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Tag Archive for: California Taxes
On Sunday, August 7th of 2022, the Senate passed the Budget Reconciliation Bill, or the Inflation Reduction Act, which includes nearly $80 billion in funding for IRS. More than half of the funding is set for enforcement. IRS aims to collect more from corporate and high-net-worth tax dodgers.
What will all this mean for taxpayers?
The founder of Milikowsky Tax Law, John Milikowsky, explains the impact from the Budget Reconciliation Bill in detail. Check out the video below for more information:
Read on for an in-depth discussion of the Inflation Reduction Act and its effects.
In this article, we will discuss:
- The Inflation Reduction Act: what it is and what the money will be used for
- How these changes will affect audits
- Red flags IRS will look for to initiate audits
- How business owners can prepare for the increased IRS scrutiny of their tax returns
- Any additional taxes the bill will impose
What is the Budget Reconciliation Bill?
In August of 2022, Senate Democrats passed the Inflation Reduction Act, a climate, health and tax package. 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
- Taxes on corporations
The Budget Reconciliation Bill and IRS
Perhaps one of the most controversial pieces of the act is the expansion of the International Revenue Service. This expansion passed on the claim that strengthening enforcement of existing taxes will raise revenue without having to create new laws. The Inflation Reduction Act allocates $79.6 billion to IRS over the next decade. Where is this money going?Enforcement
More than half of the nearly $80 billion is meant for enforcement. IRS aims to collect more from corporate and high-net-worth individuals who have been successful dodging taxes in the past. Why the focus on these taxpayers? IRS’s audit rates have dropped. In fact, in 2010, it was 16% for high earners but has declined to only 2%. To combat this drop, IRS will be hiring more revenue agents to do audits, more criminal investigators to do criminal investigation of crimes, and more revenue officers to collect the tax.Operations and Developments
The remainder of the funding is set aside for:- Operations
- Taxpayer services
- Technology
- Development of a direct free e-file system
- And more
What Do These Changes Mean for Taxpayers?
This bill will lead to an increase in the number of audits conducted each year by IRS, therefore increasing the chance that your business will be audited. However, there are steps you can take to prepare. First, let’s discuss which taxpayers are at the highest risk of being audited:- High-earners or high-income taxpayers
- Non-filers
- Self-employed business owners
High-Earners or High Income Taxpayers
A high-income taxpayer, or high-earner, is defined by IRS as someone who generally receives income in excess of $100,000 during a tax year. However, we typically see audits for high-earners of $200,000, $250,000, or higher. According to Paul Mamo, Director of Collection Operations, Small Business/Self Employed Division at IRS, “The IRS is committed to fairness in the tax system, and we want to remind people across all income categories that they need to file their taxes…These visits focusing on high-income taxpayers will be taking place across the country.”Non-filers
While non-filers can be considered someone who did not file taxes for a single year, usually we are looking at a taxpayer who has skipped at least a couple years or more. At Milikowsky Tax Law, we have some clients who haven’t filed tax returns for five, six, seven years, a significant amount of time.Self-Employed Business Owners
IRS is focused on self-employed people, whose financial situations can become tricky. For example, 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 (but more on this later).How Business Owners Can Prepare for an IRS Audit
IRS is primarily focused on high earners who do not file tax returns or have not filed for a number of years. If you are a high-earner or you have not been filing your taxes, you are at a higher risk for an audit. You can prepare for an IRS audit by ensuring that you have all of your documentation in order and that you are able to answer any questions the IRS may have. If you are audited, it is important to cooperate with the IRS and to provide them with any information they request. 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. Read our ultimate guide to IRS audits, here.Additional Taxes the Budget Reconciliation Bill will Impose
15% Minimum Corporate Tax
While the 15% minimum corporate tax mostly applies to corporations that have over $1 billion of income, it can still complicate things for other business owners; The AICPA has sent letters to Congress indicating this could result in some confusion and inconsistent results. Why? Because the 15% corporate minimum tax applies on book income, not tax return income, which are two different things. Book income is based on your books and records, such as the figures on your profit and loss statement. This can differ significantly from what is reported on your tax return. The two different figures could produce inconsistent results.One Percent Excise Tax on Stock Redemption
This bill potentially could assess a one percent excise tax on the stock redemption. This tax on stock redemption may also apply if a corporation buys back its own stock. Find a one-page summary of the Inflation Reduction Act of 2022, here.Still Have Questions?
Business owners should contact Milikowsky Tax Law if they have any additional questions about how this bill will impact them. 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. Read on to learn how to respond to an IRS audit in 2022, here.
CSLB site sweeps and EDD audits can cost business owners delays, fines, stop-work orders and even potential jail time.
In 2019 and 2020, CSLB’s Statewide Investigative Fraud Team (SWIFT) responded to 855 leads, conducted 52 sting operations and 216 sweep days. These efforts led to the issuance of 260 Notices to Appear in criminal court. In total, 368 cases resulted in administrative action and 634 cases were referred for criminal prosecution.
However, there are steps business owners can take to mitigate these risks. Let’s dive in.
What is a CSLB Site Sweep?
According to CSLB, construction site inspections, or sweeps, are “among the most effective ways that CSLB ensures contractor compliance with California’s licensing and workers’ compensation (WC) insurance requirements.”
How Do CSLB Site Sweeps Work?
A site sweep occurs when several government agencies, including CSLB, Employment Development Department (EDD), and the California Labor Commissioner target a specific local area. Teams belonging to these government agencies physically visit active sites and conduct a site inspection. These inspections are random and can occur at any time.
During a site inspection, workers are interviewed by CSLB to verify whether they are properly licensed.
What Does CSLB Look For in a Site Sweep?
CSLB will look for:
- Appropriate licenses
- Permits
- Workers’ compensation insurance for employees
- Adherence to safety rules
What Risks Do General Contractors Face in CSLB Site Sweeps?
If the agency uncovers misclassifications or unlicensed contracted workers, general contractors will be subject to heavy fines and penalties.
Additionally, general contractors who hire unlicensed workers and unlicensed subcontractors put themselves at risk for potential criminal action by the local District Attorney (DA). They risk receiving a stop-work order from CSLB.
Even a legitimate subcontractor who is licensed can run into issues if their license becomes suspended.
How Can General Contractors Prepare for CSLB Site Sweeps?
General contractors can protect themselves by regularly checking and confirming that all workers’ licenses are current and legitimate. We recommend checking licenses at least on a monthly basis.
CSLB Refers Cases to EDD to Audit
CSLB refers their cases to EDD to audit the company. Let’s take a look at what EDD audits are and the difference between CSLB audits and EDD audits.
What is the Difference Between CSLB Audits and EDD Audits?
Both CSLB and EDD can conduct audits and site sweeps of your business. However, the difference lies in what these agencies are looking for; CSLB focuses on licensing, EDD reviews payroll tax compliance.
To learn more about the difference between these agencies, read our article, here.
What Does EDD Look For in an Audit?
In an audit, EDD determines if the employer has paid the full and correct amount of taxes due under California law. Further, EDD identifies whether the independent contractors are correctly classified as 1099 workers or if they should be classified as W-2 employees.
If you are found to have misclassified your workers as 1099s as opposed to wage-earning W-2s, your company is obligated to pay back payroll taxes and will be charged back penalties.
EDD Audits and Employee Misclassification
Employee misclassification can expose your business to fines, penalties, and potential jail time.
According to EDD, industries that run a higher risk of misclassifying workers include:
- Construction
- Hospitality
- Technology
- Healthcare
- Seasonal Industries
Learn more about EDD audits, here.
Facing an EDD Audit?
Once you are aware your business is being investigated, it’s important to reach out to a qualified Tax Attorney to represent you. Crafting the narrative around the “why” and “how” of your contractors’ classification can make the difference between your case being dismissed or your company owing back payroll taxes and fines.
Call Milikowsky Tax Law as soon as you discover your business is facing an audit by CA EDD.
IRS audits can be a business owners’ worst nightmare: the hassle, the heaps of paperwork, the potentially hefty bill. However, with the right preparation and resources, an IRS audit doesn’t have to be a stressful event.
Read on for our ultimate guide to IRS audits. We answer all the most common questions to help you navigate an audit as smoothly as possible. Let’s get started.
What is an IRS Tax Audit?
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.”
How Will You Be Notified of 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.
Why Was Your Business Selected For an Audit?
There are several different reasons your business may be flagged for IRS audits.
Random Checks
Some businesses are audited in random checks. However, the chances of a random audit are low. Most taxpayers have less than a 1% chance of receiving a random audit check.
Incorrect Tax Filing Information
IRS runs tax returns through their Discriminant Information Function (DIF) system to track industry benchmarks for each industry and tax bracket. The DIF system also checks for incorrect tax filing information. Any discrepancies in tax forms, or if the form isn’t complete, may trigger an IRS audit.
Other Reasons Businesses May be Audited by IRS
People are more susceptible to an audit if they:
- Have a home-based business
- Have a cash business
- Have foreign assets
- Have large numbers of cash transactions
- Claim a disproportionate number of deductions
- Are self-employed
- Issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit
Learn how to avoid IRS red flags from cash transactions, here.
How Long Do You Have to Respond to an IRS Audit?
You have 30 days to reply to the initial audit letter.
What if You Need More Time to Respond to an IRS Audit?
Your attorney can help by advocating for more time with the IRS agent. We don’t recommend hesitating on responding to an IRS letter on your own, IRS is likely to offer extensions without assistance from an experienced tax attorney who can help present your case.
What Do You Need to Provide in an Audit?
According to IRS, they may ask for copies of:
Receipts
We recommend presenting receipts by date with notes of how they were used by or relate to your business.
Bills
Business owners can include dated bills with information such as the name of the organization that received the payment as well as the type of service it provides.
Canceled checks
Business owners can organize canceled checks with copies of the bills they paid and any applicable employer reimbursement.
Legal papers
Include a description of what the case was about, when it happened and how it relates to your business, credit or deduction. Examples include:
- Divorce settlements including custody agreements
- Criminal or civil defense papers
- Property acquisition
- Tax preparation or advice
- Loan agreements – Include a copy of the original loan with the following:
- Names of the borrowers
- Location of the property
- Financial institution making the loan
- Amount borrowed
- Terms (the number of months to pay)
- Settlement sheet
- If the loan was from an institution, include an end of tax year statement indicating interest paid
- If the loan was not from an institution, provide a statement from the payee indicating the interest paid that year as well as the payee’s address and Social Security number
- Provide a break-down of how you used the money
- Logs or diaries
- Tickets
- Medical and Dental records
- Medical savings account statements
- A copy of a handbook or other statements showing benefit and reimbursement policies
- Physician statements
- Capital improvement records for medical purposes including appraisals of the property before and after the improvements
- Contract for attendant care
- Theft or loss documents
- Insurance reports detailing the nature of the loss or damage
- If not insured, copies of fire department or police reports on the loss, theft or accident
- Photos or video showing the extent of the damage (if available)
- Appraisal from a qualified adjustor showing fair market value of the property before and after as well as an estimate of the damage
- Brief explanation of the loss
- Employment documents
- Schedule K-1
You can view a list of records IRS may request here.
How Long Do Audits Take?
The time it takes to conduct an audit depends on the case. It fluctuates depending on:
- The tax reporting error
- Communication between the person being audited and IRS officer
- When and whether the right information is provided to IRS
How Far Back Can IRS Audit Your Return?
IRS audits tax returns from the past three years. However, audits are typically from the past two years.
IRS will not look for information older than three years unless they find discrepancies within the audit they are conducting. Most audits do not look for information past six years. In criminal cases, IRS can look back more than nine years.
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 and tax audits and are experts in defending business owners in the face of IRS or other government agency audits.
Read on to learn how to respond to an IRS audit in 2022, here.
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:
- The worker is free from the control and direction of the hiring entity in connection to the performance of the work.
- The worker performs work that is outside the usual course of the hiring entity’s business.
- 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:
- Do you instruct or supervise the person while he or she is working?
- Can the worker quit or be discharged (fired) at any time?
- Is the work being performed part of your regular business?
- Does the worker have a separately established business?
- Is the worker free to make business decisions that affect his or her ability to profit from the work?
- Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
- Do you have employees who do the same type of work?
- Do you furnish the tools, equipment, or supplies used to perform the work?
- Is the work considered unskilled or semi-skilled labor?
- Do you provide training for the worker?
- Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
- Did the worker previously perform the same or similar services for you as an employee?
- 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.
Now that the April filing deadline has passed, small business owners may be asking: what’s next?
As tempting as it may be to put off thinking of taxes until next year, some small business owners may be required to respond to an California’s Employment Development Department (EDD) audit.
Read on how to learn common EDD audit triggers and and how to respond.
What is a CA EDD Audit?
EDD conducts an audit to determine if the employer has paid the full and correct amount of taxes due under California law.
What Triggers EDD Audits?
The following circumstances most commonly trigger EDD audits:
- An independent contractor filing for unemployment
- The EDD verification process
- Late filing of tax returns or late payment of taxes
- Failing to pay wages on time or collect SDI and PIT
Many verification EDD audits are conducted on a random basis. These audits are not based on any assumptions of inaccurate or incomplete information. Additionally, EDD has the power to audit a company if they believe the business has purposefully misclassified workers in an attempt to avoid paying payroll taxes.
However, many legitimate businesses are unintentionally misclassifying employees. Many of these misclassifications are a as a result of new, strict worker classification regulations, related to Assembly Bill 5 (AB-5).
What is AB-5?
AB-5 is a piece of legislation that extends employee classification status to some independent contractors and gig workers depending on the qualifications outlined in the ABC test. AB-5 went into effect on January 1st, 2020, and changed how Small Business Owners (SBOs) who hire independent contractors operate in California.
Learn more about how this law came into effect, and how Dyanmex ruined it for everyone, here.
How Can AB-5 Lead to the Misclassification of Employees?
AB-5 introduced the ABC test as a stricter guideline to determine how to classify workers as 1099 independent contractors. A worker must meet all three criteria of the ABC test to be classified as a 1099 independent contractor instead of a W-2 employee. The worker must:
- Be free from the control and direction of the hiring entity in connection to the performance of the work.
- Perform work that is outside the usual course of the hiring entity’s business.
- Be customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
If the contractor misses one of the criteria in the ABC test, they should be classified as a W-2 employee.
Learn more about AB-5 and the ABC test, here.
What Happens If I Misclassify an Employee?
Employee misclassification can lead to several unfortunate outcomes, including fines and penalties.
With the new regulations, employee misclassification is more common for small businesses. As an example, let’s examine the case study of one of our clients, Ryan Brown, who misclassified his workers and was faced with EDD audit.
Check out the video below!
Meet the Client: Ryan Brown
Ryan Brown owns a construction company in Oceanside, California. His business classified a portion of the staff as 1099 independent contractors and the rest as W-2 employees.
How Can the Misclassification of W-2 Employees Happen?
The services of the hired independent contractor must be consistent with all three of the criteria established by the ABC test or they are automatically classified as a W-2 employee.
In Brown’s case, he didn’t realize that the independent contractors were providing the same services as the W-2 employees. Therefore, the employees he classified as independent contractors didn’t meet the second requirement, “[workers] perform work that is outside of the usual course of the hiring entity’s business.” Thus, all staff members should be classified as W-2 employees–any worker the business claimed was an independent contractor was misclassified.
What Triggered Brown’s EDD Audit?
EDD conducted a random site sweep of Brown’s business. This sweep resulted in EDD finding misclassified workers.
What Happened When Brown Contacted Milikowsky Tax Law?
Brown called Milikowsky Tax Law and set an initial meeting. Before signing any kind of retainer, John started making calls to learn more about the audit and what steps they needed to take immediately to protect the business and provide accurate information to EDD and CSLB.
What Were the Results of Brown’s EDD Audit?
After less than a month, EDD sent a final letter indicating the decision– minor fines were due, the case was closed. For Brown, the results–and knowing his business was going to be fine– provided a sense of relief.
Ryan’s results are both exceptional and the kind of outcome our team strives for with every client. And while we can’t promise any client’s outcome will be the same as another, we can say with utmost assurance that the team at Milikowsky Tax Law is your relentless advocate in the face of EDD, CSLB, and IRS audit.
When determining whether your workers should be classified as employees or independent contractors, it’s critical to ensure that you are closely following the Employment Development Department’s (EDD) strict guidelines.
On the simplest level, proper classification is determined by whether or not the principal, or employer, holds the “right of control.”
What is “Right of Control?”
Right of control is determined by who holds the “right to control the manner and means” by which work is performed.
A corporate administrative assistant, for example, reports directly to an executive who manages their work. Likely they work a classic Monday through Friday, 9 to 5 schedule. When they want to go on vacation, they have to request time off or let their manager know in advance.
Now consider an app-based rideshare driver. When they’re available to work, they log into the app and begin work. Perhaps after a couple of hours, they decide they need a break, they disable the app and log off for a break. While they are required to abide by the rules and regulations set in place by the company that they work for, their hours and responsibilities are not deliberately determined by the company overall.
How does EDD determine 1099 status?
EDD utilizes the right of control as an initial way to classify workers. They take things one step further by providing a worksheet that employers can utilize to help clarify discrepancies.
Since January 2020 the new ABCs of worker classification has been implemented to try to simplify the process of determining worker classification. Under the ABC test, a worker is considered an employee and not an independent contractor, unless the hiring entity satisfies all three of the following conditions:
- 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;
- The worker performs work that is outside the usual course of the hiring entity’s business; and
- The worker is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.
Since the passing of the AB_5 gig worker bill, there have been multiple rounds of exceptions, exclusions, and widespread confusion about how the rules affect real-life business scenarios. In cases of confusion, the original 13 point Borello test is still the fallback.
The questions posed in the EDD Borello criteria include the following 13 elements to provide additional support in determining workers’ proper classification. They include the following:
- Do you instruct or supervise the person while he or she is working?
- Can the worker quit or be discharged (fired) at any time?
- Is the work being performed part of your regular business?
- Does the worker have a separately established business?
- Is the worker free to make business decisions that affect his or her ability to profit from the work?
- Does the individual have a substantial investment in their job which would subject him or her to the financial risk of loss?
- Do you have employees who do the same type of work?
- Do you furnish the tools, equipment, or supplies used to perform the work?
- Is the work considered unskilled or semi-skilled labor?
- Do you provide training for the worker?
- Is the worker paid a fixed salary, an hourly wage, or based on a piece-rate basis?
- Did the worker previously perform the same or similar services for you as an employee?
- 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 may indicate important factors to be considered. While answering “yes” to any one of them may indicate that a worker should be classified as an employee, no single factor is enough to determine so 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 offers the ability to request a written ruling by completing a Determination of Employment Work Status.
In cases where EDD initiates a worker classification audit, employers can be required to retroactively prove that their workers were correctly classified at 1099 contractors vs W-2 employees. At Milikowsky Tax Law we are experts in EDD audit defense. Our team works with you to ensure that your audit does not spread to other areas, that EDD understands the scope and function of your unique business and that you are only liable for back fines and fees on those workers who are indisputably misclassified.
We have represented hundreds of businesses and individuals audited by EDD, CSLB, CFTB, and IRS. Our team is dedicated to ensuring you get the best result and that your audit does not permanently negatively impact your business or your life. Reach out to our team for more information.
If you’ve missed the official deadline to pay your taxes, don’t stress. Getting back on track with your taxes is, in many cases, simpler than most people think.
Whether you owe individual taxes or taxes for your small business, the easiest solution is to pay your taxes as soon as you can. At Milikowsky Tax Law, we realize it’s not always that simple — and we’re here to help you navigate your late taxes.
When creating a plan to pay taxes owed after missing a deadline, it’s important to consider the ramifications of what might happen if you don’t meet your payment obligations. In addition to interest building up on what you owe, your social security benefits, ability to secure a loan, and tax refund can be impacted.
Read on to learn what to do to start resolving your tax debt as soon as you can.
Due Dates
Before we discuss what to do if you’ve missed a deadline, make sure you know for certain when your taxes are due.
For businesses in California, the deadline to file your state taxes will depend on when your fiscal year begins. Most business returns are due by the 15th day of the third month of a company’s fiscal year — so for example, if your fiscal year begins on January 1, your California state taxes will be due on March 15. Dates for tax extensions vary depending on the business. Check the state’s tax website for more details.
What to Do If You Missed the Due Date
If you’ve missed your deadline, it’s important to take action right away to get back on track. As mentioned earlier, the best thing you can do is to pay your taxes as soon as you can. Before you do that, it’s important to take a few basic steps.First, gather all of your tax and income documents. Find your past W-2s, W-9s, 1099s, or other tax statements and filings. The IRS or your employer will be able to provide you with copies of any missing statements.
Next, meet with an experienced tax attorney to discuss your repayment options. Though you may be eager to pay back your taxes as soon as possible, it benefits you to take the time to go over your tax situation with an attorney, who can offer counsel and help fill any missing gaps in your documentation. A tax attorney will advocate for you to the IRS, in order to help secure your best repayment plan.
There are a few different options for settling your tax debt, depending on your situation. If you don’t want to (or can’t afford to) pay your entire amount owed all at once, the IRS allows for payment arrangements for a maximum of 72 months and $50,000 or less owed. This can be done through the IRS Form 9465. If you owe less than $10,000, your request will likely be approved automatically.
If you owe more than you can pay, you may qualify for an offer in compromise, which allows the taxpayer to settle with the IRS by paying less than what is due. The IRS will look at your ability to pay, income, taxes owed, and the value of your assets to determine whether you qualify and what your settlement and payments will be.
For more challenging situations, you might consider the IRS’ “Currently Not Collectible” program — if you qualify for this, the IRS will wait one year before coming to collect your debt. This can give you and your tax attorney more time to make a case to file an appeal. In worst-case scenarios, bankruptcy may be an option for you; be sure to discuss with your tax attorney to determine whether you qualify.
Possible Penalties
If you do not pay or fail to meet payment obligations you agreed on, the IRS will charge you a failure-to-pay penalty and interest on your taxes owed. This will only drive up your total amount owed, potentially by a significant amount.
Your delinquent tax status will also be reported to financial institutions, making them less likely to loan you cash for a home, car, or your business. In extreme cases, liens and levies can be filed against you.
For those who are self-employed, it may also impact your Social Security benefits. If you fail to pay your taxes, your self-employment income will not be reported to the Social Security Administration, meaning you will not receive any money toward retirement or disability benefits.
If you fail to pay your business’ taxes, you may have your seller’s permit revoked, making illegal to operate your business — if you were to continue operating your business without this permit, you’d face a fine of as much as $5,000 and up to a year in prison.
The penalties can be serious, especially for a business owner, but you can minimize your risks by working with a legal professional who can advocate on your behalf. It’s always your best choice to consult a dedicated tax attorney when you’ve missed your tax deadline, to help you make your case to the IRS and get the best possible results for resolving your debts.
Paying taxes is required for the workforce and for businesses. No one wants to pay more taxes than required, but purposefully avoiding these payments can open your business up to criminal tax liability. While there are legal loopholes to pay fewer taxes, often framed as tax avoidance, there are also serious offenses when you choose to evade paying your taxes.
There are different forms of tax manipulation, some of which are federal offenses and can land you in a criminal audit by IRS. IRS criminal audits can lead to hefty fines or worse–– prison time. With a 90% conviction rate, undergoing prosecution by IRS criminal is, indeed, a big deal. So what is the difference between legal avoidance or paying less, illegal tax evasion or paying nothing, and criminal tax evasion (fraud)? The intent is the biggest deciding factor when it comes to determining between fraud, evasion, and negligence.
What is Tax Fraud?
Tax fraud is, “an intentional wrongdoing, on the part of the taxpayer, with the specific purpose of evading a tax known or believed to be owing.”
A person or a business purposefully or intentionally manipulates information on a tax return to reduce or avoid the amount of taxes owed. Forms of tax fraud include:
- Claiming false deductions
- Claiming personal expenses as business expenses
- Using false Social Security numbers
- Underreporting income
- Failure to report income
- Neglecting reporting payroll taxes
Every year the government loses millions of dollars from tax fraud. The Internal Revenue Service (IRS) investigates these tax fraud cases to determine if the person or company under question intentionally avoided their taxes owed. Parties who are found guilty are required to pay fines, penalties or, in the case of criminal prosecution, serve prison time.
What is Tax Evasion?
Tax evasion is a branch of tax fraud. Committing tax evasion is, “using illegal means to avoid paying taxes.” There is still intentional concealment to avert paying taxes. Different forms of tax evasion include:
- False or improper claims
- Omitting or concealing revenue
- Purposely underpaying taxes
- Hiding interest
The above list is very similar to the list of fraud criteria, the difference can often be subtle and lie in the harm caused or other criminal elements such as workers compensation fraud resulting in insurance fraud charges. When examining tax evasion cases, IRS views financial circumstances and financial history for suspicious activity or a history of attempts to evade taxes.
If the tax evasion activity is found to be deliberate, it is considered a criminal offense and punishable under federal law. The guilty party can be fined up to a quarter of a million dollars. An individual can be fined up to half of a million dollars for a business. They can also face up to five years of imprisonment.
Negligence
Negligence is a third form of underpaying taxes. The key difference between tax evasion and negligence charges lies in intent. In the case of negligence, elements can include insufficient payment in taxes due to miscalculations or unintentional errors when submitting tax forms. In order to receive this result, you must prove that omissions were done purely out of error.
Although negligence determination is better than one of fraud or evasion, there is still the possibility of being fined up to 20% of the underpayment.
Again, the biggest factor between tax fraud, tax evasion, and negligence is intent. Purposeful manipulation and concealing of income to avoid taxes is a punishable offense by the IRS.
If you find yourself under audit by IRS, consult with our team of experts at Milikowsky Tax Law. Our team of attorneys are equipped to review your specific case and formulate a defense strategy specific to you.
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.