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How to Respond to IRS Letter CP 2000

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

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Form 5472 Foreign Owned Company Filings

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. 

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Why IRS is Planning to Audit More Small Businesses This Year

Insights for CPAs to Minimize Audit Risk for Their Clients

Late in 2020 IRS announced that they intended to increase audits of small businesses by 50%. This news came as a shock to many small business owners who were still attempting to recover from the economic downturn brought on by the COVID-19 pandemic. While many businesses have struggled to hold on, and others closed their doors permanently there were a handful of industries whose revenues actually increased despite their early concern that they would be negatively impacted.

While IRS tax audits are daunting, there are ways to protect yourself from the negative outcomes of an audit including fees, penalties, and even jail time. 

Maintain Good Records 

Keeping good records can make the difference between being audited by IRS and coming out the other side with reduced or non-existent penalties… or not. IRS looks for businesses and individuals whose returns are inconsistent with their income and information. Incorrectly declaring your income or claiming deductions that are not applicable to your business are sure ways to have IRS take a closer look. 

Maintaining clean records facilitates fewer errors on your returns. Whether intentional or not, identifiable mistakes are a flashing red light for IRS to investigate. 

Utilizing a reputable bookkeeper or CPA can help keep your records in line to avoid errors and ensure that all legal deductions are taken.  Business owners have a wide array of totally legal deductions that can offset higher taxes, a qualified CPA can guide you to the right write-offs. Having a CPA that’s already familiar with your business can be an augmentation to your current strategy in the event that your business is audited by IRS. CPAs and tax attorneys create a partnership that will provide significant benefits to business owners in the case of a tax audit. 

Make sure you’re claiming proper deductions 

Taking advantage of as many deductions as possible is well within the legal scope for businesses. Be sure that you make use of any opportunities to save money by working with your CPA to help them understand your business structure, acquisitions outside of regular business dealings, any employee benefits changes you have made, and more. 

IRS attempts to identify taxpayers who have made incorrect claims or deductions and often chooses to audit those returns. In the event that a business or individual has claimed deductions that they are not eligible for, they may have done so repeatedly and over a prolonged period of time. In these cases, other discrepancies can be uncovered during the audit process, increasing the liability of the business owner being audited. 

Make timely payments 

Individuals, including sole proprietors, partners, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed.

Corporations generally have to make estimated tax payments if they expect to owe a tax of $500 or more when their return is filed.

When estimated your expected tax payment, IRS suggests using Form 1040-ES to correctly figure your estimated tax. It may be helpful to utilize income, deductions, and credits for the prior year as a starting point when estimating your expected tax payment. 

Estimated taxes are due on a quarterly basis. If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax.  

Why IRS is Planning to Audit More Small Businesses This Year

Make sure to correctly classify any independent contractors

While employing independent contractors may be critical to the success of your business model, you should be very careful in doing so. IRS uses specific rulings to determine whether a worker should be classified as an employee or an independent contractor. 

If it is found that you may have incorrectly classified your workers as independent contractors, the Employment Development Department (EDD) will likely partner with IRS to perform an audit. 

Some triggers that might lead to an audit of this nature include an independent contractor applying for unemployment, for which they are ineligible, or having a significantly higher number of independent contractors than full-time employees. In some cases, businesses may utilize this as a tactic to avoid paying additional taxes. 

The consequences of an underpayment or misclassification will depend on whether the auditor finds the discrepancies to have occurred intentionally or unintentionally.

Unintentional misclassifications may result in a $50 penalty for each W-2 form that was not filed for an employer classified as a contractor. The employer also faces penalties of 1.5% of employee wages to compensate for income tax withholding, 40% of employee payroll taxes, 100% of matching employer payroll taxes plus interest on each of these penalties, and a Failure to Pay Taxes penalty of 0.5% of the unpaid tax liability for each month delinquent.

Intentional and fraudulent misclassifications may result in additional penalties, such as 20% of all wages paid and 100% of payroll taxes — employer and employee share-alike. Criminal penalties, including a $1,000 fine per misclassified worker and up to one year in prison, may also be imposed. California employers can see total fines of up to $25,000 per misclassification violation.

If you are a small business and have recently prepared your annual tax return, you may be at risk of an upcoming audit. In the event that you receive an audit notification from IRS, you should reach out to an experienced tax attorney immediately. Our team of tax professionals at Milikowsky Tax Law has significant experience defending businesses in tax audits. We help keep businesses in business. Contact us today to get started. 

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Insights for CPAs to Minimize Audit Risk for Their Clients

Insights for CPAs to Minimize Audit Risk for Their Clients

If you are a CPA, here are 4 things to help your client reduce the risk of an EDD, IRS, or SBA audit:

1. Confirm that your client’s 1099-K (provided by a merchant processor) does not report gross proceeds from credit card sales that are higher than the amount you are reporting as “gross receipts” on a business income tax return. 

If there is a difference, you may consider adding a statement to explain a legitimate difference. For instance, chargebacks and returns are not subtracted from the amount of “gross proceeds” on the 1099-K form.

2. If you have a client who has more 1099 contractors than employees, have your client provide facts to support these workers have a legitimate and independent business i.e. EIN, business entity, website – something to establish a legit business. 

EDD and IRS typically look under one the following expense categories for contractors to identify contractors that paid by a business: 

  • Schedule C: “commissions and fees”; “contract labor”; or “Legal and professional”; 
  • 1120S (S corp) and 1065 (LLC): typically find these are reported under COGS or under “other deductions” with a label such as “outside services” or “contractors.”

If you prepare a business return where the business has, for instance, 10 independent contractors and only 2 employees (i.e. where the business owners are also officers of the corporation), you should spend time with the company’s management team to analyze whether the 1099 contractors are legitimate under your state’s law and federal law. 

California recently passed a new law called AB5 (effective as of 1/1/2020) that changes the analysis of a worker’s status. AB5 now has a 3-part test that is more difficult for companies to satisfy. 

You will want to review your client’s general ledger and confirm they are properly reporting ALL 1099s. You should confirm that every independent contractor who provides services (over $600) receives a 1099. If one is missed, the Employment Development Department (EDD) may extend a 3-year audit to 8 years and assess an additional penalty, where the penalty may be higher than the tax.

When reviewing the general ledger, confirm the payees are truly contractors and not workers that should be reported as employees.

Insights for CPAs to Minimize Audit Risk for Their Clients

3. If your client is selling a business, the buyer will require the current owner to produce a “tax clearance certificate” from the California Department of Tax and Fee Administration (CDTFA), the agency responsible for collecting and regulating sales tax in California.

We have had numerous audits that commenced during escrow, possibly a result of the Tax Clearance Certificate application that was filed with the tax agency. So, you may want to review your client’s general ledger and confirm that the amount of sales tax reported and paid to the state is accurate and the proper correct sales tax rate was used (that includes both local and city tax), as well as confirming that exempt sales are truly exempt.

4. If your client applied for a PPP loan, and receives a request for information and documents from their bank to substantiate their financials, consider calling a tax attorney to review SBA’s regulations and any questions from the bank. 

The Small Business Administration (SBA) is currently investigating all SBA Payment Protection Program (PPP) loans, regardless of the dollar amount of the loan.

Based on information obtained from SBA, once a request has been made for additional documents following the funding of the loan, there is an active investigation. The response from you, the CPA, and your client will affect whether the case is referred to for potential criminal investigation. This would be the case when the information simply does not support the financials or the requirements of the PPP loan.

Issues that have come up in some of our cases include: 

  • Not having a legitimate work visa
  • Using PPP funds obtained by one company that another company applied for and obtained through SBA

There are significant benefits to a CPA working with our firm. Some include the following: 

  • Our law firm does NOT prepare tax returns. We work with CPAs referring clients to those who need a business/personal tax return.
  • We typically have joint representation during an EDD or IRS audit.
  • We also handle criminal tax investigations to protect you and your client because your communications with an IRS Criminal Investigator are NOT protected by any privilege. However, having an attorney represent your client will ensure the communication and evidence your client provides are protected.

For more information or to get started working with us, contact us today. 

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5 Tips for CPAs to Minimize Audit Risk for Their Clients

CPA Tips

If you are a CPA, here are 5 things to help your client reduce the risk of an EDD, IRS, or SBA audit:

1: Confirm that your client’s 1099-K (provided by a merchant processor) does not report gross proceeds from credit card sales that are higher than the amount you are reporting as “gross receipts” on a business income tax return. 

If there is a difference, you may consider adding a statement to explain a legitimate difference. For instance, chargebacks and returns are not subtracted from the amount of “gross proceeds” on the 1099-K form.

2: If you have a client who has more 1099 contractors than employees, have your client provide facts to support these workers have a legitimate and independent business i.e. EIN, business entity, website – something to establish a legit business. 

EDD and IRS typically look under one the following expense categories for contractors to identify contractors that paid by a business: 

  • Schedule C: “commissions and fees”; “contract labor”; or “Legal and professional”; 
  • 1120S (S corp) and 1065 (LLC): typically find these are reported under COGS or under “other deductions” with a label such as “outside services” or “contractors.”

If you prepare a business return where the business has, for instance, 10 independent contractors and only 2 employees (i.e. where the business owners are also officers of the corporation), you should spend time with the company’s management team to analyze whether the 1099 contractors are legitimate under your state’s law and federal law. 

California recently passed a new law called AB5 (effective as of 1/1/2020) that changes the analysis of a worker’s status. AB5 now has a 3-part test that is more difficult for companies to satisfy. 

You will want to review your client’s general ledger and confirm they are properly reporting ALL 1099s. You should confirm that every independent contractor who provides services (over $600) receives a 1099. If one is missed, the Employment Development Department (EDD) may extend a 3-year audit to 8 years and assess an additional penalty, where the penalty may be higher than the tax.

When reviewing the general ledger, confirm the payees are truly contractors and not workers that should be reported as employees.

3: If your client is selling a business, the buyer will require the current owner to produce a “tax clearance certificate” from the California Department of Tax and Fee Administration (CDTFA), the agency responsible for collecting and regulating sales tax in California.

We have had numerous audits that commenced during escrow, possibly a result of the Tax Clearance Certificate application that was filed with the tax agency. So, you may want to review your client’s general ledger and confirm that the amount of sales tax reported and paid to the state is accurate and the proper correct sales tax rate was used (that includes both local and city tax), as well as confirming that exempt sales are truly exempt.

4: If your client applied for a PPP loan, and receives a request for information and documents from their bank to substantiate their financials, consider calling a tax attorney to review SBA’s regulations and any questions from the bank. 

The Small Business Administration (SBA) is currently investigating all SBA Payment Protection Program (PPP) loans, regardless of the dollar amount of the loan.

Based on information obtained from SBA, once a request has been made for additional documents following the funding of the loan, there is an active investigation. The response from you, the CPA, and your client will affect whether the case is referred to for potential criminal investigation. This would be the case when the information simply does not support the financials or the requirements of the PPP loan.

Issues that have come up in some of our cases include: 

  • Not having a legitimate work visa
  • Using PPP funds obtained by one company that another company applied for and obtained through SBA

5: There are significant benefits to a CPA working with our firm. Some include the following: 

  • Our law firm does NOT prepare tax returns. We work with CPAs referring clients who need a business/personal tax return.
  • We typically have joint representation during an EDD or IRS audit.
  • We also handle criminal tax investigations to protect you and your client. AS you well know,  your communications with an IRS Criminal Investigator are NOT protected by any privilege. However, having an attorney represent your client will ensure the communication and evidence your client provides is protected.

For more information or to get started working with us, contact us today. 

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Additional CA Business Tax Rules

Prop 19

**UPDATE: 2021**

Additional CA Business Tax Rules going into effect affecting states outside CA

Tax season is upon us and the newest revisions to the California tax codes affect not only residents of the state but those who do business with CA (the 5th largest economy in the world).

For the millions of Californians who went to the polls in November these ballot measures and Bills may be familiar. Here are three that passed into law and two that did not.  We review what they are and what they mean for your business and personal taxes in 2021.

In June 2020, Gov. Gavin Newson (D) signed into law Assembly Bill 85 which included retroactive tax increases.

  1. AB85 suspends a business’ ability to claim a CA net operating loss (NOL) deduction in 2020, 2021, or 2022. (“Net Operating Losses” result when a company’s expenses exceed its revenue in a year).
  2. Businesses with net income below $1 million may still claim the NOL deduction. Therefore, if your company lost money in 2020 and then had net income of $1M or more in 2021 and beyond, your NOLs would be suspended.

This law applies to all businesses – individuals (Sch C filers), flow through entities, and C corporations.

The law also retroactively caps at $5 million the amount of credits a business may claim in 2020, 2021, and 2022.

A slight tax reduction was enacted for certain businesses that are newly register to do business in the state in 2021, 2022, or 2023, with a three-year suspension of the $800 minimum corporate tax.

 

SB 1447 passed into law: The Small Business Hiring Tax Credit

The Small Business Hiring tax credit is available on a first-come, first-served basis, and is equal to $1,000 per each net new employee, up to $100,000 per business.

The requirements to claim the credit are that the business:

  • Has fewer than 100 employees and
  • Experienced a 50% or greater decline in gross income during the second quarter of 2020.

The credit can reduce a business’ personal income tax, corporation tax, or sales tax bill. The credit expires December 31, 2021.

Prop 19 – The Property tax law

Described as a protection for the elderly or those transferring property from one generation to the next, Prop 19, in practice, limits the conditions in which property owners can transfer California real property between parent and child without triggering a reassessment of the property value for property tax purposes.

The new rules went into effect on February 16, 2021.

Under Prop 19, properties are taxed based on their assessed value (also known as the base year value or taxable value) rather than their fair market value.

Assessed value equals the purchase price plus a 2% increase per year until there is a change in ownership.

The existing law excludes from reassessment transfers between parents and children of the transferor’s (a) primary residence, regardless of value, and (b) $1 million of assessed value of “other real property” (such as second homes and investment properties).  This is commonly referred to as the parent-child exclusion.

Prop 19 has the following effects:

  • The ability to transfer $1M of assessed value of “other property” is eliminated.
  • The ability to transfer a primary residence between parent and child without reassessment will not apply unless two conditions are met:
    1. The primary residence must also become the recipient (or child)’s primary residence; and
    2. The fair market value (FMV) of the primary residence at the time of transfer cannot exceed the transferor’s assessed value by more than $1 million.

If the difference between FMV and the Assessed value is greater than $1M, then the NEW assessed value will be the FMV less $1M.

If the transferor’s primary residence does not become the recipient’s primary residence, then the property will be reassessed at its fair market value.

What the new law from Prop19 means for you:

If you are transferring a home to a child and you bought that home in the 1960s or 70s in an area which was off the beaten path and – in the intervening years – the world has grown up around you significantly elevating your property value;  And, if you are now downsizing and giving the property to your child to be used as their primary residence; you may well be “gifting” them a large tax burden.

The following bills did NOT get passed into law:

AB 1253 would have increased California’s highest income tax rate of 13.3% income to 16.8% on some high-income individuals, which would have been retroactive to January 1, 2020 (before COVID-19).

AB 2088, “The Wealth Tax”, would have imposed a 0.4% wealth tax on all net worth above $30 million (global assets owned) taking into account all assets and liabilities held by an individual globally.

  • It would have applied to residents, part-year residents, and to any person who spends more than 60 days in California in a given year.
  • If the wealth tax had passed, there would have been a “tail” requiring you to keep paying for ten years. Likely this was aimed at the people who are migrating out of CA for tax purposes to places like AZ and TX as this law would have also taxed people who left CA.

 

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CPA vs Tax Attorney: What’s the Difference?

CPA vs Tax Attorney: What’s the difference?

In some cases, it may be difficult to distinguish what your CPA is capable of helping you with and which tasks are better suited for a tax attorney. Both are experts when it comes to tax matters but in different ways. 

While your CPA is an expert at preparing and submitting your taxes correctly, you’ll need a tax attorney in the event that Internal Revenue Services (IRS) notices inconsistencies in your tax submissions or if you’re the subject of an audit. In any case, you’re best off having access to both experts. 

What does a CPA do? 

A Certified Public Accountant (CPA) has a significant educational background under their belt. They are required to have completed 150 hours or more of undergraduate educational studies before passing an extensive CPA examination. 

Additionally, they have to commit to 120 hours of continued education every 3 years. As such, they are considered some of the highest-level experts when it comes to handling tax preparation. A simple way to think of CPAs is that all CPAs are accountants, but not all accountants are CPAs. The process of becoming a CPA is more complex than an average accountant. 

A CPA’s services are not often used by any average taxpayer but instead are usually used in more complex cases. CPAs know how to abide by federal laws while still minimizing your tax liability and maximizing benefits. Developing a strong ongoing relationship with a CPA may suit your needs if you are looking to build a long-term tax plan and need support sticking to it. 

CPAs are often capable of providing various services to their clients in addition to tax preparation. Some additional services they may provide include the following: 

  • Financial record review
  • Maximizing deductions 
  • Business structuring 
  • Health insurance selection
  • General Accounting

Many people choose to have a go-to CPA available for support on a regular basis. If this is not the case for you, you may choose to consult them when:

  • Filing your taxes
  • Completing an application for a loan
  • Completing an internal audit
  • When reviewing tax payments and balances

Their skills and expertise are best suited to assist you when handling these situations. 

What does a tax attorney do?

While a tax attorney is still an excellent resource to taxpayers, they serve a different set of needs than CPAs. While CPAs are technically qualified to represent you before a court in the event of an audit, a tax attorney is likely a better choice in situations where you may be involved with trouble with tax authorities. 

Similar to CPAs, tax attorneys have to complete an intensive educational path before qualifying to satisfy their role. After completing a bachelor’s degree, they must complete a Juris Doctor degree and study to take the bar exam for the state in which they intend to practice. Once they have passed the bar exam, their license must be kept up with continued ongoing education. On top of that, many tax attorneys choose to pursue a Master of Laws in Taxation to further their specialization in their field. 

Tax attorneys specialize in the legalities of tax payment and their services are most often called upon in defense cases when taxpayers are faced with audits from IRS, EDD, or other federal tax authorities. While tax attorneys may have slightly varying specialties, one thing most tax attorneys have in common is expertise in tax controversy and dispute resolution. 

One of the benefits of working with a tax attorney is that only tax attorneys have an attorney-client privilege that protects communication between a client and an attorney. This privilege can restrict IRS and California State tax agencies from discovering information provided to attorneys in confidence.

Tax attorneys fulfill various services for their clients as previously mentioned. The following include the various reasons you may need to consult a tax attorney: 

  • IRS tax audits 
  • Criminal tax defense 
  • Reporting ownership of foreign bank accounts and corporations 
  • International business transactions 
  • Tax disputes and IRS tax collection 

Compliance with Federal State and Local Regulations CPA vs Tax Attorney

Another difference between CPAs and tax attorneys is their role in complying with regulations. The American Institute of Certified Public Accountants (AICPA) recently came out and said that the Corporate Transparency Act requires legal advice to comply with the new forms. The act requires that the beneficial owner of real estate be disclosed to the IRS and FinCEN. If a piece of real estate is owned by multiple entities, the IRS wants to find out who is the beneficial owner pulling the strings and controlling the real estate. The AICPA has taken a hard stance on this and said that it’s something that CPAs should not do, and instead, tax attorneys should provide the necessary legal advice.

Who can represent your business during an SBA PPP Loan Forgiveness Appeal?

SBA has started giving loan forgiveness for businesses that used the PPP loans during the early stages of the pandemic. However, businesses deemed to have not used the funds as they were intended received loan forgiveness denials. 

If SBA denied your business’s loan forgiveness application, they will send an SBA Final Decision Letter in the mail. If you wish to appeal your forgiveness denial, you must reply and submit an under-20-page appeal 30 days before the date printed on the decision letter. Submission after the 30-day mark forfeits your appeal rights and will require you to repay the full PPP loan amount. 

Only three people can legally represent your business during an SBA PPP Loan Forgiveness Appeal:

  • An attorney
  • Shareholder owner
  • An officer

Those who are not legally entitled or allowed to represent businesses during an SBA appeal include: 

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

An attorney is legally entitled and allowed to represent your business during the appeals process. They will be able to research why your application was denied, collect supporting evidence, and create the 20-page appeal for SBA.  

Final Thoughts

While CPAs and tax attorneys both work within a similar framework, their unique specialization equips them for varying roles. In some cases your business may only need to use the services of one or the other, however, in most cases, the two roles complement one another. While your CPA may be an excellent ongoing partner to assist with the day-to-day management and filing of your taxes, they may not be the best-suited partner in the event of trouble with tax authorities. 

Rather than challenging your CPA to attempt to manage tasks outside of their usual specialties, reach out to an expert attorney to assist with any legal tax concerns you may have. Curious about what you should be paying for a tax attorney? Read our article here explaining different instances when hiring an attorney may be worth your while. 

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Your 2021 Resolution – Stay Organized For Your CPA!

woman with a lot of paper work

Starting to think about your resolutions for the new year? Well, we’ve got the perfect suggestion for you: make a commitment to make 2021 the year that you stay organized for your CPA. Whether on a personal level or for your business, staying on top of your finances with your CPA can make a huge difference in the event of an audit. 

Maintaining a good organizational system with your CPA can make or break the outcome of an audit. Working closely with a CPA has the power to decrease the chances of being audited in the first place by ensuring that your taxes are prepared with as much accuracy as possible. Partnering with a CPA inherently increases the credibility of your return. That being said, it’s not impossible to still be audited. If this is the case, you’ll likely need more help than your CPA is able to provide you with. 

Not only is financial organization critical to correctly filing a tax return, but it’s also necessary in the event of an audit. When you are notified of an audit, you have ten days to initially respond. Now’s not the time to panic, rather it’s time to buckle up and identify your supporters. One of the first things that IRS or EDD will request is additional paperwork and verification of all records. Some records they may request include:

  • check registers
  • canceled checks
  • bank statements and annual financial statements
  • federal and state income tax returns and employment tax reports
  • payroll records
  • W-2 and 1099 Forms
  • ownership verification
  • and any other forms, records, or statements pertaining to your business

Your CPA is an important partner in the process of an audit but isn’t the only person you need on your team. When you’re picking your fantasy football team your all-star quarterback is nothing without a talented running back to complete a play. Your tax team is no different. It’s important that when faced with an audit you immediately reach out for support from a tax specialist such as John Milikowsky. 

As audits ramp up and banks ask for background info, it’s extremely beneficial to already have your ducks in a row for your CPA. Our team at Milikowsky Tax Law can not only help you prepare for an audit but can also partner with your CPA to strategize if you’ve already been notified of an audit.

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CPAs: Why Your Client Needs a Tax Attorney

people having meeting

As a CPA you are an expert at advising your clients on tax optimization, business transactions, and all elements of their financial health and well-being. But, what do you do when your client is being audited? 

If your client is being audited, whether civil or criminal, you need an expert Tax Attorney. 

Why Your Client Needs an Expert Tax Attorney

Your Client Has a Tight Deadline

In the event of an IRS or EDD or other government entity audit, your client will have a limited time frame in which to respond. 

IRS will identify a deadline by which your client must respond to their letter. Generally, the revenue agent will give you 10 days to respond to the initial letter. This initial response serves the purpose of:

  • Contacting the revenue agent
  • Scheduling an appointment to provide the requested records 

Tax Attorneys and CPAs Can Partner to Provide Records

When a client has partnered with their CPA to maintain proper organization of all of their records, supplying requested documents is expedited. Once these documents are handed over, a CPA’s involvement can be reduced to the trusted advisor that the client relies on for guidance throughout all of their business dealings. 

One of the first steps in the audit process is the collection of various documentation for further information. IRS will likely request additional details on supporting documents such as:

  • Receipts
  • Bills
  • Legal papers
  • Employment documents
  • And more

The partnership between tax attorneys and CPAs is crucial to being able to meet the rapid turnaround deadlines in audits.

Tax Attorneys Can Help Prep Your Client for the Interview

During the first appointment, the taxpayer will go through an interview with their assigned IRS agent. The agent will walk through a whole litany of questions to understand such as:

  • The scope of what income looks like for the client
  • If they received an inheritance for instance
  • If they received any large transfers
  • Whether they have any cryptocurrency
  • And more 

The best practice is to contact a tax attorney to review the questions ahead of time. Credibility is one of your client’s most valuable assets during an audit. If IRS believes your client is being untruthful, perhaps as a result of being ill-prepared, they can launch a deeper investigation.

Tax Attorneys Can Help Prepare For the Bank Deposit Analysis

During a bank deposit analysis, IRS adds up all of the deposits from all of your client’s bank accounts: both personal and business. Once gathered, they compare the amount they calculate to the amount your client reported on their income tax return. 

A tax attorney can help ensure your client provides IRS with the correct documents to ensure the numbers match as closely as possible. 

The gap in reported pay versus actual pay sometimes occurs accidentally (or intentionally in the case of fraud) by miscalculating income because the client left out some income. If this occurs, it can lead to a gray area where the support of an experienced tax attorney will help defend the client’s business. 

Learn more about IRS looking into bank deposits here. 

Tax Attorneys Offer Attorney-Client Privilege

Attorneys have an attorney-client privilege that protects communication between a client and an attorney, which can restrict IRS and California State tax agencies from discovering information provided to attorneys in confidence.

Tax Attorneys Can Help to Protect CPAs From Subpoenas

Having the expertise of over 300 government audits allows our team to support your relationship with your client through the audit process while protecting you from being subpoenaed by the government entity performing the audit. 

Tax Attorneys Can Preserve Your Relationship with Your Client

The relationship with your client is the most important element to be preserved during an audit. Referring your client to a tax attorney is a good way to protect yourself from a client’s potential legal conundrum without ruining your existing relationship. 

As a CPA, one of the most valuable tools to have in your back pocket is a trusted relationship with a reputable tax attorney. This partnership enables you to better serve your clients, retain profitable clients long-term, and ensure that you’re legally protected. The partnership may create a reliable relationship to refer their clients for services outside of legal tax support, resulting in new clients for you.

Find out why tax attorneys are a CPA’s secret weapon.

Consider Milikowsky Tax Law

The Law Office of John D. Milikowsky is frequently called in by CPAs to support their clients in complex and stressful audit situations. Our goal is to keep your client out of trouble and keep your relationship intact. We do not file taxes or have CPAs in-house, all we do is support individuals and businesses in IRS and other government audits. 

If your client has received notice of an audit from IRS, EDD, CFTB, or other government entity, reach out to the tax experts at Milikowsky Tax Law immediately. We keep businesses in business.

Read on for more information about how to respond to an IRS audit, here.

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What CPAs Need to Know About Cares

CPAs and MSELF

For CPAs, one of the most important parts of the CARES loan package which has brought $2.3 trillion in loans to households, businesses, and state and local governments is the Main Street Lending Program, which provides for up to $600 billion in loans to small and midsize businesses. The Fed will also supply liquidity and certain regulatory relief to financial institutions in an effort to bolster the effectiveness of the U.S. Small Business Administration’s (SBA’s) Paycheck Protection Program (PPP).

The Main Street Facility fills a need for mid-market business funding not covered by the PPP, which was authorized under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, to make $349 billion in forgivable loans to businesses with up to 500 employees and is being refunded at the end of April to provide an additional $310 Billion to that same demographic. 

The Main Street loan program is available to U.S. companies with up to 10,000 employees and less than $2.5 billion in 2019 revenue that were in good financial standing before the COVID-19 crisis sparked widespread stay-at-home orders and stalled the American economy, leading to nearly 17 million people filing new claims for unemployment benefits over the past three weeks.

Start the application process today

As with PPP loans, businesses seeking Main Street funding will need to apply through banks and other lenders authorized to process the loans. The opening of the PPP application window on April 3rd prompted a large number of small businesses to seek funding through SBA-authorized lenders. The large amount of applications—as many per day as the SBA usually receives in a year—resulted in delays within the agency, within banks, unprepared for the influx of applications online and in Fintech which was well-positioned to process large numbers of digital applications. 

If you haven’t already, firms should start gathering the information clients will need to apply to the Main Street program. This will be particularly urgent for clients that were ineligible for the PPP, though eligible companies can receive funds from both the PPP and the Main Street program.

Pay attention to the fine print

New Main Street loans range between $1 million and $25 million (or an amount, when added to the borrower’s existing outstanding and committed but undrawn debt, four times the borrower’s 2019 earnings before interest, taxes, depreciation, and amortization (EBITDA).) 

Main Street loans added to existing loans must be at least $1 million and no more than the lesser of $150 million, 30% of the borrower’s existing outstanding and committed but undrawn bank debt, or an amount that, when added to the borrower’s existing outstanding and committed but undrawn debt, does not exceed six times the borrower’s 2019 EBITDA.

The Main Street program requires companies that borrow the funds to make “reasonable efforts” to maintain their payroll and retain their employees during the term of the loan. Borrowers also must commit to not using the funds to repay or refinance pre existing loans and lines of credit.

Watch for changes

Due to the evolution of the outbreak and its impact on the global economy, provisions are being made to these loan programs near daily. Over the last week alone, the Fed has already taken actions to help bolster the effectiveness of the PPP. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. 

In addition, the Fed, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corp. issued an interim final rule permitting banks to not include PPP loans made under the PPPLF with any of their required capital ratios, meaning that the loans won’t be counted against the banks when examiners review their books.

In addition, the Fed said PPP lenders would not be held liable for representations made by borrowers in connection with a borrower’s request for loan forgiveness under the PPP.

Milikowsky Tax Law’s team of legal experts are closely following COVID-19 relief efforts and will continue to publish insights to keep you informed about potential business implications. Visit our COVID-19 Resource Center for more news, tools, and insights you need to know in these uncertain times.