Tag Archive for: Tax audit

IRS Fresh Start: a Way Forward for Unpaid Tax Burdens

In 2008, in response to the recession caused by the collapse of the housing market, IRS re-invigorated a program that had been called The Fresh Start Program for many years. The Fresh Start initiative is not a clean slate or a way to avoid paying taxes.  IRS is staunchly unsympathetic to those individuals and business owners who try to avoid paying taxes owed. Fresh Start is, instead, a way to eliminate fees and penalties and find a payment plan that works for your financial situation  to repay back taxes in full.

When back taxes are owed IRS can place leans on properties and lays on accounts.  Under the Fresh Start program a taxpayer can apply to have a lien removed if their tax burden is under $25,000.

If you have a heavy back-tax burden here are some steps you must take to apply for the Fresh Start initiative:

1:  Pay your current year’s taxes! Taxpayers applying for the Fresh Start Program cannot have a tax balance due.  IRS is looking for businesses whose tax burden was due to temporary hardship not for chronically delinquent taxpayers.

2: Check to see if you meet the following criteria:

    • Firstly, self-employed individuals must demonstrate a drop in their net income of 25 percent or greater
    • Secondly, earnings for married couples filing jointly must be under $200,000 per year, and single filers under $100,000 per year
    • Lastly, you must owe less than $50,000 dollars in taxes overall

3: Meet with a tax attorney to determine if you may qualify for an Offer in Compromise. Factors that will affect your eligibility are:

  • Credit worthiness: Having other accounts in collections can negatively impact your credit and ability to purchase a home, car, or apply for credit.
  • Accuracy and record-keeping:  Demonstrate the amount IRS claims that you owe is not correct. Reasons can include: tax preparation error, misunderstandings about .
  • Effective Tax Administration – when the IRS determines that paying the full amount owed would cause undue financial hardship, then they may agree to take less than the full amount owed.

If you have excessive back taxes for your business or family entity, reach out to the dedicated team at MIlikowsky Tax Law.  Our expertise in IRS negotiations can help to offset your tax burden and create options for your future.

Red Flags and Risk Factors

Risk Factors and Red Flags: Why IRS might audit you!

An audit is, in itself, not a bad thing.  we have come to equate audit with accusation or wrongdoing but an IRS audit is simply a review of the records.  Int his spirit, there is no reason to fear IRS audit.

In reality, the IRS audit process is triggered by assumption of wrongdoing and, without excellent records or an adept tax attorney paired with a skilled CPA, individuals and business owners have plenty to fear from an IRS audit.

Why IRS starts an audit

Most often, audits are begun because of suspicious activity.  Sometimes, mistakes are honest ones and sometimes IRS audits and discovers mistakes that they themselves didn’t see on first look.

Here are some of the reasons IRS can trigger an audit:

1. Honest mistakes

You’ll be fined regardless of  your intent, so ensure a competent CPA prepares your taxes.

2. Under reporting income

Businesses file their 1099s religiously.  It is in a business’ best interest to report payments to contractors, they get a deduction for so doing.  Contractors occasionally “forget” to report 1099 wages.  IRS knows the money was paid and they can easily track that no taxes were paid on that money.  Want to trigger an audit? Try hiding 1099 wages.

3. 501c write offs

Usually (and IRS bases most of its red flags on a mean) lower middle and middle class people do not donate large parts of their income to charity.  You may tithe, you may be the exception.  But, IRS is nota. fan of exceptions and large charitable donations with small incomes will trigger a second look.

4. Extraordinary business expenses

There are industry standards for business deductions.  If you write of a large format printer and you are in PR or marketing, IRS will likely see that as a legitimate expense.  That vacation to Costa Rica?  Less likely. Be conservative in writing off personal expenses as business expenses.

6. The home office

If you run your business out the converted horse barn and employees come to work in that space, your office is likely legitimate. If you claim 1/5th of your rent because you work in the kitchen, you may find IRS has something to say about it. The home office expense gets scrutinized.  If you take it, be prepared to defend it.

 

If IRS Audits your business, your best choice is to call a qualified tax attorney.

Am I at Risk?

Those of us in the middle are at a lower risk than those in the upper tax brackets and those who report no income at all.  After all, how do you live?

Adjusted gross income % of total returns filed in 2016 % of these returns examined in 2017
No adjusted gross income 1.69 2.55
$1 to $24,999 36.47 0.71
$25,000 to $49,999 23.33 0.49
$50,000 to $74,999 13.26 0.48
$75,000 to $99,999 8.59 0.45
$100,000 to $199,999 12.19 0.47
$200,000 to $499,999 3.60 0.70
$500,000 to $999,999 0.58 1.56
$1,000,000 to $4,999,999 0.26 3.52
$5,000,000 to $9,999,999 0.02 7.95
$10,000,000 or more 0.01 14.52
All returns 100.0 0.62

*source http://nerdwallet.com

 

Someone looks at a document with a magnifying glass

Being audited by EDD can happen to anyone. It can be challenging to take a step back and see the audit process from an objective point of view, but maintaining your focus is essential to coming out ahead in the end. In this article, we discuss tips to simplify the process, as well as ways to avoid making mistakes throughout the experience. 

Read over the initial audit documents very carefully.

Determine if there is a deadline set by EDD to respond to the initial audit notices. Carefully review the pre-audit questionnaire to determine if there is any information that you believe may hurt you if disclosed. You must be truthful and honest with the information and documentation that you provide to EDD.

If the documentation you received requires you to call and make an appointment, respond immediately. If you need more time to prepare or you wish to seek professional advice, let the appointment secretary know what you want to do. One of the most important things in any audit is timely communication.

Review EDD “Employer’s Bill of Rights.” 

You may obtain a copy of this document by going to EDD web site. It is also known as EDD Form DE195. While most of the “rights” concern the post-assessment process of an EDD assessed deficiency, there is one fundamental right concerning courteous and timely service. 

EDD has interpreted this provision to allow a taxpayer the right to seek independent professional advice. Even if you have a set appointment for your EDD audit, you have a right to postpone this appointment while you seek the advice of one or more professional practitioners. 

Review EDD’s Document Request. 

This document request is Form DE231TA — a standard form included in the initial audit package. EDD may ask for documentation that you are under no obligation to give them, such as IRS tax returns. 

They often ask for documentation that they already have, especially under the category “State Employment Tax Reports.” EDD wants you to provide these documents because it takes them longer to get them internally. 

Documents such as check registers, canceled checks, and bank statements are information and documentation that is irrelevant for many EDD audits.

At the top of the Document Request form, there are dates showing the period of examination; for example, 10/01/2010-09/30/2013. When you assemble your documentation and information, pay particular attention to the audit period. Do not give EDD records before 10/1/2010, or records beyond 9/30/2013. You may open yourself up for a more extensive audit with a potentially larger assessment.

See a professional tax advisor before you meet with EDD, give any documents to EDD, or make any statement that will be used against you. 

A consultation with a professional may mean the difference between audit success and a potential economic disaster. EDD laws are complicated, and they are often issues of tax procedure that you need to know to protect yourself. Make the investment – it is worth it! You can contact the Milikowsky Tax Law office to set up an appointment today.

sba logo

In early May, Treasury Secretary Steven Mnuchin announced that all companies who receive loans of more than $2 million in government relief will be subject to full audits from IRS. The Payroll Protection Program allows companies to have their loans forgiven, provided they spend the funds on payroll, benefits, rent, and utilities. The decision was made in order to ensure these loans were justified after large public companies and big chains utilized the funds set aside for small businesses.

Mnuchin said the loans of as much as $10 million meant to keep workers on payrolls under the Paycheck Protection Program were intended for small firms — not public companies and big chains that have access to other means of funding. The SBA will check that borrowers who took large loans properly certified they were needed because of the coronavirus outbreak, he said.

“I want to be very clear it’s the borrowers who have criminal liability if they made this certification and it’s not true,” Mnuchin said Tuesday on CNBC. “We will make sure that what was the intent for taxpayers is fulfilled here.”

More than 220 public companies applied for at least $870 million from the government program, according to the Washington-based data analytics firm FactSquared. Those companies included Auto Nation and Ruth’s Hospitality Group. Ruth’s Hospitality Group, which owns Ruth’s Chris Steak House, took a $20 million PPP loan. AutoNation took a $77 million loan. Both companies have said they would return the money. 

The Los Angeles Lakers — the NBA’s second-most valuable team — announced last week that they decided to return the $4.6 million loan secured by the team in March after receiving a large amount of criticism from California citizens, politicians, and small business owners.

The relaunch of the Paycheck Protection Program with an additional $320 billion approved by Congress last week got off to a rocky start Monday, with lenders reporting being shut out of the overwhelmed SBA system amid a flood of loan applications and concerns about when struggling companies will get the funding they need. Mnuchin said the program is getting funding to small businesses with an average loan size of $206,000 so far, despite the attention the large firms that took relief at the expense of mom-and-pop shops are getting.

Tax Audit Survival

If you’re a business based in California, you’ve likely had dealings with the Employment Development Department (EDD). 

It is the responsibility of the EDD to collect payroll taxes and it conducts payroll tax audits of companies and businesses. In addition, the EDD conducts what’s called Unemployment Insurance (UI) benefit audits. The federal-state unemployment insurance system (UI) helps people who have lost their jobs by giving them temporary wage replacement. The EDD conducts what are known as benefit audits to protect the UI program.

Who Receives an EDD Employee Benefit Audit? 

The employer receives a notice to provide additional information from EDD. Upon receipt the employer is asked to provide specific information about the employee or 1099 worker in question’s earnings during a specific period.  A SSN check is also requested at that time.  The employer’s records are then checked against the Unemployment Insurance recipient’s claim to verify whether or not that person is eligible for Unemployment Insurance checks.   

EDD audits also aid in lowering employee Unemployment Insurance costs.  New employees are assigned a 3.4% UI rate for two to three years of employment and then that rate fluctuates after that set time depending on the contribution to UI benefits. EDD can take from 1.5% to 6.2%, but the taxable wage limit caps at $7,000 per calendar year.   

EDD benefit audits are conducted often- on a daily, monthly and quarterly basis to ensure that Unemployment Insurance (UI) is distributed to eligible claimants only. They are done through matching information provided by employers against information provided by individuals who have filed a UI claim. According to EDD, there are four types of benefit audits:

New Employee Registry Benefit Audit

This is based on information provided by California employers to determine if an individual received UI benefits after returning to work and failed to report their work and earnings. This is used for daily audits.

National Directory of New Hires

This is based on information provided by employers nationwide to determine if a claimant received UI benefits after returning to work and failed to report their work and earnings. This is used for the weekly audits.

 

Quarterly Wage Earnings

This is based on earnings reported by employers to the EDD to determine if a claimant received benefits while working and failed to report their work and earnings. This is used for the quarterly audits.

Interstate Crossmatch

EDD cross-matches wages earned in other states to determine if a claimant received benefits while working in another state. This is also done on a quarterly basis.

If the EDD determines that an individual received benefits they should not have received, or if they were overpaid, they will be assessed that amount along with any applicable penalties.

What if the Benefit Audit was started by a gig worker (or 1099 contract worker)?

The reason an EDD benefit audit is dangerous is that if a former worker has applied for UI benefits and that person was hired as a 1099 for your company, EDD will open a misclassification audit to review whether you correctly or incorrectly classified that person as a 1099 worker.  Those workers hired as 1099s should know that they are ineligible to receive Unemployment Insurance at the end of a gig with an employer.  As a legitimate 1099 worker, they have their own business, set their own hours and have other clients.  As an employer they are paid on form 1099 and therefore no worker’s compensation insurance is taken out of their checks, no taxes are withheld and no payroll taxes are paid by the employer.  Therefore, a legitimate 1099 worker would not file for unemployment. 

What to Do If You Receive a Benefit Audit

EDD will instruct you to complete the audit form and respond within 10 days of receiving the notice. Completing the audit form helps the EDD determine if the correct payments were made to the claimant. If incorrect payments were made, a credit can be given to an employer’s account

See the blank sample example below:

What is an EDD Benefit Audit

To assure your company is not being harmed or assigned penalties, make sure to complete the audit form as accurately and completely as possible. Incorrect filing of benefits is one of many issues that can come up in an EDD audit. 

If you are already part of an EDD benefit audit, and it becomes clear that  you have incorrectly classified your employees, a misclassification audit will commence on top of the benefits audit. This opens you up to more fines and penalties.  

To assure your company is not being harmed or is assessed penalties, make sure to complete the audit form as accurately and completely as possible. EDD benefit audits may seem simple but they can lead to much more complex issues.  

Read more about EDD Misclassification Audits here

 

Tax fraud
In the eyes of the federal government, there is a vast difference between a criminal tax fraud offense and a civil fraud offense. These differences focus primarily on the different burdens of proofs, penalties, statues of limitations, and defenses available to the taxpayer. 

For several reasons, often the IRS will first pursue a criminal tax fraud suit before pursuing a civil tax fraud suit. According to the IRS’s own Tax Crimes Handbook, a criminal tax fraud conviction “carries the most severe penalty of the criminal tax offenses.”

Civil tax fraud and criminal tax fraud have different burdens of proof. The IRS carries a “clear and convincing” evidentiary standard for civil tax fraud. (This is otherwise known as a “preponderance of the evidence” standard). By contrast, criminal tax evasion requires proof “beyond a reasonable doubt”—which is a higher evidentiary standard. In other words, the government must prove “more” to show criminal tax fraud than civil fraud.

Civil tax fraud and criminal tax fraud also have different associated penalties. There are several categories of civil tax fraud—for example, there is the fraudulent failure to file a return, accuracy-related penalties under IRC, spousal liability under IRC, and the fraudulent tax return for, e.g., failing to report income on your return and failing to pay tax. Each of these has different associated penalties. For instance, the penalty for fraudulently failing to file a tax return is 15% of the net tax due for each month (up to five months), with a maximum penalty of 75% of the unpaid tax. Similarly, the penalty for filing a fraudulent tax return (e.g. failing to report income) is 75% of the underpayment amount.

The penalties for criminal tax evasion are steeper. Under code 7201, a taxpayer found guilty of willfully attempting to evade tax (or its payment) could face a fine of $100,000 ($500,000 for a corporation) plus five years of imprisonment. Similarly, if a taxpayer is found to have willfully failed to pay tax, file a return, keep sufficient records, etc. he or she may face a penalty of $25,000 ($100,000 for a corporation) plus one year in prison.

Moreover, civil tax fraud and criminal tax fraud have different statute of limitations. For civil tax fraud, there is no statute of limitations, and the tax may be assessed at any time. By contrast, there is a criminal statute of limitations, but it applies only to the prosecution of the crime—the actual tax evasion—not the assessment of the tax owed. Typically, the statute is three years after the taxpayer commits the offense. But there are certain, specified carved out offenses for which a six-year statute of limitations applies.

Finally, different defenses are available for civil tax fraud and criminal tax fraud. When a civil suit for tax fraud follows a criminal proceeding for tax fraud, the doctrine of “collateral estoppel” may apply. Under this legal theory, provided certain technical requirements are met, once an issue is decided in one proceeding, it may not be retried again in a second proceeding.

This doctrine may be helpful to either the government or the taxpayer, depending upon the order of the civil/criminal proceeding and the outcome of the first case.

Consider first a criminal proceeding followed by a civil proceeding. If the government wins the criminal tax evasion suit, the taxpayer generally is “collaterally estopped” in the second (civil) proceeding from contesting that he committed fraud. Why? Because the government already proved fraud “beyond a reasonable doubt” and for the civil suit it needs even less evidence than that (requiring only “clear and convincing” evidence).

Alternatively, suppose the taxpayer is acquitted of criminal tax evasion in the first suit. Does collateral estoppel help the taxpayer? Unfortunately for the taxpayer, no, it does not. The first suit showed conviction was not provable “beyond reasonable doubt.” It remains to be seen in the civil suit whether it can be established using the lower evidentiary standard of “clear and convincing evidence.”

Now consider the reverse order of the proceedings, with the government first bringing a civil suit and losing—and then tries to bring a criminal suit for tax fraud. Does collateral estoppel help the taxpayer? It may; the taxpayer may attempt to collaterally estop the government in the second (criminal) proceeding from asserting the existence of fraud. In other words, under this scenario the doctrine of collateral estoppel helps the taxpayer.

In sum, the differences between a criminal and a civil suit are huge. It is best to speak with a qualified tax attorney, like one of the partners at Milikowsky Tax Law, to help you walk through these important nuances before the situation gets out of hand. 

 

contractors files

As many companies work to reorganize their business model in light of COVID-19, hiring a 1099 to replace your full-time employees might be a great solution.  However, there are a few things to consider before taking the step in hiring these workers. The passing of the new AB-5 regulations in January 2020 created more regulations to consider. Here are the classifications to ensure that your employee is listed as an independent contractor rather than a full-time employee. 

First, the IRS uses the “control and direction” test to identify is the employee is free from behavioral, financial, and relationship control. Then they look at the employee is performing work that could be done outside the core functions of the company. Lastly, the AB-5 ensures that the employee is conducting their work along with the work they are doing for the company. 

As the new AB-5 regulations take effect, there are a few exceptions to the independent contractor’s rules. Occupational exemptions, like doctors, lawyers, and real estate agents are excused from the AB-5 rules. Other professional services are also able to be considered independent contractors, such as marketing professionals, freelance writers, and barbers/ cosmetologists. There are a few qualifications they must abide by to be considered, these include:

They must have an established business location.

They must obtain the required business or occupational licenses.

Their rate must be negotiable.

They can set hours outside of project hours.

They must have other work with different companies.

They must use discretion and judgment on their work.

Other exemptions from AB-5 include, the referral agency exemption, which includes home cleaning service, dog grooming, graphic design, and other service listed here. The referral agency exemption also much adhere to a few qualifications including:

They must be established as a business entity.

They must be free from the control and direction of the referral agency.

They cannot be penalized for refusing service to clients/ contracts from companies.

They are allowed to work with other companies and have separate their clients.

Their services are under their name rather than the referral agency.

They set their prices, set their hours, and use their own equipment.

They must hold their business licenses and have registered for business tax.

The last two exemptions under AB-5 include the construction industry exemption and the narrow business-to-business exception. The construction industry exemption includes special regulations for subcontractors within the construction industry. With the narrow business-to-business exception any work done must be done by a sole proprietor, a partnership, an LLC, or a corporation. For more information on the exceptions to AB-5, here is a detailed list of requirements and qualifications for each category.

With all of these potential options in hiring a 1099 employee, we can help you figure out just what will work for your specific company. Contact us to see exactly how you can change your business model to allow you to hire independent contractors and cut costs during these uncertain times.

2018 form

In a surprising turn of events, IRS is limiting certain enforcement actions. To read the entire article visit IRS.gov

“The new IRS People First Initiative provides immediate relief to help people facing uncertainty over taxes,” Rettig added “We are temporarily adjusting our processes to help people and businesses during these uncertain times. We are facing this together, and we want to be part of the solution to improve the lives of all people in our country.”

Existing Installment Agreements are suspended until July 15th. By law, interest will continue to accrue on any unpaid balances.

Offers in Compromise (OIC) – The IRS is taking several steps to assist taxpayers in various stages of the OIC process by essentially pausing all collection efforts until July 15th.

Non-Filers –More than 1m households that haven’t filed tax returns are owed refunds and should contact a tax professional 

Liens, seizures and levies will be suspended during this period. However, field revenue officers will continue to pursue high-income non-filers.

In-Person Meetings – will be suspended. 

Earned Income Tax Credit and Wage Verification Reviews – Taxpayers have until July 15, 2020, to respond to the IRS to verify that they qualify for the Earned Income Tax Credit or to verify their income.

Statute of Limitations – Where a statutory period is not set to expire during 2020, the IRS is unlikely to pursue the foregoing actions until at least July 15, 2020.

“The People First Initiative is designed to help people take care of themselves and is a key part of our ongoing response to the coronavirus effort.” adds Reittig

Unemployemnt Benefits for Business Owners

As the greater impact of coronavirus COVID-19 continues to worsen, it is important to stay up-to-date with the potential repercussions as a business owner. This year’s tax filing deadlines have been extended to July 15th which will offer some relief to business owners keeping cash in the business. If your business has been forced to close its doors due to the coronavirus outbreak you may have options. John Milikowsky, founding partner of Milikowsky Tax Law reviews the options Business Owners and 1099 contractors have to file for Unemployment Insurance.

As the owner of a C-Corp or S-Corp that employees W-2 workers in the United States, you have the option to file for unemployment if you have closed your business and are no longer receiving any form of compensation. There are possibly similar options if you work as an independent contractor and have lost your sole source of income, as well.

If you have concerns or questions about filing for unemployment as a business owner or independent contractor, please contact the team at Milikowsky Tax Law today.

IRS Delays Tax Payments

This article was edited on 3/18 to reflect the update from IRS that businesses now have an extension not only pay but also to file taxes.

IRS Extends deadline to PAY AND FILE taxes to July 15 for most individuals and businesses.

The Trump administration has announced that most individuals and businesses can delay paying [and filing] taxes until July 15, 2020 due to the coronavirus.   Details are still emerging, but the hope is that this will keep upwards of $300b in the economy during the global economic slowdown.

Tax Payers do not need to file by April 15th

Businesses suffering from the global economic slowdown now have 90 days longer to pay AND FILE taxes.  This may allow loans from the SBA to come through increasing cash flow and allowing businesses hardest hit to afford those tax payments.

Taxpayers still have the option to request the six-month extension. IRS’s website  is being constantly updated during these challenging times, check with them for updates.

Who can delay payment?

Individuals who owe IRS less than $1 million and corporations who owe up to $10 million are eligible to delay payment. As this news is evolving questions around trusts and other more complex situations will need to be clarified. 

What are the penalties?

Because of the extraordinary circumstances of coronavirus, there will be no interest or penalty payments.

Will refunds still be sent?

As of March 18th, 2020, IRS is processing taxes as usual, issuing refunds, sending tax bills and auditing businesses with red flags on tehir returns.  Continue to file as usual with the same level of care and attention to detail.

CA State Taxes are delayed to June 15:

Many states have not moved their payment deadlines however, the state of California has moved their filing and payment deadline to June 15th. .

The situation is ever-evolving.  Check back often for updates.