Articles Tagged with “Federal Tax”

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You have a business that sells goods to your customers in other states. Recently, you heard that you should have collected sales tax on certain transactions or that the money you collected as sales tax should have been remitted to that state. You suspect that if you contact the state directly about your issue, the state may decide to audit you or bring you to jail for not remitting the taxes you collected. What do you do? What can give you peace of mind?

In comes the Voluntary Disclosure Program. With the Voluntary Disclosure Program, you pay the state its tax and interest, have most or all penalties waived, and most importantly, you avoid going to jail. At the end of the day, the Voluntary Disclosure Program truly is the best solution to some of the worst tax problems. But what is the Voluntary Disclosure Program and how do you qualify?

The Voluntary Disclosure Program is the process of initiating contact with a state to come clean on potential tax liabilities. To qualify for the Voluntary Disclosure Program, you cannot have been contacted by the state. If you have been contacted by the state before you apply for the program, most states recognize this contact as disqualifying you from the Voluntary Disclosure Program. However, some states may nevertheless allow you to enter the Voluntary Disclosure Program. The moral here is that as soon as you discover a tax liability that you wish to disclose, you need to enter the Voluntary Disclosure Program immediately.

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As Florida tax attorney’s we are often asked the question as to whether the IRS can come after an officer of a company personally for taxes. As a very general rule, the state or the IRS can only come after an officer personally if the taxes are trust fund taxes. This means taxes that an individually is holding on behalf of the state. The classic example is employment taxes held by the employer for the government. Another common scenario is a company collects sales tax on behalf of the state it is considered the state’s money held in trust by the company, and personal liability becomes an issue.

Whether one is dealing with the IRS or a state for trust fund taxes, the government can come after the “responsible party.” Generally, the government comes after the officers of a company or the person signing the checks to determine who the responsible party is. But what about a corporate shareholder? Can the government come after someone who is merely a shareholder in the company as a responsible party?

In late August 2013, the Tax Court heard a case involving this very issue is Hellman v. Comm’n, 106 T.C.M. 138 ( Aug. 21, 2013) In the case, the IRS determined the shareholder, Hellman, was the responsible party and went after Hellman’s assets personally. There was a pending court case to determine whether Hellman was in fact willfully failing to pay the taxes as required by section 6672, IRC. The Taxpayer challenged the refund and said this was unfair.

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In Announcement 2011-64, the Internal Revenue Service (“IRS” ), which provided taxpayers with a chance to change the status of their workers from independent contractors to employees for future tax periods. If the program was elected by a taxpayer, then the IRS would apply minimal tax liability to the employer for the past nonemployee treatment of its workers. This effective tool went into effect in September 2011, and has been used by a number of small businesses throughout Florida and nationwide. Further, Announcement 2012-45 has announced that the program would run until the end of the month, June 2013.
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Between the years of 1993 and 1997, whistle blowers brought forth ten cases accusing medical groups of conspiring to defraud Medicare. Normally, a case like this doesn’t grab my attention; however, as a Florida tax attorney, this medical case caught my eye. I was not interested in whether the claims were false, if the medical companies scammed Medicare, or what other potentially unprofessional practices the group engaged in. Rather, from a tax perspective, I was curious if the settlement payment was tax deductible.

Section 162, Internal Revenue Code (“I.R.C.”) allows a deduction for expenses of a business that are necessary and ordinary. Generally, a settlement claim paid by a business can be properly deducted on its federal tax return. See, Comm’r v. Pacific Mills, 207 F. 2d 177, 180 (1st Cir. 1953). However, under section 162(f), I.R.C., if an expense or payment is a fine or similar payment paid to the government, then the expense is not deductible. This makes sense in that the IRS does not want to grant tax incentives to companies for paying fines and the like. Thus, the question in this case is whether a settlement relating to Medicare fraud is a fine or similar payment.
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Our practice receives many calls dealing with collection due process hearings. The hearing is an opportunity for a Taxpayer to contest a tax assessment by the IRS. Recently, on April 18, 2013, the Tax Court issued a Memo (an opinion) regarding a collection due process hearing sought by two individuals. This memo serves as another reminder as to why it is often advantageous to get an experienced tax attorney involved when dealing with the state taxing agency or the IRS.

In this case, Kenneth Taggart, the Taxpayer and a Pennsylvania resident, worked as a real estate appraiser and broker. He owned two S-Corps, through which he conducted his businesses, and four rental properties. In September of 2007, the Petitioner timely filed his a zero 2006 Federal Income Tax Return, and then mailed an amended 2006 return in 2008 showing income of just over $100,000. Filing a zero return can be a useful tool to start the ticking of the statute of limitations even if the return shows 0. In addition, the Taxpayer filed a return for $133,000 in 2008 but failed to include the proper tax payment. The IRS ultimately assessed him $31,000 in tax due plus penalties and interest of about $2,000 as it is able to do under section 6651, IRC.

In 2009, an offer in compromise was received from the Taxpayer, which was rejected in early 2010 because the offer was less than reasonable in the IRS’ view. The Taxpayer missed its 30-day appeal period but was afforded an opportunity to resubmit a new offer in compromise in March 2010. Before the appeal period had run, the IRS filed a notice of tax lien accompanied with a Notice of Federal Tax Lien Filing and Your Right to a Hearing under IRC 6320. The Taxpayer submitted Form 12153 to challenge the premature Tax Lien filing. Following a conference and several correspondences with the IRS, the Taxpayer lost the challenge and his offers in compromise were denied.
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Many individual and corporate taxpayers are becoming annoyed with rising tax rates. For many wealthy Americans, income is taxed federally and by many states at the corporate level and then taxed again when the income is distributed to the shareholders of the corporation. Without even taking into account state and local taxes, most corporations are taxed a 35% rate and, with the recent tax increases, individuals are taxed at a rate over 40%. This has led to some creative tax planning in the recent years.

One recent development, as explained in more detail at CNBC.com, is a move by a number of corporations, namely private prisons, casinos, and billboards, to convert to a Real Estate Investment Trust (“REIT”). The REIT was developed as a vehicle for investors to pool money and share costs when investing in a diversified real estate portfolio. In short, a REIT is an investment pool in which a company (a trust) essentially manages the money of its investors and returns the profits to the investors. For more information about a REIT, please click here to learn about NNN, the REIT that once employed me.

The REIT has been around for decades and was largely used by only for real estate holdings. Recently, companies such as the Correction Corporation of America, a large prison company, has received the IRS’s blessing to be reclassified as a REIT. Other companies, such as Penn National Gaming, M Resort Spa and Casino, and Geo Group have also received the ok to be designated as a REIT.

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It is difficult to change the channel without hearing some development this week in the Boston Marathon explosion. This week in April, 2013 has been mostly a dark one. However, as we tend to in the face of crisis, our nation has shown its resolve and unity. While it can never replace the loss of life and the feeling of fear that stemmed from the incident, there have been some rays of sunshine. Among the acts of good faith to those struck by this horrible event are the IRS and the Massachusetts Department of Revenue. Each has shown some leniency for its respective filing deadlines.

With tax day marked as April 15, 2013, the IRS allowed for an extension as a result of the tragedy. Specifically, the IRS has allowed for a three-month filing and payment extension to Bostonians and others affected by the explosions. Consequently, no filings or payments will be due if completed by July 15, 2013. The three-month leniency applies to all individuals who are residents of Suffolk County, Massachusetts, including the City of Boston. The IRS also allowed an extension for victims and their families, first responders, and those who had preparers that were adversely affected.

Piggybacking on this idea was the Massachusetts Department of Revenue for state and local tax filings. Massachusetts announced that state and local tax payers have another week to file their returns. That means any person or business that has personal, business, or corporate income tax returns has at least until April 23, 2013 to file their returns.

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I am sure many people, myself included, have seen the movements on the airwaves and social media discussing the same-sex marriage case out of California. From constant coverage online and on news stations, to many changing their Facebook default picture, the California same-sex marriage case has grabbed the national spotlight over the last few months in 2013. Unaware of exactly what was unfolding, I have attempted to become apprised of the situation in California. Although the ruling will likely have little value for a tax attorney in South Florida, it is interesting from a constitutional and tax law perspective.
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By way of background, the status of same-sex marriage is unique in California because the state granted same-sex marriage licenses to couples in June, 2008. The same year in November, Proposition 8 ended same-sex marriages within California. Upset by the state constitutional amendment, a group took the issue to federal court to challenge the constitutionality of Proposition 8 and won on August 4, 2010 (See Perry v. Schwarzenegger). The case was appealed to the 9th Circuit Court of Appeals.

On July 31, 2012, Judges Reinhardt and Smith delivered the opinion of the 9th Circuit. Specifically, California enacted Proposition 8 which stripped the couples of the right to have their relationships recognized by the state as a “marriage.” Conversely, same-sex couples had all other rights and responsibilities, but California classified them as “domestic partners.” The challengers argued that the amendment violated the Fourteenth Amendment of the U.S. Constitution.
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Traditionally, if a corporation met the eligibility requirements of an S-Corporation, then it is almost always advisable to elect “S” status for small corporations. However, amidst the fiscal cliff tax act of 2012, some of our clients have explored the option of converting to a C-Corporation. While the results of an empirical analysis are important, other often overlooked ramifications should be considered.

By way of background, many businesses incorporate to shield its owners from personal liability as a result of acts of the business. Most small businesses organize as “pass-thru entities,” which are S-Corporations, Limited Liability Companies (LLC’s), or partnerships. Such entities are called “pass-thru entities” because the entity itself does not pay tax; rather the income is taxed when it “passes through” to the owners. In a simple example if ABC, Inc. earns $100 and it has 2 owners taxed at a 35% rate, it will not pay tax on $100. Rather the owners will report income of $50 and pay tax of $17.50.

In contrast, the traditional C-Corporation is not a “pass thru entity,” because a corporation is taxed twice. The C-Corporation is taxed on income it earns and then is taxed again when its earnings are distributed to its shareholders in the form of a dividend. In my simple example, if ABC, Inc. was a C-Corporation, it would be taxed at 35% on its $100 of income, resulting in $35 of tax at the corporate level. Upon distributing its remaining $65 to its lone shareholder, the income would get taxed again. Assuming the old 15% tax rate on dividends, the shareholder would then pay another $9.75 in tax. Therefore, purely because of its structure, $9.75 in additional tax would be due if the company were set up this way. Adding several 0’s to my simple example, one can easily see how this simple example can quickly become an issue.
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