Millionaires are at higher risk of an audit these days

According to a recent CNN report, IRS rates for millionaires jumped up again this past year. Those making more than $10 million dollars have an eighteen percent (18%) chance of audit.This represents a seventy-three percent (73%) increase from last year and 18 times the rate seen across all incomes.

Significantly, audits do not necessarily mean the IRS will collect more money.Many audits can drag out for years and often the taxpayer ends-up owing nothing.This means the IRS must gauge how much money its new enforcement efforts will bring over the next few years and then, make a decision whether the new strategy is working.It can reasonably be expected, however, that the IRS will continue ramping up audits of the wealthiest Americans if a significant amount of money is collected as a result.

Thomas Cooke, professor of accounting and business law at Georgetown University said “It’s fine and dandy for the IRS to say this is how many audits we’ve given to the wealthy, but we’ll have to get some more data on how much they collect, and the proof will be in the outcome.” In the end, whether the IRS collects money from increasing the number of audits targeting the wealthy or not, one thing is for sure.The threat of an audit will have a chilling effect on other wealthiest of American taxpayers and the increasing level of scrutiny is likely to have a positive effect on self-reporting amounts and collection efforts.

Millionaires facing an audit would be well-advised to retain a tax lawyer.Having the assistance of competent counsel during the audit, and afterwards to negotiate any possible settlement of back taxes uncovered through an audit, is a good way to help ensure a fair and just outcome.A tax lawyer can also be instrumental in advising a millionaire client how to avoid IRS wage garnishments, IRS liens, IRS levies and a host of other IRS collection techniques.A smart tax lawyer can also provide detailed information to a client about whether the client may qualify for an offer in compromise or some other arrangement to settle back taxes owing.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

DID the Internal Revenue Service just scam me?

With just a few weeks away before the dreaded April 15th filing deadline, taxpayers have more to fear than the IRS.Now they’ve got to be on the lookout for bogus IRS emails. Most people don’t realize the IRS does not initiate emails.If they receive an unexpected email from the IRS, chances are it’s a phishing attempt to collect personal information about the taxpayer.Although the emails may take on different looks and approaches to lull the taxpayer into a position of disclosing confidential personal information, all the emails show the IRS in the sender line and typically look quite official.Concerns about questionable emails should be directed to the IRS’s criminal investigations unit.

A phishing email may tell the taxpayer they’ve overpaid their taxes by $500 and are entitled to get a refund if they fill-out a form providing some additional information.The sender may even go so far as to tell the taxpayer there is a deadline for sending the information (i.e. send your response within 5 business days to ensure a prompt refund wired directly into your account and to avoid IRS garnishments, IRS levies, IRS liens and/or fines and even criminal prosecution) so that the sender may get the taxpayer’s bank account information.

In another form of the fraudulent IRS email, taxpayers are told that the IRS has determined they are eligible for a refund of $15,000.If you want the money (and, who doesn’t?) you are directed to click onto a hyperlink contained within the email and redirected to complete a form soliciting all kinds of confidential personal information.The scammers then use the information to empty the taxpayer’s bank account and steal his/her identity.

Chances are if it sounds too good to be true (i.e. the IRS is giving you money) it probably is too good to be true. Protect yourself against these scammers.Stay current and aware of your tax liabilities and avoid owing back taxes or having unfiled returns.The more you stay on top of your financial situation the less likely a scam such as this might catch you off guard.Remember, to avoid being a victim of a bogus IRS email stay alert and be vigilant to protect your confidential information.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Deductions you didn’t think existed!

As the time for filing your taxes is here, you might appreciate hearing about a few little known deductions which could arguably be available, if you qualify. These deductions involve things like cosmetic surgeries, body oils and that’s right, even beer as long as they are arguably work-related and/or advance your career/business interests!

Tax attorneys will tell you that ordinarily the IRS does not permit tax deductions for cosmetic procedures, but there are exceptions. Take the case of exotic dancer, Cynthia “Chesty Love” Hess who, in 1994, sued and beat the IRS because she took a $2,000 dollar deduction for her breast augmentation surgery which the IRS denied. Ms. Hess claimed that her breast implant surgery was work-related and that she had undertaken to have her breasts enlarged for the sole purpose of advancing her career. The U.S. Tax Court agreed.

In a remarkable opinion, written by Judge Joan Pate, the Tax Court noted that Ms. Hess’ new breasts weighed-in at approximately ten (10) pounds each and were so uncomfortable that the Judge concluded Ms. Hess derived no personal benefit from them and permitted her breast augmentation deduction as a “stage prop.”

Oils and tanning products are not usually deductible either, according to most tax lawyers, but if you are a body builder such items may arguably be claimed as work-related for tax purposes. Consider the Wisconsin bodybuilder, Corey Wheir, who in 2004 sued the IRS because it denied deductions he was claiming for bison meat, dietary supplements, body oil and tanning products.

Again, the U.S. Tax Court found that while the meat and supplements Mr. Wheir was claiming could be consumed by others, who were not body-builders (and as such, they were not allowable tax deductions), the oils and tanning products were a different story. Those items had been marketed exclusively through body-building magazines and were not generally available to the public through “normal marketing outlets.” Accordingly, the Tax Court accepted Wheir’s argument and allowed him to claim the body oils and tanning products as work-related deductions.

And then, of course, there is the story of the gas-station owner who tried to claim a tax deduction for beer he was giving away to motorists who filled-up their tanks at his station. In a judicial decision, which perhaps through inadvertence neglected to comment on the propriety of giving motorists free beer before sending them back on the highway, the Court concluded a business owner “can offer free beer to beer lovers” to improve business. As such, the beer was a legitimate business expense and could be deducted from the station owner’s taxes (see Sullivan v. Commissioner, 1982).

So if you have any questions about what deductions you may claim, or if you have unfiled returns, and/or you are concerned about how much back taxes you may owe, consult a competent tax attorney, or other tax professional, and get some advice about asserting the right deductions and getting those unfiled returns completed and filed, and resolving any back taxes before IRS wage garnishments, IRS levies and/or IRS liens complicate your ability to resolve your tax problems and settle back taxes which may be owing.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Good News on IRS Refund

Illinoisans rejoice! The Internal Revenue Service has approximately four-million dollars available for the lucky 3,600 taxpayers residing in Illinois that may have been eligible for a tax refund, but never actually received it.

On a national level, back in March of 2009, the IRS website reported that approximately 1.3 Billion dollars in unclaimed refunds awaited over a million people who did not file federal income taxes for 2005.

Specifically, Illinois IRS spokesperson Susan Hales reported that the number of people owed refunds is about the same this year as in years past.

“We do have this list every year,” Hales said. “And, for the past few years, it has been right around 3,500 tax payers on that list.

IRS Commissioner Dough Shulman released a statement to the American people regarding this issue during these hard economic times. “People should check their records, especially if they had taxes withheld from their paychecks but were not required to file a tax return. They may be leaving money on the table, including valuable tax credits that can mean even more money in their pockets.”

The primary reason why the refunds remain unclaimed by their rightful recipients is because many of these taxpayers have changed their address or changed their filing status since filing their 2009 tax returns.

Susan Hales says, “All we find in many cases, is that once people file the next year’s tax return, we’ll get an updated address, and we can send the check out to them, once we get that new address. But, we’re trying to get that money out as quickly as possible. The holidays are coming up.”

Another explanation behind the unclaimed refunds is a common mistake that many individuals make by not filing because their income was so low that they were not required to file a tax return despite the fact that they had taxes withheld from their wages or made quarterly estimated payments.

In the case that a return was not filed, the law grants a three-year window to claim a refund. After these three years have passed, the money is now U.S. Treasury property.

In order to claim a refund, please visit www.irs.gov and click on the “Where’s my Refund” link.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Employee vs. Independent Contractor

Clean Trucks Threaten Drivers’ Status

The ports of Los Angeles and Long Beach recently mandated converting freight-hauling trucks used to haul freight around the ports to newer model clean-burning trucks. It soon became apparent that most contract drivers would be unable to afford to purchase the newer late-model trucks, which can cost in excess of $100,000. Therefore, the motor carrier companies that hire them opted to buy the trucks and lease them back to the independent contract drivers.

This lease-back arrangement threatened the independent legal status of the drivers. Leasing the trucks to the drivers would suggest a permanent relationship between the companies and the drivers and tend to favor the view that the drivers were essentially employees, not independent contractors.

Long-standing practices had involved motor companies hiring the drivers as independent contractors, thus avoiding thousands of dollars in payroll taxes & worker compensation insurance. The carriers have a huge stake in maintaining the status quo. They soon can expect a major assault on the status of drivers.

According to the IRS’ website, the IRS uses three characteristics to determine the relationship between businesses and workers:

Behavioral Control covers facts that show whether the business has a right to direct or control how the work is done through instructions, training or other means.
Financial Control covers facts that show whether the business has a right to direct or control the financial and business aspects of the worker’s job.
Type of Relationship factor relates to how the workers and the business owner perceive their relationship.
The drivers’ current independent status has been tested in court in the past, with the companies prevailing, mainly by carefully maintaining a clear legal distinction between the driver as contractor and the driver as employee. The use of lease-backs with the new rigs threatens this distinction by altering the financial control factor used by the IRS.
There is a belief that the independent contractor drivers may be avoiding taxes by under-reporting their income. The motor carrier companies also avoid payroll taxes and workmen’s compensation insurance coverage by maintaining the current status. The federal and state governments have begun focusing on the possible misclassification of the port drivers as contractors. Also, the Teamsters Union hopes to have the drivers declared employees so that the union can organize them into a union.
Therefore, much is at stake as the ports begin the conversion to clean trucks, and the motor companies defend their long-held classification that the drivers are independent contractors, not employees. The use of lease-back trucks threatens this status. The importance of the change will probably be determined in court, with the drivers’ status of employee vs. independent contractor in the balance.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Changes for 1099 reporting for 2011

Currently, there are drastic legislative changes that are being proposed in reporting load income. The idea behind these changes being that the 1099 form can be used to track all purchases of over $600 regardless of if the company is a corporation and/or a partnership etc. Sound crazy? You bet your administrative nightmare it is.

Luckily for Quickbooks users, all vendors can be tracked by setting up accounts for credit cards and petty cash. For example, if you have a lot of vendors that take AMEX, Quickbooks can track the vendors in the AMEX account. Do the same in your petty cash account. This method is much easier than simply placing AMEX as a vendor in the check register and paying the bill using split lines. Nobody wants to go through 12 different AMEX, VISA, Discover and/or MC bills to make sure you’ve caught all the vendors. By setting these accounts up ahead of time you will breeze through the thousands of 1099’s you will have to do in 2011. Sarcasm aside, the rule of thumb is to always invest the work before the task and not wait until the end of the year. The real challenge is finding the resources to make that rule come true. Happy New Year!

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Tax Hike Prevention Act of 2010 Highlights

On December 17, 2010, President Obama signed into law the Tax Hike Prevention Act of 2010. With its passage, the Bush-era tax cuts that had been scheduled to expire at the end of 2010 will remain in effect for two more years. The following is a quick summary of the key provisions in the new law.
Extended income tax rates

The tax bracket rates that had been implemented earlier this decade and had been scheduled to expire at the end of this year were extended for two more years. The bracket rates are: 10%, 15%, 25%, 28%, 33%, and 35%. Also, itemized deductions and personal exemptions for high-income taxpayers will be fully allowed instead of being partially phased out.
AMT Fix

More than 20 million taxpayers would have been subject to the stealthy Alternative Minimum Tax. The amount of income exempt from this tax was extended and inflation-adjusted. Also, certain non-refundable credits will continue to be allowed to reduce regular tax and AMT.
Extended investment tax breaks

Long-term capital gains rates were extended for two years. This means most people will pay a maximum tax rate of 15% on qualified capital gains and dividends. Lower-income taxpayers will continue to enjoy a 0% tax rate on capital gains and dividends.
Marriage penalty relief

Married couples will continue to see relief from the so-called “marriage penalty” for two more years. This means they will enjoy a basic standard deduction which is twice the amount for a single individual. Also, the 15% tax bracket had been expanded to help offset this penalty, and that provision was also extended two more years.
Expanded child tax credit

The child tax credit had been scheduled to drop from $1,000 per child to $500 per child. The higher credit amount was extended for two more years. Also, the refundable portion of the child tax credit was extended for two years.
Expanded college credit

The recently expanded HOPE college tuition credit, renamed the American Opportunity tax credit, had also been scheduled to expire at the end of 2010. This “super-HOPE” tuition credit was extended for two more years.
Smaller estate tax

The federal estate tax had expired for taxpayers dying on or after January 1, 2010. A cumbersome “carry-over basis” regime had replaced the estate tax. The new law restores the estate tax, but with a surprisingly-high exclusion of $5 million and a tax rate of 35%.
Social Security tax paycheck break

Wage-earners had been allowed a Making Work Pay credit against income tax of either $400, or $800 for married couples. This was set to expire at the end of 2010. In its place, a one-year, two-percent reduction in OASDI social security tax was added. This is expected to inject about $120 billion into the economy in 2011.
Extension of individual tax breaks

A number of individual tax breaks that had been scheduled to expire were extended. These include:

State and local sales tax deduction
Higher education tuition deduction
Charitable contributions from IRA’s
$250 above-the-line teacher’s classroom expense deduction
Deduction of mortgage insurance premiums
Student loan interest deduction
Earned Income Tax Credit enhanced credit

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Some Taxpayers Must Wait to File This Tax Season

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was enacted on December 17, 2010. Because it was enacted so late in the year, the IRS announced on December 23 that some taxpayers who could benefit from this new tax law would have to delay filing their tax returns this tax season.

This includes taxpayers who are impacted by any of the three tax provisions that expired at the end of 2009 and were renewed by the tax act. The following taxpayers are affected:

Taxpayers claiming itemized deductions on Schedule A. Because the act extended the deductibility of state and local sales taxes, anyone who itemizes and file Schedule A will need to wait until late February to file their returns.
Taxpayers claiming the Higher Education Tuition and Fees Deduction. This deduction covering up to $4,000 of tuition and fees paid, is claimed on Form 8917. The form is not expected to be ready until late February.
Taxpayers claiming the Educator Expense Deduction. This deduction is for teachers with out-of-pocket expenses of up to $250. The deduction is claimed on line 23 of Form 1040, and the IRS computers will not be programmed to handle this deduction until late February.

The IRS will announce a specific date in the near future when it can start processing tax returns impacted by these recent tax law changes. In the meantime, taxpayers affected by this changes should begin working on completing their tax returns, but should not submit their returns until the IRS gives the go ahead. More information will be available at www.irs.gov soon.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

NFL PLayers: No One Is Immune From Audits

As football season is officially winding down, the IRS review of NFL player returns does not. About 20% of pro-football players could be audited this year. Among the deductions that the IRS is taking a closer look at are: agent fees, union dues, meals, entertainment and other sport related expenses like training and conditioning expenses and locker room, clubhouse and union dues.

While all of these expenses are deductible, players are required to have very detailed records of such expenses and unfortunately NFL players are not known to keep such detailed records. A simple credit card statement will not do. Often times the IRS wants to see an actual receipt or invoice for the purchase as well as an actual copy of the cancelled check.

Further, adding to the complication, players, much like regular tax payers are only given a 90 day period in which to respond to an audit notice. This means if a player gets a notice during the regular season it may make it very difficult for them to comply with the request. If a player is out of town playing games, that makes it even harder.

Failure to provide documentation for an audit can lead to an increase in tax liability, tax liens filed against the player, loss of tax refunds and can affect a player’s credit.

What can an individual, non-professional athlete take away from this? The need to keep very detailed records. Keep copies of actual receipts and even go so far as to take notes on receipts and checks as to account for what each one is for. Accountants for the athletes are advising them to invest in a scanner and software that helps them keep track of all of their expenses. That way if an NFL player does receive an audit notice, he will be properly prepared. While that might not be necessary for you, it might be something to consider.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999

Regulatory Changes for 2011 Affecting Taxes for Small Businesses

The New Year initiates tax reform. As such, small businesses will be confronted with several changes to our current tax policies, including a retroactive extension on certain temporary business tax incentives which expired in 2010, ability for small businesses to expense 100 percent of its capital investments, and implementation of a partial payroll tax holiday.

Additionally, new provisions have been enacted to provide small businesses tax credits – in other words, incentives notwithstanding their limitations and requirements – in order to persuade small business employers to purchase health insurance for their employees. Such tax credits are effective for the 2010 tax year carrying forward through to 2011. However, preexisting health insurance plans that were made effective prior to or on March 23, 2010 will be grandfathered. Grandfathered affords small business employers the opportunity to avoid the implementation of many of the new protections under the recent health care reform law. For employers and small businesses to remain grandfathered, employers cannot make any significant alterations to their employees’ health plans.

Furthermore, it is important to note that current economic conditions have led many states to take critical action in addressing budgetary issues. These states have or may contemplate impromptu tax increases or filing changes to taxes to raise state needed revenue.

Similar to state agencies, the Internal Revenue Service (IRS) is improving its enforcement efforts in a variety of areas to help collect more tax revenue during this time as the United States is dealing with budget deficits. In 2010, the IRS initiated an employment-tax audit program that concentrates on executive compensation, adherence to general employment tax filing requirements, fringe benefits, and employee misclassification, which will continue throughout 2011. In addition, it is accelerating its efforts to increase tax compliance for employees who generate an income through the collection of tips.

Tax policies, procedures, and laws are continually evolving andtherefore it is necessary to stay up to date with such changes in order to receive the most advantageous tax credits or deductions available to a particular individual or entity.

 

Segal, Cohen & Landis
9100 Wilshire Blvd. Ste. 601E
Beverly Hills, CA 90212
(310) 285-3999