Tag Archive for: taxes

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Why IRS is Redirecting Their Focus Towards Cryptocurrency Tax Evasion

Why IRS is Redirecting Their Focus Towards Cryptocurrency Tax Evasion

In mid-May, the U.S Treasury Department announced that they would require any transfer of $10,000 or more to be reported to the Internal Revenue Service (IRS). This update comes in response to growing concerns with regard to cryptocurrency compliance. 

While many forms of crypto trading were designed to be hidden or virtually invisible, IRS is far from blind to these transactions. It is suspected that a significant amount of money is laundered through crypto transactions and tax evasion occurs through illegal crypto investing and trading. 

IRS’s initial response to the rise in the use of cryptocurrencies includes training and developing their internal investigative teams to utilize data analytics to trace, identify, and audit suspicious crypto transactions. 

This recent shift in focus towards cryptocurrency violations brings up questions of, “why now?” given that IRS has been defunded and has experienced years of employment shortages, and is currently in a stage of increased recruitment efforts.  Data analytics is hardly a new venture for IRS, it has long been a staple in tracing and audits.  While the blockchain is opaque and there will be elevated challenges around information-gathering, the use of data analytics is the IRS’ best path forward in combating crypto-fraud. 

IRS’s decision to increase its utilization of data analytics tactics comes as an approach to sift through billions of transactions with greater efficiency and ease than they have in the past. This is an ideal response given the previously mentioned employment shortages currently being experienced by IRS. 

Cryptocurrency Growth 

Cryptocurrency continues to grow at an exponential rate. IRS has experienced challenges in keeping up with how quickly the unique industry has grown and evolved over recent years. The implementation of data analytics is a step towards being able to keep up with digital currency, in a way that they have not been able to previously. 

As IRS adjusts to these new processes for tracing and auditing cryptocurrency exchanges, it is predicted that they will be able to increase their success in regulating and addressing the potential of tax evasion. 

Jeffrey Cooper, former executive director of international operations at IRS Criminal Investigation told Accounting Today that it’s a process of ‘follow the money.’ He explained that once money goes into the exchange, they’re able to trace it through data analytics. 

The American Family Plan, put in place by the Biden administration, also helps deal with potential tax compliance issues with cryptocurrency by implementing a new reporting threshold of $10,000. The new reporting requirements will ensure that whatever crypto traders are doing, there will be a clear trail of traceable data to accompany it. 

According to IRS estimates, in 2019 there was a discrepancy of over $600 billion between taxes owed and taxes collected by the agency. 

Changes in the process of implementation are likely to induce upset among crypto investors. That being said, politicians across the board have prioritized crypto regulation among concerns of market manipulation and uninformed retail investments.

For business owners who have thought that crypto is a way to avoid (or evade) tax liability, to move money undetected, or otherwise skirt regulations, the recent rise in interest by IRS and other government entities in regulating the industry should come as a warning.  There are two things that we all can’t avoid…. And one of them is taxes. 

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Biden Administration Revokes Employer Friendly Independent Contractor Test

Corporate Tax Changes Under Biden: What to Know

In early May of this year, the Biden Administration officially made the decision to revoke the previously adjusted Trump era ruling on independent contractor classification. 

 

Earlier this year, in January 2021, the Trump administration took advantage of the opportunity to implement final changes to the Department of Labor (DOL) before leaving office. The “final rule” that they implemented stood largely unchanged from the original ruling which established a tiered test to determine employee versus contractor status as part of the Fair Labor and Standards Act (FLSA). 

 

The updated proposal established a two-part analysis to determine whether a worker’s correct status is that of an independent contractor or employee. The “core factors” stated are as follows: 

 

  • The nature and degree of control over the work.
  • The worker’s opportunity for profit or loss based on initiative and/or investment.

 

In addition to the previously mentioned “core factors,” the DOL also listed three other factors to support the analysis. These factors are: 

 

  • The amount of skill required for the work.
  • The degree of permanence of the working relationship between the worker and the potential employer.
  • Whether the work is part of an integrated unit of production.

 

Latest Updates

 

Following the ending of Trump’s presidency, the DOL has announced that the ruling determined by the Trump administration was inconsistent with FLSA and was thought to have a negative impact on both workers and businesses. 

 

As such, the previously implemented “final rule” was rescinded under the current Biden Administration. 

 

Going forward, companies will be responsible for judging their workers based on the existing “economic reality” test until another proposal can be made by the Biden administration. 

 

It should be noted that throughout President Biden’s campaigns, he spoke of his intentions to promote a federal standard for independent contractor classification in alignment with the existing method utilized in California. 

 

This method includes the use of the multifactor “ABC” test. Under the ABC test a worker is classified as an employee unless they meet all three of the following criteria:

  • The person 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 person performs work that is outside the usual course of the hiring entity’s business.
  • The person is customarily engaged in an independently established trade, occupation, or business of the same nature as that involved in the work performed.

 

Until further decisions are made, this test will remain the federal determination with regard to independent contractor classification. 

 

For more information or guidance on the proper status of your business’s workers, call or contact our team of tax professionals at Milikosowsky Tax Law. 

 

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PPP Loan Applications are Closed as Fraudulent Cases Emerge

PPP Loan Applications are Closed as Fraudulent Cases Emerge

 

Over the past year businesses flocked to the Small Business Administration (SBA) to submit applications to receive their share of the federally allocated Paycheck Protection Program funding. 

 

PPP loans were distributed to businesses struck hard by the ongoing coronavirus pandemic. Their intended use was to help keep workers employed by providing funding to support their ongoing paychecks following mass layoffs at the forefront of the pandemic. 

 

Since their initial rollout, it has been discovered that many businesses wrongly claimed PPP loans, resulting in millions of dollars of fraudulent claims. 

 

As of May 31, SBA has since closed the application for PPP loans. Despite being renewed by the federal government numerous times in both 2020 and 2021, businesses are no longer able to submit new requests for funding. 

 

As of May 23, SBA had approved over 11.6 million loans, totaling approximately $796 billion.

 

Even since the program application portal has been shut down, SBA will take approximately one month to process all existing applications submitted prior to the closure. 

 

While the initial rollout of the PPP loan distribution process brought with it thousands of fraudulent claims, it’s now expected that the program overall served as a starting point for SBA to continue serving small businesses into the future. 

 

While the general PPP loan applications have been closed at this time, SBA has been granted an additional $100 million to fund a pilot program providing support to underserved small businesses. This comes after speculation that despite the hundreds of billions of dollars in loans distributed over the past year, some of the neediest businesses were not able to receive the support they desperately needed. 

 

Additionally, Congress has recently granted SBA the responsibility to take charge of new relief programs for businesses in the restaurant and live-events industries, two industries that are returning to their former glory. 

 

The discovery of such a large number of fraudulent PPP claims has left all recipients at risk of an audit. While all loans disbursed of $2 million or more are guaranteed to be audited by SBA, all recipients, regardless of loan size are at risk of a potential audit. 

 

While SBA is auditing a large number of loans that were dispersed as part of the Paycheck Protection Program, those that are found to have been spent as they were intended have the opportunity to be forgiven entirely. 

 

If your business received a PPP loan and is confident that you utilized your funding for its intended purposes, there may not be a significant reason to be concerned in the event of an audit. However, in the event that you are the subject of an SBA audit, it’s imperative that you maintain ample records and documentation of all expenditures related to your receipt of a PPP loan. 

 

Another aspect of SBA audits to be concerned about is SBA’s relationship with other government agencies including EDD and IRS. In the event that your business is audited as a recipient of a PPP loan, there is the potential that SBA may uncover information in their audit that may lead them to involve additional government agencies to conduct further audits of your business. 

 

EDD and IRS audits hold significantly more complex potential outcomes and should not be considered lightly. While your business may not have otherwise triggered an IRS or EDD audit, SBA has the simple ability to pinpoint businesses for them to investigate further. 

 

If your business is the subject of an SBA, EDD, or IRS audit, the best practice is to reach out to an experienced tax attorney immediately. Making the wrong choices in the event of an audit has the potential to further incriminate you without your intention of doing so. An experienced tax attorney such as those on our team at Milikowsky Tax Law can support you through the complicated process of an audit and do our best to support the best possible outcome for you and your business. 

 

To get started working with our team, call or contact us today. At Milikowsky Tax Law, we keep businesses in business.

 

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What to Know About Tax Evasion and Avoidance

What to Know About Tax Evasion and Avoidance

While nobody wants to be responsible for paying any more taxes than is absolutely necessary, it’s critical to remain aware of the fine line between getting creative with your tax responsibilities in a legal way, and taking it too far into tax evasion or avoidance. The latter should be avoided if you don’t want to land yourself as the subject of a government audit, or even in prison. 

 

In 2019, IRS declared a tax gap of $441 billion, representing the difference between the amount of taxes that should have been collected, and how much was collected.  

 

Despite this significant total of uncollected taxes, the same year, IRS audited only 0.4% of individual taxpayers in 2019, and only 6.2% of corporations. 

 

While there are certain behaviors and triggers that may result in IRS auditing your business, it is clear that they are incapable of fully keeping up with the full amount of audits needed to regulate all taxpayers. 

 

What is tax evasion?

 

Tax evasion is defined as “the use of illegal means to avoid paying taxes.” Some examples of actions that may be labeled as tax evasion include the following:

  • Purposely underpaying your taxes
  • Underreporting your annual income
  • Claiming false deductions
  • Hiding interest
  • Falsifying records

 

What’s the difference between tax evasion and tax avoidance?

 

While tax evasion is an illegal practice, tax avoidance is the act of legal strategic tax planning. While the actions listed above are unlawful and enlist deceitful and dishonest tactics to avoid paying the funds for which they were responsible, tax avoidance involves simply reworking their options to minimize the total amount that they are responsible for paying.  

 

Some examples may include the use of tax-advantaged savings accounts (such as those for retirement or educational purposes), contributing to charitable organizations, or avoiding realized capital gains. 

 

The point in which tax avoidance transitions to tax evasion is a gray area. Oftentimes the average taxpayer may not be equipped to determine at what point this line is crossed. As such, the best practice is to consult with a tax attorney or tax law professional to ensure that your actions do not lead to potential consequences including those mentioned below. 

 

Potentially penalties for tax evasion

 

Tax evasion is a criminal offense and has the potential to lead to jail time. 

 

The average jail time for tax evasion ranges between three to five years. It varies on a case-by-case basis, but jail time for tax evasion occurs more often than one would think. What other penalties exist for tax evasion?

 

According to Internal Revenue Code, “Any person who willfully attempts in any manner to evade or defeat any tax imposed by this title or the payment thereof shall, in addition to other penalties provided by law, be guilty of a felony and, upon conviction thereof, shall be fined not more than $100,000 ($500,000 in the case of a corporation), or imprisoned not more than 5 years, or both, together with the costs of prosecution.”

 

Needless to say, IRS takes tax evasion seriously. With a 90.4% conviction rate on criminal cases, going up against the IRS criminal investigations department is not to be taken lightly. 

 

You may be able to show that there was no intent to defraud the government if you are able to prove that there was a legitimate miscalculation of taxes. With proper guidance, it is possible to partake in tax resolution negotiations with IRS or state tax authorities. It is always advised that you receive counseling from an experienced tax attorney who can help in creating a defensive strategy to bolster your case. 

 

The attorneys at Milikowsky Tax Law have extensive experience in dealing with tax evasion charges. Contact us today with further questions or to discuss your case. 

 

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Corporate Tax Changes Under Biden: What to Know

Corporate Tax Changes Under Biden: What to Know

In March 2021, the current administration and congress were able to enact the American Rescue Plan, the plan provides cash payments to individuals and included tax law changes benefitting lower-income individuals and families. The American Rescue Plan tax changes are temporary (expiring at the end of 2021) remedies targeted at those affected by the economic downturn caused by COVID-19.

They include: 

  • A child tax credit of $3,600 per child under age 6 and $3,000 per child ages 6 through 17 is fully refundable and payable in advance. It will revert for 2022 to $2,000 per child under age 17 unless extended by legislation.
  • A child and dependent care tax credit maximum credit for one individual is $4,000 and $8,000 for two or more qualifying individuals and is refundable for some taxpayers.
  • EITC extended to workers under age 25; and for 2021, individuals as young as age 19 are eligible. 
  • Premium reductions for ACA coverage for two years.

On the docket for enactment are other tax implication-filled plans such as The American Jobs Plan aims to achieve the following:

  • Create new unionized jobs and train American workers for future jobs 
  • Invest in innovation by revitalizing American manufacturing 
  • Create caregiving jobs and raise wages of home caregivers
  • Modernize homes, commercial buildings, schools, and federal buildings
  • Upgrade highways and national infrastructure
  • Update drinking water infrastructure and develop a new electrical grid 

These intended projects are planned to be funded by the Made in America Tax Plan that the presidential administration has also proposed. Currently, this tax plan is projected to bring in a total of approximately $2 trillion to cover the costs of the projects mentioned above.

The intention of this proposed legislation is to ensure that large corporations and wealthy individuals will pay a higher rate to contribute to the national funding. As currently proposed, this plan will be funded over the coming 15 years, particularly concentrated over the next eight years. 

The details of this proposed plan will implement substantial changes for many corporations across America. Additional details of the Made in America Tax Plan are:

  • Increased Corporate Tax Rate

The Made in America Tax Plan proposed an increased corporate tax rate to 28%. These rates were previously cut down to 21% in 2017 as part of the Tax Cuts and Jobs Act enacted that year. Note that these proposed rates are still lower than the rates experienced prior to their lowering in 2017.

  • Minimum Book Tax 

President Biden’s proposed updates also include the implementation of a 15% minimum book tax on firms with $100 million or more in net income. Overall, this change is targeted at corporations that have significant annual income but pay little to no taxes. 

  • Clean Energy Incentives 

President Biden’s plan mentioned both tax and non-tax incentives with relation to clean energy. While the details surrounding this aspect of his plan are still not entirely clear, it was noted that existing subsidies would be eliminated and not be expected to cause significant impacts on the price or security of energy for Americans. 

It is also mentioned that Biden’s tax plan would advance existing clean energy production by extending existing production and investment tax credits for the next 10 years. 

  • Increased IRS Enforcement

Lastly, President Biden’s proposed plan calls for a significant strengthening of IRS enforcement. He aims to reach this goal by increasing funding to IRS to increase audits of international corporations that are not meeting their tax contributions. 

In more recent news, Biden has claimed he expects that increasing IRS enforcement will bring in an additional $700 billion over the next decade. This result is expected should the administration obtain the $80 million budget from Congress.

While the administration’s proposed plans are just that, proposed, it should be noted what intended actions might mean for businesses in the near future. The likelihood that these plans will see further edits and adjustments from Congress before being approved is high. 

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Operating a Law Office Under the Tax Cuts and Jobs Act of 2017

Operating a Law Office Under the Tax Cuts and Jobs Act of 2017

Originally published by GP Solo Magazine for the American Bar Association.

Written by Lauren Suarez and Allison D.H. Soares.

April 15 symbolizes a lot of things to various lawyers, depending on whether you are a solo practitioner, a midsize firm, a partner in a large, national firm, or merely an individual just coming out of law school trying to decide whether to incorporate and hang your own shingle. 

As we look back at the impact the previous presidential administration had on the profession of law as a whole, one of the most crucial pieces of legislation of the Trump presidency was the Tax Cuts and Jobs Act of 2017(TCJA). When the TCJA was passed, it was difficult to predict whether our businesses would suffer, stay stagnant, or prosper under the new legislation. Additionally, only a handful of the TCJA adjustments were created to be permanent past 2025. As a result, many of those adjustments are set to expire in 2025 and leave us wondering where our next tax adjustments will take us. 

The TCJA is complicated enough for those who have entered into the world of tax either through preparation or controversy. In an attempt to make this area a bit easier to digest, we have provided a brief summary of the individual and business highlights of the TCJA and a synopsis of how law firms have been impacted over the last three years.

TCJA BASICS

With the passing of the TCJA, one of the biggest and most con-fusing additions was the qualified business income (QBI) deduction and how it affects flow-through entities and their partners/shareholders. A majority of law firms are established as a flow-through entity, whether this is a limited liability partnership (LLP) or an S corporation, and the partners of the firms end up carrying the tax liability burden. 

The TCJA affected various other business aspects such as depreciation, the ability of an S corporation to convert to a C corporation, employer tax credits for paid family and medical leave, business interest expense, and limitations on losses. All of these have played out in different ways for firms and individuals over the last three years. To tackle all these adjustments would take more time than we have, but we will briefly touch on those that we feel are the most important for the law profession today.

FLOW-THROUGH LAW FIRMS 

A majority of law firms are set up as an LLP, in which the income is passed through to the individual partners of the firm. There is no tax paid at the partnership level. Each individual partner reports and pays income tax on their personal return. 

The QBI deduction was not created to act as a deduction to the gross income or a firm expense. It was created to reduce the taxable income by a maximum of 20 percent. There were limitations built into the QBI deduction based on the taxable income of the individual as well as the field in which the business is engaged. Law firms are not included in the definition of a “qualified business” and therefore do not qualify for the20 percent deduction. The practice of law falls into the category of “specified service business,” which includes professionals involved in the performance of services in the fields of health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services. However, a loophole was created that still allows firm partners to take advantage of the 20 percent QBI deduction if they have taxable income from other sources outside their practice. The QBIdeduction has a limitation based on taxable income and filing status that creates a sliding scale of$157,500 to $207,500 for single filers and $315,000 to $415,00for joint filers. The deduction is not available if the filer exceeds the maximum taxable income threshold. 

Additionally, guaranteed part-ner payments do not qualify for the deduction as an alternative to wages related to “specified service business.” Thus, the QBI deduction ultimately makes firms review how they categorize their partner payments for the year and still keep their allocated shares. 

Here are a few examples to explain this concept. A husband and wife file a joint tax return and earn $800,000. The wife, Wendy, has worked at a law firm for years and has finally become a partner. The husband, Henry, has $100,000 of taxable income. Wendy’s portion of her law firm income (which is considered qualified business income) is$700,000. Unfortunately, Wendy and Henry are not entitled to a20 percent deduction because, as mentioned above, the practice of law is a specified service business and they earned more than$415,000.

Now consider the same facts, but with Wendy’s income reduced to $260,000; her portion of the law firm profit income is $200,000 and her W-2 wages are $60,000. (W-2 wages are the total wages paid by the firm with respect to the employment of its employees during the calendar year.) Wendy and Henry may qualify to take a 20 percent deduction because Wendy’s taxable income is below $315,000.Wendy could take a 20 percent deduction of the $200,000 of her share of the law firm income, which would be $40,000.

Where this example gets complicated is when joint filers earn and have taxable income between$315,000 and $415,000. The deduction would then be limited to the lesser of 20 percent of business income or a “W-2 limitation” based on wages or wages. One of the biggest and most confusing additions in the TCJA is the qualified business income (QBI) deduction. plus a capital element. The W-2 limitation equals the greater of 50 percent of W-2 wages paid by the business, or 25 percent of wages paid by the business plus 2.5 percent of the unadjusted basis of“qualified property.”

At the end of the day, if you are an attorney with a flow-through entity and your pass-through income is below $315,000 for joint filers and $157,500 for other filers, you may be entitled to take the full 20 percent deduction on your personal Form 1040 tax return. If your taxable income is more than $415,000 for joint filers or $207,500 for single filers, you will not be entitled to a deduction. If your taxable income is between those two thresholds amounts from $315,000/$157,500and $415,000/$207,500, you may get a partial deduction that is phased out as you reach the maximum amount.

NON-FLOW-THROUGH INCORPORATIONS

Though a majority of law firms are incorporated as flow-through entities, there are a number of individuals who decided to incorporate as a C corporation. If the firm is incorporated as a C corporation, the QBI deduction does not allow you to take advantage of the 20 percent flow-through deduction to your taxable income. C corporations are double-taxation entities; thus, there is no flow-through because there is taxation at both the entity and individual levels. However, you will have noticed a significant tax reduction on the overall net income of the business. 

Prior to the TCJA, personal service corporations were taxed at a flat 35 percent. That figure was reduced to 21 percent with the TCJA. However, a C corporation will still be subject to double-taxation, which, depending on the individual’s tax bracket, could be good or bad. Interestingly enough, due to the inability of many partners to take advantage of the QBI deduction, either due to their choice of incorporation or has phased out of the income thresholds, a large number of firms either remained as C corporations or converted from a pass-through entity in order to take advantage of having dividends taxed at 23.8 percent at the individual partner level. Although the QBI deduction was one of the largest overall changes to affect the firms and partners, all firms and partners also saw changes to their ability to take unreimbursed business expenses, meals, and entertainment.

IMPACT ON ALL BUSINESSES AND TAXPAYERS

The meals and entertainment deduction was an unexpected change in the TCJA. Prior to the TCJA, when a business had a meal or entertainment expense, the business was allowed to take50 percent of the cost as a deduction on its tax return. However, the TCJA has now disallowed all entertainment expenses and has restricted the types of meals that a business is allowed to deduct. For example, a business is no longer allowed a 100 percent deduction for meals provided on the business premises. 

The TCJA also limited the commuting and parking expenses that employers would incur on behalf of their employees. In larger cities, this is a benefit that had been offered to many employees and can be extremely expensive. However, over the years, many employers have taken this expense and moved it to an amount tied to their lease and taken it as a rental expense.

CHANGES THAT IMPACTED ALL INDIVIDUAL TAXPAYERS

There are many good changes that came from the TCJA, including lower tax brackets. For example, the tax bracket for individuals was reduced from 39.6 to37 percent. Attorneys, whether they are single, married, or head of household, can have an impact on the potential 10 percent to 12 percent reduction toward their overall tax liability because their income will be taxed at a lower rate on their individual returns. Those lower tax brackets, however, impacted other areas that traditionally lowered one’s tax liability. For example, charitable contributions were impacted because taxpayers had less of a need for itemized deductions. Taxpayers may also want to consider accelerating any potential medical procedures because the total threshold will increase to the meals and entertainment deduction was an unexpected change in the 10 percent this year. 

However, there are many items that put many taxpayers at a disadvantage. The state and local tax (SALT) deduction is one of those areas. The SALT deduction has been quite lucrative for many taxpayers throughout the years, particularly for those who live in high-tax states such as New York, New Jersey, and California. This deduction includes state and local property taxes paid, as well as either state and local income taxes or sales taxes. It also became one of the most contentious parts of the tax reform process. Many Republicans wanted to do away with the deduction entirely. But after some compromise, the SALT deduction survived. The TCJA created a $10,000 annual cap on the SALT deduction. This was a big disappointment to taxpayers in high-tax areas. For example, the average SALT deduction taken in New York was more than $21,000 in a recent tax year. Therefore, the average New York taxpayer, who historically claimed the SALT deduction, would see their deductible amount cut by more than half. The $10,000 cap is not in effect for Schedule E or C properties. Now, taxpayers need to plan at the beginning of the year for itemized deductions, considering the cap on SALT, mortgage interest, medical expenses, and charitable contributions. 

Additionally, between December 31, 2017, and January 1, 2026, business losses are also limited for non-corporate taxpayers. Taxpayers are limited to a business loss equal to the business gains plus $250,000 if single and plus $500,000 if filing jointly. If a taxpayer has losses that exceed those limitations, they will be carried forward to a subsequent tax year for use. 

Now that we are three years into the TCJA, attorneys are starting to see the results of this legislation on their personal and business taxes, and many are already aware of how their business and personal finances have been affected by the TCJA. As tax controversy attorneys, we are starting to see these issues come up during tax audits. So far, the most prominent issue that has been audited is the QBI deduction for individuals and businesses. Auditors want to confirm wages paid, the number of employees, and that the assets used to calculate the unadjusted basis of the business are all related to the necessary business operations. Some QBI deductions can be significant depending on the size of the business, and the Internal Revenue Service (IRS) is definitely going to look closer at something new and unknown. 

Deductions such as SALT, meals and entertainment, unreimbursed employee expenses, charitable contributions, and employee transportation are appearing differently in IRS audits. These transactions are typically caught by accident as an auditor reviews other income and expense items on the personal or business audit side. As the returns filed during the TCJA time period begin to come up within the audit win-dow, always keep your records on hand and have a clear delineation between business and personal income and expenses. 

As a final thought, we now have a Democratic presidential administration and a Democratic majority in Congress (at least for two years). They will likely reexamine and make substantial changes to the TCJA. The Biden administration has already made some predeterminations as to how they intend to dismantle the TCJA. Whether that comes to fruition or not remains to be seen. 

PUBLISHED IN GPSOLO, VOLUME 38, NUMBER 3, MAY/JUNE 2021 ©2021 BY THE AMERICAN BAR ASSOCIATION. REPRODUCED WITH PERMISSION. ALL RIGHTS RESERVED. THIS INFORMATION OR ANY PORTION THEREOF MAY NOT BE COPIED OR DISSEMINATED IN ANY FORM OR BY ANY MEANS OR STORED IN AN ELECTRONIC DATABASE OR RETRIEVAL SYSTEM WITHOUT THE EXPRESS WRITTEN CONSENT OF THE AMERICAN BAR ASSOCIATION

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PPP Fraud: IRS Vows to Crackdown

ppp fraud

2020 was a challenging year for many business owners. The ongoing global pandemic not only brought on a health crisis, but an economic crisis to match. While many companies were able to stay open because they were deemed to be essential workers, many others struggled to maintain their day-to-day operating costs on their own and turned to the government’s SBA PPP and EIDL programs for support. 

 

SBA informed lenders Tuesday, May 4th that the PPP general fund was out of money. The remaining funds ($8 billion) are set aside for community financial institutions (CFIs).  CFIs work with businesses in underserved communities. An additional $6 billion is being held in reserve for PPP applications that are still under review.

 

Between stimulus checks, PPP loans, and EIDL funds, the government was able to help many businesses and individuals hold on through these challenging times. 

 

While government support was critical to many businesses, it has recently come to light that not all recipients of the distributed PPP loans were eligible to receive such financial support. The Small Business Administration (SBA) announced that they would begin auditing loan recipients following the revelation that many recipients of PPP funds applied under false pretenses.  

 

It was initially declared that any business that received a loan of $2 million or more would be audited by SBA to confirm the correct receipt and usage of their loan. Now as we surpass a full year since the initial release of PPP funds, IRS Criminal Investigation Division says they have reviewed more than “350 cases and $440 million in tax and money laundering cases have been investigated in the last year.” As a result, they intend to continue similar audits going forward based on their findings thus far. 

 

Some instances included people attempting to take advantage of the benefits set forth by the Coronavirus Aid, Relief, and Economic Security (CARES) Act include establishing fake businesses to claim eligibility or even claiming loans for businesses that were closed years prior. 

 

For those businesses that received PPP funds but did not keep close track of the funds, those who commingled funds with operating funds and did not adequately document the ways n which those funds were used, the specter of audit may loom large.  Loans under $150K have largely been written off as forgiven.  Applicants who ask for forgiveness must keep records of the expenses paid with the PPP funds for 3 years (we suggest 5).  

 

In the event of an SBA audit, there is a very limited window in which the audited party can respond, provide paperwork and verify the correct usage of PPP funds. If you are audited by SBA, call the law offices of John Milikowsky immediately.  We have resolved over 300 cases of IRS, EDD, and other government audits and we can guide you through the rocky waters of your audit.

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EDD Audits: A Cautionary Tale 

EDD Audits: A Cautionary Tale

No one wants to find themselves under audit. Whether from IRS, EDD CFTB, or other government agencies, audits are stressful and time-consuming. When it comes to facing an audit, how you react at the start of the audit can make all the difference.  Some business owners feel that it is an overreaction to call a lawyer, or, that that is somehow an admission of guilt. In cases of government audits, it is wise to bring in qualified counsel at the start of the audit to prevent the audit from expanding to other areas beyond the initial scope. The importance cannot be underestimated, don’t wait until your situation has gotten out of control to bring in a qualified tax attorney. 

Allow us to present two scenarios culled from multiple cases we have encountered in the case of EDD and other government audits. In our first example, the client came to us for support immediately upon receiving notice of their audit. The second example reflects a client who first brought on a criminal defense attorney without a specialty in tax audits. 

Case Study 1 (the safe route)

Our first client case study features “Ryan,” a business owner in the construction field whose company has grown quickly over a short period of time. His business was the subject of a construction site sweep resulting in an audit by the Employment Development Department (EDD).  EDD auditors arrived at Ryan’s home, called his business associates, and sent aggressive letters to his business and residence alarming him, his business partners, and his family.  Ryan researched EDD audits and saw that the vast majority of EDD audits result in fines of over $200K, a business-breaking amount for the small business he owned and operated. Ryan immediately reached out to the team at Milikowsky Tax Law through a google search for EDD audit representation. 

Our first step was to take a deep dive into the areas of the business that were being audited. As is often the case with the construction industry, employing 1099 contractors was at the root of the audit. Employee misclassification is routinely the cause of an EDD audit, whether from an EDD site sweep or a contractor whose services are no longer required filing for unemployment. In the latter case, that filing immediately triggers a contractor classification audit, even if the filer did so in error, unwitting of the consequences to the business. In other cases, competitors will file complaints against a business to tie them up in red tape and audit troubles (though those cases are thankfully rare). Whatever the trigger, once an audit has begun there are strict rules around when documentation must be provided. Failure to adhere to these deadlines results in forfeiture of your case and often in high monetary penalties and required business restructuring. 

Because we are highly experienced in EDD audits, the team at Milikowsky Tax Law was able to reframe Ryan’s situation to EDD. As in many cases, assumptions are made about business structures that are at times, not correct. Among other details, verification, and understanding of the unique situation of this case, we were able to correctly classify the few workers who were incorrectly classified and help Ryan stay in business.*

The second client case study we are sharing took a different route than the case mentioned above. While Ryan immediately took action to contact our team of EDD, IRS, and government audit experts, this second story client did not do the same. 

Let’s call this client, “Joe.” Joe also owns a construction company and received a letter, call and visit his workplace letting him know he was being audited not only for worker misclassification but also licensing problems.  Joe’s first response was to ask his brother-in-law what to do.  The advice he got was to contact a criminal defense attorney. While a criminal defense attorney may be a helpful resource in the event of a criminal investigation, in this case, the attorney had no experience with EDD audits. 

When this client began working with their criminal defense attorney, they were advised to reach out and speak to EDD themselves. Choosing to take this action ultimately incriminated  Joe further. Speaking with EDD as a layperson, inexperienced in the intricacies of EDD’s audit processes and procedures leaves the door open for missteps and in this case, further incrimination. 

In their direct conversations with EDD, Joe willingly provided additional documentation to EDD that opened up investigations into other areas of his business financial dealing, other groups of employees/ 1099 contractors and worsened his audit dramatically. The criminal attorney did little research into the business structure, did not interact with EDD or IRS, and, as the deadline for high fees and criminal charges approached, Joe reached out to us.  

With weeks left in the allocated time period, we did hours of research into Joe’s business setup, his contractors, the services he provides, and how his workers are classified, not only as individuals but as groups by their functions.  We build a case for some reclassification and some dismissal and spend hours of time on the phone with EDD and IRS negotiating the settlement.  With only 3 days until Joe’s high fines and possible jail time were to be inflicted, both government agencies settled.  Joe is still in business, though the fees he had to pay were higher because of the additional audits on top of the initial inquiry.   

If you have received notice of an upcoming audit of your business, contact our team of experts at Milikowsky Tax Law immediately. Working with an experienced professional that is familiar with the details of IRS, EDD, and SBA audits may ultimately be the difference between losing your business or staying in business. Call or contact us today to discuss your case and get started. At Milikowsky Tax Law, we keep businesses in business. 

*This and all case studies on the website are not promises of results.  Cases vary widely and individual situations must be looked at with the full context in order to determine the correct path forward.  Not a guarantee of results. 

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Form 5472 Foreign Owned Company Filings

Form 5472

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

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

Who must file Form 5472? 

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

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

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

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

Form 5472 Foreign Owned Company Filings

What do I need to report on Form 5472? 

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

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

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

How do I file Form 5472? 

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

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

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

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Why IRS is Planning to Audit More Small Businesses This Year

Insights for CPAs to Minimize Audit Risk for Their Clients

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

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

Maintain Good Records 

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

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

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

Make sure you’re claiming proper deductions 

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

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

Make timely payments 

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

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

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

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

Why IRS is Planning to Audit More Small Businesses This Year

Make sure to correctly classify any independent contractors

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

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

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

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

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

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

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