Federal Government Intending to Tax Small Businesses Out of Business

At a time when most people agree the engine for creating new jobs in a depressed
economy is small business, IRS attorneys following the government’s new strategy for
increasing revenue point with concern to some recent comments by Treasury Secretary
Timothy Geithner. During testimony before the House Small Business Committee last
week, IRS tax lawyers say Mr. Geithner told Congress the federal government “must”
raise taxes on small businesses so the government doesn’t “shrink.”

According to these same IRS tax attorneys, the Obama administration’s plan to raise
taxes on small businesses is part of its overall strategy to increase revenues by raising
taxes on all Americans who make more than $250,000 per year, including small
businesses which file taxes the same way as individuals. The revelation came during
an exchange between U.S. Representative Renee Elimers, a Republican from North
Carolina, while Geithner was explaining how the Obama administration intends to raise
additional revenue.

Ms. Elimers responded, and many IRS attorneys representing small businesses agree,
that “[o]verwhelmingly, the businesses [in North Carolina and throughout the country]
continue to tell us that regulation, lack of access to capital, taxation, fear of taxation,
and just the overwhelming uncertainties that our businesses face is keeping them
from hiring.” Geithner responded by claiming the Obama tax increases would only
affect “three percent” of small businesses, while shrugging off the point that 64% of all
U.S. jobs created are through small businesses.

Geithner contents the Obama administration is “…not doing it because we want to…”
but rather out of alleged concerns that “…if we were to cut spending by [1 trillion dollars]
that magnitude to do it, you’d be putting a huge additional burden on the economy,
probably greater negative economic impact than that modest change in revenue”.
While Geithner doesn’t disagree the country needs more jobs, he maintains the
intended tax strategy is the governments only alternative.

In an incredible statement which caused several IRS tax attorneys to scratch their
heads, Geithner concluded his remarks by suggesting that further taxation of small
businesses would be “good for growth.” The comment led some IRS attorneys to
suggest he must have been referring to the growth of the federal government, as raising
taxes on small business is more likely to cause further unemployment in the private
sector and ultimately shrink the governments already struggling tax base.

 

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

Innocent-Spouse Rules under review by IRS

IRS attorneys report the Internal Revenue Service is currently reviewing its innocent-spouse rules and plans to reveal changes in as early as a few weeks. These IRS tax lawyers note that a spokesperson for the IRS, Terry Lemons, was recently quoted as saying “We are seeing from our review so far that clearly our procedures need to be improved in this area [referring to the IRS’ review of the innocent-spouse rules]”.

Part of the problem, according IRS tax attorneys and numerous members of Congress, is the two-year rule which causes many taxpayers seeking relief under the rules to miss the filing deadline. According to some IRS attorneys this is often due to a spouse hiding the mail or otherwise concealing the tax liability from the innocent-spouse until the deadline has passed.

IRS tax lawyers point out that most taxpayers don’t understand that once the IRS initiates a refund offset, which takes place when the agency withholds a taxpayer’s refund to cover unpaid back taxes owing, the clock for filing innocent-spouse protection starts. Sometimes, IRS attorneys say the innocent-spouse’s situation is further compounded by such things as domestic abuse, divorce, death and/or fraud.

Most IRS attorneys will tell you that getting innocent-spouse protection is difficult, even for those few savvied taxpayers who manage to seek relief within the two year period. The agency requires the innocent-spouse to prove they didn’t know, or did not have reason to know, that their spouse had incurred unpaid back taxes.

Among the considerations, IRS tax lawyers say the agency will look at the innocent-spouse’s education level and the couple’s financial situation. If the IRS believes the innocent-spouse actually benefited from the tax avoidance, IRS attorneys assert the agency will reject the claim and hold the innocent-spouse liable for the back taxes owing.

If you are an innocent-spouse who is now learning about back taxes incurred by your spouse, IRS attorneys suggest you seek immediate help from and IRS tax lawyer or other tax professional. Sitting around waiting for your tax problems to work-out themselves will typically result in the IRS initiating collection efforts in the form of IRS liens, IRS levies, and/or IRS wage garnishment all the while the amount of back taxes you owe continues to increase due to penalties and interest.

For women and/or men who have never been involved in their family’s finances, IRS attorneys caution it is prudent to take a greater role in understanding your financial situation. Don’t just blindly sign a joint tax return without understanding at least something about your family’s income and expenses. Being more proactive may help avoid a surprise notice from the IRS that you owe back taxes.

 

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

How many years back can the IRS go when auditing your returns?

IRS attorneys will tell you it is presently unclear how many years back the IRS may go auditing your returns in certain cases. That’s because cases like Salman Ranch, LTD suggest the IRS may go back as far as six years to audit your tax returns and look for back taxes you may owe. IRS tax lawyers say in other cases, like Home Concrete & Supply LLC, the agency has been limited to going back only three years to audit tax returns.

The good news, according to IRS tax attorneys is that most of the time the IRS will only be permitted to go back three years to conduct an audit. But, these IRS attorneys point out that the agency gets twice the time (six years) for a “substantial understatement of income.” IRS attorneys say case law interprets a “substantial understatement” as an omission of 25% or more of gross income. But understanding what is meant by omitting 25% or more of your gross income is sometimes the subject of hotly contested litigation.

IRS tax lawyers explain the IRS takes the position that anything which has the “effect” of omitting 25% or more of your gross income, such as an inflated tax basis, entitles the agency to another three years to conduct its audit. So, if you sell your home for $3 million dollars and claim your investment in the property (your basis) was $1.5 million dollars, when in truth is it was only $500,000 the effect of your basis would be that you paid tax on $1.5 million dollars when you should have paid taxes on $2.5 million dollars. In this example, IRS attorneys say the agency would argue it’s entitled to audit you going back six years.

So when does the clock start? According to IRS tax lawyers the statue of limitations typically runs three years after the return’s due date (ordinarily April 15th). If you file your tax return before the actual due date (i.e. February 15th), the due date is still the controlling date for the statute of limitations. If you file your return later, without an extension, IRS attorneys say the statute will run three years from your actual late filing date rather than the due date.

Given the foregoing, IRS tax lawyers caution taxpayers to consider keeping their tax records longer than conventional wisdom has historically dictated (three years) on the outside chance the government may want to audit six years after the fact. This is particularly true as the law in this area is continuing to be written by Federal District Courts, and the IRS keeps pushing the boundaries of the statute of limitations in which to audit.

If you have questions about whether an IRS audit is timely, you are encouraged to seek help from a competent IRS attorney or other tax professional.

 

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

Major Overhaul of Tax Code Warranted

Earlier this week the Senate Finance Committee held hearings which IRS attorneys say revealed harmful inequities and unnecessary complexity associated with the U.S. Tax Code. While the testimony came as no surprise to most IRS tax lawyers, the revelations were never the less remarkable.

According to IRS tax attorneys following the hearings, testimony from the Government Accountability Office (GAO), the Taxpayer Advocate (TPA) and small business owners suggested the tax code is too complex, unfair, and that IRS “heavy-handed” enforcement prompts reluctance in taxpayers to take proper action.

One issue raised during the testimony involved the cost of compliance. IRS attorneys report that Michael Brostek, Director, Tax Policy and Administration, testified the cost of compliance was too high and required too many man-hours. Further, these IRS tax lawyers say the GAO found reporting error rates were higher among paid tax return preparers (56%) versus individual taxpayers preparing their own returns (47%).

Perhaps even more disconcerting, according to IRS tax attorneys, was testimony from Nina Olsen, the Taxpayer Advocate, that a significant portion of noncompliance was not related to underreporting or tax evasion, but rather errors caused by the tax code’s needless complexity. Ms. Olsen testified that while only 3% of the IRS’s tax collections were due to enforcement actions, the IRS’s own statistics revealed that 67% of all
noncompliance was caused by inadvertent mistakes.

If fact, IRS attorneys say Ms. Olsen’s testimony, which consumed 48 pages, detailed problems with overly burdensome and flawed provisions within the tax code which contributes to the system’s inefficiency and promotes errors and noncompliance issues. Similarly, small business owners appearing before the Senate Finance Committee echoed the Taxpayer Advocate’s concerns.

IRS tax lawyers following the testimony claimed the GAO, TPA, and small business owners were correct. The tax code requires comprehensive overhaul in order to simplify a system which is too costly and inefficient. Small businesses struggling to stay compliant spend millions each year hiring IRS tax attorneys and other tax professionals to sort through the vagaries and complexities of the law. The results of the current system are evident: the government has higher error rates meaning it collects less taxes and spends more to do so; businesses pay more than they should to stay compliant meaning they have to hire outside help and use more internal resources resulting in less revenues to run and grow their businesses, and taxpayers feel overwhelmed by a system which is perceived as both unfair and unnecessarily complex further affecting overall compliance. It is for these reasons that IRS attorneys and the vast majority of the public say it is time to change tax code.

 

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

US Taxpayers Make Profit from Mortgage-Backed Securities

According to IRS attorneys following the government’s handling of mortgage-backed securities, the United States Treasury has completed the wind-down of its mortgage-backed securities (MBS) portfolio. IRS tax lawyers explain the MBS portfolio was acquired by the Treasury Department as part of its response to the financial crisis. These same IRS tax attorneys observe that the portfolio appears to have produced an overall profit to U.S. taxpayers of approximately $25 billion dollars.

As many may recall, the U.S. Treasury invested $225 billion dollars in MBS during 2008 and 2009 through authority provided by Congress under the Housing and Economic Recovery Act of 2008. These MBS purchases supposedly helped “to stabilize financial markets and preserve access to mortgage credit during a period of unprecedented market stress”, according to Treasury sources. But many IRS tax attorneys and the public at large seem to feel the Treasury’s efforts provided little, if any real help to beleaguered homeowners struggling to hold onto their homes.

Over the past year, as part of the Treasury’s continued efforts to reduce emergency financial crisis response programs, IRS attorneys note the Treasury has been winding-down of its MBS portfolio. According to IRS tax lawyers, the Treasury had originally planned to sell up to $10 billion dollars in MBS principal per month, subject to market conditions. However, based on a recent Treasury report, IRS attorneys say the government has already completed its MBS sales and that, overall, taxpayers have received total cash returns of $250 billion dollars from its MBS portfolio through sales, principal, and interest. This suggests the Treasury made a $25 billion dollar profit over its initial investment.

According to Assistant Secretary for Financial Markets, Mary Miller, “the successful sale of these securities marks another important milestone in the wind down of the government’s emergency financial crisis response efforts.” Ms. Miller went on to say that “this program helped support the housing market during a critical moment for our nation’s economy and delivered a substantial profit for taxpayers.”

While all agree this news is good, IRS attorneys caution the economy is still hurting and that many taxpayers continue waiting for their personal financial situations to turn-around. For millions of Americans who are unemployed, or under-employed, IRS levies, IRS garnishment, and the need to file back tax returns are still a very real problem. IRS tax lawyers say the number of Americans in tax trouble continues to be high and will likely continue to be a source of concern as long as the economy flounders.

 

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

If you can’t pay your tax liabilities, file your tax returns!

With the April 17th tax filing deadline rapidly approaching, IRS Attorneys recommend to taxpayers that even if they can’t pay what taxes they owe all at once, they should still file their unfiled tax returns and make whatever payment arrangements may be possible. These same IRS tax lawyers warn that if taxpayers don’t file their unfiled returns they’re immediately facing a failure-to-file penalty as well as interest, additional costs and potential IRS lien and/or wage levy.

Last year, the IRS issued new rules intended to help soften the blow for taxpayers who can’t afford to pay their back taxes when owed. Amongst these new rules was a measure to increase the threshold when the government files an IRS lien, as well as a provision to expand the installment and offer of compromise programs to allow more taxpayers to qualify. Despite the changes, however, IRS attorneys caution taxpayers they may still face a host of problems for not paying back taxes they owe, when they owed it, and need to understand the options available to deal with their back taxes. The IRS also followed-up this year with some expanded penalty relief.

To help those who may be struggling to pay their back taxes, the IRS has reportedly expanded its “Fresh Start” initiative. According to IRS tax lawyers, in order to take advantage of this initiative, taxpayers may fill out a new Form 1127A to request the 2011 penalty relief if they fall within one of these two categories:

Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to this year’s April 17 tax deadline; or
Self-employed individuals who experienced a 25-percent or greater reduction in business income in 2011 due to the economy.

IRS attorneys report that to qualify for this penalty relief, the taxpayer’s adjusted gross income must not exceed $200,000 (if married, filing jointly) or $100,000 if filing status is single, married filing separately, head of household or qualifying widower. However, IRS tax lawyers are quick to point out that a taxpayer’s 2011 balance due may not exceed $50,000. IRS tax attorneys warn that the penalty relief period only extends to October 15, 2012, and interest continues to accrue during that period.

 

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

Taxpayers Aided By Online Tax Resources

Reports from several IRS attorneys indicate that the Internal Revenue Service recently released tax filing statistics for 2012 (the results are through March 16th of this year). The IRS tax attorneys say the report estimates that 77.6 million individual taxpayers have already filed their returns. According to these same IRS lawyers, the 2012 returns thus far demonstrate a 4.3% increase over 2011 with respect to the number of people who have filed their returns by mid-March. The report also shows an overall increase in both the number of individual returns filed and the overall number of returns which have been filed electronically.

IRS tax lawyers say that although 77.6 million individual taxpayers may have already filed their returns, the IRS has projected a total of 145.4 million individual tax returns yet to be filed in 2012, a 1.5% increase over 2011. IRS attorneys point out that this leaves 67.8 million remaining tax returns to be filed before the April 17th deadline. While some of these individuals may end-up requesting an extension, many of them will rush to e-file their unfiled returns within the first two weeks of April, as evidenced by an increase in tax software purchases.

According to the site manager at www.tax-compare.com, Mr. Wong, “Last year [they] saw the number of signups for online tax software double in the first two weeks of April from the last two weeks of March.” Mr. Wong goes on to say that “There is definitely a push for people to finish and submit their tax returns by the deadline and, for those that are filing for an extension, to simply get the process started. [Tax-Compare.com] expect[s] this year’s numbers to reflect the IRS’ growth projections.”

IRS attorneys maintain that the IRS is predicting that 138 million unfiled tax returns will be e-filed this year (a 4.3% increase from last year) and that only 101.3 million paper returns will be submitted (down 3.1% from last year and continuing to decrease). These same IRS tax lawyers note that the IRS also predicts a 1.2% annual growth rate for individual tax returns, resulting in 156.4 million individual tax returns filed by tax calendar year 2018.

As more people are starting to use online tax software to file their back tax returns, IRS tax attorneys say that such software is becoming an indispensable tool for the majority of taxpayers. Mr. Wong at Tax-Compare.com claims, and IRS attorneys agree, that “It’s important to understand the differences among the top services and to choose a product that offers the guidance, guarantees, and protections that you’ll need when preparing your taxes yourself.”

 

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

IRS Offers Solutions to Untimely Return Filers

IRS attorneys report that tax-filing extensions are now available if you need more time to finish your unfiled returns. IRS tax lawyers are quick to point out these are extensions of time to file; not extensions of time to pay. Taxpayers who are having trouble paying what they owe may qualify for payment plans and other possible relief (i.e. offer in compromise). Last month, for example, IRS attorneys say the IRS, as part of its Fresh Start initiative announced penalty relief for unemployed taxpayers and self-employed individuals whose income has dropped.

People who have unfiled returns can get an automatic six-month extension. According to IRS attorneys the fastest and easiest way to get the extra time is through the Free File link on IRS.gov. In a matter of minutes, anyone can use this free service to electronically request an automatic tax-filing extension on Form 4868. IRS tax attorneys state that filing this form gives taxpayers until Oct. 15th to complete their returns. To get the extension, IRS lawyers say that taxpayers must estimate their tax liability on this form and should also pay any amount due.

By properly filing this form, IRS attorneys say that a taxpayer can avoid the late-filing penalty, normally (5%) per month based on the unpaid balance that applies to returns filed after the deadline. In addition, any payment made with an extension request will reduce or eliminate interest and late-payment penalties that apply to payments made after April 17th. The current interest rate is (3%) per year, compounded daily, and the late-payment penalty is normally (.5%) per month.

Besides the Free File link, IRS lawyers say that taxpayers can choose to request an extension through a paid tax preparer, using tax-preparation software or by filing a paper Form 4868, available on IRS.gov. According to some IRS attorneys, of the 10.5 million extension forms received by the IRS in 2011, about 4 million were filed electronically.

IRS tax lawyers caution that some taxpayers get more time to file without having to ask for it. These taxpayers include taxpayers living abroad; U.S. citizens and resident aliens who live and work abroad, as well as members of the military on duty outside the U.S.; Members of the military and others serving in Iraq, Afghanistan or other combat zone localities (for details, see Extensions of Deadlines in Publication 3, Armed Forces Tax Guide); and people affected by certain tornadoes, severe storms, floods and other recent natural disasters. Currently, parts of Indiana, Kentucky, Tennessee and West Virginia are covered by federal disaster declarations, and affected individuals and businesses in these areas have until May 31 to file and pay.

Ultimately, IRS tax attorneys uniformly agree that getting your unfiled tax returns completed and filed in a timely fashion saves you both money and headaches. But if for whatever reason you can’t get the returns done in time, or can’t afford to pay what you owe, consider all your other options rather than just ignoring your tax obligations.

 

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

Nicolas Cage pays $6.25 million in back taxes and may owe more

IRS tax lawyers following the Agency’s collection matters note that actor, Nicolas Cage, recently paid $6.25 million in back taxes and may still owe the IRS more. Evidently, the 47-year-old star made the hefty payment last February, which covered his 2007 back taxes. In 2010, Cage supposedly told People magazine that he owed $14 million in back taxes. Though IRS lawyers say that it is unclear whether the actor has made additional payments, they estimate he may still owe around $7 million.

“Over the course of my career I have paid at least $70 million in taxes,” Cage told People magazine. “However, I am under new business management and am happy to say that I am current for 2009. All taxes will be paid including any to-be-determined.”

IRS attorneys note that Nicolas Cage has been slapped with an IRS lien and other debts throughout the past few years. He has owned several homes and even an island in the Bahamas and has lost at least three houses through foreclosure auctions. IRS lawyers acknowledge that Cage is just one of several celebrities who owe back taxes to the government.

But Cage’s financial problems have not been limited to owing the IRS back taxes and a few residential foreclosures. Recently, he settled a $13 million dollar lawsuit with ex-girlfriend Christina Fulton, the mother of their 20-year-old son. Fulton, who dated Cage for several years in the 1980s, claimed that Cage failed to transfer ownership of a house to her after promising to do so and told her he would support her and Weston Coppola Cage financially. IRS lawyers say how the settlement may affect Cage’s tax liabilities is presently unclear.

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

Obamas Budget Proposal; Hurts Small Businesses and Job Creation

Earlier this week, President Obama spoke to a group of news reporters about his budget proposal, and employees of a North Carolina-based LED lighting company, Cree, Inc. His message was the usual political pabulum laced with a fair amount of feigned recognition about how important promoting small businesses can be in turning the economy around and improving the abysmal 9.1% unemployment rate. While President Obama noted that small businesses account for 64% of all American jobs, he still espouses the Democratic Party’s mantra of raising taxes against America’s wealthiest. But is it really just double talk?

Several IRS attorneys considered the President’s comments as nothing more than political rhetoric which doesn’t match-up with Obamas budget proposal seeking to increase the top marginal income tax rate from 35% to 39.6%. These IRS tax lawyers say such an increase, if adopted, would produce something approaching $709 billion dollars in tax increases over the next ten years. So how would taxing America’s wealthiest affect small businesses?

IRS tax attorneys point out that in North Carolina, the back-drop for President Obama’s speech, IRS date shows that out of 4.2 million individual tax returns filed in the state, nearly 660,000 were sole proprietorships. When you add partnerships and S-Corps, the number increases to approximately 825,000 small businesses. IRS attorneys say that represents more than 19.5% of all individual income tax returns filed in the State.

Those numbers are particularly significant because, according to IRS tax attorneys, the individual income tax system is the one which taxes small business profits. In other words, while President Obama says he wants to help small businesses grow and add jobs to our beleaguered economy, his budget is proposing to take from small businesses the one thing they need to grow, MONEY.

Democratic lawmakers maintain that America’s wealthiest have been making huge profits and are not reinvesting them in the economy. In light of the President’s proposed budget, and the apparent insincerity of his remarks given his budget proposal, is it any wonder why small businesses are waiting for a clearer message before reinvesting their hard-earned dollars? IRS attorneys who represent many of these small businesses suggest reinvesting profits to grow a small business while being taxed an additional 13% more (from 35% to 39.6%) would likely put most of their clients out of business.

With the 2012 Presidential election soon approaching, voters will have a clear choice between helping small businesses grow and increasing the number of jobs in America, or voting for President Obama.

 

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