Author Archive for Jeffrey B. Kahn, Esq. - Principal Attorney

Jeffrey B. Kahn, Esq. Discusses Celebrities And Their Tax Problems On ESPN Radio – November 21, 2014 Show

Topics Covered:

1. “Celebrities And Their Tax Problems” – Lauryn Hill, Wesley Snipes, Richard Hatch, Willie Nelson and Chris Tucker.

2. Lien vs. Levy

3. Aggressive Actions Beyond Liens And Levies Taken By California Tax Agencies- Franchise Tax Board (“FTB”), Board Of Equalization (“BOE”) and the Employment Development Department (“EDD”).

4. Questions from our listeners:

a. How long should I keep my tax papers?

b. How long should I worry if I haven’t filed tax returns that I should have filed?

c. If I can’t pay my taxes, should I file my return anyway?

d. Who has access to my IRS file?

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. And I am so proud to have with me in the studio today my co-host, Susannah Kahn.

Chit chat with Susannah.

Jeff says, On our weekly radio show 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!

So 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.

Being in California we have many celebrities around – and they are not immune from having tax problems and getting into tax trouble. So since I have Susannah on the show with me today, I thought that we could do our own entertainment spread called “Celebrities And Their Tax Problems”.

Susannah discuses Lauryn Hill

Legendary hip hop artist and eight-time Grammy winner Lauryn Hill started serving her three-month prison sentence in Connecticut on July 8, 2013 after pleading guilty to tax evasion charges. The South Orange, N.J. native and mother of six admitted in a state court that she hadn’t filed tax returns from 2005 to 2007. During that time, Hill, at age 37, had earned more than $1.5 million and she failed to pay over $1 million in taxes. After her period of incarceration, she was on parole for one year, spending the first three months under house arrest. 

Jeff discusses Wesley Snipes

Wesley Snipes tried nearly every defense to avoid paying taxes. Star of the Blade trilogy and White Men Can’t Jump, Snipes narrowly escaped tax-fraud charges in 2008 after a lengthy trial in which he blamed his advisers for bad information and claimed, at various points, that the IRS was an illegitimate government agency, that he was a nonresident alien, that he had received bad information from his associates … and on and on. The excuses weren’t enough to dodge a conviction on the charge of not filing a tax return, and Snipes received a three-year prison sentence for his malfeasance.

The Wesley Snipes saga began in 2006 when he was accused of tax fraud. He was originally indicted on charges of attempting to claim nearly $12 million in fraudulent tax refunds and not filing any tax returns for several years. Snipes pleaded not guilty on all counts. The matter did go to trial in 2008. Despite a lengthy list of potential witnesses, and claims that the defense to the trial could take up to a month, the Snipes defense team rested – after less than an hour – without offering any witnesses. Snipes was eventually acquitted of felony federal tax fraud and conspiracy charges. However, he was convicted of failing to file tax returns from 1999 to 2004, which were misdemeanor charges. He faced up to three years in prison for the failure to file and he received the maximum sentence.

Snipes reported to prison on December 9, 2010, at McKean Federal Correctional Institution, in northwest Pennsylvania. On April 2, 2013 Wesley Snipes was released from prison and put on house arrest until July 19, 2013.

Susannah discusses Richard Hatch

Richard Hatch outwitted, outplayed and outlasted everyone on the first season of Survivor. The Internal Revenue Service, however, is a completely different kind of opponent. Despite being one of the most publicized TV-show winners ever, Hatch somehow thought he could get away with not paying taxes on his million-dollar bounty.

Since 2005, he’s been battling with the IRS. Hatch was charged with ten criminal counts, including tax evasion. If convicted on all charges, Hatch faced up to 47 years in prison. Still, Hatch refused to take a plea. Instead, he rolled the dice and went to trial. He was eventually convicted on two of those charges (one count of “attempting to evade taxes” and one count of “filing a false tax return” relating to his 2000 and 2001 returns). A Rhode Island jury sentenced him to 51 months in prison.

Hatch spent several years in federal prison before being released in 2009. He was sent back to prison at that time for not amending his 2000 and 2001 tax returns, as ordered by the judge. Hatch said that he was told that he could not amend them because of the ongoing investigation. He’s right. Once a criminal investigation has begun, a taxpayer may not attempt to fix the problem by filing old or amended returns or by paying the tax due. After he served additional time, the requirement that he file those amended returns was eventually dropped.

Jeff discusses Willie Nelson

It’s tough to be mad at Willie Nelson. So when Willie got into tax trouble, his fans were there to bail him out. Nelson’s tax trouble started in 1984, when the IRS began looking into his returns stretching back to 1972. After years of investigation, the IRS declared that Nelson had underpaid taxes for six years, primarily because of invalid deductions he had taken after investing in tax shelters the IRS subsequently nixed. Nelson protested, but the U.S. Tax Court ruled in favor of the government, and the musician grudgingly agreed to pay $6 million in back taxes, plus more than $10 million in penalties and interest. After the IRS hit the country crooner in 1990 with a bill for $16.7 million in unpaid back taxes, Nelson had to hand over many of his possessions to stay out of prison.

Ultimately, Nelson lost virtually everything he had, including his Texas ranch. The property was returned to him, thanks to a generous fan who purchased the ranch on behalf of a group of farmers who promptly gave it back to him, as a gesture of gratitude for his ongoing Farm Aid support.

When Nelson was unable to pay off his substantial debt, in spite of the seizure of all of his property, he released a compilation album, ‘The IRS Tapes: Who’ll Buy My Memories?’ with the agreement that he would share the proceeds with the IRS.

Nelson settled his debt with the IRS for an undisclosed amount, and it was considered cleared by 1993.

Susannah discusses Chris Tucker

Chris Tucker has recently joined the ranks of Wesley Snipes and Willie Nelson of Celebrities Having Faced Tax Problems after it was discovered that he owes $14 million to the IRS, a bill that’s either outstanding or paid in full, depending on whether you believe Tucker’s publicists.

Tucker was just hit with a brand new federal tax lien for $2.5 million. The liens that were filed by IRS showed that Tucker failed to pay a total of $2,496,138.24 in 2008 and 2010. So when adding the back taxes for 2001 through 2006 that came to a grand total of over $14 million. Tucker has since been able to settle up with IRS but this story demonstrates how powerful a tax lien can be.

After the break we will have more on celebrities and their tax troubles and what we can learn from their stories to avoid tax problems. This is 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 my co-host Susannah Kahn.

Today’s theme is “Celebrities And Their Tax Problems”.

Jeff says, If you owe taxes to the IRS or State Tax Agency, you do not want to let your situation get to a point where tax liens are being filed.

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.

So a lot of people get confused between Tax Liens and Tax Levies – we will try and break this down for you.

Lien vs. Levy

Sue states – A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.

Jeff asks, when would the IRS file a Tax Lien?

Sue replies, the IRS will file a lien when the agency feels there is a chance that collection is in peril. It does not just grab your assets. Filing of a tax lien is normally dictated by the dollar amount; the IRS’s Fresh Start program has increased the lien threshold from $5,000 to $10,000.

Jeff asks, where does the lien get filed?

Sue replies, the Notice of Federal Tax Lien is filed in the public records office of each county where you own property and thus attaches to any property you own. If you sell the property, proceeds will be used to satisfy the lien. Any person or company pulling a credit report on you will see the tax lien. This will damage your borrowing ability, making it difficult to refinance your home, get an auto loan, credit card, or business loan. Also, if you are looking to refinance your loan, the lien would have to be satisfied at closing in order for the lender in the new loan to retain a senior creditor’s position.

Jeff asks, what can a taxpayer where in a refinancing the tax lien would still not be satisfied?

Sue replies, a taxpayer can request that the IRS subordinate their lien to the new lender. In the process, even though the tax lien would be older than the new loan, the IRS agrees to stand behind the new lender should the loan be defaulted and the new lender now seeks to foreclose on the property. There are specific requirements that must be followed to accomplish this so you should involve tax counsel to make sure this can be successfully and timely completed before closing.

Jeff, I heard that certain taxpayers who enter into payment plans with the IRS can get tax liens withdrawn even before the liability is paid in full?

Sue, that’s correct. If you enter into a Direct Debit installment agreement, you may have your lien withdrawn.

Eligibility Requirements are:

  1. The current amount you owe must be $50,000 or less
  2. If you owe more than $50,000, you may pay down the balance to $50,000 prior to requesting the lien withdrawal to be eligible
  3. Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier
  4. You must be in full compliance with other filing and payment requirements
  5. You must have made three consecutive direct debit payments
  6. You cannot have previously received a lien withdrawal for the same taxes unless the withdrawal was for an improper filing of the lien
  7. You cannot have defaulted on your current, or any previous, direct debit installment agreement

Jeff asks, how does this impact a taxpayer on a regular installment agreement?

Sue replies, If are currently on a regular installment agreement, you may convert to a Direct Debit Installment Agreement. Bear in mind that if you default on your Direct Debit installment agreement after the lien is withdrawn, a new notice of lien may be filed and collection efforts may resume.

Jeff, says so it should be clear that a lien just makes sure the IRS eventually gets paid. A levy means now the IRS gets paid.

Jeff discusses Tax Levies.

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in.

For instance,

  • The IRS could seize and sell property that you hold (such as your car, boat, or house), or
  • The IRS could levy property that is yours but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions).

Sue asks, what due process must IRS follow before they can levy?

Jeff replies, the IRS will levy only after these three requirements are met:

  • The IRS assessed the tax and sent you a Notice and Demand for Payment;
  • You neglected or refused to pay the tax; and
  • The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. The IRS will give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested.

Sue asks, so it sounds like that Final Notice is your last warning?

Jeff says, that’s right and it is such an easy notice to miss.

Sue asks, is there a difference between a bank levy and a wage levy?

Jeff says, if the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS.

If the IRS levies your wages, salary, federal payments or state refunds, the levy will end when:

  • The levy is released,
  • You pay your tax debt, or
  • The time expires for legally collecting the tax.

Sue asks, now what if the levy is creating an immediate economic hardship?

Jeff, it is possible that the levy may be released and we have had many cases where we were able to show this and get a full or partial release of the levy.

PLUG: And that is where we come in. 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 how the State Of California also gets into the act in causing tax problems for celebrities and us regular folks.

You are listening to 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 co-host, Susannah Kahn.

Today’s theme is “Celebrities And Their Tax Problems”.

Sue discusses O.J. Simpson

For a man who never met a legal problem he didn’t like, O.J. Simpson finds his tax troubles the least of his concerns. The CourtTV regular was one of a slew of celebrities called out by California when the state released a list of its most delinquent citizens. The Juice apparently owes the state $1.4 million in back taxes. Good luck collecting that, though. Tracking down the ex-football star isn’t the issue. He’s living in a Nevada prison on a kidnapping and armed-robbery conviction for the foreseeable future.

Jeff discusses Sinbad

Joining O.J. Simpson on the list of California’s biggest tax debtors is comedian Sinbad – real name David Adkins – who owed the Golden State $2.5 million in personal income tax.

 

Whether you are a celebrity or a regular person, if you have tax problems, ignoring them will not make them go away.

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.

Jeff says, California is unique in the structure of its tax system. Most States operate under a single tax agency. The Federal government uses a single tax agency called the IRS. But California has three tax agencies!

Sue, that’s right they are the Franchise Tax Board (“FTB”), Board Of Equalization (“BOE”) and the Employment Development Department (“EDD”).

Sue asks, What does FTB cover?

Jeff replies, The FTB administers the income tax. Applies not only to individuals, but also to sole proprietorships, partnerships, estates, and trusts. In addition, the income “passed through” to individuals by Subchapter S corporations and certain other entities is subject to State Personal Income Taxation. The tax is applied to all sources of income unless specifically excluded, including wages and salaries, interest, dividends, business-related income, and capital gains.

Sue asks, What does BOE cover?

Jeff replies, The BOE administers the Sales and Use Tax. The tax in a specific California location has three parts: the state tax rate, the local tax rate and any district tax rate that may be in effect. Sale and Use Tax is the second largest tax levied in California and is assessed at both the state and local levels.

Sue asks, What does EDD cover?

Jeff replies, EDD involves payroll taxes which includes all employer paid taxes, State Income Tax Withholding of employees, State Disability Insurance (“SDI”) Taxes and Unemployment Insurance (“UI”) Taxes.

Aggressive Actions Beyond Liens And Levies Taken By California Tax Agencies.

Sue asks, what can the FTB do that goes beyond liens and levies?

Jeff replies, the FTB publishes Top 500 Delinquent Taxpayers (one list for personal and one for corporate)

FTB is required by law to post this information at least twice annually.

  • The FTB will notify each taxpayer by certified mail 30 days before they post their information.
  • As cases are resolved, those taxpayers are removed from the list, reducing the total number of listings from the original 500.
  • Removal of this tax delinquency information, as well as the FTB’s authority to publish this list, is pursuant to California Revenue & Taxation Code Section 19195.

If your name is on this list:

  • Your occupational and professional licenses, Including your driver license may be suspended under Business and Professions Code Section 494.5.
  • State agencies will not enter into contracts for the acquisition of goods and services with you under Public Contract Code 10295.4.

Sue asks, what can the BOE do that goes beyond liens and levies?

Jeff replies, The BOE will revoke your seller’s permit. If your seller’s permit is revoked, you cannot sell your goods.

Also, did you know as a corporate director, officer, member, manager, or other person having control or supervision of the filing of returns or payments of taxes, you may become personally liable for any unpaid sales and use taxes, interest, and penalties?

Such personal liability for any unpaid taxes and interest and penalties on those taxes is triggered upon termination, dissolution, or abandonment of a corporate business or limited liability company, any officer, member, manager, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation or limited liability company in complying with any requirement of this part. Section 6829 of the Revenue and Taxation Code

Sue asks, what can the EDD do that goes beyond liens and levies?

Jeff replies, The IRS has the Trust Fund Recovery Penalty (also known as the 100-percent penalty). The EDD has something similar referred to as “CUIC 1735”. But CUIC goes way beyond the IRS’ version. Not only does the EDD assert a full 100-percent exposure of the employees tax withholdings AND the employer’s share of payroll taxes to targeted responsible individuals but also a 10% nonabatable assessment penalty (it should be noted that the IRS version is limited only to the employee’s share of FICA and withheld federal income taxes, roughly 60 % of the corporate employer’s overall liability).

The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must have both elements before they can make the 100% assessment stick.

Any officer, major stockholder, or other person in charge of the affairs of the business can be held responsible. Before the assessment can become final, the targeted responsible person must be given notice, an opportunity for an administrative hearing, and an appeal. If the targeted individual loses his or her administrative hearing and appeal, and does not pay within 10 days after assessment, her or she will be penalized a further 10% pursuant to CUIC 1135.

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 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 co-host Susannah Kahn.

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

1. How long should I keep my tax papers?

At least three years, but six years is preferable. The IRS has three years after you file a tax return to complete an audit. For example, if you filed on April 15, 2006, for 2005, keep those records until at least April 16, 2009.

The IRS can audit you for up to six years if it suspects that you underreported your income by 25% or more. If the IRS suspects fraud, there is no time limit for an audit, although audits beyond six years are extremely rare.

Keep records of purchases of real estate, stocks, and other investments for at least three years after the tax return reporting their sale was filed.

2. How long should I worry if I haven’t filed tax returns that I should have filed?

At least six years. The government has six years from the date the nonfiled return was due to criminally charge you with failing to file. There is no time limit, however, for assessing civil penalties for not filing. If you didn’t file for 1958, you still have an obligation if you owed taxes for that year. Not until you actually file a return does the normal audit time limit—three years—and collection time limit—ten years—start to run.

Don’t over worry about a nonfiled return due more than six years ago if you haven’t heard from the IRS. The IRS usually doesn’t go after nonfilers after six years—unless the IRS began its investigation before the six years elapsed. After six years, the IRS transfers its computer files to tape for storage.

3. If I can’t pay my taxes, should I file my return anyway?

Yes. Filing saves you from the possibility of being criminally charged or, more likely, from being hit with a fine for failing to file or for filing late. Interest continues to build up until you pay. Of course, filing without paying will bring the IRS collector into your life, but she’ll be friendlier if she doesn’t have to hunt you down. The sooner you start filing, the better.

4. Who has access to my IRS file?

Federal law makes IRS files private, not public records. The law has many exceptions, however. IRS files can be legally shared with other federal and state agencies. Most leakage comes as a result of sloppy state agencies that are granted access to IRS files. Furthermore, IRS employees have been caught snooping, and computer hackers have broken into government databases. While violation of the Privacy Act is a crime, rarely is anyone prosecuted for it, though IRS personnel can be fired if caught.

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.

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!

London Mayor Refuses To Pay U.S. Tax Bill

London Mayor Boris Johnson is being pursued by U.S. tax officials while his former New York counterpart Michael Bloomberg was given an honorary knighthood by Queen Elizabeth last month.

Beware As The U.S. Tax Net Closes On Thousands Of U.S. Citizens Living Abroad.

The Conservative mayor of London – who was born in New York and holds an American passport – just revealed he is being pursued by the U.S. authorities for an unpaid tax demand. The demand reportedly relates to his first home in the UK, which he said was not subject to capital gains tax in England. According to U.S. tax law all citizens are required to file a tax return and pay U.S. taxes, even those with dual citizenship and those who earned income abroad.

The British Newspaper “The Telegraph” reports the home, in Islington, north London, was bought by Mr. Johnson and his barrister wife in 1999 for £470,000. They sold the house for £1.2million in 2009. As mayor of London, Mr. Johnson earns a salary of £144,000 and on top of that he is paid £250,000 a year for his column in the Telegraph. While in the U.K. he would not have been liable for capital gains tax as residents do not pay it on the sale of their first home, Mr. Johnson could be facing a bill of over £100,000 to the U.S.

U.S. tax laws which are administered by the Internal Revenue Service mandate that if you are a U.S. citizen or resident alien, the rules for filing income, estate, and gift tax returns and paying estimated tax are generally the same whether you are in the United States or abroad.

Quite simply: Your worldwide income is subject to U.S. income tax, regardless of where you reside.

When questioned in a recent interview on NPR, Mayor Johnson complained that he had been hit with an IRS demand for capital gains tax. He said the U.S. demand related to his first home in the U.K., even though it is not subject to capital gains tax in England. Mr. Johnson thinks it is outrageous to tax U.S. citizens everywhere no matter what. He exclaimed that he hasn’t lived in the U.S. since he was five years old!

Still, U.S. tax law is what it is and the IRS demands its money. Asked whether he would pay the bill, Johnson replied: “No is the answer. I think it’s absolutely outrageous. Why should I? I pay the lion’s share of my tax, I pay my taxes to the full in the U.K. where I live and work.”

Renouncing U.S. Citizenship Is Not The Cure.

A foreign-based person looking to renounce U.S. citizenship is treated as “exiting the U.S.” To exit, you generally must prove five years of U.S. tax compliance, and in some cases you pay an exit tax which is equal to 15% of the value of all your assets! Long-term residents giving up a Green Card can be required to pay the tax too.

Will The IRS Chase Mayor Johnson Down?

Yes and if you are in the same situation the IRS should be coming after you too. We encourage taxpayers who are concerned about their undisclosed offshore accounts to come in voluntarily before learning that the U.S. is investigating the bank or banks where they hold accounts. By then, it will be too late to avoid the new higher penalties under the OVDP of 50% percent – nearly double the regular maximum rate of 27.5%.

Don’t let another deadline slip by. If you have never reported your foreign investments on your U.S. Tax Returns or even if you have already quietly disclosed or in 2012 OVDI, you should seriously consider participating in the IRS’s 2014 Offshore Voluntary Disclosure Program (“OVDP”). Once the IRS contacts you, you cannot get into this program and would be subject to the maximum penalties (civil and criminal) under the tax law. Taxpayers who hire an experienced tax attorney in Offshore Account Voluntary Disclosures should result in avoiding any pitfalls and gaining the maximum benefits conferred by this program.

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 Francisco, San Diego and elsewhere in California qualify you for OVDP.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems, get you in compliance with your FBAR filing obligations, and minimize the chance of any criminal investigation or imposition of civil penalties.

Why You Don’t Mess With California – A Primer On California Tax Collection Actions.

California is unique in the structure of its tax system. Most States operate under a single tax agency. The Federal government uses a single tax agency called the IRS. But California has three tax agencies! They are the Franchise Tax Board (“FTB”), Board Of Equalization (“BOE”) and the Employment Development Department (“EDD”).

What does FTB cover?

The FTB administers the income tax. This tax applies not only to individuals, but also to sole proprietorships, partnerships, estates, and trusts. In addition, the income “passed through” to individuals by Subchapter S corporations and certain other entities is subject to State Personal Income Taxation. The tax is applied to all sources of income unless specifically excluded, including wages and salaries, interest, dividends, business-related income, and capital gains.

What does BOE cover?

The BOE administers the Sales and Use Tax. The tax in a specific California location has three parts: the state tax rate, the local tax rate and any district tax rate that may be in effect. Sales and Use Tax is the second largest source of tax revenue in California and is assessed at both the state and local levels.

What does EDD cover?

EDD involves payroll taxes which includes all employer paid taxes, State Income Tax Withholding of employees, State Disability Insurance (“SDI”) Taxes and Unemployment Insurance (“UI”) Taxes.

The California Tax Agencies can go way beyond liens and levies to enforce collection and put pressure on taxpayers.

The FTB publishes Top 500 Delinquent Taxpayers (one list for personal and one for corporate). The FTB is required by law to post this information at least twice annually. California Revenue & Taxation Code § 19195.

  • The FTB will notify each taxpayer by certified mail 30 days before they post their information.
  • As cases are resolved, those taxpayers are removed from the list, reducing the total number of listings from the original 500.
  • Your occupational and professional licenses, Including your driver license may be suspended under Business and Professions Code §494.5.
  • State agencies will not enter into contracts for the acquisition of goods and services with you under Public Contract Code §10295.4.

The BOE will revoke your seller’s permit. If your seller’s permit is revoked, you cannot sell your goods. Also, as a corporate director, officer, member, manager, or other person having control or supervision of the filing of returns or payments of taxes, you may become personally liable for any unpaid sales and use taxes, interest, and penalties. Such personal liability for any unpaid taxes and interest and penalties on those taxes is triggered upon termination, dissolution, or abandonment of a corporate business or limited liability company, any officer, member, manager, or other person having control or supervision of, or who is charged with the responsibility for the filing of returns or the payment of tax, or who is under a duty to act for the corporation or limited liability company in complying with any requirement of this part. Section 6829 of the Revenue and Taxation Code.

The IRS has the Trust Fund Recovery Penalty (also known as the 100-percent penalty). The EDD has something similar referred to as “CUIC 1735”. But CUIC goes way beyond the IRS’ version. Not only does the EDD assert a full 100-percent exposure of the employees tax withholdings AND the employer’s share of payroll taxes to targeted responsible individuals but also a 10% nonabatable assessment penalty (it should be noted that the IRS version is limited only to the employee’s share of FICA and withheld federal income taxes, roughly 60% of the corporate employer’s overall liability). The two key elements of CUIC 1735 are responsibility and willfulness. The EDD must have both elements before they can make the 100% assessment stick. Any officer, major stockholder, or other person in charge of the affairs of the business can be held responsible. Before the assessment can become final, the targeted responsible person must be given notice, an opportunity for an administrative hearing, and an appeal. If the targeted individual loses his or her administrative hearing and appeal, and does not pay within 10 days after assessment, her or she will be penalized a further 10% pursuant to CUIC 1135.

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

Protect yourself. Federal and State 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 and State tax problems to allow you to have a fresh start.

What You Need To Know About Levies By The IRS.

A Federal Tax Lien just makes sure the IRS eventually gets paid. A levy means now the IRS gets paid.

A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.

If you do not pay your taxes (or make arrangements to settle your debt), the IRS may seize and sell any type of real or personal property that you own or have an interest in.

For instance,

  • The IRS could seize and sell property that you hold (such as your car, boat, or house), or
  • The IRS could levy property that is yours but is held by someone else (such as your wages, retirement accounts, dividends, bank accounts, licenses, rental income, accounts receivables, the cash loan value of your life insurance, or commissions).

What due process must IRS follow before they can levy?

The IRS will levy only after these three requirements are met:

  • The IRS assessed the tax and sent you a Notice and Demand for Payment;
  • You neglected or refused to pay the tax; and
  • The IRS sent you a Final Notice of Intent to Levy and Notice of Your Right to A Hearing (levy notice) at least 30 days before the levy. The IRS will give you this notice in person, leave it at your home or your usual place of business, or send it to your last known address by certified or registered mail, return receipt requested.

The Final Notice of Intent to Levy and Notice of Your Right to A Hearing is your last warning before the IRS starts levy action. You do not want to ignore this notice.

Difference between a bank levy and a wage levy.

If the IRS levies your bank account, your bank must hold funds you have on deposit, up to the amount you owe, for 21 days. This holding period allows time to resolve any issues about account ownership. After 21 days, the bank must send the money plus interest, if it applies, to the IRS.

If the IRS levies your wages, salary, federal payments or state refunds, the levy will end when:

  • The levy is released,
  • You pay your tax debt, or
  • The time expires for legally collecting the tax.

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 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.

The Power Of The Federal Tax Lien.

A lot of people get confused between Tax Liens and Tax Levies – let us break this down for you.

A lien is not a levy. A lien secures the government’s interest in your property when you don’t pay your tax debt. A levy actually takes the property to pay the tax debt. If you don’t pay or make arrangements to settle your tax debt, the IRS can levy, seize and sell any type of real or personal property that you own or have an interest in.

When would the IRS file a Federal Tax Lien?

The IRS will file a lien when the agency feels there is a chance that collection is in peril. It does not just grab your assets. Filing of a tax lien is normally dictated by the dollar amount; the IRS’s Fresh Start program has increased the lien threshold from $5,000 to $10,000.

The Notice of Federal Tax Lien is filed in the public records office of each county where you own property and thus attaches to any property you own. If you sell the property, proceeds will be used to satisfy the lien. Any person or company pulling a credit report on you will see the tax lien. This will damage your borrowing ability, making it difficult to refinance your home, get an auto loan, credit card, or business loan. Also, if you are looking to refinance your loan, the lien would have to be satisfied at closing in order for the lender in the new loan to retain a senior creditor’s position.

Alternatively, a new lender should be willing to make the new loan where the IRS agrees to subordinate its lien. A taxpayer can request that the IRS subordinate their lien to the new lender. In the process, even though the tax lien would be older than the new loan, the IRS agrees to stand behind the new lender should the loan be defaulted and the new lender now seeks to foreclose on the property.

Federal Tax Liens Do not Necessarily Have To Remain In Place While You Are Under A Payment Plan.

It is true that certain taxpayers who enter into payment plans with the IRS can get tax liens withdrawn even before the liability is paid in full. You must enter into a Direct Debit installment agreement and also meet the following to request that the Federal Tax Lien be withdrawn:

  1. The current amount you owe must be $50,000 or less;
  2. If you owe more than $50,000, you may pay down the balance to $50,000 prior to requesting the lien withdrawal to be eligible;
  3. Your Direct Debit Installment Agreement must full pay the amount you owe within 60 months or before the Collection Statute expires, whichever is earlier;
  4. You must be in full compliance with other filing and payment requirements;
  5. You must have made three consecutive direct debit payments;
  6. You cannot have previously received a lien withdrawal for the same taxes unless the withdrawal was for an improper filing of the lien; and
  7. You cannot have defaulted on your current, or any previous, direct debit installment agreement.

An existing installment agreement not structured as a Direct Debit Installment Agreement can be converted so that you can now qualify for this relief for lien withdrawal. Bear in mind that if you default on your Direct Debit Installment Agreement after the lien is withdrawn, a new notice of lien may be filed and collection efforts may resume.

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 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.

Tax Court Affirms Net-Worth Method Used to Support Fraud Determination Against Surf Shop Owners

If you think that by keeping sloppy records, the IRS cannot determine how much income you earned – think again.

The Worth family, Donald, Marie, and their son, Frank, operated a chain of seven surf and skateboard shops across California, called White Sands. Their business was selected for audit by the IRS. In the course of the audit the IRS learned that Frank was responsible for about half of the stores and Donald and Marie operated the other half. Marie also managed the books and prepared tax returns. As manager of the heavily cash-based business, Frank had the authority to write checks on certain White Sands bank accounts, wrote checks or used cash to pay vendors for merchandise as it came in, and wrote checks to reimburse himself for business expenses he paid. Frank also supervised inventory and receipts from store branches. There were no formal ownership arrangements; however, Donald and Frank held themselves out as joint owners, and Frank testified in previous cases that he was a part-owner. Frank reported income from the business on his Form 1040 Schedule C and never received a Form W-2 from White Sands.

As the civil IRS audit progressed the auditor uncovered certain banking irregularities that lead the IRS and state authorities to institute a criminal investigation into the business, resulting in Frank pleading guilty to willfully making and subscribing to a false return for 2000, and Donald and Marie pleading the same for 1998 to 2000. All three admitted to knowingly and willfully understating the businessgross receipts to decrease tax liability.

The IRS then determined deficiencies for Donald and Marie and for Frank based on unreported income using the net-worth method, because the lack of complete and reliable records precluded using the simpler bank-deposit method and sought to defend its civil assessment for taxes, penalties and interest in the U.S. Tax Court.

IRS Reconstruction Of Taxpayer’s Income.

The IRS has great latitude in reconstructing a taxpayer’s income, and the reconstruction need only be reasonable in light of all surrounding facts and circumstances. The net-worth approach is a permissible method that seeks an approximation, rather than a precise determination, of the taxpayer’s gross income.

Under the net-worth method, the IRS reconstructs a taxpayer’s income by determining net-worth at the beginning and end of each year in issue. The net worth increase (or decrease) for each year is then adjusted by adding nondeductible expenses (such as everyday living costs) and subtracting receipts from nontaxable sources (such as gifts, inheritances, and loans).  

An increase in net worth for a given year creates an inference of additional gross income for that year, provided that the IRS: (1) establishes the taxpayer’s opening net worth with reasonable certainty and (2) either shows a likely source of unreported income or negates possible nontaxable sources. Brooks v. Commissioner, 82 T.C. 413 (1984).

Battle In Tax Court.

But for the Worth’s case the primary issue before the Tax Court was whether the Worth’s failed to report income for 1998 to 2000 as determined by the IRS using the net-worth method of reconstructing income. The court’s decision was published recently – see Worth v. Comm’r, T.C. Memo 2014-232 (11/13/2014).

The court determined that the net-worth method was computed correctly and that the family was liable for the deficiencies. The court reasoned that the Worth’s failed to maintain accurate books or records from which tax liabilities could be computed and did not present any affirmative case to rebut the IRS’s arguments.

The court rejected the Worth’s arguments that the IRS agent was not a qualified expert, thus making her testimony inadmissible, finding that that the IRS agent was not testifying as an expert, but permissibly providing factual information as to how the audit was conducted and how net-worth was calculated. Moreover, the IRS audit properly investigated and accounted for alleged cash-hoards as well as other alleged loans from Donald and Marie to Frank, which could have lowered the taxpayers’ AGI. Lastly, the court determined that based on the IRS audit, criminal investigation, and admissions, Frank was a 50% owner of White Sands during the years at issue and thus half of the assets of White Sands was properly allocated to him for purposes of the net-worth analysis.

The Tax Court ultimately upheld the IRS’s deficiencies and determined the family members were liable for the civil fraud penalty (which is 75% of the underlying increase in tax) because of the understatements of income, false statements, lack of credible testimony, insufficient records, and attempts to conceal income by structuring bank deposits to fall under the reporting limit required for banks.

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

Protect yourself. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Jeffrey B. Kahn, Esq. Discusses IRS Payroll Tax Audits & Issues On ESPN Radio – November 14, 2014 Show

Topics Covered:

  1. Jade’s Story Of Her IRS Audit
  2. Would Your Business Survive an IRS Worker Classification Audit?
  3. When Payroll Taxes Pyramid It Means Penalties, Even Jail
  4. Questions from our listeners:
  • What is the new maximum wage amount in 2015 that would be subject to a total Social Security FICA tax of 12.4%?
  • What is the regular Medicare Tax that applies to compensation?
  • What is the new additional Medicare Tax that came into place?
  • When does the new additional Medicare Tax get reported and paid?
  • What payroll tax liabilities of my business could I be personally liable for?

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 the big question today is if the IRS asked to examine your business’ Federal Tax returns, would you survive the audit? For Jade Phuong who operates a nail salon, it was a nightmare that came very close to ending her business.

Jade’s Story.

Before the IRS turned her world upside down, Jade already had beaten the odds as a small-business owner. Her name salon had been operating more than eight years, a considerable accomplishment considering that most small businesses fail in less than three years. Living at home with her mother, Jade saved enough money to open her nail salon fresh out of nail school at age 25.

Despite a rocky start, Jade was able to build up her business and after a couple of years was able to enjoy a good living from her nail salon. In fact things were going so well that when a space almost twice the size of her current location opened just two doors down, she decided to move to the bigger space and expand into the tanning business by installing six tanning beds in the new space. Jade was feeling good, everything was going great. She bought her first house and moved into it. Jade finally attained the American dream. Then two weeks later she got the letter from the IRS.

The Longest Year

The letter from the Internal Revenue Service was innocuous enough – mixed in with the salon’s mail, it looked just like any other piece of business correspondence.

When Jade realized that it was indeed from the IRS, she felt a twinge of concern, but not panic. As a business, Jade would periodically get notifications and letters from the IRS or the State but this letter was different. Jade opened the letter and read the words, “Your Federal tax returns for the selected tax years have been assigned to me for examination.” The vague sense of unease Jade originally felt was now panic in full bloom.

Jade immediately got on the telephone with her accountant and told him of the letter she received. She even faxed him a copy so he could see it for himself. Sure enough Jade’s last three years of business income tax returns were selected for examination.

Her accountant said don’t worry as he felt confident that this was just a random audit and that Jade’s recordkeeping and reporting to the IRS was done by the book. So the accountant told Jade to contact the IRS agent and arrange for him to come to the business and meet her and look at the business’ books and records.

And so Jade contacted the IRS agent and scheduled a meeting at the salon.

The IRS agent came to the salon and he was business-like, but very pleasant – the agent seemed like someone you could talk to. Apparently the IRS agent very much wanted Jade to think this audit wasn’t a big deal so Jade would open up to the agent.

 

The meeting lasted two and a half hours and the agent asked a lot of questions:  When did we open? How are we set up? Who set up the business organization? Do we write off our car? What kinds of benefits do we give workers? Where do we buy our boutique items?

After leaving the salon that day, the IRS agent went to the office of Jade’s accountant, where the agent spent six hours reviewing the business’ corporate records, check registers, bank deposit slips, car mileage logs, and other papers. The agent returned to the accountant’s office for three additional days.

The examination of Jade’s records was exhaustive and comprehensive but the accountant was confident that the agent would be able to agree with just about everything as reported on the tax returns. The accountant even told this to Jade and further added that he would be very surprised if the proposed liability was more than $1,000.

“You’re joking … Right?”

And a few weeks thereafter, the IRS agent issued a letter. What the agent concluded in that letter about Jade’s business was a shocker. Jade had been classifying her workers as independent contractors. The IRS agent felt they should be classified as employees and under this classification Jade would now owe the IRS $85,000.

Jade was confident that her setup was legal and legitimate because before she even opened the nail salon’s doors, she had consulted and paid a CPA to help her write the business plan and set up the business, including how to classify her workers. The CPA set Jade’s nail technicians as independent contractors. The CPA said he represented a lot of beauty salons, and he said that’s how all the salons were classifying their workers.

But the IRS agent did not agree.

In a nutshell, the IRS agent based his determination on five factors:

  1. Realization of Profit or Loss…There was no element of risk for the nail technicians because they did not bear any of the financial burdens of the nail salon, such as rent, utilities, and insurance.
  1. Significant Investment … None of the nail technicians had any significant financial investment in the shop. All the investment was by Jade.
  1. Integration … The services of the nail technicians were fully integrated into the business operations – meaning that without the services of the nail technicians, Jade could not have continued business operations as a successful nail salon.
  1. Payment by Hour, Week, and Month … Upon completion of each customer serviced, the nail technicians then turned over the total received to the Jade. The nail technicians could not retain these payments from customers.
  1. Set Hours of Work … The business did not require the nail technicians to work set hours, but Jade allocated the hours the nail technicians would be available.

Well this was not acceptable to Jade so she hired a tax attorney to appeal this determination and fight the IRS.

Despite the IRS agent’s assertion that the workers should be treated as employees, Jade had some good facts favorable to her entitling her to treat the workers as independent contractors.

For one thing, a few years earlier she received a form letter from the State requesting that she complete a questionnaire about her workers and return it to the State. She completed the questionnaire and soon after received a letter from the State confirming that her workers were independent contractors.

In the questionnaire Jade noted that the nail technicians set their own hours. They didn’t get any benefits from the business. Everyone paid their own taxes and they knew they were responsible to pay for their own taxes.

Despite building a case to support classification of the workers as independent contractors, the position of the Appeals Officer at the IRS Office Of Appeals was that Jade still maintained enough control over the workers that they should be treated as employees.

Now this determination could be appealed to the U.S. Tax Court but to fight the IRS in court meant as much as $25,000 in legal fees, plus the $85,000 for the three years if Jade lost. But there was another option for Jade.

If Jade were to agree to convert her workers to employees and now start taking out taxes, provide worker’s compensation and liability insurances, and pay the employer’s share of their future earnings in Social Security taxes, and supply them completely, the IRS would substantially lower the liability for the prior years. In Jade’s case the liability would now drop below $20,000

Jade said at this point I have got to go with this option. So she made the changeover and paid the $20,000 to IRS. Turns out only two nail technicians left due to the changeover in worker status.

Older and Wiser

Things are looking good again to Jade who says the nail business is stronger than it’s ever been. She has increased her business, which has increased her income. She also recently upgraded her tanning salon with all new stand-up beds. Just like when she first opened, it’s the tanning beds that are pulling the salon through in the slow times.

She also has eliminated some things, like entertainment expenses and she started buying product in bulk to cut down costs. After the switch in worker status to employees, Jade raised service prices by about 5% to help cover the now higher costs of doing business. To her surprise, it didn’t hurt business at all. It was Jade’s first price increase in nine years anyway, so it was time. Jade does not know of one client who left as a result of these changes.

Jade’s story serves as a good lesson to anyone operating a business or looking to start a business which is that you need to know the rules and follow them. Don’t think that you are immune from the IRS questioning your business.

Starting in 2015, businesses with at least 50 full-time employees must offer affordable health insurance to all employees or substantial penalties will be imposed. If independent contractors are converted to employee status, this may result in a company having more than 50 full-time employees. Also, the IRS is starting a project to conduct 6,000 random audits over a period of three years with worker classification/misclassification as a key focus. The IRS anticipates that when the project is completed, it will pursue employment tax referrals from state agencies that deal with the classification of workers for both workman’s compensation and unemployment purposes.

Don’t take the chance and lose everything you have worked for. Be a survivor and be successful – which is why you listen to our show.

When we come back we are going to tell you how you can get out of IRS trouble if you have workers you are treating as independent contractors.

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 San Francisco Office is my associate attorney, Amy Spivey.

Chit chat with Amy

Would Your Business Survive an Audit?

Jeff says, Like Jade and her nail salon, I do not know of any business owner who wants to be audited by the IRS or their state tax authority.  Audits can be simply random as “decided” by the IRS computer, or they can be triggered by certain characteristics of your business operation, for example how you’ve classified independent contractors or employees (especially if they apply for unemployment insurance, worker’s compensation benefits, or even welfare).

 

Amy, you have identified three key items the IRS and state tax authorities look for if you are an independent contractor or if you use them in your business

In the context of Jade’s nail salon, Jeff to read off each and Amy to explain.

  1. Is there a lease between the independent contractor and the owner?

There must be a lease signed by the salon owner/landlord and each booth renter for every year of the audit. The IRS and your state can audit your records for the past three years (or as far back as they want if they determine your returns were fraudulent). The lease must clearly define the day-to-day operations of the booth rental operation and clearly define the separation between the salon owner/landlord and the booth renter. It should be clear how and when rent is paid: how service receipts are collected: hours of operation (hint: the independent contractor sets her own); receptionist services; who provides the equipment; who pays for supplies. Every aspect of the relationship must be spelled out.  A true independent contractor can incur financial loss (which means she invests in the business as well as earns a living from it).The salon owner must not have any control over when, where, or how the independent contractor works.

  1. How is rent paid?

This was an area that got Jade in trouble. Independent contractors must pay a flat rate – not a percentage of their service income – based on the space used. Tax agencies take a dim view on charging rent as a percentage of services because it makes it difficult for the independent contractor to incur a loss (0% of 0 income is not a loss). Paying a commission also ties the economic well-being of the salon owner to the independent contractor, making it harder to argue that the independent contractor’s services are not integral to the success of the salon.

  1. Who collects payment for services rendered?

Again, this area got Jade in trouble. The booth renter is responsible for collecting payment for all services rendered.  That doesn’t just mean taking the money from them at the front desk; it means the independent contractor must have her own cash box and have checks in her name.  They should be able to make change for cash paying customers and handle bad checks. A good rule of thumb is that a salon owner should never give an independent contractor money, and she should never issue an independent contractor a 1099 form.

Jeff says, now we only discuss three factors but the IRS and State tax agencies have other factors they can consider in determining whether the relationship is truly that of salon owner/landlord and independent contractor.

PLUG: And that is where our expertise and guidance can make a difference. 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.

 

Jeff asks, so where a business has been treating its workers as independent contractors and there is a concern that the IRS in an audit would not respect this arrangement, what can the business do?

Amy replies: The business should consider entering into the IRS’ Voluntary Classification Settlement Program (VCSP). The VCSP is a voluntary program that provides an opportunity for taxpayers to reclassify their workers as employees for employment tax purposes for future tax periods with partial relief from federal employment taxes. To participate in this voluntary program, the taxpayer must meet certain eligibility requirements and apply to participate in the VCSP by filing Form 8952, Application for Voluntary Classification Settlement Program, and enter into a closing agreement with the IRS.

 

Jeff asks, what is the eligibility for this program?

 

Amy replies, The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. The program applies to taxpayers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to prospectively treat the workers as employees.

 

A taxpayer must have consistently treated the workers to be reclassified as independent contractors or other nonemployees, including having filed all required Forms 1099 for the workers to be reclassified under the VCSP for the previous three years to participate.

 

Additionally, the taxpayer cannot currently be under employment tax audit by the IRS [income tax audit is OK] and the taxpayer cannot be currently under audit concerning the classification of the workers by the Department of Labor or by a state government agency.

 

If the IRS or the Department of Labor has previously audited a taxpayer concerning the classification of the workers, the taxpayer will be eligible only if the taxpayer has complied with the results of that audit and is not currently contesting the classification in court.

 

Jeff asks, so for a business that qualifies for VCSP what are they looking at for penalties?

 

Amy replies, A taxpayer participating in the VCSP will agree to prospectively treat the class or classes of workers as employees for future tax periods. In exchange, the taxpayer will:

  • Pay 10% of the employment tax liability that would have been due on compensation paid to the workers for the most recent tax year, determined under the reduced rates of section 3509(a) of the Internal Revenue Code;
  • Not be liable for any interest and penalties on the amount; and
  • Not be subject to an employment tax audit with respect to the worker classification of the workers being reclassified under the VCSP for prior years.

 

PLUG: The VCSP is a valuable program that a business owner should consider. 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.

 

Now if your business treats all of its workers as employees, don’t think that you can still avoid IRS trouble. Stay tuned and you will find out why.

 

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 San Francisco office I have my associate attorney, Amy Spivey.

 

When Payroll Taxes Pyramid It Means Penalties, Even Jail

 

Jeff asks, does the IRS pursue all taxes equally?

 

Amy replies, not really. The IRS is especially vigorous in going after payroll taxes withheld from wages that somehow don’t get paid to the government.  The IRS calls it trust fund money that belongs to the government.

 

That makes any failure to pay—or even late payment—much worse.

 

In fact, that’s so regardless of how the employer or its principals use the money, and regardless of how good a reason they have for not handing the money over to the IRS. When a tax shortfall occurs in this setting, the IRS will usually make personal assessments against all responsible persons who have an ownership interest in the company or signature authority over the company accounts.

 

Jeff asks, how does that work?

 

Amy replies, The IRS can assess a Trust Fund Recovery Assessment, also known as a 100-percent penalty, against every “responsible person.” The penalty is assessed under Section 6672(a) of the tax code, and the IRS uses it liberally. You can be responsible and therefore liable even if have no knowledge that the IRS is not being paid. If there are multiple owners, multiple officers, multiple check signers, they all may draw a 100% penalty assessment.

 

Jeff asks, what happens when multiple owners and signatories all face tax bills?

 

Amy replies, they generally squabble and do their best to sic the IRS on someone else. Factual nuances matter in this kind of mud-wrestling, but so do legal maneuvering and just plain savvy. One responsible person may get stuck paying while another who is even guiltier may get off scot-free.

Jeff asks, so if the IRS is going after individuals, does the IRS stop any collection action against the company?

 

Amy says, No, the government will still try to collect from the company that withheld on the wages. The IRS also wants to make sure this kind of bad tax situation doesn’t occur again.

 

Jeff says, now so far you have talked about civil exposure which involves solely the payment of money. Can the government see criminal penalties?

 

Amy says, sure they can and the government will typically seeks to enjoin this behavior. That was the approach the government took with Advanced Underground Construction, an Iowa-based company, and its principal, William David Ward II. The Justice Department sought an injunction against both, alleging the company repeatedly failed to pay federal employment taxes withheld from wage checks, the amount now due exceeding $370,000.

 

The company was using the withheld taxes as working capital, the suit claimed. The government usually succeeds with this kind of argument. In this case, the Federal Court Ordered the Iowa Construction Company to Pay Employment Taxes.

 

The practice the government was going after is sometimes called “pyramiding.” The DOJ noted that the company had made minimal payments of its tax debts, and that attempts to induce voluntary compliance failed. To stop the bleeding in a case like this, the Justice Department can seek an injunction to require a company and its principals to make timely tax deposits, to pay all withheld employment taxes, and to timely file all employment tax returns.

 

Jeff says, and what happens to the principals if they fail to comply with the injunction?

 

Amy replies, they will be held in contempt and put into jail.

 

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.

5 Payroll Tax Mistakes to Avoid

 

Jeff says: If you have at least one employee, you are responsible for payroll taxes. These include withholding federal (and, where appropriate, state) income taxes and FICA tax from employees’ wages as well as paying the employer share of FICA tax and federal and state unemployment taxes. The responsibility is great and the penalties for missteps make it essential that you do things right.

 

Jeff to read off each tip and Amy will reply.

 

  1.  Misclassifying workers

Perhaps the hottest audit issue today is misclassifying workers. There’s incentive to treat workers as independent contractors rather than employees because payroll taxes and employee benefit costs are high; a company’s only tax responsibility for an independent is issuing a Form 1099-MISC if payments in the year are $600 or more.

You don’t have the freedom to select the label for the worker; classification depends on whether you have sufficient control over the worker. This essentially means having the right to say when, where, and how the work gets done. Having an independent contractor agreement is helpful in showing that you and the worker do not intend any employer-employee relationships, but it doesn’t bind the IRS, who is not a party to the agreement.

 

  1.  Not using an accountable plan for employee reimbursements

If you normally pay for travel, entertainment, tools or other business costs for employees, you’re wasting employment tax dollars if you don’t use an accountable plan. With this arrangement, you deduct the expenses but avoid all payroll taxes on reimbursements; employees do not have any income from reimbursements.

To be an accountable plan, the employer must formalize the arrangement and set reasonable times for action (the following times are reasonable to the IRS but you can adopt shorter time limits for action):

  • The reimbursable expense must be business related.
  • Advances cannot be made before 30 days of the expense.
  • Employees must account for the expenses within 60 days of the expense.
  • Employees must return excess reimbursements to the employer within 120 days of the expense.

 

  1.  Failing to keep payroll records

You are required to maintain payroll records and have them available for IRS inspection. These include time sheets, expense accounts, copies of W-2s and other payroll records. Usually, you should keep information for at least four years.

 

You should also retain copies of Forms I-9, which shows an employee’s eligibility to work in the U.S. States may also have certain hiring forms that should be retained (e.g., E-verify forms).

  1.  Choosing to pay creditors before the IRS

When a business gets into a cash crush, it may be tempting to pay the landlord, vendor, or utility company before the IRS; don’t! As a business owner, you are a “responsible person” who remains 100% personally liable for “trust fund” taxes (amounts withheld from employees’ wages). This is so even if your business is incorporated or is a limited liability company.

 

Best strategy: Set aside cash to cover payroll taxes so you won’t use these funds for any other purpose.

 

  1.  Failing to monitor payroll company activities

Many small businesses use outside payroll companies to handle the job of figuring withholding as well as transferring funds to the U.S. Treasury to cover payroll taxes. However, some of these companies may not do their job, by error or intentionally. As an employer, even if you use an outside payroll company you remain responsible for payroll taxes.

 

Best protection: Monitor your tax account to see that funds are being deposited on time and in the correct amount. If deposits are made electronically using EFTPS.gov, you can easily see activities in your account.

 

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?

 

  1. What is the new maximum wage amount in 2015 that would be subject to a total Social Security FICA tax of 12.4%?

 

That amount will be $118,500. (Up from $117,000 in 2014). Remember that the employer pays 6.2% and the other 6.2% is withheld from the employee’s paycheck.

 

  1. What is the regular Medicare Tax that applies to compensation?

 

There is no limit on the amount of earnings subject to Medicare (Hospital Insurance) Tax. The Medicare Tax Rate applies to all taxable wages and remains a total of 2.9% (with 1.45% withheld from the employee’s paycheck).

 

  1. What is the new additional Medicare Tax that came into place?

 

Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012. The rate is 0.9%.

 

An individual is liable for Additional Medicare Tax if the individual’s wages, compensation, or self-employment income (together with that of his or her spouse if filing a joint return) exceed the threshold amount for the individual’s filing status:

Filing Status Threshold Amount
Married filing jointly $250,000
Married filing separate $125,000
Single $200,000
Head of household (with qualifying person) $200,000
Qualifying widow(er) with dependent child $200,000

 

  1. When does the new additional Medicare Tax get reported and paid?

 

You will report Additional Medicare Tax on Form 8959, Additional Medicare Tax, and attach Form 8959 to your income tax return.

 

  1. What payroll tax liabilities of my business could I be personally liable for?

 

It would be for those liabilities we callTrust Fund Liability”. This constitutes those amounts an employer is required to withhold federal income and payroll taxes from its employees’ wages and pay them to the IRS. Withheld payroll taxes are called trust fund taxes because the employer holds the employees’ money (federal income taxes and the employee portion of Federal Insurance Contributions Act (FICA) taxes) in trust until a federal tax deposit of that amount is made.

 

If you have any responsibility for a business you will want to make sure you do not have this personal exposure.

 

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!

 

 

 

IRS Clarifies Application of One-Per-Year Limit on IRA Rollovers, Allows Owners of Multiple IRA’s a Fresh Start in 2015

If you have an IRA beware of this new rule that limits the number of IRA Rollovers that are not “trustee to trustee” to one per year.

When you receive a distribution from a traditional IRA or your employer’s plan, you would normally report it as income unless you rollover that distribution to another IRA no later than 60 days after the day you receive the distribution from your traditional IRA or your employer’s plan. In the absence of a waiver or an extension, amounts not rolled over within the 60-day period do not qualify for tax-free rollover treatment. You must treat them as a taxable distribution from either your IRA or your employer’s plan. These amounts are taxable in the year distributed, even if the 60-day period expires in the next year. You may also have to pay a 10% additional tax on early distributions as discussed later under Early Distributions. Unless there is a waiver or an extension of the 60-day rollover period, any contribution you make to your IRA more than 60 days after the distribution is a regular contribution, not a rollover contribution.

Until recently, taxpayers would take advantage of this law for than once in a calendar year to enable short term access to retirement monies without have to recognize income from the short-term use of the funds during each 60-day measuring period. But starting with 2015, the IRS has stated in Announcement 2014-15, 2014-16 I.R.B. 973, that this manner of rollover is limited to one per year even if the rollovers involve different IRA’s reflecting an interpretation by the U.S. Tax Court in a January 2014 decision, Bobrow v. Commissioner, T.C. Memo. 2014-21.

Before 2015, the one-per-year limit applies only on an IRA-by-IRA basis (that is, only to rollovers involving the same IRAs). Beginning in 2015, the limit will apply by aggregating all an individual’s IRAs, effectively treating them as if they were one IRA for purposes of applying the limit.

Although an eligible IRA distribution received on or after Jan. 1, 2015 and properly rolled over to another IRA will still get tax-free treatment, subsequent distributions from any of the individual’s IRAs (including traditional and Roth IRAs) received within one year after that distribution will not get tax-free rollover treatment. As today’s guidance makes clear, a rollover between an individual’s Roth IRAs will preclude a separate tax-free rollover within the 1-year period between the individual’s traditional IRAs, and vice versa.

As before, Roth conversions (rollovers from traditional IRAs to Roth IRAs), rollovers between qualified plans and IRAs, and trustee-to-trustee transfers–direct transfers of assets from one IRA trustee to another–are not subject to the one-per-year limit and are disregarded in applying the limit to other rollovers.

IRA trustees are encouraged to offer IRA owners requesting a distribution for rollover the option of a trustee-to-trustee transfer from one IRA to another IRA. IRA trustees can accomplish a trustee-to-trustee transfer by transferring amounts directly from one IRA to another or by providing the IRA owner with a check made payable to the receiving IRA trustee.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Year-end Tax Checkup If You Are Older Than 70.5 Years – Have you satisfied your 2014 required minimum distribution?

Do not be at risk for a major tax penalty.

Don’t let the hustle and bustle of the holiday season distract you into a hefty tax penalty come April. As the end of a year approaches, many consumers begin taking distributions from many of their retirement accounts-including 401(k) and 403(b) plans, and traditional IRAs-starting in the year they turn 70-and-a-half or the year when they retire, whichever is later. Failure to do so and the amount you should have withdrawn will be taxed at 50%. It’s one of the biggest penalties in the tax code and you would be surprised how many people fall into this trap. Fidelity Investments reports that of the more than 750,000 Fidelity IRA customers who need to take a Required Minimum Distribution (“RMD”) this year, 68% have yet to withdraw enough.

For many people the wait to the end of the year to take the RMD is deliberate because waiting to withdraw gives funds more time to grow tax-free especially when the market is on an upswing, as it has been.

Just don’t delay too long and put this off beyond mid-December because it can take a few days for trades to settle and funds to become available for withdrawal especially when markets are closed for holidays and with people off celebrating the holidays the processing time may take longer. You also want to make sure you get with your advisor before her or she takes off for the balance of the month to be certain of the amount of RMD that must be taken.

Brokerages often have resources consumers can tap to make sure they’re withdrawing the right amount, or even to set up automatic withdrawals. The IRS also has worksheets and charts to help determine the correct amount. Even if you think you have that number nailed down, it can help to have a conference call with your tax preparer and financial advisor to plan for how a withdrawal may affect your tax bill next year. Consider taking out more than the minimum to ensure you have enough to live on-or just the minimum to avoid being pushed into a higher tax bracket.

Other pitfalls to watch out for.

Unnecessary RMD’s. Even if you have multiple individual retirement accounts, you only need to take one RMD from the collection, based on your age and the total value of the accounts. You don’t have to take it out of each individual account.

Merged-money mistakes. If both spouses need to take RMD’s, that cash needs to come from both parties’ accounts. Filing a joint return doesn’t mean you could take the entire amount for both spouses from one spouse’s account. The “I” in IRA is for individual. There’s no such thing as a “joint IRA”.

Inheriting An IRA. If you inherit an IRA, check before year’s end to see if you need to take an RMD. Death gets you out of pretty much everything in the tax code except for required minimum distributions.

Facing the RMD for the first time. You have a bit of a grace period. In the year you turn 70.5, you have until April 1 of the following year to take that first distribution. But a distribution on say, March 15, 2015, counts for 2014. You’ll still need an RMD for 2015-and that double withdrawal could have a more significant tax impact.

And if you do forget, what should you do?

With a properly completed Form 5329, Additional Taxes On Qualified Plans, attached to your return you may be able to persuade the IRS to waive the penalty. For taxpayers having to follow this procedure we also recommend including a statement explaining why you missed the deadline.

You know that at the Law Offices Of Jeffrey B. Kahn, P.C. we are always thinking of ways that our clients can save on taxes. If you are selected for an audit, stand up to the IRS by getting representation. Tax problems are usually a serious matter and must be handled appropriately so it’s important to that you’ve hired the best lawyer for your particular situation. The tax attorneys at the Law Offices Of Jeffrey B. Kahn, P.C. located in Los Angeles, San Diego San Francisco and elsewhere in California are highly skilled in handling tax matters and can effectively represent at all levels with the IRS and State Tax Agencies including criminal tax investigations and attempted prosecutions, undisclosed foreign bank accounts and other foreign assets, and unreported foreign income.

Description: Let the tax attorneys of the Law Offices Of Jeffrey B. Kahn, P.C. resolve your IRS tax problems to allow you to have a fresh start.

Jeffrey B. Kahn, Esq. discusses taxes on the November 9, 2014 radio show “Talking Money with Mr. C” on 760AM KFMB in San Diego

Description:  Tax planning: What’s the good news? It’s never a waste of time… there still are some tax breaks on the books that you can use to your advantage before the end of 2014.  Some types of time or monetary investments have risks, but not tax-planning. This is why EVERYONE should do it.

The bad news is that there is no guarantee that all the extenders (there is more than 50 business and individual tax breaks) — including popular things such as the higher education tuition and fees deduction, and itemized claims for state and local sales taxes and private mortgage insurance payments — will be renewed after December 31, 2014.  Lawmakers are expected to consider, or extend (hence the laws’ collective name) after the November 4th election.

Some tax moves will take a little planning. Others are very easy to accomplish. But all are worth checking out to see if they can reduce your tax bill.

Here are some year-end tax moves to make before New Year’s Day:

  1. Defer your income
  2. Add to your 401(k)
  3. Review your FSA amounts
  4. Harvest tax losses