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

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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?

Tax Write-Off: Personal Expenses

This is a category business owners can easily get into trouble with if they’re not careful.

  • Key Issue: You simply can’t deduct services of a purely personal nature that aren’t related 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.

Tax Write-Off: Guard Dog

Believe it or not, this is a legit write-off if taken correctly. In order for a dog to qualify as your company’s guard dog, it helps if you’re a little afraid of the animal yourself (picture a Rottweiler, Pit Bull or German Shepherd).

  • Key Issue: You will only be able to deduct that portion of the dog’s total time devoted to “guard-dog” duty.

  • How to Do It Right: Though it may seem rather obvious, your dog most also be guarding your inventory. Knowing the percentage of time devoted to guard-dog duty, applying this business use percentage you can deduct expenses relating to the dog but you can’t deduct the dog itself. You can however depreciate the dog over its expected lifespan as determined by a local breeder.

Tax Write-Off: Work-Related Uniforms or Costumes

The dos and don’ts of this tax write-off are fairly simple.

  • Key Issue: If the costume or uniform is something you could wear outside your job, you shouldn’t write it off. If, however, it’s obvious you can only wear it for the duties of your specific job, then it qualifies as a write-off.

  • How to Do It Right: A new suit wouldn’t qualify since you can wear it other places outside of your work environment. A perfect example of some rather unusual clothing you can write-off would be a clown suit. Even a Las Vegas showgirl with tight, sequined costumes she purchased for her performances should qualify. In this case a picture is worth a thousand words.

Tax Write-Off: Paying Wages To Family.

When employing a spouse, child or close relative, be careful not to give them any extra-special treatment.

  • Key Issue: Make sure the responsibilities of their job description are commensurate with their age and experience. Pay them the same salary you’d pay anyone else doing the same job.

  • How to Do It Right: Just like any other employee, maintain a personnel file and include them on your worker’s compensation coverage. Report them on the business’ employment tax returns and issue W-2’s at the en of each year.

What Should You Do?

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

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

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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?

Tax Write-Off: Travel Expenses

Here’s a write-off that sometimes is difficult deciding just where to draw the line. Can you deduct the cost of going to see a Cirque du Soleil show in Las Vegas if you’re treating your client? The answer is yes, as long as you can justify it as a business expense. And what if your spouse goes along on the trip? As long as they’re a partner or employee of your business and attended conventions or meetings on the trip you took together, then his or her travel and 50% of his or her meals are also deductible.

  • Key Issue: You can deduct travel expenses, and 50% of related meals and entertainment, if the travel is reasonably related to your business.

  • 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. On your next business trip grab an envelope from the stationary drawer of your hotel room and put all your receipts from that trip in it. Label the envelope with a name and date to help you remember that trip and document it should it be questioned later.

Tax Write-Off: Cell Phone Bill

If you use a cell phone as part of your business, this could be a big deduction for you. So don’t make the mistake of mixing business with pleasure by sneaking too many personal calls onto your cell phone bill.

  • Key Issue: Because of the way a cell phone can be used and many phones and features are bundled into single plans, this expense has come under much scrutiny, so people need to keep good records and keep their actual cell phone bill so they can demonstrate what portion relates to cell phone use and that a majority of the calls were business calls.

  • How to Do It Right: Take a look at your cell phone bill to make sure you receive an itemized report. Because cell phones are considered listed property, you need to keep detailed records of their use. In the case of a land line, it’s a good idea to have a separate phone number for your business since the IRS won’t let you allocate the cost of a single phone in your home to your home office.

Tax Write-Off: Home Office

Home office deductions used to be a big red flag for an audit back in the 1990’s. These days, you just need to use the deduction with caution. A good rule of thumb to follow is that anything that’s unusual and disproportionate to your level of income is something the IRS will check out.

  • 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.

Tax Write-Off: Home Office Computer

It’s not a good idea to mix your business world with your personal life so you should not use your home office computer for personal tasks if you can help it.

  • Key Issue: If there is the only computer in your house, you will have to calculate the percentage of total time you use it for business purposes.

  • How to Do It Right: Ideally, your best option is to purchase a laptop or tablet and dedicate it to being your personal computer. You then use your desktop computer solely for business. This way you can avoid any messy situations come audit time.

Tax Write-Off: Rent

Wondering if you can still take the home office deduction if you’re a renter? The answer is yes. But you need to know the right way to go about it.

  • 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.

What Should You Do?

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

When Should You Lawyer Up When Dealing With the IRS?

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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. 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.

Maybe these two true life stories will help:

In January 2014, Beanie Beans founder Ty Werner was convicted of evading $5.5 million in taxes owed on the $27 million in interest accrued from millions of dollars stashed away in a Swiss bank account. The sentence? Two years on probation and some hefty fines, which were small change for a billionaire like Werner.

Unrelated, and a couple of months earlier, Daniel Thody, a defense contractor was found guilty to five counts of tax evasion for failing to report $15,000 and $50,000 in taxes from $1.8 million earned as a contractor for the Department of Defense. He faces up to 25 years in prison, 5 years for each count.

Which one do you think hired a tax attorney and which one thought representing himself would be the smarter option?

Three good reasons you should lawyer up when dealing with the IRS:

1. Taxpayers with Legal Counsel are Treated Better. 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.

You don’t have to worry about an IRS agent getting upset with you for hiring a tax attorney either. The good ones prefer dealing with tax professionals because they don’t have to waste their time and patience explaining you the ABC’s of a tax audit or the basic IRS guidelines for a criminal investigation. In fact, hiring an experienced tax attorney is generally seen as a sign of good faith to resolve your tax issues.

2. The IRS Has Serious Muscle. The IRS is a behemoth of an agency, one of the most powerful organizations on the planet. From 2008 through to 2014, over 50 bankers from Switzerland, India, Israel and other countries have been indicted for helping rich Americans squirrel billions of dollars into offshore accounts.

If you think this is just posturing, you may want to talk to former banker Raoul Weil. In October 2013, he was picked up in Italy while on vacation with his wife and extradited to the United States. He is now on trial for conspiring to help thousands of Americans hide $20 billion in numbered accounts at UBS.

In 2013, the IRS also cracked the code of silence of Swiss financial institutions and got UBS, the largest Swiss Bank, to divulge confidential information on American tax evaders, and pay a $780 million penalty.

3. Only a Tax Attorney Can Represent You in a Criminal Investigation. 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.

What Should You Do?

Tax attorneys know how the IRS operates. So they know what to say, what not to say, and what buttons to push when negotiating your case. Hiring a tax attorney sends the IRS a clear and powerful message. You’re taking the investigation seriously; you’re not going to let IRS agents push you around; and you want to work with the IRS to avoid criminal charges.

Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

With All The Identity Theft Going On With IRS, Maybe e-filing Isn’t Worth It?

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Identity theft cost the Internal Revenue Service $5.2 billion in tax year 2013, according to an analysis from the U.S. Government Accountability Office. While the IRS estimates it prevented $24.2 billion in fraudulent refunds, there are still thousands of taxpayers whose tax refunds were delayed because a criminal beat them to the joyous task of filing tax returns.

Regardless of the fact that it’s not the best budgeting strategy, people often rely on their tax refunds to pay bills. When an identity thief files a fraudulent return which is usually done through the IRS e-filing system using someone’s Social Security number, that person won’t know about the fraud till they attempt to file themselves, and instead of the speedy refund they may have been counting on, they may have no idea when they’ll get their money from the IRS.

E-filing your taxes might appear to be the easiest, most convenient solution, but sometimes appearances can be deceiving. A few disadvantages associated with e-filing might make you think twice the next time you are filing a tax return. By knowing the cons of filing and not just the pros, you can choose which method is right for you.

Identity Theft

Although online tax software is secure, your own computer might provide an opening for a thief to steal your identity while you’re filing your taxes online. A virus or malware on your computer could grab passwords or financial data. If you use a tax program in an airport, Wi-Fi hotspot or other public location, your computer needs a strong firewall to keep others from accessing your information. Make sure to keep your security and antivirus software programs updated in order to avoid identity theft issues.

Cost

While filing by mail only costs the price of a stamp, e-filing can be more expensive. Tax filing software can be expensive and the price increases if you have to file state taxes or business taxes. The IRS offers a free online filling service, but it is only available to people who have an adjusted gross income of less than $57,000 a year.

Complicated Tax Forms

Although online tax programs that provide e-filing may be the most efficient methods, they may not be the best choice if you have a unique situation or a complicated tax return. If you own many types of investments or are part of a corporation, for example, your tax return may involve many finely detailed laws that tax software just is not sufficient enough to cover. Trying to get help on a complicated tax question from a website help desk may not be nearly as useful as getting help from an in-person tax professional.

Computer and Internet Glitches

Software glitches and Internet issues can cause unexpected problems for people who file electronically, especially if they wait until the last minute. Tax websites are typically swamped on the last day and could experience system slowdowns or errors. In addition, if your computer breaks down and you’re filing the night taxes are due, you might be out of luck. Problems can also happen after filing. In 2012, a glitch in the IRS software delayed refund payments only to taxpayers who filed online.

Not Fileable

Sometimes you might pay money for tax software and spend time preparing your taxes to be filed electronically, only to find that you’re ineligible to e-file. This can happen due to user error or other more serious issues. The IRS and state governments do not allow certain types of taxes to be e-filed, such as returns without any taxable income, prior-year tax returns or more than five tax returns filed using the same tax software.

Choosing to File by Mail or Online

Of course, there are advantages to filing online also, such as having fewer errors because the errors are caught quicker by the tax software and the digital submission will speed up the issuance of your refund. But until the IRS discontinues paper filing of tax returns, it is up to the individual taxpayer which method is best for his particular situation.

What You Should Do If You Really Do Have Tax Issues?

The tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California know exactly what to say and handle the IRS.  Our experience and expertise not only levels the playing field but also puts you in the driver’s seat as we take full control of resolving your tax problems.

Description: The Law Offices Of Jeffrey B. Kahn, P.C. has helped many people avoid collection action by the IRS and State tax agencies. Working with one of our tax attorneys is the best bet for reducing or eliminating the amount you owe.

Why Are Tax Inversions Suddenly So Popular?

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The United States is one of the few large countries that taxes citizens, permanent residents and corporations on income earned anywhere in the world.

U.S. corporations have a nifty way to avoid tax on their foreign income and reduce their U.S. tax without really leaving home. It’s called tax inversion, and due to some recent high profile deals it’s becoming all the rage.

In the past year alone, at least 14 U.S. companies have announced inversion deals with foreign (mostly Irish and British) companies. Left unchecked, these deals will continue to erode the corporate tax base, leaving others like you and me to pick up the slack.

What is tax inversion?

A U.S. company reincorporates overseas by getting acquired by a smaller company in a country where the corporate tax rate is much lower than the top U.S. rate of 35%. Generally, the U.S. firm’s management and operations remain in the United States, but it is no longer taxed on income earned outside the United States. The firm will still pay taxes on income earned inside the U.S., but it gets easier to minimize that tax. For example, the U.S. subsidiary can borrow money from its foreign parent, then deduct the interest it pays on that debt, which reduces its U.S. income and taxes.

An inversion also gives companies ways to avoid U.S. tax on profits that have been piling up overseas, largely in tax havens such as Bermuda. It is estimated that U.S. companies have about $1 trillion sitting in foreign subsidiaries. They would love to bring it home and use it to pay dividends or buy back shares, which would increase their stock price. But they would have to pay U.S. tax on it.

However, if the U.S. company gets acquired by an Irish company, for example, the Irish company can borrow that cash from the Bermuda company. The Irish company can use it to buy back shares or pay dividends without paying U.S. tax. The shareholders of the former U.S. company benefit because they own most of the Irish company.

If the big corporations can do this to avoid U.S. taxes, could you or your little corporation do the same thing?

As an individual you would have to not only leave the country but also renounce your U.S. citizenship – meaning that you now must be a citizen of some other foreign country and you will never be able to attain U.S. citizenship again. You will also need to pay an “exit tax” 15% of the value of all your assets.

For your little corporation, you will not be able to accomplish the tax inversion due to special rules that the IRS has in place. These rules would classify the new foreign corporation as a Controlled Foreign Corporation (“CFC”) because you individually as a U.S. person for tax purposes would be the sole shareholder for the foreign corporation. These rules provide that regardless of whether any distributions are made by the CFC to you, you are required to report on your individual income tax return the income that the CFC earned. Big corporations would not be classified as a CFC because their stock is widely held and not concentrated to one or a few shareholders.

Does it make any sense for the taxes to be based on where the corporate “hub” is anyway? Shouldn’t it be based on WHERE they made the money?

Actually the big corporations still have to pay U.S. taxes despite accomplishing a tax inversion. Profits earned in the U.S. would still be subject to U.S. taxes; however, the U.S. federal income tax bill on repatriated profits is reduced by the amount of income taxes paid to foreign governments on the same U.S. profit reported to IRS. So, profits earned outside the U.S. would not be subject to U.S. income taxes until those profits are repatriated back to the U.S. at which time they are subject to the full U.S. statutory corporate income tax rate of 35% upon repatriation.

So as an individual or little corporation, how do you fight back?

You would be surprised of the many tax saving opportunities that are available to U.S. persons and U.S. businesses without the need to go offshore. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California are highly skilled in making sure that you are getting all the tax saving benefits that are legally possible.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. evaluate your tax exposure and legally minimize the amount you need to pay.

Jeffrey B. Kahn, Esq. Discusses IRS And Big Data On ESPN – September 11, 2014 Show

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Topics Covered:

1. The IRS And Big Data.

2. Four Ways That Returns Are Selected for Examination

3. How the IRS is matching Big Data to your tax return and selecting you for audit.

4. Questions from our listeners:

a. Is It True That Taxpayers with Legal Counsel are Treated Better By The IRS?

b. But Will An IRS Agent Get Upset With You For Hiring A Tax Attorney?

Transcript

Good afternoon!

It’s time for the Mr. Credit Show where we attempt to make you smarter than everyone else.

This is Jeffrey Kahn, Board Certified Tax Attorney from the kahntaxlaw team. We 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.

The IRS And Big Data.

With another tax filing and estimated tax payment deadline coming up, you may have spent the last few days thinking hard about your taxes, but the IRS has been doing so for years – positioning itself as a leader in using big data.

Each year, April 15th is a memorable date for those of us in the United States – this is the deadline to file our taxes or to file an extension to delay filing a tax return to October 15th.

It is clear that the IRS is the dominant government agency in the United States. After all if there are no taxes, there can be no government. Politicians know this and over the decades have ensured that the IRS has all the powers it needs to raise federal taxes from the citizens, residents, and even tourists who stay long enough in the United States.

U.S. citizens cannot even escape U.S taxation by leaving the country because the tax law requires U.S. citizens who currently earn more than $9,750 to file even if they don’t live in the country. Even if you renounce your citizenship, as 3,805 did in 2011, you still have to pay an exit tax of 15% on all your assets including investments, homes, and even your personal possessions.

Extensive data collection

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 stopping here. The IRS has signed a $650 million ten-year contract with Unisys to further develop Big Transaction Processing Data whereby the IRS is using Unisys ClearPath Dorado Servers running at an estimated 1,200 MIPS to process tax returns.

For those of you who are not techie’s, MIPS is a measure of a computer’s central processing unit performance and its stands for “Million Instructions Per Second”. These servers will reside selected IRS Data Centers alongside several IBM z/196 mainframes, capable of running at an estimated 8,000 MIPS. Along with all this processing power are extensive data storage capabilities which will be managed in the IRS’ private cloud. It is estimated that IRS has 7.5 Petabytes of data. By the way just one Petabyte is equivalent to 1 quadrillion bytes.

Data from social media

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.

The IRS has access to every social media posting going back to 2008 so deleting your posts does not make them go away.  The IRS has bragged that their computer can make DNA blueprint of each of our behaviors. Amazingly, the IRS’ supercomputer can read all 200 million e-Filed returns in just ten hours.

All this will allow the IRS to refine its algorithms to more effectively identity those taxpayers to be selected for audit or investigation.

So while none of us enjoys doing or paying our taxes we as taxpayers can be comforted by knowing that the government is at the forefront of the big data revolution. And despite the use of these new technology skills to make the government itself more efficient, there are two certain things in life – death and taxes!

Well it’s time for a break but stay tuned because we are going to tell how the IRS selects returns for examination.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the Mr. Credit show.

BREAK

Welcome back. 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.

Jeff states: Before I continue with Amy, I must say that the overwhelming majority of taxpayers file returns and make tax payments timely and accurately. As such taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid with enforcement actions against those who fail to comply voluntarily.

Jeff says: And so if your tax returns are selected for examination you should contact the Law Offices Of Jeffrey B. Kahn. We will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention Mr. Credit when you call to make an appointment. The number to call is 866.494.6829. That is 866.494.6829.

Four Ways That Returns Are Selected for Examination

So Amy, I understand that there are four main ways that the IRS selects returns for examination. I will read off each one and let you tell our audience more.

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.

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.

Now Amy, how does one find out if the IRS does select your tax return for examination?

Amy states: This is where one must be careful because there are scammers out there who are calling people saying they are the IRS and threatening them with arrest and deportation unless they pay right away. If you are selected for an audit by the IRS, the initial contact will always be in the form of a letter sent by the assigned agent under official IRS letterhead.

Jeff asks: And what do these letters typically say?

Amy states: First it will give you the contact information of the agent and what IRS office the agent reports to.

Second it will tell you how the examination is to be conducted – this can be by mail, or through an in-person interview and review of the taxpayer’s records at the agent’s office or outside the agent’s office such as the taxpayer’s business.

Third it will tell you which years are being audited and what records will be needed. Taxpayers may act on their own behalf or have a tax professional represent or accompany them.

Jeff says: And that is where we come in. We highly recommend that you do not go into the IRS on your own. 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 Mr. Credit when you call to make an appointment. The number to call is 866.494.6829. That is 866.494.6829.

 

Stay tuned because after the break we are going to tell more about how the IRS is matching Big Data to your tax return and selecting you for audit.

You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team on the Mr. Credit show.

BREAK

Welcome back! You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team.

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

How the IRS is matching Big Data to your tax return and selecting you for audit.

Jeff states: According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.

Amy, please tell us how several of these programs work.

Individual Automated Underreporter (AUR) program

This matching program is better known by its primary notice: CP2000, Notice of Proposed Adjustment for Underpayment/Overpayment. IRS systems automatically send this notice when items reported on Form 1040, U.S. Individual Income Tax Return, don’t match information reported to the IRS by employers and other payers. The first round of these notices arrives just after Thanksgiving, and the second round arrives toward the end of the next year’s filing season.

The CP2000 notice has been a mainstay of IRS information reporting for decades. In 2012, the IRS issued more than 4.5 million CP2000 notices, with an average of $1,572 in additional taxes owed.

So Amy, what other matching programs has the IRS employed?

Form 1099-K merchant card transaction matching program

In 2012, the IRS started receiving from credit card companies, Forms 1099-K, Payment Card and Third Party Network Transactions. With merchant card transactions now being reported to IRS, the IRS quickly began using this information to match against business returns. However, because businesses do not specifically report merchant card transactions as separate line items on business tax returns, the IRS can only infer potential underreporting.

Jeff asks: Amy could you clarify for our listeners what this means?

Amy states: For example, if a business has a disproportionate amount of cash to credit/debit card sales, based on its line of business, the IRS may look closer. These kinds of mismatches have led the IRS to develop compliance initiatives, including “soft” notices requesting explanation and mail audits requesting documentation.

The IRS is developing a Form 1099-K matching initiative that will make the IRS more efficient in identifying problem tax returns. But for now many initial notices indicate that the IRS is focusing on underreporting cases in which merchant card payments appear to make up the majority or even exceed the total business receipts reported on the return. In these cases, the IRS perceives that the business is underreporting cash sales due to the disproportionate share of merchant card payments. Accrual-basis taxpayers and e-commerce businesses whose receipts do not neatly match merchant card transactions are likely early targets in this program and we have had our share of this cases where that is what happened.

Jeff says: So if you receive one of these notices it is important that you don’t ignore it. We have a special offer for our Mr. Credit listeners. 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 Mr. Credit 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. The number to call is 866.494.6829. That is 866.494.6829.

Jeff asks: Amy what type of matching does the IRS do where a tax return does not get filed?

Amy replies:

Automated Substitute for Return program

When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We have cases where the IRS ended up owing our clients money.

Jeff asks: Amy, where in the future is the IRS going with their use of Big Data?

Amy replies: The IRS has been getting a lot of help from Congress where Congress has expanded the IRS’ reach to access more information to enforce compliance and implement new legislation.

Jeff asks: And I bet that you have some examples of new powers enacted by Congress that have been bestowed on the IRS.

Amy replies:

1. FATCA – Foreign Account Tax Compliance Act.

This legislation became law in 2010. Starting in 2014, the IRS will have the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. The IRS will likely scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCen Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.

2. Patient Protection and Affordable Care Act (“Obama Care”)

As this Act is implemented in the next several years, the IRS will start using information statements for individual and employer compliance with the Act’s mandates. Starting in 2012, employers reported the value of employer-provided health insurance on Forms W-2, Wage and Tax Statement, to inform taxpayers of the value of their health insurance coverage. In 2015, the IRS will also receive information from health insurance companies on employee coverage, including the name and identifying information of the employer. The IRS can use the information to identify and penalize individuals and employers for noncompliance with Obama Care mandates.

Jeff states: A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.

Jeff says: And so we have a special offer for our Mr. Credit listeners. 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 Mr. Credit when you call to make an appointment. Call our office to make an appointment to meet Jeffrey Kahn right here in downtown San Diego. 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.

BREAK

Welcome back. You are listening to Jeffrey Kahn the principal tax attorney of the kahntaxlaw team along with my associate attorney, Amy Spivey.

OK Amy, what questions have you pulled from the Mr. Credit and kahntaxlaw inboxes for me to answer?

Is It True That Taxpayers with Legal Counsel are Treated Better By The IRS?

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 lawyer 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.

But Will An IRS Agent Get Upset With You For Hiring A Tax Attorney?

The good ones prefer dealing with tax professionals because they don’t have to waste their time and patience explaining you the ABCs of a tax audit or the basic IRS guidelines for a criminal investigation. In fact, hiring an experienced tax attorney is generally seen as a sign of good faith to resolve your tax issues and the IRS’s own Declaration of Taxpayer Rights encourages taxpayers to hire tax counsel.

Remember, 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 Mr. Credit when you call to make an appointment. The number to call is 866.494.6829. You will then be meeting with me, your Board Certified Tax Attorney, right here in downtown San Diego. Again the number 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.

Keep sending us your questions. Please let Mr. Credit know how you liked the show by going to the Mr. Credit website or our website at www.kahntaxlaw.com. That’s k-a-h-n tax law.com.

Have a great day filled with smart decisions!

 

The IRS And Big Data.

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With another tax filing and estimated tax payment deadline coming up, you may have spent the last few days thinking hard about your taxes, but the IRS has been doing so for years – positioning itself as a leader in using Big Data.

Each year, April 15th is a memorable date for those of us in the United States – this is the deadline to file our taxes or to file an extension to delay filing a tax return to October 15th.

It is clear that the IRS is the dominant government agency in the United States. After all if there are no taxes, there can be no government. Politicians know this and over the decades have ensured that the IRS has all the powers it needs to raise federal taxes from the citizens, residents, and even tourists who stay long enough in the United States.

U.S. citizens cannot even escape U.S taxation by leaving the country because the tax law requires U.S. citizens who currently earn more than $9,750 to file even if they don’t live in the country. Even if you renounce your citizenship, as 3,805 did in 2011, you still have to pay an exit tax of 15% on all your assets including investments, homes, and even your personal possessions.

Extensive data collection

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 stopping here. The IRS has signed a $650 million ten-year contract with Unisys to further develop Big Transaction Processing Data whereby the IRS is using Unisys ClearPath Dorado Servers running at an estimated 1,200 MIPS to process tax returns.

For those of you who are not techies, “MIPS” is a measure of a computer’s central processing unit performance and its stands for “Million Instructions Per Second”. These servers will reside selected IRS Data Centers alongside several IBM z/196 mainframes, capable of running at an estimated 8,000 MIPS. Along with all this processing power are extensive data storage capabilities which will be managed in the IRS’ private cloud. It is estimated that IRS has 7.5 Petabytes of data. By the way just one Petabyte is equivalent to 1 quadrillion bytes.

Data from social media

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.

The IRS has access to every social media posting going back to 2008 so deleting your posts does not make them go away.  The IRS has bragged that their computer can make DNA blueprint of each of our behaviors. Amazingly, the IRS’ supercomputer can read all 200 million e-Filed returns in just ten hours!

All this will allow the IRS to refine its algorithms to more effectively identity those taxpayers to be selected for audit or investigation.

So while none of us enjoys doing or paying our taxes we as taxpayers can be comforted by knowing that the government is at the forefront of the big data revolution. And despite the use of these new technology skills to make the government itself more efficient, there are still two certain things in life – death and taxes!

Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How The IRS Selects Returns For Examination.

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I must say that the overwhelming majority of taxpayers file returns and make tax payments timely and accurately. As such taxpayers have a right to expect fair and efficient tax administration from the IRS, including verification that taxes are correctly reported and paid with enforcement actions against those who fail to comply voluntarily.

Four 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.

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.

How Does One Find Out If The IRS Does Select Your Tax Return For Examination?

This is where one must be careful because there are scammers out there who are calling people saying they are the IRS and threatening them with arrest and deportation unless they pay right away. If you are selected for an audit by the IRS, the initial contact will always be in the form of a letter sent by the assigned agent under official IRS letterhead.

Look for the following in the IRS Notice:

First, it will give you the contact information of the agent and what IRS office the agent reports to.

Second, it will tell you how the examination is to be conducted – this can be by mail, or through an in-person interview and review of the taxpayer’s records at the agent’s office or outside the agent’s office such as the taxpayer’s business.

Third, it will tell you which years are being audited and what records will be needed. Taxpayers may act on their own behalf or have a tax professional represent or accompany them. 

And that is where we come in. We highly recommend that you do not go into the IRS on your own. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

How The IRS Is Matching Big Data To Your Tax Return And Selecting You For Audit.

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According to IRS estimates, in a calendar year employers, businesses, financial institutions, credit card companies and other third party payers will file 2.3 billion information statements. These information statements report income and financial transactions, and can help individuals and businesses prepare accurate tax returns. Using information-matching programs, the IRS compares third-party information statements with taxpayer data, and sends a notice to taxpayers when IRS systems detect inconsistencies.

Here are some of the programs IRS has in place to help select tax returns for audit:

Individual Automated Underreporter (AUR) program

This matching program is better known by its primary notice: CP2000, Notice of Proposed Adjustment for Underpayment/Overpayment. IRS systems automatically send this notice when items reported on Form 1040, U.S. Individual Income Tax Return, don’t match information reported to the IRS by employers and other payers. The first round of these notices arrives just after Thanksgiving, and the second round arrives toward the end of the next year’s filing season.

The CP2000 notice has been a mainstay of IRS information reporting for decades. In 2012, the IRS issued more than 4.5 million CP2000 notices, with an average of $1,572 in additional taxes owed.

Form 1099-K merchant card transaction matching program

In 2012, the IRS started receiving from credit card companies, Forms 1099-K, Payment Card and Third Party Network Transactions. With merchant card transactions now being reported to IRS, the IRS quickly began using this information to match against business returns. However, because businesses do not specifically report merchant card transactions as separate line items on business tax returns, the IRS can only infer potential underreporting. For example, if a business has a disproportionate amount of cash to credit/debit card sales, based on its line of business, the IRS may look closer. These kinds of mismatches have led the IRS to develop compliance initiatives, including “soft” notices requesting explanation and mail audits requesting documentation.

The IRS is developing a Form 1099-K matching initiative that will make the IRS more efficient in identifying problem tax returns. But for now many initial notices indicate that the IRS is focusing on underreporting cases in which merchant card payments appear to make up the majority or even exceed the total business receipts reported on the return. In these cases, the IRS perceives that the business is underreporting cash sales due to the disproportionate share of merchant card payments. Accrual-basis taxpayers and e-commerce businesses whose receipts do not neatly match merchant card transactions are likely early targets in this program and we have had our share of this cases where that is what happened.

Automated Substitute for Return program

When a taxpayer does not file and the IRS has information statements indicating a filing requirement, the IRS uses the data to file a return on behalf of the taxpayer if there is a projected balance owed. In 2012, the IRS used information statements to file 803,000 returns for taxpayers, totaling $6.7 billion in additional taxes owed. And the sad thing about this is in just about every case, the amount actually owed when a tax return is filed by the taxpayer is much lower than what the IRS says a non-filer taxpayer owes. We even had cases where the IRS ended up owing our clients money.

Where in the future is the IRS going with their use of Big Data?

The IRS has been getting a lot of help from Congress where Congress has expanded the IRS’ reach to access more information to enforce compliance and implement new legislation.

1. Foreign Account Tax Compliance Act (“FATCA”)

This legislation became law in 2010. Starting in 2014, the IRS will have the ability to match taxpayers’ returns against the information it receives on U.S. taxpayers with accounts at foreign financial institutions. The IRS will likely scrutinize taxpayers who have not filed the required Form 8938, Statement of Specified Foreign Financial Assets, or FinCEN Form 114, Report Of Foreign Bank Account (commonly known as “FBAR”). Our office has a lot of cases representing taxpayers with undisclosed foreign bank accounts – it is a hot issue with IRS.

2. Patient Protection and Affordable Care Act (“Obama Care”)

As this Act is implemented in the next several years, the IRS will start using information statements for individual and employer compliance with the Act’s mandates. Starting in 2012, employers reported the value of employer-provided health insurance on Forms W-2, Wage and Tax Statement, to inform taxpayers of the value of their health insurance coverage. In 2015, the IRS will also receive information from health insurance companies on employee coverage, including the name and identifying information of the employer. The IRS can use the information to identify and penalize individuals and employers for noncompliance with Obama Care mandates.

The Stakes Are High!

A recent U.S. Government Accountability Office study showed that the IRS spends $267 million on underreporter matching programs, compared with the $4.2 billion it spends on audits. But automated information-matching programs return almost six times more revenue than audits. You can see why with fewer IRS agents and reduced budgets, the IRS will increasingly rely on technology-driven matching programs to bring in more tax dollars.

So if you receive one of these audit notices it is important that you don’t ignore it. Protect yourself from excessive fines and possible jail time. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego, San Francisco and elsewhere in California defend you from the IRS.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems and minimize the chance of any criminal investigation or imposition of civil penalties.

Jeffrey B. Kahn, Esq. speaks on Tax Inversions and IRS e-Filing Problems on the Mr. Credit Show on 760AM KFMB in San Diego

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Jeffrey B. Kahn, Esq. speaks on Tax Inversions and IRS e-Filing Problems on the Mr. Credit Show on 760AM KFMB in San Diego.
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