Archive for category: IRS Operations & Procedures

Alaska’s economy is dominated by the oil, natural gas, and fishing industries, resources which it has in abundance. Tourism is also a significant part of the economy and that is where you can find some classic Alaska bars but for some time now these bars have been under pressure to stay in business and to do so have created tax problems and gained the attention of the IRS.

So what makes a classic Alaska bar?

A classic Alaska bar is a magical mixture — a touch of danger and a place where characters gather, featuring a strong relationship between bartender and patrons. More than fun, a classic Alaska bar is educational in a perverse sort of way. Past customers bring them up in conversation. People outside Alaska know of them.

What makes some bars unique is what used to be there before the bar existed – perhaps an old outpost or bootlegging operation or brothel.

Some of these classic Alaskan bars are set up as a dark and dank watering hole with sawdust on the floors and dollar bills and a bra or two nailed to wooden walls. While others may be more conventional. But the one thing that the classic Alaskan bars have in common is the atmosphere of the bar reflects the personality of its owner.

But as those owners get older and retire or pass away, a new crop of entrepreneurs are taking their shot at preserving legendary watering holes. One of those places is Louie’s Bar in the Southeast Juneau community of Douglas.

Louie’s Bar rose out of the ashes of the Great Douglas Fire of 1937, which incinerated downtown Douglas. Although the bar was not called Louie’s until 1974 when it was then inherited by a man named Louie Pusich.

But in 2013 Louie’s doors were closed – not because the owner died or retired. Instead it was closed by the Internal Revenue Service for nonpayment of taxes amounting to $1 million.

The Shutdown.

That’s right, P P’s Douglas Inn, formerly known as Louie’s Bar, was closed down and seized by the Internal Revenue Service for not paying federal taxes over the last fourteen years. The doors were locked, stools upturned on tables and lights dimmed just before the 2013 Independence Day holiday. Owner Patrick M. Peterson admitted that he did not pay federal taxes and knew that a shut down had to be coming.

Mr. Peterson was asked, how could he have racked up over $1 million in Federal taxes? He replied that “Paperwork is not my big suit. I just couldn’t keep up with it. Up until 1999, I had a good bookkeeper that was taking care of it for me. So, I had everything caught up with”. He then added that “staring with 1999, he did have others working on his bookkeeping and taxes but nobody came through with what I needed”.

Federal tax records showed that Peterson and his company Peterson Pacific Holdings owed nearly $1 million in back taxes. Three-quarters of that amount was in the form of unpaid quarterly employer taxes from early 1999 to the end of 2012. The rest is what the IRS calls a Trust Fund Recovery Penalty, or an attempt to recoup employees’ withholding, Medicare and Social Security taxes that the employer did not pass on to the federal government.

This is all evidenced by eleven federal tax liens totaling $997,188.16 that were filed against Peterson and his company between July 2011 and June 2013. They were for unpaid federal employer taxes during most of the reporting periods from First Quarter of 1999 to the Fourth Quarter of 2012.

Now, most business owners in this situation would look to reach a resolution with the IRS and avoid collection action or even worse – a business shutdown. But not Peterson. Instead he signed a quit claim deed for the Bar’s property to a Carol Collier of Riverview, Florida in exchange for $1.00 on May 20, 2013. This was at the same time when the City and Borough of Juneau (“CBJ”) property assessments showed the land valued at $67,900 and the structure valued at $174,100 for a combined total of $242,000. But don’t think that this transfer thwarted IRS collection action. You see when the IRS files a Federal Tax Lien, such lien follows any subsequent transfer of the property until the lien is paid in full or otherwise satisfied.

What is most unusual about Peterson’s case is that his business’ tax problems go back to 1999 – that’s about 15 years! How could the IRS have let this drag on for that long? Perhaps being in a remote location in the rugged State of Alaska made the growing Federal tax liabilities of Peterson’s business a low priority of IRS.

But the continued non-payment of such taxes is common, especially among struggling businesses. Owners of struggling businesses in financial trouble and having cash flow issues are saying “OK, if I don’t pay my suppliers, they’re not going to give me any inventory. If I don’t have any inventory, (then) I’m out of business. Just one quarter or one month and I’ll do better, and the IRS isn’t going to shut me down”. Unfortunately, when this practice continues over successive quarters, many businesses are unable to turn this around. The IRS calls this “pyramiding”.

The IRS is usually in contact with the taxpayer with almost-immediate notices and the assignment of a Revenue Officer to prevent such a huge pyramiding problem. But the eventual measures that were taken in Peterson’s case were an extraordinary step that the IRS had no choice to pursue. You see, Peterson did not owe just the IRS but also the City and Borough of Juneau (CBJ) for sales tax, CBJ for property taxes and the State of Alaska for unemployment insurance contributions.

So the IRS had no choice – it had to stop the bleeding and shut down Peterson’s business. A public auction would be later held and the proceeds applied to the back tax liability of Peterson’s business.

The Reopening.

Abigail Trucano and her parents, James and Arbe Williams were unhappy that the landmark bar was forcibly closed by the IRS because of unpaid back taxes amounting to $1 million. Family members were regulars, as were many in the Southeast community of Douglas. “We thought this bar was so important to Douglas,” says Trucano. “I used to come in here all the time.”

So when the IRS auctioned the bar, the Williams’ snatched it up for $145,000 and invested heavily in its renovation. Their daughter, a co-owner, took charge of operations. Trucano had worked six years as a bartender at Juneau’s downtown tourist destination, Red Dog Saloon, dealing with swarms of cruise ship tourists.

The family contacted Louie Pusich, the former founder, obtaining his permission for the use of his name. The 76-year-old attended the grand opening in July 2014 which was reopened as Louie’s Douglas Inn.

Excited for its return, a handful of Douglas residents waited on the steps of the newly renovated Louie’s Douglas Inn a few minutes before the doors would open at 3:00 p.m. on a Tuesday. A celebratory drink was in order, certainly, but the real reason was to reunite with friends, including the new owners of the bar.

The eponymous Louie Pusich walked down the hill from his home with his wife, Doreen, to the bar he once owned. He ordered a Bud Light, which he jokingly referred to as a “Butt Light.” Looking out for his health, the 76-year-old doesn’t drink much these days.

The look of the bar has changed considerably since the renovation, with a more open layout, exposed brick, new fixtures and more. While the bar has received a makeover, there’s a lot that will remain unchanged about Louie’s Douglas Inn — it’s still the “living room of Douglas.” And not it has another great story behind it – that it was raised from the 2013 wrath of the IRS.

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are in danger of wage garnishments or bank levies or having a tax lien placed against your property, stand up to the IRS and your State Tax Agency 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.

With just weeks remaining before the new tax season opens, Congress walloped the IRS with $341 million in budget cuts. That’s in addition to earlier slashes to the IRS budget of more than $1 billion since 2010, resulting in nearly 13,000 employee layoffs.

Is that a wise choice or an act of spite toward an unpopular agency?

Congress touted that the cuts are much needed but to others it looks like something else – revenge. You see many in Congress are still fuming about this year’s earlier tax-exempt organization scandal and those missing Lerner emails. There are other members of Congress that are angry about reports of wasteful spending. And still there are other members of Congress that see this as a great opportunity to keep IRS from properly implementing pieces of the Affordable Care Act – yes, the same Act that Congress pushed through a few years ago, tasking the IRS with related administrative responsibilities.

Rep. Peter Roskam (R-IL), the newly elected Chair of the Oversight Subcommittee of the House Ways and Means Committee, minced no words about the agency’s budget, referring to the IRS as a “rogue operation” earlier this year. He said about the IRS and cuts to the budget, at the time “This is an effort to get this agency under control. They have not faithfully executed the law. They have not faithfully used the resources that they have been entrusted with, and we in the House are determined to get this right and to rein them in.”

So if Representative Roskam is right, the IRS by getting less funding will have no choice to run its operations more efficiently

Will the IRS cuts paralyze the agency and allow taxpayers to slip through the system?

Now if you are still thinking that this latest move by Congress will paralyze the IRS, let’s put the amount of cuts in perspective.

Since fiscal year 2010, Congress has cut IRS funding by almost $1.2 billion, or 10%, forcing the agency to severely reduce its full-time, permanent workforce by 13,000 employees. This occurred even as the country added approximately 7 million new taxpayers. 

But let’s go back to 1995 – that’s almost 20 years ago. In 1995, the IRS had 114,064 workers to administer tax laws and process 205 million tax returns. By the end of 2013, staffing had fallen to 83,613 to administer a more complicated tax code and process 242 million tax returns and other forms. When I run these numbers I get 26% fewer IRS employees processing 20% more tax returns. Contrary to what Representative Roskam thinks, these statistics show the IRS doing an extraordinary job keep up with the functions it is charged with.

Additionally, the IRS may be one of the smarter investments for Congress. Treasury Secretary Jack Lew said last year that the IRS yields $6 in collections for every $1 it receives for tax enforcement. The agency is already working with a smaller budget than it had five years ago — $11.3 billion in 2014 compared to $11.5 billion in 2009.

So what’s another $341 million cut in funding?

The IRS still has $10.95 billion to work with in 2015. This will bring the agency’s budget below the sequester level and below the level that was in place in fiscal year 2008. This funding level was still sufficient even then for the IRS to perform its core duties, including taxpayer services and the proper collection of funds. Taxpayers back in 2008 were still being audited, investigated, prosecuted, and levied. Back in 2008 the IRS was also starting its major initiative to pursue taxpayers with undisclosed foreign bank accounts.  2015 should be no different.  But don’t get me wrong, the IRS will still need to streamline and make better use of its budget as it now has less.

So how can the IRS do more for less?

Remember, the IRS is already yielding $6 in collections for every $1 it receives for tax enforcement. I know a lot of business people who would not mind having that rate of return. Therefore, cuts in tax enforcement should be minimal.

1. More tax returns being electronically filed and electronically processed. About 150 million returns were filed in 2014 of which more than 96% were electronically filed. The IRS issued more than 61.6 million refunds for approximately $179.8 billion. The average dollar refund is about $3,000, and the IRS has directly deposited more than 52.7 million refunds to taxpayers thus far, a 0.7% increase over the same period last year.

2. Increase access to tax information through the internet. Each tax filing season the IRS provides services to taxpayers to help them fulfill their tax obligations and by meeting taxpayers’ increasing demand for self-service and electronic service options, the IRS can deliver tax information without tying up human resources. Much of this has been accomplished through the IRS’ website. As a result of these and other improvements to the IRS website and because there were no significant tax law changes enacted in 2013, the volume of phone calls to the IRS’ toll-free lines has decreased.

3. Going Paperless. The IRS generated $60 million in annual printing and postage savings by eliminating the printing and mailing of selected tax packages and publications, and by transitioning to paperless employee pay statements.

4. Reducing Office Space. In an effort to promote more efficient use of the Federal government’s real estate assets and generate savings, in 2012, the IRS announced a sweeping office space and rent reduction initiative that over two years is projected to close 43 smaller IRS offices and consolidate space in many larger facilities. These measures will reduce annual rent costs by more than $40 million and reduce total IRS office space by more than 1.3 million square feet by the end of 2014.

When you add the savings for going paperless and reducing office space, this results in the IRS spending $300 million a year less. Remember the latest cut is $341 million. Maybe Congress has this right?

 
5. IRS Working With Other Federal Agencies. For example, the IRS criminal and civil enforcement organizations work with the U.S. Department of Justice Tax Division to shut down abusive tax schemes as quickly as possible in an effort to protect taxpayers from potential additional financial harm. Parallel civil and criminal investigations are an effective and aggressive IRS approach that halts these schemes quickly and permanently.  A civil injunction against the promoter stops the scheme and prevents additional ‘clients’ from investing.  In addition, the Criminal Investigation Division shares abusive tax scheme investor lists with the civil operating divisions to ensure investor tax returns are considered for examination (audit). Also, the Department of Justice, Department of Treasury and Homeland Security entered into a joint effort to enforce the “National Money Laundering Strategy” to continue the nation’s efforts to dismantle corrupt money laundering schemes.

6. IRS Working With Foreign Financial/Tax Agencies. International tax compliance is a top priority of the IRS. The IRS is vigorously pursuing tax cheats around the world, no matter how remote or secret the location. The IRS Criminal Investigation Division (“CID”) is working to develop new ways to share information and foster cooperation among other U.S. government agencies and foreign government counterparts. To enhance its international efforts CID has expanded its overseas presence by assigning attachés to key foreign embassies and consulates. Attachés establish strong ties with foreign government and law enforcement partners working with them to gather and share information about possible financial crimes. CID also actively participates in a number of international financial task force groups to investigate significant areas of noncompliance and criminal activity. These groups include INTERPOL, the Terrorist Finance Working Group (TFWG), the Financial Action Task Force (FATF), and the Organization for Economic Co-operation and Development (OECD).

Don’t Take The Chance And Lose Everything You Have Worked For.

Protect yourself. If you are in danger of wage garnishments or bank levies or having a tax lien placed against your property, stand up to the IRS and your State Tax Agency 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.

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.

A Gallup Poll released in April 2014 found that two-thirds of Americans believe that the Internal Revenue Service abuses its power. Yet few people realize exactly how much arbitrary power the IRS has through the Courts and the Laws of the United States.

Remember that the IRS like any government agency has a purpose to enforce the laws and like other government agencies the IRS will use all means available to achieve this purpose. For one thing the IRS will conduct undercover operations sometimes even masquerade as professionals to entice other citizens to violate tax laws.

The most common and for many people most cartographic use of power by the IRS is levying bank accounts, paychecks and other sources of income. Unlike a typical creditor, the IRS is able to do this without having to hire an attorney and for the most part does not even require a person to initiate this action. Instead it is the IRS computers that scour taxpayers’ accounts and when seeing that there is an outstanding balance sending out those dreaded Notices of Levy. What is even more tragic is that many times the amount that the IRS is seeking to collect is more than what the taxpayer should actually owe.

Take, for example, the case of Melvin Powers. In 1983 the IRS decided to investigate Mr. Powers’ 1978 and 1979 tax returns. Mr. Powers was a Houston builder and owner of five office buildings; he had only an eighth-grade education. The IRS had made no effort to examine Mr. Powers’ tax returns during the three years of the statute of limitations. Six weeks before the statute was to expire, an IRS agent asked Mr. Powers to sign a waiver of his statute of limitations, allowing the IRS to investigate him for another three years. Mr. Powers willingly agreed. In 1986, the IRS disallowed almost all of Mr. Powers’ business deductions for 1978 and 1979 and demanded $7,145,266.71 in back taxes, interest and penalties.

Shortly after the IRS’s assessment, a bankruptcy court trustee seized all of Mr. Powers’ operations, caused Mr. Powers to vacate his office premises, and took possession of his books and records for all years. Then, in early 1991, the IRS reversed itself and conceded that Mr. Powers actually had legitimate losses for the years under scrutiny and thus owed no taxes for those years. After IRS officials canceled the $7 million tax bill, Mr. Powers successfully sued the IRS to cover his legal costs for the case but it was already way too late as the IRS had devastated his life.

Another amazing position that the IRS maintains is that the IRS is entitled to impose penalties or seize property for overdue taxes even after the agency admits sending tax deficiency notices to the wrong address.

Take for example the case of Clayton and Darlene Powell. In late 1987 the Powell’s moved from Adelphi, MD, to Mitchellville, MD, and filed a tax return with their new address in early 1988. A few weeks after the IRS received the Powell’s’ new address, the agency sent a notice of deficiency for their 1984 tax return to their old address. The local post office — though it had the forwarding address — returned the notice to the IRS. Though the three-year statute of limitations had expired on the Powell’s 1984 return, on Dec. 28, 1988, the IRS sent a tax bill to their new address giving the couple 10 days to pay $6,864 in back taxes, interest and penalties or have their property seized. The Powell’s paid and then sued the IRS to get a refund.

The Federal Appeals Court ruled that “the Powell’s are entirely innocent” and ordered the IRS to issue a refund. The IRS then appealed the decision to the Supreme Court, contending that as long as the IRS mailed a tax deficiency notice to a taxpayer’s “last known address”, the taxpayer must be presumed to have received the notice — even when it is indisputable that he did not receive it.

The Justice Department, in its brief on this case, noted that the IRS “issues more than 2 million notices of deficiency each year and approximately 240,000 of those notices were returned undelivered during the past year.” The Justice Department whined that requiring the IRS to actually notify citizens of tax assessments before final seizure notices would impose “unmanageable detective burdens” on the IRS. The government went on to say that “This case threatens to create a ‘window of time’ during which the Internal Revenue Service may be helpless to protect its rights in pursuing delinquent taxpayers”.

The Supreme Court denied the government’s request to re-examine the Powell case. Yet even though the IRS lost in Federal Appeals Court on this issue and paid back the Powell’s, the agency has formally chosen to disregard that court’s verdict — to follow a policy of “nonacquiescence,” in legal terms. The IRS believes the court made a mistake and thus that the agency has no obligation to respect its decision.

So what is one to do when it is the IRS’ perspective that the citizen has an unlimited obligation to comply with its demands — even when the IRS fails to inform the citizen of its demands? You need to hire an experienced and local tax attorney who is accountable to you and will act in your best interest to defend you from the IRS and get an acceptable resolution. Having experienced tax counsel will level the playing field and take the IRS out of the driver’s seat.

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.

It is usually impossible to get the inside scoop of how the IRS is looking at taxpayers but sometimes a retired IRS agent will provide me with some valuable insight.

Before I go into this, let’s cover some of the basics about the structure of the IRS. Generally, there are four classes of employees at the IRS. 

The Office Examiner is the person who audits personal income tax returns which can include the small Schedule Cs-the sole proprietor.  This person usually does not have a degree in accounting.  These audits are performed at the IRS office. 

The Revenue Agent will have a degree in accounting and is the person who audits large Schedule C’s and corporate income tax returns.  These audits are performed at the business. 

The Revenue Officer is the person who collects past due tax accounts.  These are the people who will give you a bad time, and they can have the worst attitudes.  When they wanted to make the IRS kinder and gentler, these are the people they wanted to tame down.  However, there are cases that involve some real big crooks, and the actions that the Revenue Officer takes are justifiable. 

Then, there are the Special Agents who work in the Criminal Investigation Division (CID) handle the fraud and criminal cases.  These are the people who pack the heaters (guns, shotguns, and rifles).  These are the kind, sympathetic, and understanding people that you will meet in the event that you are ever found to be significantly cheating on your taxes.  You see, by going after you, making a public case out of you (newspapers, radio and TV), and by putting you in jail, they can assist in the government’s goal of voluntary compliance with the tax laws.

How A Routine Audit On Excise Taxes Turned Into A Nightmare For The Taxpayer-Business Owner.

The Revenue Agent was assigned a case where a company that was manufacturing truck parts was turned in by one of its competitors.  The competitor suspected that the company was not paying the excise tax that is due on truck parts since this company was winning most of the government bids to supply the military.  The excise tax on the parts, tires and fuel is used to maintain the Federal roads.

The Revenue Agent pulled copies of the returns from the IRS and sure enough, no tax was being reported or paid. While at the company’s place of business, the Revenue Agent noticed that one of the owners had a picture of an airplane on his wall.  Since there is also an annual excise tax on small airplanes, the Revenue Agent decided to test this business owner.  So the Revenue Agent got him into a conversation about how much he loved his airplane and then the Revenue Agent asked him for copies of the excise tax returns for the plane.  The business owner acted dumb, like he didn’t know anything about it.  So the Revenue Agent gave him blank forms to fill out for the last three years. 

After receiving the completed forms, the Revenue Agent checked what tax returns were filed by the business owners and what was reported on those tax returns. Well what the Revenue Agent found was that one of the business owners had never filed personal income tax returns for the last five years.  The Revenue Agent was then able to show that the business owner committed tax fraud through his intentional disregard for the law.

This case was then transferred to the CID where it did go to a criminal trial. Besides having to deal with a criminal tax proceeding, the non-compliant business owner who didn’t file his five years of tax returns suffered more misfortune as his wife divorced him and he lost total custody of his kids.  He and his business partner still owed $250,000 in taxes plus significant penalties and interest, to the IRS.

Abuse Of The Travel & Entertainment Deduction.

Some companies like to spend large amounts on travel and entertainment and, in some industries, it is necessary.  The Revenue Agent was assigned a case where, for the size of the company, the Travel & Entertainment (T&E) expense seemed a little high.  As the Revenue Agent got into the audit, he realized that there was only one salesman-the owner-and his T&E expenses per year amounted to $250,000.

As the Revenue Agent started going through the receipts for the expenses, he noticed some interesting things. The Revenue Agent noticed receipts for mink coats, wash machines, and TV’s.  The Revenue Agent asked the outside CPA about these items and he said that they were for corporate gifts to clients.  Now the Internal Revenue Code limits gifts to $25.00 per person, per year but these were a little higher than that.  The Revenue Agent asked the accountant what the purpose of these gifts were and he said that this was the only way that the company could get the buyers’ in the retail chains to purchase the company’s products.  What the Revenue Agent was able to show was that these items were corporate bribes and payoffs to purchasing agents.  The retail chain purchasing agents were on the take.  The items were for their wives and their own homes.

Needless to say, the Revenue Agent disallowed 50% of the company’s T&E expenses due to a lack of documentation and excessive gifts for the three most recent years.

The Wedding And The Boat.

Sometimes a Revenue Agent goes out to a company and on the surface of the tax return and financial statements everything looks just normal.  But, on occasion, the unusual just jumps out at you.

In one audit the Revenue Agent following standard audit procedures came across an entry in the books for about $80,000 that looked a little unusual, so the agent checked it off and asked for the documentation.

When the Revenue Agent returned to complete the audit, the CPA sat down with the agent to go over the list of items that the agent had requested.  When the agent came down to the $80,000 item, the CPA explained to the agent that it was for the owner’s daughter’s wedding and that since the owner HAD TO invite his customers to the wedding that some or all of it was a business expense.  Now some people will try to justify anything; however, the average Joe out there can’t take a tax deduction for inviting fellow employees to his daughter’s wedding. Needless to say, the taxpayer didn’t get the deduction.

Again, sometimes when things look normal, they aren’t.  In another audit the Revenue Agent stumbled on an entry hidden in Cost Of Goods Sold (CGS).  The CGS is where material, labor and related product costs are supposed to be recorded.  So what is the total cost of a 45 foot yacht doing there?

The explanation given to the Revenue Agent was: “Oh, no!  We didn’t mean for that to happen.  Alice the bookkeeper entered that to the wrong account, and it slipped by us.”  So the agent said “I suppose that she should have buried it in another account”.  While there is a provision in the law for the use of a boat as a travel and entertainment expense, expensing a whole boat in one year just doesn’t work. Again, needless to say, the taxpayer didn’t get the deduction.

It Just Doesn’t Add Up.

The Revenue Agent was assigned to audit a small retail store.  Upon going through the books and records, the agent could not get the deposits on the books to balance to the tax return and neither could the accountant.

The agent asked the accountant to prepare a cost of living analysis for the owner and the business.  Congress has given the IRS the authority to prove the income of the taxpayer.  This is a simple task.  All deposits to your bank accounts are income unless you can prove otherwise.  However, if all of the income does not get deposited, then the second method of proving income is a cost of living analysis.  In that case, your income is equal to your cost of living unless you can prove otherwise.

Well, the cost of living analysis showed $100,000 more per year of income than what had been reported on the tax return.  Now the accountant and business owner were nervous!  The Revenue Agent then sent the case for a fraud review and the IRS authorized the taxpayer to be charged with a Civil Fraud Penalty amounting to 75% of the increase in income tax.

What Should You Do?

If you receive notice that your tax returns are to be audited or there is a knock on your door by IRS Special Agents, do not try and take this matter on your own. Instead, enlist the services of a qualified tax attorney at the Law Offices Of Jeffrey B. Kahn, P.C. with offices in Los Angeles, San Diego, San Francisco and elsewhere in California to resolve these inquiries.

Description: Working with a tax attorney lawyer is the best way to assure that your freedom is protected and to minimize any additional amount you may owe to the IRS.