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Taxes

It is not uncommon for many people to want to get done with their taxes as quickly as possible and not devote a moment beyond what they have to. If they complete their own taxes using computer software or an online program, they may rush through the process and fail to read and understand what is being asked. This can lead to failure to make required disclosures, submitting erroneous information to the IRS, and other tax problems. Even if you work with a tax preparer, rushing through the process can still land you in a difficult situation should you fail to disclose all sources of income, submit incomplete tax documents, or fail to provide the tax preparer with all of the information he or she will need to complete your taxes accurately. These failure can result in a tax audit which may reveal further noncompliance with the US Tax Code and additional penalties.

At the Brager Tax Law Group, one of our goals is to provide taxpayers with the information they need to avoid preventable mistakes. Because our practice is focused on helping clients through difficult tax problems we have seen some of the common mistakes filers make because they are rushing through the return or otherwise fail to provide complete and accurate information.

You did not include all sources of income
The failure to report all sources of income is one of the top reasons why individuals end up facing a tax audit. In some instances, the reporting failure may be attributed to an independent contractor position where, rather than a W-2, the worker receives a 1099. The worker may not initially recognize the additional tax burden 1099 status can entail. When the larger than expected tax bill comes due, there can be a strong temptation to “fix” the tax problem by failing to disclose the 1099 income. However, the IRS has systems and procedures in place to catch these instances where the numbers provided by the taxpayer simply do not add up.

In other instances the failure to report foreign income or foreign accounts may lead to a tax audit. The US is one of only a handful of countries that taxes its citizens and green card holders on their worldwide income regardless of where it was earned. In recent years the IRS has significantly stepped up its efforts at detecting and prosecuting offshore tax evasion. If you also hold foreign financial accounts to which an FBAR of FATCA disclosure duty apply, the risks of detection and an audit or criminal investigation become even more pronounced.

You use only whole, round numbers in your filings
While working in powers of tens and using nice, round even numbers makes the math easy to handle, such an approach immediately raises a red flag because the odds of such figures are, at best, implausible. Real life is messy. Rarely will your net earnings, withholdings and deductions equal rounded numbers. Such acts make it easy for the IRS to identify that you did not provide accurate information on your tax return. Aside from facing criminal or civil consequences for providing false or inaccurate tax information, the IRS may also decide to launch an audit to uncover additional wrongdoing.

You take excessive deductions
Tax deductions are intended to prevent taxpayers from paying taxes on certain expenditures. However certain deductions, such as the home office deduction, attract suspicion because it is so commonly abused. Furthermore, excessive deductions are also a common reason for triggering an audit. Some people may think, “How will the IRS know what deductions are legitimate?” However, the IRS does have a general idea because it can compute the average deduction for a filer with similar income levels and circumstances. If your claimed deductions depart significantly from the average, the IRS agent may decide to inquire further through an audit.

Understanding Random Audits
The random audit is also a means through which some people come under additional scrutiny and tax problems are uncovered. Therefore, it is essential that you provide accurate tax information for each and every year where the duty to file taxes exists. If you fear that past filings may subject you to a future audit or you are already facing a tax audit, call the Brager Tax Law Group at (800) 380-TAX LITIGATOR or contact us online today.

The 6th Circuit recently taught an expensive lesson to a Michigan couple about carefully following procedure when dealing with tax problems and subsequent loss of their $64,000 refund occurred because of a seeming minor error. Following an IRS tax dispute began, as the IRS’ records stated that the envelope containing the Stockers’ amended 2003 return was postmarked four days late. Compounding the Stockers’ tax problems, the IRS failed to retain the postmarked envelope in question. Seeking help in their tax dispute the Stockers brought suit, but the District Court granted the IRS’ motion to dismiss for lack of jurisdiction due to the suit being barred as past the three-year period for filing a claim for a tax refund. On appeal, the 6th Circuit affirmed.

The 6th Circuit was unmoved by the Stockers’ attempts to prove the mailing date of their return through means other than those set forth in IRC Section 7502. As the IRS’ records indicated that the returns were postmarked four days late, the Stockers could not prove timely delivery under IRC Sec. 7502(a)(1), which states that the postmark of the returns establishes the date of mailing. Additionally, Mr. Stocker’s failure to obtain the certified mail receipt precluded the use of IRC section 7502(c)(1), which states that the “date of registration shall be deemed the postmark date”. The court rebuffed the Stockers’ attempts to prove timely delivery through circumstantial evidence; rather, the Court stated that its own precedent prevented any other method of proof. Finally, the court held that the District Court had not abused its discretion in refusing to draw the inference that the Stockers had timely filed their returns because of the IRS’ failure to retain the postmarked envelope in violation of internal policy.

Despite the seemingly minor nature of the Stockers’ mistakes, the 6th Circuit was highly unsympathetic to their plight. Ultimately, the court reiterated that only certain procedures are available to prove timely filing, and the Stockers’ own mistakes precluded them from receiving relief, despite their innocent nature. While calling it “unfortunate” that the Stockers could not prove the timeliness of their return, the court sent a strong message to taxpayers that it was unwilling to make exceptions for even the most innocent of mistakes.
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A Kansas woman will still face federal criminal tax charges for failure to pay payroll taxes after a federal court ruled the charges should not be dismissed simply because the taxes have since been paid.

As tax litigation attorneys we frequently hear from clients who have been contacted by the IRS criminal investigation division. Their first reaction is, “I will get the taxes paid can you get the IRS to drop the charges?” Unfortunately at that point simply paying the taxes will rarely solve the problem by itself. Payroll taxes cases usually turn criminal because the tax problem has been ignored for far too long.

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In this case, the employer was charged with seven counts of failing to pay over trust fund taxes (income taxes and FICA), which had been withheld from employees’ pay. The tax violations allegedly occurred between 2003 and 2005. She submitted evidence in 2010 that she had turned over to the Internal Revenue Service all unpaid taxes. She argued the charges should be dismissed since the taxes had been paid.

The government argued payment did not “cure” her of the violations or immunize her from prosecution. It was a novel legal question not addressed in case law. Section 7202 of U.S. tax law states: “Any person required under this title to collect, account for, and pay over any tax imposed by this title who willfully fails to collect or truthfully account for and pay over such tax shall . . . be guilty of a felony. . . .”

The defendant noted the law makes no reference to a “due date” or other time frame. Section 7203 does make reference to a time frame when it states “at the time or times required by law or regulations.”

The court ruled that the statute’s wording “failure to pay over” necessarily encompasses late payments by any common sense standard. Additionally, the court ruled the defendant’s interpretation of the law would make it the only area of criminal law in which a crime could be undone at any time until conviction.

The defendant was also charged with two counts of failure to pay individual income taxes, which were not addressed in the court decision.
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Our tax attorneys continue to see businesses struggle with payroll tax problems. Whether you have 3 employees or 300, or whether you have downsized in response to the struggling economy, payroll tax audits can cause serious legal and financial problems that can threaten the survival of a business.

The U.S. Department of Justice reports a recent case out of northern Virginia, in which a business owner was sentenced to 19 months in prison for failing to collect, account for, and pay to the Internal Revenue Service more than $200,000 in employee withholding taxes.
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He was also ordered to pay $88,826.79 in restitution to the IRS.

The defendant was president of a computer software company. According to the government’s allegations, he failed to pay to the government employees’ withholdings for Social Security, Medicare and federal income taxes from December 2004 to June 2008.

The case was handled by the Justice Department’s Tax Division, the U.S. Attorney for the Eastern District of Virginia, and the Internal Revenue Service.
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In a recent worker classification ruling SS8 2010030006 the IRS held that a part-time bookkeeper/general office worker was an employee and not an independent contractor. Generally the existence of an independent contractor relationship is based upon a 20 factor common law test set forth in Rev. Rul. 87-41, 1987-1 CB 298. Some of the factors the IRS took into account were:

The worker performed services at the payor’s place of business as well as her own home The payer provided all office supplies including telephone, fax machine etc., although the worker provided her own computer, and accounting software.
The bookkeeper was paid hourly The worker did not receive any benefits
The worker provided services for a period of about 2 years.
The payer’s had obtained a state ruling that the worker was an independent contractor.
The payer and the worker had an oral agreement whereby the worker agreed to independent contractor status The worker was trained by the payer on some of its proprietary software.
The worker did not hold herself out as being in an independent business.

As a tax attorney who has been through many payroll tax audits I know it can be difficult to prove that a worker is an independent contractor to the satisfaction of the Internal Revenue Service or the California Employment Development Department (EDD).

Nevertheless payers who are subject to a payroll tax audit have a variety of defenses including the so-called safe harbor provisions of Section 530 of the Revenue Act of 1978. This underused provision of the law allows for workers who fail the 20 factor common law test be treated as independent contractors provided the following requirements are met:

1. For federal employment tax purposes the payer never treated the individual as an employee for any period, nor did it ever treat workers holding substantially similar positions as employees;

2. All federal tax returns (including Form 1099) are filed on a basis consistent with the taxpayer’s treatment of the individual as not being an employee; and
3. A reasonable basis existed for classifying the individual as an independent contractor. Reasonable basis includes:

a. Reliance on judicial precedent or revenue ruling;
b. Previous IRS tax audit;
c. Long-standing recognized practice of a significant segment of the industry; or d. Any other reasonable basis.

If your company is contacted by the EDD or the IRS for a payroll tax audit or any other tax problem call the former IRS tax attorneys at Brager Tax Law Group, A PC.

Frank L. Amodeo has serious criminal tax problems. The U.S. Department of Justice announced that he has been convicted in one of the biggest employment tax fraud cases in Internal Revenue Service (IRS) history. The penalties for these criminal tax charges exceed 22 years and he will be required to pay a judgment of $181 million dollars.

Amodeo collected federal withholding taxes through his numerous payroll tax companies, and then knowingly neglected to forward this tax money to the IRS. Consequently, he was charged and convicted with five felonies: willful tax evasion (totaling $181 million); obstructing an agency proceeding (by intentionally defrauding the IRS in their attempt to collect payroll tax); and conspiring to commit wire fraud, to obstruct an agency investigation, and to impede the IRS. Amodeo was forced to surrender more than $1 million cash, three homes, several luxury automobiles, commercial real estate, a Lear Jet, and his corporations in attempt to fulfill his outstanding tax debt.

While this may have been one of the larger tax fraud cases on record, people have gone to jail for tax evasion for much smaller cases.

If you have any tax problems, including potential tax fraud or payroll tax problems, contact the tax controversy lawyers at Brager Tax Law Group, A P.C.

The Internal Revenue Service (IRS) has released IRS Publication 1779 with guidance for workers to help them determine whether they are employees or independent contractors. Interestingly IRS Publication 1779, which is only two pages does not specifically mention the 20 factor test set forth in IRS Revenue Ruling 87-41, 1987-1 C.B. 296. Instead it groups various factors into three categories-Behavioral Control, Financial Control and Relationship of the Parties. For example under the category Behavioral Control it states that “if you receive extensive instructions on how work is to be done this suggests you are an employee.”

While the publication appears to be aimed at workers rather than employers, an employer could be lulled into a false sense of security by relying on the publication since among other things it fails to mention that even though an employer does not actually exercise control, if the employer maintains the legal right to control the worker those workers may well be employees.

Nor does the publication mention that Section 530 of the Revenue Act of 1978 also known as the “safe harbor rules” allows employers to treat individuals as independent contractors even if they do not qualify under the common law rules. For more information on that topic see our article Independent Contractor Treatment for Workers is Broadly Available.

If you are an employer and the IRS or the California Employment Development Department (EDD) has challenged your treatment of workers as independent contractors, or you have other payroll tax problems, contact the tax problem attorneys at Brager Tax Law Group for assistance.

According to the Government Accountability Office (GAO) the Internal Revenue Service (IRS) hasn’t been doing a very good job collecting payroll taxes. Payroll taxes are amounts that employers withhold from employee wages for federal income taxes, Social Security, and Medicare (so called trust fund taxes) as well as the employer’s matching contributions. The willful failure to pay these payroll taxes is a violation of the criminal tax law, a felony punishable by up to 5 years in jail under Internal Revenue Code (IRC) Section 7602.

The GAO study found that over 1.6 million businesses owed over $58 billion dollars in uncollected payroll taxes. The GAO concluded that the IRS didn’t file tax liens quickly enough, and that it didn’t go after the owners of businesses for the trust fund recovery penalty (TFRP) fast enough. The report also suggested that the IRS wasn’t seizing business assets often enough, pointing out that there were only 667 seizures in fiscal 2007, down from over 10,000 in 1997. The report was a rather scathing indictment of the IRS, and various U.S. Senators were quick to jump on the “bash the IRS bandwagon.” Senator Norm Coleman called on the IRS to “ratchet up its efforts” to recover billions in unpaid payroll taxes, and to hold “tax cheats” accountable.

The IRS responded that among other efforts it is developing and testing streamlined procedures to file injunctions against business with repeat payroll tax problems, and shut them down quickly. Apparently this would include employers whose principals were previously assessed a trust fund recovery penalty, as well as those who have operated multiple entities with payroll tax problems.

If your business has payroll tax problems you are at risk of the IRS putting you out of business, and assessing the trust fund recovery penalty resulting in owners, and officers having substantial personal tax liability. If you would like assistance in dealing with these, and other types of tax problems contact the Los Angeles California tax attorneys at Brager Tax Law Group, A P.C.

Internal Revenue Code § 6672 provides that so-called responsible persons who willfully fail to pay corporate payroll taxes may be held personally responsible for the payment of the trust fund portion of these taxes. Internal Revenue Code § 6672 is sometimes referred to as the trust fund recovery penalty (TFRP). Who is a responsible person? As the court in Horovitz v. United States (WD PA 2008) explained: “responsibility is a matter of status, duty or authority.” The definition of responsible person is not limited to the person with the final say on which bills get paid, but includes others as well.

Horovitz illustrates the principle that more than one person can have liability for the trust fund recovery penalty. The CFO was deemed to be a responsible person since he had the full authority to sign checks, could hire and fire employees, signed payroll tax returns, was a corporate officer, and a 20% owner. The CEO was also held liable for the trust fund recovery penalty since he invested several million dollars in the business, owned 80% of the stock, had unlimited hiring and firing ability and check writing authority, and served as the CEO with day to day involvement in the business.

If you have payroll tax problems, and the IRS is threatening to impose the trust fund recovery penalty contact the Los Angeles, California tax litigation lawyers at Brager Tax Law Group, A P.C.

The California Employment Development Department (EDD) announced that it will be exchanging payroll tax information with the Internal Revenue Service (IRS) . The EDD is the state agency which includes in its duties making sure that employers withhold and payover state payroll taxes. The EDD programs include payroll tax audits of business owners to make sure that all workers who have been treated as independent contractors are truly independent contractors, and not employees. In determining whether workers are properly classified the EDD sometimes relies on the 20 factor test set forth by the IRS in Rev. Proc. 87-41. It also relies on a 9 factor test set forth in the California Supreme Court case set forth in Tieberg v. California Unemployment Insurance Appeals Board (1970), 2 Cal. 3d 943 P. 2d 975; 88 Cal. Rptr. 175. The factors listed are:

1) Whether or not the one employed is engaged in a distinct occupation or business;

(2) The kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of a principal or by a specialist without supervision;

(3) The skill required in the particular occupation;

(4) Whether the employer or the worker supplies the instrumentalities, tools, and place of work for the person doing the work;

(5) The length of time for which the person is employed;

(6) The method of payment, whether by the time or by the job;

(7) Whether or not the work is part of the regular business of the employer;

(8) Whether or not the parties believe they are creating an employer-employee relationship; and

(9) Whether the principal is or is not in business.

Although the EDD has supplied information from its payroll tax audits to the IRS for many years, the IRS has not been particularly efficent at using this information to start its own payroll tax audits. Whether or not this new agreement foreshadows an increased degree of enforcement by the IRS is unknown. However, it underscores the risk of not contesting an EDD payroll tax audit. For more information about filing an appeal of an EDD payroll tax audit see our article

If your company has been contacted the EDD for a California payroll tax audit or has other California payroll tax problems contact the California tax lawyers at Brager Tax Law Group, a P.C.