Tax Relief Blog

TAX AUDIT - DO IT SMOOTH

It is not uncommon for the IRS to conduct a tax audit on a company any uncalled day. The very news that the IRS would be paying a visit can cause undue, unnecessary stress for any individual/ organization. While a tax audit is just routine procedure conducted by the IRS, it has however gained a notorious reputation of being an extremely nerve wracking process for the taxpayer. To make the tax audit process an easy journey, the IRS is and has always made best of its attempt.

IRS Audit Overview

Pre-audit Analysis

An in-depth pre-audit analysis is essential to conducting a quality examination. IRS Examiners, Revenue Agents, should prepare a comparative analysis of the taxpayer's returns for multiple years to assist in the identification of:

• large, unusual and questionable items,
• missing schedules, statements and/or elections
• inconsistencies between different years, and
• audit potential.

A successful IRS taxpayer audit depends upon what is done before the interview. The IRS examiner should obtain as much information about the taxpayer, be organized, and prepare an interview outline that is tailored to the taxpayer under examination. As preliminary information is gathered, it should be carefully reviewed and documented for the IRS tax audit.

First and foremost, you must respond to any IRS Notice.

If you receive a letter or notice from the IRS, it will explain the reason for the correspondence and provide specific instructions. Many of these letters and notices can be dealt with simply, without having to call or visit an IRS office.

The notice you receive covers a very specific issue about your account or tax return. Generally, the IRS will send a notice if it believes you owe additional tax, are due a larger refund, if there is a question about your tax return or a need for additional information.

Do you owe back Taxes? Did you receive an audit letter from the IRS?

First, do not to panic. The IRS uses various letters to communicate with taxpayers about IRS back taxes and IRS tax audits. As with most IRS communications, there are strict deadlines associated with these letters that you have to meet. You should seriously review the items that are being challenged and prepare your factual response in a clear way to the IRS. As taxpayer, you can represent yourself, or hire a professional tax representative as a power of attorney to resolve your tax matters. Selecting a tax return for audit does not always suggest that the taxpayer has either made an error or been dishonest. In fact, some audits result in a refund to the taxpayer or acceptance of the return without change.

We represent clients before the IRS to resolve their tax controversies. The tax law is complicated and a professional will be better able to guide you through the audit experience, or to effectively resolve your back tax matter.

Call our reliable tax helpline at 1-877-78-TAXES [1-877-788-2937].

Tax relief services offered such as: wage garnishment release, offer in compromise, negotiated installment agreements, IRS audit representations, 941 payroll tax help, tax resolution service

Employment and Payroll Tax Audit & Examination:
The IRS announced its plan to audit the first 6,000 employment tax audits and small business will be their audit target. The IRS will start examining 2,000 companies every year over the next 3 years.

The IRS will utilize its audit findings to target a select group of businesses and aggressively audit their payroll tax and refine estimates to close the tax gap. IRS audit agents are specially trained to audit employment and payroll tax for the audited businesses.

Colleges and Universities Tax Audits:
The IRS will audit 400 Colleges and Universities this year. The IRS is looking for unrelated business income to focus its examination at. The IRS suspects that many universities aren't paying taxes on income from unrelated activities to their tax-exempt status, for example: stadium advertising, gym memberships, and executive pay.

Contractors with unpaid back taxes:
The IRS is cracking down hard on contractors with unpaid back taxes. The current Obama administration is developing new regulations to prevent federal contractors from receiving any government contracts as long as they owe back tax debt. In 2008, procedures were in place to prevent any contractor from bidding on government contacts if they owed $3,000 or more in tax liens and or tax judgments to the IRS.

The Revenue Service is also eyeing projects that use rehabilitation credit. IRS Agents have spotted developers claiming the 20% income tax credit on the cost of renovating certified historic buildings before they have the necessary documentation from the National Park Service to certify that the subject project is in fact historic in nature. The IRS will crack down on developers who are performing Historic structure renovations.

Employers with unpaid FICA on tips:
The IRS is sending out bills to employers such as restaurants and hotels to collect on unpaid FICA on unreported tips using data they collected from form 4137 which employees use to report tip income that they didn't disclose to their employers. The IRS is sending letters to these employers instructing them to include their calculated amount on their next scheduled payroll deposit. Employers who comply will avoid any penalties and interest on the back taxes. The IRS is also revising the 4137 form to include the employer's EIN number.

Mike Habib EA actively represents taxpayers in audits and examination before all administrative levels of the IRS. Don't compromise on your representation, contact us today.

Get your free audit consultation by calling 1-877-788-2937.

What are your chances for being audited? IRS's 2008 data book provides some clues IR 2009-22

Mike Habib, EA Tax Relief & Tax Problem Resolution

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2008 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits), and what categories of returns IRS is focusing its resources on, as well as data on other enforcement activities, such as collections.

What are the chances of being examined? A total of 1,391,581 individual income tax returns were audited during FY 2008 (Oct. 1, 2007 through Sept. 30, 2008) out of a total of 137.8 million individual returns that were filed in the previous year. This works out to 1.0% of all individual returns filed (about the same as the audit rate for the preceding year).

Of the total number of returns audited, 503,755 (36.2%) were selected on the basis of an earned income tax credit (EITC) claim (down slightly from the 36.5% rate for FY 2007).

Only 22.3% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.7%) were correspondence audits. These percentages are about the same as they were in FY 2007.

About 1.36 million individual returns were farm returns that showed gross receipts from farming (Schedule F). Of this group, only 7,542 (0.5%) were audited in 2008.

The no-change rate (returns accepted as filed after examination) was 11% for individual returns examined by revenue agents, tax compliance officers, or tax examiners, and 15% for correspondence exams.

Here's a roundup of selected audit rates from IRS' latest databook. Following are the audit rates for individual nonbusiness returns that didn't claim the earned income tax credit:

• For "selected nonbusiness returns" (includes returns without a Schedule C (nonfarm sole proprietorship), Schedule E (supplemental income and loss), Schedule F (profit or loss from farming), or Form 2106 (employee business expenses), 0.4% (same as for FY 2007).
• For returns with Schedule E or Form 2106 (excludes returns with a Schedule C, nonfarm sole proprietorship, or Schedule F, profit or loss from farming), 1.3% (up from 1.2% for FY 2007).
• For nonfarm business returns by size of total gross receipts: under $25,000, 1.2% (down from 1.3% for FY 2007); $25,000 under $100,000, 1.9% (down from 2% for FY 2007); $100,000 under $200,000, 3.8% (down from 6.2% for FY 2007); and $200,000 or more, 0.6% (down from 1.9% for FY 2007).

The audit rates for entities were as follows:

• Fiduciary (estate and trust income tax returns), 0.1% (the same as for FY 2007);
• Corporations with less than $10 million of assets, 1.0% (up from 0.9% for FY 2007);
• Corporations with $10 million or more of assets, 15.3% (down from 16.8% for FY 2007);
• S corporations, 0.4% (down from 0.5% for FY 2007);
• Partnerships, 0.4% (same as FY 2007);
• Estate tax returns, 8.1% (up from 7.7% for FY 2007); and
• Gift tax returns, 0.4% (down from 0.6% for FY 2007).

On the corporation side, there were a total of 783,864 civil penalty assessments (up from 762,718 for FY 2007), 82.6% for either failure to pay or underpayment of estimated tax.

Offers in compromise. In FY 2008, 44,000 offers in compromise were received by IRS, and 11,000 (25%) were accepted. Over recent years, these numbers have been dropping; in 2007 for example, 46,000 offers in compromise were received by IRS, and 12,000 (26%) were accepted.

Criminal cases. IRS initiated 3,749 criminal investigations in FY 2008. There were 2,785 referrals for prosecution and 2,144 convictions. Of those sentenced, 80.9% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2007, IRS initiated 4,211 criminal investigations, there were 2,837 referrals for prosecution, and of those sentenced, 81.2% were incarcerated.

Information returns. IRS received a total of 1.883 billion information returns in FY 2008, including Forms 1098 (mortgage interest, student loan interest, and tuition), 1099 (interest, dividends, etc.), 5498 (individual retirement arrangement and medical savings account), W-2 (wages), W-2 (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 2.8% were submitted on paper.

Get tax relief and resolve your tax matters by contacting the tax firm of Mike Habib, EA at 1-877-78-TAXES or online at myirstaxrelief.com

Keywords: IRS tax problem, IRS tax audit, offer in compromise, surviving an audit, IRS tax help, IRS tax relief, IRS tax examination

TIGTA assesses how well IRS Examination function scrutinizes all open tax periods during audits [Audit Report No. 2009-30-034]:

IRS Examination function employees do not always appropriately inspect and examine prior and/or subsequent year tax returns when warranted, the Treasury Inspector General for Tax Administration (TIGTA) said in a new audit.

Auditors reviewed 68 statistical sample cases and found that 13 (or 21%) of the cases warranted scrutiny of additional returns but none were selected for examination. In 26 (or 38%) of the 68 cases, "there was no evidence that examiners inspected either the prior or subsequent year return to identify similar issues to the years under examination or if large, unusual, or questionable items existed that would warrant examination," the audit said. Factors that might be considered include the comparative size of an expense, if the nature of the item is significant, the beneficial effect of the manner in which an item is reported, and missing items on the return.

"When examiners do not make the proper decision to select returns for examination, taxpayers are not provided equitable treatment, and the examination is not as effective for improving taxpayer compliance on future tax returns," TIGTA said.

The audit also found that Compliance function tax examiners are currently unable to assess subsequent year tax returns and select them for audit. As a result, IRS "could be missing an opportunity to conduct examinations more efficiently and consistently from year to year," TIGTA said. This assessment was based on a review of 68 additional cases which revealed that in 31 (or 46%) of those cases the same issues adjusted on the tax year return under examination were present on the subsequent year return.

The audit is available at http://treas.gov/tigta/auditreports/2009reports/200930034fr.pdf.

For IRS tax audit and tax examination expert help, contact Mike Habib, EA at 1-877-78-TAXES or online at www.myirstaxrelief.com

IRS OKs use of one property to engineer a reverse and forward like-kind swap Chief Counsel Advice 200836024

In Chief Counsel Advice (CCA), IRS has given its blessing to the use of one property to engineer both a completed reverse like kind exchange and an attempted forward like kind exchange. The forward exchange was necessary because the value of the relinquished property far exceeded the value of the replacement property that the taxpayer received. Because the forward exchange couldn't be completed within the statutory time limits, however, the taxpayer wound up paying tax on the net cash it received.

Observation: The new CCA is noteworthy because it shows how far the like-kind exchange rules can be stretched, with IRS's approval, to accommodate complex conditions.

Background. In general, no gain or loss is recognized on the exchange of property held for productive use in a trade or business or for investment if the property is exchanged solely for property of a like kind which is held either for productive use in a trade or business or for investment. (Code Sec. 1031) Like-kind treatment is barred if the property to be received is not identified (e.g., by being specified in the contract) on or before 45 days after the transfer, or isn't received within 180 days after the transfer or by the due date (with extensions) of the return for the year of transfer if earlier. (Code Sec. 1031(a)(3))

Qualified intermediaries (QIs) may be used to structure like-kind exchanges using qualified exchange accommodation arrangements (QEAAs). (Reg. § 1.1031(k)-1(g)(4)) Under established rulings policy, IRS will treat an exchange accommodation titleholder () as the beneficial owner of property for federal income tax purposes if the property is held in a qualified exchange accommodation arrangement (QEAA).

A like-kind exchange can be set up in "forward" or "reverse" mode:

• In a "forward" (or regular) deferred like-kind exchange using a QI, the taxpayer transfers the relinquished property to the QI, who will sell the property to a buyer. The QI then takes the proceeds of the sale of the relinquished property, buys the replacement property, and transfers the replacement property to the taxpayer.
• In a "reverse" deferred like-kind exchange, the replacement property is acquired first by the QI (typically using money borrowed from the taxpayer). The taxpayer then identifies relinquished property and transfers it to the QI, who sells it to an outside buyer. Finally, the QI transfers the replacement property to the taxpayer.

Rev Proc 2000-37, 2002-2 CB 308, tailors the 45-day and 180-day statutory periods to the specific situation of QEAAs holding title to property involved in a multiparty exchange.

Facts. A taxpayer we'll call Hotels, Inc., wanted to acquire a building in Phoenix, Arizona. However, instead of buying it, Hotels wanted to engineer the acquisition as an exchange for one of the buildings it owned elsewhere. To that end, Hotels entered into a QEAA with EAT, an affiliate of QI. The deal called for EAT to facilitate a parking arrangement and acquire the Phoenix property in a like-kind exchange. EAT agreed to take title to the Phoenix property through a wholly-owned single member limited liability company called RPLLC. Hotels loaned RPLLC funds to buy the Phoenix property, for which RPLLC gave Hotels a promissory note obligating EAT to repay the loan to Hotels if the latter subsequently acquired the Phoenix property from EAT.

The following transactions took place:

• On Date 1, RPLLC acquired the Phoenix property from Seller, financing the $21 million purchase price by assuming an existing $12 million mortgage on the property and borrowing the $9 million balance from Hotels.
• On Date 2, thirty-three days after the acquisition of the Phoenix property by EAT through RPLLC, Hotels identified in writing to EAT three like-kind properties it owned to potentially serve as relinquished property for the Phoenix property. One of these properties was a building in Houston.
• On Date 3, Hotels entered into a written exchange agreement with QI to facilitate the exchange of the Houston building. Hotels assigned to QI the right to receive the net sales proceeds for the Houston building from the company interested in buying it (Buyer).
• On Date 4, QI, acting on behalf of Hotels, transferred the Houston building to Buyer for a total purchase price of $50 million. The net sales proceeds of $41 million (i.e., $50 million less a $9 million mortgage) were deposited with QI. Also on Date 4, which was 180 days from the acquisition of the Phoenix building by EAT, QI directed EAT to transfer the Phoenix building to Hotels as replacement property for the Houston building for a total of $9 million from the sale of the Houston building and an assumption of a mortgage of $12 million. EAT transferred its 100% membership interest in RPLLC to Hotels, thereby transferring the Houston property to Hotels. In addition, Hotels received $9 million in repayment of EAT's obligation under the note.
• On Date 5, which was 42 days after the sale of the Houston property, Hotels identified in writing to QI three additional properties, which were intended by Hotels to be additional replacement properties for the exchange of the Houston property. However, although Hotels had a bona fide intent to enter into a deferred exchange on Date 4, it failed to acquire any other replacement property in the 180-day period subsequent to Date 4.

Hotels later received the remaining proceeds from the sale of the Houston building from QI. Since the attempted deferred exchange transaction spanned two separate tax years, Taxpayer reported the remaining $32 million gain from the sale of the Houston building in the tax year that included the date it received the remaining proceeds in accordance with the installment sale rules of Code Sec. 453 and Reg. § 1.1031(k)-1(j)(2).

Observation: Although the CCA doesn't explain the derivation of the "remaining $32 million gain," it's apparently the $41 million cash from the sale of the Houston building net of the $9 million cash used to buy the Phoenix building.

Observation: Under Code Sec. 453(a) and Code Sec. 453(b)(1), the installment sale rules must (unless the taxpayer elects out) be used to report gain on the disposition of nondealer property where at least one payment is to be received after the close of the tax year in which the disposition occurs. The installment method may be elected even though no payments are received in the year of sale. Here, although Hotels wound up paying tax on the "cash boot" it received because the forward exchange failed, it nonetheless wound up deferring that tax to a year following the year in which the Houston building was disposed of.

Potential problem. The examiner looking at Hotels' transactions thought that they violated Congressional intent because (1) there could be up to 360 days between the day on which replacement property is parked with an exchange titleholder at the inception of the reverse exchange and the day the deferred exchange is completed, and (2) Hotels is entitled to two separate 45 day identification periods for the forward and reverse exchanges. The argument, in essence, was that the transactions were contrary to the identification and replacement provisions in Code Sec. 1031(a)(3).

Transactions pass muster. The CCA pointed out that Hotels planned on making two exchanges, not one. A taxpayer has 45 days to identify replacement property in a deferred exchange and 45 days to identify relinquished property once replacement property is parked. Hotels satisfied the identification requirement in both instances. Moreover, a taxpayer may park property with an EAT for 180 days or less. Also, in a deferred exchange, a taxpayer must close its exchange by acquiring replacement property within the exchange period, which is the earlier of 180 days after the date on which the taxpayer transfers the property relinquished in the exchange, or the due date (determined with regard to extension) for the taxpayer's return for the tax year in which the transfer of the relinquished property occurs. The CCA said Hotels stayed within all of these guidelines.

The CCA conceded that neither Code Sec. 1031 and its regs, nor Rev Proc 2002-37 expressly allow the same relinquished property to be used in both a reverse exchange and a forward deferred exchange. However, it concluded that nothing in these authorities prohibits this coupling in the use of the same relinquished property. Also, taxpayers using the revenue procedure are not constrained to exclusively acquire as replacement property only the property parked with the EAT. It also pointed to a long history of the courts giving significant latitude in structuring like-kind exchanges under Code Sec. 1031.

As a result, the CCA concluded that if the statutory and regulatory guidelines were followed (i.e., time limitations, the avoidance of constructive receipt, etc.) and if Hotels stayed within IRS's administrative guidelines, the gain it realized on the reverse exchange is deferred under Code Sec. 1031 and the gain on the intended deferred exchange is to be recognized in the tax year that includes the date that Hotels received the remaining proceeds from the sale of the Houston property, in accordance with Reg. § 1.1031(k)-1(j)(2)(ii).

For 1031 tax deferred exchange audit, or 1031 tax deferred IRS problem CLICK HERE.

IRS Tax Help

by Mike Habib, EA

UNFILED BACK TAX RETURNS

IRS Tax Audit Help

If you are being audited, we can represent you before IRS and advocate your position to explain and push for every valid deduction possible under audit. If you have received an audit notice, please call us as soon as possible so that we can begin working on your case while it is in the early stage of the audit.

Offer in Compromise - OIC Tax Help

Installment Agreement - IA Tax Help

Currently Non Collectible - CNC Tax Help

Wage Levy / Wage Garnishment / Wage Attachment Tax Help

Bank Levy Release Tax Help

Payroll Tax Problem Representation Tax Help

Taxpayer Account Review Tax Help

Penalty Abatement Tax Help

Innocent Spouse Relief Tax Help

Federal Tax Lien Help

I focus my tax practice on "Tax Relief Help", as an IRS licensed Enrolled Agent (EA) specializing in solving Tax Problems, I can represent individuals and businesses in all of the following states, counties, and metro cities, Alabama Alaska Arizona Arkansas California Colorado Connecticut Delaware Florida Georgia Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington D.C.. West Virginia Wisconsin Wyoming. AL AK AZ AR CA CO CT DE DC FL GA HI ID IL IN IA KS KY LA ME MD MA MI MN MS MO MT NE NV NH NJ NM NY NC ND OH OK OR PA RI SC SD TN TX UT VT VA WA WV WI WY New York, Los Angeles, Orange County, Riverside, San Bernardino, San Francisco, Ventura, Lancaster, Palmdale, Santa Barbara, Chicago, Washington D. C., Silicon Valley, Philadelphia, Boston, Detroit, Dallas, Houston, Atlanta, Miami, Seattle, Phoenix, Minneapolis, Cleveland, San Diego, St Louis, Denver, San Juan, Tampa, Pittsburgh, Portland, Cincinnati, Sacramento, Kansas City, Milwaukee, Orlando, Indianapolis, San Antonio, Norfolk & VB, Las Vegas, Columbus, Charlotte, New Orleans, Salt Lake City, Greensboro, Austin, Nashville, Providence, Raleigh, Hartford, Buffalo, Memphis, West Palm Beach, Jacksonville, Rochester, Grand Rapids, Reno, Oklahoma City, Louisville, Richmond, Greenville, Dayton, Fresno, Birmingham, Honolulu, Albany, Tucson, Tulsa, Tempe, Syracuse, Omaha, Albuquerque, Knoxville, El Paso, Bakersfield, Allentown, Harrisburg, Scranton, Toledo, Baton Rouge, Youngstown, Springfield, Sarasota, Little Rock, Orlando, McAllen, Stockton, Charleston, Wichita, Mobile, Columbia, Colorado Springs, Fort Wayne, Daytona Beach, Lakeland, Johnson City, Lexington, Augusta, Melbourne, Lancaster, Chattanooga, Des Moines, Kalamazoo, Lansing, Modesto, Fort Myers, Jackson, Boise, Billings, Madison, Spokane, Montgomery, and Pensacola

To disclose or not to disclose, that is the question.

Hiding Income Offshore is not the way to go.

Mike Habib, EA

For years, offshore accounts have been a hot topic in popular culture and for the IRS; most recently Liechtenstein has been mentioned, however the IRS is interested in accounts anywhere in the world that generate income for US taxpayers. The IRS is particularly interested in locating those people trying to hide income in offshore accounts as well as the promoters of off-shore tax avoidance schemes.

Individuals continue to try to avoid paying US taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore debit cards, credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance plans.

US taxpayers are required to report all foreign financial accounts if their total value exceeds $10,000 at any point during a given year. Failure to report the accounts can result in a penalty of up to 50 percent of the amount in the accounts. Yikes!

Hiding or not reporting income from foreign sources may be a crime. And the IRS, along with its international partners is pursuing those who hide income or assets offshore to evade taxes. There are specially trained IRS examiners whose focus is to examine aggressive international tax planning, including the use of entities and structures established in foreign jurisdictions. The goal is simply to ensure that U.S. citizens and residents are accurately reporting their income and paying the correct tax.

In addition to reporting your worldwide income, you must also report whether you have any foreign bank or investment accounts. The Bank Secrecy Act requires that you file a Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR), if:

· You have financial interest in, signature authority, or other authority over one or more accounts in a foreign country, and

· The aggregate value of all foreign financial accounts exceeds $10,000 at any time during the calendar year.

Just in the past month a federal judge agreed to allow the IRS to serve legal papers on Swiss banking giant UBS AG in an expanding investigation of U.S. taxpayers who may have used overseas accounts to hide assets and avoid taxes. The summons is one that allows the IRS to investigate a full range of people as it is not limited to one particular individual. The investigation was started after a former UBS private banker pleaded guilty to defrauding the IRS, and claims that UBS has about $20 billion in assets in undeclared accounts for U.S. taxpayers.

UBS is cooperating with Swiss and U.S. investigations and will disclose records involving U.S. clients who might have broken tax laws.

The Treasury Department and the Internal Revenue Service recently announced their initiative to encourage the voluntary disclosure of unreported income hidden by taxpayers in offshore accounts. Under this new plan, eligible taxpayers have to pay back taxes, interest and accuracy and delinquency penalties, but will not face fraud and information return penalties. To obtain the benefits of the initiative, taxpayers will be required to disclose information about who promoted or solicited their participation in the offshore financial arrangement.

Do you have an offshore tax problem? Did you receive an opportunity letter? Contact us today to represent you before the IRS.

If It Seems Too Good to Be True, It Probably Is

Tax Return Preparer Fraud

Mike Habib, EA

Dishonest tax return preparers can cause many problems for taxpayers who fall victim to their schemes. These scam artists make their money in a number of ways including skimming a portion of their clients' refunds, charging a percentage of the return and charging inflated fees for return preparation services.

Return preparer fraud generally means the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may manipulate income figures to fraudulently obtain tax credits.

Sometimes, the client, or the taxpayer may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on his or her tax return. When the IRS detects the false return, the taxpayer - not the return preparer - must pay the additional taxes and interest and may be subject to penalties.

When choosing a tax preparer, you should be as careful as you are when choosing a doctor or lawyer. Failure to do so could end up costing you a lot of money.

Here are some things to consider when hiring someone to prepare your tax return:

• Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.
• Avoid preparers who base their fee on a percentage of the amount of the refund.
• Use a reputable tax professional who signs your tax return and provides you with a copy for your records.
• Find out the person's credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents (EAs) can represent taxpayers before the IRS in all matters including audits, collection and appeals. Other return preparers may, on a limited basis, only represent taxpayers for audits of returns they actually prepared.
• Consider whether the individual or firm will be around to answer questions about the preparation of your tax return months, or even years, after the return has been filed.
• Review your return before you sign it and ask questions on entries you don't understand.
• No matter who prepares your tax return, you, the taxpayer, are ultimately responsible for all of the information on your tax return. Therefore, never sign a blank tax form.
• Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.
• Ask questions. Do you know anyone who has used the tax professional? Were they satisfied with the service they received?

Remember that no matter who prepares your tax return, you, the taxpayer, are ultimately responsible for all of the information on your tax return.

If you suspect tax fraud, or are aware of a return preparer who is filing false returns, you can report this activity to the IRS, through Form 3949-A, Information Referral, by downloading it at www.IRS.gov, or by calling 1-800-829-3676 to order it by mail. You are not required to identify yourself, if you do - your identity will be kept confidential and you may even be entitled to a reward.

Are you a victim of tax preparer fraud? We have represented taxpayers who were victims of tax preparer fraud, and could represent you too. Call us today.

TIGTA study finds modest audit rate increase for C corps but marked increase for passthroughs ( S Corps)

Trends in Compliance Activities Through Fiscal Year 2007, TIGTA Reference Number 2008095

A recently released TIGTA (Treasury Inspector General for Tax Administration) report reveals that despite a slight uptick in FY 2007, IRS audits of corporations have declined dramatically over the last ten years. However, audits of S corporation and partnership returns increased substantially over the same period.

TIGTA's findings for business entities. The new TIGTA report examined IRS statistical data and found the following audit trends for business:

• The number of corporate income tax returns examined (excluding returns for foreign corporations and S corporations) increased by just over 4% in FY 2007, after dropping by 1% in FY 2006. However, the number of examinations dropped by almost 45% since FY 1998, from 53,648 (1 of every 48 returns filed) to 29,664 (1 of every 75 returns filed). TIGTA notes that the 13% drop in the number of corporate income tax returns filed during the same 10-year period may have impacted the exam coverage rate. For FY 2007, the number of corporate tax returns examined with assets of less than $10 million grew by slightly over 12%, the number of corporate tax returns examined with assets of $10 million and greater decreased by almost 9%, and exams of those with assets of $250 million and greater decreased by almost 20%. Overall, however, the exam rate is much higher for large corporations than for those with assets of less than $10 million.
• The number of S corporation exams declined by 75% from FYs 1998 to 2004, but increased by almost 176% from FYs 2004 to 2007; the increase in FY 2007 alone was slightly over 26%. Since FY 2004, however, the number of S corporation returns filed has increased by 16%. TIGTA notes that the increase in exam coverage can be partly attributed to an IRS research project studying the compliance of S corporations.
• The number of partnership returns examined increased by 25% in FY 2007 and has increased by almost 141% since the 10-year low experienced in FY 2001. The number of returns filed increased by about 42% between FYs 2001 and 2007. About 1 of every 408 returns filed was examined in FY 2001. This increased to 1 of every 241 for FY 2008.

Enhanced tax breaks make it an especially good time to buy business autos

Mike Habib, EA
myIRSTaxRelief.com Thanks to economic woes in general and financial trouble for auto manufacturers in particular, it's a good time to shop for a new vehicle, if you can afford to do so. Thanks to bonus first year depreciation deductions under the Economic Stimulus Act of 2008, it's an even better time to buy if the vehicle is going to be used for business. This Practice Alert takes a close look at the enhanced first year write-offs that are available to new business autos, light trucks or vans that are placed in service this year.

Bonus depreciation basics. In general, for property placed in service after Dec. 31, 2007, in tax years ending after that date, taxpayers get an additional depreciation deduction in the placed-in-service year equal to 50% of the adjusted basis of "qualified property." (Code Sec. 168(k)(1)) This is property that meets all of these conditions:

• It is property falling within one of four statutory categories, the most important of which is property to which MACRS applies with a recovery period of 20 years or less. (Code Sec. 168(k)(2)(A))
• The original use of the property commences with the taxpayer after Dec. 31, 2007. Original use is the first use to which the property is put, whether or not that use corresponds to the taxpayer's use of the property. (Code Sec. 168(k)(2)(A))
• The property is acquired by the taxpayer (a) after Dec. 31, 2007, and before Jan. 1, 2009, but only if no binding written contract for the acquisition is in effect before Jan. 1, 2008, or (b) pursuant to a binding written contract which was entered into after Dec. 31, 2007, and before Jan. 1, 2009. (Code Sec. 168(k)(2)(A)(iii))
• The property is placed in service after Dec. 31, 2007, and before Jan. 1, 2009 (the placed-in-service date is extended for one year for certain property with a recovery period of ten years or longer and certain transportation property). (Code Sec. 168(k)(2)(B), Code Sec. 168(k)(2)(C))

If all of the Code Sec. 168(k) requirements are met, bonus first-year depreciation automatically applies to qualified property, unless the taxpayer "elects out" under Code Sec. 168(k)(2)(C)(iii).

Under pre-Stimulus Act regs that taxpayers may rely on pending further guidance, the bonus depreciation allowance is found by multiplying the qualifying property's unadjusted depreciable basis by 50%. (Reg. § 1.168(k)-1(d)(1)(A)) The unadjusted depreciable basis is basis for gain or loss purposes, before depreciation, amortization, or depletion, less a number of adjustments, including a reduction in basis for personal use (i.e., use other than for trade or business or investment purposes), and a reduction for any portion of the property expensed under Code Sec. 179. (Reg. § 1.168(k)-1(a)(2)(iii))

To calculate regular depreciation allowances for qualifying property, the taxpayer first subtracts the bonus first year depreciation amount from the unadjusted depreciable basis of the asset. (Code Sec. 168(k)(1)(B), Reg. § 1.168(k)-1(d)(2))

Depreciating luxury autos. Purchased autos and other vehicles used in a trade or business normally are depreciated over five years using 200% declining balance depreciation, with a built-in switch to straight line. (Code Sec. 168(b)(1); Code Sec. 168(e)(3)(B)) Because the depreciation rules generally treat property as placed in service in the midpoint of the placed-in-service year (Code Sec. 168(d)(1)), yielding only half of the otherwise allowable depreciation for the placed-in-service year, the actual depreciation period is six years. The regular depreciation percentages (if the half-year convention applies) are:

• 20% for the first year;
• 32% for the second;
• 19.2% for the third year;
• 11.52% for each of the fourth and fifth years; and
• 5.76% for the sixth year.

However, the deduction normally obtained by applying the above depreciation rules (and the Code Sec. 179 expensing rules) to autos, light trucks and vans, is limited by the so-called "luxury auto dollar caps" of Code Sec. 280F. Thus, the maximum annual depreciation/expensing deduction for a business auto is the lesser of the otherwise allowable depreciation/expensing allowance or the applicable luxury-auto dollar cap.

For vehicles acquired and placed in service in 2008 that are not eligible for bonus depreciation (e.g., they are bought used, or the taxpayer elects out of bonus depreciation for five-year property), the dollar caps for: (1) autos (not trucks or vans) are $2,960 for the placed in service year, $4,800 for the second tax year, $2,850 for the third tax year; and $1,775 for each succeeding year; and (2) for light trucks or vans (passenger autos built on a truck chassis, including minivans and sport-utility vehicles (SUVs) built on a truck chassis) are: $3,160 for the placed in service year, $5,100 for the second tax year, $3,050 for the third tax year; and $1,875 for each succeeding year.

Boosted write-off for business autos, and light trucks or vans. Under the Stimulus Act, for vehicles that otherwise are qualified property under Code Sec. 168(k) (assuming the taxpayer doesn't elect out of bonus depreciation for 5-year property), the regular first-year luxury auto caps are boosted by $8,000 to $10,960 for autos, and to $11,160 for light trucks or vans.

Calculating first-year depreciation deduction. Where expensing isn't claimed, the first-year dollar-cap for a new passenger auto, truck or van that is qualified property under Code Sec. 168(k) and is acquired and placed in service in 2008, is determined as follows:

(1) Multiply the vehicle's depreciable basis by its business/investment use in the placed-in-service year.
(2) Multiply Line (1) result by 50%.
(3) Subtract Line (2) from Line (1).
(4) Multiply Line (3) result by 20% (assuming the half-year convention applies).
(5) Add Line (4) result to Line (2) result.
(6) Multiply the appropriate first-year dollar cap ($10,960 for autos, $11,160 for light trucks or vans) by the business/investment use percentage.

(7) The lesser of Line (5) or Line (6) is the total first-year depreciation allowance for the vehicle.
Illustration 1: On Jan. 10, 2008, a business bought and placed in service a new $35,000 auto and uses it 100% for business. It does not expense any part of the auto's cost, and the half-year depreciation convention applies. The 2008 depreciation deduction for the auto is computed as follows:

(1) $35,000 × 100% business use = $35,000.
(2) $35,000 × .50 = $17,500 bonus depreciation.
(3) $35,000 − $17,500 = $17,500 remaining basis.
(4) $17,500 × .20 first year depreciation allowance = $3,500.
(5) $17,500 + $3,500 = $21,000.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $21,000 or $10,960 = $10,960 regular first year depreciation.

Caution: The combined special depreciation allowance and regular first-year depreciation deduction for lower-priced vehicles may be less than the maximum first-year depreciation allowance.

Illustration 2: The facts are the same as in the first illustration, except that the new auto costs $18,000. The 2008 depreciation deduction for the auto is computed as follows:

(1) $18,000 × 100% business use = $18,000.
(2) $18,000 × .50 = $9,000 bonus depreciation.
(3) $18,000 − $9,000 = $9,000 remaining basis.
(4) $9,000 × .20 first-year depreciation allowance = $1,800.
(5) $9,000 + $1,800 = $10,800.
(6) $10,960 × 1.0 = $10,960.
(7) Lesser of $10,800 or $10,960 = $10,800 regular first year depreciation.

Hidden danger for company owned vehicles. A vehicle is qualified property eligible for bonus first year depreciation only if it is used more than 50% in a qualified business use. (Reg. § 1.168(k)-1(b)(2)(ii)(A)(2)) In general, this isn't a problem for company owned autos so long as employee personal use is properly treated as compensation income under the fringe benefit rules. In this case, personal use is treated as qualified business use. ( Reg. § 1.280F-6(d)(2) ; Instructions for Form 4562 (2007), p. 9) However, a vehicle bought new in 2008 and provided to a 5% company owner (or a related person) will not be eligible for bonus first year depreciation unless it is actually used more than 50% for business driving. (Code Sec. 280F(d)(6)(C)) Thus, companies tempted by the prospect of larger first year writeoffs to buy new vehicles this year for their 5% owners should do so only if their business mileage on the car will exceed 50% of total mileage. Keep in mind, too, that depreciation recapture applies if qualified business use in the placed in service year exceeds 50% of total use but declines below that level in subsequent years. The 50% bonus first-year depreciation allowance for a passenger auto that qualifies under Code Sec. 168(k) is taken into account in computing recaptured depreciation. (Code Sec. 168(k)(2)(F)(ii))

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IRS Regs clarify Code Sec. 501(c)(3) exempt status and impact of excise taxes

Mike Habib, EA

MyIRSTaxRelief.com

T.D. 9390, 03/27/2008; Reg. § 1.503(c)(3)-1, Reg. § 53.4958-2

IRS has issued final regs clarifying the substantive requirements for tax exemption under Code Sec. 501(c)(3) and the relationship between those requirements and the imposition of Code Sec. 4958 excise taxes. The final regs adopt proposed regs issued in 2005 with some modifications.

Background. To qualify for tax exemption under Code Sec. 501(c)(3), an organization must be organized and operated exclusively for religious, charitable, scientific, or educational purposes. In addition, no part of its net earnings may inure to the benefit of any private shareholder or individual, no substantial part of its activities may include attempts to influence legislation, and the organization may not intervene in political campaigns. Under preexisting regs, an organization isn't exempt under Code Sec. 501(c)(3), if it is organized or operated for the benefit of private interests such as designated individuals, its creator or his family, the organization's shareholders, or persons controlled, directly or indirectly, by such interests. (Reg. § 1.501(c)(3)-1(d)(1)(ii))

Code Sec. 4958 imposes excise taxes on transactions that provide excess economic benefits to disqualified persons with respect to public charities and social welfare organizations described in Code Sec. 501(c)(3) and Code Sec. 501(c)(4) (certain social welfare organizations), which are collectively referred to by Code Sec. 4958(e) as "applicable tax-exempt organizations."

Final regs. Adopting the proposed regs, the final regs add several examples to illustrate the requirement that an organization serve a public rather than a private interest. They show that prohibited private benefits may involve non-economic benefits as well as economic benefits. In addition, they indicate that a prohibited private benefit may arise regardless of whether payments made to private interests are reasonable or excessive. (Reg. § 1.501(c)(3)-1(d)(1)(iii))

The proposed regs provided guidance on certain factors that IRS will consider in determining whether an applicable tax-exempt organization described in Code Sec. 501(c)(3) that engages in one or more excess benefit transactions continues to qualify for exemption. Two comments voiced the need to clarify the terms "significant" and "de minimis" as used in the proposed regs. One comment suggested adding examples combining potential de minimis values with other abating or negative factors and/or examples containing values that are not de minimis. The final regs contain a new example that illustrates the application of the revocation factors to an excess benefit transaction that is neither significant in comparison to the size and scope of the organization's exempt activities nor de minimis. (Reg. § 1.501(c)(3)-1(f)(2)(iv), Example 6)

One comment requested clarification of the term "repeated" as used in Example 3 of Prop Reg § 1.501(c)(3)-1(g). IRS says the term was used in that example to correspond to the third factor in the proposed regs, which looked to "whether the organization has been involved in repeated excess benefit transactions." In response to this comment, the third factor of the proposed regs has been revised to substitute the term "multiple" for the word "repeated." (Reg. § 1.501(c)(3)-1(f)(2)(ii)) The term "multiple" refers to both (1) repeated instances of the same (or substantially similar) excess benefit transaction, regardless of whether the transaction involves the same or different persons; and (2) the presence of more than one excess benefit transaction, regardless of whether the transactions are the same or substantially similar and regardless of whether they involve the same or different persons. (T.D. 9390, 03/27/2008)

The fourth factor under the proposed regs has been revised to make clear that implementation by an organization of safeguards that are reasonably calculated to prevent excess benefit transactions will be treated as a factor weighing in favor of continuing to recognize exemption regardless of whether such safeguards are implemented in direct response to the excess benefit transaction(s) at issue or as a general matter of corporate governance or fiscal management. (Reg. § 1.501(c)(3)-1(f)(2)(ii)) Thus, an organization may be treated as having implemented safeguards reasonably calculated to prevent excess benefit transactions even though the organization is contesting the existence of the excess benefit transaction(s) at issue. (T.D. 9390, 03/27/2008) An example is added to illustrate how implementation of safeguards, including preexisting safeguards, will be taken into account in determining whether to continue to recognize an organization's tax-exempt status. (Reg. § 1.501(c)(3)-1(f)(2)(iv), Example 6)

Observation: Thus, affected organizations should consider implementing such safeguards to help preserve exempt status should they engage in an excess benefit transaction.

Two comments suggested adding an example specifically addressing reasonable compensation. The new example added by these final regs does that. (Reg. § 1.501(c)(3)-1(f)(2)(iv), Example 6)

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What are the chances of being examined? A total of 1,384,563 individual income tax returns were audited during FY 2007 (Oct. 1, 2006 through Sept. 30, 2007) out of a total of 134.5 million individual returns that were filed in the previous year This works out to 1.0% of all individual returns filed (slightly higher than the 0.97% audit rate for the preceding year).

Of the total number of returns audited, 503,267 (36.5%) were selected on the basis of an earned income tax credit (EITC) claim (down slightly from the 40.3% rate for FY 2006).

Only 22.49% of the audits were conducted by revenue agents, tax compliance officers, and tax examiners; the bulk of the audits (about 77.5%) were correspondence audits. These percentages are about the same as they were in FY 2006.

About 1.5 million individual returns were farm returns that showed gross receipts from farming (Schedule F). Of this group, only 5,705 (0.4%) were audited in 2007.

The no-change rate (returns accepted as filed after examination) was 12% for returns examined by revenue agents, tax compliance officers, or tax examiners, and 16% for correspondence exams.

Here's a roundup of selected audit rates from IRS' latest databook. Because the audit categories aren't organized the same way for individuals as they were for FY 2006, comparisons to the rates for the previous fiscal year aren't possible.

Following are the audit rates for individual nonbusiness returns that didn't claim the earned income tax credit:

• For "selected nonbusiness returns" (includes returns without a Schedule C (nonfarm sole proprietorship), Schedule E (supplemental income and loss), Schedule F (profit or loss from farming), or Form 2106 (employee business expenses), 4%.
• For returns with Schedule E or Form 2106 (excludes returns with a Schedule C, nonfarm sole proprietorship, or Schedule F, profit or loss from farming), 1.2%.
• For nonfarm business returns by size of total gross receipts: under $25,000, 1.3%; $25,000 under $100,000, 2%; $100,000 under $200,000, 6.2%; and $200,000 or more, 1.9%.

For returns with total positive income (TPI) of at least $200,000 and under $1 million, the audit rate was 2% for nonbusiness returns and 2.9% for business returns. For returns with TPI of $1 million or more, the audit rate was 9.3%.

The audit rates for entities were as follows:

• Fiduciary (estate and trust income tax returns), 0.1% (the same as for FY 2006);
• Corporations with less than $10 million of assets, 0.9% (up from 0.8% for FY 2006);
• Corporations with $10 million or more of assets, 16.8% (down from 18.6% for FY 2006);
• S corporations, 0.5% (up from 0.38% for FY 2006);
• Partnerships, 0.4% (up from 0.36% for FY 2006);
• Estate tax returns, 7.7% (down from 9.66% for FY 2006); and
• Gift tax returns, 0.6% (down from 0.77% for FY 2006).

IRS activity on other fronts. Here's a roundup of over valuable information carried in the new IRS Data Book.

Penalties. In fiscal year 2007, IRS assessed 27.3 million civil penalties against individual taxpayers, up from 25.9 million civil penalties assessed in the previous year. Of the FY 2007 assessments, 15.17 million (55%) were for failure to pay, followed by 7.72 million (28.2%) for underpayment of estimated tax. There were 327,822 assessments (1.1%) for "accuracy penalties"assessments of penalties under Code Sec. 6662 for negligence, substantial understatement of income tax, substantial valuation misstatement, substantial overstatement of pension liabilities, and substantial estate or gift tax valuation understatement, and understatement of reportable transactions under Code Sec. 6662A .

On the corporation side, there were a total of 762,718 civil penalty assessments (up from 701,785 for FY 2006), 82.9% for either failure to pay or underpayment of estimated tax.

Offers in compromise. In FY 2007, 46,000 offers in compromise were received by IRS, and 12,000 (26%) were accepted. Over recent years, these numbers have been dropping; in 2006 for example, 59,000 offers in compromise were received by IRS, and 15,000 (25.4%) were accepted.

Criminal cases. IRS initiated 4,211 criminal investigations in FY 2007. There were 2,837 referrals for prosecution and 2,155 convictions. Of those sentenced, 98.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2006, IRS initiated 3,907 criminal investigations, there were 2,720 referrals for prosecution, and 81.7% were incarcerated.

Information returns. IRS received a total of 1.825 billion information returns in FY 2007, including Forms 1098 (mortgage interest, student loan interest, and tuition), 1099 (interest, dividends, etc.), 5498 (individual retirement arrangement and medical savings account), W-2 (wages), W-2 (gambling winnings), and Schedules K-1 (pass-through entities). Of the total, only 3.1% were submitted on paper.

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