Topics Covered:

1. Tax Time – Why we pay.
2. Top Tax Write-Offs That Could Get You In Trouble With The IRS – Part 1: Travel Expenses, Cell Phones, Home Office Deduction and Home Computers.
3. Top Tax Write-Offs That Could Get You In Trouble With The IRS – Part 2: Personal Expenses, Guard Dogs, Uniforms and Wages Paid To Family.
4. Answering Your Questions:

• When Should You Lawyer Up When Dealing With the IRS?
• Is It True That Taxpayers With Legal Counsel are Treated Better?
• Why Should I Only Use A Tax Attorney For Representation In A Criminal Tax Investigation?

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Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.

I have a lot to cover today in the world of taxes and helping me out today will be my associate attorney Amy Spivey who will be calling in later in today’s show.

So It’s Tax Time – Why do we pay?

Well I must tell you how it began with an earthquake. What hit San Francisco in 1906 was one of the worst natural disasters in American history. Once the water mains broke, there was no way to fight the dozens of fires caused by ruptured gas mains, except by dynamiting buildings in the fire’s path, which made things worse. The fires lasted for days. More than 3,000 people died, including the city’s fire chief, who fell two stories after the dome of the California Hotel crashed into the fire station. Most of the city was destroyed. Economic aftershocks were felt as far away as London. Twelve insurance companies went bankrupt, and, after a gold shortage and a doomed scheme to corner the copper market, the Knickerbocker, the second-largest trust in New York, failed, setting off the Panic of 1907. The New York Stock Exchange nearly collapsed. So did the United States Treasury.

The Panic of 1907 contributed to the passage of the Sixteenth Amendment, in 1913, which granted Congress the right to levy an income tax, and to the establishment of a central banking system, the Federal Reserve. It’s hard to believe that both the Sixteenth Amendment and the Federal Reserve have now been around for 102 years.

Taxes dominate domestic politics and as expected all of the 2016 presidential hopefuls are no exception to this. But this was not always the case. Since the 1970’s, almost all of that talk has been about cuts, which ought to be surprising, because more than 90% of Americans receive social or economic security benefits from the federal government. Americans, though, find it easier to see what they pay, than what they get — not because they aren’t paying attention but because the case for taxation is so seldom made.

Oliver Wendell Holmes, Jr., said, nearly a century ago “Damning taxes is a piece of cake. It’s defending them that’s hard because taxes are what we pay for civilized society,” In case you did not know this statement made by Mr. Holmes’ is engraved on the front of the I.R.S. Building in Washington. No one’s said it better since. And that, right there, is the problem.

The concept of taxes, which dates to the beginning of recorded history, are payments made to a ruler in exchange for military protection, public services, and civil order. In the ancient world, taxes were paid in kind: landowners paid in crops or livestock; the landless paid with their labor. Taxing trade made medieval monarchs rich and funded the early-modern state. Then a series of political revolutions began that led to monarchs ceding the power to tax to legislatures. One of those revolutions lies behind our American independence.

But let’s go back to the earthquake. In 1906, the day the earthquake hit and the fires began, people raced to the San Francisco Bay and boarded ferries to escape the flames. A handful of men rushed to the banks, but before long all that was left of the city’s deposit and lending institutions, aside from rubble and ashes, were their fireproof steel vaults: red hot, smoking, and locked.

During the recession that followed the panic that followed the earthquake, the number of people applying for poor relief in New York tripled; in Philadelphia, it increased nearly fivefold. A purpose of a federal reserve was to allow the government to halt a panic by shoring up faltering banks. A purpose of a federal income tax was to undergird the Treasury with a stable source of revenue. But it had another purpose, too. The richest one per cent of households, which had held about a quarter of the nation’s wealth in 1890, now held more than a third. The new income tax was intended to answer populist rage at the growing divide between the rich and the poor. In the election of 1908, both parties favored an income tax—Democrats hoping to close that gap, Republicans hoping to quiet that rage.

Republicans won. The new President, William Howard Taft, who had been a federal judge (and who went on to serve as Chief Justice), wanted to avoid signing a law that would end up going back to the Supreme Court. So he decided to support a constitutional amendment. It went to the states for ratification in 1909.

Constitutional amendments are notoriously difficult to ratify. The Sixteenth Amendment was not. Once it got out of Congress, it passed, handily, in 42 of 48 states, six more than required, and took effect on February 25, 1913. The House voted on an income-tax bill in May; Woodrow Wilson signed it in October. Its highest rate was 7%. The next year, the Bureau of Internal Revenue printed its first 1040. The form was three pages, the instructions just one.

Taxes have got a lot hairier since. The Revenue Act of 1916, anticipating the United States’ entry into the war in Europe, raised taxes on incomes, doubled a tax on corporate earnings, eliminated an exemption for dividend income, and introduced an estate tax and a tax on excess profits. Rates on the wealthiest Americans began to skyrocket, from 7% to 77%, but most people paid no tax at all. By 1918 only about 15% of American families had to pay personal income taxes, and the tax payments of the wealthiest 1% of American families accounted for about 80% of the revenues.

Remember, taxes are what we pay for civilized society, for modernity, and for prosperity. The wealthy pay more because they have benefitted more. Taxes, well laid and well spent, insure domestic tranquility, provide for the common defense, and promote the general welfare. Taxes protect property and the environment; taxes make business possible. Taxes pay for roads and schools and bridges and police and teachers. Taxes pay for doctors and nursing homes and medicine. During an emergency, like an earthquake or a hurricane, taxes pay for rescue workers, shelters, and services. For people whose lives are devastated by other kinds of disaster, like the disaster of poverty, taxes pay, even, for food.

What’s surprising, given how much money and passion have been spent to defeat a broad-based, progressive income tax over the past century, and how poorly it has been defended, is that it has endured. In addition, the IRS which is government agency charged with administering the tax laws and enforcing compliance has become one of the largest and most powerful government agencies. Let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble! And it all started with an earthquake in San Francisco.

Lest we not forget on October 17, 1989 – a 6.9 magnitude earthquake rocked the San Francisco Bay Area. Remember history does have a way of repeating itself.

Well it’s time for a break but stay tuned because we are going to tell you the top tax write-offs that could get you in trouble with the IRS.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our Walnut Creek office is my associate attorney, Amy Spivey.

Chit chat with Amy

Jeff states: Top Tax Write-Offs That Could Get You In Trouble With The IRS – Part 1 of 2

From travel expenses to paying wages to family members, there’s no limit to what people will try to write off at tax time for the sake of their business. But where do you draw the line? Which write-offs you’re trying to write off go too far?

Amy opens up with Tax Write-Off: Travel Expenses
One of the top write-offs scrutinized by the IRS is Travel Expenses. Traveling out of town to attend a business convention should be straight-forward but what if you travel to see a show along with one of your clients?  And what if you and your client each bring their spouse?  You can see how it becomes harder to justify that this has a business purpose but if you can it all is deductible including 50% of the related meals.

Jeff states:

• Key Issue: You can deduct most of your business travel expenses on your tax return; however, there are some limitations and considerations that the IRS sets on what constitutes business travel. According to the IRS, “travel expenses are the ordinary and necessary expenses of traveling away from home for your business, profession, or job.” However, for these expenses to be deductible, you must be away from your tax home (the town where your business is located) for a period longer than one day’s work, and you must be away overnight and the travel is reasonably related to your business.       Keep in mind that any related meals and entertainment will only be 50% deductible.

• How to Do It Right: The more accurate your records are, the more likely they’ll be accepted and validated by the IRS if you become involved in an audit situation. Start making it a point with your next business trip to collect all your receipts and put them in an envelope or one of those extra zip-lock bags you happened to bring with you. Label the envelope or zip-lock bag with the trip name and date and file it so that now you have the backup should it be questioned later.

Amy opens up with Tax Write-Off: Cell Phone Bill
The IRS recognizes that cell phones are used to conduct business.  The problem is many people have ditched the ol’ land line and solely use a cell phone not only for business but all telephonic communication.  Once you start doing that, your deduction for cell phone charges could be reduced or even eliminated because of  the personal use conducted on the same phone line.

Jeff states:

• Key Issue: Unlike the past when cell phones were good just for talk, many people now use them to text and search on the internet and even as a personal computer or organizer.  Also, the cell-phone companies have come out with various plans where multiple phones and features are bundled into single plans.  All of this has resulted in the IRS scrutinizing the deductibility of cell phone charges.  Keeping a copy of your bills and even plan terms becomes important to demonstrate what portion actually relates to your business.

• How to Do It Right: Grab your last cell phone bill and look up the current terms of your plan (it may have changed since you first got your last cell phone or started service). Cell phones are classified as “listed property” by the IRS requiring that you keep detailed records of their business use. While a phone on a land line is not listed property, I suggest that you have a second land line which is exclusively used for business as the IRS will not allow any allocation of business use of the cost of a single phone in your home to your home office. The problem in determining what amount of these expenses can be allocated to business use is a lot more arbitrary now a days because of the bundling of services (phone, internet, cable) on one bill by providers and the marginal costs of adding that additional line or service which you intend to use for business. Example, if the extra cost for adding an additional cell phone with unlimited talk, text and data to your plan which you intend to exclusively use for business is $10.00, the IRS could argue that of your $300.00 monthly cell phone bill, only $10.00 should be deductible.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Amy opens up with Tax Write-Off: Home Office

Going back to times before the 1990’s it was uncommon to work out of your house so home office deductions were not as popular back then.  But with the advances in technology and new businesses that do not require a formal traditional brick and mortar presence, home offices are more prevalent.  Since claiming a home office deduction can still be a trigger for an audit, you need to make sure you have done your homework to back this up.

Jeff states:

• Key Issue: Home office space is the exact square footage area in your home dedicated exclusively to the running of your business.

• How to Do It Right: Get an accurate floor plan of your residence and the exact square footage of the space exclusively used for business. Once you figure out the percentage of your home office compared to your overall home, then you can go back to your heating bills, electric bills and all other bills that go to supporting your home, and figure out the amount you can deduct for running your business.

Jeff states – the rules and recordkeeping for the home office deduction apply the same whether you are a home-owner or you are a home-renter.

For taxable years starting on, or after, January 1, 2013 (filed beginning in 2014), you now have a simpler option for computing the business use of your home (IRS Revenue Procedure 2013-13, January 15, 2013). The standard method has some calculation, allocation, and substantiation requirements that are complex and burdensome for small business owners. This new simplified option can significantly reduce recordkeeping burden by allowing a qualified taxpayer to multiply a prescribed rate by the allowable square footage of the office in lieu of determining actual expenses.

Highlights of the simplified option:

• Standard deduction of $5 per square foot of home used for business (maximum 300 square feet). That means the maximum amount of home-office deduction is $1,500.00.
• Allowable home-related itemized deductions claimed in full on Schedule A. (For example: Mortgage interest, real estate taxes).
• No home depreciation deduction or later recapture of depreciation for the years the simplified option is used.

This simplified option does not change the criteria for who may claim a home office deduction. It merely simplifies the calculation and recordkeeping requirements of the allowable deduction.

Amy opens up with Tax Write-Off: Home Office Computer

By now you should be seeing a theme that mixing your business world with your personal life does make it harder to determine and justify how much in various expenditures are business related and therefore deductible.  Usage of computer at you home is another one of those classic examples where you really should  avoid using your home office computer for personal tasks.

Jeff states:

• Key Issue: If there is the only one computer in your house, how are you able to deduct its cost when it is not solely used it for business purposes?

Computers are “listed property.” These are items that can easily be used for personal as well as business purposes–for example, cars and certain other vehicles, computers, and any other property generally used for entertainment, recreation, or amusement such as VCRs, cameras, stereos, and camcorders.

• How to Do It Right: The problem with having one computer in the house is similar to what we discussed about having one land line in the house.  The nest way to solve that is to purchase a second computer device such as a laptop or tablet and dedicate that device for personal use. You then use your desktop computer solely for business. This way you need not worry about the business use of your desktop coming under scrutiny in an IRSaudit.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned because after the break we are going to tell you more of the top tax write-offs that could get you in trouble with the IRS.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

And on the phone from our Walnut Creek office I have my associate attorney, Amy Spivey.

Jeff states: From travel expenses to paying wages to family members, there’s no limit to what people will try to write off at tax time for the sake of their business. But where do you draw the line? Which write-offs you’re trying to write off go too far?

Amy opens up with Tax Write-Off: Personal Expenses
By now you should be seeing a theme that mixing your business world with your personal life does make it harder to determine and justify how much in various expenditures are business related and therefore deductible.  So you need to be careful.

Jeff states:

• Key Issue: That’s right.  You simply can’t deduct personal expenses which have no relation to your business.  But where do you draw the line when there is some relationship to your business?

• How to Do It Right: Getting an opinion from a tax professional as to whether an expense is deductible for your business makes most sense. The cost of high-speed internet service should be deductible but you can’t deduct such homecare services as gardening, landscaping and tree removal simply because you work out of a home office.

Amy opens up with Tax Write-Off: Office Setup & Artwork

This is another category business owners can easily get into trouble with if they’re not careful. Here business owners claim that the purchase of expensive artwork or antiques is to brighten up the office and impress their clients. The IRS seems more willing to accept this as a deductible business expense when the item purchased is physically used in your business and can wear-out and get used over time.

Jeff states:

• Key Issue: This goes back to the concept that business expenses to be deductible must be ordinary and necessary and reasonable in amount. You can’t fully deduct expenses that do not meet these standards.

• How to Do It Right: When it comes to high-end furniture or antiques or fine art work, getting an opinion from a tax professional as to whether an expense is deductible for your business makes most sense.       You have to look at this on a case-by-case basis. What may be ordinary and necessary and reasonable for one business may not be so for another.

Amy opens up with Tax Write-Off: Dogs & Other Pet Creatures

Dogs and other pet creatures could be a legitimate write-off if they have a valid business purpose and other requirements are met.  The most straight forward example would be that of a guard dog.  It helps when that dog resides fully at the premises of the business guarding the premises and is a breed that is typical for such a job (I don’t think that little toy poodle would qualify but a German Shepherd would).

Jeff states:

• Key Issue: You will need to document what portion of the dog’s total time is devoted to “guard-dog” duty as that percentage of business use would then be applied to the expenses of the dog.

• How to Do It Right: Knowing the percentage of time devoted to guard-dog duty and applying this business use percentage should allow you to deduct a portion of the expenses relating to the dog. You may even be able to depreciate the dog over a certain term just like you would with any capital asset.

Jeff states, with regards to other pet creatures – Having a high tech salt water aquarium in the lobby of your office could be deductible but put that same unit in your home office – not likely. Remember what may be ordinary and necessary and reasonable for one business may not be so for another. So getting an opinion from a tax professional as to whether an expense is deductible for your business makes most sense.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Amy opens up with Tax Write-Off: Uniforms or Costumes

If you buy a smart new suit for your profession or uniforms for your trade, it might seem these are obvious work expenses and valid tax deductions. But this is not necessarily so according to the IRS. Work clothes that can double as street or evening clothes are no more deductible than anything else in your closet. To claim a deduction for buying clothes, the clothes have to be mandatory for your job and unsuitable for everyday wear.

Jeff states:

• Key Issue: Is the costume or uniform something suitable you could wear outside your job?  If yes, the IRS will not let you write it off.  A perfect example of some rather unusual clothing you can write-off would be a clown suit. But a new suit would not be deductible since you can wear it outside of your work environment and it would be considered “suitable” in that environment.

• How to Do It Right: Well regarding that new suit, if it happened to be something that included a patch or embroidery of your business, your could make the argument that it is a business expense even though  you can wear it other places outside of your work environment because in that case you are advertising your business.   Entertainers have a harder time but if their clothing purchases are used only in there performers it would be hard for the IRS to maintain that there was a personal use component.  In these cases a picture is worth a thousand words. Likewise if the clothing somehow identifies or promotes your business, it should also qualify as a write-off. A good example is you order polo knit shirts that have your company’s name embroidered on them. Despite the fact that a polo knit shirt is something acceptable to wear outside your work environment, the addition of your company’s now can make it deductible.

Amy opens up with Tax Write-Off: Paying Wages To Family.

The IRS does pay close attention to a business owner who employs a spouse, child or close relative. Many self-employed people want to hire family members to work for them. But as with many things in life, there’s a right way and a wrong way to do this. Doing it correctly not only promotes family togetherness, it can also create tax savings for you because when you hire a family member your business can take a deduction for reasonable compensation paid to this employee, which consequently reduces the amount of taxable business income that flows through to you.

Jeff states:

• Key Issue: Is the compensation of these family members based on their responsibilities of their job,  their age and experience? You should be paying them the same reasonable salary you would pay anyone else doing the same job. The key here is that you meet the standard of “reasonable compensation” because the IRS can question compensation paid to a family member if the amount doesn’t seem reasonable given the services actually performed.

• How to Do It Right: Just like any other employee, you should maintain a personnel file and include them on your worker’s compensation coverage. Include them with your other employees on the business’ employment tax returns and issue W-2’s at the end of each year. As with wages paid to all employees, wages paid to family members are subject to withholding taxes. The payment of the employer-share of these taxes will be a deductible business expense for tax purposes.  Of course that portion of the taxes withheld from the employees’ paychecks are not deductible.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

OK Amy, what questions have you pulled from the kahntaxlaw inbox for me to answer?

William from Encino asks: When Should You Lawyer Up When Dealing With the IRS?

Answer: If you receive a notice from the IRS regarding small mistakes and omissions with your income tax return, you can probably deal with the IRS directly or by giving your tax preparer a quick call. However, if there is any chance your case could go sour, you need to call a qualified and experienced tax attorney, and pronto. The IRS is the world’s largest collection agency. They will ask the taxpayer for information on their employment, bank accounts, properties owned, automobiles and any other assets they may have for the purpose of knowing what they can levy or garnish. They will note down all conversations with the taxpayers for future use by other agents. The IRS can seize just about any assets needed to pay unpaid taxes. A good rule of thumb is that if you’re asking yourself whether it’s serious enough to merit calling a tax attorney, it probably is.

Sam from Ventura asks: Is It True That Taxpayers With Legal Counsel are Treated Better?

Answer: It’s unfair, even illegal, but it’s also human nature. IRS agents are flesh and blood and if they can get away with bullying someone into their interpretation of the law, they probably will. A tax attorney can ensure the IRS is playing by the rules and treating you fairly. IRS investigators are much more careful about asking inappropriate questions or wasting your time with unnecessary requirements, if they know they are dealing with a tax attorney. Now on the other side, many taxpayers think that because they exercise their right to hire representation, the IRS will think that they have something to hide. Well it is no secret that the Federal Tax Code is complicated and ever-changing. Just keeping up to date on these changing tax codes is a full-time job, and something you don’t have time to do. The IRS recognizes this and also knows that you have a business, a job for that matter a life that must still go on despite you being selected for examination. In my 27 years of practice I have not had one case where by my virtue of representation of a client the IRS thought anything different about the client’s motives in hiring me.

Seth from Irvine asks: Why Should I Only Use A Tax Attorney For Representation In A Criminal Tax Investigation?

Answer: When it comes to tax planning, business budgeting and asset management, a CPA is – all things being equal – more useful than a tax attorney is. But when you have a dispute with the IRS, especially if you’re accused of tax fraud or tax evasion, a tax attorney is the only intelligent choice. Tax attorneys are the only ones who can represent you in a court of law and provide you the legal advice and analysis you need. Anything discussed with your tax attorney is protected under the attorney-client privilege. Unlike CPA’s and accountants, attorneys cannot be subpoenaed to testify against a client in a criminal procedure. One of the worst things a CPA can do is to get more involved with your case that has potential criminal exposure before you hire tax counsel. The government likes this because they can subpoena the CPA and his files on you and the CPA being unfamiliar with the legal consequences and procedures of criminal investigations could unknowingly be hurting your case.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Thanks Amy for calling into the show. Amy says Thanks for having me.

Well we are reaching the end of our show.

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day everyone!

Issues discussed:

Mr. Credit said: I was listening to your radio show last week and heard a couple things I think are worth repeating to our audience as well:

a. Tell us about the data breach at the IRS…

The IRS announced recently that criminals used taxpayer-specific data acquired from non-IRS sources to gain unauthorized access to information on approximately 100,000 tax accounts through IRS’ “Get Transcript” application. This data included Social Security information, date of birth and street address.
For those of you who are not familiar with the “Get Transcript” application, it is a self-help service created by the IRS where taxpayers and their authorized representatives can get taxpayer account information through the IRS computers without the assistance of IRS personnel. In light of the IRS budget cuts, the IRS has been working on creating these self-help systems to reduce the personal needed at IRS call centers and IRS walk-in centers and thus save costs. During this past filing season, taxpayers successfully and safely downloaded a total of approximately 23 million transcripts.
Unfortunately, putting self-help systems in place without solid security features could lead to bigger problems and opportunity to defraud the government. And this is what happened over the past few months when third parties gained sufficient information from an outside source before trying to access the IRS site, which allowed them to clear a multi-step authentication process, including several personal verification questions that typically are only known by the taxpayer.

This apparent data breach is under review by the Treasury Inspector General for Tax Administration as well as the IRS’ Criminal Investigation Division. The IRS has identified 200,000 total attempts to access data and will be notifying all of these taxpayers about the incident. And for those 100,000 or so taxpayers whose accounts were accessed, the IRS announced it will provide free credit monitoring services.

b. Many people may not realize this, but the IRS is using “big data” to run all sorts of screenings, filters and ultimate select people for audits, correct?

To keep track of this, the IRS has one of the most extensive data collections in the world. Traditionally its power to enforce has come through the matching of data. For example, you received a W-2 Form from your employer showing how much you earned. That same form is submitted by your employer to the IRS. Now the IRS can match your return to that form to make sure you are reporting the income. The same thing goes for 1099 forms showing your earnings from miscellaneous income, gambling winnings, interest and dividend income, sales of assets, deductions, and so on.

But the IRS is not just stopping with Big Data Transactions, the IRS is now pursuing Big Data Social Media Analytics just like Google.

But unlike the normal corporate big data analytics, the IRS has one big advantage: It knows everyone’s social security numbers, as well as all the tax information from the firms we as taxpayers interact with, and as such the IRS can join the dots between Google,EBay, LinkedIn, Facebook, Yelp, Twitter, and perhaps your PayPal and credit card accounts along with your emails to overseas bankers.

And speaking of offshore banks, the IRS has been collecting information from the offshore banks on their U.S. accountholders and account characteristics so that by identifying an account number with a foreign bank, the IRS knows what type of account it is and when it was opened. That information becomes relevant when the IRS computers are scouring tax return information to verify foreign income is being reported and foreign accounts being disclosed.

c. What are 4 ways that returns are selected for examination?

1. Potential participants in abusive tax avoidance transactions – Some returns are selected based on information obtained by the IRS through efforts to identify promoters and participants of abusive tax avoidance transactions. Examples include information received from “John Doe” summonses issued to foreign and domestic banks, credit card companies, businesses and participant lists from promoters ordered by the courts to be turned over to the IRS.

2. Computer Scoring – Some returns are selected for examination on the basis of computer scoring. Computer programs give each return numeric “scores”. The Discriminant Function System (DIF) score rates the potential for change, based on past IRS experience with similar returns. The Unreported Income DIF (UIDIF) score rates the return for the potential of unreported income. IRS personnel screen the highest-scoring returns, selecting some for audit and identifying the items on these returns that are most likely to need review.

3. Information Matching – Some returns are examined because payer reports, such as Forms W-2 from employers or Form 1099 interest statements from banks, do not match the income reported on the tax return. Starting this year the IRS is getting this same level of information from foreign banks who have U.S. account holders.

4. Related Examinations – Returns may be selected for audit when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for examination. In examinations that include undisclosed foreign bank accounts, the IRS will look for family relatives who may have the same involvement in foreign accounts and also failed to make the proper disclosures.

Issues discussed:

a. How can I legitimately have a “company car” for my business?

Can my company make the payments? Gas?

What kind of records do I have to keep?

b. Health Savings Accounts…Are they ALL they’re cracked up to be from a tax perspective? http://finance.yahoo.com/news/triple-tax-benefit-health-savings-141156253.html

Topics Covered:
1. America’s Most-Wanted Swiss Bankers
2. Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty

3. Five common myths about the dreaded tax audit

4. Questions from our listeners:
a. Can a state court determine who may claim a dependency exemption for a child?
b. My son was born on December 31. Can I claim him as a dependent and qualify for the child tax credit?
c. My child was stillborn. Can I claim my child as a dependent on my tax return?
d. If I claim my daughter who is a full-time college student as a dependent, can she claim her own personal exemption when she files her return?
Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

This is your host Board Certified Tax Attorney, Jeffrey B. Kahn, the principal attorney of the Law Offices Of Jeffrey B. Kahn, P.C. and head of the KahnTaxLaw team.

You are listening to my weekly radio show where we talk everything about taxes from the ESPN 1700 AM Studio in San Diego, California.

And today I have a special guest with me in the studio. In the spirit of Day Your Child To Work Day, my daughter Madison is here with me.
Say Hi Madison. Madison says Hi Dad!
Madison is five years old and this is her first time seeing her Dad work in the studio.

When it comes to knowing tax laws and paying taxes, let’s face it — everyone in the U.S. is either in tax trouble, on their way to tax trouble, or trying to avoid tax trouble!

It is my objective to make you smarter so that you legally pay the least tax as possible, avoid tax problems and be aware of the strategies and solutions if you are being targeted by the IRS or any State tax agency.

Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into our website at www.kahntaxlaw.com.
I have a lot to cover today in the world of taxes and helping me out will be my associate attorney Amy Spivey who will be calling in later.

America’s Most-Wanted Swiss Bankers

For decades, Switzerland has occupied an outsize role in the world of shady international finance. The country’s strict secrecy laws have made it the offshore banking destination of choice for U.S. tax evaders. The Swiss Bankers Association estimates that Swiss banks still hold at least $2 trillion that customers haven’t declared to tax authorities in their home countries. They say that you’re not a self-respecting Swiss bank if you don’t have some dodgy money floating around your system.

Since 2008 the U.S. Department of Justice and the IRS have been waging an uneasy war against Swiss banks that enable tax evasion. UBS Group and Credit Suisse Group have paid a combined $3.4 billion in U.S. fines, penalties and restitution. Wegelin, the country’s oldest bank, closed its doors entirely in 2013 after pleading guilty to conspiracy to evade taxes. In a break from long-standing policy, the government of Switzerland has pledged in recent years to share bank information with tax authorities around the world.

Despite these sweeping changes some of the biggest Swiss banks, are reluctant to take action against their employees. Credit Suisse—which in 2014 pleaded guilty to conspiracy to help Americans file false tax returns and agreed to pay the U.S. and New York state $2.6 billion—kept three indicted bankers on its payroll for almost three years after they were charged despite their failure to respond in court. Well that complacency ended last May when the New York State Department of Financial Services required the three bankers’ employment be terminated as part of a settlement.

At least 21 financial advisers in Switzerland under U.S. indictment remain at large, making them fugitives in the eyes of the American government. Their acts aren’t considered crimes under Swiss law so the country won’t extradite or prosecute them. Several still work in the Swiss financial industry, offering tax advice and other services. Some still have U.S. clients. And so far 50,000 Americans have voluntarily come forward disclosing their foreign accounts and reporting their foreign income to avoid criminal prosecution and reduced penalties.

What Should You Do?

If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Even for those who have lost money over the years, not being able to pay the entire fines from the OVDP is not an excuse — there are ways to negotiate payments. 

Well it’s time for a break but stay tuned because we are going to tell you the Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

Calling into the studio from our San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Top Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty

Jeff continues: Carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

Amy states: It’s one thing to make an innocent mistake on your taxes, or to overlook a tax break that could lower what you owe the IRS. While such innocent mistakes will still cost you, they usually won’t invoke the ire of the IRS to pursue criminal prosecution or assess a Civil Fraud Penalty.

Amy continues: When you intentionally disregard tax law, however, such willful neglect will get you in real trouble. The IRS defines “willfulness” as a voluntary, intentional violation of a known legal duty, specifically your tax filing and payment responsibilities.

Jeff states: Such intentional tax violations could lead to tough penalties on top of the unpaid tax and interest added to it. In some cases, the IRS pursues intentional violations as criminal acts that could carry jail time.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Jeff continues: So it’s not a good idea to think even think about neglecting your tax filing duties or fudging the entries a little or a lot. And in case you have any doubt as to what might be problematic, here are the top tax sins that could land you in very hot tax water.

Jeff to read off each sin and Amy to comment – Jeff may skip some of the sins or go through quickly to save time.

1. Not reporting all your earned income

Failure to report all the money you make is a main reason folks end up facing an IRS auditor. When it comes to earned income — that’s your pay for work performed — not reporting payment generally isn’t an issue if all your money comes from wage or salary income. That amount is detailed on W-2 forms that must be attached to your Form 1040.

But if you’re an independent contractor, either as your full-time job or from side work in addition to your salaried position, it’s your responsibility to keep track of your earnings and let the IRS know the amount at tax time. When you’re paid more than $600 you should get a 1099-MISC from the client. And when your business accepts credit cards for payment, remember that each year your credit card merchant service provider will issue a 1099-K reflecting all the charge sales your business made. Don’t think of ignoring one of these forms. The IRS gets copies, too.

And even when you don’t get an earnings statement, it’s still your legal duty to report the income. Even without third-party tracking, the IRS will take a long look at your return if the numbers seem off.

2. Not reporting all your unearned income

Unearned income generally is investment income. In these cases, your banker, broker or the mutual funds that you bought directly will send you 1099-DIV or 1099-INT statements with your annual earnings. Again, don’t think you can “forget” to count one or more of these amounts. The IRS is copied on these statements, too.

3. Forgetting about foreign funds

Foreign financial accounts add another layer of complexity and potential costs if you fail to report them. The IRS has been on a mission for the last few years to halt hidden offshore accounts, significantly increasing its detection efforts and prosecuting owners of unreported accounts. And now starting with 2014 foreign banks are reporting interest and investment income to the IRS just like their domestic bank counterparts

The risk is even greater if you own a foreign financial account that must be disclosed under the Foreign Bank Account Report (FBAR) rules or the Foreign Account Tax Compliance Act (FATCA). A whole separate set of penalties applies here with a minimum amount of $10,000.00 per year per each account not disclosed.

4. Exaggerating deductions

Tax deductions are a great way to reduce your tax bill. They lower your income, which generally means your tax liability will be lower, too. Many taxpayers, however, are tempted to inflate the amounts that they claim on Schedule A.

The IRS, thanks to its automatic computer screening tool known as the discriminant information function (DIF), knows what the average deduction amount is for various income levels. If your claims are larger, you can bet your 1040 will be pulled for further review.

If you did indeed have an unusually large but legitimate charitable deductions, great. Claim those that you have receipts for and then show the IRS examiner your substantiating documentation. But if you’re just pumping up the amount on your own, you could face serious consequences.

5. Inflating self-employment expenses

This is the business counterpart to inflated individual itemized deductions. Here self-employed individuals bump up the business expenses they list on their Schedule C filings. This form filed by sole proprietors offers a way to claim a variety of business expenses that can reduce self-employment income and therefore the 15.3 self-employment tax. Among the expense categories are advertising costs, office supplies and other expenses, depreciation and Section 179 expenses, auto expenses and travel, meals and entertainment costs.

As you can see, there are lots of tempting opportunities to hike amounts to reduce taxable self-employment income. Were those stamps really for office mailings, or did you use them to send out personal holiday cards? What about that book? Was it really something that helps your run your company better or was it a volume you wanted for your personal bookshelf? 

6. Mixing business and pleasure

A specific section of Schedule C that’s prone to, shall we say, shady claims is the meals and entertainment line item. When properly claimed, a business owner can deduct some of the costs of taking a client out to eat and/or an entertainment venue. But sometimes business folk go out with friends and then write it off as a business expense.

That’s not to say that you can’t be friends with other business owners or even your clients. But when you’re picking up the check, you need to make sure that the dining etc. experience is really work related. You can’t just go out with a friend, ask “how’s your business going?” and then claim the evening as a business expense. Well, you can, but if the IRS catches on to your expense ruse, you’re in trouble.

This also could be a tax problem if you combine business and personal travel. While that’s totally acceptable to the IRS, you can’t claim the travel costs as a business expense if you actually spent more time lounging on the beach instead of meeting with new clients for your new line of bathing suits. 

Instead, make sure you know how to make the most of legitimate business entertainment expenses and travel expenses by hooking up with a tax professional. 

7. Sharing your home office

A home office isn’t an automatic red flag but that doesn’t mean you should be cavalier in claiming your work space. If the room or specific area in a room isn’t used regularly and exclusively for your business dealings, it does not qualify as a home office.

Yes, it’s easy to ignore those personal files in your desk drawer. After all, when you worked at a cubical for your employer you had personal stuff there. But technically, you are illegally claiming this deduction if you conduct personal tasks in your so-called office.

8. Not making a profit

Legitimate business owners want to make money, even if it means paying taxes. Other folks, though, set up operations that they fully intend to run at a loss for tax purposes. That is the textbook definition of a tax evasion scheme.

The IRS is wise to this and tries to limit such losses by requiring that a business eventually make a profit. According to the IRS time table, eventually means you must be in the black in three out of five years.

Your inability to do so will cost you. And if the IRS can show your bleeding bottom line wasn’t just due to a lack of business aptitude, but a willful intent to operate at a loss, you will be deemed to have committed a tax sin.

Jeff states: Remember, carelessness on your tax return might get you whacked with a 20% penalty. But that’s nothing compared to the 75% civil penalty for willful tax fraud and possibly facing criminal charges of tax evasion that if convicted could land you in jail.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned because after the break we are going to tell you the Five common myths about the dreaded tax audit.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

And on the phone from our San Francisco office I have my associate attorney, Amy Spivey.

Five common myths about the dreaded tax audit

Amy states: Filing taxes is punishment enough without the vague threat of an IRS audit looming over our heads. For understandable reasons, the IRS insists on keeping the ins and outs of its auditing process on the murky side. After all, how will you catch the bad guys if you give them the rule book first? Here are a few common myths about the dreaded tax audit:

Amy to read off each myth and Jeff to discuss.

Myth #1: Only the wealthy get audited.

While it’s true that big businesses and the uber-rich are often targets of IRS tax probes, that doesn’t necessarily mean low- and middle-income workers are free and clear. The agency is increasingly relying on data mining and robo-audit systems to detect errors in tax returns, which has actually made it easier to go after small-fish taxpayers.

In 2013, the IRS audited more than 6.5 million taxpayers with an adjusted gross income of less than $1 million. And it audited fewer than 40,000 of those reporting $1 million or more.

One of the biggest reasons behind that discrepancy is the IRS’s move to pursue people who fraudulently claim the Earned Income Tax Credit, a juicy tax break worth an average $5,891 for a family of five earning less than $50,270 a year.  In 2012 alone, EITC fraud cost the government between $11.6 billion and $13.6 billion.

If you really look at the scrutiny of low- and middle-income wage earners, there is much more detailed scrutiny now than for those with investments and other sources of income. It just takes fewer resources to audit lower-income earners. And in all fairness to the IRS, Congress hasn’t been exactly generous with budgets.

And while the overall number of audits has been declining since 2010, the IRS has decreased the rate of millionaire probes more than other income brackets.  Auditing rates for the under-$200,000 income club fell by only 0.14% between 2011 and 2013, compared with a 1.63% decrease in the rate of audits of those making $1 million or more, according to the IRS.

Myth #2:  An audit means you’ll have an IRS agent knocking down my door

If the IRS’s computer system flags your tax return, you’d be hard-pressed to get an agent to pick up the phone, let alone make a house call. The traditional IRS audit and someone showing up on your doorstep is a thing of the past.

For starters, the IRS does not have the manpower. Thanks to rounds of budget cuts, the IRS has had to reduce staff by more than 8,000 employees since 2010 with no sign of relief yet.  Congress recently ordered the agency to slash another $526 million from its budget in 2014.

And while the agency’s funding and employee count decrease, more and more Americans are filing taxes each year, nearly 146 million in 2013 alone, up from 138 million five years ago.

Of the 6.5 million audits conducted last year, only 362,500, or 5.5%, resulted in an actual field visit. If your return is flagged, you’ll most likely get a letter in the mail seeking additional information. From there, you can either answer by return mail or call them directly or even better hire tax representation.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Myth #3: If I owe tax money, the IRS will be after me in a hurry

Rest assured, if IRS flags your return for suspicious activity, you will hear from them at some point — but probably not for a year or two…or more. The IRS actually has three to six years to go after questionable tax returns, and with personnel shortages, even taxpayers who willingly call them to sort out issues have a hard time getting them resolved.

Last year, more than 20 million phone calls to the IRS went unanswered, leaving just 61% of callers able to get through to a human being.

The IRS is under-funded and under-staffed. If a consumer calls the IRS, when they get through to a human being, they will likely just be told where to find the answer on the IRS website.

Myth #4: If I file for too many deductions and tax credits, I’m setting myself up for an audit

Tax credits and deductions are there for a reason: to ease the tax burden for workers who need it most. Don’t let the threat of an audit dissuade you from applying for tax credits and deductions you’re justifiably due.

Despite the IRS’s efforts to crack down on Earned Income Tax Credit fraud, it is actually one of the most commonly overlooked deductions. Twenty percent of eligible workers have missed out on the EITC, which is worth an average $5,891 for a family of five and $475 for single-filers without children.

Home-office deductions are another oft-cited target for the IRS. But it’s an overblown fear that hardly applies today, when there are more than 42 million Americans working as freelancers and independent contractors.

This was once the case, back when working from home was less common but with millions of home offices running today, the system is far more accommodating for home office users. The important thing to remember: Make sure you keep your receipts and documents and only deduct legitimate business expenses… which mean that the expense must be typical and necessary for your business.

The bottom line: If you’ve earned a tax credit or can justifiably claim a deduction, do it. Just make sure you’ve done the research and know what you need to back up your claim first.

Myth #5: I’ve got my tax refund so I don’t have to worry about an audit.

Even if your tax return was accepted and you cashed your refund check, you’re still fair game for auditors.

The IRS uses a special matching system that tracks each taxpayer’s W-2s, 1099s and 1040 forms. If it turns out that you’ve under-reported your income, the system will eventually catch up to you.

You could get your refund, and about one or almost two years later, if there’s a problem with your taxes, you’ll likely get a letter in the mail from the IRS.

As noted above, the IRS has three years to track you down, but in extreme cases of underreporting or tax evasion, they can basically come after you whenever they want.

And that’s not even the worst part. Any interest and penalties owed on your unpaid taxes will start accruing the day your taxes were due — not two years later when the IRS letter finally shows up in your mailbox. Two years of compounding interest and penalty charges will only add salt to the wound.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Stay tuned as we will be taking some of your questions. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the KahnTaxLaw Radio Show on ESPN.

BREAK

Welcome back. This is KahnTaxLaw Radio Show on ESPN and you are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

If you would like to post a question for us to answer, you can go to our website at www.kahntaxlaw.com and click on “Radio Show”. You can then enter your question and maybe it will be selected for our show.

OK Amy, so with my daughter Madison in the studio with me today I thought it would be appropriate for us to talk about dependents. What questions have you pulled from the kahntaxlaw inbox on this topic for me to answer?

1. Question: Can a state court determine who may claim a dependency exemption for a child?

Answer: Federal tax law determines who may claim a dependency exemption for a child. Even if a state court order allocates a dependency exemption for a child to a noncustodial parent, the noncustodial parent must comply with the Federal tax law to claim an exemption for the child. To claim an exemption for a child, the noncustodial parent must attach to the noncustodial parent’s return a copy of a release of claim to exemption by the custodial parent. The release may be on a Form 8332, Release/Revocation of Release of Claim to Exemption for Child by Custodial Parent, or a document that conforms to the substance of that form.

2. Question: My son was born on December 31. Can I claim him as a dependent and qualify for the child tax credit?

Answer: Yes, if your child was born alive during the year and you meet the dependency tests, you may claim him as a dependent and take the full exemption.

3. Question: My child was stillborn. Can I claim my child as a dependent on my tax return?

Answer: You cannot claim a dependency exemption for a stillborn child.

4. Question: If I claim my daughter who is a full-time college student as a dependent, can she claim her own personal exemption when she files her return?

Answer: If you can claim an exemption for your daughter as a dependent on your income tax return, she cannot claim her own personal exemption on her income tax return. Your daughter should check the box on her return indicating that someone else can claim her as a dependent.

PLUG: The Law Offices Of Jeffrey B. Kahn will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the KahnTaxLaw Radio Show when you call to make an appointment. Call our office to make an appointment to meet with me, Jeffrey Kahn, right here in downtown San Diego or at one of my other offices close to you. The number to call is 866.494.6829. That is 866.494.6829.

Chit Chat with Amy.

Thanks Amy for calling into the show. Amy says Thanks for having me.

And Madison thank you for being in the studio with me today. Well we are reaching the end of our show.

You can reach out to me on Twitter at kahntaxlaw. You can also send us your questions by visiting the kahntaxlaw website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day everyone and a great weekend!