Three tax takeaways for Saturday, February 23, 2019

The gig economy consists of online platforms like Uber, Etsy, Lyft, Handy, TaskRabbit, and Grubhub, or running a small business on E-bay, to name a few. A recent Treasury Inspector General for Tax Administration (TIGTA) audit to evaluate the reporting habits of the gig economy yielded numerous problems including: significant general income underreporting by taxpayers, differences between reported income on tax returns and the income reported by payers on form 1099-K, and tax returns “Riddled with mistakes.” On the IRS’ side, there were also problems with their Automated Underreporter Program (AUR) used to identify and evaluate potential violators. AUR employees removed thousands of cases from inventory without proper justification or justification that was inaccurate. It is estimated that about 59% of suspected taxpayers were not selected to be worked. That means that out of the total sample, either the case was not worked or the account was deficient. That is big and the IRS knows it, so expect more attention within this industry.

In a related vein, let me remind everybody what Structuring is. That is when you deposit just under $10,000 of cash into your business account on a regular and recurring basis with the intention of avoiding the bank filing form 8300, Report of Cash Payments. The IRS is now urging banks and businesses that are required to report large cash transactions, that they can now e-file their transaction reports; “It’s fast, easy and free.” Cash businesses represent a special area of concern for the IRS and the audit techniques are interesting to say the least.

The tax laws do not consider emotional distress to be a physical injury or sickness. If you receive damages from a lawsuit that are due to emotional distress, you must include them in your income, unless those damages were to pay for medical care attributable to the emotional distress.

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Choosing how your business will be taxed

Every now and then a new client comes in the door with IRS letters because they went to an attorney to have their small business incorporated before they understood the process. What happened was that the client thought that the articles of incorporation was all there was to it, they saw their bill, and when the attorney offered additional services they said no and left. Professionals are not your teachers. They provide a service. If you plan to own and operate a corporation there is a presumption that you are aware of the matters involved. Kind of like driving a car, if you are behind the wheel, it is presumed that you know how to drive.

Filing articles of incorporation or articles of organization for an LLC is only the start. You will need an Employer Identification Number (EIN) and you need to file an IRS election as to how you choose to be taxed. Depending on your choice of entity classification there are other elections. Straightening out one of these messes will cost you about $750. To do it correctly the first time should cost about $300 assuming that your business is already incorporated or organized.

Do you notice that I am not telling you exactly how to do this? That’s because firstly, you are not aware of such matters (legalese for “You don’t know what you are doing”), and secondly, for a $300 business expense why take the chance? When you pay a licensed tax professional to do it for you there are years of understanding and experience that go into the process. So if you want to have an S corporation or an LLC go see a licensed professional, understand that the service is not free, and take heed of their advice. Otherwise you will be paying for damage control later.

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The truth about IRS Offers in Compromise, Part 2

Besides not being easy, taking a long time and professional services being expensive, IRS Offer in Compromise are intended only for those who are truly unable to meet their obligations, and in most cases there are no easy deals.

It’s not a way to beat the tax man. It is a program to help those who do not have the ability to pay their back taxes. I have had more than a few persons approach me with questions like, “I have some taxes I want to get out of paying and I heard you can take care of that.” Understand that this is not like TV where the crafty lawyer prevails by finding a loophole. That sort of thing is procedural.

The Offer process follows a set of numerical standards that are reviewed by an IRS Qualifying Agent, before going to their Manager for final determination. There is some subjectivity, and there are Offers based on effective administration which are even more subjective (rare), but most offers follow a formula called the Reasonable Collection Potential (RCP) to determine if you can pay the tax.  If you can pay within the statutory collections period then you do not qualify for an Offer. If you don’t qualify now, you might qualify later, and there are other options available to you besides making an Offer in Compromise.

Competent professionals can evaluate your RCP for between $600 and $800 of your retainer, and tell you with confidence whether or not you will qualify for an Offer at that time. If you don’t qualify they tell you and then it’s back to the drawing board. Anybody out there ever have your $4,000 retainer completely used up during discovery (besides one of my past clients), only to be told you don’t qualify – sorry, we can’t help you? Be careful who

you choose. Ask about their RCP evaluation process. That should put them on notice. The RCP also contains a number of valuable allowances that are not widely published, but your competent representative will know about them.

In a nutshell; if your financial condition is so bad that you have to choose between paying your taxes or paying your utility bill, then you likely qualify for an Offer. If the IRS is threatening to levy your bank account, the filing of the application will freeze any adverse collection actions until a final determination is made. Frivolous Offers made just to delay collections are penalized and you will still owe the tax, even more penalties, and even more interest. If your situation is this dire then you probably don’t have $4,000 to pay the retainer for an Offer. However, a $200 consultation at this point is worth the money because you have other options.

There are no easy deals. Another misconception is that if you offer to pay a big amount right now, then the IRS might consider writing off the rest of your tax debt in exchange. The IRS is still going to use the RCP. They’ll be happy to take the big down payment, and then it will be even easier for you to pay what is left within collections statue, and you will be even less likely to qualify for an Offer.

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The truth about IRS Offers in Compromise, Part 1

An Offer in Compromise is when the office of the Commissioner of the IRS compromises your Federal tax debt in exchange for an acceptable offer of partial repayment based on your true ability to pay.

Convincing the IRS that you are in a dire financial condition takes time, after all, you might be lying. To find your true ability to pay the IRS is going to subject you to an arduous process of evaluations; not once, but twice. The IRS has 12 months to respond to your application and ask for additional financial information; otherwise they are stuck with your initial paperwork. They will contact you just inside of 12 months to request a new and complete set of documents because the other ones are a year old and unsuitable for a current evaluation. You will comply and you’ll be nice about it because they have something you want. Statutorily the IRS has to accept or reject your offer within 2 years or your initial Offer stands. You can expect the formal determination in just under 2 years.

You have to be in current compliance with all of the tax laws before you can file an Offer. You have to remain currently compliant with the tax laws during the entire Offer process, and for the 5 years following the acceptance of your Offer, otherwise the IRS will put your bill back to where it was before you started. Consider that you owed the Government $50,000, you fell on hard times, and the IRS eventually accepts your offer of $5,000. Two years after your Offer was accepted you fail to pay your full tax amount by April 15. You’ll get a letter giving you one last chance, and if you don’t pay those current taxes the $45,000 that was compromised will be put back into your account.

Unless you go it alone the cost of filing an Offer is not cheap. Have you ever noticed those ads on the radio or television asking, “If you owe the IRS $10,000 or more call us?” Ever wondered why the magical number was $10,000? The average retainer for an Offer in Compromise is $4,000. Add to that the fees for filing two missing tax returns, and amending three others (necessary to bring you into current compliance), and the cost of representation just shot up to about $6,000. If you didn’t owe the IRS at least $10,000 it might not be worth the effort. On the up side, you can pay your accountant at the start of the process and that reduction to your bank account asset will not be considered to have been intentionally dissipated.

Offers in Compromise are not easy, they take time and they can be expensive.

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3 Quick Business Tax Takeaways for Friday, January 18, 2019

Businesses can still deduct 50% of Meals as a business expense for tax year 2018, but the new laws specifically deny expenses for entertainment, amusement, or recreation.

Existing businesses that wish to convert to being taxed as an S corporation have no more than two months and 15 days from the beginning of the tax year to make the election. There are numerous pitfalls to avoid when changing tax treatment. Contact your licensed tax professional for help because that consultation can be well worth the money.

A word on late filing penalties for S corporations and partnerships: If you are a partner in a partnership or a shareholder in an S corporation, the penalty for failing to file your tax return on time is $195 multiplied by the number of partners or shareholders, times the number of months the return is late not to exceed a total of 12 months. That means that if your partnership or s corporation completely failed to file it’s 2016 tax return and you just found out about it, and you have 8 shareholders or partners, the penalty for failing to file in time is $195 X 8 X 12 months = $18,720 plus interest. Keep track of your records. File on time.

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Unpaid student loans and the Treasury Offset Program

If you don’t pay certain debts that are guaranteed by the federal government, like student loans, the government will seize your tax refunds and even a portion of your Social Security benefits to cover the unpaid balance(s). Keep in mind that refunds can include earned income tax credits and child tax credits intended to help your family, and you will lose those benefits. This is done under the Treasury Offset Program; a centralized offset program to collect delinquent debts owed to federal agencies and states.

In addition to taking your tax refunds, the government can also take up to 15% of your Social Security benefits but they have to leave you with at least $750 a month. If your income supports the ability to repay your student loan debt but you refuse to pay, or avoid their attempts at contacting you, they can sue you. If you keep thumbing your nose at them they might even arrest you – it happens.

If you receive mailings do not procrastinate; open them. If you owe delinquent student loans the best thing you can do is to contact your lender and make arrangements for payments that you can afford. If your Social Security benefits are being garnished you have rights before the Department of Education to negotiate affordable repayment options.

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The Zapper Program

The most prevalent method of under-reporting business income is by skimming cash from gross income. This method omits an amount of sales from ever being entered it into the accounting system. Now comes modernization and Revenue Suppression Software (RSS), commonly referred to as a Zapper program. Zappers automatically skim off a set percentage of cash transactions from Point of Sale (POS) systems like the ones used in restaurants.

In late 2016 the U.S. Justice Department announced criminal charges against Jon Yin for selling Zapper programs. He was working as a software salesman for a Canadian company called Profitek. Profitek sold an add-on RSS program that could only be used with its POS software. The Zapper software could only be ordered from a supplier in China.

Yin plead guilty to a scheme estimated at costing federal and state taxing authorities more than $3.4 million in tax revenues. The IRS now trains its revenue agents to test for Zapper software in restaurants and all other cash intensive businesses.

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5 Quick Tax Takeaways for Friday, December 21, 2018

First: the Foreign Earned Income Exclusion increases from $102,100 in 2017 to $103,900 for 2018. See IRS Publication 54 for more information.

Second: the 2018 business mileage rate is 54.5 cents per mile, and the 2019 rate will be 58 cents per mile.

Third: the medical expense floor was 7.5% of adjusted gross income for 2018. It is 10% of adjusted gross income for 2019.

Fourth: the contribution limit for a 401K went from $18,500 in 2018 to $19,000 for 2019. If you are 50 years of age or older, you can add another $6,000 under the catch-up rules.

Fifth: the contribution limit for an IRA goes from $5,500 for 2018 to $6,000 for 2019. If you are 50 years of age or older, you can add another $1,000 under the catch-up provisions.

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Michigan seizes property for unpaid taxes

For the small cost of $8.41, an 83 year old Michigan man lost his property. If he had sought out professional advice he should have been able to avoid this catastrophe.

Last year a Michigan court of appeals allowed for the seizure of a rental property purchased for $60,000 in order to satisfy a delinquent property tax debt of $8.41. The owner forgot to pay his $496 in 2011 property taxes, discovered the error, and in 2013 paid the amount in full. He did however fail to properly account for interest and ultimately underpaid by $8.41. The County foreclosed on the property and sold it at auction for $24,500 to satisfy the $8.41 along with $277 in additional penalties and interest. The county refused to refund any of the surplus from the sale.

States like Michigan, Massachusetts, Minnesota, North Dakota and Oregon have aggressive property seizure laws intended to deprive criminals of their spoils and means of continuing their nefarious behavior. The underpayment of property taxes is not a crime in Michigan but a law intended for criminals seems to have been perverted for no other reason than to add to the state’s general fund. Other states will at least return any surplus after the tax debt has been satisfied.

If you have unpaid taxes, either federal or state, you need to at least consult with a licensed tax practitioner. Experienced tax pros know how to make sure that your payoff is correct and binding. You also have rights in the face of tax seizures and we know how to protect those rights. Contact Weiss & Associates for help.

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Late S Corporation Elections

If you are having trouble with any S corporation elections you need to know that there are ways to fix late or incomplete elections. This goes for the S corporation election, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections, and Qualified Subchapter S Subsidiary (QSub) elections.

Eligibility to be classified as an S corporation goes further than just filing a form. Pertinent factors that need to be considered include but are not limited to; entity eligibility, shareholder eligibility, legal requirements, capital structure, election process, LLC’s as eligible entities, Q-sub elections, association status, trust structures, and converting from an existing C corporation.

If you failed to make the proper elections, the elections were late, or the elections contained flaws, you need to consult with a licensed tax practitioner to avoid mistakes. Maybe the IRS sent you a letter that your S election has been rejected. Or you’ve been in business a while, filed the tax return for an S corporation and the IRS sends you a letter stating that your corporation has not been granted S status and that you need to re-file using form 1120 for your C corporation. Contact our firm because we can help. Remember that your first attempt failed and your chances to fix this are going to run out.

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