Tag Archives: IRS

Death Warrant in the Tax Proposal?

photo of Larry Goldsmith

Larry Goldsmith

The Senate and Congressional income tax bills propose to eliminate itemized medical deductions.  For the elderly, who depend on pensions and social security income, and who require nursing homes and private caregivers, this deduction is essential. Nursing home expenses and caregiver costs can easily exceed $100,000 annually. If an elderly individual with an annual income of $80,000 is forced to pay taxes on the $80,000, this individual will not have the financial resources for necessary living expenses.

Larry Goldsmith is a partner and director of litigation services at CJBS, LLC. Mr. Goldsmith is regularly engaged to be a financial forensic expert witness in matters of divorce and business litigation.

Questions or comments? E-mail Larry Goldsmith at larry@cjbs.com if you have any questions about this posting or if he can be of assistance in any way.

Larry Goldsmith to Address Highland Park-Highwood Legal Aid Clinic

photo of Larry Goldsmith

Larry Goldsmith

Larry Goldsmith, J.D., C.P.A., M.A.F.F., will speak on the subject of Financial Discovery at the Highland Park-Highwood Legal Aid Clinic on Wednesday, January 18th, 2017 at 7:00 pm. Financial discovery, including careful study of tax returns, is an important part of the process for uncovering useful information in legal proceedings involving divorce or other litigation matters.

Larry Goldsmith is a partner and director of litigation services at CJBS, LLC. Mr. Goldsmith is regularly engaged to be a financial forensic expert witness in matters of divorce and business litigation.

The Highland Park-Highwood Legal Aid Clinic is located at 1830 Green Bay Rd. in Highland Park, Illinois. Phone: (847) 926-1867.

Questions or comments? E-mail Larry Goldsmith at larry@cjbs.com if you have any questions about this posting or if he can be of assistance in any way.

Can You Discharge Those Unpaid 1040 Taxes in Bankruptcy?

by Larry Goldsmith, CPA, JD, CFF, MAFF

Last week, I reviewed a new client’s IRS transcript. The client apparently filed his individual income tax returns late and wanted to file bankruptcy to discharge his 1040 tax obligations. I subsequently learned that the IRS filed substitute individual income tax returns on the client’s behalf and issued an income tax deficiency before the income tax returns were filed.

 The question was: if the Internal Revenue Service files a substitute tax return on behalf of the debtor/ taxpayer, before the taxpayer files their own income tax returns would that late tax return be considered eligible for a bankruptcy discharge under Section 523 tax return?

I have to admit that it was my belief at the time that if the late filed tax returns increased the income tax assessment, the late filed tax returns would be dischargeable if the tax returns qualified under the various timing constraints. However, after further research, examining several court cases, I have concluded that if the income tax returns were filed after the IRS had issued a substitute tax return, or issued a deficiency, a bankruptcy discharge is not attainable, even where the debtor subsequently filed an income tax return.

It appears that the bankruptcy courts have not consistently held on issues of discharge where the debtor filed a late tax return prior to the IRS issuing a notice of deficiency. From the Appellate court statements I doubt if the courts would favor the discharge of the late filed income tax returns.

Here are a couple of cases exemplifying the court’s consistency in this matter:

IN RE PAYNE 431 F.3D 1055 (7TH CIR 2005)

The taxpayer failed to file a 1986 tax return, and the IRS subsequently filed a substitute tax return for the debtor. In 1992 the taxpayer filed an offer in compromise that was rejected. The taxpayer filed a Chapter 7 in 1997. The bankruptcy court discharged the 1986 tax debt.

The 7th Circuit Court of Appeals stated that, the substitute tax return and an offer in compromise do not constitute a tax return and therefore the income taxes were not dischargeable.

MALLO V. INTERNAL REVENUE SERVICE

A married couple filing jointly, the Mallos filed their individual income taxes several years after the IRS issued notices of deficiency. Two years after filing the income tax returns the Mallos filed bankruptcy seeking to discharge the income tax obligations.

The Mallo bankruptcy court held that post assessment filings do not constitute tax returns and are therefore excepted from discharge under 523(a)(1).

The Court of Appeals held that tax debt was not dischargeable because, “the filing of a return after an assessment negates an honest and reasonable attempt to comply with tax law”.

The Court of Appeals held that, “if a Form 1040 is filed late, the tax debt is non-dischargeable under 523(a)(1)(b)(i). The court reasoned that a late tax return is not a return as defined by Section 523(a); it does not satisfy applicable filing requirements.

The Court observed that the definition of a filed tax return differs from the IRS’s definition.

The U.S. Supreme Court acknowledged the different interpretations and stated that further review was not warranted, thereby upholding the U.S. Court of Appeals for the Tenth Circuit findings.

My advice after researching this matter? Always file your tax returns in a timely manner.

Questions or comments? E-mail me at larry@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

Larry Goldsmith is an experienced Financial Forensic expert and CPA who investigates and verifies financial income and assets in matrimonial matters. CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. 

Partnership Audits Increase; Other Business Audits Drop In FY 2014

Michael Blitstein, CJBS

Michael Blitstein, CJBS

by Michael W. Blitstein, CPA

Just released IRS audit coverage statistics show a slight increase in audits of partnerships, but decreases in audits of large corporations and S corporations in fiscal year (FY) 2014. For all types of businesses, the FY 2014 audit coverage rate was 0.57%, representing a decline from 0.71% in FY 2012 and 0.61% in FY 2013.

Audits of large corporations experienced the steepest decline, according to the IRS, but must balance its audit work with available resources.

Partnerships

Unlike other categories, audits of partnerships increased in FY 2014. In FY 2013, the audit coverage rate for partnerships was 0.42%. The audit coverage rate for partnerships increased slightly to 0.43% in FY 2014.

Since FY 2007, the audit coverage rate for partnerships has been in the neighborhood of 0.40%, the IRS reported.

Large and small corporations

For large corporations (corporations with assets more than $10 million), the audit coverage rate in FY 2014 was 12.23%, compared to 15.84% in FY 2013 and 17.78% in FY 2012. The FY 2014 audit coverage rate was 0.95% for small corporations (corporations with assets less than $10 million). The rate was unchanged from FY 2013 but reflected a decline from FY 2012, when the audit coverage rate for small corporations was 1.12%.

IRS highlighted the decline in audits of large corporations. Audits for corporations with more than $10 million in assets fell by 20% between FY 2013 and FY 2014.  Audits for large corporations are at the lowest rates in a decade.

S corporations

The IRS also reported that audits of S corporations declined. The audit coverage rate for S corporations in FY 2014 was 0.36%, reflecting a decline from 0.42% in FY 2013, and a decline from 0.48% in FY 2012.

Impact of budget cuts

IRS Commissioner Koskinen attributed the decline in audit coverage to recent cuts in the agency’s budget. The IRS budget has fallen by more than $1.2 billion in the last five years. Like overall IRS staffing, the number of compliance employees who conduct audits has also fallen sharply during this period.

The Consolidated and Further Continuing Appropriations Act, 2015 reduced the agency’s FY 2015 budget by approximately $346 million. President Obama has proposed to fund the IRS at $12.9 billion for FY 2016, reflecting a $2 billion increase over FY 2015. This would help the IRS stop this decline in enforcement efforts and help improve critical taxpayer services, Koskinen predicted. Koskinen is scheduled to testify before House and Senate panels this week about the agency’s FY 2016 budget request.

Michael W. Blitstein, CPA is a partner with the firm of CJBS, LLC, in Northbrook, Illinois. Michael advises his clients on tax, business and retirement planning, developing short and long-term strategic plans designed to achieve success for business owners and their businesses.

He can be reached at michael@cjbs.com

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Tax Audit Red Flags

by Michael W. Blitstein, CPA
The IRS audits only slightly more than 1% of all individual tax returns annually. So why do they pick some returns to investigate and ignore others?  Although there’s no sure way to avoid an IRS audit, you should be aware of the following red flags that could increase your chances of drawing unwanted attention from the IRS.

You Have Foreign Assets…

Stashing money overseas? Then you’re probably well aware that the IRS has been ramping up its efforts to rein in offshore accounts.  Launched in 2009, the agency’s voluntary disclosure program has already raked in more than $5 billion in back taxes, interest and penalties for illegally hiding assets in offshore accounts.

Taxpayers are asked to check a box on Schedule B if they have an ownership interest in foreign accounts. If they then fail to provide information about those assets, it will undoubtedly trigger an audit.

Indicating on your return that you do business in foreign countries or take many trips abroad for work could also raise eyebrows if no foreign assets are reported.

Your Return Has Too Many Zeroes…

While rounding numbers on your tax return to the nearest dollar is okay, rounding to the nearest thousand is not – especially when itemizing deductions like business expenses, unreimbursed employee expenses and job hunting costs.  If you submit figures like $5,000 in auto costs, $2,000 in gas mileage and $4,000 in lodging, it may look like you pulled those numbers out of thin air or inflated them by rounding – since it’s unlikely that every single expense was a perfect multiple of $1,000.

You Have a Home Office…

Just because you do some work on your couch while watching TV doesn’t mean it counts as a home office.

After years of watching people abuse the home office deduction, the IRS is on the look out. In order to avoid being scrutinized, make sure you only claim reasonable expenses – and only those that directly apply to the part of the home used as an office.  Remember, the credit can only be claimed if the home office is your primary place of business and is used exclusively for work. People get into trouble when the IRS suspects they are mixing personal costs with their business costs.

You Forgot Some Income…

For people who earn money from various places, remembering to report every single cent can be difficult. But ‘I forgot’ isn’t a good enough excuse for the IRS.  For any miscellaneous income over $600 you received throughout the year, the company you worked for should send you a Form 1099. If you don’t receive it for some reason – it was mistakenly sent to a previous address, for instance – you can be sure that the IRS will still get it.  You can either request the missing form from the employer or simply report the income without the form. This is why it helps to track your income throughout the year.

Of course, some people earn money that may not get reported on.  Even if the IRS doesn’t know about it, you must report this income as well or you risk the agency finding out.

You Exaggerate Donations…

Even good deeds can spark suspicion at the IRS.  If you report extremely high charitable contributions – especially relative to your income – make sure you have the proof to back it up.  Receipts for cash donations of more than $250 are required in the event the IRS comes knocking.  Donating items gets a little trickier, because it’s common for people to think the items are worth a lot more than someone will actually pay for them. So it’s important to be reasonable with your valuations.

You Own a Money Losing Business…

If you own a business that is reporting losses year after year, the IRS may grow suspicious that it’s actually a hobby.  There’s a rule-of-thumb saying you must have a profit in two [out] of five years – if you don’t have a profit they’re going to look at it as a hobby.  To fend off the IRS, make sure to keep diligent financial records and do little things like have business cards and company letterhead.

You Have a Shady Tax Preparer...

If your tax preparer tries to convince you to claim deductions that sound too good to be true or to report income that doesn’t line up with what you would have reported, watch out.  You want a preparer that will get you the best refund possible – but not if it means breaking the law.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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IRS Issues Guidance on Expanded Work Opportunity Tax Credit

by Michael W. Blitstein, CPA 

The IRS has released guidance and posted online Frequently Asked Questions (FAQs) for employers planning to claim the enhanced Work Opportunity Tax Credit (“WOTC”) for hiring qualified military veterans.  The guidance contains transition relief, describes electronic submission of the form used to claim the credit and describes the procedures for tax-exempt organizations to claim the credit.

The WOTC was enhanced as part of the VOW to Hire Heroes Act, passed by Congress at the end of November 2011. Employers who hire members of targeted groups, and who obtain a certification from an appropriate state agency as to each employee’s status as a member of the targeted group, are entitled to a tax credit.

For military veterans, the VOW to Hire Heroes Act expanded the WOTC, which rewards employers with a tax credit for hiring individuals from targeted groups. The “Returning Heroes Tax Credit” and the “Wounded Warriors Tax Credit” are intended to encourage employers to hire unemployed military veterans.

Employers that hire veterans who have been looking for employment for more than six months may be eligible for a maximum $5,600 credit per employee (Returning Heroes Tax Credit); employers that hire veterans who have been looking for employment for less than six months may be eligible for a credit of up to $2,400 per employee. Employers that hire veterans with service-connected disabilities who have been looking for employment for more than six months may be eligible for a credit of up to $9,600 per employee (Wounded Warriors Tax Credit).

Form 8850, Pre-Screening Notice and Certification Request for the Work Opportunity Credit, must be submitted to the state agency within 28 days of the employee beginning work for the employer. The credit applies in the case of qualified veterans who begin work prior to 2013.

The IRS guidance contains transition relief, providing that employers of veterans hired on or after November 22, 2011, and before May 22, 2012, have until June 19, 2012, to complete and submit the newly revised form to the state agency. The 28-day rule will apply to veterans hired after May 21, 2012. This transition relief also applies to qualified exempt organizations claiming the credit. Qualified tax-exempt organizations that employ veterans who are members of a targeted group also may take advantage of the credit.

The FAQs on the IRS website address topics such as how employers claim the enhanced WOTC for hiring qualified veterans, how a non-profit organization can claim the credit, and more.

In the case of exempt organizations, the credit is allowed against the employer’s Federal Insurance Contribution Act (FICA) tax obligation on wages paid to the veteran within one year of hiring. However, the liability on the organization’s employment tax return is not reduced by the credit; rather, the credit is processed separately and the amount properly claimed is refunded to the exempt organization. This is likely to occur after the filing of the return, so organizations are cautioned not to reduce their FICA obligation on their returns in anticipation of the refund.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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