Tax Tips: Pasadena Tax Attorney & CPA – IRS Notice of Deficiency
The IRS Notice of Deficiency is an official letter to put you on notice that the clock is ticking. Basically the IRS is informing you that they are about to assess a tax liability against you. Also, it gives you notice that you have only 90 days to contest the proposed assessment in Tax Court.
The tax court is the only court where you can contest a tax liability without first paying the full tax liability. Thus it is important to file a claim in a timely manner. If you miss that deadline there are other court venues but you will have to pay the full tax liability in advance to proceed.
Irrespective of any tax court filings that might be undertaken the underlying problem can often be resolved without the necessity of expensive litigation. The IRS does make errors which can result in an incorrect tax liability. The use of administrative procedures is the first option that you should explore.
There are different types of letters that you might get from the IRS:
• Proposed Individual Tax Assessment Letter – also known as the 30-day letter. This is your notice that the IRS has no record of your Individual Income Tax Return – Form 1040. It informs you that the IRS intents to compute a tax assessment based on income reported by your employer, banks, etc. In short, you have 30 days to file your return or the IRS will compute the tax for you—then collection action will commence.
• Notice of Deficiency Letter—also known as the 90 letter. This informs you of the tax assessed plus interest and penalties. Your options are:
o File your Individual Income Tax Return – Form 1040 with supporting schedules. If you do this, you don’t need to petition the tax court.
o File a consent to assessment and collection form. You are basically agreeing to the tax liability.
o Submit a letter explaining why you are not required to file a return.
If you don’t file a tax return and you don’t agree with the proposed tax owing by the IRS, you have 90 days from the notice to dispute the amount owed.
Professional advice is recommended to determine your best options to minimize your tax liabilities. You should never ignore a Notice of Deficiency. As a taxpayer you have rights but you must act in a prompt manner as there is only a short window of time available.
John Spurgeon is a tax attorney in Pasadena, California servicing clients in the greater Los Angeles area. John Spurgeon & Associates, who are both tax attorneys and CPAs, have the proven knowledge to effectively deal with the IRS. Please call 626-440-9518 for a complimentary initial consultation.
Tax Tips: Pasadena Tax Attorney & CPA – S Corporations
A business can operate in several different legal arrangements including:
• Sole proprietorship – this is one person owning the business. Downside is that the owner is personally liable for all debts and liabilities of the business. The taxable income (net profit) is included in the owner’s personal tax return. The owner can deduct all legitimate business expenses on his personal tax return.
• Partnership – two or more people form a business and share the profits in an agreed upon split. The taxable income (net profit) is reported on the partner’s personal tax returns. Again the partners individually and collectively are responsible for the debts and liabilities of the business.
• A corporation is a legal entity formed by one or more persons under the laws of a specific state or federal statute. Legally it has a separate legal existence from that of its shareholders (owners). Thus, and very importantly, the shareholders are not legally liable for the debts or liabilities including law suits of the corporation with some exceptions. This is a huge advantage to protect the personal assets of a business owner. There are two main forms of corporations:
o C Corporations – shares are held by the shareholders and may be publicly traded. It is taxed separately from its owners under subchapter C of the Internal Revenue Code. In other words, the corporation itself pays income taxes (both federal and state) on the taxable income (net profit) of the corporation. In some situations the income from a C Corporation is subject to double taxation and is not typically the legal form that a small business should utilize.
o S Corporations – shares are held by the shareholders and but can’t be publicly traded. An S Corporation is a corporate entity that has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. A corporation when formed by default is considered a C Corporation—thus an application must be made and be approved by the IRS to be a S Corporation. The taxable income (net profit) is passed on to the shareholders who report the taxable income on their personal tax returns. These personal tax rates are typically lower than the corporate rates paid by a C corporation. In California for a S Corporation, there is a minimum annual corporate income tax of $800 paid to the Franchise Tax Board.
Determining the most advantageous legal structure is based on a number of factors including:
• number of shareholders
• annual profits
• exit strategies i.e. plan on how to exit the business
• estate planning
• and other factors
Getting it right from the start of a business is vitally important to minimize taxes and personal legal liabilities.
John Spurgeon is a tax attorney in Pasadena, California servicing clients in the greater Los Angeles area. John Spurgeon & Associates, who are both tax attorneys and CPAs, offer a complimentary initial consultation. Please call 626-440-9518.
Tax Tips: Pasadena Tax Attorney & CPA – Unfiled Tax Returns
If you have unfiled tax returns for this year or several years, it is vital that you deal with this with some urgency. The following are tax tips that can help you make this process easier:
• The first thing to know is that filing tax overdue tax returns with the IRS and Franchise Tax Board for California is a situation that can be resolved
• If you have any taxes due once the returns are filed, that is a different matter which also can be resolved with the help of a tax attorney or CPA
• You don’t want to ignore this as the IRS has substantial powers to seize your assets and even commence criminal proceedings against you
• If you don’t file on time you will be subject to large penalties—so the sooner you get your house in order the better
• If you lose your job and apply to unemployment benefits, you could be ineligible
• You will be restricted in arranging financing for a home, car or student tuition if your returns are in arrears. Banks have tightened credit and will ask for tax returns to verify your income. Failure to file tax returns would be a “red flag” to a financial institution.
• The IRS and Franchise Tax Board have sophisticated computer systems to indentify tax evaders. Once you are in their cross hairs they are relentless in going after you.
The objective would be to get your overdue tax returns prepared and filed as quickly as possible. This will greatly support your case that you are a law abiding citizen and not a tax evader. Not filing a tax return is a criminal offense.
If you continue to avoid filing, the IRS and Franchise Tax Board have the right to guess at your income and file a return for you. Once this substitute return is filed and you have tax owing, the tax agencies can commence aggressive collection actions—even if the return is quite wrong.
So the solution is get your back returns filed. Who knows, you could even have a refund due but you only have three years to file or your refund is lost.
Once the returns have been filed, a tax attorney or CPA can assist you with dealing with the IRS and/or Franchise Tax Board regarding any taxes due. There are programs available to make installments or even reduce tax liabilities.
John Spurgeon is a tax attorney in Pasadena, California servicing clients in the greater Los Angeles area. John Spurgeon & Associates, who are both tax attorneys and CPAs, offer a complimentary initial consultation. Please call 626-440-9518.
Tax Tips: Pasadena Tax Attorney & CPA – Tax Preparation Advice
Here is some practical advice when preparing your tax returns or getting the documentation ready for your tax attorney or CPA to do the preparation. You will save yourself a lot of grief by being prepared and keeping good records throughout the year. A tax accountant or tax attorney can do wonders but they will need complete and accurate data.
• If you are self employed, you have many deductions that are available to you but you need to have the details available. Wage and salary earners have fewer opportunities for eligible deductions.
• Rule number 1 is to keep accurate and complete records. These are needed for the tax preparer as well as documentation in the event of an IRS or Franchise Tax Board audit. There is no better “protection” that having excellent documentation of your income and especially your expenses.
• Separate out your personal expenses from your business expenses. This is quite simple to do if you open a bank account for your business and only use it for business income and expenses. Don’t use your business bank account, debit card or credit card as your personal piggy bank.
• Pay yourself just like other employees. Even if you are not a corporation you should pay yourself by writing a check for your “salary”. Then the salary is deposited to your personal bank account where you spend it on personal expenses.
• Get advice from your tax attorney or CPA regarding deductions that require special treatment. These include an office in your home, car expenses, meals, entertainment, and charitable donations. Once you get the advice then stick to the program. E.g. if your tax advisor suggests leasing a car, then lease a car and keep track of the business miles vs the personal miles.
• When you make a business purchase, get a receipt and file it away.
• Don’t pay by cash – use your business bank account, business debit card or business credit card.
• On the income side prepare an invoice or sales receipt for each sale.
• Deposit all income into your bank account – never disburse funds from income before it is deposited.
• Get printed bank statements with originals or copies of checks.
• Utilize accounting software such as Quick Books which is user friendly and every tax accountant knows how to use it to prepare your tax return. Ideally your accounting is done weekly. By keeping your “books” up to date, you can also use the information to manage your business.
Get into a routine with your bookkeeping so that it is kept up to date. That way your tax attorney or CPA can quickly and efficiently prepare your annual tax return. It will save you money and make your records defensible against an IRS audit.
John Spurgeon is a tax attorney in Pasadena, California servicing clients in the greater Los Angeles area. John Spurgeon & Associates, who are both tax attorneys and CPAs, offer a complimentary initial consultation. Please call 626-440-9518.
Pasadena Tax Attorney & CPA – IRS Child-related Exemptions
As a tax and family law attorneys and CPAs we offer timely and accurate representation before the IRS and family law courts in Pasadena and the greater Los Angeles areas
By way of example, you and your spouse have separated and during the following months you both share the kids. Maybe you were never married and still share the child or children. There is no formal parenting plan; it just works out to be whatever is convenient as to which parent has the kid and for how long. Now its time to have your tax returns filed and so you both decide to file individually.
• You have your own tax attorney or CPA, and she tells you and your spouse to file a head of household and take the exemption for junior.
• It is the custodial parent that gets the write off for the child or children. But who is the custodial parent entitled to the exemption? The following represents IRS rules, which generally can’t be overridden by a state family law court.
• It is the custodial parent who is entitled to the dependency exemption, assuming that the parents together (or at least one of them) contribute one-half of the child’s support. In the case of the remarriage of a parent, support of a child received from the step-parent is treated as received by the parent. (Internal Revenue Code §152(e) (6).
For purposes of determining whether or not an individual received, for a given calendar year, over half of his support from the taxpayer, there shall be taken into account the amount of support received from the taxpayer as compared to the entire amount of support which the individual received from all sources, including support which the individual himself supplied.
The term “support” includes food, shelter, clothing, medial and dental care, education and the like. Generally, the amount of an item of support will be the amount of expense incurred by the one furnishing such item. If the item of support furnished an individual is in the form of property or lodging, it will be necessary to measure the amount of such item of support in terms of its fair market value.
If a parent (not necessarily married or separated) provided over one-half of the child’s support, that parent can claim the dependency exemption. That parent has the burden of proving payment one-half and cannot rely upon a waiver from the other parent, which is applicable only for separated or divorced parents.
As tax attorneys and CPAs we provide tax planning, solutions to tax controversies, including tax obligations and tax audits. Our practice areas also includes family law.
