Are You A Business Owner With Incomplete Books And Records Facing An IRS Audit?
Your business records are lost or damaged and now you get selected by IRS for an audit if your income tax returns. Just because you can’t back up all your business expenses with receipts does not mean that you lose deductions. Here is a case of a coin dealer who still prevailed despite his lack of sufficient receipts and records.
The Huzella Case
In a recently published Tax Court case, Thomas R. Huzella v. Commissioner, TC Memo 2017-210 (October 23, 2017), the taxpayer, Mr. Huzella who resided in Virginia, bought and sold coins on eBay. All payments he received for the coin sales were processed through PayPal and those payments were reflected on a Form 1099-K, Payment Card and Third Party Network Transactions, issued by PayPal. This Form 1099-K reported for calendar year 2013 aggregate payments of $37,013 from 399 separate payment transactions during the year.
Mr. Huzella has been collecting coins since 1958. His father also collected coins, and some of those coins eventually were gifted to or inherited by Mr. Huzella. He did not keep any records to establish his basis in any of his coins which the IRS regardless of how and when he acquired them. He also did not keep any of his receipts for his business expenses including internet costs, packaging and shipping costs.
Mr. Huzella’s 2013 income tax return was selected for audit. That audit was likely triggered by the 1099-K income that was reported by PayPal which was not reported on the taxpayer’s return. The IRS auditor increased Mr. Huzella’s gross income by the proceeds of the coin sales and gave no credit for any cost of goods sold or expenses he incurred in this activity. So the taxpayer ultimately appealed to the U.S. Tax Court seeking credit for cost of goods sold and business expenses that were denied.
Tax Code Requires Substantiation Of Expenses
Taxpayers bear the burden of proving that claimed business expenses were actually incurred and were “ordinary and necessary”. IRC Sec. 162(a). Taxpayers also bear the burden of substantiating expenses underlying their claimed deductions by keeping and producing records sufficient to enable IRS to determine the correct tax liability. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84 (1992); Reg. § 1.6001-1(a), Reg. § 1.6001-1(e)). The failure to keep and present such records counts heavily against taxpayers’ attempted proof. John E. Rogers & Frances L. Rodgers v. Commissioner, TC Memo 2014-141.
But Unsubstantiated Expenses May Still Be Recognized Under The Cohan Rule
If a taxpayer with inadequate business records proves that he incurred certain expenses but cannot substantiate the exact amount, the Court in appropriate circumstances may estimate the amount allowable. George M. Cohan v. Commissioner, 39 F.2d 540, 542-544 (2nd Cir. 1930). Under this so called “Cohan Rule”, the Court “bears heavily…upon the taxpayer whose inexactitude is of his own making.” This means that the taxpayer must provide some reasonable evidentiary basis for the estimate. The Tax Court should then only allow you to deduct the least amount of money that you could have possibly spent. Although this may not be the entire sum you are claiming, it is better to get something than nothing when you do not have the receipts to back up your expenses.
Anti-Cohan Rule
But there are some types of business expenses that will not benefit under the Cohan Rule. The “Anti-Cohan Rule” found in IRC Sec. 274(d) requires taxpayers to produce receipts and logs in order to deduct expenses for business use mileage, entertainment and promotion and travel. The government added this provision to require substantiation because of the difficulty to estimate these items and the high level of scrutiny that such expenses include items that are not fully related to the business.
So Back To Mr. Huzella’s Case …
By applying the Cohan Rule, the Tax Court through the taxpayer’s testimony establishing a reasonable evidentiary basis for estimated business expenses, can find for the taxpayer deductions which ordinarily would be denied by IRS.
Mr. Huzella maintained no records of any kind to establish his cost or other bases in the coins that he sold on eBay. At trial he could not present any documentation from eBay to establish his acquisition cost for any of the coins but he was able to submit eBay records of his sales and listing transactions, which provide a detailed description of each item listed for sale. He also submitted coin catalogs from 2011 and 2013 and charts tracking the market prices of silver during 2010 to 2013. He testified that he turned over his inventory fairly quickly and that he had purchased fairly recently on eBay many of the items he sold there. The eBay sales records supported his testimony to some degree.
Evaluating Mr. Huzella’s testimony and the evidence as a whole, the Court found that he substantiated a cost of goods sold of $12,000. Furthermore, the Court also found he was entitled to deductions of $942 for PayPal fees, $2,188 for eBay fees, $600 for internet charges, $600 for postage and $100 for packaging costs.
What Should You Do?
Just because you fail to maintain adequate records or your records got lost or damaged should not mean that your business expenses are disallowed in an IRS audit. Taxpayers who hire an experienced tax attorney in audits and tax appeals who at the earliest opportunity introduces and applies the Cohan Rule should result in the least possible audit adjustments and avoiding costly litigation. Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. located in Orange County, Long Beach and other California locations get you the best possible result in your tax audit.
The Consequences Of Violating The Five-year Probationary Term After Getting An Offer In Compromise
The IRS offers a program called an Offer In Compromise (“OIC”). An OIC allows you to settle your tax debt for less than the full amount you owe. It may be a legitimate option if you can’t pay your full tax liability, or doing so creates a financial hardship.
With a properly completed application for an Offer In Compromise and required financial disclosures, the IRS will consider your ability to pay, income, expenses and asset equity. Only when it can be shown that the amount offered represents the most the IRS can expect to collect within a reasonable period of time will the IRS approve an OIC.
What people do not realize is that if your OIC is accepted, you are subject to certain terms over the next five years that if any term is violated the IRS reserves the right to revoke your OIC and thus put you back to where you originally started subtracting the payments made under the OIC and adding the accrual of more penalties and interest to the current date.
So it is important that anyone with an accepted OIC be aware of these terms and follow compliance:
1. You must comply with all provisions of the internal revenue laws, including requirements to timely file tax returns and timely pay taxes for the five year period beginning with the date of acceptance of the OIC and ending through the fifth year, including any extensions to file and pay. This is what I refer to as the “Five-year Probationary Period”.
2. Youmust promptly pay any liabilities assessed after acceptance of the OIC for tax years ending prior to acceptance of the OIC that were not otherwise identified in your application for an OIC.
So if your OIC included the Form 1040 liability for 2015 and later after your OIC was accepted you got audited for 2015 and that audit resulted in a liability, you would need to promptly pay that liability or else face a revocation of your OIC.
Likewise, if your OIC covered only individual income taxes and you were later assessed with unpaid employment taxes of a business, the failure to pay those new liabilities could result in a revocation of the OIC.
If the OIC was being submitted for joint tax debt, and one of the taxpayer-applicants does not comply with future obligations, only the non-compliant taxpayer will be in default of the OIC. This situation could occur where husband and wife who filed joint income tax returns and jointly secured an OIC later gets divorced and one party defaults on the OIC terms listed above.
An accepted OIC will not be defaulted solely due to the assessment of an individual shared responsibility payment made against another liable taxpayer. This situation could occur where two business owners have personal liability for unpaid employment taxes of the business and one of the owners defaults on the OIC terms listed above.
Now if you find that you cannot keep up with any of these terms, early intervention by your tax counsel with the IRS may still prevent your OIC from getting revoked. Once you receive a final determination by IRS that your OIC is revoked, any new OIC that may now be submitted will be based on your then current financial situation which if it has since improved would lead to an even higher Offer amount with no credit for what was paid under the prior OIC.
Business Consulting, 401(k) Plans and IRS Audits -What Need To Know, On ESPN Radio
Jeffrey B. Kahn, Esq. and Windus A. Fernandez Brinkkord Discusses Business Consulting, 401(k) Plans and IRS Audits -What Need To Know, On ESPN Radio – August 12, 2016 Show
Jeffrey B. Kahn, Esq. and Windus A. Fernandez Brinkkord Discusses Business Consulting, 401(k) Plans and IRS Audits -What Need To Know, On ESPN Radio – August 12, 2016 Show
Topics Covered:
- Special Guest Chuck Hunter, CEO at Multivariable Solutions
- 401(k) Plans
- IRS Tax Audits – What You Need To Know
- Questions:
- What exactly are the pros and cons of leaving my 401(k) with my previous employer?
- How accurate are the do-it-yourself type software that allow you to calculate and file your taxes after answering a few questions? Why is it more beneficial to have a tax professional prepare your taxes as oppose to said software?
Jeff states: Good afternoon! Yes sometimes we just have to take the money and run!
Welcome to Inside Advantage – Your Financial And Tax Radio Show.
This is 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.
Windus states:
And this is Licensed Financial Planner, Windus A. Fernandez Brinkkord, Senior Vice President Of Investments at Trilogy Financial Services.
You are listening to our weekly radio show where we talk everything about finances and taxes from the ESPN 1700 AM Studio in San Diego, California.
Jeff states:
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!
Windus states:
And whether you are on the rebound or flying high, we have the information you need to make sound financial decisions and map out your strategy for success.
Jeff states:
Our show is broadcasted each Friday at 2:00PM Pacific Time and replays are available on demand by logging into the KahnTaxLaw website at www.kahntaxlaw.com.
Jeff states:
For today’s show we have coming up:
Segment 2 material: 401(k) Plans
Windus states:
Also coming up is:
Segment 3 material: IRS Tax Audits and What You Should Be Aware Of
And of course towards the end of our show, we will be answering some of your questions.
Jeff starts chit chat with Windus.
Jeff states: So for today’s special guest:
We would like to introduce Chuck Hunter! Chuck is the Founder and CEO of Multivariable Solutions, a domestic and international Business Consulting Firm located here in the Greater San Diego area.
- So Chuck, tell us a little bit about what you do?
- What is your goal or mission at Multivariable Solutions?
- What prompted you to found your own company?
- What would you say your niche market is? What types of companies tend to come to you the most, whether it’s based on size, growth goals, or various sectors…
- How long have you been with Multivariable Solutions? What had you done in your career before that prepared you to take on the role of CEO?
- Most companies and consultants focus on one or two variables whereas Multivariable Solutions looks across a wide spectrum. What exactly do you look for?
Jeff states: Well it’s time for a break but stay tuned because we are going to tell you all about 401(k) Plans.
You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.
BREAK
Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.
And be aware of the special offer that Windus has for you: Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.
401(k) Plans
Some states, including California, are implementing regulation requiring companies of 5 or more people to offer retirement plans. In California, this is called the Retirement Savings Trust Act. The reason this is being required is:
The California State Treasurer states that based on their research fewer than 45% of California’s private workforce has access to a work sponsored retirement plan in the age group of 25-64. This is worse than the nationwide average of 53%. This is specifically only in the public sector.
To go a step further, in the public and private sectors, nearly ½ of all Californian’s are currently on track to retire with income below 200% of the federal poverty level of $22,000 per year for one person. *This information is coming from Trinet, an HR retirement planning company’s site. Trinet is one of many companies that help work on this here in San Diego.
The Secure Choice Retirement Savings is where companies that do not set up a plan of their own, will have to direct employees. The scary part of this is that for the first three years contributions could be kept in Treasury bills, regardless of your age, until more extensive models can be built! Better to have a large company like Fidelity or T. Rowe Price manage this then to have the treasurer put together a board that is going to take 3 years to put proper investment models in place.
*Chuck, with the work that you do, do you recommend companies start plans for their employees? When you do, what type of plans do you typically recommend?
There is also a new emerging “robo” 401k platform employers can implement. I have to say, when reading about this, a 401k plan is not the place for “robo” implementation. I can tell you that the IRS could have a field day auditing plans that are incorrectly established and 401k plans need to be very specific to the company.
Here are some main points for plans to remember:
*Employees with plan balances of under $5,000 can be forced out of the plan
*The fund line up should be reviewed on a schedule and there should be defined parameters for which funds are brought into the plan and removed from the plan.
*401k plans are required to have a diverse line up for employees to select from.
*Target date funds are becoming more popular and are often now the QDIA
*QDIA is the Qualified Default Investment for when an employee is auto enrolled in the plan but does not go in after to elect an allocation.
*Why might an employer elect to do auto enrollment?…because they want to contribute themselves without actually matching! J
Why a 401k plan over a SIMPLE plan.
*401k plans allow for employers to be selective about who is in the plan and match in a more creative fashion. Sometimes in a benefit to the employee and sometimes not. SIMPLE plans are “simpler” to maintain annually BUT they aren’t always on the best platforms for the employee and some have fees that just aren’t that transparent or favorable. The 401k plan can be a very powerful tool and if put in place correctly, can be very inexpensive to the employee for long term retirement savings. And in case anyone out there receives a 403 b 2 notice, THIS IS a key notice regarding the fees you pay in the 401k plan.
Top Company 401k plan issues:
- Not removing or encouraging x-employees to rollover their funds
2. Too much company stock or TOO much risk options without enough conservative options for employees.
3. Not remitting money in a timely fashion
4. Being “top heavy” having to force money out of the plan for your top employees. Being Top heavy means earning more than $120,000 in income or being more than a 5% owner in the company.
Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.
Stay tuned because after the break we are going to tell you IRS Tax Auditing and What You Should Be Aware Of.
You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.
BREAK
Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.
Calling into the studio from my Walnut Creek Office is my associate attorney, Amy Spivey.
Chit chat with Amy
And be aware of the special Offer that I have for you: PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in 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 states: So I don’t know of anyone who enjoys being audited by the IRS. The IRS randomly selects tax returns for audit each year.
Jeff asks: Amy can you go over the deadlines that the IRS has if looking to audit a tax return?
Amy replies: Now the IRS does have a deadline by which they must complete an audit of your tax return. Normally that deadline is three years after the due date of the tax return. So a 2013 income tax return that was filed by the April 15, 2014 filing deadline, the IRS would have until April 15, 2017 to audit that tax return.
Jeff states: Well here we are August 12, 2016 but do not relax so quickly. If you filed an extension for your 2013 tax income return, then you just extended the IRS’ time to audit to October 15, 2017.
Windus asks: Could the government have an even longer time to audit a tax return?
Amy replies: The government has an even longer time of six years where you omitted more than 20% of your income on your tax return and if you never filed a tax return or you filed a fraudulent tax return, there is no deadline for the government and you can be audited any time!
Windus asks: Amy, what are the different types of audits that the IRS conducts?
[Amy responds allowing Jeff to comment before proceeding to the next.]
Correspondence Audit: This is the least severe type of audit. It involves the IRS sending a letter in the mail requesting more information about part of a tax return. For instance, the agency may have questions regarding charitable deductions and request you send in receipts to substantiate your deduction. “It’s the lowest level of the audits.” “If you have the receipts or information it’s generally not an issue.” If your tax return is legitimate and you have the data to back up any claims on your return, you may want to handle the situation on your own. BUT If you don’t have the receipts or information, then you should have a tax representation professional deal with the IRS because you could face fines, penalties and interest if you end up owing money.
Office Audit: If the IRS has more questions about your return, then you’ll get a letter in the mail inviting you into an IRS office for the audit. The office audit is more serious, so you should always have a tax representation professional to come with you or turn over the audit representation to him. A tax representation professional can gather information in advance of the meeting and make sure it is complete so that the office audit can be wrapped up with the IRS as quickly as possible. “If the IRS still needs additional records, you’ll have time to supply the missing information.”
Field Audit: This is the most serious type of audit and involves the IRS visiting you at your home or office. “The reason the field audit is more serious is the IRS auditor will ask to see other things.” “They don’t want to limit it to particular items.” While there are much fewer field audits than office or correspondence audits, I wouldn’t let any client go into a field audit without representation. “It’s the most serious level of audit. If they are coming out to you, they are looking for something.”
Jeff states: So everyone wants to know, what sets off alarms at the IRS? Well for one thing it pays to keep in mind these 10 “red flags” that could increase the chance you’ll be targeted for an audit.
[Windus to read off each flag followed by Amy explanation and Jeff comment.]
- High income. The audit rate for 2011 tax returns, which was about 1.11% overall, shot to 3.93% for taxpayers with income of $200,000 or more. That’s almost one out of every 25 returns. The IRS tends to chase the “big money,” and while that’s no reason to earn less, you should realize that higher income exposes you to a greater audit risk.
- Unreported income. The IRS computers match up the income listed on W-2 and 1099 forms with the income reported on individual returns. You’re likely to draw IRS scrutiny if you don’t report all of your taxable income or if you underreport the total, even if an omission is inadvertent. Check your tax forms to ensure the information is correct.
- Large charitable gifts. Besides providing personal satisfaction, deductions for charitable gifts can offset highly taxed income on your return. But the IRS may become suspicious if the amount you deduct is disproportionate to your income. In particular, make sure that deductions for gifts of property are legitimate and include an independent appraisal when required.
- Home office deductions. If you qualify, you can write off your direct costs of using part of your home as an office, plus a percentage of everyday living expenses such as property taxes, mortgage interest, utilities, phone bills, insurance, etc. But the basic rule is that you must use the office “regularly and exclusively” as your principal place of business. Simply doing work at home when your main office is elsewhere won’t cut it.
- Rental real estate losses. Generally, “passive activity” rules prevent investors from deducting losses on rental real estate. But a special exception allows a loss deduction of up to $25,000 for “active participants,” subject to a phase-out between $100,000 and $150,000 of adjusted gross income (AGI). Another exception applies to qualified real estate professionals. The IRS may zero in on taxpayers claiming losses under either exception. This aspect of the tax law can get very technical so you should inquire with a tax professional to see if you qualify.
- Travel and entertainment expenses. This is often a key audit target. IRS agents particularly look for self-employed individuals and other business owners who claim unusually large write-offs for travel and entertainment expenses and meals. Note that the tax law includes strict substantiation rules that must be followed in order to deduct any of these expenses.
- Business use of cars. Another area ripe for abuse by taxpayers is the use of a vehicle for business purposes. The annual amount you can claim via depreciation deductions for the vehicle, based on percentage of business use, is limited by so-called “luxury car” rules. IRS agents have been trained to ferret out taxpayer records that don’t measure up. Another red flag is a claim for 100% business use of a vehicle, especially if another vehicle isn’t available for personal use.
- Hobby losses. As a general rule, you can deduct expenses for a hobby only up to the amount of the income it produces. You normally can’t claim a loss for the activity, unless your involvement rises to a level of a bona fide business. Usually, an activity is presumed not to be a hobby if you show a profit in any three out of the past five years, but the IRS can refute this presumption.
- Foreign bank accounts. The IRS has started clamping down on taxpayers with offshore accounts in “tax havens” in which banks do not disclose account information. Failure to report foreign income can trigger steep penalties and interest. If you have foreign bank accounts, make sure you properly report the income when you file your return.
- Cash businesses. If you operate a small business in which you’re largely paid in cash—for example, if you own a car wash, restaurant or bar, or a hair or nail salon—the IRS is more likely to examine your return. Past history indicates that cash-heavy taxpayers may underreport their income or, in some cases, not report any income at all. Accordingly, the IRS remains on high alert.
Jeff states: These red flags don’t mean you should shy away from claiming the tax breaks you rightly deserve. But when the IRS knocks on your door you need to be prepared. Which is why …
PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in 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.
Stay tuned as we will be taking some of your questions. You are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord on Inside Advantage on ESPN.
BREAK
Jeff states: Welcome back. This is Inside Advantage – Your Financial And Tax Radio Show on ESPN and you are listening to Board Certified Tax Attorney, Jeffrey B. Kahn, and Licensed Financial Planner, Windus A. Fernandez Brinkkord.
And Windus and I always pleased to make our offers to our listeners where… PLUG: The Law Offices Of Jeffrey B. Kahn, P.C. will provide you with a Tax Resolution Plan which is a $500.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Jeffrey Kahn, right here in 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.
Windus states: Windus PLUG: Trilogy Financial Services will provide you with a retirement cash flow analysis which is a $600.00 value for free as long as you mention the Inside Advantage Radio Show when you call to make an appointment. Call my office to make an appointment to meet with me, Windus A. Fernandez Brinkkord. The number to call is 858.314.5169. That is 858.314.5169. Or visit www.guideyourstory.com. NPC DOES NOT PROVIDE TAX NOR LEGAL ADVICE.
You should also know that the securities and advisory services are offered through National Planning Corporation (NPC) Member FINRA, SIPC, and a Registered Investment Advisor. Trilogy Financial Services and NPC are separate and unrelated Entities.
Jeff states: And again I would like to thank our special guest, Chuck Hunter, CEO at Multivariable Solutions for being on the show today. Chuck as our special guest you have the honors of drawing the questions from our listeners for us to answer. OK Chuck, what questions have you pulled for us to answer?
Question: What exactly are the pros and cons of leaving my 401(k) with my previous employer?
Windus answers.
Question: How accurate are the do-it-yourself type software that allow you to calculate and file your taxes after answering a few questions? Why is it more beneficial to have a tax professional prepare your taxes as oppose to said software?
Jeff answers.
Jeff states: Well we are reaching the end of our show.
Windus states: Have a great day everyone!
Income Tax Evaders May Still Face Big Fines And Up To Five Years In Jail After Coming Forward
Tax cheats cost the government real money from the lost revenue and the costs associated with enforcement and collection of unpaid tax liabilities. On the Federal and State levels, enforcement of the tax laws is a priority task to ensure that everyone is paying their fair share. Recently, the South Carolina Department Of Revenue (“SCDOR”) charged 30 employees of the Boeing Company with tax evasion over several years going back to 2011. The employees voluntarily turned themselves in to SCDOR investigators but are still faced with the prospect of hefty penalties and a five-year jail sentence for each charge.
The SCDOR Investigation
According to the news release from the SCDOR, the Boeing employees filed W-4 forms claiming exemption from South Carolina’s state income taxes. Apparently, during tax years 2011 to 2014, the workers claimed state tax exemptions although they did not qualify under South Carolina’s individual income tax guidelines. During the years in question, these Boeing workers also failed to file their state tax returns.
It is important to note that the workers received notices from SCDOR encouraging them to comply with the tax laws prior to issuance of arrest warrants. These Boeing employees were given several opportunities to rectify their tax problems but failed to do so. The tax liabilities ranged from $4,000 to about $20,000 based on collective incomes exceeding $4 million. Boeing issued a statement saying that the company was aware of the employees’ tax issues and were proceeding with their own investigation. Aside from their tax troubles, these employees may face disciplinary action from their employer.
Understanding State Income Tax Regulations
The State of South Carolina collects income taxes from residents earning an income in the state. Residents who earn incomes outside South Carolina would pay state taxes to the second state. If that state does not collect income taxes, the taxpayer must pay state taxes to South Carolina as their residential state. Nonresidents who earn income from South Carolina employers must pay taxes to this state. The state does not use a separate withholding exemption certificate from the Federal Form W-4. Exemptions and deductions that are allowed on the federal form are accepted for the state tax returns. In general, employees who received a full refund of taxes withheld in the previous year and who anticipate no tax liabilities in the current year may claim exemption from state taxes.
Enforcement of state taxes varies depending on the prevailing tax code although the state Department of Revenue is charged with enforcement. The process and penalties may vary, so it is important to consult a tax professional when you are faced with any State as well as Federal tax liabilities.
What Constitutes Tax Fraud?
Tax fraud is the deliberate intent to avoid paying taxes through whatever means despite the taxpayer being fully aware that taxes are lawfully due.Tax fraud may trigger penalties under the definitions of Title 26 in the Internal Revenue Code.
Specifically, Title 26 U.S.C. Section 7201 states that tax evasion is a felony that carries a penalty of imprisonment for at most five years or a $250,000 fine for each charge for every individual or a combination of fine and imprisonment along with reimbursement of court costs.
Tax evasion is an example of tax fraud. Tax evasion refers to all deliberate acts where taxpayers misrepresent their taxable income on their tax returns. This would include actions such as inflating expenses for larger deductions, strategically under-reporting taxable income or failing to file tax returns in a mistaken attempt to avoid paying taxes.
The Truth about Dealing with the IRS and State Tax Agencies
There could be any number of reasons why individuals choose to forego filing their tax returns. In the case of the Boeing employees, it is difficult to say what, if anything, made them believe that they could get away with non-filing and non-payment of state taxes for an extended period. It is safe to say that their end-game was not prison, but it appears to be heading in that direction. Looking at the amount of tax liabilities that each individual owed the SCDOR, it would have been much more sensible to comply with state tax laws. The tax dues were miniscule compared to the criminal penalties should they be prosecuted for tax evasion.
The existing tax code is based on the premise that taxpayers are willing and able to honor their tax obligations as upstanding citizens. As such, the IRS and the State revenue offices have programs in place to encourage taxpayers to voluntarily come forward to resolve their non-compliant status instead of waiting for tax agency notices or letters. Voluntary disclosure by taxpayers may count in their favor when the revenue investigator decides if the case merits criminal prosecution. The IRS also allows payment plans and in some cases, reduction of tax liabilities for low-income taxpayers.
Redemption for Non-filers
Tax laws may be rigid, but the IRS and State Tax Agencies do not exist to go after taxpayers who make simple and unintentional mistakes on their tax returns. However, blatant fraud that includes non-compliance with tax filing regulations over several years and ignoring tax agency notices will trigger an investigation and prosecution if for fraud charges. The tax agencies do not need to prove how much you actually owe in taxes to charge you with tax fraud and possibly secure a felony conviction.
If for any reason you failed to file tax returns or you need to amend any of your returns from the last six years, it is best to consult a tax professional to make sure that you are making the right steps. When you work with a tax attorney or a tax expert, you may not have to deal directly with the IRS or State Tax Agency. Your tax representative takes charge of requesting tax transcripts from previous years if you don’t have them anymore. If you owe taxes and are unable to make full payment at the time your returns are filed, your tax representative can negotiate a viable payment plan.
Don’t wait for the IRS or State Tax Agency to contact you if you have not been filing your tax returns or need to amend information submitted in previous returns. For your peace of mind, consult a tax professional who can guide you through the process to ensure a positive outcome and avoid prosecution.
Five common myths about the dreaded tax audit
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. How will you catch the bad guys if you give them the rule book first? But because of the sense of mystery around the process, it’s an area of regulation often misunderstood by taxpayers.
Here are a few common myths about the dreaded tax audit:
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.
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.
Don’t Take The Chance And Lose Everything You Have Worked For.
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 Ten Tax Sins That Could Land You In Jail Or Charged With Fraud Penalty
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.
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.
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.
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.
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.
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. Afterall, 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. Using whole, rounded numbers
Yes, round numbers are easier to add and subtract. Yes, your tax software rounds entries. And yes, even the IRS says you can round your entries on your 1040 to whole dollars.
But when it comes to deductions and expenses, it tends to make the IRS think that you are making up amounts. Now some people add tip amounts so that meal checks come out to even numbers. But those people should still keep those receipts. Other financial transactions, however, rarely end in .00. And since when to all your business expense you are claiming on your tax return end in round hundreds or thousands? At best, all those rounded numbers make it look like you didn’t keep good records showing precise amounts. And that could encourage the IRS to take a closer look at all your entries.
9. Improperly claiming a dependent
Sometimes determining just who is your tax dependent can be messy. There are lots of rules about relationships and support earned or provided and who lives for how long in your house. You also must have the Social Security number of the person regardless of relationship that gets put on the 1040.
Sometimes the confusion leads to an innocent mistake as to who is eligible to be listed as your tax dependent. Other times, though, folks knowing claim a person as dependent to get the added exemption amount or to claim the refundable Earned Income Tax Credit.
Faking dependents is not a good idea. The IRS knows this happens. It looks at who has and hasn’t been named before on your return. Plus, family situations often are messy enough without adding tax cheating to the mix.
10. 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.
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.
Don’t Take The Chance And Lose Everything You Have Worked For.
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.
How The IRS Is Connected To The Growing Sharing Economy.
If you are earning income through entities like Uber, Lyft, Airbnb and others, beware the IRS will be verifying your reported income.
The Sharing Economy
On the internet, everything is for hire. Last night 40,000 people rented accommodation from a service that offers 250,000 rooms in 30,000 cities in 192 countries. They chose their rooms and paid for everything online. But their beds were provided by private individuals, rather than a hotel chain. Hosts and guests were matched up by Airbnb, a firm based in San Francisco. Since its launch in 2008 more than 4,000,000 people have used it—2,500,000 of them in 2012 alone. It is the most prominent example of a huge new “sharing economy”, in which people rent beds, cars, boats and other assets directly from each other, coordinated via the internet.
You might think this is no different from running a bed-and-breakfast, owning a timeshare or participating in a car pool. But technology has reduced transaction costs, making sharing assets cheaper and easier than ever—and therefore possible on a much larger scale. The big change is the availability of more data about people and things, which allows physical assets to be disaggregated and consumed as services. Before the internet, renting a surfboard, a power tool or a parking space from someone else was feasible, but was usually more trouble than it was worth. Now websites such as Airbnb, RelayRides and SnapGoods match up owners and renters; smartphones with GPS let people see where the nearest rentable car is parked; social networks provide a way to check up on people and build trust; and online payment systems handle the billing. I call these websites “sharing economy facilitators”.
As the sharing economy continues to grow, so do the associated tax problems. The IRS obviously is interested in folks who earn money using their autos as on-call car services or rent their homes to out-of-towners.
Duty To Report Income
Except as otherwise in the Internal Revenue Code, gross income means all income from whatever source derived (IRC Sec. 61). So whether your work in the sharing economy is you only job or a secondary job, you need to report your income from that work on your income tax return.
Remember you are not an “employee” of the sharing economy facilitators; you are an “independent contractor”. As such, there is no withholding of any taxes from your checks; you are responsible for all taxes – Self Employment taxes and income taxes – on your net earnings. Uber spells this out, sort of, on their site:
“You pay taxes as an individual—there’s no need to register as a business. File taxes as you normally would, and we’ll send you a 1099 form that you will use to report the income you made driving with Uber.”
You will report your net income from your Uber activitiy, (i.e., what you are paid minus any associated expenses), on Schedule C and the Schedule C “bottom line” will show up on line 12 of your Form 1040. (“Business income or (loss). Attach Schedule C or C-EZ”.)
The net income from your activity with the sharing economy facilitator is subject to Self Employment taxes, (Social Security and Medicare), at a 15.3% rate. Now you will get to deduct one-half of these Self Employment taxes on your Form 1040 but if you consider that you still have income taxes to pay as well, the effective tax rate can easily exceed 30% and you will also have your state’s income tax on top of that.
So whether you are using your personal car for business or part of your residence as a “B&B”, you will need to have good personal records of your expenses. In a situation where you are using your personal car for business you typically can deduct either “actual” costs for the percentage of business use, (though cell phone and food probably are not pertinent) or you can deduct mileage at a standard rate for business use. If you go the “simple” route and deduct mileage instead of “actual” expenses your Schedule C would consist of exactly 2 lines so it’s not very hard – but you will loose out on a lot of deductions.
Why The IRS Likes The Sharing Economy
Unlike traditional transactions where two parties directly deal with each other and nothing is reported to the IRS, sharing economy facilitators who connect the two parties, collect the money from the paying party and transmit the revenue to the service provider will report the sale to IRS using Form 1099. The IRS now has a tool by which they can match up the amount of income you report on your tax return and if the Form 1099 amount is greater, you can be sure that the IRS will catch this and send you a tax bill.
How About Money Collected For Special Projects?
Money collected for special projects via crowd-sourcing sites also is generally viewed by Uncle Sam as taxable income, regardless of whether it’s for a movie or a recipe. There is no tax benefit even to contributions to help out folks in need.
No tax break for donors – Setting up online money-collection sites like GoFundMe to help out folks who’ve encountered a catastrophe is today’s equivalent to the donation jar at the neighborhood grocery. Just that those dollars, since the crowd funding money is given directly to the individuals, not to IRS-approved 501(c)(3) organizations that pass it along, tax laws regarding charitable gifts say that the donors can’t deduct the gifts as itemized tax deductions.
Income to recipients – Now you would think that the money the recipient of the crowd-sourcing account do not have any tax worried as the Internal Revenue Code says that gifts are not taxable income to the recipients. But IRS is treating these funds received as taxable income and after matching the recipient’s tax return to the Form 1099 reported by the company running the crowd-sourcing account the IRS will generate a tax bill where the reported income is understated. It does not matter that the money received was used for the purpose intended when setting up the account. So until the IRS issues any definitive guidance or a Court weighs in on this issue, beware.
Don’t Take The Chance And Lose Everything You Have Worked For.
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.
What Are The Pros And Cons Of Going On Extension?
It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the National Federation Of Independent Business (“NFIB”) Small Business Economic Trends survey, released earlier this year, revealed that 20% of businesses cite taxes as their biggest problem.
With April 15th fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension:
Extra time to file doesn’t mean extra time to pay.
An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April 15th deadline.
If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5% in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; 5% for each month or part of a month you’re late, up to 25%.
That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations.
You can’t be sure exactly how much you owe without first completing your tax return.
And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15th; meaning you’ll have to do some heavy estimating.
If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90% of the tax you owed, you’ll end up owing a penalty of 0.5% of the unpaid amount every month until you pay the balance.
To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments but given the complexities of the tax law and ever-changing rules, it is best to seek a professional tax advisor to ensure the accurate calculation of taxes owed.
It will make acquiring a new loan difficult.
If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.
Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause.
Your potential refund will take longer.
As a small business or startup, you might be due a tax refund from the IRS; that is once you file your taxes. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.
Extending the filing of your tax return extends the period of time that the IRS can select your tax return for audit.
Generally the IRS has up to three years after the filing deadline of your tax return to select it for examination or audit. So if you timely file your 2014 tax return by April 15, 2015, the IRS will have until April 15, 2018 to audit your 2014 tax return. However, if you file an extension of your 2014 tax return, the IRS will now have until October 15, 2018 to audit your 2014 tax return.
Filing an extension where your prior years’ tax returns are currently under examination.
Since the IRS has a three-year window to audit tax returns, if your 2012 or 2013 tax returns are currently under examination, it is probably a good idea to file an extension for 2014. This way, the scope of the audit is not expanded to the 2014 tax year as you now would have until October 15, 2015 to file your 2014 tax return. The IRS cannot force you to file a tax return before its filing deadline so if your audit is completed before October 15th, you may delay or even avoid 2014 being examined by IRS.
Filing an extension where you are currently on a payment plan with the IRS.
A condition of any payment plan established with the IRS for your back tax liabilities is that you do not create any new liabilities. If you expect to owe for 2014 and you file your tax return no later April 15th with an unpaid balance, the IRS computers will automatically default your payment plan putting you back to square one. But if you file an extension for 2014, you could possible delay this action by IRS for at least another six months which may be enough time for you to put away extra funds so that when you file 2014 you can include full payment of the balance due and avoid default.
If seeking a payment plan or Offer In Compromise for your back taxes, don’t file an extension and file no later than April 15th.
Where you owe back taxes to the IRS, it’s usually a good idea to include all tax years in your proposal which could be a payment plan or Offer In Compromise. Only existing liabilities from filed tax returns may be wrapped into any proposal. A liability from a 2014 tax return that has yet to be filed will not be included in your proposal and when it now comes time to file, you will need to include full payment. Otherwise, you now defaulted what was previously set up.
And if you have foreign bank accounts ….
Filing for an extension on your income tax return does not extend the June 30th deadline to file your Report Of Foreign Bank Accounts (“FBAR”) using FinCEN Form 114 with the U.S. Department Of Treasury.
Don’t Take The Chance And Lose Everything You Have Worked For.
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.
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