshold instead of basing lien-filing decisions on an analysis of the taxpayer’s financial situation. In cases where the IRS has determined a taxpayer is suffering an economic hardship or possesses no significant assets, the filing of a lien is unlikely to further tax collection but will further damage a taxpayer’s credit rating, thus harming the taxpayer, increasing the taxpayer’s cost of living, and reducing the chance the taxpayer will be able to obtain a job and pay off the tax debt. Consequently, TAS will work with the IRS to evaluate the results of its limited changes to the lien-filing process.

The Taxpayer Advocate Service is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. If you believe you are eligible for TAS assistance, you can reach TAS by calling the TAS toll-free number at 1–877–777–4778 or TTY/TDD 1-800-829-4059.

Here's what the Report contains:

Continue reading "Taxpayer Advocate" »

July 5, 2011

Withdrawal Of Notice Of Federal Tax Lien

The IRS may withdraw a filed Notice of Federal Tax Lien (and so may the state of California) if the:


• Notice was filed prematurely or not according to IRS procedures;

• Taxpayer entered into an installment agreement to pay the debt on the notice of lien and the agreement did not provide for a notice of lien to be filed;

• Withdrawal will expedite collecting the tax; or

• Withdrawal would be in the taxpayer’s best interest and the best interest of the government.

The IRS will forward the withdrawal for recordation, provide a copy of the withdrawal to the taxpayer, and, if the taxpayer sends a written request, send a copy to other institutions the taxpayer indicates.

For professional tax help, call attorney Mitchell A. Port at (310) 559.5259.

June 30, 2011

Your Tax Lien And Credit Scores

Current California law provides that if the Franchise Tax Board issues a levy or files a lien in error, the FTB must correct it. The FTB is in error if it issues the levy or files the lien prematurely and does not follow its own administrative procedures. The FTB is also in error if you have an installment agreement in good standing with it to satisfy the tax liability for which it is issuing the levy or filing the lien, unless the levy is allowed by agreement.

Under these circumstances, the Franchise Tax Board will return your property if they took it. If they filed a lien, they will send a copy of the notice of withdrawal to you. You may request that the FTB send a notice of release to specified third parties

A new bill pending in the California capital – Sacramento - would authorize the Franchise Tax Board (FTB) to withdraw a Notice of State Tax Lien upon payment of the underlying debt in full. According to the author’s office, the purpose of this bill is to allow the department to issue a State Tax Lien Withdrawal upon payment in full to improve the credit history of taxpayers. This bill would become effective January 1, 2012, and would apply to State Tax Lien Withdrawals issued on or after that date, irrespective of the date the State Tax Lien was originally issued.

FTB uses two documents to release a filed State Lien:

1. FTB will issue a “Notice of Release of State Tax Lien” (State Release) when the tax liability is satisfied or has become legally unenforceable. FTB also has the discretion to issue this notice in instances where it determines that releasing a lien would facilitate the collection of the tax liability or the release would be in the best interest of the state and the taxpayer.

2. FTB can issue a “Notice of Release of State Tax Lien Filed in Error” (State FIE) if FTB determines any of the following:

• A State Lien was filed in error,

• A State Lien was filed contrary to administrative procedures,

• A State Lien was filed after a taxpayer enters into an installment payment agreement to satisfy the tax liability for which the State Lien was issued, unless the agreement states otherwise.

Upon request of the taxpayer, FTB is required to mail a copy of the State FIE to the major credit reporting companies in the county where FTB filed the State Lien. See Appendix 1 for a comparison chart of Federal and California authority for lien releases versus withdrawals.

A PENDING BILL

A pending bill would give the FTB the authority to do the following if a liability represented by a State Tax Lien, including penalties and interest has been paid in full:

• Issue a Notice of Withdrawal at the same office in which the Notice of State Tax Lien was filed.

• Provide a copy of the Notice of Withdrawal to the taxpayer.

• Notify credit reporting agencies, financial institutions, and certain other creditors of the Notice of Withdrawal upon written request of the taxpayer. As a result of the Notice of Withdrawal, the State Tax Lien would be removed from the credit report of the taxpayer as though it never existed.

For professional tax help, call Los Angeles attorney Mitchell A. Port at (310) 559-5259.

June 23, 2011

Fifth Circuit Court Of Appeals Ruled That A 90-Day Letter Does Not Start If Mail Is Undeliverable

Pamela R. Terrell appealed the Tax Court’s order dismissing her petition for lack of jurisdiction. The Tax Court found it lacked jurisdiction because Terrell filed her petition more than ninety days after the Commissioner of Internal Revenue (“Commissioner”) sent her a Notice of Final Determination (“Notice”). Terrell argues that because the Commissioner did not send the Notice to her “last known address,” as required by I.R.C. § 6015(e), this Court should find her petition timely as it was filed within ninety days of the Internal Revenue Service (“IRS”) mailing the Notice to her correct address.

The IRS was on notice that its address on file for Terrell was incorrect, because the United States Postal Service (“USPS”) had already returned three of the IRS’s prior mailings to Terrell as undeliverable. The IRS thus had a duty to exercise reasonable diligence to search for her correct address, but failed to do so before sending the Notice. The Notice sent on April 6, 2007 was, therefore, not sent to her “last known address,” and became null and void when it was subsequently returned as undeliverable. Terrell’s ninety days began to run only after the IRS re-sent the Notice to her correct address on May 14, 2007. Because Terrell filed her petition with the Tax Court within ninety days of the May 14th Notice, her petition was timely. Accordingly, the Fifth Circuit Court of Appeals REVERSES the ruling of the Tax Court and REMANDS it for a determination of the petition’s merits.

Terrell argues that the IRS did not mail the Notice to her “last known address,” because the IRS failed to conduct a “reasonably diligent” search for her address before mailing the Notice. She asserts that her ninety-day petition period did not begin until she received the re-sent Notice, making her petition timely and giving the Tax Court jurisdiction.

The Court's inquiry into these claims proceeds in two parts. First, the Court must determine whether the IRS failed to exercise “reasonable diligence” in locating Terrell’s correct address and thereby failed to send the Notice to her “last known address” as required by § 6015(e). Second, if the Court finds that the IRS failed to exercise “reasonable diligence” and the Notice was therefore not sent to her “last known address,” the Court must determine the date on which Terrell’s petition period started in order to assess whether the Tax Court had jurisdiction over her petition.

A. Validity of the April 6, 2007 Notice

An individual who requests Innocent Spouse Relief “may petition the Tax Court (and the Tax Court shall have jurisdiction) to determine the appropriate relief available . . . not later than the close of the 90th day after” the date the IRS “mails, by certified or registered mail to the taxpayer’s last known address, notice of the Secretary’s final determination of relief available to the individual.” I.R.C. § 6015(e)(1)(A). Although there is a dearth of cases interpreting § 6015, the Tax Court and the parties correctly cite to analogous cases from IRC §§ 6212 and 6213 concerning the IRS sending tax deficiency notices. 2 See Estate of Cowart v. Nicklos Drilling Co., 505 U.S. 469, 479 (1992) (“[I]dentical termswithin an Act bear the same meaning.”). In both § 6015 and § 6213, the Tax Court has no jurisdiction over a taxpayer’s petition if it is not filed before the deadline.

In order to have jurisdiction to hear a taxpayer’s petition, § 6015(e) requires that the taxpayer request review within ninety days of the IRS sending notice to the taxpayer’s “last known address.” I.R.C. § 6015(e)(1)(A). The Tax Court’s jurisdiction is a question of law that we review de novo. Ferguson v. Comm’r, 568 F.3d 498, 502 (5th Cir. 2009). However, whether the IRS properly sent notice to the taxpayer’s “last known address,” thereby starting the ninety day response period, is a question of fact that we review for clear error. Ward v. Comm’r, 907 F.2d 517, 521 (5th Cir. 1990).

“‘[L]ast known address’ is a term of art and refers to that address which, in light of all relevant circumstances, the IRS reasonably may consider to be the address of the taxpayer at the time the notice of deficiency is mailed.” Mulder v. Comm’r, 855 F.2d 208, 211 (5th Cir. 1988) (emphasis added) (citing Brown v. Comm’r, 78 T.C. 215, 218 (1982)). This Court has interpreted Mulder as standing for the rule that “absent a subsequent, clear and concise notification of an address change, the IRS is entitled to consider the address on the taxpayer’s most recently filed return as the taxpayer’s ‘last known address.’” Pomeroy v. United States, 864 F.2d 1191, 1194 (5th Cir. 1989) (citations omitted). This rule, however, does not dispense with the requirement that the IRS must use “reasonable diligence” to determine the taxpayer’s address in light of all relevant circumstances. When the IRS knows or should know at the time of mailing that the taxpayer’s address on file may no longer be valid because of previously returned letters, “reasonable diligence” requires further investigation. See Mulder, 855 F.2d at 212 (finding no “due diligence” where “two letters posted shortly before the notice . . . were returned undelivered” and the notice itself was neither delivered nor returned); see also Pomeroy, 864 F.2d at 1195 (“Given that the two returned letters put the IRS on notice that the taxpayer had changed his address, the IRS in Mulder should have done further investigation prior to sending the deficiency notice . . . .”); Ward, 907 F.2d at 522 (“[W]hen the IRS was aware before mailing the deficiency notice that the taxpayer had moved, the Internal Revenue Service was required to exercise greater diligence . . . .”); Follum v. Comm’r, 128 F.3d 118, 119–120 (2d Cir. 1997) (“The Commissioner has an obligation to exercise reasonable diligence to ascertain the taxpayer’s correct address if prior to mailing the deficiency notice she has become aware that the address last known to the agency may be incorrect.”).

Here, the Tax Court clearly erred in finding that the IRS exercised reasonable diligence. The proper inquiry for reasonable diligence examines the facts the IRS knew or should have known at the time it sent the Notice. The Tax Court instead focused on the fact that after the IRS sent the Notice and it was returned as undeliverable, it then checked its database and found an updated address from Terrell’s recently filed tax return. But when the IRS sent the Notice on April 6, it should have already known that Terrell’s address on file was incorrect because three separate mailings had been returned as undeliverable. Although the IRS had not received “clear and concise notification” that her address had changed, the IRS is not entitled to rely on a lack of notification once it is on notice that its address on file is incorrect. See Pomeroy, 864 F.2d at 1195.

Because the IRS failed to take any steps to determine Terrell’s correct address after receiving the returned mail and before mailing the Notice, we are compelled to find it did not exercise reasonable diligence. The IRS could have done a computer search through the DMV, contacted Terrell's employer, searched using Terrell’s social security number, or undertaken any number of actions that might have located the Dallas address. See Mulder, 855 F.2d at 212 (listing different actions taken in other cases that might constitute reasonable diligence). Because the IRS failed to exercise reasonable diligence, the IRS did not mail the Notice to Terrell’s “last known address.”

B. Effective Start Date of the Petition Period

Having determined that the Notice sent on April 6 was not sent to Terrell’s “last known address,” we must now determine the date on which Terrell’s ninety-day petition period began. The Commissioner urges this Court to adopt the “no prejudice” rule espoused by the First, Second, Third, Sixth, Ninth, and Eleventh Circuits. This rule holds that despite failing to mail the notice to the taxpayer’s “last known address,” the IRS satisfies the statutory notice requirement if the taxpayer actually receives the notice without delay prejudicial to her ability to petition the Tax Court. Under the “no prejudice” rule, the Commissioner asks us to apply the ninety days beginning from April 6, as Terrell still had ample time to respond after receiving the re-sent Notice.

Terrell urges this Court to adopt the position of the Fourth, Seventh, and D.C. Circuits. These courts have held that where the IRS fails to send the notice to the taxpayer’s “last known address,” but the taxpayer receives subsequent actual notice, the limitations period begins to run on the date the taxpayer receives actual notice. Under this rule, the ninety days would begin when Terrell received the Notice the IRS re-sent on May 14.

We decline, however, to weigh in on this circuit split. We hold that because the IRS not only failed to send the original Notice to Terrell’s “last known address,” but also had the Notice returned as undeliverable, the Notice as originally sent is null and void. As the Notice was returned undelivered to the IRS, we need not decide whether we would apply the “no prejudice” rule if the original Notice had actually reached Terrell.

Our decision is in line with the distinction adopted by the Ninth Circuit in Mulvania. In Mulvania, the IRS sent an erroneously addressed notice of deficiency to the taxpayer, which was eventually returned as “[n]ot deliverable as addressed.” Mulvania, 769 F.2d at 1377. While the mistake here was based on a typographical error, the notice was similarly not sent to the taxpayer’s “last known address.” Despite its adherence to the “no prejudice” rule, the Ninth Circuit distinguished situations where the original notice of deficiency is returned to the IRS as undeliverable. The Ninth Circuit held that this notice “became null and void when it was returned to the IRS.” Id. at 1379; see also Holof v. Comm’r, 872 F.2d 50, 56 (3d Cir. 1989) (citing agreement with the Mulvania “null and void” principle). The Mulvania court further distinguished this situation from one where “the notice was improperly addressed, but the postal authorities nonetheless delivered the letter to the taxpayer.” Mulvania, 769 F.2d at 1379.

This “null and void” principle does not conflict with the decisions of the other Circuits that have adopted the “no prejudice” rule. The cases the Commissioner cites from these Circuits all concern situations where, despite the IRS’s error, the original notice was actually delivered either to the taxpayer himself, the taxpayer’s Post Office box, or the taxpayer care of his accounting firm. See Sicari, 136 F.3d at 927 (USPS informed taxpayers of notice waiting at Post Office); Patmon & Young Pro. Corp., 55 F.3d at 216 (notice sent to Post Office box returned as “refused” and “unclaimed”); Borgman, 888 F.2d at 917 (notice automatically forwarded to the taxpayer by USPS); Pugsley, 749 F.2d at 692 (notice automatically forwarded to the taxpayer by USPS); Delman, 384 F.2d at 930 (notice sent to the taxpayer care of his accounting firm and duplicate sent to his attorney by regular mail, who promptly informed the taxpayer). Here, unlike these cases and like the taxpayer in Mulvania, Terrell never received the original Notice sent by the IRS. Therefore, the “no prejudice” rule is not directly applicable to the facts at hand. We reach only our narrow holding today and leave for another day the question of whether this Court will adopt the “no prejudice” rule or instead the “actual notice” rule.

The Commissioner expresses concern that failing to adopt the “no prejudice” rule creates a difficulty in determining the effective date of the Notice because of practical problems in discerning the date when the taxpayer received the Notice. Our decision does not, however, implicate this concern. After the original Notice was returned as undeliverable, the IRS subsequently mailed a second Notice on May 14 to the correct address. As the May 14 mailing was legally effective, we use the mailing date of this Notice as the beginning of the ninety day petition period rather than the day Terrell received the Notice. Because Terrell properly filed her petition within ninety days after May 14, the Tax Court was not without jurisdiction to hear the petition.

IV. CONCLUSION

Given the IRS’s notice that Terrell’s address on file was no longer valid, it failed to exercise “reasonable diligence” in locating Terrell’s correct address before sending the original Notice. Therefore, the Notice was not sent to Terrell’s “last known address.” This, and the fact that the Notice was returned by USPS as undeliverable, rendered the original Notice null and void. The statutory petition period began only when the IRS re-sent the Notice to Terrell’s correct address on May 14, 2007. As Terrell filed her petition within ninety days of this date, the Tax Court erred in finding itself without jurisdiction to hear the merits of Terrell’s petition.

REVERSED and REMANDED.

The Court's opinion was filed November 1, 2010 under case number 09-60822.

June 10, 2011

IRS Audits Pick Up In Los Angeles

The Los Angeles Times ran an interesting article on the 2011 tax audit season in California. My clients in San Diego, Ventura, Santa Barbara, San Francisco and Sacramento may have seen the article but the rest of us Californians ought to know about it too.

As a tax attorney in Los Angeles, I agree with the article's closing paragraph which said:

"Hire a professional: The tax code is complex and audits are frightening, unfamiliar territory for most taxpayers. Unless your audit is incredibly simple or involves a small amount of money, you'd be wise to hire a skilled professional to represent you."

Call lawyer Mitchell A. Port at (310) 559-5259 for tax help.

June 6, 2011

Roni Deutch - The Tax Lady - Resigns

“Tax Lady” Roni Deutch resigned from the California state Bar, reports the June issue of the California Bar Journal.

Last August, then-Attorney General Jerry Brown filed a large lawsuit against Deutch. Brown accused Deutch of swindling clients and orchestrating a “heartless scheme” in which she promises to reduce clients’ IRS tax debts “but instead preys on their vulnerability, taking large upfront payments but providing little or no help in lowering their tax bills.”

As a solo practitioner in Los Angeles, I don't provide legal services to help with IRS and Franchise Tax Board tax problems as part of a large franchise. My services are provided one-on-one with my clients. Call for tax help - (310) 559-5259.

June 6, 2011

Roni Deutch - The Tax Lady - Resigns

“Tax Lady” Roni Deutch resigned from the California state Bar, reports the June issue of the California Bar Journal.

Last August, then-Attorney General Jerry Brown filed a large lawsuit against Deutch. Brown accused Deutch of swindling clients and orchestrating a “heartless scheme” in which she promises to reduce clients’ IRS tax debts “but instead preys on their vulnerability, taking large upfront payments but providing little or no help in lowering their tax bills.”

As a solo practitioner in Los Angeles, I don't provide legal services to help with IRS and Franchise Tax Board tax problems as part of a large franchise. My services are provided one-on-one with my clients. Call for tax help - (310) 559-5259.

May 30, 2011

Free Tax Web Sites

Here is a partial listing of websites making available excellent resources to do your own federal tax research for free.

Justia
TaxAttorney.org
Tax Links
Findlaw
JURIST
Legalbitstream
Tax Sites
Tax Talent
eTaxJobs

Federal Tax Law
Congress
Internal Revenue Code
Joint Committee on Tax'n
Joint Economic Committee
Senate Finance Committee
House Ways & Means Com.
Congressional Budget Office


Executive Branch
IRS
Treasury Department
Office of Tax Policy
DOJ Tax Division
Regulations
Public Rulings
• Private Rulings
... Actions on Decisions
... Appeals Settlement Guidelines
... Chief Counsel Bulletins
... Exempt Org. Field Memoranda
... General Counsel Memoranda
... Information Letters
... Field Service Advisories
... Private Letter Rulings
... Technical Advice Memoranda
Internal Revenue Manual
Tax Forms and Publications

Courts
Tax Court
GPO Access

May 26, 2011

Tax And Business Topics Discussed

These Tax Topics contain general individual and business tax information. The same information is elaborated upon at the IRS website.

IRS Help Available Topic 100
IRS Services – Volunteer Tax Assistance, Toll–Free Telephone, Walk–in Assistance, and Outreach Programs Topic 101
Tax Assistance for Individuals with Disabilities and the Hearing Impaired Topic 102
Tax Help for Small Businesses and Self-Employed Topic 103
Taxpayer Advocate Service – Your Voice at the IRS Topic 104
Armed Forces Tax Information Topic 105
Tax Relief Disaster Situations Topic 107

IRS Procedures Topic 150
Your Appeal Rights Topic 151
Refund Information Topic 152
What To Do if You Haven't Filed Your Tax Return Topic 153
Forms W-2 and Form 1099–R (What to Do if Not Received) Topic 154
Forms and Publications – How to Order Topic 155
Copy of Your Tax Return – How to Get One Topic 156
Change of Address – How to Notify IRS Topic 157
Ensuring Proper Credit of Payments Topic 158
Prior Year(s) Form W-2 (How to Get a Copy of) Topic 159
Form 1099–A (Acquisition or Abandonment of Secured Property) and Form 1099–C (Cancellation of Debt) Topic 160

Collection Topic 200
The Collection Process Topic 201
Tax Payment Options Topic 202
Refund Offsets: For Unpaid Child Support, And Certain Federal, State, and Unemployment Compensation Debts Topic 203
Offers in Compromise Topic 204
Innocent Spouse Relief (Including Separation of Liability and Equitable Relief) Topic 205
Dishonored Payments Topic 206

Alternative Filing Methods Topic 250
Substitute Tax Forms Topic 253
How to Choose a Tax Return Preparer Topic 254
Self-Select Pin Signature Method for Online Registration Topic 255

General Information Topic 300
When, Where, and How to File Topic 301
Checklist of Common Errors When Preparing Your Tax Return Topic 303
Extensions of Time to File Your Tax Return Topic 304
Recordkeeping Topic 305
Penalty for Underpayment of Estimated Tax Topic 306
Backup Withholding Topic 307
Amended Returns Topic 308
Roth IRA Contributions Topic 309
Coverdell Education Savings Accounts Topic 310
Power of Attorney Information Topic 311
Disclosure Authorizations Topic 312
Qualified Tuition Programs (QTPs) Topic 313

Which Forms to File Topic 350
Which Form – 1040, 1040A, or 1040EZ? Topic 352
Decedents Topic 356

Types of Income Topic 400
Wages and Salaries Topic 401
Interest Received Topic 403
Dividends Topic 404
Business Income Topic 407
Capital Gains and Losses Topic 409
Pensions and Annuities Topic 410
Pensions – The General Rule and the Simplified Method Topic 411
Lump–Sum Distributions Topic 412
Rollovers from Retirement Plans Topic 413
Rental Income and Expenses Topic 414
Renting Residential and Vacation Property (formerly Renting Vacation Property and Renting to Relatives) Topic 415
Farming and Fishing Income Topic 416
Earnings for Clergy Topic 417
Unemployment Compensation Topic 418
Gambling Income and Expenses Topic 419
Bartering Income Topic 420
Scholarship and Fellowship Grants Topic 421
Social Security and Equivalent Railroad Retirement Benefits Topic 423
401(k) Plans Topic 424
Passive Activities – Losses and Credits Topic 425
Stock Options Topic 427
Traders in Securities (Information for Form 1040 Filers) Topic 429
Exchange of Policyholder Interest for Stock Topic 430
Canceled Debt – Is it Income or Not? Topic 431

Adjustments to Income Topic 450
Individual Retirement Arrangements (IRAs) Topic 451
Alimony Paid Topic 452
Bad Debt Deduction Topic 453
Moving Expenses Topic 455
Student Loan Interest Deduction Topic 456
Tuition and Fees Deduction Topic 457
Educator Expense Deduction Topic 458

Itemized Deductions Topic 500
Should I Itemize? Topic 501
Medical and Dental Expenses Topic 502
Deductible Taxes Topic 503
Home Mortgage Points Topic 504
Interest Expense Topic 505
Charitable Contributions Topic 506
Miscellaneous Expenses Topic 508
Business Use of Home Topic 509
Business Use of Car Topic 510
Business Travel Expenses Topic 511
Business Entertainment Expenses Topic 512
Educational Expenses Topic 513
Employee Business Expenses Topic 514
Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas) Topic 515

Tax Computation Topic 550
Standard Deduction Topic 551
Tax and Credits Figured by the IRS Topic 552
Tax on a Child's Investment Income Topic 553
Self–Employment Tax Topic 554
Alternative Minimum Tax Topic 556
Tax on Early Distributions From Traditional and Roth IRAs Topic 557
Tax on Early Distributions From Retirement Plans, Other Than IRAs Topic 558

Tax Credits Topic 600
Earned Income Credit Topic 601
Child and Dependent Care Credit Topic 602
Adoption Credit Topic 607
Excess Social Security and RRTA Tax Withheld Topic 608
Retirement Savings Contributions Credit Topic 610
First-time Homebuyer Credit — Purchases Made In 2008 Topic 611
First-time Homebuyer Credit — Purchases Made In 2009 And 2010 Topic 612

IRS Notices Topic 650
Notices – What to Do Topic 651
Notice of Underreported Income – CP-2000 Topic 652
IRS Notices and Bills, Penalties and Interest Charges Topic 653

Basis of Assets, Depreciation, and Sale of Assets Topic 700
Sale of Your Home Topic 701
Basis of Assets Topic 703
Depreciation Topic 704
Installment Sales Topic 705

Employer Tax Information Topic 750
Social Security and Medicare Withholding Rates Topic 751
Form W-2 – Where, When, and How to File Topic 752
Form W-4 – Employee's Withholding Allowance Certificate Topic 753
Employer Identification Number (EIN) – How to Apply Topic 755
Employment Taxes for Household Employees Topic 756
Form 941 and 944 – Deposit Requirements Topic 757
Form 941 – Employer's Quarterly Federal Tax Return and Form 944 – Employers Annual Federal Tax Return Topic 758
A New Tax Exemption and Business Credit are Available for Qualified Employers Under "The HIRE Act" of 2010 Topic 759
FICA Tax Refunds for "Medical Residents" – Employee Claims Topic 760
Tips – Withholding and Reporting Topic 761
Independent Contractor vs. Employee Topic 762
The "Affordable Care Act" of 2010 Offers Employers New Tax Deductions and Credits Topic 763

Electronic Media Filers – 1099 Series and Related Information Returns Topic 800
Who Must File Electronically Topic 801
Applications, Forms, and Information Topic 802
Waivers and Extensions Topic 803
Test Files and Combined Federal and State Filing Topic 804
Electronic Filing of Information Returns Topic 805

Tax Information for Aliens and U.S. Citizens Living Abroad Topic 850
Resident and Non–Resident Aliens Topic 851
Foreign Tax Credit Topic 856
Individual Taxpayer Identification Number (ITIN) — Form W–7 Topic 857
Alien Tax Clearance Topic 858

Tax Information for Residents of Puerto Rico Topic 900
Is a Person With Income from Puerto Rican Sources Required to File a U.S. Federal Income Tax Return? Topic 901
Credits and Deductions for Taxpayers With Puerto Rican Source Income That is Exempt From U.S. Tax Topic 902
Federal Employment Tax in Puerto Rico. Topic 903
Tax Assistance for residents of Puerto Rico. Topic 904

May 9, 2011

Pursuing Frivolous Tax Arguments: The Penalties

Taxpayers filing returns with frivolous positions may be subject to the accuracy-related penalty under Internal Revenue Code section 6662 (twenty percent of the underpayment attributable to negligence or disregard of rules or regulations) or the civil fraud penalty under Internal Revenue Code section 6663 (seventy-five percent of the underpayment attributable to fraud) or the erroneous claim for refund penalty under Internal Revenue Code section 6676 (twenty percent of the excessive amount). Additionally, late filed returns setting forth frivolous positions may be subject to an addition to tax under Internal Revenue Code section 6651(f) for fraudulent failure to timely file an income tax return (triple the amount of the standard failure to file addition to tax under Internal Revenue Code section 6651(a)(1).

For a more detailed discussion, read the article posted by the IRS.

May 5, 2011

Frivolous Arguments In Collection Due Process Cases

This is the second in a three part series of frivolous tax arguments.

Under Internal Revenue Code Sections 6320 (pertaining to liens) and 6330 (pertaining to levies), the IRS must provide taxpayers notice and an opportunity for an administrative appeals hearing upon the filing of a notice of federal tax lien and prior to levy. Taxpayers have the right to seek judicial review of the IRS’s determination in these proceedings. Internal Revenue Code Section 6330(d). These reviews can extend to the merits of the underlying tax liability, if the taxpayer has not previously received the opportunity for review of the merits, e.g., did not receive a notice of deficiency. IRC Section 6330(c)(2)(B). A face-to-face administrative hearing concerning a taxpayer’s underlying liability will not be granted if the hearing request raises solely frivolous arguments. The Tax Court will impose sanctions pursuant to Section 6673 against taxpayers who seek judicial relief based upon frivolous or groundless positions.

Discussed below are some of the more common frivolous tax arguments raised in collection due process cases.

A. Invalidity of the Assessment

Contention: A tax assessment is invalid because the taxpayer did not get a copy of the Form 23C, the Form 23C was not personally signed by the Secretary of the Treasury, or Form 23C is not a valid record of assessment
Contention: A tax assessment is invalid because the assessment was made from a substitute for return prepared pursuant to section 6020(b), which is not a valid return

B. Invalidity of the Statutory Notice of Deficiency

Contention: A statutory notice of deficiency is invalid because it was not signed by the Secretary of the Treasury or by someone with delegated authority
Contention: A statutory notice of deficiency is invalid because the taxpayer did not file an income tax return

C. Invalidity of Notice of Federal Tax Lien

Contention: A notice of federal tax lien is invalid because it is unsigned or not signed by the Secretary of the Treasury, or because it was filed by someone without delegated authority
Contention: The form or content of a notice of federal tax lien is controlled by or subject to a state or local law, and a notice of federal tax lien that does not comply in form or content with a state or local law is invalid

D. Invalidity of Collection Due Process Notice

Contention: A collection due process notice (Letter 1058, LT-11 or Letter 3172) is invalid because it is not signed by the Secretary or his delegate
Contention: A collection due process notice is invalid because no certificate of assessment is attached

E. Verification Given as Required by I.R.C. § 6330(c)(1)65

Contention: Verification requires the production of certain documents

F. Invalidity of Statutory Notice and Demand

Contention: No notice and demand, as required by I.R.C. § 6303, was ever received by taxpayer
Contention: A notice and demand is invalid because it is not signed, it is not on the correct form (such as Form 17), or because no certificate of assessment is attached

G. Tax Court Authority

Contention: The Tax Court does not have the authority to decide legal issues

H. Challenges to the Authority of IRS Employees

Contention: Revenue Officers are not authorized to seize property in satisfaction of unpaid taxes
Contention: IRS employees lack credentials. For example, they have no pocket commission or the wrong color identification badge

I. Use of Unauthorized Representatives

Contention: Taxpayers are entitled to be represented at hearings, such as collection due process hearings, and in court, by persons without valid powers of attorney

J. No Authorization Under I.R.C. § 7401 to Bring Action

Contention: The Secretary has not authorized an action for the collection of taxes and penalties or the Attorney General has not directed an action be commenced for the collection of taxes and penalties

May 2, 2011

Frivolous Tax Arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

This is the first in a series of three articles addressing frivolous tax arguments in general:

A. The Voluntary Nature of the Federal Income Tax System

Contention: The filing of a tax return is voluntary
Contention: Payment of tax is voluntary
Contention: Taxpayers can reduce their federal income tax liability by filing a “zero return
Contention: The IRS must prepare federal tax returns for a person who fails to file
Contention: Compliance with an administrative summons issued by the IRS is voluntary

B. The Meaning of Income: Taxable Income and Gross Income

Contention: Wages, tips, and other compensation received for personal services are not income
Contention: Only foreign-source income is taxable
Contention: Federal Reserve Notes are not income
Contention: Military retirement pay does not constitute income

C. The Meaning of Certain Terms Used in the Internal Revenue Code

Contention: Taxpayer is not a “citizen” of the United States, thus not subject to the federal income tax laws
Contention: The “United States” consists only of the District of Columbia, federal territories, and federal enclaves
Contention: Taxpayer is not a “person” as defined by the Internal Revenue Code, thus is not subject to the federal income tax laws
Contention: The only “employees” subject to federal income tax are employees of the federal government

D. Constitutional Amendment Claims

Contention: Taxpayers can refuse to pay income taxes on religious or moral grounds by invoking the First Amendment
Contention: Federal income taxes constitute a “taking” of property without due process of law, violating the Fifth Amendment
Contention: Taxpayers do not have to file returns or provide financial information because of the protection against self-incrimination found in the Fifth Amendment
Contention: Compelled compliance with the federal income tax laws is a form of servitude in violation of the Thirteenth Amendment
Contention: The Sixteenth Amendment to the United States Constitution was not properly ratified, thus the federal income tax laws are unconstitutional
Contention: The Sixteenth Amendment does not authorize a direct non-apportioned federal income tax on United States citizens

E. Fictional Legal Bases

Contention: The Internal Revenue Service is not an agency of the United States
Contention: Taxpayers are not required to file a federal income tax return, because the instructions and regulations associated with the Form 1040 do not display an OMB control number as required by the Paperwork Reduction Act
Contention: African Americans can claim a special tax credit as reparations for slavery and other oppressive treatment
Contention: Taxpayers are entitled to a refund of the Social Security taxes paid over their lifetime
Contention: An “untaxing” package or trust provides a way of legally and permanently avoiding the obligation to file federal income tax returns and pay federal income taxes
Contention: A “corporation sole” can be established and used for the purpose of avoiding federal income taxes
Contention: Taxpayers who did not purchase and use fuel for an off-highway business can claim the fuels tax credit
Contention: A Form 1099-OID can be used as a debt payment option or the form or a purported financial instrument may be used to obtain money from the Treasury

April 28, 2011

The 2011 Dirty Dozen Tax Scams

Following is the Dirty Dozen for 2011:

1. Zero Wages

Filing a phony wage-or-income-related informational return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

2. Abusive Retirement Plans

The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

3. Filing False or Misleading Forms

IRS personnel are seeing various instances in which scam artists file false or misleading returns to claim refunds to which they are not entitled. In one variation of this scheme, a taxpayer seeks a refund by fabricating an information return and falsely claiming the corresponding amount as withholding. Phony information returns, such as a Form 1099 Original Issue Discount (OID), which claims false withholding credits, are usually used to legitimize erroneous refund claims. One version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.

The IRS continues to see instances in which people file false or fraudulent tax returns to try to obtain improper tax refunds. The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds.

Because scammers often use information from family or friends in filing false or fraudulent returns, beware of requests for such data. Don’t fall prey to people who encourage you to claim deductions or credits you are not entitled to or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

4. Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

5. Return Preparer Fraud

While most return preparers are professionals who provide honest and excellent service to their clients, some make basic errors or engage in fraud and other illegal activities.

Dishonest return preparers can cause big trouble for taxpayers who fall victim to their ploys. These fraudsters derive benefit by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by making false promises. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against dozens of others.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of requirements for paid tax preparers, including registration with the IRS and a preparer tax identification number (PTIN), as well as competency tests and ongoing continuing professional education.

The new regulations require paid tax preparers (including attorneys, CPAs, and enrolled agents) to apply for a Preparer Tax Identification Number (PTIN) before preparing any federal tax returns in 2011.

Higher standards for the tax preparer community will result in greater compliance with tax laws, increase confidence in the tax system and ultimately lead to a better experience for taxpayers.

6. Hiding Income Offshore

The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

In early February, the IRS announced a special voluntary disclosure initiative designed to bring offshore money back into the U.S. tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011. The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. In response to numerous requests, information about this initiative is available on IRS.gov in eight different languages, including: Chinese, Farsi, German, Hindi, Korean, Russian, Spanish, and Vietnamese.

7. Identity Theft and Phishing

Identity theft occurs when someone uses an unsuspecting individual’s name, Social Security number, credit card number or other personal information without permission to commit fraud or other crimes. For example, a criminal can use someone else's information to run up bills on that person's credit card, empty that person’s bank account or take out a loan in that person’s name. And when it comes to taxes, a criminal with someone else’s personal information can file a fraudulent tax return and collect a refund.

Phishing is one tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. Phishing involves the use of phony e-mail or websites -- even social media. A scammer may pose as an institution such as the IRS. IRS impersonation schemes flourish during tax season. Spyware, which can be loaded onto an unsuspecting taxpayer’s computer by opening an e-mail attachment or clicking on a link, is another tool identity thieves use to steal personal information.

Identity theft is a major problem that affects many people each year. That's why it's important that taxpayers protect their personal information. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. A suspicious e-mail or an “IRS” Web address that does not begin with http://www.irs.gov should be forwarded to the IRS at phishing@irs.gov.

8. Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

9. Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

IRS personnel have recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

10. Disguised Corporate Ownership

Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.

Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

11. Nontaxable Social Security Benefits with Exaggerated Withholding Credit

The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.

12. Fuel Tax Credit Scams

The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupations or income levels make the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

April 25, 2011

IRS Notices And Letters

What do those letters sent by the IRS mean? Here's a list of some of the standard letters along with an explanation of what they mean:

Letters and Notices Offering an Appeal

Letter 525 – General 30 Day Letter

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 531 – Notice of Deficiency

This letter is notice of the Commissioner's determination that you owe additional tax or other amounts for the tax year(s) identified in the letter. The Internal Revenue Code authorizes the Commissioner to send this notice. The letter explains how to dispute the adjustments in the notice of deficiency if you do not agree. To dispute the adjustments without payment, you file a petition with the Tax Court within 90 days from the notice date.

Letter 692 – Request for Consideration of Additional Findings

This letter accompanies a report giving you a computation of the proposed adjustments to your tax return. It informs you of the courses of action to take if you do not agree with the proposed adjustments. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 15 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 915 – Letter to Transmit Examination Report

This letter explains adjustments in amount of tax. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 950 – 30 Day Letter-Straight Deficiency or Over-Assessment

This letter is used for unagreed, straight deficiency, straight overassessment or mixed deficiency and overassessment field examination cases. This letter may be used for various types of tax. The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 1153 – Trust Funds Recovery Penalty Letter

This letter explains that the IRS’s efforts to collect the federal employment or excise taxes due from the business named on the letter have not resulted in full payment of the liability. Therefore, the IRS proposes to assess a penalty against you. If you agree with this penalty for each tax period shown, you are asked to sign Part 1 of the enclosed Form 2751 and return it to the person/office that sent you the letter. If you do not agree you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how you file a protest. You need to file your protest within 60 days from the date of the letter in order to appeal this decision with the Office of Appeals.

Letter 3016 – IRC Section 6015 Preliminary Determination Letter (30 Day)

This is a preliminary letter giving you 30 days to appeal the determination for innocent spouse relief under IRC Section 6015. The letter explains that if you do not agree with the determination you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how you file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3391 – 30-Day Nonfiler Letter

This letter advises you the IRS believes you are liable for filing tax returns for the periods identified in the letter. It includes a report giving you a computation of the proposed adjustments to your tax return and explains the adjustments. The letter explains that if you agree with the adjustments, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publications explain how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3727 – 30-Day Letter Notifying Taxpayer No Change to Original Report Disallowing EIC Based on Failure to Meet Residency Test for Children Claimed

This letter explains why the IRS will not allow your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Letter 3728 – 30-Day Letter Notifying Taxpayer No Change to Original Report Partially Disallowing EIC Based on Failure to Meet Residency Test for 1 Child

This letter explains why the IRS can only give you part of your earned income credit (EIC). The letter explains that if you agree with the adjustment, you sign and return the agreement form. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter or referenced publication explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

Collection Letters

Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the proposed action with the Office of Appeals.

Letter 1058 – Final Notice Reply Within 30 Days

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 1085 – 30-Day Letter Proposed 6020(b) Assessment

This letter is to notify you of your unpaid taxes and that the Service intends to levy to collect the amount owed. The letter and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

This letter is to notify you the IRS filed a notice of tax lien for the unpaid taxes. If you do not agree you can request appeals consideration within 30 days from the date of the letter. The letter and publications explain how to request a hearing from Appeals. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your lien notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

Notices

CP 90 – Final Notice of Intent to Levy

CP 90 notifies you of your unpaid taxes and that the IRS intends to levy to collect the amount owed. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 92 – Notice of Levy upon Your State Tax Refund

CP 92 notifies you that the IRS levied your state tax refund to pay your unpaid federal taxes. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 242 – Notice of Levy upon Your State Tax Refund

CP 242 notifies you that the IRS levied your state tax refund to pay your unpaid federal tax. This notice and referenced publications explain how to request an appeal if you do not agree. You need to file a Form 12153, Request for A Collection Due Process Hearing and send it to the address shown on your levy notice within 30 days from the date of the letter in order to appeal the action with the Office of Appeals.

CP 523 – IMF Installment Agreement Default Notice

CP 523 notifies you that the IRS intends to terminate your installment agreement in 30 days. You have the right to request an appeal if you do not agree by following the instructions in the notice.

CP 2000

You receive this letter when the IRS receives income, deduction or credit information that does not match your return. You are provided a computation of the proposed adjustments to your tax return based upon this information. If you agree, you sign and return the agreement forms. If you do not agree, you can submit a request for appeal/protest to the office/individual that sent you the letter. The letter explains how to file a protest. You need to file your protest within 30 days from the date of this letter in order to appeal the proposed adjustments with the Office of Appeals.

April 19, 2011

The United States Tax Court

When the Commissioner of Internal Revenue has determined a tax deficiency, you may dispute the deficiency in the Tax Court before paying any disputed amount. The Tax Court’s jurisdiction includes the authority to redetermine transferee liability, make certain types of declaratory judgments, adjust partnership items, order abatement of interest, award administrative and litigation costs, redetermine worker classification, determine relief from joint and several liability on a joint return, review certain collection actions, and review awards to whistleblowers who provide information to the Commissioner of Internal Revenue.

The United State Tax Court has taxpayer information that covers a variety of topics such as:

Introduction to the Tax Court

About the Court

Starting a Case

Before Trial

During Trial

After Trial

For help from a qualified tax attorney, call Mitchell A. Port at 310.559.5259.

April 5, 2011

IRS Wants To Collect Gift Taxes When California Real Estate Is Transferred To Family

In a lawsuit recently filed by the IRS, the Internal Revenue Service wants to order California’s Board of Equalization (a state tax agency) to provide its computer database of everyone who transferred real estate to relatives for little or no consideration from 2005 to 2010. The BOE oversees property tax issues.

If granted, the lawsuit could expose many Californians to IRS audits as well as federal penalties or even significant back taxes. This is especially threatening to those who didn’t file federal gift tax returns.

California’s Proposition 13 limits annual property assessment increases to 2% or less unless the property is sold. Two other initiatives permit property transferred to children and, in certain situations, grandchildren, to retain the 2% cap. To claim the exclusion from reassessment and save a lot of money every year by the new owner/family member, paperwork has to be filed with the county where the property is located. Data from that paperwork is sent to the BOE where it is entered into a database.

The IRS identified that database and has asked for access to it.

Discuss your California real estate transfers with a tax attorney. Call Mitchell A. Port at (310) 559-5259 for tax help.

March 22, 2011

Whistleblower Claims - Reporting Tax Cheats

The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

For almost 150 years, the IRS has had authority to pay rewards to whistleblowers. The initial reward was a minimum of 1% of the amount recovered from the taxpayer, maximum of 15%, and a cap of $10 million. In the Tax Relief and Health Care Act of 2006, Congress introduced legislation, which enhanced the whistleblower rewards as well as created a whistleblower office within the IRS.

On December 13, 2010, the Whisleblower Office submitted its annual report to Congress, and indicated that it received more than 5000 cases in fiscal year 2009, 460 of which will likely qualify for an award.

The rewards that are available can be large. To be eligible for the larger reward, the tax, penalties, interest, additions to tax, and additional amounts in dispute must be more than $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 at issue.

While the award is mandatory, the amount is somewhat discretionary. By statute 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 amount of the award can be reduced if the whistleblower was involved in the noncompliance. If the whistleblower is convicted of criminal conduct arising from his or her role in planning and initiating the action, the Whistleblower Office will deny the award.

On June 18, 2010, the IRS added new provisions to the Internal Revenue Manual (IRM) applicable for the whistleblower program. Topics include the following:

25.2.2 Whistleblower Awards
25.2.2.1 Overview: Authority and Policy
25.2.2.2 General
25.2.2.3 Submission of Information for Award under Sections 7623(a) or (b)
25.2.2.4 Initial Review of the Form 211 by the Whistleblower Office
25.2.2.5 Grounds for Not Processing Claims for Award
25.2.2.6 Processing of the Form 211 7623(a) Claim for Award
25.2.2.7 Processing of the Form 211 7623(b) Claim for Award
25.2.2.8 Whistleblower Award Administrative Proceeding
25.2.2.9 Award Computation
25.2.2.10 Appeal Rights under section 7623(b)
25.2.2.11 Confidentiality of the Whistleblower
25.2.2.12 Funding Awards
25.2.2.13 Award Payment Procedures
25.2.2.14 Annual Report to Congress

Read more about how you file a claim by clicking here.

March 18, 2011

IRS Ends Tax Package Mailing

Business and individual taxpayers will no longer receive paper tax packages in the mail from the IRS. Tax packages contained the forms, schedules and instructions for filing a paper tax return. The IRS is taking this step because of the continued growth in electronic filing as well as to help reduce costs.

Businesses may go to IRS.gov after January 10, 2011, and click on Forms and Publications, or go directly to IRS.gov/formspubs and follow the directions for getting forms and instructions.

Only 8 percent of individuals who filed tax returns last year received tax packages in the mail. The rest either used a paid tax professional or software or e-filed their tax returns. In 2010 to date, more than 96 million individual tax returns were e-filed, and an estimated 20 million paper returns were filed through paid preparers.

For more info, look at "Frequenlty Asked Questions To Help Taxpayers Obtain IRS Tax Products".

March 7, 2011

Tax Problems: How To Resolve Disputes With The IRS

Preparing a Request for Appeals

Appeals Online Self-Help Tools

Online Videos and Podcasts of the Appeals Process

Is Appeals the Place for You?

Are You Ready to Request an Appeals Conference or Hearing?

What You Can Expect from Appeals

Forms and Publications About Your Appeal Rights

There are ways to resolve tax issues faster

Appealing Collection Issues

Appealing Examination Issues

What can Appeals do for you? The Appeals mission is to resolve tax controversies, without litigation, on a basis which is fair and impartial to both the Government and the taxpayer in a manner that will enhance voluntary compliance and public confidence in the integrity and efficiency of the Service.

Call a lawyer skilled in resolving tax controversies who has the experience you need to get it done. Call attorney Mitchell A. Port at (310) 559-5259 for tax help.

February 28, 2011

California Taxpayers' Bill Of Rights

The California Legislature enacted the Taxpayers’ Bill of Rights. For the first time, legislation spelled out your rights as California taxpayers as well as the State's obligations to you.

Here's a brief summary by topic of your rights:

Your Rights to Confidentiality

Your Tax

Bills You Receive From the Franchise Tax Board

Your Payment Responsibilities

Your Rights During a Tax Audit

Your Protest Rights

Protest Procedure

How FTB Handles Your Protest

Your Appeal Rights

Board of Equalization Appeal Procedure

Collection Actions

Tax Liens

Wage and Bank Levies

Property Seizure and Sales

Penalties

Changing Your Filing Status

Information Reported from Third Parties

Bills You Receive From Us

Interest

Reimbursement of Costs

Levies and Liens

Outstanding Delinquent Accounts

Employee Relief/Unremitted Withholdings

Suspension of Interest/Fail to Notify

Procedures for Imposing Penalties

Notice of Interest Charges

Abatement of Interest/Disaster Areas

Waiver of Early Withdrawal Penalties

Notice Include Deadlines

Related Franchise Tax Board Publication

Taxpayers’ Rights Advocate

For help with enforcing your rights and resolving other tax disputes, call Mitchell A. Port at 310.559.5259.

February 14, 2011

Tax Solutions For The Self-Employed And Small Business Owner

IRS Small Business and Self-Employed Tax Center provides resources to help small businesses and self-employed persons. The IRS website provides important tax information available for all stages of owning a business. The site at www.irs.gov/smallbiz offers the following resources:

Small business educational events

Tax-related news that could affect your business

A-Z Index for Business – find information fast

Employment tax information – federal income tax, Social Security and Medicare taxes, FUTA and self-employment tax

Employer Identification Number online application

Small business forms and publications

IRS videos for small businesses

Other resources available on the IRS website include a tax calendar designed for small business taxpayers, a guide to IRS audits, a virtual small business tax workshop and video and audio presentations.

Tax Calendar for Small Business Taxpayers:

The Tax Calendar for Small Businesses and Self-Employed is a 12-month calendar is filled with information on general business taxes, IRS and Social Security Administration customer assistance, electronic filing and paying options, retirement plans, business publications and forms, and common tax filing dates. All of this is contained in Publication 1518. Each page highlights different tax issues and tips that may be relevant to small-business owners, with room on each month to add notes, state tax dates or business appointments. You can also download the tax events into your calendar or subscribe to the tax calendar events. The calendar provides the small business owner with a ready resource for meeting their tax obligations.

IRS Audit Guide:

"Your Guide to an IRS Audit” takes you through the steps of an audit from notification to closing and demonstrate the stages of each type of audit: correspondence, office and field. The videos address issues that are common to audits of small businesses.

Virtual Small Business Tax Workshop:

The IRS Virtual Small Business Tax Workshop is an interactive resource to help small business owners learn about their federal tax rights and responsibilities and consists of nine lessons that can be selected and viewed in any sequence.

The IRS Video Portal:

Tax questions? Tax topics are presented through video on the IRS Video Portal. The video portal contains archived versions of live panel discussions, archived webinars, video clips, and audio archives of national phone forums.

February 7, 2011

As Taxpayers, We Have An Advocate At The IRS And California's Franchise Tax Board

The mission of the Taxpayer Advocate Service (TAS) is that as an independent organization within the IRS, it helps you resolve tax problems with the IRS and recommends changes that will prevent the problems from happening again.

The California Franchise Tax Board also has a Taxpayers' Rights Advocate for California tax problems.

Here are seven things you should know about the TAS:

1. The service is free and confidential.

2. TAS employees know the IRS and how to navigate it. It will listen to your problem, help you understand what needs to be done to resolve it, and stay with you throughout the tax resolution process until your problem is resolved.

3. TAS helps you when your tax problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.

4. You may be eligible for TAS help if you believe an IRS procedure just isn't working as it should or you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere.

5. TAS is your voice at the IRS.

6. TAS has at least one local taxpayer advocate in every state. You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service -- Your Voice at the IRS, and on its website at Contact Your Advocate. You can also call a toll-free case intake line at 1-877-777-4778.

7. You can learn about your rights and responsibilities as a taxpayer by visiting the TAS online tax toolkit at www.taxtoolkit.irs.gov.

February 3, 2011

Tax Penalties In California

California has almost 70 different types of penalties it can impose in the area of tax. The California Franchise Tax Board has a "penalty reference chart" which provides the name of the tax penalty, the California Revenue and Taxation Code Section on which the penalty is based, the equivalent Internal Revenue Code Section, the reason for imposition of the penalty and the penalty computation. The penalty reference chart is here.

Some of the FTB penalties are for the following types of things:

Limited Liability Company (LLC) Fee Estimate Penalty

Withholding Penalties

Unqualified or Suspended Corporation Doing Business in this State

Underpayment of Estimated Tax (Addition to Tax)

Failure to File Correct Information Return

Frivolous Proceedings; Failure to Exhaust Administrative Remedies

Noneconomic Substance Transaction Understatement

Failure of Exempt Organizations and Trusts to File Annual Information Return

There are plenty more listed in the FTB chart.

January 31, 2011

Are Your Taxes Dischargeable In Bankruptcy?

Taxpayers often believe that their tax liabilities are automatically dischargeable in bankruptcy as part of the process of eliminating all debts, including tax debts. This belief is accurate to a point.

Generally, federal income tax debts are dischargeable in bankruptcy when the tax debts are more than 3 years old and for which the tax return, if one was to be filed, was filed more than 240 days before filing the bankruptcy petition.

In addition to being able to discharge federal income tax debts in bankruptcy, filing a bankruptcy petition usually stops the IRS’s collection efforts. Therefore, bankruptcy may be an option to prevent the IRS from levying on bank accounts, wages or other property.

Bankruptcy can be used to leverage a taxpayer’s request for tax relief. So, if the tax debt is dischargeable in bankruptcy, the threat of filing bankruptcy may compel the IRS to settle the taxpayer's debt on the taxpayer's terms for perhaps “pennies on the dollar”.

There are also several disadvantages to filing bankruptcy. For example, federal tax liens may survive the bankruptcy process. Further, to the extent that the tax debt is not discharged in bankruptcy, the IRS may view the taxpayer as being in a better position to pay the IRS now that some of the other debts have been eliminated by the bankruptcy.

An experienced tax attorney can help you determine if bankruptcy is a viable option for resolving your tax debt. Call Mitchell A. Port at (310) 559-5259 to discuss resolving your tax problem.

January 20, 2011

What's The 100% Penalty Assessed By The IRS?

When social security, Medicare and income taxes that must be withheld are not withheld or are not deposited or paid to the IRS, the trust fund recovery penalty (aka "100% penalty") may apply. The penalty is the full amount of the unpaid trust fund tax. This penalty may apply to you if these unpaid taxes cannot be immediately collected from the employer or business.

The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes and who acted willfully in not doing so.

For example, if you volunteer for a charitable organization and perhaps are a member of the board or are an officer, if the charity fails to pay it’s trust fund taxes, you may be personally liable for all or a portion of the unpaid amount. There may not be insurance available to cover you if that happens.

Call for professional tax advice to help solve tax problems like this. Call Mitchell A. Port at (310) 559-5259.

January 17, 2011

When You Owe More Than $100,000 In Tax

To expedite resolving accounts when $100,000 or more in tax, penalties and interest are owed, the Internal Revenue Service needs to have the following information available when making contact:

• Valid Power of Attorney (Form 2848) covering all tax periods
• Copies of delinquent tax returns and /or ASFR returns (automated substitute for returns)
• Completed Form 433- A, 433-B or 433-F
• Explain in detail why the taxpayer is not able to full pay or borrow to full pay
• Three months of current bank statements (all accounts)
• Three months of current pay stubs for both the taxpayer and the taxpayer’s spouse
• Value of 401K/Retirement
• Investment income
• Employer’s information including work number
• Value of all property and/or available equity
• Year make of vehicles, value, equity, balance owed, and monthly payments
• Commission statement
• Profit and Loss statements for self-employed taxpayers
• Life insurance policies, (whole or term), any borrowing ability? And/or value of policy
• Spouse’s income and source with name/address/phone number
• Rental income
• Pension income and/or Social Security income
• Out-of-pocket medical expenses
• Substantiation of Court ordered payments
• Substantiation of payments being made
• Secured loan(s) - amount of loan and remaining balance(s)
• Number of individual’s living in the house hold

For tax help from an attorney, call an experienced lawyer who can get the IRS off your back. Call Mitchell A. Port at (310) 559-5259.

January 6, 2011

What Happens When You Don't File Your Past Due Tax Return Or Contact The IRS

Here is a bit of information about not filing a past due tax return and the steps that the IRS will take as a result. Taxpayers who don't file a past due return or contact the IRS are subject to the following:

The IRS will file a substitute return for you. Be aware that this substitute return is based only on information the IRS has from other sources. Consequently, if the IRS prepares this substitute return, it will not include any additional exemptions or expenses you may be entitled to and may overstate your actual tax liability.

Interest and penalties will be assessed and will increase the amount of your payment obligation.

Once the tax is assessed the IRS will start the collection process, which can include imposing a levy on bank accounts or on your wages or filing a federal tax lien against your property.

Even if the IRS has already filed a substitute return, it still makes sense for you to file your own return to make sure you take advantage of all the credits, exemptions and deductions you are allowed. The IRS will generally adjust your account to reflect the correct figures which might result is a reduction of the amount of tax, penalties and interest owed.

Tax problems are solveable with the help of a tax lawyer experienced in solving hard tax questions. Call Mitchell A. Port at (310) 559-5259 for tax help.

December 28, 2010

Two-Year Hiatus From Mandatory e-pay Penalty Ending

Starting January 1, 2011, the mandatory e-pay penalty will be assessed when a person required to make payments electronically pays using any other method.

The penalty is equal to one percent (1%) of the amount paid, unless failure to pay was for reasonable cause and not willful neglect. (Revenue and Taxation Code section 19011.5)

Electronic payments are required once a person:

* Makes an estimate tax or extension payment (by check or electronic method) over $20,000.

* Files an original return with a tax liability over $80,000.

Taxpayers who were previously notified (in 2009 or 2010) they meet the e-pay requirement must make their payments electronically starting January 1, 2011 to avoid the penalty.

When you are required to make electronic payments but pay by other means, the FTB can assess a penalty equal to 1 percent of the amount paid, unless your failure to pay electronically was for reasonable cause and not willful neglect.

For more information on individual mandatory e-pay, including on how to make electronic payments and the penalty, go to ftb.ca.gov and search for mandatory epay.

December 22, 2010

Employment Taxes

The IRS has useful information about employement taxes. A large part of my California law practice is helping those with unpaid employment taxes. More information about employment taxes (FICA, FUTA, Self-employment tax) is at the IRS website. Topics include the following:

Federal Income Tax and Social Security and Medicare Taxes

Federal Unemployment (FUTA) Tax

Self-Employment Tax

Reporting Employment Taxes

Depositing Employment Taxes

e-file for Business and Self-Employed Taxpayers

Preparing and Filing Form W-2

Outsourcing Payroll Duties

Independent Contractor (Self-Employed) or Employee?

References/Related Topics

Businesses with Employees
Employment Tax Forms
Employment Tax Publications
Obtaining Blank Federal Tax Deposit Coupons
Virtual Small Business Tax Workshop, Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA)
SSN Verification
Tax Calendar for Small Businesses and Self-Employed
Unemployment Insurance (UI) Taxes
W-2 Online. Create, save, print, and submit Forms W-2 and W-2c online.
Wage Reporting

November 29, 2010

IRS Audit Guide

The IRS made 10 videos entitled "Your Guide to an IRS Audit" to provide basic information about the small business audit process.

Those tax audit videos cover the following 10 topics:

1. What is an IRS audit?

2. You've been contacted - what should you do next?

3. Should you get a representative?

4. How do you prepare your records for the audit?

5. What happens when you have an audit at the IRS office?

6. What happens when the IRS audit occurs at your location?

7. What happens after your first appointment?

8. What happens when you agree with the audit findings?

9. What happens when you disagree with the audit findings?

10. If you owe, what are your payment options?

If you have any questions about your audit, you may wish to consult an income tax professional. Call tax attorney Mitchell A. Port at (310) 559-5259.

November 15, 2010

"Last Known Address" And Claim For Innocent Spouse

Pamela R. Terrell appealed the Tax Court's order dismissing her petition for lack of jurisdiction. The Tax Court found it lacked jurisdiction because Terrell filed her petition more than ninety days after the Commissioner of the Internal Revenue Service sent her a Notice of Final Determination. Terrell argued that because the Commissioner did not send the Notice to her “last known address,” as required by the Internal Revenue Code, the Federal Appeals Court should find her petition timely as it was filed within ninety days of the Internal Revenue Service mailing the Notice to her correct address.

The IRS was on notice that its address on file for Terrell was incorrect, because the United States Postal Service had already returned three of the IRS's prior mailings to Terrell as undeliverable. The IRS thus had a duty to exercise reasonable diligence to search for her correct address, but failed to do so before sending the Notice.  The Notice sent on April 6, 2007 was, therefore, not sent to her “last known address,” and became null and void when it was subsequently returned as undeliverable.  Terrell's ninety days began to run only after the IRS re-sent the Notice to her correct address on May 14, 2007.   Because Terrell filed her petition with the Tax Court within ninety days of the May 14th Notice, her petition was timely.   Accordingly, The Fifth Circuit Court of Appeals reversed the ruling of the Tax Court and sent the case back to the Tax Court for a determination of the petition's merits.

Have a similar tax problem? Call a California tax lawyer to discuss fixing your tax questions. Call Mitchell A. Port at (310) 559-5259.

November 11, 2010

Tax Information For Same Sex Married Couples In California

Same-sex couple marriages performed in California on June 16, 2008 and before November 5, 2008 will be treated as valid marriages for California purposes. Same-sex married couples (SSMCs) have the same state tax benefits and requirements as any married California taxpayer.

To learn more, read California's Franchise Tax Board's Publication 776.

Married couples must file their California income tax returns using either the married filing jointly or married filing separately filing status. However, federal laws do not permit SSMCs to file federal tax returns as married filing jointly or married filing separately.

November 9, 2010

California's Tax Collection Manual

Here is a step-by-step description of the California Franchise Tax Board's tax collection procedures for delinquent and unpaid income and other taxes. If you have a tax question because a tax problem has arisen, speak with a qualified tax attorney or tax lawyer in Los Angeles who can help.

The Collection Procedures Manual covers these tax topics:

Introduction Section

Responsibility Section

Case Administration Section

Case Processing Section

Debtor Asset Location Section

Voluntary Case Resolution Section

Involuntary Case Resolution Section

Case Servicing Section

Special Processes Section

Glossary

Call Mitchell A. Port now to solve and fix your tax problems. Call (310) 559-5259.

November 1, 2010

Tax Collection Of Unpaid Taxes By The IRS

When you have a tax debt the IRS has many tools to use to collect the delinquent tax. For example they can:

Seize and sell your car, or even your home

Serve an IRS tax levy on your wages

Serve an IRS tax levy on your bank account

File an IRS tax lien

Seize your state income tax refund to satisfy your IRS tax debt

Serve an IRS tax levy on your brokerage account

Hire a private debt collector working on commission to collect your tax debt.

The IRS can take all of the money in your bank or brokerage account to pay your tax debt. They can even serve a tax levy and seize your life insurance policy, your pension, or your IRA. If you have a business the IRS can contact your customers, tell them that you have an IRS tax debt, serve a tax levy and take your accounts receivable.

If the IRS serves a tax wage levy on your employer, not only is it a personal embarrassment but your employer is required to begin paying your salary to the IRS. Depending on the number of dependents you have you could be left with very little to live on. If your employer doesn't pay the money to the IRS he could be held personally liable for your tax debt.

You have rights, including the right to consult an IRS tax lawyer, or tax attorney to help you obtain tax relief. As tax lawyers with IRS tax experience Mitchell A. Port can help you solve your tax problems. Possible solutions for your tax problem may include:

Negotiating a reduced tax due to IRS errors involved in a prior tax audit

Having your tax debt declared currently uncollectible so you can have a tax holiday from your old IRS tax debts

Negotiating an Installment Payment Agreement so that you can pay your IRS tax debt over as long as 10 years or more

Submitting an Offers in Compromise to reduce your tax debt

Determining whether your IRS tax debt can be wiped out in bankruptcy

Determining whether the time the IRS has for collecting your tax debt has expired, or will expire soon

Obtaining a short-term deferral of your IRS tax debt so that you can have time to get back on your feet

Negotiating releases of IRS tax liens so that you obtain a loan to pay-off your tax debt

Filing claims for interest and penalty abatement

Negotiating innocent spouse relief to reduce or eliminate or your IRS tax debt

Obtaining releases of a tax levies

Reviewing your IRS tax accounts to determine whether or not the IRS has correctly calculated your taxes

If your IRS tax debt is over $50,000, you can benefit from tax lawyers and tax attorneys reviewing your tax debt to decide on the best solution for you. Don't wait until the IRS has served a tax levy on your wages or seized your bank account. Call attorney Mitchell A. Port now at (310) 559-5259 or contact him online to make an appointment and find out how a former IRS tax attorney can help.

October 25, 2010

IRS Tax Appeals

Before preparing a request for Appeals, select the appropriate appeal procedure. Sometimes the choice comes down to whether you want to retain the right to take your case to court. If you decide you want to present your dispute to Appeals, you will need to prepare a request for Appeals and mail it to the office that sent you the decision letter.

Collection Appeals Program (CAP)
Collection Appeals Program (CAP) is generally quick and available for a broad range of collection actions. However, you can’t go to court if you disagree with the Appeals decision.

Collection Due Process (CDP)
Collection Due Process (CDP) is available if you receive one of the following notices: a Notice of Levy and Notice of Your Right to a Hearing, a Final Notice - Notice of Intent to Levy and Notice of Your Right to A Hearing, a Notice of Levy on Your State Tax Refund – Notice of Your Right to a Hearing (Levy Notices), a Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (Lien Notice), and a Notice of Jeopardy Levy and Right of Appeal. If you disagree with the Appeals decision, you may be able to take your case to court.

Trust Fund Recovery Penalty (TFRP)
If you are a person responsible for withholding, accounting for, or depositing or paying specified taxes including non-resident alien (NRA) withholding and employment taxes, and willfully fail to do so, you can be held personally liable for a penalty equal to the full amount of the unpaid trust fund tax, plus interest. A responsible person for this purpose can be a sole proprietor, a partner, an owner or officer of a corporation, or an employee of any form of business. A trustee or agent with authority over the funds of the business can also be held responsible for the penalty.

Offer in Compromise – “Pay Pennies on the Dollar” (OIC)
An Offer in Compromise (OIC) is an agreement between you and the government that settles a tax liability for payment of less than the full amount owed.

Fix your tax problem with the help of an experienced tax attorney. Call Mitchell A. Port at (310) 559.5259.

September 30, 2010

Unpaid Sales And Use Taxes In California Is A Serious Tax Problem

The Los Angeles Times ran an article on September 27, 2010 which discussed delinquent sales taxes in California owed to the State Board of Equalization.

The article said that the total of uncollected sales- and use-tax revenue — including unpaid penalties and interest — stood at $1.4 billion as of June 30, according to the Board of Equalization figures obtained by The Times. Much of that money was paid by consumers but not turned over to the state by retailers, although it also includes some transactions in which the debt is in dispute.

About a third of the largest defaults come from auto dealers and related businesses, according to a Times review of state records.

For help with your delinquent tax payments, call tax attorney Mitchell A. Port at 310.559.5259 to solve your tax problem.

September 27, 2010

Revoking An Installment Agreement

The California Franchise Tax Board can revoke the installment agreement it has made with you and your business if:

New liabilities accrue.

Payments are dishonored.

A business entity repeatedly fails to make I/A payments.

Your business can enter an installment agreement if you cannot pay your total balance in 90 days due to a financial hardship. Under this program, you would agree to pay a specified amount on a specified day each month.

The requirements to meet when you request an installment agreement are:

You must file any delinquent tax returns.

You may need to complete a financial condition form and then send it to the Franchise Tax Board. If necessary, the FTB may require other financial documentation to process your installment agreement request.

FTB staff will determine if an account qualifies for an installment agreement and the time period allowed.

Even if you enter an installment agreement, the FTB may need to file a lien to secure your tax debt. Applicable penalties, fees, and interest accrue until the balance is paid. This increases your balance due.

If you need tax help, contact Mitchell A. Port at (310) 559-5259.

September 23, 2010

IRS Can Lien Your Pension

Everyone knows pensions are exempt assets that are safe from creditors, right? Nope. A recent U.S. Tax Court case (Wadleigh v. Commissioner) says that this is not always true.

Vance Wadleigh filed a 2001 federal income tax return on August 16, 2002, reporting a balance due but did not pay the tax. The IRS assessed a tax liability and issued a timely notice and demand for payment on September 16, 2002.

The assessment caused a section 6321 lien (the so-called “secret” lien) to attach to all of Wadleigh’s property, including an ERISA pension he had from his employer. Although the pension was fully vested, it would not be in payout status until November 2007. A Notice of Federal Tax Lien (NFTL) was filed in 2002, but was later withdrawn. As a result, the IRS had only a section 6321 lien with respect to the taxpayer’s 2001 tax liability.

In 2005, Wadleigh and his wife filed a voluntary Chapter 7 bankruptcy petition, listing the pension as an excluded asset. They were discharged in bankruptcy that included the 2001 federal income tax liability.

Despite the discharge, in 2006 the IRS issued a notice of intent to levy on the pension income.
After an appeal was denied, Wadleigh brought an action in the Tax Court, making three arguments:

1. His liability for the unpaid tax was discharged in bankruptcy,

2. The levy was invalid because it was made before he was in payout status, and

3. The proposed levy was invalid because a previous levy on his pension was released.

The Tax Court rejected all three arguments.

When a taxpayer fails to pay tax upon notice and demand, a section 6321 lien arises by operation of law and continues until the liability is satisfied or becomes unenforceable by lapse of time. The lien attaches to all property and rights to property belonging to the taxpayer from the moment the tax is assessed.

The IRS ordinarily follows up on the section 6321 lien by filing a Notice of Federal Tax Lien (NFTL) (1) to give it priority over judgment creditors, mechanic’s lienors and bona fide purchasers and (2) to prevent the lien from being discharged in bankruptcy.

If a taxpayer files for bankruptcy, the bankruptcy estate includes all legal or equitable interests of the debtor in property except assets excluded under section 541 of the bankruptcy code. As interpreted in Patterson v. Shumate, the section 541 exclusion includes interests in ERISA-qualified pension plans.

It is important to distinguish between excluded property and exempt property, however. Excluded property is never subject to the jurisdiction of the bankruptcy court at all, while exempt property is included in the bankruptcy estate but cannot be used to satisfy creditors’ claims.

When a debtor is discharged in bankruptcy, he is discharged from personal liability, but liens and other secured interests may survive. Exempt property can be subject to an IRS lien following discharge in bankruptcy if (1) the federal tax liability is not dischargeable or (2) the liability is dischargeable but the IRS filed a pre-petition NFTL.

Here, the IRS lien was not discharged in bankruptcy because the pension plan was an excluded asset under 26 U.S.C. 541(c)(2) and the trustee in bankruptcy had no power over it. Note, however, that only ERISA pensions are excluded under section 541(c)(2).

Thus, if Wadleigh had a non-ERISA pension like an IRA instead of the ERISA pension, it would have been an exempt asset rather than an excluded asset and could have been discharged in bankruptcy.

This suggests that a taxpayer with an ERISA pension subject to a secret section 6321 lien could convert the pension to an IRA before filing for bankruptcy and have the lien on the IRA discharged in bankruptcy. However, this planning strategy may have limited application though because it works only if the IRS fails to file a NFTL.

August 31, 2010

Do You Owe More Than $100,000 In Tax?

Often, before your tax problem is assigned to a revenue officer for collection “in the field”, tax collection is handled by a branch of the Internal Revenue Service called “ACS” (Automatic Collection Service). This is where the computer generated notices come from. ACS has developed this check sheet to help expedite the resolution on accounts in the Large Dollar Unit of ACS. The check sheet is for those accounts with a balance due of $100,000 or more.

To expedite the resolution on accounts in the Large Dollar Unit, please have the following information available when contacting ACS.

• Valid Power of Attorney (Form 2848) covering all tax periods
• Explain in detail why the taxpayer is not able to full pay or borrow to full pay
• Completed Collection Information Statement (Form 433- A, B or F)
• Number of individual’s living in the house hold
• Value of 401K/Retirement
• Copies of delinquent tax returns and /or ASFR returns
• Rental income
• Spouse’s income and source with name/address/phone number
• Three months of current bank statements (all accounts)
• Investment income
• Year make of vehicles, value, equity, balance owed, and monthly payments
• Employer’s information including work number
• Secured loan(s) - amount of loan and remaining balance(s)
• Life insurance policies, (whole or term), any borrowing ability? And/or value of policy
• Profit and Loss statements for self-employed taxpayers
• Three months of current pay stubs for both the taxpayer and the taxpayer’s wife
• Out-of-pocket medical expenses
• Commission statement
• Value of all property and/or available equity
• Substantiation of Court ordered payments
• Substantiation of payments being made
• Pension income and/or Social Security income

For additional help, call a tax attorney. Call Mitchell A. Port at (310) 559-5259.

August 18, 2010

Online Payment Agreement

You don't need a tax lawyer if you owe the federal government (IRS) $25,000 or less in income tax, penalties and interest. Instead, you can access an online payment agreement.

For tax debts larger than $25,000, speak with a qualified tax attorney about your options. Call Mitchell A. Port at (310) 559-5259.

July 23, 2010

Received A Notice From The IRS?

The IRS has a video on YouTube covering receipt of a notice in the mail. It's short but worthwhile. Click here.

Have you received a notice? Call a tax attorney about solutions to your tax problem. Call Mitchell A. Port at (310) 559-5259.

July 21, 2010

Kinder And Gentler IRS: Understanding Your Notice

If you receive a letter or notice from the IRS, it will explain the reason for the correspondence and provide instructions. The notice you receive covers a very specific issue about your account or tax return. Generally, the IRS will send a notice if it believes you are due a larger refund, owe additional tax, there is a need for additional information or if there is a question about your tax return.

Redesigned notices are now being sent to us as taxpayers. Don't panic: instead, call a tax attorney. Call (310) 559-5259.

The redesigned notices cover these topics:

Balance Due

Additional Child Tax Credit

Refund

Overpayment

Direct Deposits

Tax Exemptions

Filing Requirements. You may no longer need to pay the Alternative Minimum Tax.

Filing Requirements. You may no longer need to file Form 941 and Form 940.

Payment Process

Filing Requirements. You may no longer owe excise tax.

July 8, 2010

Do You Have A Tax Dispute?

Do you have a tax dispute? If you are a California resident, you probably do. But since the IRS reaches across the world in its efforts to collect a tax debt, anyone anywhere can have a tax problem.

If so, then you need to determine if Appeals is right for you.

Appeals is the place for you if:

You received an IRS correspondence explaining you have the right to come to Appeals to dispute an IRS decision.

AND

You do not agree and are not signing an agreement form sent to you.

If you meet the above qualifiers listed above then you may be ready to request an Appeals conference or hearing.

If you've received an IRS correspondence and already know your case qualifies to be reviewed with Appeals then you should go to the Appeals homepage to determine your next steps.

You are ready to request an Appeals conference or hearing if you can explain why you disagree. If you believe the facts used by the IRS are incorrect, then you should have records or other support available to back up your position.

Appeals is not for you if:

Your only concern is that you cannot afford to pay the amount you owe.
The correspondence you received from the IRS was a bill and there was no mention of Appeals.

If you cannot identify the requirements, or if you do not meet the conditions for coming to Appeals as explained above, contact a qualified tax attorney for help. Call Mitchell A. Port at (310) 559-5259.

June 11, 2010

IRS Summons

In general, the IRS issues summonses only when the taxpayer (or other witness) will not voluntarily produce the information or other records. When a taxpayer or third person is willing to testify and produce documents voluntarily, a summons may not be required. With limited exceptions, the IRS has the power to issue an IRS summons without court approval. The Service should only issue a summons when it is prepared to seek judicial enforcement if the summoned party fails to fully comply.

The IRS typically asks that taxpayers provide information to the IRS. These IRS requests usually involve an "information document request." The IRS summons is the primary means for enforcing these information requests.

Internal Revenue Code Section 7602 provides the Service with summons authority.

Once served, the taxpayer must act to comply with the IRS summons or act to quash the summons. If the taxpayer fails to act, the IRS will seek to have a court enforce the IRS summons. If the taxpayer fails to act after a court has ordered enforcement, the court can and does impose sanctions on the taxpayer.

The summons does not require the witness to do anything other than appear on a given date to give testimony or produce existing books, papers and records or both. A summons cannot require a witness to prepare or create documents, including tax returns, that do not currently exist.

If the IRS issues an IRS summons, it is imperative that the taxpayer immediately contact an experienced tax attorney.

June 7, 2010

Bankruptcy And Your Taxes

Some tax liabilities are dischargeable in bankruptcy.

Usually older federal income tax debts are dischargeable in bankruptcy. The tax must be more than three years old. The tax return which reported the tax debt must have been filed with the Internal Revenue Service and if it was filed, then it must have been filed more than 240 days before filing the bankruptcy petition.

Some tax penalties may also be discharged in bankruptcy and you may be able to halt the accrual of interest during the bankruptcy proceeding. If the tax debt and penalties are not dischargeable in bankruptcy then it is still possible that the tax debt and penalties can be restructured in bankruptcy.

Many tax experts believe that unpaid payroll tax which has been converted into a personal liability of the responsible person who willfully failed to pay the tax is not dischargeable in bankruptcy.

In addition to being able to discharge federal income taxes in bankruptcy, filing a bankruptcy petition may stop the IRS’s collections activities. Therefore, bankruptcy may be an option to prevent the IRS from levying on bank accounts, wages or other assets.

If your tax debt is dischargeable in bankruptcy, it may be possible that the threat of filing bankruptcy can persuade the IRS to settle your debt on more favorable terms for you.

But there are disadvantages to filing bankruptcy. For instance, IRS liens may survive the bankruptcy process and to the extent that the tax debt is not discharged in bankruptcy, the IRS may view you (who now has fewer debts) as being in a better position to pay the IRS.

Call an experienced tax attorney to help you determine if bankruptcy is an option for resolving your tax debt.

June 3, 2010

Tax Deduction For Alimony Payments

As high as the divorce rate in California is, the tax rules regarding alimony payments become increasingly important. Not following the tax law may result in the IRS assessing significant taxes, penalties and interest. Preventing or solving this tax problem can easily be done with the proper advice from your tax lawyer.

Alimony payments may be included in gross income to the payee spouse and tax deductible by the payor spouse. If under federal tax law the payments do not qualify as alimony, the payments may be excluded from gross income of the payee spouse and may not be tax deductible by the payor spouse.

Recharacterizing alimony payments is very common for the IRS on audit. For the payor spouse, this may result in the IRS disallowing tax deductions for the alimony payments. For payee spouse, this may result in the IRS finding that the spouse failed to report alimony income.

These problems are avoidedable with proper tax planning. Separating and divorcing spouses can recognize significant federal income tax savings when aware of what payments do not qualify as alimony. Generally, payments do not qualify as alimony for purposes of federal tax law if:

• the spouses are members of the same household at the time the payments are made,

• the divorce decree or separation agreement designates the payments as non-alimony,

• the payments are not made pursuant to a divorce decree or separation agreement,

• the spouses are married and file a joint tax return (married couples who file a joint tax return may qualify for innocent spouse relief),

• the payments are child support,

• the payments consist of property rather than money,

• the payments are for the payee spouse’s bills (such as mortgage payments and real estate taxes),

• the payments call for significantly larger payments in the first three years following separation or divorce, and

• there is an obligation to continue the payments after the death of the payee spouse (either in the decree or agreement or in state law).

Divorce decrees or separation agreements should be written in a way that addresses these rules. As with other major financial transactions, taxpayers should consult with their tax attorney if they have any doubt about the taxation of their alimony or other payments.

May 31, 2010

Franchise Tax Board "Practice and Procedures"

Want to know the California's collection procedures are for delinquent taxes? Check out the "Collection Procedures Manual" here. Here is a list of topics in the Manual:

Introduction Section

Responsibility Section

Case Administration Section

Case Processing Section

Debtor Asset Location Section

Voluntary Case Resolution Section

Involuntary Case Resolution Section

Case Servicing Section

Special Processes Section

Glossary

Are you being audited by the California Franchise Tax Board? Here is the audit manual so you don't have to be surprised by what happen.

Is your partnership being audited? Read the partnership manual.

S corporations are an easy target for revenue collection. What is the Franchise Tax Board's approach to the audit? Here is the S corporation manual.

Want additional help from a tax attorney? Call Mitchell A. Port at (310) 559-5259.

May 24, 2010

Report Tax Fraud In California

If you believe an individual or company is not complying with California's personal income tax or corporate income and franchise tax laws, you can report that information to Franchise Tax Board (FTB). No rewards are offered for reporting this information.

Income tax fraud is intentionally paying less tax than you owe.

Examples of income tax fraud are:

Not filing state income tax returns.

Preparing documents, books, and records that understate the true income or overstate the expenses of a business.

Making false or fraudulent claims for refunds.

Questionable tax practitioner practices.

Failing to report all income received.

Opening and closing of new businesses to evade taxes.

Claiming to be a resident of another state while residing in California.

Reporting Income Tax Fraud

1. What type of information should I provide when reporting a possible fraudulent activity?
Please include the following details if available:

Individual/business name

Individual/business address

Marital status

Spouse's name

Alleged tax violation

How you became aware of the alleged violation

Availability of supporting documents

Asset information (vehicles, property, etc.)

Your contact information (optional)

2. If FTB uses the information I provide to collect more taxes, will I receive a reward?
No. FTB does not pay rewards for informant information.

3. After I provide information to FTB, can I receive updates on the investigation?
No. Privacy and disclosure laws prohibit FTB from sharing information whether action is taken or not.

4. How do I modify information on a report I previously submitted?
If you need to provide additional information or wish to correct previous information, submit another report. On the second report, select the "Additional Information" box at the beginning of the report, and enter your referral number or the name of the person or business you reported.

5. Can the person I am reporting find out my identity?
No. We treat any information you provide as confidential unless compelled by law to do otherwise.

6. How do I know if you received my online referral report?
If your submission is successful, you will receive a confirmation window with a reference number. Keep the number or print the confirmation page.

7. Where do I send supporting documents?

Mail:
FRANCHISE TAX BOARD
PO BOX 1565
RANCHO CORDOVA CA 95741

Fax: 916.843.2060

May 7, 2010

Get Help To Solve Your Tax Problems

The IRS provides information on recent tax changes as they impact the following areas:

Businesses
Disaster Areas
Estates and Trusts
Exempt Organizations
Foreign Issues
Individuals
IRAs and Other Retirement Plans

Other tax topics are below.

The IRS provides information broken down by most popular categories. Those categories are at: Frequently Asked Question Categories

IRS Procedures
Filing Requirements/Status/Dependents/Exemptions
Itemized Deductions/Standard Deductions
Interest/Dividends/Other Types of Income
Pensions/Annuities/Retirement Plans (i.e., 401(k), etc.)
Social Security Income
Child Care Credit/Other Credits
Earned Income Tax Credit
Estimated Tax
Capital Gains, Losses/Sale of Home
Sale or Trade of Business, Depreciation, Rentals
Small Business/Self-Employed/Other Business
Aliens and U.S. Citizens Living Abroad
Electronic Filing (e-file)
Magnetic Media Filers
Other (Alternative Minimum Tax, Estates, Trusts, Tax Shelters, State Tax Inquiries)
Individual Retirement Arrangements (IRAs)

Finally, the IRS assembled its most frequently asked tax questions in one easy location. Top Frequently Asked Questions

What are the tax changes for this year?
Is there an age limit on claiming my children as dependents?
How much does an unmarried dependent student have to make before he or she has to file an income tax return?
If I claim my daughter as a dependent because she is a full-time college student, can she claim herself as a dependent when she files her return?
Can I receive a tax refund if I am currently in a payment plan for prior year's federal taxes?
For head of household filing status, do you have to claim a child as a dependent to qualify?
What is the American Recovery and Reinvestment Act (ARRA) of 2009?
What should I do if I made a mistake on my federal return that I have already filed?
What is a split refund?
How do I know if I have to file quarterly individual estimated tax payments?

Continue reading "Get Help To Solve Your Tax Problems" »

April 26, 2010

Family Fights $61 Million IRS Tax Bill

First the family of Norman F. Levy, the late New York City real estate tycoon, was swindled out of hundreds of millions of dollars by close friend Bernard L. Madoff, forcing the closing of two Levy charities. Then Levy heirs coughed up $220 million to the Madoff bankruptcy trustee to repay personal withdrawals made before Madoff's Ponzi fraud collapsed in 2008.

Now, adding insult to injury, the unlucky clan is fighting a $61 million estate tax bill from the Internal Revenue Service.

The whole story is reported in Forbes.com in an article published April 21, 2010

April 23, 2010

"Geithner Defense" Rejected By Tax Court

This past Monday, the Tax Court held that blaming TurboTax for errors on a return did not excuse the taxpayer from penalties. Lam v. Commissioner, T.C. Memo. 2010-82 (Apr. 19, 2010).

Misuse of TurboTax, even if unintentional or accidental, is not a defense to the Internal Revenue Service imposing penalties. You must still show a reasonable cause for the underpayment of taxes to avoid penalties.

Need help with finding an accountant to prepare your tax return so you can avoid penalties if you are nervous about using software to prepare taxes, call Mitchell A. Port at 310.559.5259 for a referral. If you want your tax problem fixed, call Mitchell A. Port.

April 16, 2010

Even The Rich And Famous Can Have Tax Trouble

The Detroit News online at detnews.com under it's "Tax Watchdog" headline posts story after story about celebrity tax troubles. Those with tax problems - according to the article - include Corey Feldman, Faith Evans, Mel Blount, Emanuel Steward, Jesse James, Anjelica Huston, Ving Rhames and Dwight Yoakam.

Don't ignore your tax problems. Speak with an experienced tax attorney about a solution. Call Mitchell A. Port at (310) 559-5259.

April 14, 2010

Internal Revenue Code At Your Fingertips

A new app is available for your iPhone which provides access to the Internal Revenue Code and Federal Regulations.

Here is what LawToGo says about its app:

Updated periodically.

Searchable: You can search using keywords or terms plus you can create boolean expressions using "AND" or "OR". You can even specify a "hit" only if a word or term is within x number of words of another word or term. See the help screen in the search tab.

Comprehensive: Always and instantly have a law book at your finger tips.

Fast: Uses a fast and easy navigation format that allows users to go from general to specific in seconds.

Light: Stop lugging around books to meetings.

Reliable: No internet connection needed. The apps work in a concrete basement as well as in a 40th floor conference room because the data is stored right in your iPhone.

Landscape mode: Tilt your iPhone to adjust your view to see a law section in an easy to read landscape format.

Disclaimer: my blog does not endorse this or any other product but merely presents it for informational purposes only.

April 8, 2010

What The IRS Won't Seize Or Sell

Internal Revenue Code § 6334 discusses property exempt from an IRS levy. Here's a list:

There shall be exempt from levy—

(1) Wearing apparel and school books
Such items of wearing apparel and such school books as are necessary for the taxpayer or for members of his family;

(2) Fuel, provisions, furniture, and personal effects
So much of the fuel, provisions, furniture, and personal effects in the taxpayer’s household, and of the arms for personal use, livestock, and poultry of the taxpayer, as does not exceed $6,250 in value;

(3) Books and tools of a trade, business, or profession
So many of the books and tools necessary for the trade, business, or profession of the taxpayer as do not exceed in the aggregate $3,125 in value.

(4) Unemployment benefits
Any amount payable to an individual with respect to his unemployment (including any portion thereof payable with respect to dependents) under an unemployment compensation law of the United States, of any State, or of the District of Columbia or of the Commonwealth of Puerto Rico.

(5) Undelivered mail
Mail, addressed to any person, which has not been delivered to the addressee.

(6) Certain annuity and pension payments
Annuity or pension payments under the Railroad Retirement Act, benefits under the Railroad Unemployment Insurance Act, special pension payments received by a person whose name has been entered on the Army, Navy, Air Force, and Coast Guard Medal of Honor roll (38 U.S.C. 1562), and annuities based on retired or retainer pay under chapter 73 of title 10 of the United States Code.

(7) Workmen’s compensation
Any amount payable to an individual as workmen’s compensation (including any portion thereof payable with respect to dependents) under a workmen’s compensation law of the United States, any State, the District of Columbia, or the Commonwealth of Puerto Rico.

(8) Judgments for support of minor children
If the taxpayer is required by judgment of a court of competent jurisdiction, entered prior to the date of levy, to contribute to the support of his minor children, so much of his salary, wages, or other income as is necessary to comply with such judgment.

(9) Minimum exemption for wages, salary, and other income
Any amount payable to or received by an individual as wages or salary for personal services, or as income derived from other sources, during any period, to the extent that the total of such amounts payable to or received by him during such period does not exceed the applicable exempt amount determined under subsection (d).

(10) Certain service-connected disability payments
Any amount payable to an individual as a service-connected (within the meaning of section 101 (16) of title 38, United States Code) disability benefit under—
(A) subchapter II, III, IV, V,,[1] or VI of chapter 11 of such title 38, or
(B) chapter 13, 21, 23, 31, 32, 34, 35, 37, or 39 of such title 38.

(11) Certain public assistance payments
Any amount payable to an individual as a recipient of public assistance under—
(A) title IV or title XVI (relating to supplemental security income for the aged, blind, and disabled) of the Social Security Act, or
(B) State or local government public assistance or public welfare programs for which eligibility is determined by a needs or income test.

(12) Assistance under Job Training Partnership Act
Any amount payable to a participant under the Job Training Partnership Act (29 U.S.C. 1501 et seq.) from funds appropriated pursuant to such Act.

(13) Residences exempt in small deficiency cases and principal residences and certain business assets exempt in absence of certain approval or jeopardy
(A) Residences in small deficiency cases
If the amount of the levy does not exceed $5,000—
(i) any real property used as a residence by the taxpayer; or
(ii) any real property of the taxpayer (other than real property which is rented) used by any other individual as a residence.

(B) Principal residences and certain business assets
Except to the extent provided in subsection (e)—
(i) the principal residence of the taxpayer (within the meaning of section 121); and
(ii) tangible personal property or real property (other than real property which is rented) used in the trade or business of an individual taxpayer.

(b) Appraisal
The officer seizing property of the type described in subsection (a) shall appraise and set aside to the owner the amount of such property declared to be exempt. If the taxpayer objects at the time of the seizure to the valuation fixed by the officer making the seizure, the Secretary shall summon three disinterested individuals who shall make the valuation.

(c) No other property exempt
Notwithstanding any other law of the United States (including section 207 of the Social Security Act), no property or rights to property shall be exempt from levy other than the property specifically made exempt by subsection (a).

(d) Exempt amount of wages, salary, or other income

(1) Individuals on weekly basis
In the case of an individual who is paid or receives all of his wages, salary, and other income on a weekly basis, the amount of the wages, salary, and other income payable to or received by him during any week which is exempt from levy under subsection (a)(9) shall be the exempt amount.

(2) Exempt amount
For purposes of paragraph (1), the term “exempt amount” means an amount equal to—
(A) the sum of—
(i) the standard deduction, and
(ii) the aggregate amount of the deductions for personal exemptions allowed the taxpayer under section 151 in the taxable year in which such levy occurs, divided by
(B) 52.

Unless the taxpayer submits to the Secretary a written and properly verified statement specifying the facts necessary to determine the proper amount under subparagraph (A), subparagraph (A) shall be applied as if the taxpayer were a married individual filing a separate return with only 1 personal exemption.

(3) Individuals on basis other than weekly
In the case of any individual not described in paragraph (1), the amount of the wages, salary, and other income payable to or received by him during any applicable pay period or other fiscal period (as determined under regulations prescribed by the Secretary) which is exempt from levy under subsection (a)(9) shall be an amount (determined under such regulations) which as nearly as possible will result in the same total exemption from levy for such individual over a period of time as he would have under paragraph (1) if (during such period of time) he were paid or received such wages, salary, and other income on a regular weekly basis.

(e) Levy allowed on principal residences and certain business assets in certain circumstances
(1) Principal residences

(A) Approval required
A principal residence shall not be exempt from levy if a judge or magistrate of a district court of the United States approves (in writing) the levy of such residence.

(B) Jurisdiction
The district courts of the United States shall have exclusive jurisdiction to approve a levy under subparagraph (A).

(2) Certain business assets
Property (other than a principal residence) described in subsection (a)(13)(B) shall not be exempt from levy if—

(A) a district director or assistant district director of the Internal Revenue Service personally approves (in writing) the levy of such property; or

(B) the Secretary finds that the collection of tax is in jeopardy.
An official may not approve a levy under subparagraph (A) unless the official determines that the taxpayer’s other assets subject to collection are insufficient to pay the amount due, together with expenses of the proceedings.

Consult with a tax attorney immediately. Call Mitchell A. Port and get help with your tax problem.

April 6, 2010

Checklist For Closing A Business

When closing a California business, you must file the final employment tax returns in addition to making final federal tax deposits of these taxes if you have employees. You must also file an annual tax return for the year you go out of business and attach a statement to your return showing the name of the person keeping the payroll records and the address where those records will be kept.

The annual tax return for an S corporation, corporation, partnership, 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 no longer exists, 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 reporting the exchange of like-kind property, reporting the disposition of business property and/or changing the form of your business.

Depending on your type of business structure you have, below is a list of common actions to take when closing your business:

Checklist

• Issue payment information to sub-contractors.
• Report information from 1099s issued.
• Report the sale or exchange of property used in your trade or business.
• File final employee pension/benefit plan.
• Issue final wage and withholding information to employees
• Report information from W-2s issued.
• File final tip income and allocated tips information return.
• Report capital gains or losses.
• Report partner's/shareholder's shares.
• Consider allowing S corporation election to terminate.
• Report business asset sales.
• Make final federal tax deposits
• File final quarterly or annual employment tax form.
• Report corporate dissolution or liquidation.

References/Related Topics

Closing a Business
Canceling an EIN – Closing Your Account
• Contact state and local agencies because there may be requirements relating to state and local governments as well.
• The SBA also provides advice on closing a business.

April 1, 2010

Employment Taxes

The obligation for a California business to pay taxes is fully clarified and easily understood on the IRS website. Steering clear of tax problems is a little easier when paying taxes is explained. However, sometimes tax controversies still happen after falling behind and the IRS wants all the back taxes paid.

Business tax topics are at the IRS website and cover the following:

Federal Income Tax and Social Security and Medicare Taxes

Independent Contractor (Self-Employed) or Employee?

Depositing Employment Taxes

Preparing and Filing Form W-2

Federal Unemployment (FUTA) Tax

Self-Employment Tax

Reporting Employment Taxes

Correcting/Adjusting Employment Taxes

e-file for Business and Self-Employed Taxpayers

Outsourcing Payroll Duties

Certain Taxpayers May Now File Their Employment Taxes Annually

Combined Annual Wage Reporting (CAWR)

References/Related Topics

• Businesses with Employees
• Employment Tax Forms
• Employment Tax Publications
• Obtaining Blank Federal Tax Deposit Coupons
• Virtual Small Business Tax Workshop, Lesson 9 - What you need to know about Federal Unemployment Taxes (FUTA)
• SSN Verification
• Tax Calendar for Small Businesses and Self-Employed
• Unemployment Insurance (UI) Taxes
• W-2 Online. Create, save, print, and submit Forms W-2 and W-2c online.
• Wage Reporting

Call Mitchell A. Port at (310) 559-5259 to help fix your tax problems.

March 30, 2010

Power Of Attorney And The IRS

There is an IRS publication which discusses who can represent you before the IRS and what forms or documents - like powers of attorney - are used to authorize a person to do that. Usually, attorneys, certified public accountants (CPAs), enrolled agents, and enrolled actuaries can represent taxpayers before the IRS. Under special circumstances, other individuals, including unenrolled return preparers, can represent you. To learn more, read Publication 947 on the IRS website. To speak with a qualified tax lawyer about this and other tax problems and tax solutions, call Mitchell A. Port at (310) 559-5259.

March 15, 2010

I Got A Notice From The IRS: Now What?

1. Many of these letters can be dealt with simply and painlessly. Do not panic.

2. It’s important that you keep copies of any correspondence with your records.

3. Most correspondence can be handled without calling or visiting an IRS office. However, if you have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the correspondence available when you call to help us respond to your inquiry.

4. Each letter and notice offers specific instructions on what you are asked to do to satisfy the inquiry.

5. There are number of reasons the IRS sends notices to taxpayers. The notice may request payment of taxes, notify you of a change to your account or request additional information. The notice you receive normally covers a very specific issue about your account or tax return.

6. If you receive a correction notice, you should review the correspondence and compare it with the information on your return.

7. If you do not agree with the correction the IRS made, it is important that you respond as requested. Write to explain why you disagree. Include any documents and information you wish the IRS to consider, along with the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.

8. If you agree with the correction to your account, usually no reply is necessary unless a payment is due.

9. Call a tax attorney for help. Call Mitchell A. Port at (310) 559-5259.

March 4, 2010

Federal Tax Liens Are A Serious Problem

The “National Taxpayer Advocate” 2009 Annual Report to Congress in part discusses the notice of federal tax lien (NFTL). The Report said that on average, a lien filing reduces a taxpayer’s credit score by 100 points. Unpaid tax liens may remain on a taxpayer’s credit history, leaving a derogatory mark on the credit history indefinitely. Released liens, including those paid off by the taxpayer, are not generally removed from the credit history until seven years from the date of release. Thus, an NFTL has a significant long-term impact on a taxpayer’s credit record. As a result, some lenders decline to extend credit to a taxpayer if the IRS has filed an NFTL against the taxpayer’s property. Others will charge substantially higher rates, even if the lien is subordinated. Impaired credit history can also affect a taxpayer’s ability to obtain insurance or rent an apartment on reasonable terms. Moreover, some licensing boards require members to maintain a clean credit history and some employers require employees to do so as a condition of employment. Thus, a lien filing can mean that employees lose their jobs and self-employed individuals cannot maintain the licensing necessary to remain in business. It can also hamper the taxpayer’s ability to stay compliant and obtain credit needed to pay preexisting tax debts.

Properly applied, the notice of federal tax lien (NFTL) can be an effective tool in tax collection. It gives the IRS a priority interest in the taxpayer’s property, such as a home or a car, and may enable the IRS to collect all or a portion of the tax debt if the taxpayer sells or refinances the property.

If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection.

If improperly applied, however, tax liens have the potential to cause needless harm to taxpayers and undermine long-term tax collection. Assume, for example, that a taxpayer loses his job during a recession and becomes unable to pay his tax bill. The filing of a tax lien can significantly harm the taxpayer’s credit and thus negatively affect his or her ability to obtain financing, find or retain a job, secure affordable housing or insurance, and ultimately pay the outstanding tax debt. Moreover, the government must consider that its role as a creditor is different from that of a private entity creditor. If the filing of a tax lien drives up the taxpayer’s costs and renders him or her unemployed or underemployed, the government may be forced to make outlays in the form of unemployment benefits, food stamps, and the like. Thus, the imprudent filing of a tax lien has the potential to badly damage the taxpayer and the taxpayer’s family and simultaneously reduce federal revenue – a lose-lose proposition.

For this reason, the decision whether to impose a tax lien should be made on a case-by-case
basis. Yet, the IRS files many liens systemically….

The results of research done by the Taxpayer Advocate suggest that the IRS’s use of liens may not be furthering the agency’s revenue collection objective and, equally significant, that the IRS has shown very little interest in evaluating the effectiveness of liens for itself.

A federal tax lien (FTL) arises when the IRS assesses a tax liability, sends the taxpayer notice and demand for payment, and the taxpayer does not fully pay the debt within ten days. An FTL is effective as of the date of assessment and attaches to all of the taxpayer’s property and rights to property, whether real or personal, including those acquired by the taxpayer after that date. This lien continues against the taxpayer’s property until the liability either has been fully paid or is legally unenforceable.

It is IRS policy not to use the NFTL as a negotiating tool. The IRS is required to release a lien not later than 30 days after the underlying liability either is fully satisfied through full payment of tax or is legally unenforceable (typically, by expiration of the statutory period for collecting the tax).

If you have tax problems, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.

February 16, 2010

IRS Impersonators

During income tax filing season, there are a lot of IRS impersonation schemes. These schemes may take place by email, phone, fax, internet sites and social networking sites.

The IRS will not send you unsolicited e-mails about your tax situations, tax accounts or personal tax issues. If you receive such an e-mail, most likely it's a scam.

Some impersonations may be commercial internet sites that you unknowingly visit, thinking you’re accessing the genuine IRS Web site, IRS.gov. However, such sites have no connection to the IRS.

Many impersonations are identity theft scams that try to trick you into revealing personal and financial information that can be used to access your financial accounts. Some email scams contain links or attachments that download malicious code (virus) that infects your computer or direct you to a bogus form or site posing as a genuine IRS form or Web site when you click on them.

February 8, 2010

The IRS And YouTube

There exists an official YouTube channel of the Internal Revenue Service. It features videos produced by the IRS on various tax administration topics. Information is available about all kinds of topics, including the the appeals examination process, appeals collection process, tax tips, record keeping, choosing a tax preparer, how to track your tax refund, how to check your tax withholding and the homeowner credit claim.

January 25, 2010

Getting A Transcript Of Your Tax Information

Here are some things to know if you need copies of your federal tax return information from the IRS.

There are2 options for obtaining free copies of your federal tax return information — tax account transcripts and tax return transcripts.

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

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

To request either transcript by phone, call 800-829-1040 and follow the prompts in the recorded message.

To request a tax return transcript through the mail, businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T, Request for Transcript of Tax Return. Individual taxpayers should complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Form 4506T-EZ is only for individuals who filed a Form 1040 series return.

You should receive your tax account transcript within 30 calendar days from the time the IRS receives your request. Allow 10 working days for delivery of a tax return transcript.

If you still need an actual copy of a previously processed tax return, it will cost $57 per tax year and take much longer. Complete Form 4506, Request for Copy of Tax Form, and mail it to the IRS address listed on the form for your area. Allow 60 days for actual copies of your return. Copies are generally available for the current year as well as the past six years.

January 21, 2010

California's Largest Tax Scofflaws

California's Franchise Tax Board publishes an annual list of the state's largest tax debtors. Some of those on the list are people who habitually flout or violate the law. The amount of income tax due from taxpayers ranges from $9,940,513 to $100,000. Federal individual income taxes are probably unpaid as well - but the IRS does not publish the names of delinquent taxpayers. The FTB's list is here.

If you owe California or the IRS over $25,000 in unpaid tax, call an experienced tax attorney for help resolving your tax problem. Call Mitchell A. Port at (310) 559-5259.

January 14, 2010

IRS Audits Used To Collect Employment Tax Data

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.

January 12, 2010

Federal Tax Lien Filed In Error

There is any number of different ways by which the IRS mistakenly files a federal tax lien against you for your unpaid taxes. In California (and throughout the U.S.), federal tax lies are filed in the county in which you live: say, Los Angeles, Orange, Santa Barbara or Ventura county. If the IRS erroneously files a tax lien, you should file Form 12277: Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. This application is based on Internal Revenue Code section 6323(j).

Erroneously Filed Notice of Federal Tax Lien

Treasury Regulation Section 301.6326-1 defines an erroneously filed Notice of Federal Tax Lien (NFTL) as one which is filed during the presence of one of the following conditions:

1. The tax liability was assessed in violation of a bankruptcy stay.

2. The statute of limitations for collection expired prior to the filing of the NFTL.

3. The tax liability was satisfied prior to the NFTL filing.

4. The tax liability was assessed in violation of deficiency procedures in Internal Revenue Code Section 6213.

Within 14 days of when an erroneous NFTL is identified, a Form 668Z, Certificate of Release of Federal Tax Lien, and Letter 544, Letter of Apology - Improvident/Erroneous Filing of Notice of Federal Tax Lien, must be issued by Advisory.

At your written request, a copy of the release and letter of apology may be furnished to creditors or credit bureaus. You may be instructed to provide names, mailing addresses, and permission to disclose the information.

Filing and release fees will be abated on erroneously filed NFTLs.

Improvident or Inadvertent Lien Filing

If an improvidently or inadvertently filed NFTL has been released, no consideration will be given to a request that the NFTL also be withdrawn.

When a NFTL is improvidently or inadvertently filed and then subsequently released, the Internal Revenue Service will provide you with a Letter 544.

If the criteria for release of a lien that has been improvidently or inadvertently filed are not present, the Internal Revenue Service will consider withdrawal of the NFTL.

Remember, a lien is not a levy. These two things are different from each other. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt. A levy is a legal seizure of your property to satisfy a tax debt.

For additional tax help, call Mitchell A. Port, a tax attorney in Los Angeles, for guidance. Call (310) 559-5259.

January 6, 2010

Tax Liens And Tax Levies

What is the difference between an IRS tax lien and an IRS tax levy?

A tax lien is a document filed in a public place such as a California County Recorder’s Office telling the world that you owe taxes. A tax lien lists the years for which taxes are owed the type of tax and the amount of the taxes owed. Credit reporting agencies will find the tax lien and report it on your credit report. If you want to sell any real property you own, the IRS or Franchise Tax Board of California will be paid out of the equity in your property by the escrow company. No money will be taken out of your bank account by the tax lien.

If the IRS or California FTB serves a tax levy on your bank then the bank is required to send all of your money to the IRS or FTB that is on deposit the day the levy is served. If the IRS or FTB sends a wage levy for delinquent taxes to your employer then your employer is required to send almost all of your earnings to the IRS or FTB less a small amount which is exempt.

Call a California tax attorney to discuss the help you need to fix your tax problem. Call Mitchell A. Port at (310) 559-5259.

January 4, 2010

IRS Warns Individuals and Businesses To Avoid Questionable Employment Tax Schemes

California business owners are subject to a variety of taxes by the State and also by the cities (including Los Angeles, Santa Barbara, Orange and Ventura). Some of those California businesses might have cash flow problems as a result. Some may be involved in one or more of the eight schemes where federal employment taxes are not properly withheld or paid by employers from their employees’ paychecks recently described by an IRS alert to taxpayers and business owners.

Regardless of the reason, federal law requires employment tax withholding and payment by employers. Nevertheless, there are many reasons employers don’t withhold or pay employment taxes. One reason may be because of a situation where an employer collects the taxes and elects to keep it during a period of financial difficulty rather than pay it to the Internal Revenue Service. Another reason may arise from an effort to use the government as a bank to 'borrow the money for a short time' with intentions to pay it back later. For a few tax protestors, it involves philosophical differences with the tax law of the United States that courts consistently reject.

Employment taxes consist of Social Security along with federal income tax withholding, Medicare taxes and unemployment taxes. Also, many states have withholding requirements for various employment related taxes.

The IRS takes a variety of steps to minimize employment tax non-compliance. These efforts have led to some criminal convictions resulting in jail-time and fines. The agency has a number of civil actions it can take like audits and filing tax liens against property the taxpayer owns.

Tax Prison

During the past three years, 117 individuals have been sentenced to confinement in a federal prison, a halfway house or home detention for criminal violations related to employment taxes. Approximately 77 percent of the persons sentenced for evading employment taxes served an average of 17 months confinement and were ordered to make restitution to the government for the taxes evaded, plus interest and penalties.

The eight most common types of employment tax non-compliance include:

1. Paying Employees in Cash. Paying employees in whole or partially in cash is a common method of evading income and employment taxes. There is nothing wrong with compensating an employee in cash, but employment taxes are owed regardless of how the employees are paid. And the IRS will build its case using all available information even if there are no payroll records or checks.

2. Misclassifying worker status. Sometimes employers incorrectly treat employees as independent contractors to avoid paying employment taxes. Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who misclassify employees as independent contractors (and are not eligible for relief under Section 530 of the Revenue Act of 1978) will be liable for the employment taxes on wages paid to the misclassified worker and subject to penalties.

3. 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. An often cause is a lack of profit or capital for operating costs, so the business owner uses the trust funds to pay other liabilities. The quarterly employment tax liabilities accumulate (or “pyramid”) until the employer has little hope of catching up. Businesses involved in pyramiding frequently shut down or file for bankruptcy and then start a new business under a different name starting the cycle over.

4. S Corporation Officers Compensation Treated as Corporate Distributions. In an effort to avoid employment taxes, some S Corporations are improperly treating officer compensation as a corporate distribution instead of wages or salary. By law, officers are employees of the corporation for employment tax purposes and compensation they receive for their services is subject to employment taxes.

5. Unreliable Third Party Payers. There are two primary categories of third party payers – Payroll Service Providers and Professional Employer Organizations. Payroll Service Providers typically perform services for employers such as filing employment tax returns and making employment tax payments. Professional Employer Organizations offer employee leasing meaning that they handle administrative, personnel, and payroll accounting functions for employees who have been leased to other companies that use their services. Many of these companies provide outstanding services to employers. Unfortunately, in some instances, companies of both types of services have failed to pay over to the IRS the collected employment taxes. When these employment service companies dissolve, millions in employment taxes can be left unpaid. Employers are urged to exercise due diligence in selecting and monitoring a third party payer. For example, when choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS). This allows the business owner to verify payments made on their behalf. Also, an employer should never allow their address of record with the IRS be changed to that of the third party payer.

6. Offshore Employee Leasing. This scheme, which was designated as a Listed Transaction by the Service in 2003, misuses the otherwise legal business practice of employee leasing. Under the typical promotion, an individual taxpayer supposedly resigns from his or her current employer or professional corporation and signs an employment contract with an offshore employee leasing company. The offshore company indirectly leases the individual’s services back to the original employer using a domestic leasing company as an intermediary. The individual performs the same services before and after entering into the leasing arrangement. While the total amount paid for the individual’s services stays the same or increases, most of the funds are sent offshore as “deferred” compensation. The “deferred” compensation is then paid to the individual as a “loan” or ends up in an account under the individual’s control. Promoters of these arrangements improperly claim that neither employment taxes nor income taxes are owed on the “deferred” compensation. Because it is a Listed Transaction those who use the scheme are required to disclose their participation on current tax returns, and will be liable for the unpaid tax and subject to penalties and interest. Civil and criminal actions are being taken against promoters and participants in offshore leasing schemes – one promoter was convicted of defrauding the U.S. and sentenced to 70 months imprisonment, two other promoters have been ordered by the courts to stop marketing the scheme and a San Diego doctor plead guilty to tax evasion and is awaiting sentencing.

7. Frivolous Arguments. Unscrupulous individuals and promoters have used a variety of false or misleading arguments for not paying employment taxes. These schemes are based on an incorrect interpretation of “Section 861” and other parts of the tax law and have been refuted in court. One variation of this scheme involves the improper use of Form 941c, Supporting Statement to Correct Information on Form 941, to attempt to get a refund of previously paid employment taxes. Recent court cases have resulted in criminal convictions of promoters. Employer participants could also be held responsible for back payments of employment taxes, plus penalties and interest.

8. Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns. Preparing false payroll tax returns intentionally 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.

Tax problems? Need tax help? Call a tax attorney. Call Mitchell A. Port at 310.559.5259.

January 1, 2010

Misplaced Your Employer Or Tax Identification Number?

If you applied for and received a taxpayer identification number for your trust or an employer identification number for your business but have since misplaced it, try the following actions to locate the number:

• If you used your EIN to open a bank account, or apply for any type of state or local license, you should contact the bank or agency to get your EIN.

• Ask the IRS to search for your EIN by calling the Business & Specialty Tax Line at (800) 829-4933. The hours of operation are 7:00 a.m. - 10:00 p.m. local time, Monday through Friday. An assistor will ask you for identifying information and provide the number to you over the telephone, as long as you are a person who is authorized to receive it. Examples of an authorized person include, but are not limited to, a sole proprietor, a partner in a partnership, a corporate officer, a trustee of a trust, or an executor of an estate.

• Find the computer-generated notice that was issued by the IRS when you applied for your EIN. This notice is issued as a confirmation of your application for, and receipt of an EIN.

December 28, 2009

Are You Being Audited Or Examined By The IRS?

Under IRS audit or exam? Help yourself and know what to expect. The IRS publishes information – Guides - telling you what it looks for during an audit. The Audit Techniques Guides (ATGs) contain examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations. These Guides focus on developing highly trained examiners for a particular market segment. These Guides cover all types of business, such as:

Construction Industry

Factoring of Receivables

Golden Parachutes

Retail Industry

Veterinary Medicine

Get help and use an experienced professional. Call Mitchell A. Port at (310) 559-5259.

December 8, 2009

Troublesome Tax Issues?

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS whose employees assist taxpayers who are seeking help in resolving problems with the Internal Revenue Service, who believe that an IRS system or procedure is not working as it should or who are experiencing economic harm. Here are some things you should know about TAS:

1. The service is confidential, suited to meet your needs and FREE.

2. TAS employees know the IRS and how to navigate it. They say they will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved.

3. TAS helps taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. This includes businesses as well as individuals.

4. You may be eligible for TAS help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should.

5. TAS has at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. You can call your local advocate, whose number is in Publication 1546, Taxpayer Advocate Service. You can also call the toll-free case intake line at 1-877-777-4778.

You can also file Form 911, Request for Taxpayer Advocate Service Assistance, with the Taxpayer Advocate Service, or request that an IRS employee complete Form 911 on your behalf.

Call Your Local Taxpayer Advocate in California:

Laguna Niguel
24000 Avila Rd.
Stop 2000
Laguna Niguel, CA 92677
949-389-4804

Los Angeles
300 N. Los Angeles St.
Stop 6710 LA
Los Angeles, CA 90012
213-576-3140

Oakland
1301 Clay St.
Suite 1540S
Oakland, CA 94612
510-637-2703

Sacramento
4330 Watt Ave.
Stop SA5043
Sacramento, CA 95821
916-974-5007

San Jose
55 Market St.
Stop 0004
San Jose, CA 95113
408-817-6850

December 4, 2009

IRS Helps With Your Tax Problems

The IRS and the Taxpayer Advocate Service (TAS) worked together to develop a toolkit. TAS is an independent organization within the IRS whose employees assist taxpayers who are experiencing economic harm, who are seeking help in resolving tax problems that have not been resolved through normal channels, or who believe that an IRS system or procedure is not working as it should. It's purpose is to make it easier for you to:

• Understand why it’s important to follow the tax laws

• Get your tax refund quickly and fairly Learn about special tax credits

• Understand your options when you owe the IRS money

• Understand basic tax information

• Learn more about the tax end of starting a small business

• Help prevent identity theft

• Determine if you need an Individual Taxpayer Identification Number (ITIN)

Specific tax topics include:

Help with Tax Problems

Receiving an IRS Notice
Taxpayer Advocate Service (TAS)
Low Income Taxpayer Clinics (LITC)

Individuals

Federal Payment Levy Program
Cancellation of Debt
Income Tax Refund Delivery
Identity Theft
Taxpayers with Disabilities
Recovery Rebate Credit for Individuals
Individual Taxpayer Identification Numbers (ITIN)

Home and Family

TaxTax Benefits for Education
Credit to Aid First-Time Homebuyers
Mortgages: Basic Information
Earned Income Tax Credit (EITC) and Family Credits

Businesses

Starting a Small Business
Recordkeeping for Small Businesses
Employers of Disabled Persons

General Tax Information

Collection and Payment Alternatives
Complying with Tax Laws
Choosing a Tax Preparer
Visiting an IRS Office

November 23, 2009

IRS Freedom of Information Act

In a policy statement issued by the Internal Revenue Service about the Freedom of Information Act, the IRS states the following:

The Internal Revenue Service is committed to full compliance with the Freedom of Information Act (FOIA), 5 U.S.C. § 552. The FOIA provides that agency records are to be made available to the public unless required or permitted to be withheld. The FOIA accommodates the countervailing interests in disclosure and nondisclosure. The IRS is committed to administering the FOIA with respect to agency records in a manner consistent with preserving the fundamental values held by our society, including public accountability, safeguarding national security, enhancing the effectiveness of law enforcement agencies and the decision-making processes, protecting sensitive business information, and protecting personal privacy.

The Freedom of Information Act (FOIA), 5 U.S.C. § 552, provides public access to agency records unless protected from disclosure by one of the FOIA’s nine exemptions or three exclusions. The FOIA applies to records created by Federal agencies and does not cover records held by Congress, the courts, or state and local government agencies. Each state has its own public access laws which should be consulted for access to state and local records.

The IRS provides guidance accessing FOIA information. Click on any of the following:

IRS FOIA Guide

How to Write Your Request

Example FOIA Letter

Optional Items

Proof of Identity and Right to Access

Fee Schedule

IRS Disclosure Offices

CAF Client Listing Request

Here's a sampling of frequently asked questions about FOIA:

This page answers Frequently Asked Questions about FOIA. Please also see How to Write a FOIA Request and the Guide to Accessing Treasury Records .

Who can make a request under the Freedom of Information Act?

What is a reasonable description of records?

What authorization is required if I make a FOIA requests about myself?

What authorization is required for FOIA information to be released to a third party?

What the FOIA does not require.

When can I expect a response?

How and Under what circumstances may I receive expedited processing?

What is the 30-day rule?

What will cause a delay in the processing of a request?

What if I can't specify exactly where the records are located, but I have some information?

Contract records, solicitation and winning bid records are sometimes available to the public. How do I know when a FOIA request is needed?

Will the FOIA allow me to see records on my neighbor/coworker who is being investigated by the Treasury?

Why should a request sent by fax also contain my signature?

Why should I send my request to the specific Treasury bureau and not one office at Departmental Offices (DO)?

Why should requests for tax records go to the IRS when the Secretary of the Treasury is authorized by law to make tax assessments?

Are there fees associated with a FOIA request and what are they?

What are the various requester fee categories?

What services are free and what are chargeable for the various fee categories?

How are fees determined?

Can a fee be waived?

Under what circumstances may records be withheld?

Can I appeal a denial of request?

November 19, 2009

California Tax Service Center

The Internal Revenue Service and California’s tax agencies (Franchise Tax Board, Employment Development Department and Board of Equalization) have formed a partnership called the Joint Tax Agency Communications Committee. The mission of the committee is to “speak with one voice” where feasible with regards to tax issues and to enhance education and outreach efforts by leveraging resources. The website is: California Tax Service Center.

These tax agencies have joined together to streamline and improve taxpayer resources and educational programs. One-stop tax help is the goal.

Income tax, payroll tax, and sales and use tax FAQs are now at one joint website. Information is available in one place for things like forms and publications, filing online, payment options, reporting requirements, rates and schedules, important dates, as well as credits and deductions.

"In this world nothing can be said to be certain, except death and taxes."

For tax help from a tax lawyer, call Mitchell A. Port at (310) 559-5259.

October 22, 2009

California's Tax Preparers' Mistakes On Our Tax Returns

The IRS is interested in what are the top mistakes on individual income tax returns filed on paper and by e-file. Errors are categorized by whether you filed Form 1040EZ, 1040A, or 1040.

1. We computed your recovery rebate credit for you.

2. We changed the amount of the recovery rebate credit you claimed on your tax return because the amount entered was computed incorrectly.

3. We changed the amount of tax shown on your return. The amount entered was incorrect based on your taxable income and filing status.

4. We changed the amount of taxable income on your return because there was an error in the subtraction of your exemption or combined standard deduction/exemption amount.

5. The refund amount or the amount you owe was computed incorrectly.

6. We changed the amount claimed as standard deduction on your tax return. You are entitled to a higher standard deduction if you and/or your spouse are age 65 or older and/or blind.

7. We changed the amount of taxable social security benefits on because there was an error in the computation of the taxable amount.

8. We didn't allow the recovery rebate credit you claimed. You do not qualify for the credit since there was no qualifying income.

9. For one or more of your dependents the last name doesn’t match our records or the records provided by the Social Security Administration.

If you owe tax and have a serious tax problem, call Los Angeles attorney Mitchell A. Port at (310) 559-5259 for tax help.

October 19, 2009

Choose Your Tax Preparer Wisely

You are legally responsible for what’s on your tax returns even if prepared by someone else. As a result, it is important to choose carefully when hiring an individual or firm to prepare your personal income tax returns. So, if you pay someone to prepare your tax return, choose that preparer wisely.

The IRS has a long and helpful list of points to keep in mind when someone else prepares your return which you can read by clicking here.

Once the tax return is finished and you owe more money than you can pay, you may need to speak to a tax attorney to help with that tax problem. Mitchell A. Port can help.

October 7, 2009

Top Delinquent Taxpayers In California

This year's list of the top 250 delinquent taxpayers who owe the California Franchise Tax Board $100,000 or more in income tax is now available here. By the time they make it on the list, a tax lien has already been recorded.

Before making it to the list, the FTB sends the taxpayer a certified letter with a return receipt requested. The letter provides information about how to avoid being placed on the list. Here are the options:

• Pay the liability in full
• Establish an installment agreement
• Enter into an Offer in Compromise
• Substantiate a bankruptcy filing

The largest amount owed is $9,940,513.49 and the smallest amount is $217,909.17.

Negotiate a tax resolution with a qualified tax lawyer. Call attorney Mitchell A. Port at (310) 559-5259 for help.

October 5, 2009

IRS Updates Mediation Procedures

PURPOSE

Revenue procedure 2009-44 updates the mediation procedure for cases in the Appeals administrative process. This revenue procedure expands and clarifies the types of cases that may be mediated in Appeals. Generally, this program is available for cases in which a limited number of legal and factual issues remain unresolved following settlement discussions in Appeals.

SIGNIFICANT CHANGES

This revenue procedure modifies the Appeals mediation program to expand the types of cases that are eligible for mediation while also clarifying the types of cases that are ineligible.

SCOPE OF MEDIATION

.01 In general. Mediation may be used to resolve issues in cases that qualify under this revenue procedure while they are under consideration by Appeals. This procedure may be used only after Appeals settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the issue(s) for which mediation is being requested.

.02 Applicability. Mediation is available for:
(1) Legal issues;

(2) Factual issues;

(3) A Compliance Coordinated Issue (CCI) or an Appeals Coordinated Issue (ACI). (CCI and ACI issues are listed online at www.irs.gov/appeals.) However, a CCI or ACI issue will not be eligible for mediation when the taxpayer has declined the opportunity to discuss the CCI or ACI issue with the Appeals CCI or ACI coordinator during the course of regular Appeals settlement discussions;

(4) An early referral issue when an agreement is not reached, provided the early referral issue meets the requirements for mediation;

(5) Issues for which a request for competent authority assistance has not yet been filed.

(6) Unsuccessful attempts to enter into a closing agreement; and

(7) Offer in compromise and Trust Fund Recovery Penalty cases.

.03 Inapplicability. Mediation will not be available for:
(1) Cases in which mediation is not appropriate under the general statutory authority and guidelines for use of alternative dispute resolution in the administrative process;

(2) Issues designated for litigation;

(3) Issues docketed in any court;

(4) Collection cases, except for certain offer in compromise and Trust Fund Recovery Penalty cases;

(5) Issues for which mediation would not be consistent with sound tax administration, such as, but not limited to, issues governed by closing agreements, by res judicata, or by controlling Supreme Court precedent;

(6) Frivolous issues;

(7) “Whipsaw” issues, such as, but not limited to, issues for which resolution with respect to one party might result in inconsistent treatment in the absence of participation of another party;

(8) Cases in which the taxpayer did not act in good faith during settlement negotiations, such as, but not limited to, cases in which the taxpayer failed to timely respond to document requests or offers to settle, or failed to address arguments and precedents raised by Appeals; and

(9) Issues that have been otherwise identified in subsequent guidance issued by the IRS as excluded from the mediation program.

APPLICATION PROCESS

.01 Mediation is optional. A taxpayer and Appeals may request mediation after consultation with each other.

.02 Filing requirements.
(1) Where to file. To request mediation, the taxpayer should send a written request to the appropriate Appeals Team Manager. The taxpayer should also send copies of the written request to the appropriate Appeals Area Director and to the Chief Appeals, 1099 14th Street, NW, Suite 4200E – East, Washington, DC 20005, Attn: AP:TS:TPP. (See Exhibit 1 of this revenue procedure for a listing of the addresses for each Appeals Area Director.)

(2) Required information.
The mediation request should include:

(a) The taxpayer’s name, taxpayer identification number, and address (and the name, title, address, and telephone number of a person to contact);

(b) The name of the Team Case Leader, Appeals Officer, or Settlement Officer;

(c) The taxable period(s) involved;

(d) A description of the issue for which mediation is being requested, including the dollar amount of the adjustment in dispute; and

(e) A representation that the issue is not an excluded issue listed in the “Scope of Mediation” section above.

.03 Review of Mediation Request. The Appeals Team Manager will confer with the Appeals Office of Tax Policy and Procedure before deciding to approve or deny a mediation request. Generally, the Appeals Team Manager will respond to the taxpayer and the Team Case Leader or Appeals Officer within two weeks after the Appeals Team Manager receives the request for mediation.

(1) Request approved. If Appeals approves the mediation request, the Appeals Team Manager will inform the taxpayer and the Team Case Leader or Appeals Officer and will schedule a conference or conference call that may include a representative from Appeals Tax Policy and Procedure Headquarters to discuss the mediation process.

(2) Request denied. If Appeals denies the mediation request, the Appeals Team Manager will promptly inform the taxpayer and the Team Case Leader or Appeals Officer. Although no formal appeal procedure exists for the denial of a mediation request, a taxpayer may request a conference with the Appeals Team Manager to discuss the denial. The denial of a mediation request is not subject to judicial review.

AGREEMENT TO MEDIATE

.01 Written agreement.
Upon approval of the request to mediate, the taxpayer and Appeals will enter into a written agreement to mediate. The agreement to mediate should:
(a) Be as concise as possible;

(b) Specify the issue(s) that the parties have agreed to mediate;

(c) Contain an initial list of witnesses, attorneys, representatives, and observers for each party;

(d) Identify the location and the proposed date of the mediation session; and

(e) Prohibit ex parte contacts between the mediator and the parties.

.02 Participants.
The parties to the mediation process will be the taxpayer and Appeals. Each party must have at least one participant with decision-making authority attending the mediation session. The agreement to mediate will set forth the procedures by which the parties inform each other and the mediator of the participants in the mediation, and will set forth any limitation on the number, identity, or participation of such participants. In general, the parties are encouraged to include, in addition to the required decision-makers, those persons with information and expertise that will be useful to the decision-makers and the mediator. In this regard, Appeals has the discretion to communicate ex parte with the IRS Office of Chief Counsel, the originating function, e.g., Compliance, or both, in preparation for or during the mediation session. Appeals also has the discretion to have Counsel, the originating function, or both, participate in the mediation proceeding to present the position and views of the IRS, and to rebut representations and arguments made by the taxpayer. Counsel's participation in this regard is separate from the review function outlined in Section 9.02 of this revenue procedure.

MEDIATION PROCESS

.01 Selection of mediator and expenses. An Appeals employee trained as a mediator will serve as the mediator under this revenue procedure. Appeals will pay all expenses associated with the use of an Appeals mediator. The taxpayer and the Appeals Team Manager will select the Appeals mediator from a list of trained employees who, generally, will be located in the same Appeals office or geographical area as the taxpayer, but will not be a member of the same team that was assigned to the case. Additionally, at the taxpayer’s expense, the taxpayer may elect to use a co-mediator who is not employed by the IRS. The taxpayer and the Appeals Team Manager will select the non-IRS co-mediator from any local or national organization that provides a roster of neutrals. A representative from the Appeals Office of Tax Policy and Procedure may participate in the negotiations to select a non-IRS co-mediator. Criteria for selecting a non-IRS co-mediator may include: completion of mediation training; previous mediation experience; substantive knowledge of tax law; or knowledge of industry practices. A mediator shall have no official, financial, or personal conflict of interest with respect to the parties, unless such interest is fully disclosed in writing to the taxpayer and the Appeals Team Manager and they agree that the mediator may serve.

.02 Appeals personnel as mediators and conflict statement. To address the inherent conflict arising from the Appeals mediator’s status as an employee of the IRS, the Appeals mediator will provide to the taxpayer a statement confirming his or her proposed service as a mediator and stating that (i) he or she is a current employee of the IRS, (ii) a conflict results from his or her continued status as an IRS employee, and (iii) this conflict will not interfere in the mediator’s ability to facilitate the case impartially.

MEDIATION SESSION

.01 Discussion summaries. Each party will prepare a discussion summary of the issues (including the party’s arguments in favor of the party’s position) for consideration by the mediator. The discussion summaries should be submitted to the mediator and the other party no later than two weeks before the mediation session is scheduled to occur.

.02 Confidentiality. The mediation process is confidential. Therefore, all information concerning any dispute resolution communication is confidential and may not be disclosed by any party, participant, observer or mediator except as provided by statute.

.03 Withdrawal. Either party may withdraw from the process anytime before reaching a settlement of the issue(s) being mediated by notifying the other party and the mediator in writing.

POST-SESSION PROCEDURES

.01 Mediator's report. At the conclusion of the mediation process, the mediator will prepare a brief written report and submit a copy to each party.

.02 Closing procedures. If the parties reach an agreement on all or some issues through the mediation process, Appeals will use established procedures, including preparation of a Form 906, Closing Agreement on Final Determination Covering Specific Matters. For offer in compromise cases with liabilities of $50,000 or more, any settlement or agreement reached through mediation must be reviewed by the Office of Chief Counsel before being finalized.

If the parties do not reach an agreement on an issue being mediated, they may request arbitration for the issue, provided the mediation issue meets the requirements for arbitration. If arbitration is not requested or approved, Appeals will not reconsider the mediated issue(s), and a statutory notice of deficiency will be issued with respect to all unagreed issues (or the case will be processed using established closing procedures if there is no deficiency).

GENERAL PROVISIONS

Use as precedent. A settlement reached by the parties through mediation will not be binding on the parties (or be otherwise controlling) for taxable years not covered by the agreement. Except as provided in the agreement, no party may use such settlement as precedent.

EFFECTIVE DATE
This procedure is effective October 5, 2009, the date this revenue procedure is published in the Internal Revenue Bulletin.

This type of tax problem necessitates the input of a qualified tax attorney. Mitchell A. Port is just such an attorney. Call Mitch at (310) 559-5259.

October 1, 2009

Tax Quotes

I like to pay taxes. With them I buy civilization.
~Oliver Wendell Holmes, Jr.

The income tax created more criminals than any other single act of government.
~Barry Goldwater

The taxpayer - that's someone who works for the federal government but doesn't have to take the civil service examination.
~Ronald Reagan

Did you ever notice that when you put the words "The" and "IRS" together, it spells "THEIRS?"
~Author Unknown

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

Taxes grow without rain.
~Jewish Proverb

If we don't do something to simplify the tax system, we're going to end up with a national police force of internal revenue agents.
~Leon Panetta

Tax complexity itself is a kind of tax.
~Max Baucus

I can give you 1040 good reasons why I hate to pay taxes. Mitchell A. Port

Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.
Benjamin Franklin - Letter to Jean-Baptiste Leroy (13 November 1789)

September 24, 2009

What Is The Tax Auditor Looking For?

The IRS recently updated its "Audit Technique Guides". These Guides contain examination techniques, common and unique industry issues, business practices, industry terminology and other information to assist examiners in performing examinations. If you have a construction business, a new vehicle dealership, a retail business or if you're in the laundromat business, learn what an auditor is trained to look for. Dozens of other audit guides for all kinds of economic and financial activities are available to help you before the audit begins.

If you want the help of a tax attorney during the audit and exam process, call Mitchell A. Port at (310) 559-5259.

September 21, 2009

New Deadline For Disclosing Offshore Accounts

Earlier this morning the Internal Revenue Service announced that it is allowing a one-time extension of the deadline for special voluntary disclosures by those with unreported income from offshore accounts. Those taxpayers now have until Oct. 15, 2009.

PURPOSE OF EXTENSION:

By providing a short extention of the deadline, the IRS is providing relief for those taxpayers who had intended to come forward before the deadline, but faced various challenges in meeting it.

The extension will allow tax preparers and attorneys the necessary time to interview and advise their backlog of taxpayers with these undisclosed offshore accounts, and prepare the necessary paperwork to qualify for the special penalty provisions.

Remember, your tax preparer may also be extremely busy completing individual income tax returns (Forms 1040) for 2008 for those clients on extension. Speak with your advisor sooner than later in order to avoid missing the deadline.

IRS officials decided to extend this deadline after receiving repeated requests from tax practitioners and attorneys around the country following an influx of taxpayer requests.

LAST CHANCE! There will be no further extensions.

September 15, 2009

Penalties Will Be Limited

The IRS Tax Amnesty for Foreign Bank Account Report ("FBAR") filings is ending this coming September 23rd. Individuals and entities who have foreign financial accounts are required to file Form 90-22.1 with the IRS every June 30th.

Those who don't file by June 30th next year are subject to criminal penalties of up to five years in jail and a fine of $250,000. In addition, a willful failure to file the FBAR can result in a civil penalty of the GREATER of $100,000 or 50% of the balance in the account. This penalty can be imposed on an annual basis, and can exceed the balance in the account.

Those who come forward by September 23rd will have penalties limited.

Since early in the year, the IRS has been advertising its offshore voluntary disclosure program under which the IRS will not to bring criminal prosecutions of owners of foreign bank accounts if they work with the IRS Criminal Investigation Division by no later than September 23rd.

The IRS has a FAQs page worth reviewing too.

Get help NOW! Call tax attorney Mitchell A. Port at (310) 559-5259.

September 8, 2009

So Many Tax Payment Options In California

It is no surprise in California that the Franchise Tax Board provides many different payment options to pay your individual income tax.

The options are:

Check, money order, or cash - Mail your payment or pay in person.

Installment Agreement request - Complete and submit an online request to make monthly payments for tax, bill, or notice.

Credit Card - Pay with your Discover/NOVUS, MasterCard, Visa, or American Express. Make your payment online or by phone. Official Payments Corporation charges a convenience fee of 2.5% (minimum $1) to use this service.

Web Pay - Pay the current amount you owe and schedule payments up to one year in advance. Select the payment amount and payment date. We'll deduct the payment from your account on the day you selected.

Western Union - Pay online, by phone, or in person at one of their worldwide offices.

For California businesses who owe tax, there are also these options:

Check, money order, or cash - Mail your payment or pay in person.

Installment agreement request - Make monthly payments.

Electronic funds transfer for banks and corporations.

Still have trouble paying your taxes? For tax help, call attorney Mitchell A. Port at (310) 559-5259.

September 2, 2009

Installment Agreement - Online Payment Agreement

Don’t call a tax attorney for tax help if your tax problem is that you owe $25,000 or less in combined tax, penalties, and interest. You can use the online payment agreement (OPA) application to request a payment agreement.

Often, the application allows you to qualify, apply for an installment agreement, and receive immediate notification of approval. Sometimes you will need to mail in paperwork or speak with the Internal Revenue Service before they can determine your eligibility for an installment agreement. If that is the case, the OPA application will give you an address or a toll-free phone number to reach them.

The information you need to have when using the Online Payment Agreement is here.

The IRS even explains the three payment options you have.

If you want to know when to call the IRS, check here.

For less than $25,000 in tax, penalties and interest, do not call a tax attorney.

August 27, 2009

Did You Receive An IRS Notice?

One of the most unpleasant experiences my clients in Los Angeles, California and across the country have is when they receive a notice from the IRS about unpaid taxes, underpaid taxes or unfiled tax returns.

The IRS published its "Summertime Tax Tips" which provides a short list of eight things you should know about IRS notices in case you get one.

If you owe more than $50,000 in tax, call a qualified tax attorney for help. Call Mitchell A. Port at (310) 559-5259.

August 20, 2009

More On Offers In Compromise From The IRS

The IRS has excellent information on its website easily understood about Offers in Compromise. Those of us in Los Angeles, California and throughout the rest of the country who owe tax ought to consider an OIC.

Here's what the website covers:

What You Must Know Before You File an Offer in Compromise

All Taxpayers Do Not Qualify for an Offer in Compromise

Offer in Compromise Payments are Non-refundable

Federal Tax Liens are Not Released

Payments May be Designated

Refunds

Levies

Statutory Period for Collection Suspended

Five Year Compliance

OIC Payment and Application Fee Exceptions

Appeal

Approved Installment Agreement

Mandatory Acceptance

Work with a qualified tax attorney on your tax problem. Call Mitchell A. Port at (310) 559-5259.

August 17, 2009

Few Pay Pennies On The Dollar - Including Californians

Beware of promoters’ claims that tax debts can be settled through the offer in compromise program for "pennies on the dollar".

The preferred approach to the IRS is through your tax attorney so that your interests are protected from those at the tax agency who try and gather information from you to use it to your disadvantage.

Unless you have special circumstances (and some Californians do), an offer in compromise (OIC) will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement.

An offer is an agreement between you and the Internal Revenue Service that settles your tax liabilities for less than the full amount owed.

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

Three Types of OICs

The IRS may accept an offer in compromise based on three grounds:

1. Doubt as to Collectibility - Doubt exists that you could ever pay the full amount of tax liability owed within the remainder of the statutory period for collection.

Example: You owe $20,000 for unpaid tax liabilities and agree that the tax you owe is correct. Your monthly income does not meet your necessary living expenses. You do not own any real property and do not have the ability to fully pay the liability now or through monthly installment payments.

2. Effective Tax Administration - There is no doubt that the tax is correct and there is potential to collect the full amount of the tax owed, but an exceptional circumstance exists that would allow the IRS to consider an OIC. To be eligible for compromise on this basis, you must demonstrate that the collection of the tax would create an economic hardship or would be unfair and inequitable.

Example: You have assets sufficient to satisfy the tax liability and provide full time care and assistance to a dependent child, who has a serious long-term illness. It is expected that you will need to use the equity in assets to provide for adequate basic living expenses and medical care for the child. There is no doubt that the tax is correct.

3. Doubt as to Liability - A legitimate doubt exists that the assessed tax liability is correct. Possible reasons to submit a doubt as to liability offer include: (1) the examiner made a mistake interpreting the law, (2) the examiner failed to consider your evidence or (3) you has new evidence.

Example: You were vice president of a corporation from 2004-2005. In 2006, the corporation accrued unpaid payroll taxes and you were assessed a trust fund recovery penalty as a responsible party of the corporation. You were no longer a corporate officer and had resigned from the corporation on 12/31/2005. Since you resigned prior to the payroll taxes accruing and was not contacted prior to the assessment, there is legitimate doubt that the assessed tax liability is correct.

OIC Payment Options

Usually, you must submit a $150 application fee and initial payment along with the Form 656, Offer in Compromise. You may chose to pay your offer in compromise in one of three payment options:

1. Lump Sum Cash Offer - Payable in non-refundable installments, the offer amount must be paid in five or fewer installments upon written notice of acceptance. A non-refundable payment of 20 percent of the offer amount along with the $150 application fee is due upon filing the Form 656.

If the offer will be paid in 5 or fewer installments in 5 months or less, the offer amount must include the realizable value of assets plus the amount that could be collected over 48 months of payments or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 5 months and within 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over 60 months of payments, or the time remaining on the statute, whichever is less.

If the offer will be paid in 5 or fewer installments in more than 24 months, the offer amount must include the realizable value of assets plus the amount that could be collected over the time remaining on the statute.

2. Short Term Periodic Payment Offer - Payable in non-refundable installments; the offer amount must be paid within 24 months of the date the IRS received the offer. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the offer investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect over 60 months of payments or the remainder of the statutory period for collection, whichever is less.

3. Deferred Periodic Payment Offer - Payable in non-refundable installments; the offer amount must be paid over the remaining statutory period for collecting the tax. The first payment and the $150 application fee are due upon filing the Form 656. Regular payments must be made during the investigation.

The offer amount must include the realizable value of assets plus the total amount the IRS could collect through monthly payments during the remaining life of the statutory period for collection.

The IRS is not bound by either the offer amount or the terms proposed by you. The OIC investigator may negotiate a different offer amount and terms, when appropriate. The investigator may determine that the proposed offer amount is too low or the payment terms are too protracted to recommend acceptance. In this situation, the OIC investigator may advise you as to what larger amount or different terms would likely be recommended for acceptance.

Payments and Application Fees

When filing an offer in compromise, two separate remittance documents should be sent, one for the application fee and the other for the required offer payment.

The Form 656-PPV, Offer in Compromise Payment Voucher, included in the Form 656, should be completed and attached to any periodic payment(s) that becomes due. Failure to submit any required periodic payments, after the initial payment has been submitted, will result in the offer being declared withdrawn.

The OIC application fee reduces the assessed tax or other amounts due. The application fee will be returned if the OIC is deemed not to be processable. Unless the offer in compromise has been submitted under doubt as to liability or a completed Form 656-A and Offer in Compromise Application Fee and Payment Worksheet is included with the Form 656, the $150 application fee must be included with the offer or the IRS will return the offer.

August 11, 2009

New IRS Appeals Programs

At the end of last year, the IRS announced a two-year test of two programs: the post-Appeals mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP).

Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals’ request for mediation. Appeals will evaluate a taxpayer’s request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals.

During the test period, Appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for timely requesting such strategies when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. An OIC submitted during Collection Due Process (CDP) as an alternative to a Collection action is not eligible for these alternative dispute resolution strategies during the test period.

The Post-Appeals mediation process is available for both legal and factual issues. The mediator’s role is to facilitate settlement negotiations so the parties can reach their own agreement. The mediator does not have settlement authority over any issue.

The Arbitration procedure is available for factual issues only. The arbitrator’s role is to hear both sides of a disputed issue and then render a decision on the specific factual issue being arbitrated. This decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is/is not liable for the TFRP under § 6672. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding.

Complete procedures for initiating a request for post-Appeals mediation or arbitration are in Announcement 2008-111. The agency will seek appropriate Offer in Compromise and Trust Fund Recovery Penalty cases for both post-Appeals mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for these cases.

For the two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.

July 23, 2009

IRS Collection and Audit Letters

Whether you live in Los Angeles, California, anywhere else in California or across the U.S., if you get a letter from the IRS you must respond appropriately and timely. Here's a sampling of some of the letters commonly used:

Collection Letters

Letter 11 – Final Notice of Intent to Levy and Notice of Your Right to a Hearing

Letter 1058 – Final Notice Reply Within 30 Days

Letter 1085 – 30-Day Letter Proposed 6020(b) Assessment

Letter 3172 – Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320

Examination Letters

Letter 525 – General 30 Day Letter

Letter 531 – Notice of Deficiency

Letter 692 – Request for Consideration of Additional Findings

Letter 1153 – Trust Funds Recovery Penalty Letter

Letter 1389 – 30 Day Letter, Tax Shelter Activity

Letter 3016 – IRC Section 6015 Preliminary Determination Letter (30 Day)

Letter 3391 – 30-Day Nonfiler Letter

Letter 3727 – 30-Day Letter Notifying Taxpayer No Change to Original Report Disallowing EIC Based on Failure to Meet Residency Test for Children Claimed

Letter 3728 – 30-Day Letter Notifying Taxpayer No Change to Original Report Partially Disallowing EIC Based on Failure to Meet Residency Test for 1 Child

Notices

CP 90 – Final Notice of Intent to Levy

CP 92 – Notice of Levy upon Your State Tax Refund

CP 242 – Notice of Levy upon Your State Tax Refund

CP 523 – IMF Installment Agreement Default Notice

CP 2000 - You receive this letter when the IRS receives income, deduction or credit information that does not match your return.

July 9, 2009

California IOUs: Use It To Pay Taxes

On July 7, 2009, the Franchise Tax Board (FTB) announced payment of current and past due personal and corporate taxes with California registered warrants (IOUs) is acceptable

By law, FTB cannot deposit the IOU until it is payable, but FTB will credit your account on the date the IOU is received to stop the accrual of interest. If the IOU is not sufficient to pay the outstanding balance, you should send an additional payment for the difference.

June 23, 2009

Offer In Compromise Co-Pay Repeal

To submit an Offer In Compromise (OIC) with the Internal Revenue Service in order to pay pennies on the dollar, a nonrefundable 20% downpayment is required. Combined with a very low acceptance rate by the Internal Revenue Service of OICs, the downpayment has the effect of discouraging people from applying for an Offer.

A Congressional bill was recently introduced the title to which tells it all: “Repeal of the Partial Payment Requirement on Submissions of Offers in Compromise”. If this is enacted into law, the struggle with your tax debts may be a bit easier.

If you have a tax problem and need a tax lawyer, call Mitchell A. Port at (310) 559-5259.

June 10, 2009

Unfiled Tax Return: IRS Can Collect Anywhere - Even Los Angeles

The Internal Revenue Service has filed a $819,848 federal tax lien against Sen. John Kerry's 2004 presidential campaign. The campaign says the tax return was filed and lost by the IRS while the IRS says no tax return was ever filed. Sen. Kerry's office blamed IRS clerical error for the claim and said his campaign owes no penalties.

The liability described in the tax lien is based on Internal Revenue Code Section 6721 entitled "Failure to File Correct Information Returns".

The Massachusetts Democrat said the IRS mishandled payroll tax forms that he said were correctly filed by his campaign in 2005.

Avoid this tax problem. Speak with a qualified tax attorney in Los Angeles from anywhere in the U.S. about your situation. Call Mitchell A. Port at (310) 559-5259.

June 5, 2009

Late Tax Payment - Late Filed Tax Return

Filing a past due return may not be as difficult as you think. Los Angeles, California taxpayers should file all tax returns that are due, regardless of whether or not full payment can be made with the return. Same is true for California tax returns.

Whether paying taxes with a timely filed tax return, or filing late and paying taxes late after receiving a bill from the IRS (and the bill is correct), LA's taxpayers are encouraged to pay the taxes they owe in full.

Prevent the IRS from levying bank accounts, wages, or other income, or taking other assets. Prevent the IRS from filing a Notice of Federal Tax Lien that may have a detrimental effect on your credit standing.

If you don't file your tax return, the IRS will file a substitute return for you, which will not include any additional exemptions or expenses you may be entitled to and may overstate your real tax liability. Once the tax is assessed the IRS will start the collection process, which can include placing a levy on wages or bank accounts or filing a federal tax lien against your property.

Call a tax professional - call attorney Mitchell A. Port.

June 3, 2009

Free Tax Help

Get Free Help.

The IRS offers free tax assistance in person, by telephone, computer and by fax. The IRS can assist taxpayers with obtaining forms, publications and answers to a wide range of tax questions. The IRS can also help find free tax preparation for those who qualify.

In Person

Taxpayers needing face-to-face help solving individual or business tax problems can get help every business day in every IRS Taxpayer Assistance Center.

By Phone

Call the toll-free customer service line at 1-800-829-1040.

Use Your Computer

Through the Internet, you can access a wealth of free tax information on the IRS Web site. Taxpayers can check out links such as Forms and Publications to download necessary forms, instructions or publications; get the FAQs (Frequently Asked Questions) to get answers to questions

By Fax

You can receive faxed forms and publications by calling 1-703-368-9694 (not a toll-free call). Simply follow the directions from the prompts.

Be careful when providing the IRS with your information while you are trying to information from them. Hire a tax professional if you are concerned you might inadvertantly disclose information you may not want the IRS to have at this time.

June 1, 2009

IRS Now Hiring

There are jobs in California.

The IRS is recruiting hundreds of Internal Revenue Agents with a minimum 30 hours of college-level accounting coursework for openings around the country. To apply for these and other IRS jobs, go to the IRS job search on USAJOBS.

May 21, 2009

Do You Have A Foreign Financial Account?

Do You Have a Foreign Financial Account?

If you have authority over or own a foreign financial account, including a brokerage account, unit trust, mutual fund, bank account or other types of financial accounts, then you may be required to report the account yearly to the IRS. Under the Bank Secrecy Act, each United States person must file a Report of Foreign Bank and Financial Accounts (FBAR), if

1. The value of the account exceeds $10,000 at any time during the calendar year, and

2. The person has financial interest in, signature authority (or other authority that is comparable to signature authority) over one or more accounts in a foreign country.

The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

A United States person is not prohibited from owning foreign accounts. The FBAR is required because foreign financial institutions may not be subject to the same reporting requirements as domestic financial institutions.

Definition of Terms

What is an FBAR?

Who must file an FBAR?

When is the FBAR due?

Where are FBAR forms available?

What are the exceptions to the FBAR filing requirement?

How do foreign account holders report their accounts to the IRS?

Where do account holders file the FBAR?

How long should account holders retain records of the foreign accounts?

What is a United States person?

Would a foreign athlete or entertainer that occasionally visits the U.S. in order to compete or perform in an event, be considered a United States person for FBAR purposes?

What is a foreign country?

What is a financial account?

Does more than one form need to be filed for a husband and wife owning a joint account?

What constitutes signature or other authority over an account?

What does “maximum value of account” mean (for Box 15 on the FBAR)?

Is an FBAR required if the account generates neither interest nor dividend income?

How does an FBAR filer amend a previously filed FBAR?

What is the statute of limitations for assessing civil penalties for violations of the FBAR requirements?

What happens if an account holder is required to file an FBAR and fails to do so?

An American citizen, X, gives a person who is a citizen or resident of the U.S. power of attorney to X’s Canadian bank accounts. X files an FBAR form annually. Does the power of attorney also need to file an FBAR?

A fiduciary who is a U.S. person has control as a trustee for an IRA with a foreign account. Should an FBAR be filed?

Does the term “other authority over a financial account” mean that a person, who has the power to direct how an account is invested, but who cannot make disbursements to the accounts, has to file an FBAR?

Must a U.S. person file an FBAR on a Eurodollar account in the Cayman Islands?

A N.Y. corporation owns a foreign company that has foreign accounts. The corporation will file an FBAR for the foreign company’s accounts. Do the primary owners of the U.S. Company also have to file?

A company has over 25 foreign accounts. What should they enter in Part ll of the FBAR?

A person is a non-resident alien and only visits the United States to manage his personal interests, such as rental property. Does that person have to file an FBAR?

Reporting and Filing Information

A person who holds a foreign account may have a reporting obligation even though the account produces no taxable income. Checking the appropriate block on Form 1040 Schedule B, and filing Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, satisfies the account holder’s reporting obligation.

A foreign account holder must mail the Form TD F 90-22.1 on or before June 30 of the following year to:

U.S. Department of the Treasury
P.O. Box 32621
Detroit, MI 48232-0621.

The FBAR is not to be filed with the filer’s Federal income tax return.

The granting, by IRS, of an extension to file Federal income tax returns does not extend the due date for filing an FBAR. There is no extension available for filing the FBAR.

Account holders who do not comply with the FBAR reporting requirements may be subject to civil penalties, criminal penalties, or both.

Exceptions to the Reporting Requirement

There are exceptions to the reporting requirement. These exceptions include:

1. Accounts in U.S. military banking facilities operated by a United States financial institution to serve U.S. Government installations abroad are not considered to be accounts in a foreign country for purposes of the reporting requirement.

2. An officer or employee of a bank that is subject to the supervision of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, or the Federal Deposit Insurance Corporation, is not required to report having signature or other authority over a foreign account if the officer or employee has no personal interest in the account.

3. An officer or employee of a domestic corporation whose equity securities are listed on a national securities exchange or which has assets exceeding $10 million and 500 or more shareholders of record, is not required to report having signature or other authority over a foreign account if the person has no personal financial interest in the account, and the officer or employee has been advised in writing by the chief financial officer of the corporation that the corporation has filed a current report that includes the foreign account.

The IRS has launched a "tax amnesty" for those who turn themselves in within the next 5 months. It is critical that clients be made aware of this program, and be counseled on whether it is in their best interest to participate. The issues are complex, and require a balancing of a number of financial, tax and criminal considerations including the non-applicability of the federal authorized tax practitioner privilege. The "amnesty" will expire on September 22, 2009, so time is of the essence. Current year FBARs are due June 30th.

May 19, 2009

U.S. Tax Court Announces e-Filing Pilot

The United States Tax Court will begin a pilot eFiling program through Practitioner Access and Petitioner Access on May 7, 2009.

The pilot will be restricted to petitioners and practitioners in good standing with the Court who have registered for eAccess, agreed to its Terms of Use, and consented to eService. The pilot applies to all cases first calendared for trial or hearing after August 31, 2009.

For example, if you have registered for Practitioner Access, consented to eService, and your case is first calendared for trial or hearing on September 21, 2009, you may eFile in that case during the pilot, but not if the case was set for hearing or trial before September 1, 2009. You can also participate in the pilot if your case has not been set for trial. If your case is set for trial or hearing before September 1, 2009, you may not eFile in that case during the pilot.

Please note that eFiling in a particular case can be commenced only after the petition has been filed with the Tax Court in that case. All petitions must be submitted to the Court in paper form.

May 15, 2009

Tax Scams

The Internal Revenue Service issued its 2009 “dirty dozen” list of tax scams, including schemes involving phishing, hiding income offshore and false claims for refunds.

Tax schemes are illegal and can lead to problems for both scam artists and taxpayers who risk significant penalties, interest and possible criminal prosecution.

The IRS urges taxpayers to avoid these common schemes:

Filing False or Misleading Forms

The IRS is seeing scam artists file false or misleading returns to claim refunds that they are not entitled to. Frivolous information returns, such as Form 1099-Original Issue Discount (OID), claiming false withholding credits are used to legitimize erroneous refund claims. The new scam has evolved from an earlier phony argument that a “strawman” bank account has been created for each citizen. Under this scheme, taxpayers fabricate an information return, arguing they used their “strawman” account to pay for goods and services and falsely claim the corresponding amount as withholding as a way to seek a tax refund.

False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, Claim for Refund and Request for Abatement. Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

Hiding Income Offshore

The IRS aggressively pursues taxpayers and promoters involved in abusive offshore transactions. Taxpayers have tried to avoid or evade U.S. income tax by hiding income in offshore banks, brokerage accounts or through other entities. Recently, the IRS provided guidance to auditors on how to deal with those hiding income offshore in undisclosed accounts. The IRS draws a clear line between taxpayers with offshore accounts who voluntarily come forward and those who fail to come forward.

Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or life insurance plans. The IRS has also identified abusive offshore schemes including those that involve use of electronic funds transfer and payment systems, offshore business merchant accounts and private banking relationships.

Return Preparer Fraud

Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

Phishing

Phishing is a tactic used by Internet-based scam artists to trick unsuspecting victims into revealing personal or financial information. The criminals use the information to steal the victim’s identity, access bank accounts, run up credit card charges or apply for loans in the victim’s name.

Phishing scams often take the form of an e-mail that appears to come from a legitimate source, including the IRS. The IRS never initiates unsolicited e-mail contact with taxpayers about their tax issues. Taxpayers who receive unsolicited e-mails that claim to be from the IRS can forward the message to phishing@irs.gov. Further instructions are available at IRS.gov. To date, taxpayers have forwarded scam e-mails reflecting thousands of confirmed IRS phishing sites. If you believe you have been the target of an identity thief, information is available at IRS.gov.

Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets, including easements on property, closely-held corporate stock and real property. Often, the donations are highly overvalued or the organization receiving the donation promises that the donor can purchase the items back at a later date at a price the donor sets. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of the positions on the list are subject to a $5,000 penalty. More information is available on IRS.gov.

Disguised Corporate Ownership

Some taxpayers form corporations and other entities in certain states for the primary purpose of disguising the ownership of a business or financial activity. Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes, and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some promoted transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the promised tax benefits and are being used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

The IRS has recently seen an increase in the improper use of private annuity trusts and foreign trusts to divert income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust arrangement.

Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to IRAs as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into IRAs or companies owned by their IRAs at less than fair market value to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity which is considered prohibited.

Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

How to Report Suspected Tax Fraud Activity

Suspected tax fraud can be reported to the IRS using Form 3949-A, Information Referral. Form 3949-A is available for download from the IRS Web site at IRS.gov. The completed form or a letter detailing the alleged fraudulent activity should be addressed to the Internal Revenue Service, Fresno, CA 93888. The mailing should include specific information about who is being reported, the activity being reported, how the activity became known, when the alleged violation took place, the amount of money involved and any other information that might be helpful in an investigation. The person filing the report is not required to self-identify, although it is helpful to do so. The identity of the person filing the report can be kept confidential.

May 11, 2009

Your Rights As A Taxpayer

The IRS publishes a thorough explanation of your rights as a taxpayer.

You have rights as a taxpayer when dealing with the IRS. Whether you file a Form 1040 or a complicated corporate return, you will benefit from knowing your rights as a taxpayer and being familiar with the IRS' obligations to protect them.

The Taxpayer Advocate Service (TAS) is an IRS program that provides an independent system to assure that tax problems, which have not been resolved through normal channels, are promptly and fairly handled.

What should you do if you receive a notice from the IRS?

You have rights to representation - learn more about granting power of attorney.

The IRS accepts most taxpayer's returns as filed. If it inquires about your return or select it for examination, it does not suggest that you are dishonest. The inquiry or examination may or may not result in more tax. Learn about your rights during the examination process and get information about how audits are conducted.

It is your right to appeal any action taken by the IRS to change your account.

Learn about the collection process IRS may follow to collect overdue taxes, including a summary of your rights and other important information about the collection process.

For further tax help, call former IRS attorney Mitchell A. Port at (310) 559-5259.

May 5, 2009

Offers In Compromise For California Businesses

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.

May 1, 2009

Standards of Conduct for Attorneys, CPAs, EAs and Enrolled Actuaries

Standards of Conduct for Certified Public Accountants, Attorneys, Enrolled Actuaries and Enrolled Agents are available at the IRS website. Circular 230 contains regulations governing the practice of attorneys, certified public accountants, enrolled agents, enrolled actuaries, and appraisers before the Internal Revenue Service.

April 15, 2009

California's Tax Season Finally Over

It's crunch time for California’s taxpayers and their accountants alike in the rush to get state and federal income taxes postmarked in by tonight's 11:59:59 p.m. deadline.

Some of my CPA friends can't wait to teach their teenagers how to drive.

My other friends who are tax preparers are just looking forward to getting some sleep.

Another California tax season over – at last.

April 10, 2009

Know IRS Procedures

Here is a link to the "Top Frequently Asked Questions for IRS Procedures".

Try this link to the "Frequently Asked Question Subcategories for IRS Procedures".

For tax assistance with the IRS or California's tax authorities such as the Franchise Tax Board or California State Board of Equalization, call a qualified tax attorney. Call Mitchell A. Port at (310) 559-5259.

April 8, 2009

Tax Law Changes In California For 2008

Curious about what tax law changes occurred in California that impacts your income tax return (Form 540)? The Franchise Tax Board (FTB) publised a summary of those changes which you can view here.

Some of the tax changes cover these topics:

Electronic payments

Mortgage forgiveness debt relief

Net operating loss

Tax shelters

Business tax credit limitation

Estimated tax payments

Same-Sex married couples

Voluntary contributions

Third party designee

Conformity

Rice Straw Credit

Withholding on California Real Estate

Consult your tax preparer to determine whether any of these changes may apply and benefit you.

April 6, 2009

Internal Revenue Code: The Tax Laws

The IRS makes available the Tax Code, Regulations and Official Guidance at its website. Proper tax planning is available by proper use of the Code, Treasury Regulations and other government resources. Here is your source for last minute planning opportunities which can treat last year's income, expenses and deductions in a way advatageous to you.

April 3, 2009

California Revenue and Taxation Code

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" »

April 1, 2009

Filing Your 1040

The IRS website is a fantastic resource during this tax season for providing information and answers to commonly asked questions. Here is a few of the topics covered:

2009 Tax Year Highlights

Recovery Rebate Credit

First-Time Homeowners Credit

Earned Income Tax Credit

Facing Difficult times financially?

Use Online Tools

Find out if you qualify for Earned Income Tax Credit

Calculate your optional itemized deduction for state and local sales taxes

See if you might be subject to the Alternative Minimum Tax

Find out the status of your refund and more

Products and Services in Spanish

Frequently Asked Questions and Answers

Are you or your spouse a member of the U.S. Armed Forces?

Tax relief in disaster situations

Tips for Choosing a Tax Preparer

Commonly Requested Tax Forms and Instructions

Taxpayer Advocate Service

Need more assistance? The IRS wants to help; lots of information is available for individuals and businesses.

March 18, 2009

Madoff And Ponzi - How To Report Your Tax Obligation

Deductibility of Theft Losses:

The Internal Revenue Service and Treasury Department are aware of investment arrangements that have been discovered to be fraudulent, resulting in significant losses to taxpayers. These arrangements often take the form of so-called "Ponzi" schemes, in which the party perpetrating the fraud receives cash or property from investors, purports to earn income for the investors, and reports to the investors income amounts that are wholly or partially fictitious.

The Internal Revenue Service and Treasury Department recognize that whether and when investors meet the requirements for claiming a theft loss for an investment in a Ponzi scheme are highly factual determinations that often cannot be made by taxpayers with certainty in the year the loss is discovered.

Payments, if any, of purported income or principal to investors are made from cash or property that other investors invested in the fraudulent arrangement. The party perpetrating the fraud criminally appropriates some or all of the investors' cash or property.

Revenue Ruling 2009-9, 2009 I.R.B (March 2, 2009), describes the proper income tax treatment for losses resulting from these Ponzi schemes.

In view of the number of investment arrangements recently discovered to be fraudulent and the extent of the potential losses, this revenue procedure provides an optional safe harbor under which qualified investors (as defined in the revenue procedure) may treat a loss as a theft loss deduction when certain conditions are met.

This treatment provides qualified investors with a uniform manner for determining their theft losses. In addition, this treatment avoids potentially difficult problems of proof in determining how much income reported in prior years was fictitious or a return of capital, and alleviates compliance and administrative burdens on both taxpayers and the Service.

Under Revenue Procedure 2009-20, the IRS issued guidance on the examination of returns and claims for refund, credit or abatement. This revenue procedure provides an optional safe harbor treatment for taxpayers that experienced losses in certain investment arrangements discovered to be criminally fraudulent. This revenue procedure also describes how the Internal Revenue Service will treat a return that claims a deduction for such a loss and does not use the safe harbor treatment described in this revenue procedure.

March 16, 2009

Fix Your Tax Problem Fast

If you owe over $100,000 in unpaid income tax to the Internal Revenue Service or a large amount to the California Franchise Tax Board, you can quickly resolve your tax problem by having the following information available when contacting the Internal Revenue Service:

• Valid Power of Attorney (Form 2848) covering all tax periods
• Completed Form 433- A, B or F
• Explain in detail why the taxpayer is not able to full pay or borrow to full pay
• Copies of delinquent tax returns
• Rental income
• Three months of current bank statements (all accounts)
• Three months of current pay stubs for both yourself and your spouse
• Investment income
• Pension income and/or Social Security income
• Value of 401K or Retirement account
• Value of all property and/or available equity
• Employer’s information including work number
• Number of individual’s living in the household
• Secured loan(s) - amount of loan and remaining balance(s)
• Life insurance policies, (whole or term), any borrowing ability? And/or value of policy
• Profit and Loss statements for self-employed taxpayers
• Commission statement
• Year make of vehicles, value, equity, balance owed, and monthly payments
• Out-of-pocket medical expenses
• Substantiation of payments being made
• Substantiation of Court ordered payments
• Spouse’s income and source with name/address/phone number

Additional information and /or documentation may be needed to determine disposition of the account.

Call a qualified Los Angeles tax attorney for the right tax help. Call Mitchell A. Port at (310) 559-5259.

March 6, 2009

California’s Multi Tax Agency Form for Offer in Compromise

California's Franchise Tax Board, Employment Development Department and the State Board of Equalization now allow taxpayers behind in their tax payments to use one form when applying to more than one tax agency for an Offer in Compromise.

Are you an OIC candidate for taxes owed to California's tax agencies?

The Offer in Compromise (OIC) program is for taxpayers that do not have, and will not have in the foreseeable future, the income, assets, or means to pay the tax liability. It allows you to offer a lesser amount for payment of a nondisputed final tax liability. Although each case is evaluated based on its own unique set of facts and circumstances, California gives the following factors strong consideration in the evaluation:

The offer is in the best interest of California.

Your present and future expenses.

The amount of equity in your assets.

Your present and future income.

Your ability to pay.

The potential for changed circumstances.

California’s tax agencies will not recommend approval of offers if there are assets or income available to pay more than the amount offered.

Can California’s tax agencies process your application?

Your offers will be evaluated independently by each agency. The BOE, FTB, and EDD have different criteria for participation in their OIC programs.

For all agencies, you must agree that you owe the amount of the liability. If you dispute the liability, you should appeal through the appropriate agency’s appeal process.

For FTB, your application will be processed if all of the required FTB income tax returns have been filed. If you have no filing requirement, note it on your application.

For both BOE and EDD, you must be out of business and must not have a controlling interest or an association with the business or a successor to the business that incurred the liability. This includes operating a business of the same nature.

For EDD, you cannot have access to income to pay more than the accumulating interest and 6.7 percent of the outstanding liability on an annual basis.

For EDD, an offer will not be considered for liabilities assessed for fraud or where the employer has been convicted of a violation under the California Unemployment Insurance Code.

For BOE, an offer for a liability with a fraud assessment will not be considered if there is a criminal conviction of fraud. For other fraud assessments, an offer will be considered if a minimum of the tax plus the fraud penalty is offered.

Are collections suspended?

Submitting an offer does not automatically suspend collection activity. Wage garnishments already in place at the time of the offer will continue and will not be considered as partial payment of the offered amount. However, in many cases, collection action will be suspended until the OIC evaluation is completed. If delaying collection activity jeopardizes California’s ability to collect, collection efforts may continue. Interest will continue to accrue as prescribed by law.

Will California’s tax agencies require you to continue payments on an Installment Agreement?

All the agencies require that you continue making periodic payments as called for in any existing installment agreement while your offer is being considered.

Call Mitchell A. Port, a California tax attorney, for help with your tax problems. Call (310) 559-5259.

March 2, 2009

California Income Taxes: Get Some Relief

The California Franchise Tax Board explains that if you meet certain legal requirements, you may qualify for relief of payment on all or part of your unpaid income tax balance. California's Franchise Tax Board will work with you to determine if you meet the requirements for relief. One approach is to complete and submit a "Request for Innocent Joint Filer Relief".

Speak to a licensed California tax attorney to discuss fixing your tax problems. Call Mitchell A. Port at (310) 559-5259.

February 26, 2009

How To Prepare Your Request To Appeal An IRS Decision

INTEREST AND PENALTIES DO NOT STOP ACCRUING WHEN YOU FILE YOUR REQUEST FOR APPEAL

Review the letter and publication(s) that were sent to you by the IRS. The information will usually be straight-forward and will say:

When the request must be received

How to prepare a request for an appeal (protest)

What information you need to include in the request for an appeal

Where to mail the request


For specific information appealing Collection issues, refer to the Collection page.

For specific information appealing Examination issues, refer to the Examination page.

Interest and certain penalties will continue to accrue during the Appeals process and during any subsequent Appeals to the Courts on any amount not paid. In order to stop the accrual of interest and penalties on proposed adjustments, refer to Notice 1016, How to Stop Interest. For an explanation on how to stop interest from accruing on an unpaid balance, refer to Publication 594, What You Should Know About the IRS Collection Process.

Call a California tax attorney for help with your IRS appeal. Call Mitchell A. Port at 310.559.5259.

February 20, 2009

Read This Before Choosing A Tax Preparer

The IRS has some great tax tips for California's taxpayers. Take a look at a recent tax tip about selecting your tax preparer. Here's what it said:

You are legally responsible for what’s on your tax returns even if they are prepared by someone else. So, it’s important to find a qualified tax professional. If you will be paying someone to do your tax return, choose a tax preparer wisely.

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.

Most tax return preparers are professional, honest and provide excellent service to their clients; you can use the following tips to choose a preparer who will offer the best service for their tax preparation needs.

Find out what the service fees are before the return is prepared. Avoid preparers who base their fee on a percentage of the amount of your refund or who claim they can obtain larger refunds than other preparers.

Only use a tax professional that signs your tax return and provides you with a copy for your records.

Avoid tax preparers that ask you to sign a blank tax form.

Choose a tax preparer that will be around to answer questions after the return has been filed.
Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?

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.

Before you sign your tax return, review it and ask questions.

Do you need a referral to qualified tax return preparers? Call Mitchell A. Port at 310.559.5259 and ask for that referral.

February 18, 2009

California's Program To Suspend LLCs For Noncompliance

Beginning now, California’s Franchise Tax Board (FTB) will take action which helps the FTB bring Limited Liability Companies (LLCs) into tax compliance and reduce the State's budget deficit.

Read more about this in the Los Angeles Times article from January 12, 2009.

California’s FTB and California’s Secretary of State (SOS) are working together to implement a suspension/forfeiture process for Limited Liability Companies (LLCs).

The FTB will suspend/forfeit the rights, powers and privileges of LLCs for non-payment of taxes, penalties, or interest, and/or failure to file a return (California’s Revenue and Taxation Code Sections 23301, 23301.5 and 23304.1(d)). The LLC suspension/forfeiture process will be very similar to the one for corporations.

Implementing the suspension/forfeiture process will have a dramatic effect on LLCs that have failed to meet their filing and payment obligations. We will send notification to all entities at their last known addresses, 60 days before imposing suspension/forfeiture.

Non-registered LLCs acting and filing in California will be subject to contract voidability. The reasons for contract voidability are the same as for suspension/forfeiture: failure to file a return, and/or failure to pay taxes, penalties, or interest.

Get help with compliance. Call a tax attorney licensed in California. Call Mitchell A. Port at (310) 559-5259.

February 12, 2009

Help For Financially Distressed Taxpayers From The IRS

If you are behind on tax payments there could be additional help available if you are facing an unusual hardship situation.

As the new tax filing season begins, the IRS is taking steps to help people who owe back taxes. The IRS can help in the following areas, to mention just a few:

Hardship Situation. Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in hardship cases where you are unable to pay. If you recently lost a job or face other financial problems, IRS assistors may be able to suspend collection in some situations without documentation to minimize the burden on you.

Home Equity Values in Flux Result in An Additional Review for Offers in Compromise: An Offer in Compromise (OIC), an agreement between a taxpayer and the IRS that settles the taxpayer’s tax debt for less than full amount owed, may be a viable option for taxpayers experiencing economic difficulties. However, the equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay are not necessarily accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new, second review of the information to determine if accepting an offer is appropriate.

The IRS May Provide Added Flexibility Where Installment Agreement Payments Are Missed: The IRS is allowing more flexibility for individuals with existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. Depending on the situation, the IRS may allow a skipped payment or a reduced monthly payment amount. If you are in this situation you should contact the IRS.

Speedier Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases of levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.

To talk with a California tax attorney who can help solve your tax problem, call Mitchell A. Port at 310.559.5259.

February 10, 2009

Top Ten Business Entity Errors That Delay Processing Your California Tax Return

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.

January 27, 2009

Use The Taxpayer Advocate To Help Fix Your Tax Problem

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.

January 23, 2009

Tax Humor?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

January 21, 2009

Tax Calculation Of Innocent Spouse's Share Of Income

California is a community property state which means most property acquired during the marriage (except for gifts or inheritances) is owned jointly by both spouses and is divided upon divorce, annulment or death. Joint ownership is automatically presumed by law in the absence of specific evidence that would point to a contrary conclusion for a particular piece of property.

In a recent Fifth Circuit Court of Appeals decision, the taxpayer claimed that in determining her share of the community property interest in order to calculate how much income to pay tax on, the IRS should have made the “separate tax formula allocation . . . upon the basis of the spouse who earned the income and not upon the basis of a community property split.”

The only disputed issue before the court was how the separate tax liability should be calculated—the taxpayer argued that it should be calculated based on the wages she personally earned, and the IRS argued that it should be calculated based on fifty percent of all community income.

The court simply held that the taxpayer's argument is not supported by the IRS's revenue rulings or any other legal authority. The court relied on Revenue Ruling 2004-74 which provides that tax is simply not calculated on the share of community income earned by just one spouse but instead is calculated on the 50% interest attributable to the spouse who live in a community property state (like California).

Do you qualify for innocent spouse relief? Speak with a California tax attorney who understands community property law. Call Mitchell A. Port at 310.559.5259.

January 15, 2009

Substitute For Return

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.

January 13, 2009

Tax Calendar For California Businesses

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.

January 9, 2009

Compliance With IRS Employment Tax Filings Gets Easier For Some Of California's Employers

To reduce burden on small employers many of whom do business in Los Angeles County, Ventura County, Santa Barbara County and Orange County California, the IRS has simplified the rules for filing employment tax returns to report social security, Medicare, and withheld federal income taxes. Certain employers must file Form 944, Employer’s ANNUAL Federal Tax Return, instead of Form 941, Employer’s QUARTERLY Federal Tax Return.

For taxable years beginning on or after January 1, 2009, employers who estimate that their annual employment tax liability will be $1,000 or less can contact the IRS to request filing Form 944 instead of Forms 941 for a taxable year. Instructions for filing Form 944 are here. Only upon request will the IRS send a notification letter to qualified employers confirming that they may file Form 944 for that taxable year. Once employers receive this notice they must file Form 944 and cannot file Forms 941 instead for a taxable year until they contact the IRS to change their filing requirement to Form 941 for that taxable year and receive confirmation that their filing requirement has been changed.

The IRS will issue guidance published in the Internal Revenue Bulletin informing employers how they can contact the IRS to participate in the Form 944 Program and how they can elect out if they later decide that they want to file Forms 941 instead of Form 944. Under the 2006 regulations, employers were only eligible to opt out if they estimated that their employment tax liability would exceed the $1,000 threshold or if they wanted to e-file Forms 941 quarterly instead. Because the program is being made voluntary, beginning in tax year 2010, employers will be able to opt out for any reason if they follow procedures to be provided in future guidance.

For payroll tax issues, call tax attorney Mitchell A. Port for further information and help.

January 7, 2009

Californians Get Tax Lien Relief

Currently, there are more than 1 million federal tax liens outstanding tied to both real and personal property - many filed in California. The IRS issues more than 600,000 federal tax lien notices annually. Filing a Notice of Federal Tax Lien is a formal process by which the government makes a legal claim to property as security or payment for a tax debt. It serves as a public notice to other creditors that the government has a claim on the property. The federal tax lien will make it difficult to address financial problems you may be having about your home.

In a recent announcement, the IRS said:

"An expedited process that will make it easier for financially distressed homeowners to avoid having a federal tax lien block refinancing of mortgages or the sale of a home.

If taxpayers are looking to refinance or sell a home and there is a federal tax lien filed, there are options. Taxpayers or their representatives, such as their lenders, may request that the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. Taxpayers or their representatives may request that the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

The process to request a discharge or a subordination of a tax lien takes approximately 30 days after the submission of the completed application, but the IRS will work to speed those requests in wake of the economic downturn.

“We don’t want the IRS to be a barrier to people saving or selling their homes. We want to raise awareness of these lien options and to speed our decision-making process so people can refinance their mortgages or sell their homes,” said Doug Shulman, IRS commissioner.

“We realize these are difficult times for many Americans,” Shulman said. “We will ensure we have the resources in place to resolve these issues quickly and homeowners can complete their transactions.”

In some cases, a federal tax lien can be made secondary to another lien, such as a lending institution’s, if the IRS determines that taking a secondary position ultimately will help with collection of the tax debt. That process is called subordination. Taxpayers or their representatives may apply for a subordination of a federal tax lien if they are refinancing or restructuring their mortgage. Without lien subordination, taxpayers may be unable to borrow funds or reduce their payments. Lending institutions generally want their lien to have priority on the home being used as collateral.

To apply for a certificate of lien subordination, people must follow directions in Publication 784, How to Prepare an Application for a Certificate of Subordination of a Federal Tax Lien. Again, there is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235, Collection Advisory Group Addresses, for address information.

Taxpayers or their representatives may apply for a certificate of discharge of a tax lien if they are giving up ownership of the property, such as selling the property, at an amount less than the mortgage lien if the mortgage lien is senior to the tax lien. The IRS may also issue a certificate of discharge in other circumstances if the taxpayer has sufficient equity in other assets, can substitute other assets, or is able to pay the IRS its equity in the property. Without a tax lien discharge, the taxpayer may be unable to complete the home ownership change and the ownership title will remain clouded.

To apply for a tax lien discharge, applicants must follow directions in Publication 783, Instructions on How to Apply for a Certificate of Discharge of a Federal Tax Lien. There is no form but there must be a typed letter of request and certain documentation. The request should be mailed to one of 40 Collection Advisory Groups nationwide. See Publication 4235 for address information.

The IRS also urges people to contact the agency’s Collection Advisory Group early in the home sale or refinancing process so that it can begin work on their requests. People sometimes delay informing lenders of the tax liens, which only serves to delay the transaction.

January 5, 2009

California Passes Mandatory Electronic Payment Law

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.

December 29, 2008

Checklist To Close Your California Business

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.

December 15, 2008

Tax Treatment Of Investment Advisory Costs

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.

December 4, 2008

Lost Your IRS Appeals Case? Now You Can Mediate And Arbitrate Your Defeat

Two new Appeals programs are available from the IRS:

Applicable in California (and elsewhere) is a two-year test of two programs referred to as the post-Appeals mediation and arbitration procedures for Offer in Compromise (OIC) and Trust Fund Recovery Penalty (TFRP).

Beginning Dec. 1, 2008, for a two-year test period, Appeals will offer post-Appeals mediation and arbitration for OIC and TFRP cases for taxpayers whose appeals are considered at the Appeals office in Atlanta, Ga.; Chicago, Ill.; Cincinnati, Ohio; Houston, Texas; Indianapolis, Ind.; Louisville, Ky.; Phoenix, Ariz.; and San Francisco, Calif.

Under these two alternative dispute resolution programs, the taxpayer or Appeals may request nonbinding mediation. The taxpayer may decline Appeals’ request for mediation. Appeals will evaluate a taxpayer’s request for mediation based on the criteria detailed in Revenue Procedure 2002-44 and Announcement 2008-111. A request for binding arbitration must be made jointly by the taxpayer and Appeals. The mediation and arbitration procedures do not create any additional authority for settlement by Appeals.

During the test period, Appeals employees will advise the taxpayer of the availability of these alternative dispute strategies and the deadline for timely requesting such strategies when a rejection of an OIC is sustained or a proposed TFRP assessment is sustained. An OIC submitted during Collection Due Process (CDP) as an alternative to a Collection action is not eligible for these alternative dispute resolution strategies during the test period.


The Post-Appeals mediation process is available for both legal and factual issues. The mediator’s role is to facilitate settlement negotiations so the parties can reach their own agreement. The mediator does not have settlement authority over any issue.

The Arbitration procedure is available for factual issues only. The arbitrator’s role is to hear both sides of a disputed issue and then render a decision on the specific factual issue being arbitrated. This decision is binding on both parties. However, the arbitrator does not have the authority to decide that the offer in compromise itself must be accepted or that a person is/is not liable for the TFRP under § 6672. Neither party may appeal the decision of the arbitrator or contest the decision in any judicial proceeding.

Complete procedures for initiating a request for post-Appeals mediation or arbitration are in Announcement 2008-111. The agency will seek appropriate Offer in Compromise and Trust Fund Recovery Penalty cases for both post-Appeals mediation and arbitration during the two-year test period in order to evaluate the effectiveness of alternative dispute resolution for these cases.

Call a California tax attorney to assist in preserving your rights when it comes to resolving your tax problems. Call Mitchell A. Port at (310) 559-5259.

November 21, 2008

IRS Sells Real And Personal Property At Government Auctions

Unpaid individual income taxes and other unpaid federal taxes may be satisfied by the sale of property seized by the IRS.

Under authority of the Internal Revenue Code, the property described in the IRS website has been seized or acquired for nonpayment of internal revenue taxes and will be sold. The IRS posts legal notices covering the nature of title, redemption rights, effect of junior encumbrances, title offered, and forms of payment before making a bid.

The types of property sold are listed under the headings below and each state in the U.S. may contain some or all of these types of property for sale.

Internet Domain Names

Real Estate

Real Estate - Seeking Guaranteed Bids

Antiques, Art, Jewelry, Collectibles and Luxury Items

Misc. Property - Quick Notice Sales - Seeking Bidders

Household Goods - Personal Property

Commercial/Industrial Property, Equipment and Supplies

Financial Instruments, Notes, Patents

Automobiles, Motorcycles, Trucks and Boats

Liquor Licenses

Don't let your tax liability go unpaid. Call a California tax attorney for help. Call Mitchell A. Port at (310) 559-5259.

November 11, 2008

Internal Revenue Bulletins

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.

November 7, 2008

Billions in Federal Payroll Taxes Owed

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.

November 5, 2008

Medical Students As Employees: Does Employer Pay FICA?

The University of Chicago Hospitals (“UCH”) brought a refund action (in an appeal entitled "University of Chicago v. USA", Case No. 07-3686, decided October 29, 2008 by the 7th Circuit Court of Appeals) against the United States to recover taxes it paid in 1995 and 1996 under the Federal Insurance Contributions Act (“FICA”), §§ 3101-3128, on behalf of its medical residents. UCH maintained it was entitled to a refund because its residents qualified for the “student exception” from FICA tax under the Internal Revenue Code (“IRC”), 26 U.S.C. § 3121(b)(10), and the controlling Treasury Regulation in place during the relevant time period, § 31.3121(b)(10)-2.

After the IRS took no action in response to the refund claim, UCH filed this refund action, seeking $5,572,705 it had paid in FICA contributions for its residents in those years.

The district court agreed initially to entertain the government’s motion on the question of whether medical residents are categorically not “students” under § 3121(b)(10) and therefore not exempt from FICA tax as a matter of law. If the answer to this question was “no”—that is, if residents may qualify for the student exception—then the case would proceed on the question of whether UCH’s residents were students within the meaning of § 3121(b)(10).

The district court rejected the government’s argument that residents were per se ineligible for the student exception.

The U.S. Court of Appeals for the Seventh Circuit granted the government’s petition and affirmed the U.S. District Court holding that the student exception under § 3121(b)(10) is not per se inapplicable to medical residents as a matter of law; rather, a case-by- case analysis is required to determine whether medical residents qualify for the statutory exemption from FICA taxation. The implementing Treasury Regulation applicable at the time set forth a method for determining eligibility for the student exception— one that focused on the character of the employing organization as a school, college, or university and the relationship of the employee-student to that organization. This necessarily implies a case-specific analysis, not a categorical ineligibility for certain classes of employee-students.

Have a FICA tax problem? Speak with a Los Angeles tax attorney about it and call Mitchell A. Port at (310) 559-5259.

November 3, 2008

The IRS Mission

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.

October 29, 2008

California Employers: Do You Have Independent Contractors Or Employees?

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.

October 8, 2008

IRS E-mails

WARNING: be on the alert for phone calls and e-mails you may receive claiming to come from the IRS or other federal agency and which mention your tax refund or economic stimulus payment. A scam is likely to be in the making. The scam’s purpose is to obtain personal and financial information — such as your Social Security number, name, credit card or even PIN numbers and bank account information to use to commit identity theft. The e-mails and calls usually state that the IRS needs the information to process a refund or stimulus payment or deposit it into the taxpayer's bank account. The e-mails often contain links or attachments to what appears to be the IRS Web site or an IRS "refund application form." Don’t be fooled no matter how genuine in appearance.

The IRS does not send taxpayers e-mails about their tax accounts. Additionally, the way to get a tax refund or stimulus payment, or to arrange for a direct deposit, is to file a tax return.

Read more about identity theft and suspicious IRS e-mails.

October 6, 2008

What New California Business Owners Need To Know About Federal Taxes

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.

October 3, 2008

California Worker Status: Employee or Independent Contractor

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.

October 1, 2008

IRS Enforcement Improving

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.

September 29, 2008

Know Your Tax Responsibilities As An Employer

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.

September 12, 2008

Fix Your Tax Problem By Meeting With The IRS

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

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

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

September 1, 2008

Willful Failure To Pay Over Employee Payroll Taxes

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

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

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

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

August 28, 2008

Tax Relief For Mortgage Debt Forgiven

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.

August 15, 2008

Innocent Spouse: What Are The Tests?

The IRS issued a revenue procedure which lists the various factors necessary to satisfy to obtain equitable relief as an innocent spouse.

If you have a tax problem, and believe that you maybe qualify for innocent spouse relief contact the Mitchell A. Port at (310) 559-5259.

August 1, 2008

Scammers Use Fax and Email To Pose As IRS

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.

July 30, 2008

Tax Questions And Answers

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.

July 28, 2008

Withholding Compliance

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.

July 21, 2008

IRS Enforcement Getting Better

Don’t have tax problems or need tax help at the moment? California’s taxpayers beware: the IRS continues to make progress in a number of key enforcement areas. The IRS is showing improvements in areas critical to maintaining a fair, efficient tax system while bringing billions of additional dollars into the Treasury.

The IRS enforcement efforts increased again in fiscal year 2007. For instance, 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

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

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

• Audits of individuals with incomes of $1 million or more increased 84 percent. One out of 11 individuals with incomes of $1 million or more faced an audit in 2007.

• Overall, the total individual returns audited increased by 7 percent. That’s the highest number since 1998.

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

• The IRS increased audits of individual returns with income of $100,000 or more, up 13.7 percent from last year’s total.

Businesses

In the business arena, the IRS continued efforts to review more returns of flow-through entities – partnerships and S Corporations. Our business numbers reflect that we have placed more emphasis in the growing area of these flow-through returns. While large corporate audits are down slightly, we have increased our focus on mid-market corporations – those with assets between $10 million and $50 million dollars. The IRS enforcement budget in 2007 was similar to the budget in 2006, and in times of flat budgets, the agency cannot increase activity across the board but must address the areas where there is growth and potential risk.

• Audits of S Corporations increased to 17,681 during 2007, up 26 percent from the prior year.

• Audits of partnerships increased to 12,195 during 2007, up almost 25 percent.

• Audits of mid-market corporations increased to 4,473, up 6 percent from last year.

• Audits of businesses in general rose to 59,516, an increase of almost 14 percent from the prior year.

• Although the audits of large corporations dipped slightly in 2007 to 9,644 audits, the number of audits is up 14 percent.

Taxpayer Services

• 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.

• 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.

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

For tax help with serious problems, call tax attorney Mitchell A. Port at (310) 559-5259.

July 15, 2008

Eliminate Interest On Tax

In almost every situation, the IRS never abates interest on unpaid taxes since the thinking is that not paying tax is like getting a loan which the IRS is not about to make interest-free.

But in a U.S. Tax Court case decided last week, the Court held that the IRS has the authority to abate interest. The sole issue for decision was whether the IRS’s decision not to abate interest with respect to the taxpayer’s income tax liability was an abuse of discretion.

The relevant part of the Select Steel, Inc. case was the Court's explanation for its decision that was as follows:

If, as part of a section 6330 proceeding, a taxpayer makes a request for abatement of interest, the Court has jurisdiction over the request for abatement of interest that is the subject of the Commissioner’s collection activities. Katz v. Commissioner, 115 T.C. 329, 340-341 (2000).

Under section 6404(e)(1), as in effect for petitioner’s 1994 fiscal year, the Commissioner may abate part or all of an assessment of interest on any deficiency or payment of income taxes to the extent that the deficiency in payment is attributable in whole or in part to any error or delay by an officer or employee of the IRS in performing a ministerial act.

Although Congress amended section 6404(e)(1) in 1996 to permit the Commissioner to abate interest with respect to “unreasonable” error or delay resulting from “managerial” or ministerial acts, the amendment applies only to interest accruing with respect to deficiencies for taxable years beginning after July 30, 1996.

The term “ministerial act” means a procedural or mechanical act that does not involve the exercise of judgment or discretion and occurs during the processing of a taxpayer’s case after all the prerequisites to the act, such as conferences and review by supervisors, have taken place. Corson v. Commissioner, 123 T.C. 202, 207 (2004).

A decision concerning the proper application of Federal tax law is not a ministerial act. Id. An error or delay in performing a ministerial act is taken into account only if it is in no significant aspect attributable to the taxpayer and only if it occurs after the IRS has contacted the taxpayer in writing with respect to the deficiency or payment. Sec. 6404(e)(1).

Section 6404(e) is intended to apply only “in instances where failure to abate interest would be widely perceived as grossly unfair.” H. Rept. 99-426, at 844 (1985), 1986-3 C.B. (Vol. 2) 1, 844. Section 6404(h)(1) authorizes the Court to decide whether the Commissioner’s failure to abate interest was an abuse of discretion and, if so, to order an abatement. See Jones v. Commissioner, T.C. Memo. 2008-56.

Generally, the taxpayer must prove that the Commissioner’s discretion was exercised arbitrarily, capriciously, or without sound basis in fact or law. Lee v. Commissioner, 113 T.C. 145, 149 (1999); Woodral v. Commissioner, 112 T.C. 19, 23 (1999). However, “The Commissioner is in the best position to know what actions were taken by Internal Revenue Service officers and employees during the period for which petitioners’ abatement request was made and during any subsequent inquiry based upon that request.” Jacobs v. Commissioner, T.C. Memo. 2000-123.

Do you have a similar situation and believe that interest should be eliminated? Do you have other tax problems you want to discuss with a California tax attorney? Call Mitchell A. Port at (310) 559-5259.

June 11, 2008

Identity Theft, Phishing And Your Tax Information

Consumers have been warned in the past on the fraudulent use of the IRS name or logo by scammers trying to gain access to consumers’ financial information in order to steal their identity and assets. The Internal Revenue Service has issued several recent warnings with a lot of detail on how to prevent being scammed. When identity theft takes place over the internet, it is called phishing.

Phishing (as in “fishing for information” and “hooking” victims) is a scam where internet fraudsters send e-mail messages to trick unsuspecting victims into revealing personal and financial information that can be used to steal the victims’ identity. Current scams include phony e-mails which claim to come from the IRS and which lure the victims into the scam by telling them that they are due a tax refund.

Identity theft is somewhat different that phishing since it can not only be committed through e-mail (phishing) but it can also be done by other means such as regular mail, fax or telephone, or even by going through your trash.

Here are some of the warnings provided by the IRS on such scams:

IRS Warns of New E-Mail and Telephone Scams Using the IRS Name; Advance Payment Scams Starting

IRS Warns of New E-mail Scam Offering Cash for Participation in “Member Satisfaction Survey”

IRS Warns of Phony e-Mails Claiming to Come from the IRS

IRS Establishes e-Mail Box for Taxpayers to Report Phony e-Mails

Identity Theft and Your Tax Records

As soon as the IRS learns about designs involving use of the IRS name, it tries to alert consumers as well as authorities that can shut down the scheme. The most recent schemes are listed below.

Continue reading "Identity Theft, Phishing And Your Tax Information" »

June 6, 2008

Discharged Indebtedness Is Income And Is Taxable

During their marriage, the Stevenses purchased a dilapidated investment property in Chicago. (Investors are making similar purchases in Los Angeles, Ventura, Santa Barbara and Orange Counties, California, all of which may lead to a similar outcome as occurred in Chicago.) The couple borrowed $256,000 for the purchase of the property, only to realize shortly thereafter that not only did they not like each other, but they also could not make the payments. Rather than falling into foreclosure and ruining their credit, they entered into a short-sale agreement with the lender and, in 2003, found a buyer willing to purchase the property for $200,000.

Even though the lender had informed the Stevenses that they would report the discharge of indebtedness to the Internal Revenue Service and had mailed separate letters to Mr. Stevens and his ex-wife informing them of the exact dollar amount, neither reported the discharged indebtedness as income on their tax return.

Generally, a taxpayer must include income from the discharge of indebtedness under Section 61(a)(12) of the income tax regulations. However, there are exceptions to this rule. Section 108(a) provides that a taxpayer may exclude income from the discharge of indebtedness if the discharge occurs in a bankruptcy case, or when the taxpayer is insolvent, or if the indebtedness is qualified farm or business real estate debt.

The IRS determined and the Tax Court agreed that in addition to the tax deficiency, a 20 percent accuracy-related penalty under Code Section 6662(a) to be applicable because Mr. Stevens understated his income tax by $21,323 on his return. Because Mr. Stevens’ understatement of tax was greater than 10 percent of the tax required to be shown on the return or $5,000, the understatement was a substantial understatement of income tax pursuant to Code Section 6662(d)(1)(A). Mr. Stevens argued that he should not be held liable for the penalty because of his reliance on Ms. Stevens to report all of the relief from indebtedness income (Form 1099-C income) from the cancellation of indebtedness on her income tax return since both Forms 1099-C were mailed to her address.

The argument that Mr. Stevens had relied on his ex-wife to report the income from the indebtedness did not hold water with the Court.

The Tax Court concluded that Mr. Stevens failed to show that his reliance on Ms. Stevens’ reporting the full amount of income and paying the requisite tax on that income was reasonable. Mr. Stevens admitted that he knew Ms. Stevens had received both Forms 1099-C and that the amount at issue, $74,494.96, should have been reported--either in full or in part--on one of or both of the Stevenses’ returns for that year. The record is silent as to any facts that would have led to a reasonable assumption on the part of Mr. Stevens that he was not responsible for reporting the amount contained on the Form 1099-C in income.

The lesson, of course, is not to trust your ex-spouse to pay your taxes. The Court did state that Mr. Stevens could look to civil remedy against his ex-wife, as they did own the property as joint tenants and should be equally responsible for the declaration of the income tax.

You can read the entire Court decision here.

Need help negotiating with the IRS the amount of tax to be paid on relief from indebtedness income? Call tax attorney Mitchell A. Port at (310) 559-5259 for tax help.

May 27, 2008

No Right To A Civil Proceeding Before Bringing A Criminal Trial For Tax Evasion

Defendant-Appellant James Ellett appealed from the judgment of the United States District Court for the Northern District of New York convicting him, after a jury trial, of four counts of income tax evasion and one count of failure to file an income tax return. The United States Court of Appeals for the Second Circuit held on May 23, 2008, that due process did not require that Ellett be given the opportunity to litigate his tax position civilly or administratively before being prosecuted for tax evasion.

To read the case, click here.

May 23, 2008

Innocent Spouse Relief Requires Joint Tax Return

The Ninth Circuit - which has jurisdiction over all of us taxpayers living in California - upheld the Tax Court's holding that innocent spouse relief under Internal Revenue Code §6105 is available only if you have filed a joint return for the year in question. Christensen v. Commissioner, No. 06-71881 (9th Cir. 4/21/08), affirming T.C. Memo. 2005-299:

Christensen argues that Code §6015(f) is available to spouses who face joint liability under community property laws but do not file a joint return. We disagree. In light of the plain language of § 6015 and the context of the statute, we conclude that § 6015(f) is available only to spouses who file a joint return.

Call a qualified California tax lawyer for help seeking innocent spouse relief - call Mitchell A. Port at 310.559.5259.

May 21, 2008

New IRS Publication On Innocent Spouse

Last month, the IRS released a revised Publication 971 for those seeking innocent spouse relief. Other articles in this blog on innocent spouse relief are: "Who Is An Innocent Spouse In California?", "Innocent Spouse Made Easier" and "California Taxpayers: Innocent Spouse Relief".

The revised IRS Publication provides this introduction:

When you file a joint income tax return, the law makes both you and your spouse responsible for the entire tax liability. This is called joint and several liability. Joint and several liability applies not only to the tax liability you show on the return but also to any additional tax liability the IRS determines to be due, even if the additional tax is due to income, deductions, or credits of your spouse or former spouse. You remain jointly and severally liable for the taxes, and the IRS still can collect from you, even if you later divorce and the divorce decree states that your former spouse will be solely responsible for the tax. In some cases, a spouse (or former spouse) will be relieved of the tax, interest, and penalties on a joint tax return.

Three types of relief are available to married persons who filed joint returns.

1. Innocent spouse relief.
2. Separation of liability relief.
3. Equitable relief.

Married persons who did not file joint returns, but who live in community property states [like California], may also qualify for relief. See Community Property Laws, later. This publication explains these types of relief, who may qualify for them, and how to get them. You can also use the Innocent Spouse Tax Relief Eligibility Explorer at www.irs.gov to see if you qualify for innocent spouse relief.

If you have a tax problem and believe that you may be entitled to innocent spouse relief, and wish to have a California tax lawyer represent you please contact Mitchell A. Port.

May 14, 2008

Most Frequently Asked Questions: Economic Stimulus Payments

California taxpayers waiting and wondering about their tax stimulus payment from the IRS can visit the IRS website for answers to frequently asked questions by clicking here.

Other tax problems related to unpaid payroll taxes, unpaid income taxes or unfiled tax returns, call Los Angeles tax attorney Mitchell A. Port at (310) 559-5259.

May 7, 2008

Wesley Snipes Convicted

For his willfully failing to file an income tax return, Wesley Snipes was sentenced to three years in federal prison. He was charged with having failed to pay over $15,000,000 in taxes.

A jury acquitted Wesley Snipes of fraud and conspiracy charges and certain other tax charges even though they convicted him for failure to file his 1999, 2000, and 2001 tax returns.
According to the IRS, tax protestors Eddie Ray Kahn and Douglas P. Rosile (who themselves face 10 and 4-1/2 years' incarceration respectively) met Snipes in 1998 who followed their suggestion to (among other things) stop filing tax returns.

He also filed amended returns requesting payments from the government of millions of dollars in refunds from earlier years' filings.

Allegedly, Snipes doctored tax returns, and sent fake checks to the Treasury to evade paying his tax liabilities.

For what was technically a misdemeanor, Snipes was convicted and sentenced to time in prison.

According to Justice Department prosecutors, this represented a "singular opportunity….to deter tax crime nationwide." And "Snipes's long prison sentence should send a loud and crystal clear message to all tax defiers that if they engage in similar tax defier conduct, they face joining him and his co-defendants . . . as inmates in prison."

May 5, 2008

A Tax Morale Approach To Compliance

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.

May 2, 2008

California's Collection Procedures Manual

Income tax owed but unpaid in California may be collected by the Franchise Tax Board (FTB) using any number of collection methods described in California's Collection Procedures Manual. The Manual describes the desired culture and philosophy for the Collection Program.

California's Collection Procedures Manual contains the following topics:

Introduction Section

Responsibility Section

Case Administration Section

Case Processing Section

Debtor Asset Location Section

Voluntary Case Resolution Section

Involuntary Case Resolution Section

Case Servicing Section

Special Processes Section

Glossary

If you have an income tax problem in California or with the IRS, call Mitchell A. Port for tax help at (310) 559.5259.

April 30, 2008

Closing Your California Business?

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.

April 28, 2008

California's Enhanced Tax Revenue Collection Efforts

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.

April 21, 2008

California Taxpayer Advocate

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.

April 11, 2008

Military Personnel May Qualify For New Tax Rebate

On March 20, 2008, the Internal Revenue Service issued a release which advises U.S. military taxpayers, serving in a designated combat zone, that their nontaxable combat duty pay will qualify as income for purposes of eligibility for the tax rebate payable under the Economic Stimulus Act of 2008. The tax rebate is available in either 2008 or 2009.

Service members who would not otherwise file a federal income return, as a result of their nontaxable combat zone income, must now file Form 1040A, U.S. Individual Income Tax Return, with the IRS by October 15 in order to receive the economic stimulus payment in 2008.

To receive the rebate, the service member must:

(i) show at least $3,000 in qualifying income (earned income, combat zone pay, Social Security benefits or Veterans Affairs benefits) on their tax return;

(ii) file their 2007 federal income tax return on or before Oct. 15, 2008 (a service members federal income tax filing deadline is extended by 180 days after leaving a combat zone) to receive the tax rebate in 2008; and

(iii) file Form 1040A with the IRS (report the nontaxable combat duty pay on Line 40b of Form 1040A).

April 7, 2008

Release of Lien Or Discharge Of Property

The Internal Revenue Service published final regulations related to the release of a Federal tax lien and discharge of property under sections 6325, 6503, and 7426 of the Internal Revenue Code. These regulations update existing regulations and contain procedures for processing a request made by a property owner for discharge of a Federal tax lien from his property under section 6325(b)(4).

These regulations are effective January 31, 2008 and apply to any release of lien or discharge of property that is requested after January 31, 2008.

Basis for Release of Lien:

1) Liability satisfied or unenforceable.

2) Bond accepted.

3) Certificate of release for a lien which has become legally unenforceable.

4) Satisfaction of tax liability.

5) Proof of full payment.

6) Notice of a Federal tax lien which lists multiple liabilities.

7) Taxpayer requests discharge of specific property from the lien.

If you have tax liens that should be released, call Mitchell A. Port.

April 2, 2008

Frivolous Tax Claims To Avoid

Songwriter and performer Paul Simon sang about the 50 ways to leave your lover. The IRS has identified about another 50 ways to take frivolous tax positions to avoid compliance with the federal tax laws.

Congress passed recent legislation amending the Internal Revenue Code requiring the Treasury Secretary to prescribe, and periodically revise, a list of tax positions identified as frivolous. Notice 2007-30, 2007-14 I.R.B. 883, contained the prescribed list. The list was recently revised to add more positions identified as frivolous.

Frivolous Positions. Positions that are the same as or similar to the following are frivolous:

Continue reading "Frivolous Tax Claims To Avoid" »

March 20, 2008

Tax Scams – The Top Twelve

There is no secret formula that can eliminate a person’s tax obligations. People should be wary of anyone peddling any of these scams. Taxpayers in California anecdotaly seem especially vulnerable. Consult a tax attorney (perhaps in Los Angeles) if you have doubts about an "opportunity" being presented to you.

The Internal Revenue Service issued its 2008 list of the 12 most egregious tax schemes and scams.

Tax schemes can lead to problems for both scam artists and taxpayers. Tax return preparers and promoters also risk significant penalties, interest and possible criminal prosecution.

Avoid these common schemes:

1. Return Preparer Fraud

Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Some preparers promote the filing of fraudulent claims for refunds on items such as fuel tax credits to recover taxes paid in prior years. Taxpayers should choose carefully when hiring a tax preparer, especially one who promises something that seems too good to be true.

2. Hiding Income Offshore

Individuals continue to try to avoid paying U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans. The IRS and the tax agencies of U.S. states and possessions continue to aggressively pursue taxpayers and promoters involved in such abusive transactions.

3. False Claims for Refund and Requests for Abatement

This scam involves a request for abatement of previously assessed tax using Form 843, “Claim for Refund and Request for Abatement.” Many individuals who try this have not previously filed tax returns. The tax they are trying to have abated has been assessed by the IRS through the Substitute for Return Program. The filer uses Form 843 to list reasons for the request. Often, one of the reasons given is "Failed to properly compute and/or calculate Section 83-Property Transferred in Connection with Performance of Service."

4. Misuse of Trusts

For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

5. Zero Wages

Filing a phony wage- or income-related information return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer also may submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme.

6. Frivolous Arguments

Promoters of frivolous schemes encourage people to make unreasonable and unfounded claims to avoid paying the taxes they owe. Most recently, the IRS expanded its list of frivolous legal positions that taxpayers should stay away from. Taxpayers who file a tax return or make a submission based on one of these positions on the list are subject to a $5,000 penalty. The most recent update of the list of frivolous positions includes: misinterpretation of the 9th Amendment to the U.S. Constitution regarding objections to military spending, erroneous claims that taxes are owed only by persons with a fiduciary relationship to the United States, a nonexistent “Mariner’s Tax Deduction” related to invalid deductions for meals and the misuse of the fuel tax credit (see below). The complete list of frivolous arguments is on the IRS Web site at IRS.gov.

7. Disguised Corporate Ownership

Some people are going as far as forming domestic shell corporations in certain states for the purpose of disguising the ownership of a business or financial activity. Once formed, these anonymous entities can be used to facilitate underreporting of income, non-filing of tax returns, engaging in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance.

8. Abusive Retirement Plans

The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

9. Scams Related to the Economic Stimulus Payment

Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a 2007 federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. For instance, a potential victim is told by phone or e-mail that he or she is eligible for a rebate but must provide a bank account number (or similar information) to get the payment. If the target is unwilling, the victim is then told that he cannot receive the rebate unless the information is provided. Individuals should remember that the only way to get a stimulus payment is to file a 2007 tax return. The IRS urges taxpayers to be extra-vigilant. The IRS will not contact taxpayers by phone or e-mail about their stimulus payment.

10. Abuse of Charitable Organizations and Deductions

The IRS continues to observe the misuse of tax-exempt organizations. Misuse includes arrangements to improperly shield income or assets from taxation, attempts by donors to maintain control over donated assets or income from donated property and overvaluation of contributed property. In addition, IRS examiners are seeing an upturn in instances where taxpayers try to disguise private tuition payments as contributions to charitable or religious organizations.

11. Phishing

Phishing is a tactic used by Internet-based thieves to trick unsuspecting victims into revealing personal information they can then use to access the victims’ financial accounts. These criminals use the information obtained to empty the victims’ bank accounts, run up credit card charges and apply for loans or credit in the victims’ names. Phishing scams often take the form of an e-mail that appears to come from a legitimate source. Some scam e-mails falsely claim to come from the IRS. To date, taxpayers have forwarded more than 33,000 of these scam e-mails, reflecting more than 1,500 different schemes, to the IRS. The IRS never uses e-mail to contact taxpayers about their tax issues. Taxpayers who receive unsolicited e-mail that claims to be from the IRS can forward the message to a special electronic mailbox, phishing@irs.gov, using instructions contained in an article titled “How to Protect Yourself from Suspicious E-Mails or Phishing Schemes.” Remember: the only official IRS Web site is located at www.irs.gov.

12. Fuel Tax Credit Scams

The IRS is receiving claims for the fuel tax credit that are unreasonable. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

For tax and legal advice from a former IRS attorney now working throughout Southern California, particularly in Los Angeles County, Orange County, Santa Barbara County and Ventura County, call Mitchell A. Port at 310.559.5259.

March 17, 2008

The Tax Collection Manual

IRS tax issues can be the bane of our existence. The tax office of your local income tax preparer is often the best place to find relief. If you wish to learn as much as you can from authoritative tax collection sources, look at the IRS’ own publications. One such tax collection source is the Internal Revenue Manual (IRM) published by the federal government. How the government may go about resolving your tax problems is explained in the Manual. The IRM contain the policies, procedures, instructions, guidelines, and delegations of authority which direct the operation and administration of the Internal Revenue Service’s tax collection arm. Topics include tax administration, personnel and office management, and others. Below is a list of the topics covered in “Part Five Collecting Process”:

5.1 General Collecting Procedures

5.2 Reports

5.3 Entity Case Management System (ENTITY)

5.4 Case Processing

5.5 Insolvencies, Decedents Estates and Estate Taxes

5.6 Collateral Agreements

5.7 Trust Fund Compliance

5.8 Offer in Compromise

5.9 Bankruptcy

5.10 Seizure and Sale

5.11 Notice of Levy

5.12 Federal Tax Liens

5.13 Collection Quality Measurement

5.14 Installment Agreements

5.15 Financial Analysis

5.16 Currently Not Collectible

5.17 Legal Reference Guide for Revenue Officers

5.18 Liability Determination

5.19 Liability Collection

5.20 Abusive Tax Avoidance Transactions

Tax help is available from a qualified tax attorney in Los Angeles, California. Call Mitchell A. Port, Esq. at 310.559.5259 to discuss your tax problems.

March 10, 2008

How To Report Tax Cheats Or Fight Back

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.

February 20, 2008

Offer In Compromise

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" »

February 13, 2008

FTB Publicizes Names Of Delinquent Taxpayers

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.

February 8, 2008

Have You Been Mistakenly Treated As An Independent Contractor? There's A Solution

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.

February 6, 2008

Federal Court Reverses The U.S. Tax Court

An IRS appeals officer is disqualified by statute from conducting a Collection Due Process (CDP) hearing regarding the taxpayers' 2001 and 2002 tax liabilities when the officer had previously considered those liabilities during a CDP hearing involving a prior year's tax liability.

The taxpayer had requested that the Internal Revenue Service appeals officer recuse himself from hearing the collection due process matter since he had already been involved with the same taxpayer on a related matter. The IRS refused to appoint someone else to hear the new tax matter. The U.S. Tax Court agreed with the IRS.

In a recent decision (Cox v. Comm'r Internal Revenue, No. 06-9004), the 10th Circuit Court of Appeals reversed the Tax Court in the Tax Court's decision upholding a levy for certain tax liabilities against petitioners-taxpayers as contrary to the provisions of Internal Revenue Code section 6330(b)(3).

The question the court was asked to answer was to define the use of the term “no prior involvement” in a taxpayer’s matter when assigning a hearing officer to a collection due process case. The law requires the appointment of an impartial appeals officer to hear CDP matters who “has had no prior involvement with respect to the unpaid tax specified in [the CDP Notice] before the first hearing”.

In it’s holding, the court of appeals said all that is required to recuse the Internal Revenue Service’ appeals officer is that he in fact did have prior involvement with the same liabilities for which the taxpayers sought another remedy.

If you think you should have a new hearing officer at your collection due process hearing and you are being denied your request, you ought to retain an experienced tax attorney to help preserve your legal rights. Call Mitchell A. Port at 310.559.5259 for help.

February 4, 2008

Harebrained Tax Schemes

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.

February 1, 2008

Government Sues To Close San Diego Tax Preparation Firm

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.

January 30, 2008

Tax Avoidance Or Tax Evasion?

Employment Tax Evasion Schemes

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

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

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

Employment Leasing

Employee leasing is another legal business practice, which is sometimes subject to abuse. Employee leasing is the practice of contracting with outside businesses to handle all administrative, personnel, and payroll concerns for employees. In some instances, employee-leasing companies fail to pay over to the IRS any portion of the collected employment taxes. These taxes are often spent by the owners on business or personal expenses. Often the company dissolves, leaving millions in employment taxes unpaid.

Pyramiding

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

Paying Employees in Cash

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

Other schemes include:

Unreliable Third Party Payers.

Frivolous Arguments.

Offshore Employee Leasing.

Misclassifying worker status.

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

S Corporation Officers Compensation Treated as Corporate Distributions.

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

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

January 28, 2008

This Tax Season, Select A Professional Tax Preparer

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Free Tax Return Preparation For You by Volunteers

e-file for Individual Taxpayers

Free File

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

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

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

Internal Revenue Service
Fresno, CA 93888

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

January 23, 2008

California's State Tax Agencies

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

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

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

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

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

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

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

January 21, 2008

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

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

Q&A topics cover these areas:

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

January 18, 2008

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

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

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

January 16, 2008

Need Information From The IRS About Your Tax Return?

For individuals requesting transcripts:

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

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

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

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

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

January 9, 2008

Who Is An Innocent Spouse In California?

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

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

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

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

Relief by court order.

Equitable relief.

Complete or partial innocent spouse relief.

Relief by separate allocation of liability.

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

Relief from community income.

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

You may qualify for relief by court order if:

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

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

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

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

Provide relief on taxes already paid.

3. Under what conditions is equitable relief allowed?

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

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

January 3, 2008

Favorite Urban Tax Legends

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

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

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

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

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

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

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

The Amish don't pay income tax.

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

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

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

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

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

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

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

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

Taxing labor/services is unconstitutional.

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

AMT is only for high income taxpayers.

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

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

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

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

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

Life insurance proceeds are not taxable.

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

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

Claiming an office in the home increases your audit risk.

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

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

Someone has to win the Irish Lottery.

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

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

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

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

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

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

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

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

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

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

Receiving a 1099 increases your audit risk.

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

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

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

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

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

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

December 26, 2007

Personal Tax Help -- Face-to-Face With The IRS

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.

December 14, 2007

Employment Tax Fraud: Some Samples

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.

December 11, 2007

Reporting Suspected Tax Fraud Activity

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.

December 3, 2007

U.S. Corporation Short-Form Income Tax Return, Form 1120-A, Is Obsolete

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.

November 26, 2007

Where's My Tax Refund?

You filed your tax return and you're expecting a refund. You have just one question and you want the answer now - Where's My Refund?

$110 million belongs to you through your tax refund. The IRS is looking for over 115,000 taxpayers who are due refund checks after those checks were returned as undeliverable. The refund checks, averaging about $953, can be claimed as soon as you update your address with the IRS. Some taxpayers have more than one check waiting.

You can ensure the IRS has your correct address by filing Form 8822, Change of Address. If you do not have access to the internet and think you may be missing a refund should first check their records or contact your tax preparer, then call the IRS toll-free assistance line at 1-800-829-1040 to update your address.

The Where’s My Refund? tool on IRS.gov enables you to check the status of your refunds. You must submit your social security number, filing status and amount of refund shown on your 2006 income tax return. The tool will provide the status of your refund and in some cases provide instructions on how to resolve delivery problems.

You can access a telephone version of “Where’s My Refund?” by calling 1-800-829-1954.

Whether you split your refund among several accounts, opted for direct deposit to one account or asked IRS to mail you a check, you can track your refund through this secure Web site. You can get refund information even if you filed just to request the telephone excise tax refund.

To get to your personal refund information, be ready to enter your:

Exact refund amount shown on your return

Filing status (Single, Married Filing Joint Return, Married Filing Separate Return, Head of Household, or Qualifying Widow(er))

Social Security Number (or IRS Individual Taxpayer Identification Number)

If you don’t receive your refund within 28 days from the original IRS mailing date shown on Where’s My Refund?, you can start a refund trace online.

If Where’s My Refund? shows that the IRS was unable to deliver your refund, you can change your address online.

Need tax help or have a California or federal tax problem? Call Mitchell A. Port at 310.559.5259.

November 19, 2007

New Coordinated Effort By The State And Federal Tax Authorities

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.

November 9, 2007

Is Your Compensation Reasonable Or A Disguised Dividend?

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.

November 5, 2007

California Businesses: Online EIN Application Processes Requests Very Quickly

California business owners can now request an Employer Identification Number (EIN) - a tax I.D. - through a web-based system that immediately processes requests and generates identification numbers in real time, the Internal Revenue Service recently announced.

Here's how it works. California business owners such as those in Los Angeles County, Orange County, Santa Barbara County and Ventura County, access the internet EIN system through IRS.gov and enter the required information. If the information passes the automatic validity checks, the IRS issues a permanent EIN. If the information does not pass the validity checks, the application is rejected. You then have an opportunity to correct the information and resubmit the application.

The internet EIN application is interactive and asks questions tailored to the type of entity you are establishing.

The system provides "help" screens throughout the application process. This means you will no longer have to print the EIN instructions and separately search for answers while requesting an EIN.

When the EIN application process is complete, you have the option to view, print and save your confirmation notice; you no longer have to wait for the IRS to mail it. Third parties authorized by you can also be provided with the EIN, but the third party cannot view, print or save the confirmation notice. Instead, the confirmation notice is mailed to you.

An EIN assigned through internet submission is immediately recognized by IRS systems. You can begin using the EIN immediately for most business purposes.

For tax help regarding other business activity - creating Subchapter S or C corporations, drafting contracts, liquidating a company - you may call Mitchell A. Port at 310.559.5259.

October 29, 2007

Organization Of The IRS

Do you have a tax problem with the IRS but can't easily navigate through the government bureaucracy? Are you considering using a California tax attorney to negotiate around the tax maze? Do you want a glimpse of what the IRS structure is so as get answers to your tax controversy? Well, please keep reading....

In 1998 Congress enacted the IRS Restructuring and Reform Act prompting a comprehensive reorganization and modernization of the IRS. The IRS reorganized itself to closely resemble the private sector model of organizing around customers with similar needs.

The IRS is divided into three commissioner-level organizations to support its structure and ensure accountability:

Commissioner

Specialized IRS units report directly to the Commissioner’s office. The IRS Chief Counsel also reports to the Treasury General Counsel on certain matters.

Commissioner, Internal Revenue — Kevin M. Brown, Acting
IRS Chief Counsel — Donald L. Korb
Appeals — Sarah Hall Ingram, Chief
Taxpayer Advocate Service — Nina E. Olson, National Taxpayer Advocate
Equal Employment Opportunity and Diversity — Diane Crothers, Chief
Research, Analysis, and Statistics — Mark Mazur, Director
Communications and Liaison — Frank Keith, Chief

Deputy Commissioner for Operations Support

The Deputy Commissioner reports directly to the Commissioner and oversees the integrated IRS support functions, facilitating economy of scale efficiencies and better business practices:

Deputy Commissioner for Operations Support — Linda Stiff
Modernization and Information Technology Services — Richard A. Spires, Chief Information Officer
Agency-Wide Shared Services — James P. Falcone, Chief
Mission Assurance and Security Services — Daniel Galik, Chief
Human Capital Officer — Robert Buggs, Chief
Chief Financial Officer — Janice J. Lambert, Chief

Deputy Commissioner for Services and Enforcement

The Deputy Commissioner reports directly to the Commissioner and oversees the four primary operating divisions and other service and enforcement functions:

Deputy Commissioner for Services and Enforcement — Kevin M. Brown
Wage and Investment Division — Richard J. Morgante, Commissioner
Large and Mid-Size Business Division — Deborah M. Nolan, Commissioner
Small Business/Self Employed Division — Kathy Petronchak, Commissioner
Tax Exempt and Government Entities Division — Steven T. Miller, Commissioner
Criminal Investigation — Eileen C. Mayer
Office of Professional Responsibility — Stephen Whitlock, Acting Director

See the basic structure of today's IRS in this picture of the IRS Organizational Chart.

Call Mitchell A. Port for tax help at 310.559.5259.

October 26, 2007

SPOTLIGHT #3: Useful California Business Law And Tax Links

What Government Assistance Is Available to California Employers and California Businesses?

Here's a collection of links to California State government web sites with useful information for businesses in Los Angeles County, Santa Barbara County, Orange County and Ventura County. There is something here for you whether you are already conducting business in California, just starting in Los Angeles, Beverly Hills or Culver City, or expanding to a new state.

Visit the California State web sites here and find helpful information on doing business in California, links for California employers, California taxation and more.

California State Web Site

Doing Business in the State

Business
Permits and Licenses
Secretary of State
California Department of Corporations

Taxation

Board of Equalization
Franchise Tax Board

Employer Links

Department of Industrial Relations
Employment Development Department
New Hire Registry

General

State Agency Index
California Code of Regulations
Department of General Services
Small Business Assistance Center
Small Business and DVBE Services
County Web sites
City Web sites

For doing business and related tax matters in all the other States, the IRS website has terrific information. Go to State Links.

Do you have California business law questions or IRS or California State tax problems? Please call Mitchell A. Port at (310) 559-5259.

October 24, 2007

Trust Fund Tax Payments

When you pay your employees, you do not pay them all the money they earned. As an employer, you have the obligation of withholding taxes from their paychecks. Your employees trust that you pay the withholding to the Treasury by making Federal Tax Deposits. That is why they are called trust fund taxes. The income tax and employees' share of FICA (social security and Medicare) that you withhold from your employees' paychecks are part of their wages you pay to the federal government instead of to your employees.

Through this withholding, your employees pay their contributions toward retirement benefits (social security and Medicare) for current retirees and the income taxes that are owed and reported on their tax returns. Your matching share of FICA along with your employees' trust fund taxes, are paid to the government through the Federal Tax Deposit System. The withheld part of these taxes is your employees' money, and the matching portion is their retirement benefit. Refer to Employment Taxes and the Trust Fund Recovery Penalty (TFRP) for more information.

Employment tax deposits are a current expense. Postponing paying them is not the same as making a late payment on your utility bill. Congress has established penalties for delays in turning over employment taxes to the Treasury. The longer it takes to pay that money, the more it will cost you. Refer to Publication 15, Circular E, Employer's Tax Guide, for more information.

Need answers to questions about your trust fund tax, call Mitchell A. Port at (310) 559-5259.

October 22, 2007

Former IRS District Director Pleads Guilty To $1.3 Million Tax Fraud

No one is above the law – not even an employee of the Internal Revenue Service based in Vista, California. A former Internal Revenue Service (IRS) district director pleaded guilty recently to conspiring to defraud the government through his involvement in a tax fraud scheme promoted by “Renaissance, The Tax People, Inc.” During a hearing before a U.S. District judge, Jesse Ayala Cota admitted defrauding the government of more than $1.3 million and to earning more than $300,000 from his participation in the scheme.

This is an example of someone implying he has “insider information” to help others enrich themselves by buying into his bogus tax avoidance system. However, what he sold was long-term legal and financial problems for those who bought his advice.

Renaissance used Cota’s credentials as a former district director for the IRS to lend the tax fraud scheme legitimacy and to induce people to join and to remain members.

Cota admitted that during his participation in the conspiracy, those involved prepared or had others prepare false federal income tax returns resulting in a tax loss of approximately $1.3 million. Cota also admitted that from 1997 though April 2002, the conspirators, through Renaissance, operated a scheme to defraud the government and individuals by marketing a program to sell illegal tax deductions through false and misleading representations.

Cota also admitted that he and his co-conspirators falsely assured their clients and others that Renaissance’s tax system was legal. Cota acknowledged that a co-conspirator sent an e-mail message to customers falsely asserting that there existed written endorsements from “over 2,000 tax attorneys, enrolled agents and certified public accountants that every strategy contained in the Tax Relief System is absolutely sound, unassailable and proven over the past 40 years.” The e-mail also falsely claimed that “the training offered by Renaissance, the Tax People, through the Tax Relief System . . . was approved for continuing education credit for CPAs in all 50 states.”

Cota faces a potential maximum sentence of five years in prison followed by up to three years of supervised release, a $250,000 fine, and liability for the costs of prosecution. Sentencing is scheduled for January 2008.

For civil tax problems, rather than criminal tax controversies, call Mitchell A. Port at 310.559.5259.

October 19, 2007

SPOTLIGHT #2: The IRS - Income Tax Highlights

Perhaps you’ve had a chance to read the featured article on the history of the Los Angeles Superior Court (probate, civil and criminal) posted on October 15, 2007. Here is another article covering the highlights of the history of the IRS beginning with the enactment of a new income tax in 1862 and its repeal just 10 years later.

1862 - To help pay for Civil War expenses, President Lincoln signed into law a revenue-raising measure. The measure created the nation's first income tax as well as a Commissioner of Internal Revenue. The new law levied a 3% tax on income between $600 and $10,000 and a 5% tax on income of more than $10,000. (Those were the good ol' days.)

1867 - Responding to public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90% of all revenue came from taxes on wine, beer, liquor and tobacco.

1872 - Income tax repealed.

1894....

Continue reading "SPOTLIGHT #2: The IRS - Income Tax Highlights" »

October 17, 2007

New IRS Guidelines For "Allowable Living Expenses"

Just a couple of weeks ago, the Internal Revenue Service issued the 2007 allowable living expense standards. The new standards apply to those of us taxpayers with a tax debt living in California as well as to the rest of the country. Elsewhere in this blog in connection with installment agreements and the Offer In Compromise, I have discussed the so-called “national standards”. These standards enable the Internal Revenue Service to treat all taxpayers in the same region the same way when it comes to paying for allowable living expenses before paying back-taxes.

Allowable living expense standards, also known as collection financial standards, are used to determine the ability of a taxpayer to pay a delinquent tax liability. For purposes of federal tax administration the standards are effective Oct. 1, 2007.

This year the standards have been redesigned to incorporate:

a new category for out of pocket health care expenses;

the elimination of income ranges for national standards for food, clothing and other items;

a nationwide set of tables for national standard expenses, eliminating separate tables for Alaska and Hawaii;

an expanded number of household categories for housing and utilities;

an allowance for cell phone costs in housing and utilities;

equal allowances for first and second vehicles under transportation expenses;

fewer Metropolitan Statistical Areas for vehicle operating costs; and

a separate nationwide public transportation allowance.

To discuss this and other tax problems with a former IRS tax attorney, call Mitchell A. Port at 310.559.5259.

October 12, 2007

Techniques To Record Your Business Transactions

For a lot of reasons, including an IRS audit, a good recordkeeping system includes a summary of your business transactions. Business transactions are ordinarily summarized in ledgers and journals.

A ledger is a book that contains the totals from all of your journals. It is organized into different accounts.

A journal is a book where you record each business transaction shown on your supporting documents. You may have to keep separate journals for transactions that occur frequently.

Whether you keep ledgers and ledgers and how you keep them depends on the type of business you are in. For example, a recordkeeping system for a small business might include the following items:

Employee compensation records

Check disbursements journal

Daily summary of cash receipts

Monthly summary of cash receipts

Business checkbook

Depreciation worksheet

The system you use to record business transactions will be more effective as you follow good recordkeeping practices. Generally, it is best to record transactions on a daily basis. For example, record expenses when they occur, and identify the source of recorded receipts.

The responsibility to prove entries, deductions, and statements made on your tax returns is known as the burden of proof. You must be able to prove (substantiate) certain elements of expenses to deduct them. Generally, you can meet your burden of proof by having the information and receipts (where needed) for the expenses. You should keep adequate records to prove your expenses or have sufficient evidence that will support your own statement. Additional evidence is required for travel, entertainment, gifts, and auto expenses. You generally must have documentary evidence, such as receipts, canceled checks, or bills, to support your expenses.

For expert representation before the IRS or California Franchise Tax Board, please call Mitchell A. Port at 310.559.5259.

October 10, 2007

Keeping Employment Tax Records

Records for employment taxes should be kept for at least four years. These should be available for IRS review. Records should include:

Dates and amounts of tax deposits you made.

Your employer identification number.

Dates of employment.

Amounts and dates of all wage, annuity, and pension payments.

Copies of returns filed.

The fair market value of in-kind wages paid.

Names, addresses, social security numbers, and occupations of employees and recipients.

Records of fringe benefits provided, including substantiation.

Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.

Copies of employees' and recipients' income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).

Any employee copies of Form W-2 that were returned to you as undeliverable.

Amounts of tips reported.

Records of allocated tips.

Consider having your power of attorney, your California tax lawyer, represent you when questions arise concerning your taxes. Call Mitchell A. Port at (310) 559-5259.

October 8, 2007

How Long You Should Keep Records

It is fairly well-settled among tax lawyers and tax accountants that the length of time you should keep a document depends on the expense, action, or event the document records. Generally, you must keep your tax records that support deductions on a tax return or an item of income until the period of limitations runs out for that return.

The period of limitations is the period of time that the IRS can assess additional tax or in which you can amend your tax return to claim a credit or refund. Below is information containing the periods of limitations that apply to income tax returns. The years mentioned below refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.

It is important to note that you should keep copies of your filed tax returns. They help in preparing future tax returns and making computations if you file an amended return.


1. You owe additional tax and situations (2), (3), and (4), below, do not apply to you; keep records for 3 years.

2. You do not report income that you should report, and it is more than 25% of the gross income shown on your return; keep records for 6 years.

3. You file a fraudulent return; keep records indefinitely.

4. You do not file a return; keep records indefinitely.

5. Keep all employment tax records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

6. You file a claim for a loss from worthless securities or bad debt deduction; keep records for 7 years.

7. You file a claim for credit or refund after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

For a more complete explanation, see my blog posting from August 6, 2007.

As you decide whether to keep a document or throw it away, consider whether the records are connected to assets. In other words, keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. You must keep these records to figure any amortization, depletion deduction, or depreciation and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if you received property in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. You must keep the records on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

If you have an existing business confronting a serious IRS tax audit or other examination, a federal or California state tax problem and would like to speak with a California business lawyer and former IRS tax lawyer about serving as your power of attorney, this is an important posting. Call Mitchell A. Port at (310) 559-5259.

October 5, 2007

What Kind Of Records You Should Keep

As a business person operating in California, you may choose any recordkeeping system suited to your business that clearly shows your income and expenses. Generally, 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. Your recordkeeping system should also include a summary of your business transactions. This summary is usually made in your ledgers and accounting journals. Your books must show your gross income, as well as your deductions and credits.

Supporting Business Documents
Purchases, sales, payroll, and other transactions you have in your business will generate supporting documents such as invoices and receipts. Supporting documents include canceled checks, paid bills, sales slips, deposit slips, receipts and invoices. These documents contain the information you need to record in your books. It is important for you to keep these documents because they support the entries in your books and on your tax return. You should keep them in an orderly fashion and in a safe place. For instance, organize them by year and type of income or expense. For more detailed information refer to Publication 583, Starting a Business and Keeping Records.

The following are some of the types of records you should keep:

Continue reading "What Kind Of Records You Should Keep" »

October 1, 2007

Why You Should Maintain Business Records

California business owners must keep records. Indeed, everyone in business must keep records. Good records will help you do the following:

Monitor the progress of your business

Prepare your tax returns

Support items reported on tax returns

Keep track of deductible expenses

Identify source of receipts

Prepare your financial statements

Continue reading "Why You Should Maintain Business Records" »

September 26, 2007

Tax Fraud - Pick Your California Tax Return Preparer Carefully

When the IRS detects the false return, you the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties. This can be a very serious tax problem. Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim false deductions, inflated personal or business expenses, excessive exemptions on returns prepared for their clients or unallowable credits. Preparers may also manipulate income figures to obtain tax credits fraudulently. Sometimes, you may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on your tax returns. While most preparers provide excellent service, be careful when choosing a tax preparer. You are ultimately responsible for all the information on the tax return even if someone else prepares a tax return. Consider the Following When Choosing Your Tax Preparer
No matter who prepares your tax return, you are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form. Use a reputable tax professional who signs your tax return and provides you with a copy for your records. Accept a referral to a preparer from a trusted friend or advisor. Avoid preparers who base their fee on a percentage of the refund amount. Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received? Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months or years after the return has been filed. Accountancy firms that have been around for awhile may continue to be around for awhile longer – at least long enough for your purposes. Review your tax return before and ask questions on entries you don't understand before you sign it. Find out the person’s credentials. Only attorneys, CPAs and enrolled agents can represent you before the IRS in matters including collection and appeals, and audits. Other return preparers may only represent taxpayers for audits of returns they actually prepared. Be careful with tax preparers who claim they can obtain larger refunds than other preparers.

Continue reading "Tax Fraud - Pick Your California Tax Return Preparer Carefully" »

September 24, 2007

Late Filed Tax Returns And IRS Civil Penalties

If your tax problems result from your not having filed your federal income tax return, three specific penalties will likely be assessed by the IRS when you file your delinquent returns. These are the failure-to-pay penalty, the failure-to-file penalty and the estimated-tax penalty.

The non-filing and non-payment penalties can be waived for reasonable cause when circumstances beyond your control explain not filing your tax return.

Unfortunately, at the time you file your delinquent tax returns, more often than not the Internal Revenue Service will calculate and assess these delinquency-related penalties and you must then request that the IRS consider a waiver of the penalty assessment.

Continue reading "Late Filed Tax Returns And IRS Civil Penalties" »

September 6, 2007

501(c)(3) Determinations Recently Revoked

Did you know that the Internal Revenue Service publishes a list of tax-exempt organizations which have lost their tax-exempt status? You can see a recent list by clicking here. Some of those troubled by tax problems are in California. No longer exempt under section 501(c)(3) of the Internal Revenue Code, these organizations no longer qualify to receive tax-deductible contributions under Code section 170(c)(2).

When the Internal Revenue Service revokes recognition of section 501(c)(3) status, Publication 78 does not immediately reflect the change. Instead, the IRS publishes the change in the Internal Revenue Bulletin (IRB), which can be accessed by clicking on the organization’s name here. Here is a cumulative list of such organizations published in the IRB from November 2005 to present. Click here for a page listing revocations back to January 2005.

Want to form a 501(c)(3) and it's equivalent in California? Call Mitchell A. Port for a consultation at (310) 559-5259.

September 4, 2007

Clarifying Income Tax Withholding Requirements

Are you a California taxpayer with a tax problem involving income tax withholding? Have you found that your employer in Los Angeles County, Santa Barbara County, Orange County or Ventura County can be more helpful without having to consult with a tax attorney? The IRS published a list of 13 questions and answers about compliance with income tax withholding requirements. Here they are:

Q1: 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?
A1: Employers are no longer required to routinely submit Forms W-4 to the IRS. However, in certain circumstances, the IRS may direct you to submit copies of Forms W-4 for certain employees in order to ensure that the employees have adequate withholding. You are now required to submit the Forms W-4 to IRS only if directed to do so in a written notice or pursuant to specified criteria set forth in future published guidance.
________________________________________
Q2: 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?
A2: The IRS is making more effective use of information contained in its records along with information reported on Form W-2 wage statements to ensure that employees have enough federal income tax withheld.
________________________________________
Q3: If the IRS determines that an employee does not have enough federal income tax withheld, what will an employer be asked to do?
A3: If the IRS determines that an employee does not have enough withholding, we will notify you to increase the amount of withholding tax by issuing a “lock-in” letter that specifies the maximum number of withholding allowances permitted for the employee. You will also receive a copy for the employee that identifies the maximum number of withholding exemptions permitted and the process by which the employee can provide additional information to the IRS for purposes of determining the appropriate number of withholding exemptions. If the employee still works for you, you must furnish the employee copy to the employee. If the employee no longer works for you, you must send a written response to the IRS office designated in the lock-in letter indicating that the employee is no longer employed by you. The employee will be given a period of time before the lock-in rate is effective to submit for approval to the IRS a new Form W-4 and a statement supporting the claims made on the Form W-4 that would decrease federal income tax withholding. The employee must send the Form W-4 and statement directly to the IRS office designated on the lock-in letter. You must withhold tax in accordance with the lock-in letter as of the date specified in the lock-in letter, unless otherwise notified by the IRS. You will be required to take this action no sooner than 45 calendar days after the date of the lock-in letter. Once a lock-in rate is effective, an employer can not decrease withholding unless approved by the IRS.

Continue reading "Clarifying Income Tax Withholding Requirements" »

August 27, 2007

What Has The IRS' Taxpayer Advocate Done Lately?

The Taxpayer Advocacy Panel (TAP) has released its 2006 Annual Report. TAP is a Federal Advisory Committee made up of citizen volunteers, representing all 50 states, the District of Columbia, and Puerto Rico, dedicated to helping the IRS identify ways to improve customer service and responsiveness to taxpayers needs.

By analyzing a large number of issues, setting priorities and conducting research, TAP has made important recommendations to improve the IRS and reduce taxpayer burden. The panel is a Federal Advisory committee established under the authority of the Department of the Treasury.

The 2006 TAP Annual Report illustrates the partnership between TAP and the IRS. Through this partnership TAP has been able to make positive changes to improve the tax administration system.

This annual report highlights important actions of the Panel and summarizes 58 new recommendations for improvement that TAP generated for IRS consideration in 2006. The Report also provides an update on the status of the 250 recommendations submitted to the IRS since TAP was established in 2002, many of which have been partially or fully implemented.

Take a look at the full report.

For more information about the IRS and tax problems you may have, please contact Mitchell A. Port at (310) 559-5259.

August 20, 2007

I'll See You In Court

How does the IRS determine which cases it will pursue? Why do some tax cases end up in court? In an address to the Tax Court Judicial Conference, former Chief Counsel B. John Williams of the Internal Revenue Service spoke on his approach to designating cases for litigation. You can read his comments to get insight into this aspect of tax administration by clicking here: "Designating Cases for Litigation".

August 17, 2007

Executive Compensation - IRS Audits Fringe Benefits And Perks

California business owners take heed: the Internal Revenue Service published the “Executive Compensation - Fringe Benefits Audit Techniques Guide” giving you a road-map to what it will examine when auditing your executive perks.

Corporate executives in Los Angeles County, Santa Barbara County, Ventura County and Orange County and throughout California often receive extraordinary fringe benefits that are not provided to other employees. New income tax problems arose because of changes in the law.

In 1984, the Internal Revenue Code (“Code”) was changed to include the term “fringe benefits” in the definition of gross income found in Code §61. A fringe benefit provided in connection with the performance of services, regardless of its form, is treated as compensation includible in income under Code §61. Any property or service that an executive receives in lieu of or in addition to regular taxable wages is a fringe benefit that may be subject to taxation.

Whether a fringe benefit is taxable depends on whether there is an exclusion under the law that applies to the benefit. For example, when Code §61 was amended to include the term “fringe benefits”, §132 was added to provide exclusions for certain commonly provided fringe benefits.

Section 132 provides exclusions for working condition fringes, qualified moving expenses, de minimis fringes, no additional cost services, qualified transportation fringes, qualified employee discounts and qualified retirement planning services.

Although fringe benefits are taxable, employers may not treat them as wages for income and employment tax purposes. Employers may classify a taxable fringe benefit under expense accounts other than compensation and thereby not subject the fringe benefit to income and employment taxes.

Continue reading "Executive Compensation - IRS Audits Fringe Benefits And Perks" »

August 13, 2007

CPA In Bakersfield, California, Prohibited From Advising Customers Not To File Tax Returns

After a two-day hearing in Fresno, California, the U.S. District Court for the Eastern District of California recently issued a preliminary injunction against Lowell Baisden, a Certified Public Accountant. The injunction prevents him from promoting his tax scheme.

The California court found that Baisden’s tax scheme involved a plan which encouraged and assisted customers to create corporations into which they had their incomes deposited for the purpose of decreasing their tax liability. The court also found that Baisden prepared tax returns in California which characterized wages as rent, which is not subject to self-employment or employment taxes.

Several of Baisden’s customers are physicians and nurse anesthetists, many of whom have not filed past-due tax returns. According to Baisden’s plan, the customers created real estate and forestry corporations, but almost all of the income reported by the corporations was derived from their income from their jobs in the medical profession. Baisden reported deductions for the corporations for customers’ car expenses, lawn care expenses and expenses related to their personal residences.

The California court also found that Baisden prepared tax returns that identified customers as investors when they were actually physicians or nurses. The tax returns claimed business deductions for non-deductible personal expenses of customers or for which he and his customers did not have supporting documentation. The tax returns he prepared also failed to report compensation to owners of those corporations.

Finally, the court found that Baisden engaged in misconduct by falsely advising his clients not to comply with IRS document and meeting requests, filing meritless requests to delay civil audits, advising clients to make insufficient estimated tax payments, and advising customers not to file lawfully due returns.

Since 2001, the Justice Department has obtained injunctions against more than 230 tax preparers and tax-fraud promoters. More information about these cases is available on the Justice Department Web site. More information is available about the Justice Department’s Tax Division.

If you have a tax controversy you wish to discuss with a California tax attorney, call Mitchell A. Port at 310.559.5259.

August 10, 2007

Recordkeeping

Why Should I Keep Records?

Everyone in business - California businesses as well - must keep records. Keeping good records is very important to your business. This discussion involves advice I give to my clients in Los Angeles County, Ventura County, Orange County and Santa Barbara County, California. Good records will help you do the following:

Monitor the progress of your business

Keep track of deductible expenses

Identify source of receipts

Prepare your financial statements

Support items reported on tax returns

Prepare your tax returns

Continue reading "Recordkeeping" »

August 8, 2007

Why Pay Taxes? - The Truth about Frivolous Tax Arguments

Here’s an interesting read. Published by the IRS and read by tax attorneys like me as well as by others, The Truth About Frivolous Tax Arguments addresses some of the more common false "legal" arguments made by individuals and groups who oppose compliance with the federal tax laws.

These arguments are grouped under several general categories, with variations within each category. Each contention is briefly explained, followed by a discussion of the legal authority that rejects the contention. The second section deals with frivolous arguments encountered in collection due process cases. The final section illustrates penalties imposed on those pursuing frivolous cases.

Continue reading "Why Pay Taxes? - The Truth about Frivolous Tax Arguments" »

August 7, 2007

How Long Should You Keep Your Tax Records?

That question comes up often with my clients in Los Angeles County, Orange County, Santa Barbara County and Ventura County. It isn’t exactly a big tax problem for which a Los Angeles tax attorney like myself needs to offer tax help. But the length of time a document must be retained depends on the action, expense, or event the document records. Generally, records that support an item of income or deductions on a tax return must be retained until the period of limitations for that return runs out.

PERIOD OF LIMITATIONS DEFINED:

The period of limitations is the period of time in which a tax return can be amended to claim a credit or refund, or that the IRS can assess additional tax.

I've listed below the periods of limitations that apply to income tax returns. (Unless otherwise stated, the years refer to the period after the return was filed. Returns filed before the due date are treated as filed on the due date.)

KEEP RETURNS FOR 3 YEARS IF:

If you file a claim for credit or refund after you file your return; keep records for 3 years from the date you filed your original return or 2 years from the date you paid the tax, whichever is later.

KEEP RETURNS FOR 4 YEARS IF:

It is an employment tax record. Keep all such records for at least 4 years after the date that the tax becomes due or is paid, whichever is later.

KEEP RETURNS FOR 6 YEARS IF:

You do not report income that you should report, and it is more than 25% of the gross income shown on your return.

KEEP RECORDS FOR 7 YEARS IF:

You file a claim for a loss from worthless securities or bad debt deduction;

KEEP RECORDS INDEFINITELY IF:

You have filed a fraudulent return, or

You do not file a return;

BUT WAIT, THERE'S MORE:

The following questions should be applied to each record as you decide whether to keep a document or throw it away.

PAY SPECIAL ATTENTION TO RECORDS CONNECTED WITH PROPERTY:

Records relating to property must be retained until the period of limitations expires for the year in which you dispose of the property in a taxable disposition.

Those records are needed to figure any depreciation, amortization, or depletion deduction and to figure the gain or loss when you sell or otherwise dispose of the property.

Generally, if property is received in a nontaxable exchange, your basis in that property is the same as the bases of the property you gave up, increased by any money you paid. Records must be retained on the old property, as well as on the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition.

THE TIME IS UP. NOW WHAT?

Even when records are no longer needed for tax purposes, they should be retained until it is certain they will not be needed for other purposes. For example, an insurance company or creditors may require the records to be held for a period of time beyond what the IRS requires.

If you have concerns about this issue and other tax controversies and tax problems, please call Mitchell A. Port at (310) 559-5259 to discuss the tax help you need.

August 3, 2007

What You Can Do If You Owe Tax Of $25,000 Or Less

The Online Payment Agreement (OPA) allows eligible individuals to apply for an installment agreement to pay off their tax liability. To qualify, you must have your bill from the IRS and have filed all required tax returns. You must owe less than $25,000 and be able to pay the entire liability within 60 months.

Paying your taxes in full and on time avoids unnecessary penalties and interest. However, if you cannot pay your taxes in full, you may request a payment agreement.

This application will allow you or your authorized representative (Power of Attorney) to self qualify, apply for an installment agreement, and receive immediate notification of approval.

There may be times when you will need to mail in paperwork or speak with us before we can determine your eligibility for an installment agreement. If that is the case, the OPA application will give you an address or a toll-free phone number to reach the IRS.

Continue reading "What You Can Do If You Owe Tax Of $25,000 Or Less" »

August 1, 2007

Attention All Tax Non-Filers

My clients in Los Angeles County, Ventura County, Santa Barbara County and Orange County who are “taxpayers” present tax problems in two flavors: those who don’t pay their tax and those who don’t file their tax returns. Some tax problems involve both non-filers and non-payment.

As a California tax attorney involved with tax controversies, I have a checklist when helping the client who is a non-filer:

Create a workable plan to deal with all aspects of the client’s non-filing.

Instruct the client to obtain all tax-filing information.

Determine if Automated Substitute for Return (ASFR) assessments have been made or attempted by IRS.

Retain the services of a competent accountant to prepare necessary returns.

Obtain copies of last-filed tax returns.

Advise the client to consider filing status decisions in the preparation of tax returns.

Have the client prepare drafts of 433-A/B Financial Disclosure Forms.

Review with client collection alternatives: installment agreements, currently uncollectable status.

Consult with the Revenue Officer if the taxpayer’s delinquent account has been assigned to one.

Contact the IRS, if necessary, to obtain unreported income documents or request tax transcript.

Respond appropriately to all IRS correspondence requesting delinquent filed tax returns.

Prepare Form 843 for filing incident to Penalty Appeal Procedure, if necessary.

Review with client approximate likely penalty assessments.

Prepare factual grounds for reasonable cause waiver.

Review new procedures for filing of offers in compromise.

Refer client to bankruptcy attorney, if appropriate and taxes appear dischargeable.

Insure that the client remains current in order to qualify for collection alternatives. This includes making estimated tax payments and tax deposits as required by law and filing all extension requests and current returns. (Note: Under current offer in compromise procedures, a client who is not current will not have his offer returned as “non-processable” but will be contacted and given the opportunity to correct the situation, if possible.)

If you face the tax problem of having unfiled returns or unpaid federal or California State taxes, call Mitchell A. Port at (310) 559-5259 for tax help.

July 30, 2007

Initiation To Understanding IRS Guidance

When I was employed at a tax lawyer at the Office of Chief Counsel in Washington, D.C., I was involved in tax litigation. It was left to others to take the specifics of laws enacted by Congress and translate them into detailed regulations, rules and procedures.

Seven of the most common forms of guidance regarding IRS tax administration are explained briefly here.

Private Letter Ruling

A private letter ruling or PLR is issued in response to a written request submitted by a taxpayer and is binding on the IRS if the taxpayer fully and accurately described the proposed transaction in the request and carries out the transaction as described. PLRs are generally made public after all information has been removed that could identify the taxpayer to whom it was issued. A PLR is a written statement issued to a taxpayer that interprets and applies tax laws to the taxpayer's specific set of facts. A PLR is issued to establish with certainty the federal tax consequences of a particular transaction before the transaction is consummated or before the taxpayer's return is filed. A PLR may not be relied on as precedent by other taxpayers or IRS personnel.

Revenue Ruling

Revenue rulings are published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. A revenue ruling is the conclusion of the IRS on how the law is applied to a specific set of facts and is an official interpretation by the IRS of the Internal Revenue Code, related statutes, tax treaties and regulations. For example, a revenue ruling may hold that taxpayers can deduct certain automobile expenses.

Revenue Procedure

A revenue procedure is also published in the Internal Revenue Bulletin for the information of and guidance to taxpayers, IRS personnel and tax professionals. A revenue procedure is an official statement of a procedure that affects the rights or duties of taxpayers or other members of the public under the Internal Revenue Code, related statutes, tax treaties and regulations and that should be a matter of public knowledge. While a revenue ruling generally states an IRS position, a revenue procedure provides return filing or other instructions concerning an IRS position. For example, a revenue procedure might specify how automobile expenses should be computed by those entitled to the deduction by applying a certain mileage rate in lieu of calculating actual operating expenses.

Continue reading "Initiation To Understanding IRS Guidance" »

July 26, 2007

Make Designated 100 Percent Penalty Tax Payments

How does the Internal Revenue Service apply partial payments made by a California business entity (or any other State entity) before January 1, 2003 on its Form 941 employer tax liability where the Trust Fund Recovery Penalty (“TFRP”) liability has been assessed and the Letter 1153 (DO) has been sent to the responsible person before June 19, 2000?

Partial payments made by businesses in Los Angeles County, Santa Barbara County, Ventura County or Orange County, California to the IRS without written direction to designate payments to the trust fund portion for the most recent tax period will be applied by the Service “in the order of priority that the Service determines will serve its best interest.” (emphasis added).

Generally, the order of priority that the IRS determines will serve its best interest means that undesignated payments are applied first to the liability with the shortest or most imminent statute of limitations for collections, then to the liability with the next shortest statue and so on and so forth. The tax period or liability with the shortest collection statute is not always the earliest or oldest tax period or liability.

A voluntary partial payment made by a California business entity before January 1, 2003 on its Form 941 employer tax liability, where the TFRP liability has been assessed and the Letter 1153 (DO) has been sent to the responsible person before June 19, 2000, will be applied pursuant to the taxpayer’s written instructions.

A partial involuntary and/or undesignated payment made under the same circumstances will be applied first to the non-trust fund portion of tax, then to assessed lien fees and collection costs, then assessed penalties, then assessed interest, then accrued penalties and accrued interest, and then finally to the trust fund portion of the tax.

Continue reading "Make Designated 100 Percent Penalty Tax Payments" »

July 14, 2007

IRS Summertime Tax Tip

Gambling winnings are fully taxable and must be reported on your tax return. All gambling winnings must be reported regardless of whether any portion is subject to withholding. In addition, you may be required to pay an estimated tax on your gambling winnings. For information on tax withholding on gambling income, refer to Publication 505, Tax Withholding and Estimated Tax. The IRS has a terrific article on gambling income which you can read in the IRS Newsroom.

When the unpaid tax on gambling winnings is a serious tax collection problem, call tax attorney Mitchell A. Port at 310.559.5259.

July 13, 2007

Protecting A New Business From Creditors' (the IRS) Claims

In an IRS Office of Chief Counsel Release 200036045, dated May 16, 2000, two issues were raised:

First: Whether the terms of a trust prevent the attachment of the federal tax lien.

Second: What collection device, if any, should be used to collect from the taxpayer's interest in the trust.

The Chief Counsel’s Release arrived at two conclusions:

First: The taxpayer has a property interest in the trust subject to the federal tax lien, despite the spendthrift, discretionary, and remainder interest provisions. The Internal Revenue Service believed that this property interest is limited to the payments to be made as provided for by the trust.

Second: A suit to foreclose the federal tax lien would be the collection action, if any, that the Internal Revenue Service would recommend.

The Chief Counsel’s Release draws a distinction between fully discretionary trusts and those requiring payments for support: “Where a trust gives the trustee uncontrolled, absolute discretion with respect to the distributions, if any, made to a beneficiary, the beneficiary has no basis to compel the trustee to make a distribution. Therefore, he does not have any interest which is subject to the federal tax lien. On the other hand, a beneficiary does have a right to property subject to the federal tax lien where, under state law, he can force the trustee to act, as is the case with a support trust.”

Strategic Planning Lessons Learned:

First: A trust created by parents or other third parties can help to protect business assets from creditors and estate taxation.

Second: Giving a trust beneficiary the power to withdraw assets for his or her support makes the trust assets subject to an IRS lien for outstanding taxes.

If you want to discuss your own situation with a California tax attorney, call Mitchell A. Port at (310) 559-5259.

July 9, 2007

Innocent Spouse Relief Made Easier

Attention all California taxpayers in Los Angeles County, Ventura County, Santa Barbara County and Orange County: The Internal Revenue Service announced the other day that it redesigned Form 8857, Request for Innocent Spouse Relief. The intent behind the redesign is to help reduce follow-up questions and reduce the burden on taxpayers. Perhaps your tax problem can be resolved by qualifying for innocent spouse relief. Please review my post made last Valentine's Day, February 14th, entitled "California Taxpayers - Innocent Spouse Relief" for a more thorough discussion on this hot topic.

The form will ask more questions initially. The IRS believes that by collecting critical information early in the process, that will mean faster processing of the request. Previously, Form 12510, Questionnaire for the Requesting Spouse, was separate from Form 8857. The redesign will combine and streamline the two forms. As the IRS believes with most forms it redesigns, this redesigned form will be easier to understand and complete and will help educate us about the process.

The new design will eliminate an estimated 30,000 follow-up letters annually. This will result in reduced burden, quicker responses to taxpayers and less cost to the government. The revisions were based on suggestions from an IRS process improvement team.

When you and your spouse file a joint return, both of you are jointly and individually responsible for the tax. Innocent Spouse relief provides an opportunity for one of you to be relieved from the joint debt under certain circumstances. If you believe that only your spouse or former spouse should be responsible for the tax, you can request relief from the tax liability.

Speak to a qualified California tax attorney about how you might qualify for this relief. Call Mitchell A. Port at (310) 559-5259.

June 23, 2007

Payroll Tax Fraud War Stories

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

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

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

Continue reading "Payroll Tax Fraud War Stories" »

June 19, 2007

Your Tax Lawyer And The IRS - Powers Of Attorney

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

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

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

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

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

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

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

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

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

June 16, 2007

Beware! New E-mail Tax Scams

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

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

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

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

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

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

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

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

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

June 6, 2007

For Fun In The California Sun

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

June 4, 2007

Offer In Compromise Revised - Tax Help Made Easier

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

Continue reading "Offer In Compromise Revised - Tax Help Made Easier" »

June 1, 2007

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

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

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

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

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

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

Does the activity make a profit in some years?

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

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

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

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

Has the taxpayer changed methods of operation to improve profitability?

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

Do you depend on income from the activity?

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

May 29, 2007

Tax Season Sets New Records

New records were set for the number of returns e-filed by home computer users, the number of balance-due returns filed electronically and the number and amount of direct-deposit refunds. Among the highlights of new statistics recently released:

A record 22 million taxpayers e-filed from a home computer, up 11 percent over the same time last year and eclipsing 2006’s year-long total of 20.3 million.

The number of balance-due returns filed electronically surged 14.2 percent to a record 9.4 million. For all of last year, almost 8.9 million balance-due returns were filed electronically.

The over 76.7 million e-filed returns accepted through May 4 topped the more than 73.2 million electronically-filed returns received for all of 2006. It’s also an 8.9 percent increase over last year at this time, with most of the increase coming in March and April. Based on current trends, the agency expects about 58 percent of all returns to be e-filed this year. Taxpayers who filed for extensions can use e-file until Oct. 15.

The average refund this year is $2,255, a 2.5 percent increase over last year at this time. More than 59 million refunds, a new record, were deposited directly into savings, checking and brokerage accounts, representing more than 61 percent of all refunds issued. Those who choose direct deposit get their refunds at least a week sooner. Available year-round, direct deposit eliminates the chance of a lost, stolen or undeliverable refund. Taxpayers claiming refunds who have not yet filed may want to consider using direct deposit to get a head start on their 2007 IRA contribution.

This filing season visits to IRS.gov, the agency’s popular Web site, climbed almost 10 percent to more than 140 million.

Nearly $158 billion have been directly deposited so far this year, an 11 percent jump over last year at this time. This surpasses the 2006 year-end total of $149.2 billion.

These statistics are neatly layed out in this chart: Download file

May 24, 2007

Leading Law Firm Pays IRS $39.4 Million Penalty

Sidley Austin LLP Pays IRS $39.4 Million Penalty


The IRS reached a settlement yesterday with the law firm of Sidley Austin LLP, which paid a civil tax shelter promoter penalty of $39.4 million. The penalty results from the firm’s failure to comply with tax shelter registration requirements and promotion of abusive tax shelters.

The firm issued opinions in connection with potentially abusive tax shelters to over 700 high-net worth individuals and corporations. Some of the packages marketed to these individuals included listed transactions such as BOSS (Bond & Option Sale Strategy), variants of the so-called “Son of BOSS” shelter that went by names of BLIPS (Bond Linked Issue Premium Structure), COBRA (Currency Options Bring Reward Alternatives), and COINS (Currency Option Investment Strategy), and others that went by the names of OPIS (Offshore Portfolio Investment Strategy), FLIP (Foreign Leveraged Investment Program), and POPS (Partnership Option Portfolio Securities).

The firm also issued tax opinions in connection with certain potentially abusive non-listed transactions involving distressed assets, bond and equity strips and lease strips.

“Sidley Austin has paid a significant penalty for its role in promoting abusive tax shelters,” said IRS Acting Commissioner Kevin M. Brown. “The firm has also taken concrete steps to prevent a recurrence of this behavior in the future, which they have agreed to maintain going forward. We appreciate their actions and their cooperation in our ongoing investigations.”

May 22, 2007

Tax Court Trumps Court Of Federal Claims Says U.S. Supreme Court

A 1986 amendment to the Internal Revenue Code §6404(e)(1) permits the U.S. Treasury Secretary to abate interest that accrues on unpaid federal income taxes if the interest assessment is attributable to IRS error or delay.

Later, the federal courts uniformly held that the Secretary’s decision not to abate was not subject to judicial review. In 1996, Congress added what is now §6404(h), which states that the Tax Court has “jurisdiction over any action brought by a taxpayer who meets the requirements referred to in section 7430(c)(4)(A)(ii) to determine whether the Secretary’s failure to abate . . . was an abuse of discretion, and may order an abatement, if such action is brought within 180 days after the date of the mailing of the Secretary’s final determination not to abate . . . .” §6404(h)(1).

The IRS denied petitioner Hincks’ request for abatement of interest assessed in 1999 for the period March 21, 1989, to April 1, 1993. The Hincks then filed suit in the Court of Federal Claims seeking review of the refusal to abate.

The court granted the Government’s motion to dismiss, and the Federal Circuit affirmed, holding that §6404(h) vests exclusive jurisdiction to review interest abatement claims in the Tax Court. The Supreme Court held that the Tax Court provides the exclusive forum for judicial review of a failure to abate interest under §6404(e)(1).

May 21, 2007

Robert L. Schulz And “We The People” Sued By Feds To Stop Tax Scam

The Tax Scheme Cost U.S. Treasury $21 Million.

The Justice Department has sued to stop Robert L. Schulz from selling a tax fraud scheme said to have cost the U.S. more than $21 million. Also named in the suit are two corporations, We the People Foundation for Constitutional Education Inc., and We the People Congress Inc.