The IRS also has only 3 years to audit your filed return to seek additional tax assessments against you pursuant to IRC Section 6501 (4 years for the State of California).  This can be extended if there is a suspicion of tax fraud.

Once the IRS has assessed a tax they have 10 years to collect pursuant to 6502 of the Internal Revenue Code.  California’s limitation on collection is 20 years.  If after an audit there is additional tax assessed the same collection limitation rules apply.

When the IRS selects your return for examination, 75% of audits are conducted via correspondence.  Communication is by mail or over the telephone.  Audits at the local IRS office or field audits at the taxpayer’s home or business are much less frequent.  According to the IRS, the overall chance of being audited is lower than 2%.  More common are CP2000 examinations where the IRS has noted different income, payments, credits and deductions on your return versus what was reported by employers, banks, businesses and other payers.   In 2010 4.3 million taxpayers were sent CP 2000 letters.  The best way to deal with an audit or CP2000 is responding within the time frames provided.  In examinations and audits the burden is on the taxpayer to prove that the information is correct.  Make sure your records are complete.

]]> http://gartlandlaw.com/blog/it-is-all-about-timing/feed/ 0 http://gartlandlaw.com/blog/you-do-not-have-to-get-on-the-list/ http://gartlandlaw.com/blog/you-do-not-have-to-get-on-the-list/#comments Wed, 15 Feb 2012 23:01:27 +0000 Kim http://gartlandlaw.com/blog/?p=138 Continue reading →]]> The Franchise Tax Board (FTB) publishes a list of the 500 largest state income tax delinquencies yearly.  They already have the power to suspend Contractor licenses, but will have additional authority in July 2012 to suspend other professional licenses.  In smaller liability cases the FTB  sends out notices that if ignored lead to levies of wages, bank accounts, and liens against your property.

There are several plans for dealing with your tax liability with the state of California.  If the liability cannot be paid off within 1 year, a Financial Statement is submitted for an evaluation by the FTB to determine if you qualify for a hardship, a partial pay agreement, or a 5 year installment plan.  If your reasonable expenses exceed your income the FTB will not take any collection actions against you and close your case for a year.

It’s a common misperception you are able to settle tax debt for less than what you owe using an offer in compromise.  Only if you do not have sufficient income or assets to pay your taxes in the foreseeable future can you qualify for this program. You must show your ability to pay, but also taking into account your assets and future income the likelihood you can ever full pay is slight.

You should also be aware that tax bankruptcy is another available option to discharge qualifying tax debt.

Bank levies, wage garnishments, being placed on public lists, and now license suspensions can be avoided by working with the FTB.

If this property is not rented out and is just a second home for you. No Tax return is required since you are not considered a California Resident and only in California seasonally (snowbirds). However, you will be required to file a California tax return if this home is ever sold. All profits would be considered capital gains by the state of California.

Canadian Investors should consider forming a California C Corporation to purchase investment real estate. This achieves your goals of acquiring California real estate without you personally having a potential tax liability. Please consult with our office for more details on this issue.

In addition, there are other cases not involving real estate in which you may have a filing requirement. Those are listed briefly below.

               -You are a shareholder in a California S-Corp

-You are a Partner in a California Partnership.

-You have gambling winnings from a Casino located in California

-You are the beneficiary of a trust or estate that has an interest in this State

For all home based businesses the direct expenses of conducting business are deducted from gross income in determining net profit or loss.  The importance of the allowable deductions on a Schedule C is that with the exception of meals and entertainment they are 100% deductible.

Not all home based businesses qualify for the “Business Use of the Home” deduction (Form 8829).  The IRS requires that an area of your home be exclusively used for a trade, profession or business related activity.  Additionally, that area must be used regularly and be your principal place of business. Even if you see clients at other locations, you will qualify if all the administrative and managerial activities of your business are conducted at your home office.

When planning for your future, consider a well planned home based business.

Every day people are living in fear of the IRS because they either have not filed tax returns for several years or they have filed and owe taxes.  They do not file tax returns because they cannot afford to pay the amount they owe or are suffering from needless levies on their wages because they do not think there is anything that can be done if they are.
What they do not know is the power of Internal Revenue Code Section 6343 that prevents the IRS from levying wages or bank accounts of taxpayers experiencing a finnancial hardship.

Discussion

Internal Revenue Code Section 6343(a)(1) provides in pertinent part:

The [IRS] shall release the levy upon all, or part of, the property or rights to property levied upon and shall promptly notify the person upon whom such levy was made (if any) that such levy has been released if . . . (D) the [IRS] has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer.

The method by which the IRS is informed that the taxpayer is experiencing a financial hardship is by way of the Collection Information Statement For Wage Earners and Self-Employed Individuals (Form 433-A or 433-F).  The Collection Statement identifies assets of the taxpayer as well as setting forth the monthly income and expenses of the taxpayer.
To support the information provided to the IRS the taxpayer provides bank records, pay stubs, and substantiation of expenses.  If the Collection Statement shows that a levy
would create a financial hardship due to the financial condition of the taxpayer all levies must be released.  To determine if the expenses are deemed reasonable the IRS uses National and Local Standards for housing, living, transportation and out of pocket medical
expenses.

The Representative from the IRS will compare the reported expenses with the Local and National Standards and make a determination if the expenses are “reasonable”.
When the expenses meet or exceed the income then the taxpayer can be placed in a non-collectible or hardship. As long as the taxpayer is in this category no levies will be issued
against the taxpayer’s wages or bank accounts.

A common term when dealing with representatives from the IRS who are attempting to collect on assessed tax liabilities  is compliance by the taxpayer.  What compliance means in this context is whether the taxpayer has filed all tax forms up to the present time as well as having made all necessary estimated tax payments for the current year.  Up until recently, when requesting to have a levy released on a taxpayer’s wages or bank accounts a representative from the IRS would say something like, “I will not consider releasing any levy until the taxpayer is in compliance.”  This seeming dead end made it impossible to get any relief for the taxpayer regardless of the amount of financial hardship the taxpayer was experiencing until all tax returns were filed and processed so that compliance could be satisfied.

In 2009 the seminal United States Tax Court case of Kathleen A. Vinatieri vs. Commissioner of Internal Revenue, (2009) 133 T.C. No. 16, held that if the taxpayer was able to show under IRC Section 6343(a)(1)(D) that the levy was creating a financial hardship the IRS was required to release the levy regardless of the taxpayer’s noncompliance with filing returns.  In Vinatieri the taxpayer was able to show
through a 433-A that she was unable to pay her reasonable basic living expenses
if the IRS went forward with its levy on her wages.  Even without the levy her expenses were even to or exceeded her income.

Subsequent to the Vinatieri case the Office of Chief Counsel of the IRS issued a notice to all personnel notifying them of considering the financial hardship on the taxpayer in determining the appropriateness of a levy directly citing the holding in Vinatieri.  CC-2011-005, Issued on November 22, 2010.  Now, when dealing with the IRS in a case where a hardship can be demonstrated, all IRS personnel have been informed that non-compliance cannot be used against the taxpayer as a hindrance to  having levies released and being  placed into a non-collectible category.

Conclusion

6343 is a powerful tool available to taxpayers.  Not being able to afford to pay taxes is no
longer an excuse to avoid filing taxes.  Similarly, after filing taxes and having a liability taxpayers should not be afraid to contact the IRS and provide a 433-A or 433-F that shows that a levy would create a financial hardship and request  placement into a non-collectible or hardship category if reasonable expenses meet or exceed monthly income.

The taxpayer was self-employed and his spouse is a homemaker.  However he gave up his
self-employment to find a “real job” with a W-2 because his business income is so erratic.  No quarterly estimated taxes have been paid for the current year.

For purposes of this article, let’s assume that all the above occurred during the 2011 tax year and the taxpayer sought the assistance of a bankruptcy attorney.  Also assume the taxpayer closed down his self-employed business on June 30, 2011 and proceeded to become a W-2 employee on July 1, 2011.

The bankruptcy attorney could possibly advise the taxpayer and his wife to go to a consumer credit company to set up long term repayment on the debt that is owed.
Additionally the practitioner may advise the taxpayer to negotiate with the civil judgment creditor to reduce the amount of the obligation.  Usually all of this would fail miserably.  If the taxpayer was successful in reducing the debt owed to a lesser amount he may face the
possibility of the creditor issuing a 1099-C (cancellation of debt) which may become income in that tax year.

At this juncture the taxpayer/debtor would usually ask the bankruptcy attorney how a Chapter 7 bankruptcy would be of benefit to them.  The practitioner would probably
indicate to the taxpayer/debtor that the unsecured creditors would be eliminated
in the Chapter 7 bankruptcy however the $20,000 in non-exempt assets would be
sold by the trustee then given to the creditors on a pro-rata basis.  Therefore, the remainder of the balance owed to the creditors would be extinguished, a 1099-C would not be issued, and the non-exempt assets of course would no longer be available to the creditors as they were liquidated in the bankruptcy.

The taxpayer/debtor would naturally assume (with a sigh of relief) that everything was taken care of.  The husband would then continue his W-2 job thinking all is well.  However, in February 2012 the taxpayer meets with his tax preparer and receives “bad
news.”  The taxpayer is informed that because he was self-employed for the first several months of 2011 and no estimated taxes were paid to the IRS his self-employment tax plus income tax is approximately $15,000.  When the taxpayer files his 2011 taxes on or before April 15, 2012 the IRS will now asses additional penalties and interest and file a lien against the taxpayers residence.  Although the equity in the home was protected with certain exemptions in the Chapter 7 bankruptcy, those exemptions do not apply to the IRS and if they chose to do so they could sell the house resulting in the taxpayer and his family not having a place to live.  This usually is not the case, however it could happen.

Since the taxpayer has a wife and three children in the home and a moderate amount of income he is unable to immediately pay the tax debt for the year 2011 which is growing on a daily basis with interest and penalties.  All of this could have been averted if the bankruptcy practitioner had knowledge of IRC 1398(d).  Section 1398(d) allows the taxpayer to file a “short year” for purposes of filing a tax return.  This can be accomplished without asking for permission from the Department of Treasury.  What does the filing of this “short year” do for the taxpayer in conjunction with his Chapter 7 bankruptcy?
Remember that for several months in 2011 the tax obligation equaled around $15,000 and the taxpayer did not find out about it until 2012.  However if the practitioner had the 1040 tax return prepared prior to the commencement of the bankruptcy that obligation then existed at that moment.  When the Chapter 7 bankruptcy is filed the practitioner files a claim for the IRS for the $15,000 plus small amounts for penalties and interest.  That tax obligation becomes a “priority debt” in the bankruptcy scenario.  The general unsecured creditors still remain general unsecured and when the trustee in the bankruptcy sells  the assets, which were approximately $20,000, the priority tax debts gets paid first and if there is nothing left over for the general unsecured creditors then they receive nothing
and are discharged.  So, in this case the trustee would see there is a claim for the $15,000 plus interest and penalties on a tax obligation for a short year 2011.  The trustee also notes that it is a priority claim and when the trustee liquidates the non-exempt assets the taxes are paid off first.

In the month of February 2012 the taxpayer now goes to his tax preparer and explains that there was a 1040 filed for short year 2011 and the tax preparer can prepare another 1040 for the balance of the year 2011.  The difference now is that the taxes have been paid for the self-employment for 2011 and the W-2 withholdings have covered the tax liability for the balance of the year with the second 1040.  There will be no tax obligation and no tax liens put on the taxpayers home.  This allows him that “fresh start” that the bankruptcy court has available for a taxpayer/debtor.

Usually when taxpayers/debtors are interviewed the issue of good credit vs. bad credit really does not exist.  They already have bad credit or are going to have bad credit anyway.  How do I get control back in my life and how does that control give me a future?  The answer in this scenario is: utilization of section 1398(d) of the IRC to give you that control and that future.

If you have a business, you can expense 100% of the cost of fixed asset purchases in 2011.  This deduction may not be available in 2012.

Are you planning on filing an extension because you are either going to owe and can’t afford to pay or you think an additional 6 months will give you time to save the money,
you should reconsider.   The problem with the cycle of filing for an extension every year is suffering through additional penalties and interest.  You should file your return on time and get into an installment agreement to pay off the taxes before next year’s return are
due.  If the amount you owe is more than can be paid by April 2013, get into a 5 year payment plan.

There is no time like the present to get everything organized before the end of the year.  If you or your dependents incurred medical expenses in 2011 that exceeded 7.5% of your adjusted gross income make sure you have complete records to present to your tax preparer. Before the end of 2011, pay professional memberships, license renewal fees, and make charitable contributions.  Make sure your business mileage log is up to date.  Lastly, preserve your allowable deductions by organizing receipts with notations of business purpose for meals and entertainment, and business travel.

Under the tax code, so long as we are doing our job and properly representing you and your business, the IRS needs to deal directly with us.  Because of this you don’t need to worry about an IRS agent asking you questions that could trick you or where you accidentally give an incorrect answer just because you didn’t understand the question.

This is really important as a recent IRS document states that “the practice of initiating audits with taxpayers, rather than involving tax representatives,  emphasized by instructors in an examiner training class”

Crazy isn’t it, an IRS auditor training class teaching incorrect practices.  What other incorrect procedures are they being taught.

If you are under audit you need representation by knowledgable professionals.  We’ve been serving clients in Palm Springs, Palm Desert, Indio, Cathedral City, and the entire Coachella Valley for over 20 years now.  Call us now to get the protection you deserve.

Probably one of the best programs the IRS has available if you can’t afford to pay your taxes, is the ability to loan you the money to pay your taxes.  To put it differently, if you can’t afford to pay your tax bill when your tax return is due, the IRS has a program where you can ask to make payments over a number of years to the IRS.

In fact, if the amount you owe the IRS is less than $25,000 and you promise to pay off the tax debt within 25 years, the IRS will automatically allow you to stretch out your payments.  This program is a great way to protect yourself from an IRS lien or wage garnishment.  Sure, they are going to charge interest and a user fee, but you don’t have to come up with 100% of the money immediately.

The ability to get a loan from the IRS has become so widespread, their internal affairs department even wrote up an analysis of the program.

If you are behind on your taxes and live in Palm Springs, Palm Desert, Indio, Cathedral City or the entire Coachella Valley, we can help you decide which IRS program will work the best to help out you and your family.

Guess what?  You now have that IRS inside information.  In fact, the IRS themselves are going to provide you with it.  The IRS has a website full of audit guides, the guides they provide to their people with in order to understand different businesses.

If you live in Palm Springs, Palm Desert, Indio, Cathedral City, or the entire Coachella Valley and your business is facing an IRS audit, give us a call.  We’ve handled hundreds of audits for small business owners and even have a former auditor on our staff.