Jeffrey B. Kahn, Esq. Discusses Taxes And The IRS On ESPN Radio – July 17, 2015 Show

Topics Covered:

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

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

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Yes we are all working for the tax man!

Good afternoon! Welcome to the KahnTaxLaw Radio Show

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

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

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

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

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

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

So It’s Tax Time – Why do we pay?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BREAK

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

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

Chit chat with Amy

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

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

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

Jeff states:

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

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

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

Jeff states:

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

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

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

Amy opens up with Tax Write-Off: Home Office

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

Jeff states:

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

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

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

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

Highlights of the simplified option:

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

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

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

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

Jeff states:

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

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

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

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

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

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

BREAK

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

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

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

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

Jeff states:

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

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

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

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

Jeff states:

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

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

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

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

Jeff states:

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

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

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

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

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

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

Jeff states:

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

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

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

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

Jeff states:

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

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

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

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

BREAK

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

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

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

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

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

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

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

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

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

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

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

Well we are reaching the end of our show.

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

Have a great day everyone!