audits

IRS ADVISES ITS AUDITORS HOW TO AVOID TAXPAYER’S RIGHT TO GO TO TAX COURT

June 11, 2019 by Frank

IRS Challenges Corporate Taxpayers Who Fail to Pay Shareholder Employees a Reasonable Compensation by Denying Taxpayers Access to the Tax Court

Background

Since 2005, the IRS has focused more attention of the issue of compliance and reasonable compensation to improve it enforcement and compliance strategies. If a taxpayer fails to pay its key shareholder/employees a reasonable compensation, the non-compliance by the taxpayer can be very costly. The IRS will assess the taxpayer payroll tax penalties and interest for failure to timely remit its required payroll taxes on the unreported compensation when the taxpayer filed its quarterly Form 941 and the required remittances.

Tax Court Advantage

When a taxpayer has the right to file a petition with the Tax Court, the taxpayer can avoid paying the IRS assessment until the case is resolved. Another significant possible benefit of going to Tax Court is that the IRS Appeals Office, if the taxpayer appeals the audit exam decision, needs to consider the risk of litigation. Generally this means that the Appeals Officer will often look for a compromise payment to have the taxpayer agree not to go to Tax Court if the IRS Appeals Officer feels that the IRS position may not be upheld by the Tax Court.

IRS Strategy to Avoid Going to Tax Court

Tax Planning Tip #1:

The easiest, best and most cost-effective course of action is by avoiding the challenge in the first place by having your tax professional prepare a comprehensive reasonable compensation analysis. These studies can usually be prepared for a cost of approximately $750.00 for the initial year and approximately $300.00 in subsequent years to keep the study current. Compared to audit representation fees that can run in the thousands of dollars, this would be money well spent.

Tax Planning Tip #2:

If you did not do Tax Planning Tip #1, be advised that the IRS examining agent will likely take two steps to keep the dispute out of Tax Court.

First, the IRS will ask that the taxpayer confirm that the corporate officers are employees under IRC Sec. 3121(d)(1) and will not send the taxpayer IRS Letter 3523: Notice of Determination of Worker Classification.

Second, the agent will ask the taxpayer to confirm that it is not entitled to relief under Sec. 530 of the Revenue Act of 1978.

Tax Planning Tip #3:

We recommend that a taxpayer not represent themselves in an IRS audit. Rather, an experienced tax professional, preferably a tax resolution specialist, be engaged to resolve the IRS’s audit concerns. The IRS agent’s job is to collect the monies due the IRS. Sometimes tax issues are not black or while, but are gray and open to interpretation. The IRS will interpret these issues to maximize the tax assessment. A tax pro, who understands the tax law and how the IRS operates, will be an advocate for the taxpayer with the objective of minimizing the audit assessment.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2019 Keystone Financial Solutions, Inc. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PA EMPLOYERS & INDEPENDENT CONTRACTORS – LEARN FROM NJ AUDITS

June 5, 2019 by Frank

NJ WARNS EMPLOYERS & ACCOUNTANTS WHO ISSUE FORM 1099-MISC TO EMPLOYEES

NJ says employers are misinformed if they believe that by simply reporting a worker’s earnings to the federal government using Form 1099, as opposed to Form W-2, that the worker becomes as an independent contractor.

NJ SOLICITS HELP OF ACCOUNTANTS ABOUT EMPLOYERS WHO MISCLASSIFY INDEPENDENT CONTRACTORS

The New Jersey Department of Labor recently released a message to NJ’s licensed accountants regarding misclassifying employees as independent contractors. NJ is solicitating the assistance of the state’s accountants to educate their business owners as to who is an employee and who is an independent contractor. The misclassification of workers is not a new issue to our firm. We have previously discussed the rules in our August 19, 2011, October 15, 2012, September 10, 2013 and February 15, 2015 posts.

JOINT AUDIT EFFORTS OF U.S. DEPT. OF LABOR (DOL), IRS & STATE DOL

What is important about this NJ announcement is that the state realizes it is losing tax revenues (uncollected unemployment compensation and disability benefits tax funds) and will focus its audit exams on small business owners misclassifying their employees. Now, in addition to the IRS and U.S. Department of Labor audits looking for employer misclassifications of its workers, NJ employers will see NJ auditors in their rear view mirrors.

WILL PA EMPLOYERS BE NEXT?

States are copycats. If NJ is “seeing the light” and collecting additional tax revenues, soon other states will be doing the same.

STATE TAX REVENUES ARE AT RISK

NJ says it has seen a number of cases where small and medium sized employers believe that by simply making the decision to report a worker’s earnings to the federal government using Form 1099, as opposed to Form W-2, a potential employer may unilaterally deem that individual to be an independent contractor, thereby avoiding the responsibility under N.J.S.A. 43:21-7 to make contributions respecting that individual to the unemployment compensation and State disability benefits funds.

EMPLOYERS NEED TO UNDERSTAND AN AUDITOR’S APPROACH

If a service is performed for remuneration or under any contract of hire, written or oral, express or implied, it is considered to be covered W-2 employment, unless the potential employer is able to establish the following with regard to the service at issue and the individual providing that service:

(A) Such individual has been and will continue to be free from control or
direction over the performance of such service, both under his contract of
service and in fact; and

(B) Such service is either outside the usual course of the business for which
such service is performed, or that such service is performed outside of all
the places of business of the enterprise for which such service is performed;
AND

(C) Such individual is customarily engaged in an independently established
trade, occupation, profession or business.

Accordingly, where an employer fails to meet any one of the three criteria listed above with regard to an individual who has performed a service for remuneration, that individual is considered to be an employee and the service performed is considered to be employment subject to all payroll withholding taxes.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

HOW TO SIGNIFICANTLY INCREASE THE TAXES YOU OWE TO THE IRS

May 31, 2019 by Frank

OUT OF VOGUE: FRIVOLOUS ARGUMENTS

Neither the IRS Nor the Courts Tolerate Frivolous Arguments Made by Taxpayers . . . and to Make Them Can be Very Costly

Tax Protestors

Most Americans despise having to pay taxes on their hard-earned income. Because of that frustration and anxiety of “Where will I find the money to pay the taxes I owe?”, promoters of frivolous and sometimes illegal schemes come out of the woodwork (like the cockroaches they are) to entice taxpayers by convincing them to make unreasonable and outlandish legal claims on their returns to avoid paying their taxes.

The IRS reminds taxpayers that time and again, that these frivolous arguments have been thrown out of court.

Some of the popular “secret” schemes that are promoted include:

The First Amendment allows taxpayers to refuse to pay taxes on religious or moral grounds;

The only “employees” subject to federal income tax are those who work for the federal government;

Only foreign-source income is taxable.

What Are the Consequences of Making Frivolous Arguments?

Not only can the perpetrators of illegal schemes be prosecuted, so can taxpayers who make use of them. “Don’t be fooled by people citing dubious legal schemes to avoid paying taxes,” said IRS Commissioner Chuck Rettig. “Despite what con artists may tell you, there is no secret way to avoid paying what you legally owe. Taxpayers should be on the lookout for these and other common tax scams.”

In addition to committing a civil crime, taxpayers can also face a variety of civil penalties for engaging in these schemes. Key among them is the $5,000 penalty for filing a frivolous tax return. The penalty applies to anyone who submits a frivolous tax return or other specified submissions, such as a request for a collection due process hearing, installment agreement, offer-in-compromise or taxpayer assistance order if any part of these submissions is based on a frivolous position. A list of more than 40 such positions can be found in Notice 2010-33, 2010-17 I.R.B.609. The list is not all inclusive, and the IRS and the courts may add to it at any time.

The IRS Reminds Taxpayers these Schemes also can Bring Other Civil Penalties Including:

Accuracy-related penalty—20 percent of the underpaid tax;

Civil fraud penalty—75 percent of the underpayment attributable to fraud;

Erroneous refund claim penalty—20 percent of the excessive amount.

Late-filing and late-payment penalties may also apply.

The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court. The Court is tired of repeatedly hearing various tax protest cases which have been struck down for eons. By imposing these penalties, it is the hope of the court that the penalties may deter others from abusing the court’s time.

For those taxpayers who make very egregious arguments where an intent to defraud the U.S. Government can be proven, immediately consult with a criminal attorney when IRS agents with shiny badges knock on your door. In addition to committing a civil crime, you could be found to have committed a criminal crime.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Retirement Accounts – Protected in Bankruptcy?

May 1, 2019 by Frank

Retirement Accounts – Which Ones Are Protected in Bankruptcy?

Knowing the Bankruptcy Rules Can Help Protect Your Assets From Your Creditors

When employees who have contributed to their employer’s 401(k) or 403(b) retirement plans leave their place of employment, they are often faced with this major financial decision.

“Do I leave my retirement funds in my (former) employer’s 401(k) plan, roll those funds into my new employer’s 401(k) plan, or roll the funds into a new or existing IRA?” Factors that may impact your decision are that the former employer may not allow you to maintain your retirement funds in your old 401(k) plan and the new employer may not allow those monies to be rolled over into the new employer’s retirement funds. There are also investment factors such as the diversity of investment options within the different employer plans, the historical performance of the different plans, accessibility to those monies, etc.

When making such a major financial decision, you should FIRST consult with your advisers . . . your financial investment adviser and tax professional, at a minimum.

Many people mistakenly believe that all retirement funds are 100% protected from claimants in bankruptcy. That is not necessarily true. While we are speaking about bankruptcy, you may be thinking that bankruptcy is not of concern to you. Hopefully, it is not. But we have seen taxpayers in our office with very significant IRS tax debt problems who have either filed for bankruptcy or have at least considered it. Before finding themselves in financial distress, they too were never concerned about bankruptcy.

It is our non-legal understanding that employer-held pension, 401(k) and 403 (b) accounts are 100% protected in bankruptcy. If bankruptcy is of concern to you, you need to consult with an experienced bankruptcy attorney.

However, the same protection does not hold true for IRA accounts you hold. Effective April 1, 2019, the inflation-adjusted cap on IRA bankruptcy protection will increase to $1,362,800 (up from $1,283,025). This cap applies only to IRA or Roth IRA contributions and earnings on those funds. It does not apply to company retirement plans.

What if you were to roll 401(k) monies into your IRA account and the balance in that IRA account exceeded the $1,362,800 protection cap? Have you now exposed the funds in your IRA that exceed the IRA protection limit to your claimants?

There is good news. For purposes of the Bankruptcy Abuse Prevention and Consumer Protection Act, a rollover IRA is a traditional or Roth IRA account that was originally funded through a transfer from a qualified retirement plan. Qualified retirement plans include standard 401(k) plans, traditional pension plans and certain profit-sharing plans. Under BAPCPA, a properly executed rollover IRA (be sure to consult with your tax professional as to how to properly execute an IRA rollover) originating from a qualified retirement plan is fully shielded from creditors in a bankruptcy. The aforementioned ERISA protection continues even after the company plan assets are rolled into an IRA. Thus, it is possible to combine monies from former employers’ retirement plans with your IRA monies and have those funds protected in bankruptcy.

It is very important to maintain accurate and complete financial records when ERISA monies are combined with IRA monies to prevent an issue in bankruptcy. The burden is on the person filing for bankruptcy to delineate between IRA contributions/earnings and his 401(k) rollover dollars. If the IRA owner was very successful with his IRA investments and his/her IRA contributions and earnings began to creep toward (or exceed) the new $1.362 million cap, it would be important for the account holder to understand his potential bankruptcy exposure if supporting documents could not support the separation of ERISA and IRA monies.

Since maintaining records can be a challenge to some individuals, an easier course of action may be to maintain two IRAs – one for IRA contributions and earnings – and the other for the ERISA 401(k) rollover dollars to an IRA.

While the maintenance of separate accounts is not explicitly required under law, it helps to avoid potential issues during a bankruptcy proceeding. With separate accounts, the origin of assets is easy to document and the asset pools are easy to track for purposes of securing all available bankruptcy protections.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

DON’T BLAME THE IRS – BLAME CONGRESS

April 24, 2019 by Frank

CONGRESS COULD INVEST YOUR TAX DOLLARS AND RECEIVE A 300:1 RETURN, BUT INSTEAD CHOOSE BOONDOGGLES

Nina Olson, IRS Tax Advocate Watch Dog, Issues Annual Report to Congress Suggesting Improvements at the IRS to Help Taxpayers

Taxpayers and tax professionals who communicate with the Internal Revenue Service (IRS) realize that the experience can be very frustrating. The IRS sometimes appears to be a very slow-moving bureaucracy (except when it comes to collecting back taxes).

Congress continues to cut the IRS budget resulting in IRS staff reductions and service center and field office closings. These actions make it more difficult for taxpayers to have their tax problems resolved. Waiting times when calling the IRS for assistance have significantly increased. Taxpayers no longer have the luxury of walking into a nearby IRS office (without an appointment) to have their tax questions answered.

And while the IRS is everyone’s favorite whipping boy, the real problem is Congress for its failure to properly fund the IRS.

The IRS is now being told by Congress, and rightfully so, to make better use of information technology to become more efficient to handle its workload. The immediate problem with that strategic plan is that the IRS computers are obsolete and need to be replaced and reprogrammed. The IRS needs to modernize its computer systems and that takes money!

When we look at our household budgets, we spend our dollars where we get the biggest bang on the dollar. One can only wonder why Congress does not do the same.

For its fiscal year ending September 30, 2018, the IRS collected nearly $3.5 trillion on a budget of $11.43 billion — a return on investment of about 300:1. Congress, showing its infinite wisdom, reduced its funding for IRS technology upgrades by 62 percent from FY 2017 ($290 million) to FY 2018 ($110 million) and constituted just one percent of the agency’s overall appropriation in FY 2018.

Nina Olson, the IRS watchdog who heads The Taxpayer Advocate Service (TAS) which is an independent organization within the IRS that helps taxpayers and protects taxpayer rights, has recommended that additional funding be provided to the IRS . . . subject to accountability measures. The accountability measures are deemed necessary due to the IRS’s historical record of not effectively planning and executing technology upgrades. Specifically, Olson recommends that Congress provide the IRS with additional dedicated, multi-year funding to replace its core IT systems pursuant to a plan that sets forth specific goals and metrics and is evaluated annually by an independent third party.

With an investment return of 300:1, the reluctance of Congress not to upgrade IRS technology abilities is bewildering.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

PROCRASTINATORS – APRIL 15th ANXIETY REACHES NEW HEIGHTS

April 15, 2019 by Frank

DEADLY STORM THREATENS MILLIONS IN THE NORTHEAS

A deadly storm travels from the South and hits the Northeast with severe thunderstorms, powerful winds and possible tornadoes. Residents and businesses lose electrical power.

TAXPAYERS WHO PROCRASTINATE PANIC

Fellow tax professionals in PA report that they have lost electrical power due to a major storm that uprooted trees and downed power lines. The preparers are unable to open their tax preparation software without electrical power and thus are unable to e-file the tax returns of their clients or file extensions of time to file. It has been reported that some post offices have no power and taxpayers are calling their tax professionals asking what they should do to meet the April 15 deadline.

THE BENEFITS OF NOT WAITING UNTIL THE LAST MINUTE

There is a very good reason that tax professionals request that taxpayers send their information in by March 15 or some other date well before April 15. Not only are tax professionals inundated by taxpayers requesting that their returns be prepared in the waning days before the April 15 due date, by there are factors that tax professionals cannot control.

This year it is the unexpected storm knocking out electrical power.

In prior years, the IRS computers have crashed due to the number of tax returns filed at the last minute.

WHAT YOU NEED TO DO

Carefully read and complete your tax professional’s tax organizer and send it and your tax documents by the due date set by your preparer. If you are missing a partnership K-1 form or some other tax document, send everything else and include a note about the missing item. This allows your tax professional to begin work on your return ASAP.

Be sure you have whitelisted your tax professional’s email address and frequently check your email inbox.

When your tax professional sends you a draft of your return to review, immediately review it. The longer you wait to review it, the closer the April 15 deadline approaches and returns get backed up at your preparer’s office.

Sign up for EFTPS payments. This is the IRS’s Electronic Federal Tax Payment System (https://www.eftps.gov) that allows you to expeditiously make payments to the IRS and receive an immediate confirmation of the amount, date, and tax year of the payment.

Understand that if your preparer completes your return before the due date and efiles the return, any balance due can be scheduled for payment on the due date. Thus, filing early does not mean that the funds are paid early.

PEACE OF MIND

Taxpayers have a choice. Filing early reduces the liklihood of ID theft by scammers and avoids the panic of what to do when you hit the proverbial wall on April 15 and the best plans go awry.

Or, you can continue to procrastinate and stress yourself by filing at the last minute.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.