IRS Tax Problems: Beware of Fraudulent Acts
Auditors are trained to spot common types of fraudulent acts by taxpayers. The acts are called badges of fraud. Common badges of fraud include a business with two sets of books, false receipts and altered checks. These kinds of acts can land you in big trouble.
Auditors are trained to look for fraud. They know the tax law is complex and expect to find a few errors in every tax return. Hopefully, they will give you the benefit of the doubt if the error is interpreted as an honest mistake.
A careless mistake on your tax return might cause a 20% penalty to your tax bill. Tax fraud causes a 75% civil penalty. The line between negligence and fraud is not clear and subject to interpretation by Uncle Sam.
At the first hint of an IRS tax problem, contact a tax attorney. Let the attorney help you and the government distinguish what is negligence and not fraud.
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
Tax Tips: Tax Surprises in Divorce
What if the tax law were to affect each of your family law cases? Consider the dangers and opportunities of taxation during and after divorce to help cushion your financial blows. Make the best use of available tax exemptions and relief to ensure truly equitable asset division and fair child and spousal support.
Consider the following tax tips and be sure you understand each:
● Family support taxation, payment and recapture.
● Taxation of “family home” transfers.
● Taxation of stock options.
● Account for factors that can skew the financial analysis of assets.
● Know how to make the best use of “innocent spouse” rules.
Use the following as a check list with your tax attorney.
I. DETERMINE FILING STATUS
A. Claiming Head of Household
B. Should a separated Couple File jointly or separately? Pros and Cons
C. Dependent Exemptions and Credits
II. RELIEF FROM JOINT AND SEVERAL LIABILITY – INNOCENT SPOUSE
A. Three Types of Relief
B. Joint Returns
1. Obtaining Relief Under IRC§6015(c) and IRC§6015(b)
a. Factors Weighing in Favor of Relief
b. Factors Weighing Against Relief
2. Equitable Relief Under IRC§6015(f)
C. Married Filing Separate Returns §66 (a-c)
D. Requesting Relief – Form 8857
III. SPOUSAL AND CHILD SUPPORT
A. Is the Support Tax Deductible?
B. What Qualifies as deductible spousal support?
C. Spousal Support: Payment to Third Party and “Recapture”
D. Child Support
1. Qualified Payment
2. Contingency Relating to the Child
3. Support Calculation Case Study
IV. TAX CONSEQUENCES IN THE DIVISION OF ASSETS
A. Requirements for §1041
1. Transfers Within One Year After Marriage Ends
2. Six Year Presumption – “Related to the Cessation” of Marriage
B. §1041 and Basis
C. Marital Residence Exclusion Requirements
V. DIVIDING STOCK OPTIONS AND PENSION PLANS
A. Glossary of Relevant Terms and Concepts
B. The Taxable Event
C. ISOs (Incentive Stock Options) vs. NQs (Non-Qualified Stock Options)
D. Dividing Stock Options: Transfer Taxes and Reporting Tips
E. QDROs to Divide Pensions
1. Definition
2. Key Components to Include
3. When to File a QDRO
4. Distribution Under a QDRO
VI. OTHER TAX CONSIDERATIONS
A. Equalizing Notes
B. Legal Expenses
C. Carryover Items
For more tax tips and other related tax attorney tips, please visit http://www.taxproadvocate.com
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
Tax Information Regarding the Sale of a Home
A spouse or former spouse who is excluded from the family residence in connection with dissolution proceedings can still exclude gain when the family home is sold.
Internal Revenue Code section 121 provides for exclusion of gain on the sale of a principal residence. To qualify, a taxpayer must have owned and used the home as his or her principal residence for period aggregating at least 2 years during the 5-year period immediately preceding the sale.
The amount of gain excluded generally may not exceed $250,000. There are exceptions, for married taxpayers who file a joint return for the taxable year of the sale. They may exclude up to $500,000, provided that either spouse has owned the home, and both spouses have used the home as their principal residence, for periods aggregating at least 2 years during the 5 year period immediately preceding the sale, and the exclusion is not being applied to a second sale within any 2 year period occurring entirely on or after May 7, 1997.
Prorated exclusions are available to taxpayers who fail to meet the requirements regarding ownership, use, or time elapsed since the most recent prior sale to which the exclusion applied.
Regarding separation or divorce, an individual will be treated as using property as his or her principal residence during any period of ownership in which in the individual’s spouse or former spouse is granted us e of the property under a decree of divorce or separate maintenance, another form of decree requiring a spouse to make payments for the support or maintenance of the other spouse, or a written separation agreement. This is commonly called a Duke order.
Note that there is a gray area with regards to IRS sections 1041 and 121. If you are separated from your spouse or facing divorce, contact your CPA and discuss these two code sections.
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
Tax Attorney Advice Regarding Foreclosure
There a four main considerations that a taxpayer must think about when it comes to foreclosure.
1. If a lender suffers greater than $600 loss, they are required to prepare and file a Form 1099-C (Cancellation of Debt) with the IRS.
2. Debt cancellation is treated as ordinary income, even if a long term capital gain would have been recognized.
3. Relief for residential homeowners: The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007. Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence. Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified.
4. Relief for investor owners of residential real property or owners of commercial property. Exception to imposition of taxable gain when the sale/loss of the real property made the owner insolvent.
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
How Not To Solve Tax Problems
The follow is a continuation of our series on the audit of tax returns and specifically fraud. Taxpayers should be cognizant of the fact that they will not solve a tax problem through fraudulent actions. These audit guidelines provide examiners with information and techniques designed to assist the auditor in recognizing and detecting indications of fraud reflected on a return. Most of the fraud situations which an examiner will encounter concern omission or understatements of taxable income. Below are some of the most common “badges” of fraud.
1. Omissions of sources of income. Examples: tip income, income from self employment and gambling winnings.
2. Substantial unexplained increases in net worth, especially over a period of years.
3. Substantial excess of personal expenditures over available resources.
4. Bank deposits from unexplained sources substantially exceeding reported income.
5. Failure to deposit receipts to business account contrary to normal practices.
6. Cashing checks representing income at a check cashing services and banks other than the taxpayer’s.
7. False statement, especially if made under oath, about a material fact involved in the examination. For example, taxpayer submits an affidavit stating that a claimed dependent lived in his household when in fact the individual did not.
8. Attempts to hinder the examination. For example, failure to answer pertinent questions or repeated cancellations of appointments, refusal to provide records, threatening potential witnesses, including the examiner or assaulting the examiner.
9. Assets placed in another name.
10. Close relationship between parties to a transfer.
11. Transactions surrounded by secrecy.
When the agent has discovered the “first indications of fraud,” the agent and the agent’s group manager confer with a “fraud coordinator” about the fraud potential of the information obtained. If the facts so warrant, the examiner will then prepare a referral report (Form 2797) to enable the Criminal Investigation Division to determine the criminal potential of the case.
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
The IRS is Tracking You
As a tax attorney and CPA I have noted some interesting changes in IRS behavior. In this series of blogs, I will explore with you the process by which Uncle Sam processes returns for examination.
It is often said that our system of taxation rests upon “voluntary compliance” by the American taxpayer. However, the goodwill of the American taxpayer is not left untried, and compliance is encouraged to promote the highest degree of voluntary compliance on the part of taxpayers.
The IRS reported that for fiscal year 2007 the audits of small businesses organized as corporations rose by 12 percent from the previous year. Audits of high-income taxpayers, i.e., those earning more than $100,000 per year, surpassed the highest figure in 20 years and triple the number of audits completed in 2001. Audits of taxpayers increased by 7 percent from the previous year. Revenue from IRS collection activity in fiscal year 2007 increased to $59.2 billion, an increase of 22 percent from the previous year. The number of criminal prosecutions grew by 6 percent from 2006.
Have you noticed the trend?
The French minister of finance for Louie the 14th stated that the art of taxation is plucking the most feathers from the goose with the least amount of squawks. In the wake of the enactment of the 1998 Act, the IRS developed the National Research Program (NRP). The NRP is a comprehensive effort by the IRS to measure compliance for different types of taxes and various sets of taxpayers, patterns and areas for examination.
The NRP is designed to provide a statistically valid representation of the compliance characteristics of taxpayers. Under the NRP, the IRS places greater emphasis on using its own internal computer generated data and publicly available data associated with each tax return in making the determination of whether a return should be considered for audit.
By maximizing use of data rather than person to person audits, the IRS keeps negative media stories out of the press while building its case against taxpayers.
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 and experience to effectively deal with IRS tax liens or the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
Tax Attorney Pasadena: Paying Household Employees
For those you that have domestic help or household employees, be aware of Uncle Sam filing requirements. Domestic help may include a housekeeper, nanny, maid, pool man, dog walker, driver, personal attendant, cook etc. As a tax attorney and CPA I recommend that if you pay them over $1,000 in a calendar year, that you put them on the payroll. Payroll includes filing with the IRS and making Federal and State deposits.
Many of you will say, don’t worry, I paid them cash. Don’t fool yourself. That domestic that you let go can file for unemployment benefits, which can come back to haunt you.
The IRS is interested in the millions of unreported dollars paid to these people. Even if the employee doesn’t have enough income to file tax returns, that domestic could still eligible for state unemployment insurance. From the IRS standpoint, the best part is the penalties and interest they will get from you, the employer.
Here are the rules:
• If you have a household employee, you may need to withhold and pay social security and Medicare taxes, pay federal unemployment tax, or both.
• You do not need to withhold federal income tax from your household employee’s wages. But if your employee asks you to withhold it, you can.
Do You Need To Pay Employment Taxes?
IF you … THEN you need to …
A– Pay cash wages of $1,700 or more in 2009 to any one household employee. Withhold and pay social security and Medicare taxes.
• The taxes are 15.3% of cash wages.
• Your employee’s share is 7.65%.
(You can choose to pay it yourself and not withhold it.)
• Your share is a matching 7.65%.
Do not count wages you pay to—
• Your spouse,
• Your child under the age of 21,
• Your parent (see page 4 for an exception), or
• Any employee under the age of 18 at any time in 2009
B– Pay total cash wages of $1,000 or more in any calendar quarter of 2009 to household employees. Pay federal unemployment tax.
• The tax is usually 0.8% of cash wages.
• Wages over $7,000 a year per employee are not taxed.
• You also may owe state unemployment tax.
Do not count wages you pay to—
• Your spouse,
• Your child under the age of 21, or
• Your parent.
State employment taxes. You should contact your state unemployment tax agency to find out whether you need to pay state unemployment tax for your household employee. You should also determine if you need to pay or collect other state employment taxes or carry workers’ compensation insurance.
Household employers must file Schedule H of Form 1040 to pay FICA (The Federal Insurance Contributions Act (FICA) tax is a federal payroll tax), FUTA (Federal Unemployment Tax Act) and any withheld federal income tax. Household employment taxes must be included in estimated tax payments.
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 and the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
Avoid Unexpected Tax Liabilities by Consulting a Tax Attorney
There are three basic levels to an IRS tax audit examination and its aftermath:
1. The tax audit process itself
2. The appeals process
3. Tax court or district court.
The first level or audit stage is not at all dispositive (settling of the matter) of the taxpayers final overall liability. At the audit stage, when a tax examination is completed by the auditor, the additional tax can be just the tip of the iceberg. For example a $5,000 audit tax does not contain interest and penalties.
Depending upon the nature of the tax and the auditor perceptions, the penalties can sometimes be 100% of the tax. Therefore, a taxpayer may and often does underestimate the “out the door” liability when he or she prematurely agrees to the tax.
Once the Taxpayer signs off on the federal liability, the adjustments are shared with the Taxpayer’s state. A state like California, which has an income tax, will then seek its own income tax based upon the federal audit report.
To add insult to injury, the IRS will audit proceeding or subsequent years from the year just audited, looking for the same adjustment. If the taxpayer has signed off on the liability for the initial year in question, he or she may have waived any argument for preceding or subsequent years for the same type of adjustment. For example, if the taxpayer’s unreimbursed business expenses are not accepted at the audit stage, those same expenses will likely not be accepted in later audits.
A tax attorney or CPA should be consulted before a taxpayer signs off on the tax audit results.
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 and the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
The IRS is Now Hiring
As I reported in previous posts and articles, the IRS is now hiring employees when many companies are cutting back. The administration is quietly increasing its staff to generate badly needed revenue and implementing its program of leveling the playing field.
According to BNA Daily Tax Report the Internal Revenue Service will hire more than 3,500 frontline enforcement employees as it embarks on its largest hiring initiative in recent history, Deputy Commissioner for Services and Enforcement Linda E. Stiff said March 30.
This number includes more than 2,000 new revenue agents and revenue officers, Stiff said during a luncheon at the Tax Executives Institute’s 59th Midyear Conference. Several hundred of these new hires will be directed at large corporate compliance, and as many as 700 will be hired to deal with international issues, she said.
In future posts I will discuss the standards and techniques used by examiners during the course of their income tax audits.
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 and the Franchise Tax Board. Please call 626-440-9518 for a complimentary initial consultation.
When You Really Need a Tax Attorney
Taxpayers should be aware that there are serious penalties for tax fraud. These may include failure to file, under reporting or not reporting income, money laundering and other economic crimes. An investigation can result from cash transactions reported to banks.
Where there is smoke, there is often fire and, where there is cash, there is often illegal activity, or at least that is the rationale adopted by Congress.
Grand Jury
The government routinely relies on the use of grand juries to investigate alleged criminal tax matters. The Grand jury is both an investigative and accusatory tool used by the government to indict Taxpayers for criminal acts. If the Taxpayer is not indicted by the Grand Jury for criminal matters, the government can still file a civil matter against the Taxpayer.
For the ordinary citizen, being subpoenaed to appear before a grand jury is a harrowing experience. An initial distinction between the Internal Revenue summons and grand jury subpoena is that, unlike the IRS, the grand jury does not give a definite period of notice prior to the return date on the subpoena.
The witness appearing before a grand jury should have both a Fifth and Sixth Amendment right to have counsel present with him or her while they are testifying. As both a tax attorney and a CPA, I strongly recommend to clients to have representation.
CID (Criminal Investigation Division)
The law enforcement arm of the IRS is its Criminal Investigation Division. CID investigators will often serve grand jury subpoenas and conduct informal interviews of the witnesses before the witness engages an attorney. This is especially frightening because a witness can be charged with lying to a federal officer, when the witness believed that he or she was cooperating and perhaps deflecting the investigation away from them.
CID resources are focused into three “strategies”:
• the Compliance Strategy,
• the Money Laundering Strategy, and
• the International Strategy.
CID has an astonishingly broad array of sources from which it can obtain information about a taxpayer’s finances. Such sources include the Financial Crimes Enforcement Network (FinCEN), an organization established by the US Treasury Department, to support domestic and international anti-money laundering efforts.
CID even has access to financial and earnings statements from parents of students applying for federal financial aid for college, to loan application submitted to the Small Business Administration, and to information from banks, insurance companies, and credit card agencies.
The Internal Revenue stresses how important it is for a special agent to be well prepared for an interview “since there may only be one opportunity to interview the subject or witness.” Special agents will try to schedule an interview at a time early in the investigation when it is likely to catch the taxpayer off guard.
They are well aware that a taxpayer who is interviewed before he or she as sought the advice of counsel may make incriminating statements despite being given Miranda type warnings. Taxpayers will frequently make damaging admissions, or statements that will destroy what would otherwise be a viable defense.
As soon as a taxpayer learns that a special agent has been assigned to investigate him or her, prudence mandates that an experienced tax attorney be retained.
