It’s that time of year again…tax season. For many small business owners, taxes top the list of business-related concerns. In fact, the National Federation Of Independent Business (“NFIB”) Small Business Economic Trends survey, released earlier this year, revealed that 20% of businesses cite taxes as their biggest problem.

With April 15^th fast approaching, more and more small business owners are tossing around the idea of filing for a much-needed tax extension. While filing for an extension might seem like the way to go during the hustle and bustle of tax season, there are a few things small business owners should consider before deciding to file for a six-month extension: 

Extra time to file doesn’t mean extra time to pay. 

An extension will change the tax filing deadline from April 15 to October 15, but you still have to pay the tax you owe by the April 15^th deadline.

If you don’t, you’ll have to pay interest on the unpaid amount plus an extra 0.5% in penalties for every month you’re late. However, the penalties for not filing on time are much higher than the penalties for not paying on time; 5% for each month or part of a month you’re late, up to 25%.

That being the case, if you need extra time to finish up your tax return, don’t hesitate to file for an extension. In an effort to avoid needing to file an extension, implement a payroll system you can rely on to automate tax filings and maintain compliance in accordance with ever-changing state and federal regulations. 

You can’t be sure exactly how much you owe without first completing your tax return. 

And, while filing for an extension gives you an additional six months to finish your tax return, you still have to pay the amount owed by April 15^th; meaning you’ll have to do some heavy estimating.

If you miscalculate the amount of tax owed, you’ll have to pay the necessary penalties and fees. If you paid less than 90% of the tax you owed, you’ll end up owing a penalty of 0.5% of the unpaid amount every month until you pay the balance.

To avoid unnecessary penalties, the IRS has a Form 1040-ES that includes a worksheet you can use to calculate your estimated tax payments but given the complexities of the tax law and ever-changing rules, it is best to seek a professional tax advisor to ensure the accurate calculation of taxes owed. 

It will make acquiring a new loan difficult. 

If you think you might need a loan sometime in the near future, you might want to think twice before filing for an extension. For starters, a recently filed tax return is usually a required financial document when seeking a loan or other forms of credit from a bank.

Banks use recent tax returns to gauge compliance. While filing for a tax extension doesn’t necessarily raise any red flags, not having your tax return in hand does little for your cause. 

Your potential refund will take longer. 

As a small business or startup, you might be due a tax refund from the IRS; that is once you file your taxes. Filing for a tax extension also means having to wait awhile longer to claim your tax refund. If you wait to file your taxes until October, you won’t see that money until the fall.

Extending the filing of your tax return extends the period of time that the IRS can select your tax return for audit.

Generally the IRS has up to three years after the filing deadline of your tax return to select it for examination or audit.  So if you timely file your 2014 tax return by April 15, 2015, the IRS will have until April 15, 2018 to audit your 2014 tax return.  However, if you file an extension of your 2014 tax return, the IRS will now have until October 15, 2018 to audit your 2014 tax return.

Filing an extension where your prior years’ tax returns are currently under examination.

Since the IRS has a three-year window to audit tax returns, if your 2012 or 2013 tax returns are currently under examination, it is probably a good idea to file an extension for 2014.  This way, the scope of the audit is not expanded to the 2014 tax year as you now would have until October 15, 2015 to file your 2014 tax return.  The IRS cannot force you to file a tax return before its filing deadline so if your audit is completed before October 15^th, you may delay or even avoid 2014 being examined by IRS.

Filing an extension where you are currently on a payment plan with the IRS.

A condition of any payment plan established with the IRS for your back tax liabilities is that you do not create any new liabilities.  If you expect to owe for 2014 and you file your tax return no later April 15^th with an unpaid balance, the IRS computers will automatically default your payment plan putting you back to square one.  But if you file an extension for 2014, you could possible delay this action by IRS for at least another six months which may be enough time for you to put away extra funds so that when you file 2014 you can include full payment of the balance due and avoid default.

If seeking a payment plan or Offer In Compromise for your back taxes, don’t file an extension and file no later than April 15^th. 

Where you owe back taxes to the IRS, it’s usually a good idea to include all tax years in your proposal which could be a payment plan or Offer In Compromise.  Only existing liabilities from filed tax returns may be wrapped into any proposal.  A liability from a 2014 tax return that has yet to be filed will not be included in your proposal and when it now comes time to file, you will need to include full payment.  Otherwise, you now defaulted what was previously set up.

And if you have foreign bank accounts ….

Filing for an extension on your income tax return does not extend the June 30th deadline to file your Report Of Foreign Bank Accounts (“FBAR”) using FinCEN Form 114 with the U.S. Department Of Treasury.

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.

Vincent Burroughs who lives in Oregon was selected by the IRS for an audit of his tax returns. Little did he know that the IRS was going to clean him out in more ways than just his bank account.

Let me explain – maintaining a friendly but professional demeanor can be important to an audit or tax dispute. But having sex with a government agent for a better audit result – well not such a good idea. Yet a lawsuit involving an allegedly alluring—and demanding—female IRS agent suggests that sometimes facts and figures can become overwhelming. If you believe the plaintiff, Mr. Burroughs, passion it seems can overtake a tax audit.

Unlikely? I agree. Preposterous? Perhaps. But Mr. Burroughs filed a lawsuit against the IRS alleging that IRS Agent Dora Abrahamson threatened him with penalties in his tax audit if he did not – let’s say, come across. And in this lawsuit Mr. Burroughs was seeking punitive damages.

What led to “the encounter”…

For a long time Mr. Burroughs said, he was making good money as a contractor. But when the economy hit the skids, his business dried up, quashing his hopes of becoming a full-time motorcycle racer. He got behind on his taxes — by about $20,000, he figured.
Then in August 2011, he was selected for an audit by the IRS. IRS Agent Dora Abrahamson was assigned to the audit. She allegedly told Burroughs that “she knew who he was, and that it was lucky for him that this was the case, and that they should meet”. Ms. Abrahamson allegedly flirted with him over the telephone and via text messages offering him massages and sent him a photo of herself in her underwear – not exactly IRS-approved business attire – and in a suggestive pose.

Mr. Burroughs maintains that he initially ignored her advances until September 2011. That’s when Ms. Abrahamson arrived at his home for an arranged audit meeting. Only she wasn’t dressed much like an IRS agent. Mr. Burroughs said she showed up dressed provocatively and proceeded to proposition him threatening a 40% tax audit penalty if she didn’t get what she wanted.

The interview with ABC News.

Mr. Burroughs was interviewed by ABC News. Like many other taxpayers, Mr. Burroughs said that when he found out he was being audited “he started shaking immediately. His heart rate went up. He was looking to cooperate with the IRS as much as he could”. But IRS agent Ms. Abramson assured him that she was most eager to help out.

Mr. Burroughs stated, “She was sending me texts. Some of them made me feel like, I am lucky that she has got my audit, ’cause she is gonna help me. Then, some of them made me feel like, I think this girl wants something else”. A week or so after the audit began, Mr. Burroughs said, he hadn’t gathered the papers he needed. He said Ms. Abrahamson asked about stopping by to give him a hand. He agreed.

So in September 2011, at 9:00 p.m. on a warm night in Eugene, Oregon, Mr. Burroughs said he opened his front door to IRS agent Dora Abrahamson. It was the first time the two ever met. Mr. Burroughs said in the interview with ABC News that “she said she was going to do my paperwork. She came up the stairs, knocked on the door and I opened the door”.

That’s when the encounter allegedly occurred.

Mr. Burroughs described in greater detail what happened –“She just pushed me back, and I kind of went back, and I landed like that, and she immediately came over, got on top of me, started kissing on me. … [T]hen she leaned up and started tearing my shirt off.”

Mr. Burroughs said they then went into his bedroom.

That was Mr. Burroughs’ interview with ABC News. But let’s get back to the story and what happened after that encounter at Mr. Burroughs’ home.

Mr. Burroughs said that he received a call from Ms. Abrahamson informing him that she was stepping down from his audit due to a “conflict of interest”. A new IRS agent was assigned who came up with a report that Mr. Burroughs owed not the $20,000 he figured – but that Mr. Burroughs owed around $69,000!

Mr. Burroughs was not happy. He said, “somebody has to be accountable for what the IRS does, because they are unaccountable. They run with no leash on.”

Fifteen months go by . . .

Now not that the story isn’t already bizarre enough, but also raising eyebrows is the lack of formal protest. In the fifteen months that transpired after the encounter, Mr. Burroughs doesn’t seem to have made any form of complaint to the IRS or law enforcement in spite of his claims to have suffered much over the incident. But all that changed when, seemingly out of nowhere, in January 2013 he filed suit in the U.S. District of Oregon, Eugene Division (Burroughs v. Abrahamson et al (6:13-cv-00141-TC)).

In his lawsuit, he says he suffered “anguish, humiliation, mental distress, depression, lost income, and loss of trust in governmental authority.” At the time of the encounter with Ms. Abrahamson, he was in an “exclusive relationship with another woman,” he said, and because of the demanding IRS agent, that relationship also suffered.

He calls Abrahamson’s behavior “persistent sexual harassment” and says, among other things, that she was negligent in “permitting her carnal desires to overcome her judgment that it was inappropriate to pursue a sexual relationship with a taxpayer she was auditing.” Her advances, the complaint alleged, “were an excessive intrusion on his person.”

In the lawsuit he was seeking unspecified punitive damages. The lawsuit claimed that Ms. Abrahamson’s conduct caused the plaintiff distress and a rift in his relationship with a “significant other”.

The lawsuit also alleges that the government is liable for damages because IRS officials provided inadequate supervision. I guess Mr. Burroughs was expecting a ménage à trois?

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.

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 business’ gross 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.

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).

Do you operate a beauty salon? Here are 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.

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.

2. How is rent paid?

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.

3. Who collects payment for services rendered?

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.

I only discussed 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.

Our Expertise And Guidance Can Make A Difference.

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.