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.

Amongst several factors that strike fear deep in the hearts of grown American men and women is receiving the IRS audit summons. Even if you have submitted your returns honestly and accurately, it is possible that your accounts may be subjected to an IRS audit. Though you are entitled to know why you are being audited, once you have received the audit communications from the IRS, they just can't be wished away. You just have to buck up and handle the IRS audit to the satisfaction of the IRS and get yourself off the hook.

What is an IRS Tax Audit and Examination?

An IRS tax audit and examination isn't fun because they will be evaluating all aspects of what you have reported on your tax returns. They have the right to do this for individuals as well as for businesses. Sometimes, there is something on a given tax return that causes them to see red flags. Others are selected at random to be inspected from top to bottom.

It can be very unnerving for an IRS tax audit and examination to occur. They will go through your personal or business tax information. They will do it with a fine toothed comb too, searching for information to verify that the tax information reported is accurate. If everything is accurate they will finish up and be on their way.

Some people get lucky and discover they are entitled to some money from the IRS. However, that isn't always the way it works. There are more people that find they now owe the IRS more money than they thought.

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.

Did you receive an IRS tax audit for your vineyard?

Code Sec. 179 expensing has become a potent tax saver, thanks to current law's $500,000 deduction ceiling. So it should come as no surprise that taxpayers and their advisers are on the lookout for assets that potentially qualify as Code Sec. 179 property eligible for expensing. One such class of property is vineyards and orchards. IRS has published an Audit Techniques Guide (ATG) turning a thumbs down on expensing for such property, but its conclusion appears to be based on prior law. A more recent ATG leaves the door open to a better result. This Practice Alert presents the case for treating vineyards and orchards as Code Sec. 179 property and covers IRS's current "conflicted" guidance as well.

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

Tax relief experts have a job pretty similar in nature to specialists of any other field. For example, if you are traveling on the road and suddenly your car breaks down due to a mechanical fault, you cannot fix it without the service of an expert mechanic, unless you possess such proficiencies. Likewise, when your IRS taxes get out of control due to financial problems, carelessness or any other reason, you need the help of a tax relief expert to carry on with your smoother journey of life. But there are many so-called experts you need to beware of, who are there only to take your money. Let us try to expose these scammers!

The American economic system relies heavily on the taxation system and this is why the IRS handles the individuals vehemently who try to evade taxes. However, in current cloudy financial circumstances paying taxes is not an easy job. If you have become a tax defaulter, need not worry because there are several legal ways out.

If you try to solve your IRS tax problems without the technical know-how expertise, it is just like trying to fix your broken car without the help of a mechanic and you will end up nowhere. If you do not want to waste your time and money, contact a reliable tax relief expert, as soon as you realize the tax problem. Procrastination will result in nothing but penalties and higher interest and you will be paying much more than the actual back taxes owed.

Is there a worse scenario than being haunted by the hostile IRS officers and you do not have enough money to pay back the taxes? Yes, if you fall a victim to fake tax relief experts. These scammers have interest in your money not in solving your problems. At the end of the day you will pay their huge fee, the whole tax amount plus penalties and interest.

The trustworthy tax relief experts usually offer free consultation before they take up your case. In this session you should ask them as many questions as you can, to assess their capabilities. If they are paying more attention to your money rather than your tax problem, go somewhere else to seek help.

On the other hand, there are honest and helpful experts who try to be as fair as possible as they know their client is in financial problems. These experts bear all the burden of representing you before the IRS, formulating the best solution for you and in the end, get you favorable results for a reasonable fee.

IRS Tax Audits and Examination

The US Internal Revenue Service organizes audits and examinations on tax returns to ensure tax compliance by both individuals and businesses. But because it's virtually impossible to actually audit and examine every ITR for discrepancies, the audits are mostly randomized so your chances of getting picked for a particular year is just as high as getting overlooked. Many taxpayers manage to survive every tax season without undergoing an IRS tax audit but there are those that are not as lucky.

The audit selection process

What are the odds that you will get picked anyway? The IRS selects participants for audits through a number of methods. For instance, an IRS examination may be conducted on returns that are linked to individuals and corporations that have already been reported for tax avoidance transactions. Large corporations, on the other hand, typically undergo audits for their Form 1120 every year. There are also those that come up as a result of information matching in relation to payer reports or those that have been involved with transactions with other individual taxpayers or business partners that have also been picked out for the audit.

Individual audits

To ensure that you survive the IRS tax audit practically unchanged, you want to make sure that your Form 1040 is always accurate. The IRS offers a number of opportunities for tax breaks but you are responsible for keeping your records updated in case the IRS requests for proof of your deductions. It would be easier to prepare your return for potential audits if you keep your records properly organized throughout the year. This will help you establish a proper defense in case the IRS actually challenges this year's return.

Here are some tips on how you can survive the IRS' tax exam and keep yourself out of trouble during the audit in case you do get picked.

• Keep at least three years' worth of your tax returns and related records
• Don't throw your checkbook stubs
• Categorize your receipts from your purchases made the whole year
• Track the costs and the basis for expenses incurred when you make taxable investments or for various investments
• Keep your deductible items in a journal and make sure to record them as they occur
• Save your bills and proof of payments accordingly

For corporations

As earlier mentioned, many large and multinational conglomerates undergo IRS examination every year so keeping their affairs in order is practically like second nature. But for smaller companies, there's always the chance that you will get overlooked. But before you get too complacent, you want to take note of certain elements in your Form 1120 that could actually attract the attention of the IRS and merit an audit.

• Large deductions for charity
• Too many business expenses incurred and reported
• Excessive deductions that were itemized
• Prior tax issues
• Complex transactions for investments during the year
• Tax shelter losses

If you suddenly find yourself chosen for a tax audit, it pays to be prepared for it. What you need to do is you need to go over the details of your return and make sure that you understand it so you can effectively answer the questions that IRS may throw at you. It would also help to seek the help of a licensed tax professional. Mike Habib, for instance, can help you go through tax audits so you don't have to deal with the IRS on your own.

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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

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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

Seventh Circuit classifies computer programmer as an independent contractor

Suskovich v. Anthem Health Plans of Virginia, Inc., (CA 7 1/22/2009) 103 AFTR 2d ¶2009-385

The Court of Appeals for the Seventh Circuit, affirming a district court, has concluded that a computer programmer was an independent contractor and not an employee.

Facts. Anthony Suskovich worked for WellPoint/Anthem (WellPoint) at various times over several years, beginning in '96. While no record exists of any contractual agreement between Suskovich and WellPoint, Suskovich stated on a form he used to access WellPoint's computer system that he was a "contractor." Suskovich billed WellPoint for his time on an invoice form that he had created, stating that he was a "salesperson" who sold "computer consulting" to WellPoint. He was paid at an hourly rate of $60, resulting in an annualized salary of about $200,000, and received no benefits. For tax purposes, his salary was reported on Form 1099 rather than Form W-2. He had a similar relationship with Trasys, Inc., beginning in 2000.

Prior to his death in January of 2006, Suskovich was under investigation by IRS for failure to file tax returns. At the time of his death, he owed $100,000 to IRS and $33,000 to the state of Indiana. His wife requested "innocent spouse" relief, but was denied. The estate then filed a lawsuit, arguing that Suskovich should have been classified as an employee, rather than as an independent contractor, and that the money owed to IRS and the state of Indiana should have been withheld by WellPoint and Trasys. On the other hand, WellPoint and Trasys contended that Suskovich was an independent contractor and that he owed back taxes because of his own failure to file proper tax returns or pay his withholding taxes. A federal district court had granted summary judgment to WellPoint and Trasys. Suskovich's estate appealed the decision.

Appellate court's ruling. The Seventh Circuit upheld the district court's decision based on an analysis of the following factors:

• Degree of control. The Court pointed out that neither WellPoint nor Trasys had control over the details of Suskovich's work. Suskovich was accountable to Trasys and WellPoint only for his final performance on projects. This factor supported a finding that Suskovich was an independent contractor.
• Length of employment. The Court noted that although Suskovich worked for WellPoint and Trasys over an extended period of time, he only worked on short projects, usually lasting six to twelve months. The record demonstrated that he never enjoyed any guarantees that his work would extend beyond this limited duration, and, accordingly, this factor favored independent contractor status.
• Method of payment. The Court had ruled previously that the use of Form 1099 was appropriate for a finding that a worker was an independent contractor. The Court also pointed out that Suskovich was never added to WellPoint's or Trasys' payroll. Instead, he had to invoice his hours in order to be paid. In addition, Suskovich listed his income on his own tax returns as income from a sole proprietorship, and he claimed business deductions related to that proprietorship.
• Belief of the parties. The Court said that the tax returns, resumes, tax forms, and contractual agreements with the defendants overwhelmingly favored the conclusion that Suskovich considered himself to be an independent contractor.
• Other factors. Three other factors, the "distinct occupation or business" factor, the "kind of occupation" factor, and the "skill required" factor, all supported a finding of independent contractor status, as Suskovich had the sort of advanced programming skills that allowed him to contract his work out to a number of companies.

Contact Mike Habib, EA at 1-877-78-TAXES for any payroll tax problem or CLICK HERE.

No More Tax Problems in 2009

Mike Habib, EA

Here is a New Year resolution you can't afford to ignore... No more tax problems!! Yes, you can get rid of your tax problems in 2009.

You can solve your tax problems and get tax relief through our tax resolution services. You can finally get a fresh start by getting rid of your looming tax problem.

Are you asking yourself ... if I have tax problems whom should I contact?

You have many options to settle your tax account and move on with your life. Here are some options that should entice you to get your life in order:

• Offer In Compromise: an offer in compromise, OIC, will usually be accepted by the taxing authority to resolve your tax problem if the amount offered to settle your tax problem is equal or exceed the taxpayer's Reasonable Collection Potential, RCP. The IRS, or the State, or the Sales Tax Agency determines RCP by using the financial analysis tools like the 433-A for individuals and 433-B for business entities.

• Installment Agreement: paying the tax amount through a negotiated installment agreement is a common way to resolve your tax problem. You should seek our professional tax advice, as the taxing authority will usually request a large monthly payment, while our firm will work on attaining an installment agreement that is reasonable and you can live with without causing a financial and economic hardship on you and your family.

• Currently Non Collectible - CNC Currently Non Collectible - CNC is accomplished when the IRS holds off an individual or business taxpayer's account from active enforcement collection efforts. There are specific rules and requirements that a taxpayer must meet before a CNC status be accomplished. The IRS would not pursue enforcement collection activity against the taxpayer and possibly the statute of limitations on the entire tax liability will run.

It makes far more sense, and will probably be less costly in the long run, to resolve your tax problem with the IRS now, rather than dealing with the potential embarrassment and financial burden of having your employer garnish and levy your wages / paycheck or the IRS freezes and levy your bank accounts.

The IRS released tax records on their most famous tax problem cases that imprisoned Al Capone, they inadvertently nabbed the Governor of New York allegedly spending tens of thousands of dollars for what they least expected. From Will Smith, to Wesley Snipes to Nicolas Cage IRS audits and collection activities are on the rise, and is expected to continue in 2009 and for many years to come!

Tax problems do not go away by themselves... Take action today by contacting Mike Habib, EA directly at 1-877-78-TAXES or CLICK HERE

Capital contributions did not restore or increase shareholders' tax bases in loans to S corporations Nathel, (2008) 131 TC No. 17

Mike Habib, EA

The Tax Court has held that taxpayers' capital contributions to S corporations did not constitute income to the S corporations and that the contributions did not restore or increase their tax bases in their loans to the S corporations.

Background. Generally, under Code Sec. 1367 a shareholder's tax bases in the stock in, and in the loans to, an S corporation are adjusted to reflect the shareholder's share of income, losses, deductions, and credits of the S corporation as calculated under Code Sec. 1366(a)(1). Under Code Sec. 1367(a)(1), a shareholder's tax basis in his S corporation stock is increased by, among other things, the shareholder's share of the S corporation's income items (including tax-exempt income). Under Code Sec. 1367(a)(2), a shareholder's tax basis in his S corporation stock is decreased (but not below zero) by, among other things, the shareholder's share of losses and deductions. If a shareholder's tax basis in his stock in an S corporation is reduced to zero by his share of the losses of the S corporation, any further share of the S corporation's losses decreases, but not below zero, the shareholder's tax basis in outstanding loans the shareholder has made to the S corporation. (Code Sec. 1367(b)(2)(A), Reg. § 1.1367-2(b)(1)) Thus, a shareholder's tax basis in loans the shareholder has made to an S corporation may be lower than their face amount or zero because of downward adjustments in such basis caused by losses of the S corporation that are passed through to the shareholder. (Code Sec. 1367(b)(2)(A))

Facts. In calculating ordinary income relating to $1,622,050 in loan payments received from two S corporations, for purposes of Code Sec. 1366(a)(1), brothers Ira and Sheldon Nathel treated $1,437,248 in capital contributions they made to the S corporations as income to the S corporations and as restoring or increasing under Code Sec. 1367(b)(2)(B), their tax bases in loans that they previously had made to the S corporations. Ira and Sheldon then used the restored or increased tax bases in the loans they made to the S corporations to offset ordinary income that otherwise would have been reportable by them on their receipt from the S corporations of the $1,622,050 loan payments.

On audit, IRS determined that Ira's and Sheldon's $1,437,248 capital contributions were not to be treated as restoring or increasing their tax bases in their loans to the S corporations but as increasing their tax bases in their stock in the S corporations, resulting in additional ordinary income being charged to them on receipt of the S corporation loan payments.

Court's conclusion. The Tax Court held that for purposes of Code Sec. 1366(a)(1), Ira and Sheldon's $1,437,248 capital contributions to the S corporations did not constitute income to the S corporations and that under Code Sec. 1367(b)(2)(B), Ira and Sheldon's capital contributions did not restore or increase their tax bases in their loans to the S corporations.

The Court reasoned that by attempting to treat their capital contributions to the S corporations as income to the S corporations, Ira and Sheldon in effect sought to undermine three cardinal and longstanding principles of the tax law: (1) that a shareholder's contributions to the capital of a corporation increase the basis of the shareholder's stock in the corporation; (2) that equity (i.e., a shareholder's contribution to the capital of a corporation) and debt (i.e., a shareholder's loan to the corporation) are distinguishable and are treated differently by both the Code and the courts; and (3) that contributions to the capital of a corporation do not constitute income to the corporation.

For S Corporation Tax Help, For S Corporation Tax Audit, For S Corporation Back Taxes Help CLICK HERE

Like many of us, you've probably dreamed of turning a hobby or avocation into a regular business. You won't have any unusual tax headaches if your new business is profitable. However, if the new enterprise consistently generates losses (deductions exceed income), IRS may step in and say it's a hobby--an activity not engaged in for profit--rather than a business.

What are the practical consequences? Under the so-called hobby loss rules, you'll be able to claim those deductions that are available whether or not the enterprise is engaged in for profit (such as state and local property taxes). However, your deductions for business-type expenses (such as rent or advertising) will be limited to the excess of your gross income from the hobby over those expenses that are deductible whether or not the enterprise is engaged in for profit. Deductible hobby expenses are claimed on Schedule A of Form 1040 as miscellaneous itemized deductions subject to a 2%-of-AGI "floor." By contrast, if the new enterprise isn't affected by the hobby loss rules, all otherwise allowable expenses would be deductible on Schedule C, even if they exceeded income from the enterprise.

There are two ways to avoid the hobby loss rules. The first way is to show a profit in at least three out of five consecutive years (two out of seven years for breeding, training, showing, or racing horses). The second way is to run the venture in such a way as to show that you intend to turn it into a profit-maker, rather than operate it as a mere hobby. The IRS regs themselves say that the hobby loss rules won't apply if the facts and circumstances show that you have a profit-making objective.

How can you prove that you have a profit-making objective? In general, you can do so by running the new venture in a businesslike manner. More specifically, IRS and the courts will look to the following factors: how you run the activity; your expertise in the area (and your advisers' expertise); the time and effort you expend in the enterprise; whether there's an expectation that the assets used in the activity will rise in value; your success in carrying on other similar or dissimilar activities; your history of income or loss in the activity; the amount of occasional profits (if any) that are earned; your financial status; and whether the activity involves elements of personal pleasure or recreation.

The classic "hobby loss" situation involves a successful businessperson or professional who starts something like a dog-breeding business, or a farm. But IRS's long arm also can reach out to more prosaic situations, such as businesspeople who start what appears to be a bona-fide sideline business.

Please call our offices to get more details on whether a venture of yours may be affected by the hobby loss rules, and what you should do right now to avoid a tax challenge.