Tax Controversy Lawyer Blog

For most taxpayers, the amount that they owe in taxes is pre-paid to the IRS through employee withholdings, amounts deducted by employers from each paycheck throughout the year. These withholdings are required to be paid to the US Treasury by the employer periodically throughout the year. But, for those persons who are self-employed, independent contractors and the like, paying federal income taxes to the US Treasury can often get put to the side.

Because the self-employed individual receives compensation directly from its customers, rather than the periodic paycheck that most people receive, the IRS requires self-employed persons to make estimated tax payments on April 15th, June 15th, September 15th and January 15th of the following year. Quarterly estimated tax payments must be made by a self-employed individual if he or she expects to owe at least $1,000 in tax for the current tax year.

A self-employed taxpayer is required to make the quarterly estimated tax payments in amounts which equal either 25% of 90% of the amount of tax due for the current year; or, in amounts equal to 25% of 100% of the amount of tax due for the prior year. As a result, many tax return preparers and tax return preparation software compute and provide quarterly estimated tax payment vouchers based on 100% of the previous years taxes. Taxpayers should use these vouchers to make their estimated tax payments.

For many reasons, taxpayers do not make proper estimated tax payments. Generally, the end result is a large tax bill on April 15. Some taxpayers will have the resources to pay the bill in full, many others will not. Either set of taxpayers will be charged an estimated tax penalty to compensate the government for the time value of money it lost when the estimated tax payments were not made.

Continue reading "Self-Employed? Just Do It...Four Times a Year!" »

A relatively common occurrence with many businesses, is a failure to pay over withheld income and employment taxes. Often cash-strapped businesses hope that conditions will improve and decide to use the withheld taxes as working capital to fund operations. The Internal Revenue Service and other taxing authorities HATE being an "unwilling participant in a floundering business".

In response to all too often finding itself as a unwitting lender, the Internal Revenue Service received authority from Congress in 1954 to assess personal liability against "responsible persons that willfully fail to pay over" withheld income and employment taxes.

The Trust Fund Recovery Penalty results in personal liability for 100% of the withheld income and employment taxes ("Trust Fund" taxes) for every "responsible person" assessed. While deemed a penalty, the Trust Fund Recovery Penalty is a collection device used by the Internal Revenue Service to recoup those taxes it has credited to other taxpayers. As such, the Service typically assesses the penalty against as many taxpayers as possible, to increase the odds of repayment. While this may seem to be unfair, it depends on who you ask.

Example: ABC, Inc. owes federal payroll taxes of $1,000,000.00, of which $750,000.00 are "Trust Fund" taxes. ABC, Inc.'s President, Vice President, Chief Financial Officer and Treasurer were all assessed the Trust Fund Recovery Penalty. As a result, each person assessed the TFRP owes the US Treasury $750,000.00, which accrues interest until paid. The IRS is prohibited from collecting more than $750,000.00 (excluding interest) no matter the source. So let's say ABC, Inc.'s President pays $500,000.00, Vice-President pays $225,000.00, and Treasurer pays $25,000.00. According to ABC, Inc.'s CFO, it seems like a good deal. All he owes is the interest.

Of course, the best course of action is not to count on luck. The best way to avoid this conundrum is to make sure the withholdings are deposited in the correct manner and on schedule. Don't make the mistake of failing to deposit: it can cost you more than just your business.

Continue reading "Employers Beware: Failure to Pay Employee Withholdings Can Result in Personal Liability" »

After various studies pertaining to accuracy in the reporting of income and expenses by cash intensive businesses, the IRS has created a new guide for its agents to refer to when conducting audits of such firms. With the tax "gap" reportedly at hundreds of billion of dollars, the IRS has begun training its Revenue Agents to be more savvy in interviewing business owners and recognizing indicators of unreported income.

According to the guide, businesses that make a routine practice of misappropriating cash often have a pattern of reporting losses and/or low profit margins that are insufficient to sustain the business or its owners. The IRS lists the following indicators of unreported income:

• A lifestyle that cannot be supported by the income reported

• A business that reports losses each year yet continues to operate

• Account balances increasing annually despite reporting of low net profits or losses

• Business debt decreases, remains low, or doesn't increase despite reporting of low profits or losses

• A wide gap between the taxpayer's gross profit margin and that typical of the industry

• Uncommonly low annual sales given the type of business

The IRS specifically refers to the following businesses as "cash intensive": restaurants, bail bonds, beauty shops, car washes, check cashing locations, coin operated amusements, convenience stores, laundromats, and scrap metal processors. These types of businesses must ensure that they are keeping detailed and accurate records of their sales and expenses. That way when the IRS auditor contacts you, you will be prepared for the Information Document Request you are sure to receive.

Continue reading "IRS Agents Using New Cash Guide to Hunt for Unreported Income" »

If you have ever been audited by the Internal Revenue Service, then you know audits are no walk-in-the-park. They can take a long time to conclude and that's not good for your nerves. However, eventually they do come to an end and the IRS will provide you with a copy of the Revenue Agent's Report and proposed changes. Luckily for taxpayers this letter is not the end of the road. You have 30 days to file a written protest as to why you disagree with the proposed changes. The IRS Office of Appeals will review your protest and the audit file and contact you or your tax controversy attorney to schedule a conference.

The function of the IRS Office of Appeals is to settle tax disputes, which typically arise in the form of proposed adjustments after an audit, in a more relaxed and informal way. The Appeals conference is conducted by correspondence, by telephone or in person. At the conference, you or your tax controversy attorney will meet with an Appeals Officer to discuss your return and make your case as to why the IRS erred in its audit of your return. The Appeals Officer, truly known for his or her neutrality, considers your position and may offer to settle your case right then. The trick to getting your way in Appeals is preparation, preparation, and preparation.

Continue reading "Think the IRS is Wrong? Appeal It - And Win!" »

The IRS has selected approximately 260,000 returns claiming the first-time homebuyer credit for correspondence audits so far in 2010. The audits are apparently the result of filers failing to include sufficient documentation with their tax returns. These correspondence audits constitute approximately 21% of all correspondence examinations. Accordingly, the IRS is truly turning up the heat this summer on those claiming the first-time homebuyer credit.

The IRS requires homebuyers claiming the credit to attach the following:

• A copy of the settlement statement showing all parties' names and signatures, the property address, the contract sales price, and the date of purchase

• In the case of a mobile home, a copy of the executed retail sales contract

• In the case of a newly constructed home where you do not have an executed settlement statement, a copy of the certificate of occupancy

Additional documentation may be necessary, as indicated below:

Homebuyers who purchased after April 30, 2010, but before July 1, 2010, that entered into a binding contract before May 1, 2010 to purchase a home before July 1, 2010, must also attach:

• A copy of the pages from a signed contract to make a purchase

Homebuyers who are claiming the credit as a long-time resident of the same main home must attach copies of one of the following:

• Form 1098, Mortgage Interest Statement

• Property Tax Records; or

• Homeowner's insurance records

Continue reading "The IRS Attacks: First-Time Homebuyer Credit Claims" »

As a rule, spouses who file their income taxes under the status of Married Filing Jointly are jointly and severally liable for any income tax liability shown on the return as well as any additional income tax liability which may arise as the result of an audit. In other words, if your spouse makes a mistake on your jointly filed income tax return, you may be held both jointly liable (both you and your spouse) and severally liable (just you) for the amount of the underpayment caused by your spouse's error. And, to add to the fun, the amount of income earned by either spouse is irrelevant in determining joint and several liability. So, even if you report zero income for a given tax year, you could be held personally liable for the entire amount of the tax liability that results from any underpayment or your spouse's error on your jointly filed return.

However, the IRS and certain states provide "innocent spouse" relief from joint and several liability when the appropriate circumstances exist. Typically, there are three types of innocent spouse relief. A common theme of the relief provisions is lack of knowledge on the part of the "innocent spouse". If a spouse can show that he or she neither knew nor should have known of the error on the jointly filed income tax return, that spouse may not be held liable for any portion of the underpaid tax and penalties associated with such error. In this instance, a failure to communicate may not save a marriage but it might just save some taxes.

Continue reading "Is a Failure to Communicate Just Too Taxing? Get the Innocent Spouse Relief You Deserve" »