Inflation Reduction Act Law. State gets involved to help the population during the economic crisis
In August 2022, Senate Democrats passed the Inflation Reduction Act, which allocates nearly $80 billion to the International Revenue Service (IRS) and leaves business owners asking: What are the tax implications of this bill? Will there be more audits? How will audits change? In this article, we’ll break down what the Inflation Reduction Act is, where the money is going, the resulting tax implications, what businesses will be targeted, and how IRS audits will change. Let’s dive in.

What is the Inflation Reduction Act?

The Inflation Reduction Act is a climate, health, and tax package passed by Senate Democrats. The bill passed with all 50 Democratic votes in the Senate.  The final version of the act proposes policy changes such as:
  • Climate and energy provisions
  • Prescription drug price reforms, and
  • Taxes on corporations

Will the Inflation Reduction Act Increase IRS Audits?

The Inflation Reduction Act allocates $79.6 billion to the International Revenue Service over the next decade. These funds will increase IRS audits. Let’s take a look at where exactly the money is going. 

Enforcement: IRS is Hiring

According to the 2021 IRS Data Book, IRS in Fiscal Year 2021 had about 79,000 full-time equivalent (FTE) employees, and about 35,000 of them were dedicated to enforcement activity. In 2021, IRS closed about 739,000 tax examinations and processed more than 261 million tax returns and supplemental documents. This number of tax examinations in 2021 was less than half of the number of tax examinations in 2012. So, what does this mean for business owners? IRS is making an effort to conduct more audits than in the past few years and using the additional resources from the Inflation Reduction Act to do so. Let’s take a look at how. With the increased budget resulting from the Inflation Reduction Act, IRS will be expanding its staff. IRS will be hiring additional:
  • Revenue agents (to conduct audits)
  • Criminal Investigators (to carry out criminal investigations), and
  • Revenue officers (to collect taxes)

Operations and Developments

The remaining additional funding will be used for:
  • Technology
  • Development of a direct free E-file system 
  • Operations, and
  • Taxpayer services
According to recent estimates from the Congressional Budget Office, those improvements are projected to bring in $203.7 billion in revenue from 2022 to 2031.

What Sizes of Businesses will be Impacted by the Inflation Reduction Act?

What businesses will be impacted by the Inflation Reduction Act? Let’s discuss.

Large Corporations and the 15% Minimum Corporate Tax

Large corporations with profits over $1 billion will be impacted by the Inflation Reduction Act. The bill imposes a 15% minimum tax on adjusted financial statement income for these corporations. Businesses owned by private equity would be exempt from this tax and the Joint Committee on Taxation projects that the tax would affect approximately 150 corporations. While the current statutory corporate tax rate is 21%, around 200 or more large corporations use tax loopholes to avoid paying that rate and pay below 15%. The bill will target these corporations. This provision would be effective for taxable years beginning after December 31, 2022.

Self-Employed Business Owners Are More Likely to be Audited

Self-employed business owners will be more likely to be audited as a result of this bill. Why? IRS is focused on self-employed people, whose financial situations can become tricky. For example, in these businesses, there are no W-2 jobs with a paycheck; there is just money coming in and going out. This increase in audits means that self-employed people will have to be even more careful in filing the proper forms and providing the correct taxable income.

Why is IRS Making These Changes?

According to Forbes, “the two primary revenue-raising provisions of the bill are a 15% corporate minimum tax and IRS tax enforcement funding, together estimated to raise over $400 billion.” “In total, the bill will raise over $700 billion in revenue over 10 years, including the aforementioned tax changes, as well as taxes and savings from a prescription drug-pricing proposal.”

How Will Audits Change with a Better-funded IRS?

After the Inflation Reduction Act, audits will not only be more common, but also different. Why? The flux of new hires means the audits will be conducted by revenue agents with less experience. For example, according to IRS, a revenue agent “must be trained on the job for at least two to three years to have the experience and expertise to audit a complex return.”

How Can Businesses Prepare for and Navigate These Changes?

You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you can answer any questions IRS may have. If you are audited, it is important to cooperate with IRS and to provide them with any requested information. If you are self-employed, we encourage you to keep track of income and expenses so you can file a tax return. Consider taking a look at bank and credit card statements for an idea of business expenses. For more, read our ultimate guide to IRS audits.

Hire an Experienced Tax Attorney

In the event of an IRS audit, business owners should consider enlisting the help of an experienced tax attorney. A tax attorney can help to guide you through the process of an IRS audit as well as navigate any issues brought on by a less experienced revenue agent.

Still Have Questions?

Business owners should contact Milikowsky Tax Law if they have any additional questions about how the Inflation Reduction Act will impact them. At Milikowsky Tax Law, we have over a decade of experience working with IRS and tax audits. We’re experts in defending business owners in the face of IRS or other government agency audits. Interested in learning more? Read on to learn how to respond to an IRS audit in 2022.
SBA PPP Loan Paperwork

The Small Business Administration (SBA) has forgiven over 98% of the total Paycheck Protection Program (PPP) loan value that borrowers requested them to forgive; recently, however, SBA has begun to issue more forgiveness PPP loan forgiveness denials.

Many of these recent denials issued by the SBA are not consistent with their own guidelines. Borrowers have received denial letters based on:

  •  Insufficient communication between SBA and lenders
  •  Misapplication of SBA’s Interim Final Rules (IFRs) or affiliation rules
  •  Mistakes by SBA surrounding the loss or misuse of borrower information

Borrowers should be aware that such denials are appealable. Consider challenging forgiveness denials if you believe SBA’s decision is in error.

Read our full guide to SBA’s PPP loan forgiveness denial below to learn more about how to appeal a denial, the criteria required for an appeal, and who can represent your company in the process. 

How Do I Know if My Business’ PPP Loan Forgiveness was Denied?

If SBA denied your application, you will receive an SBA Final Decision Letter in the mail. 

Learn more about what to do if your PPP loan is not forgiven, here.

How Do I Know Why My Business’ Forgiveness Application was Denied?

The first page of the Final Decision letter contains a section indented and in bold that provides the reasons SBA denied your request for forgiveness. It’s important to understand why SBA is rejecting the forgiveness application before taking action- such as appealing the denial.

Who Makes the Decision on PPP Forgiveness?

The decision to deny your PPP loan forgiveness can be made by:

  • Your lender (i.e. bank, credit union)
  • The Small Business Administration (SBA)

How Much Time Do I Have to Appeal a PPP Loan Forgiveness Denial?

You must respond to SBA and submit your appeal within 30 days of the date listed on your SBA Final Decision Letter.  The timeline for SBA forgiveness appeals is inflexible. Once your initial 30-day period expires, you will lose your right to appeal SBA’s denial to forgive your PPP loan.

How Do I Appeal a PPP Loan Forgiveness Denial?

You must appeal denials of forgiveness to the SBA’s Office of Hearings and Appeals (OHA) within the 30-day period. 

File appeals through OHA’s case portal. Filings for PPP appeals received in any other manner may be rejected and not docketed for processing.

SBA states that OHA has jurisdiction over appeals where SBA has provided the borrower with a PPP final loan review decision finding the borrower:

  • Is ineligible for a PPP loan
  • Is ineligible for the PPP loan amount received
  • Used the loan proceeds for unauthorized uses
  • Is ineligible for the PPP loan forgiveness amount determined by the lender in its full or partial approval decision issued to SBA, or
  • Is ineligible for PPP loan forgiveness when the lender has issued a full denial decision to SBA.

Learn more about how to appeal an SBA PPP forgiveness denial, here. 

What Information Do I Need to Provide in the Appeal?

The criteria for an appeal filed with the SBA are strict. According to SBA, appeals must contain:

  • A complete, detailed statement as to why the SBA loan review decision is erroneous, with accurate information and legal arguments supporting the statement;
  • No more than 20 pages (not including attachments)
  • Clearly labeled exhibits and attachments

Due to the strict criteria of the appeal, we recommend hiring a qualified attorney to represent your business and help you to create a strong, successful appeal. 

Who Can Represent My Business in the Appeal Process?

An identified legal representative of the business or a qualified attorney must represent the appeal since the SBA PPP loan is a business loan and not a personal loan. To represent your business, one must be:

  • A shareholder owner 
  • An officer, or
  • An attorney

Who Can’t Represent My Business in the SBA Appeal Process?

The following positions are not legally entitled or allowed to represent businesses in the SBA appeal process:

  • Certified Public Accountants (CPAs)
  • Lenders 
  • General Employees

What if I Lose My Appeal?

Any appeal denied in the Office of Hearings and Appeals will have to go to a higher court. Why? Because SBA is a federal agency. The process of going to federal court can be extremely tedious and expensive due to the strict regulations. 

To avoid the costly and time-consuming process of going to the federal district court, we recommend hiring a qualified attorney to make sure you’re building a strong appeal for your business.

While each case is unique and this is not an indication of success in other cases nor a promise of results, our team at Milikowsky Tax Law has extensive experience in government audits and cases involving government entities from IRS to SBA and CSLB.  

Contact Milikowsky Tax Law and learn how we can help.

What to do if IRS Audits your Business

Business owners may not be sure where to start if IRS audits their company. However, an IRS audit doesn’t have to feel stressful or disorganized. In this article, we’ll discuss a set of steps business owners can take if they find out they are being audited by IRS. 

Familiarize Yourself With Common Audit Triggers

The first question many business owners may have when being audited is simply: why is IRS choosing to audit my business? By knowing and understanding common audit triggers, taxpayers can understand how to prevent future audits as well as gain more insight into what caused this audit to occur.

Businesses are more susceptible to an audit if they:

  • Have foreign assets 
  • Have a cash business 
  • Are self-employed 
  • Have a home-based business 
  • Claim a disproportionate number of deductions 
  • File incorrect or incomplete returns 
  • Have a large number of cash transactions 
  • Earn less than $25,000 or more than $500,00
  • File a Schedule C 
  • Claim a vehicle as 100% business expense 
  • File taxes late

Review the Audit Letter Carefully

Take time to fully read the audit letter and consider hiring a professional, such as a tax attorney, to help walk you through it. The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. 

*Taxpayers should note that IRS does not send emails or phone messages to notify taxpayers of an audit. These types of communication may be a scammer attempting to retrieve personal information or data.

Understand the Type of Audit IRS is Conducting

IRS defines an audit as “as a review and examination of an organization’s or individual’s accounts and financial information to ensure information is reported correctly according to the tax laws and to verify the reported amount of tax is correct.”

IRS has several different ways of auditing businesses. There are two primary forms of audits: correspondence and field audits.

Correspondence Audits

Correspondence audits are the most common type of audit. This form of audit is generally considered to be easier to navigate than a field audit. Why? A correspondence audit occurs when there are errors on the business owner’s tax returns and IRS identifies these errors.

As a response, IRS sends a letter that describes each of these mistakes in detail. The business owner can respond and correct or explain the error through sending additional information to IRS.

Field Audits

A field audit is more thorough than a correspondence audit. Auditors will visit a business site in person. In this case, the auditor will examine financial records and compare them to the business owner’s return.

Prepare the Paperwork

IRS should list the information it requires in your audit letter. Once you know what information IRS needs, you can collect all of the records and supporting documentation requested (but nothing additional). For example, you may need to submit records such as:

  • Bank statements
  • Receipts from vendors, and businesses you have worked with
  •  Invoices 
  • Pay stubs
  • Payroll records
  • And other information

You can view a list of records IRS may request here.

Answer the Auditor’s Questions

In the case of a correspondence audit, send in the requested documents to correct the error on your tax return or to provide the necessary information to complete it. In the event of a field audit, you will have an interview with an auditor as they visit your business in-person.

In this interview, the auditor will ask questions about your tax return. We suggest being as straightforward and clear as you can. We also advise against volunteering any information or accounting records you are not required to give, including previous years’ tax returns, just to keep the process as simple as possible.

Consider Contacting an Experienced Tax Attorney

The combination of a tight deadline, little to no room for mistakes and potentially severe consequences can be a lot for a taxpayer to handle alone and lead to a poor interaction with IRS. This is why we suggest letting your tax professional do the talking for you.

An experienced tax attorney can help guide you through the process and ensure you are timely, responsive, and compliant. 

Additionally, tax lawyers offer attorney-client privilege, whereas other tax professionals, such as CPAs, do not. Therefore, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed. A qualified attorney can review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance. 

Facing an IRS Audit?

If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS, tax audits and tax issues. are experts in defending business owners in the face of IRS or other government agency audits.

Is your small business ready for an  audit? We dive into five signs your small business is ready for an IRS audit, here.

California CPAs should ask their clients who hire 1099s if they have a contractual agreement, invoices, licenses, insurance, and an EIN.

Certified Public Accountants (CPAs) have the most insight into their business owner clients’ daily transactional history. You may find that your clients who have 1099 contractors are now in the grey area of worker classification since it was redefined by AB-5 in January 2020.  

Under the new bill, all workers are automatically classified as W-2 employees unless they meet all three of the following criteria

  1. The worker is free from the control and direction of the hiring entity in connection with the performance of the work, both under the contract for the performance of the work and in fact
  2. The worker performs work that is outside the usual course of the hiring entity’s business
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

We frequently see cases of inadvertent contractor misclassification that are flagged by The Employment Development Department (EDD). EDD audits are most commonly triggered by: 

  • Independent contractors filing for unemployment benefits 
  • Employee complaints 
  • Late tax filings 
  • Random verification audits 

If the agency finds any misclassified workers during the audit, it results in fines, fees, and penalties that can be damagingly high if left unaddressed. 

Keeping this in mind, here are questions you can ask your clients to ensure that their 1099s are correctly classified, and help your clients reduce the risk of an EDD Misclassification Audit: 

  • Do your 1099s do similar jobs to your W-2s?
  • Do you have a contractor agreement with all of your 1099s?
  • Do your contractors Invoice you?
  • Does your contractor have a license?
  • Do they have insurance? 
  • Do they have an EIN?

Here’s an overview of how each question can provide more insight for your clients. 

Do Your 1099s do Similar Jobs to Your W-2s?

1099 independent contractors who perform similar jobs as W-2 employees may be considered an employee during an audit unless there is a clear distinction between the two. Make sure there are clear distinctions between the two. The W-2 employee works regulated hours, has specific job functions, is provided work equipment, and is told when and how to perform their job duties. They also receive employee benefits and do not have a clear end date for the work performed. 

On the other hand, 1099 independent contractors have flexible working hours, flexible job requirements as dictated through the contract, must provide their own working equipment, can work for multiple employers at the same time, and are not directly managed on job functions. They do not receive employee benefits and have a clearer job end-date. 

For example, one of your business owner clients may have a marketing coordinator who is classified as an employee. Your client may want to hire a marketing agency for a website redesign as a 1099 independent contractor. While both the marketing coordinator and the marketing agency perform job functions under the marketing umbrella, their job functions and classifications are different. 

The coordinator develops and executes the client’s marketing strategy specifically for your client’s company for as long as they work in that specific role. The hired marketing agency will perform the website redesign for your client until the project is complete. Once finished, the partnership is completed. While the marketing agency is working on your client’s website redesign, they can simultaneously work for other companies. 

Do You Have a Contractor Agreement With all of Your 1099s?

The independent contractor agreement outlines specific details for the job the independent contractor will perform. It is the working arrangement between the client and the contractor that typically includes:

  • A description of the job or service provided by the contractor
  • Payment details (this can include information about retainers, deposits and billing) 
  • The length and term of the project or service 

Do Your Contractors Invoice You?

Invoices help keep records of payments, type of work performed, and hours worked. Having organized records of invoices between the contractor and the client helps EDD verify that the independent contractor is indeed an independent contractor. 

Clients who put 1099s on scheduled payroll put themselves at risk for a misclassification audit. W-2 workers should be placed on payroll, not 1099s. 

Does Your Contractor Have a License?

Some workers (such as healthcare professionals and construction workers) are required to provide proper licenses to work. Failing to hire workers with proper licensure can open your client’s business to hefty fines and penalties from EDD. 

If your client hires contractors who don’t have licenses do they have: 

  • A website?
  • A social media presence? 
  • A marketing budget?

These are all important factors to consider. 

Do They Have Insurance? 

Independent contractors provide their own insurance to cover liability, worker’s compensation, or other risks to help them protect their business. If your client is insuring their independent contractors, this is a sign they may actually be W-2 employees. 

Do They Have an EIN?

An EIN is an Employer Identification Number. This is a unique tax identification number for businesses in the United States to pay state and federal taxes. Asking independent contractors without an EIN to provide one is a simple way to further ensure they are 1099s.

All of these factors add up to a robust defense against a misclassification audit by EDD. By fixing any misclassification errors ahead of time, CPAs can save their business owner clients the hefty fines and penalties associated with EDD audit findings. Want to learn more about the EDD audit process? 

Read our article on what to expect in an EDD audit here. 

 

California CPA's should ask their clients the right questions to help them avoid triggering an EDD audit

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California Assembly Bill 5 (AB-5) took effect on January 1, 2020, and is the new standard by which employers must classify employees. Small business owners (SBOs) should familiarize themselves with AB-5 and the ABC test to avoid employee misclassification and potential penalties from the Internal Revenue Service (IRS).

What is Assembly Bill 5 (AB-5)?

Assembly Bill 5, commonly referred to as AB-5, is a piece of legislation that extends employee classification status to some independent contractors, requiring that hiring entities reclassify these workers as employees based on the strict criteria outlined in the ABC Test.

What Caused Assembly Bill 5?

Assembly Bill 5 was inspired by the April 2018 Dynamex Case—when Dynamex reclassified all employees (previously classified as W-2s with all the associated perks) as independent contractors to save employee costs– before being signed into law by Governor Gavin Newsom in September 2019.

Read on to learn how Dynamex ruined it for everyone.

What Businesses Does AB-5 Affect?

AB-5 affects all small businesses and small business owners. Most prominently, AB-5 impacts SBOs who hire 1099 independent contractors and their operations in California.

How Does AB-5 Affect Businesses?

Through AB-5, the California Employment Development Department (EDD) places the burden of proof on businesses to show that workers are correctly classified as 1099 contractors.

The misclassification of employees can lead to:

  • High fines
  • Penalties
  • And back tax payments

How Do I Correctly Classify 1099 Independent Contractors?

AB-5 introduced the ABC test as a stricter guideline to determine how to classify a worker as a 1099 independent contractor. 

What is ABC Test?

Check out our video below for an in-depth explanation of the ABC Test.

The ABC test is a set of requirements that the worker must meet to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must meet all three criteria of the ABC test to be correctly classified as an independent contractor:

  1. The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
  2. The worker performs work that is outside the usual course of the hiring entity’s business.
  3. The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

If the contractor fails to meet any of the criteria in the ABC test, they are automatically classified as a W-2 employee instead.  

How To Meet The ABC Test Criteria 

When classifying your 1099 independent contractors according to the ABC Test, gather the following information to make sure they are classified correctly.

The First Criteria

  • Gather information on project deliverables and how they are delivered.
  • Have your contractor submit an invoice.
  • Keep correspondence about project timelines recorded in a clear and accurate manner.
  • Ensure you’re not placing requirements on your 1099 contractors regarding how they perform their work. For instance, do not tell the workers what to do or specify reporting requirements. 
  • Document and file scope of work (SOW) from your contractor.

The Second Criteria

  • Compose a definition of your contractors’ line of work.
  • Compose your definition of your business’s line of work (i.e. what products or services does your company provide?)

The Third Criteria

  • Verify if your 1099 has insurance.
  • Ask if they have a legal entity.
  • Check if they have associations, unions, or other affiliations.
  • Review their professional certifications.
  • Gather their business card, website, and a list of other clients the contractor has worked for.

What is the Borello Test?

Before AB-5 was signed into law, the Borello test was used to determine if an employee should be classified as a 1099 independent contractor or a W-2 employee. The Borello test was established by the Supreme Court in S.G. Borello & Sons, Inc. v. Dept. of Industrial Relations (1989). The test relies on 13 factors to determine employee classification.

Even with new AB-5 regulations, the Borello test can still be a useful resource to help classify employees.

EDD provides the full Borello test worksheet with the following questions to help guide classification:

  1. Do you instruct or supervise the person while he or she is working?
  2. Can the worker quit or be discharged (fired) at any time?
  3. Is the work being performed part of your regular business?
  4. Does the worker have a separately established business?
  5. Is the worker free to make business decisions that affect his or her ability to profit from the work?
  6. Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
  7. Do you have employees who do the same type of work?
  8. Do you furnish the tools, equipment, or supplies used to perform the work?
  9. Is the work considered unskilled or semi-skilled labor?
  10. Do you provide training for the worker?
  11. Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
  12. Did the worker previously perform the same or similar services for you as an employee?
  13. Does the worker believe that he or she is an employee?

Answering “yes” to questions 1-3 would provide a strong indication that the worker is an employee. Answering “no” to questions 4-6 would indicate that a worker is not in business for themselves and would likely classify as an employee. Questions 7-13 indicate important factors to be considered.

While answering “yes” to any one of the questions may indicate that a worker should be classified as an employee, no single factor is enough to determine classification independently.

The full worksheet provided by EDD provides further clarification on certain factors and circumstances.

If completing the provided worksheet does not provide sufficient clarification for employers, EDD also offers the ability to request a written ruling by completing a seven-page form called Determination of Employment Work Status. The form supports any business entity looking to determine if a worker is an employee or an independent contractor.

How Do I Avoid Misclassification?

You can avoid misclassification by carefully analyzing the arrangement you have with your worker in relation to the guidelines described in the ABC test and regulations set forth by AB-5.

To learn more, read on about how to hire an independent contractor.

What should you pay for a tax attorney?

 

How much should you pay for a tax attorney? It depends on the issue you’re facing. If you’re a business owner, you can expect to pay a little bit more because these cases tend to have more complicated issues. Sometimes, cases can cost $2,000 to $3,000, but it depends on the complexity of the case itself. 

A sole proprietor receiving a letter from the IRS two years after filing a return may be able to work with their CPA, instead of a tax attorney. However, it depends on the amount of tax liability. If the potential tax liability is not more than $40,000, it makes more sense to try to resolve it with your CPA first. 

Now, there can be a lot of tax legal issues that come along with an IRS audit, but if it’s simple enough, your CPA should be able to resolve it. At Milikowsky Tax Law, we do work with a lot of CPAs for these types of cases. Many times, the CPA may do the majority of the work, and we provide the legal support, depending upon the technicality of the issue. 

Case Study 

Recently, we worked with a client— let’s call her Sandy— who worked as a W-2 employee in a hospital and also claimed to own a business. On that business, the client reported $100,000 of gross income and about $250,000 of expenses. Resulting in claiming a loss of $150,000. 

After filing these taxes, the IRS sent the client a letter explaining they didn’t believe the return and requested an interview. Sandy brought the letter to our office before she became a client asking for our help. 

During our conversation, I asked her what exactly she did for work because the claim reported her business as telephony, and that she is a W-2 employee at a health organization. Neither form of employment is related to each other. 

Sandy explained she invested some money in a foreign country with a man who she didn’t know too well. He would tell her that she made $100,000 in a year but would ask her to wire money to him for expenses. He explained, “we spent $250,000 so you owe me $150,000”

When IRS reviewed her filings, the agency wondered how the client was losing money every year working in telephony. Upon speaking with the IRS agent, our firm’s biggest concern became the 15-year history of tax filings reporting a loss of money.  The client essentially zeroed out her taxes through her paychecks.

What appeared to be a very simple issue in the beginning, with not a lot of value, became a bigger concern as we uncovered its complexities with the IRS agent assigned to her case, who we’ve worked with numerous times on these types of cases. 

Should I Hire an Attorney?

When looking to hire a tax attorney, it’s beneficial to call the attorney to receive initial ideas and suggestions. Any attorney who is worth their weight in gold can talk through the issues quickly, and maybe even look through your return. 

Our office can assess a case in about five minutes and let potential clients know if their case is one that needs the support of an attorney, or if their CPA can handle the case instead. 

Important factors to consider for potential clients before hiring an attorney are:

  • Do you understand what documents the IRS are looking for?
  • What are the claims? 
  • What are the issues? 
  • What years are IRS auditing? 

More simple cases include a person facing an audit who failed to report income from a distribution. In these cases, the person facing the audit will most likely pay the additional taxes required. An attorney may be able to help waive the penalty if it’s high enough, but that would be found upon an initial assessment with the attorney. 

Keep in mind the fees you, as a potential client, are willing to pay an attorney in addition to audit finding fees or penalties owed. The goal of hiring an attorney is to hopefully pay much less, a fraction of what you could potentially owe, and get a result. Remember that attorneys are not able to guarantee results, however, anybody with significant experience will be able to tell you the likelihood of success. 

Questions about IRS? 

IRS performs audits randomly and also when flagged through tax filings. They require important documentation, organization, and meetings with the IRS auditor. 

Read our article that answers the most common IRS audit questions here

 

What should you consider before hiring an attorney

What Every Business Owner Needs to Know:

Starting a business rarely begins with a strategic checklist of all of the resources necessary to run and scale successfully. Rather, many, if not most businesses start because the founder has a passion or skill that is exceptional and in-demand and they grow from there.  Because of this, many business owners find themselves at strategic points in their growth with gaps in resources that are easily avoidable with a comprehensive simple checklist of what every business owner needs to know. 

Take stock of the resources you currently have and compare them to this checklist to see if you have gaps, overlaps that can drain resources, or if you’ve overlooked an important area of expertise. After all, an ounce of prevention is worth a pound of cure.

Your Checklist

Bookkeeper

You’ll need someone to keep track of your expenses and invoices.  Whether that person is in-house and manages your accounts receivable/ accounts payable, or outsourced and sends monthly reports on your cash flow status, a bookkeeper is essential to any business’ operations. 

A great San Diego based resource for bookkeeping is BooXkeeping. This company, started by Max Emma provides bookkeeping services for small to medium-sized businesses. They are a virtual service that serves a variety of industries. 

Certified Public Accountant

Gone are the days of the once-a-year call to a CPA to file taxes.  With great power comes great tax complexity. A once a year conversation is not going to cut it.  You need a CPA who is invested in your holistic business financial health.  

Mid-sized CPA firms such as Encore Partners, and Eakes and Company provide financial insights and strategies beyond simple tax planning and preparation.  Finding a CPA who understands your industry and special situation is a great addition to your team and your financial wellness as a company. 

Payroll Provider

At a certain point, Quickbooks is too simple for your company’s payroll needs. Getting a great payroll provider sounds easy, but with the behemoths dominating the industry many business owners feel they’re just a number.  Payroll is crucial because, as much as you may work because of the love you have for the company, your employees work at least in large part because you pay them.  

Some San Diego resources for payroll include Coastal Payroll and PayrollHUB. Both provide payroll services and human capital management services to let you stay focused on running your business. 

Insurance Provider

Business insurance is complex, expensive, and consequential.  From cyber liability to the industry-specific coverage you may need if you transport goods or provide services across state lines or internationally, proper insurance coverage is essential. 

Finding an insurance company that specializes in commercial coverage and will reach out to you more often during renewal time is not that easy.  From health insurance to EPLI coverage, insurance is a large part of the benefits you’ll offer to employees, and the protection you need for your business. 

Consider a small to mid-sized firm, some we know of here in San Diego are:

  • Benchmark Commercial Insurance offers commercial and personal line insurance for business owners and individuals with complex structures. 
  • Morrison Insurance creates various insurance programs for small to midsize businesses to help you find the greatest value for your dollar. 
  • Competitive Edge specializes in high-risk and construction insurance. The founder, Brenda Jo, is passionate about believing that you are more than the history of your insurance claims 
  • SBMA Benefits provides affordable ACA compliant Minimum Essential Coverage for Applicable Large Employers.

Human Resources

Human resources… Aren’t all resources human resources?  When it comes to compliance, having Human Resources services in-house or fractionally can make the difference between a bad hire becoming a lasting issue and being a blip on your company radar.  

The right HR provider can partner with your company to create manuals, handbooks, and pieces of training to keep you compliant. They also assist in creating operational structures to support healthy company culture and more. 

San Diego HR resources we know are: 

  • Culture Works operationalizes your workforce’s culture by implementing systems, processes, leadership training, and a foster of culture alignment to aid in a smooth operations process. 
  • Possibilities Consulting has outsourced HR services through Ari Saul and additionally, they help develop inspirational leadership, intentional culture, and high-performance teams in the workplace. 

Attorney

You don’t need an attorney until you need an attorney.  From employment law attorneys to civil litigation, finding the right lawyer when you need one will speed the time to resolution and protect you from unnecessary losses.  

Civil litigation attorneys Gupta Evans and Ayres and Employment law attorneys Tencer Sherman are reliable resources in the San Diego area. 

Protecting your intellectual property not only protects your ideas but can ensure that disgruntled ex-employees don’t take your business plan and implement it in a state with no non-compete clauses. Gary Eastman of Eastman IP is a resource here in San Diego.

At Milikowsky Tax Law, we’ve been entrepreneurs ourselves. We know first-hand about the challenges and the excitement of growing a business.  Regardless of your industry, there are structural elements that will help your company grow and manage the fluctuations of staffing, client success, and scaling more easily. 

Think we forgot something? Connect with us and share! 

Want to know when you might need a CPA vs a Tax Attorney? Read our article here

 

What Every Business Owner Needs to Know:

Top 7 Most Common Questions About IRS Audits

Anytime you file taxes, there is a chance that your tax return might be audited by the Internal Revenue Service (IRS). The agency conducts standard procedures to find any errors or discrepancies among taxpayers. The audit process is meticulous and, should you find yourself under the scrutiny of IRS, will require detailed information from you. 

In the article below, you’ll learn about the audit process and frequently asked questions surrounding IRS audits.

Why was I selected for an Audit?

There are different reasons you may be flagged for IRS audits. Some are due to random checks; however, you have a low chance of being audited this way. Most taxpayers have less than a 0.6% chance of receiving a random audit check. 

IRS runs tax returns through their Discriminant Information Function (DIF) system to continually update their database and make sure they are tracking industry benchmarks for each industry and tax bracket. 

The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, such as an imbalance of tax returns, a discrepancy between reported earnings and employer filings, or unreported cash transactions by one member of a transactional party, will trigger DIF to send your return to an IRS audit officer. 

People are more susceptible to an audit if they:

  • Earn less than $25,000 or more than $500,000
  • File incorrect or incomplete returns 
  • Have large numbers of cash transactions 
  • Claim a disproportionate number of deductions 
  • Are self-employed
  • Have a home-based business
  • Have a cash business 
  • Have foreign assets 

Sometimes you can be audited as a result of your business partners or investors going through an audit. 

How Will I Know If I am Selected for an Audit?

You will know if you are selected for an audit if you receive a verified letter in the mail from IRS. They do not call to notify you about your audit. 

What Do I Do If I’m selected for an Audit?

If you or your business are selected for an audit, make sure you read all of the information sent to you in your audit notification letter.  The letter and accompanying information request packet will notify you as to what entity is being audited (business or personal) what year(s) are under review and who your auditor is. Once you know what IRS needs, make sure you collect all of the records and supporting documentation requested (but nothing additional). You will need to submit records from banks, vendors, and businesses you have worked with, invoices and pay stubs, payroll records, and medical expenses among other information.

Should I Hire an IRS Tax Attorney to Help Me?

We suggest contacting a qualified tax attorney to help guide you through your audit, to ensure you are timely, responsive, compliant, and do not unintentionally increase the scope of your audit to other areas of your business or personal finances that would otherwise remain unscrutinized.. There is little to no margin for error during an audit, a tight timetable, and potentially severe consequences to a poorly handled interaction with IRS. Unlike CPAs who do not have attorney-client privilege, attorneys are able to speak with your IRS officer on your behalf without risk of subpoena or summons of records discussed.  A qualified attorney can, review your documents with an expert eye, create the right strategy for you, represent you or your business, and provide valuable advice and guidance. 

How long do I have to reply to an IRS audit?

You have 30 days to reply to the initial audit letter. Do not hesitate, and make sure you take the appropriate steps early on. IRS is not likely to provide extensions unless you have a good reason.  Your attorney can help by advocating for more time with the IRS agent.  A good attorney will know many of your local IRS auditors and have strong relationships built on well-structured prior cases and mutual respect. 

How Long Do Audits Take?

The time it takes to conduct an audit depends on the case. It fluctuates depending on:

  • The seriousness of the tax reporting error
  • When and whether the right information is provided to IRS
  • Communication between the person being audited and IRS officer

How Many Years of Tax Returns Can IRS audit?

IRS audits tax returns from the past three years; however, most are from the past two years. Only when IRS agents find discrepancies within the audit they are conducting do they dig for information older than three years. Most audits do not look for information past six years. Though in cases of criminal audits IRS can look back 9 years and longer. 

If you or someone you know received an audit letter from IRS, reach out to our expert team at Milikowsky Tax Law. We have over a decade of experience working with IRS and tax audits and are experts in defending business owners in the face of IRS or other government agency audits. 

Do you know how to Respond to IRS Letter CP 2000

What is a CP 2000?

Watch our video below:

IRS sends audit letters to taxpayers when tax returns and reported data from employers or banks do not match. This specific letter is IRS letter CP 2000. It is not a formal audit letter notice. However, it does notify the taxpayer that the agency found a discrepancy, and asks if the taxpayer agrees or disagrees with the tax changes.

These letters are different and more complex because they’re correspondence audits. You are not meeting with an auditor face to face. Instead, you’re dealing with the audit through letters. Mail correspondence can be more challenging than explaining audit technicalities face to face.

Explaining audits on paper takes more effort than audits performed in person because the taxpayer receiving the letter needs to know the correct documents to provide, and what issue IRS is looking at. Advocacy plays a large role in these audits. 

IRS released YouTube videos and dedicated a frequently asked questions page to help walk through common CP 2000 questions for those who received the letter and have questions.

What Triggers IRS to Send a CP 2000 Letter? 

These letters originate because of a mismatch of information. At times, the mismatch is due to a simple but valid error or omission. For example, a taxpayer might have received $200,000 from a distribution from an IRA account, but forgot to report that on a tax return.

This causes IRS to look into the tax return because the distribution was reported by the organization and the investment company to IRS. This triggers IRS to view that the same Social Security Number reported income from a third party, which is valid, and a tax return that doesn’t reflect the income from the third party IRA. This in turn, triggers IRS to send the CP 2000 letter to ask why there was a discrepancy.

Other scenarios, such as reporting different numbers on W-2 income, can trigger an IRS CP 2000 letter. A sole proprietor with a merchant account who fails to report the correct amount of gross receipts can also receive the letter.

A proprietor can collect $1,000,000 in credit card payments, but only report $800,000 for a variety of reasons. Sometimes proprietors are not always collecting income. A merchant collecting credit card sales might run into chargebacks or refunds. 

These chargebacks and refunds are not included in the total number that the bank reports to IRS. Banks only report gross proceeds, not net. They’re not offsetting total income with returns- which can trigger the discrepancy.

What Do I Do if I Receive a CP 2000?

CP 2000 letters are sent in the mail by IRS. The agency gives 30 days to respond to the letter. If they do not receive a response, they will send a second letter called an IRS Notice CP3219A. IRS provides a phone number on the letter to assist taxpayers with any questions and explain further action required to settle discrepancies. 

You may receive a CP 2000 letter late because IRS is currently backlogged. If this occurs, look at the date at the top of the letter and calculate 30 days out to find when your response is due.

If you need more time, it’s possible to respond to the agency asking for a two or three-week extension. Remember to provide a specific date as to when you can provide requested records. Best practice when mailing correspondence with IRS is to send letters through certified mail.

Requesting an extension doesn’t guarantee the agency will grant the additional time. However, if IRS closes your case, you will be able to argue that you requested a time extension, and it was unreasonable for the IRS to close it. 

What Happens if I Don’t Respond to a CP 2000? 

Failure to respond to a second letter, or failure to provide correct information triggers an assessment by IRS. If this occurs, the taxpayer will need to petition the tax court. However, if you file a timely request, you can go to appeals. 

Should I Hire an Attorney? 

Depending on the case, your CPA can support you during the audit process. However, if the proposed taxes owed are high enough, consider hiring a tax attorney with experience dealing with IRS letter CP 2000.

An experienced attorney has the resources to understand how to navigate discrepancies while helping you explain the reasoning behind the differences in reported income. 

Curious about what else can trigger an IRS audit of your business? Read our article here

What is IRS letter CP 2000

Form 5472

One important aspect of being a business owner is ensuring that you keep up with changing laws and regulations that may be applicable to your business. There are consistent changes and updates being made to various legal requirements and ignoring those changes or failing to recognize them could result in negative consequences for your business. 

One ruling that business owners should be sure to maintain awareness of is the need to complete and file Form 5472. 

Who must file Form 5472? 

Form 5472 must be filed by any business owner that has a foreign owner or foreign shareholders of 25% or more of the company. Form 5472 is used by IRS to understand global transactions and transfer pricing issues between domestic and foreign-related parties. 

The requirement for eligible business owners to file this form began in 2017. It should be noted as well that this form should be filed by the corporation rather than the individual or shareholders themselves. 

What happens if I don’t file Form 5472 and am supposed to?

New laws enacted in 2017 significantly increased penalties related to not appropriately filing. Penalties include fines of between $10,000 to $25,000. These penalties may be enacted both for failure to form or filing in an incomplete manner. Penalties may also be charged for failing to maintain adequate records. 

Form 5472 Foreign Owned Company Filings

What do I need to report on Form 5472? 

All reportable transactions must be included in the submission of Form 5472. Reportable transactions are broadly defined by IRS as:

  • Any type of transaction listed in Part IV (sales, rent, etc.) for which monetary consideration was the sole consideration paid or received during the reporting corporation’s tax year
  • Any type of transaction or group of transactions listed in Part IV, if:
    • Any part of the consideration paid or received was not monetary consideration 
    • Less than full consideration was paid or received

To put this information in simpler terms, if you receive any money from, pay any money to, or pay anything on behalf of an eligible LLC, you must file For 5472. 

How do I file Form 5472? 

It should be noted that in order to file Form 5472, you must have an Employer Identification Number (EIN). Once your EIN is obtained, you can file Form 5472. Unlike many other forms, Form 5472 cannot be filed electronically. It must be filed and submitted by paper or fax. 

While IRS provides specific instructions on how to complete the filing of Form 5472, the instructions are complex and may be confusing for many. 

If you’re concerned about your Form 5472 being filed correctly, our team of experts at Milikowsky Tax Law may be able to support you. Avoid penalty charges by ensuring that your filings are completed correctly the first time. In the event that you do face penalties, we are prepared to help keep them to a minimum and make necessary adjustments. Call or contact us today to get started.