Tag Archive for: Tax Returns

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

 

W-2

IRS has extended the deadline for personal tax filings from April 15 to July 15. It has also extended the deadline for contributing to your 2019 IRA. So, if you have not contributed, you still have time.

Trying to decide whether or not to contribute to your IRA?

Consider how much of an impact the economic shutdown has already had on your finances.

If you are among those who lost their primary source of income—whether from a job or a business—this may not be the time. Instead, it’s time to focus your energy and your resources on taking care of yourself and your family. You need to bridge the gap until you know how you’ll stabilize your income and start to rebuild.

But if you still have financial stability, from a job or a business, think about maintaining the momentum of regularly contributing to your IRA. It’s a pillar of a secure retirement.

Here are some other steps you can take to make the most of this deadline extension:

  1. If you’re getting a refund, go ahead and file.

Even with the extra time, taxpayers should still be collecting paperwork and preparing to file their returns. Those who are expecting a refund probably should file as soon as possible, as the IRS is still processing returns and issuing checks.

If you are expecting a refund, you’re likely to get it faster if you file your return electronically and opt for direct deposit.

  1. If you expect to owe taxes, don’t put it all off.

For taxpayers who expect to owe, the extra time allows for more time to collect the necessary funds. But try not to put off tax-related things altogether — the best way to pay taxes at any time is in small increments over several months. Talk to your accountant about the possibility of setting up a payment plan to help you budget.

  1. Check when your state return is due, too

Depending on where you live, you might still have to pay taxes owed to your state by April 15, or a different listed date. For example, California has pushed its deadline to July 15. The American Institute of Certified Public Accountants is keeping a list of the deadline changes by state.

  1. Be patient with your tax preparer.

Tax preparers are dealing with the similar stresses many Americans are facing in light of the pandemic. Many are working from home, and now they’re also figuring out how these last-minute changes affect their clients and the mechanics of tax filing.

“Just be cognizant of using secure methods of providing personal documents to your tax pros. Most should have secure methods of receiving documents,” says Matt Keefer, a certified public accountant and director of tax services at accounting firm Gorfine Schiller Gardyn in Owings Mills, Maryland.

For more information about the details of this tax deadline, visit our blog.

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.

handcuffs and mullet

IRS Criminal Investigations, How They Begin and Why

IRS Criminal investigations begin with a suspicion of fraud and violations of:

  • Internal Revenue Code
  • Bank Secrecy Act
  • Money laundering statutes

…Among others.

When IRS determines there is a case against a violator, they refer it to the Department of Justice.

Why IRS Special Agents target a business for investigation

  1. An IRS revenue agent, an auditor detects possible fraud.
  2. An IRS Revenue officer – a collections officer detects possible fraud.
  3. A member of the community reports possible fraud.
  4. Another agency, such as law enforcement or EDD or state tax board reports possible fraud.

What happens if an IRS Audit is begun?

  • The primary investigation starts  when the special agent’s front line supervisor looks at the initial findings and decides whether to continue the investigation.
  • Then a subject criminal investigation commences.
  • At this point, at least two Criminal Investigators at a management level have reviewed the ‘primary investigation’ material and determined there is sufficient evidence to initiate a subject criminal investigation*.

The Process of a Criminal Investigation

The special agent works closely with IRS Chief Counsel Criminal Tax Attorneys during the course of the criminal investigation.  AS in any criminal case the accused, or investigated, party has rights.  Among those rights are the right to counsel. IRS Special Investigators will gather information by any means necessary.

  • Interviews of third party witnesses
  • Surveillance
  • Search warrants
  • Subpoenaing bank records
  • Reviewing financial data.

A determination is made to go to trial or not

If the special agent determine that the evidence does not substantiate criminal activity, then the audit is discontinued.

If the special agent determines that the evidence does incriminate, then prosecution is recommended and a prosecution recommendation is sent to:

1.  The Department of Justice, Tax Division, (if it is a tax investigation) or
2.  The United States Attorney for all other investigations.

Prosecution by the Dept. of Justice

Once the case is turned over, the IRS special agent turns over all findings to the lawyers for the prosecution and is no longer involved in the case. The ultimate goal of an IRS Criminal Investigation prosecution recommendation is to obtain a conviction – either by a guilty verdict or plea. There are approximately 3,000 criminal prosecutions per year * as of 2017.

If IRS Criminal Investigators contact you, know your rights, contact a qualified Tax Attorney immediately and take the 5th amendment which is the right to remain silent.

*https://www.irs.gov/compliance/criminal-investigation/program-and-emphasis-areas-for-irs-criminal-investigation

Woman talking to a couple

Preparing and filing accurate business tax returns can be complicated. That’s why so many business owners rely on CPAs to help them navigate the complexities of the tax world. 

As a CPA, it is your responsibility to help your clients manage their tax compliance and achieve the best possible outcomes for their business’ health. That means not only finding as many deductions as possible, but also ensuring the accuracy of the document and minimizing a client’s risk of audit

If you’re just getting started as a CPA, you may still be honing your skills and enhancing your abilities to recognize red flags in an instant. With the support of a tax attorney, you can take your CPA services to the next level. 

Give Your Clients the Confidence They Need

Here at Milikowsky Tax Law, we’ve spent years working with hundreds of small business owners and partnering with their CPAs to ensure they’re prepared to handle taxes with confidence. Not only are we trained to spot the signs of an impending audit, but are also experienced in helping clients respond to IRS requests.

Over time, every dedicated CPA masters the art of tax return preparation. In the meantime, it pays to learn from those with experience and expertise in the field. Milikowsky Tax Law has perfected the process of analyzing and preparing tax returns to reduce the risk of audit for our clients. Our approach to managing tax matters helps to deliver incredible accuracy and peace of mind to hundreds of business leaders. 

In our new e-book, you can learn how to harness the same techniques to serve your own clients. As experts in the world of tax law and audit management, we’ve explored every facet of the California tax environment, making us the ideal partner for local CPAs

Learn how you can protect the rights and livelihood of your clients, keeping the threat of audit to an absolute minimum. 

The information contained on our website and in blogs is provided for information purposes only and does not constitute legal advice.

Resources:

https://www.caltaxadviser.com/blog/2019/04/the-tax-attorney-a-cpas-secret-weapon/

https://www.usatoday.com/story/money/taxes/2018/03/24/20-of-americans-are-making-this-tax-filing-mistake/33109881/ 

A woman signing a document

You Filed Your Taxes: Now What?

April 15th has passed and, hopefully, you’ve filed your 2018 taxes and can breathe a sigh of relief. Before you lock that filing cabinet, here are a few final steps to ensure your records are up to date.

1: Go old school. Print a copy of your completed tax return and file it somewhere safe. Next year, you’ll appreciate having it handy for reference when you need to know your Annual Gross Income (AGI). You’ll want to hang onto those returns for 3 years minimum… up to 7 if your business has claimed a loss or a bad debt.

2: Settle up or make a plan if you owe money. You can pay online eliminating the need to snail-mail a check to the US Dept. of Treasury (not IRS… just in case you forgot). If you owe a lot and can’t pay it all, don’t ignore the debt! Set-up a payment plan, request a delay in collection or apply for an Offer in Compromise.

3: Correct your mistakes. If you’re like many of us you know how easy it is to forget to mail that proxy form, get bread at the market, declare income from that side hustle… Now that you’ve filed your taxes, you may have a face-palm moment as you realize you’ve forgotten to declare some income, mis-categorized your business or forgot to claim a deduction.

Don’t panic.

Call your CPA and let them know you want to file an amended tax return. You have 3 years from the filing year to correct your mistakes, though you’ll want to take care of any omissions or errors as soon as you’re aware of them. If you e-filed your return, give it time to be processed and if you are due a refund wait to receive it before you submit your amended return.

Tax season is over, at least until June 15th when it’s time to file quarterly estimated business taxes. For now, enjoy the spring days and, if you see a CPA, buy them a beer, they deserve it!

Woman handing paperworks to a man

Everyone makes mistakes from time to time, but when it comes to your tax return, a single error could lead to countless problems with the IRS. While getting chosen for an audit doesn’t always mean that you’ll end up owing more taxes. However, it can result in changes that will affect how you report a transaction on future tax returns or possibly result in a criminal investigation.

Close to 1 million tax returns are audited every year in the United States. So, how do you reduce your chances of being picked?

Founder of Milikowsky Tax Law, John Milikowsky, will be speaking at the Tax Empowerment Seminar on February 8, 2019, to answer all of your questions about identifying and avoiding red flags on your tax return.

Protect Your Business from the Threat of an Audit

Tax audits aren’t just risky for the people who exaggerate their deductions or sweep certain income under the rug. The IRS primarily audits a tax return to ensure compliance with the tax laws and to uncover mistakes and inaccuracies on tax returns. The choice to audit your business often comes down to the number of red flags identified on your tax return.

This means that you’ll be under scrutiny for potential additional interests, civil penalties, civil fraud penalties, or possible criminal action. Civil penalties are assessed on the discrepancies in the amount of tax reported on your tax return that can lead to substantial additional costs, including as much as 40% of any underpayment in tax. Serious discrepancies that show a pattern of errors may give the government justification to pursue a criminal conviction for tax evasion or fraud.

Learn how to protect your business from these risks at this year’s Tax Empowerment Seminar, from the leader of one of the country’s most well-renowned audit management attorneys. John Milikowsky will talk you through the steps to help you identify potential errors on your tax return and minimize the risk of an IRS audit before you file your tax return with the IRS.

Learn How to Reduce Your Risk of Audit from an Experienced Tax Attorney

As the founder of Milikowsky Tax Law and a long-term business owner just like you, John Milikowsky knows how to protect companies from the potentially destructive results of an IRS audit. In fact, he was selected as one of the top 5 best tax lawyers in San Diego by the Union-Tribune Readers Poll in 2015. In 2009, John Milikowsky presented a proposal to Congressional committee staff members, IRS, and U.S. Treasury to assist taxpayers in reducing penalties when a tax return contained an inadvertent error.

He leads an experienced and impressive team of tax professionals to guide each client through the complexities of legal tax matters, one step at a time. With over a decade of experience in tax law and navigating audits, and many years of business experience, Mr. Milikowsky knows firsthand how to identify the most common red flags that can put your business at risk of being audited — and he can teach you how to look out for errors on your own tax return.

In this year’s Tax Empowerment Seminar, Milikowsky will be sharing his secrets, insights, and exceptional advice with you.

Details of the Event

On Friday, February 8, John Milikowsky will take the stage at the Corporate Alliance for an engaging 2-hour experience to teach you all about identifying potential problems on your tax return. Doors for the main event will open at 7:30 am so you can join your peers for breakfast. The official workshop and seminar will begin at 8 am.

In creating our proprietary audit metric technology, Mr. Milikowsky has learned a lot about analyzing the more delicate details of tax returns. With years of experience in handling hundreds of tax audits and representing many businesses who are audited by IRS and the various California tax agencies, Mr. Milikowsky will be on hand to talk with you about your concerns with tax issues.

Bring along your bank statements, profit and loss reports, tax returns (all for the same tax year), and use our innovative MTL ClearTax Transparency workbook to see the results for yourself. By the time you leave the seminar, you’ll have more knowledge about how to read a tax return and understand how the IRS audits a tax return.

Mr. Milikowsky will be inviting an IRS Criminal Special Agent to the stage to discuss the key 2019 objectives the IRS will be focusing on this year and the red flags that will be most important in 2019.

Join Us for the Ultimate Tax Preparation Event

Discover what it feels like to have an experienced tax attorney at your side, guiding you through the tax return process with accuracy and relentless dedication. You can even bring your CPA along and spend some time discussing your tax return.

Are you ready to take the best possible step for your tax return this year?

Sign up for the Empowerment event today, and we’ll see you there!