Having Friends in High Places Won't Get You That Far with the IRS!

Knowing the chances of the IRS auditing your Income Tax Return is relatively slim, are you willing to take that gamble and “modify” the figures on your return to maximize your refund or minimize the taxes owed?  If so, you are definitely not alone!

But before you turn in that return, you might want to consider this – even the smallest misrepresentation on your return is TAX FRAUD! Mistakes are one thing, but knowingly changing items on your return for your financial gain is another.

So you might be wondering, how will the IRS really know if I fudge on my expenses at my rental houses or the amount I donated to the Humane Society?

Recognizing the frequency of these misrepresentations, the IRS has taken an initiative this year to crack down on those Taxpayers making “little white lies” that have flown under the radar in prior years.  And it is not just the “rich” who are subject to the new scrutiny. With the increasing number of IRS “busts” at tax preparation companies – much like the one we reported right here in Gainesville, Florida just weeks ago http://taxattorneyflorida.com/tax-scammers/ – the IRS isn’t taking anything for granted.  

Last night CNBC aired a special broadcast “The American Tax Cheat,” which highlighted the IRS crackdown on taxpayers.  Find out more here: http://www.cnbc.com/id/42154647/THE_AMERICAN_TAX_CHEAT_WILL_PREMIERE_ON_APRIL_14TH

Looks like the IRS has upped the ante – Still want to take the audit gamble?

The Handwritten "Closed, No Longer Open" Sign Attached to the entrance of the Gainesville, Florida Hooters

Tax Day 2011 – Have No Fear, Hooters is Here!!  Well, at least they were here…

According to a handwritten poster on the door, Hooters of Gainesville, located at Southwest 34^th Street in Gainesville, Florida, is

“CLOSED: No Longer Open”

The Gainesville and Ocala locations closed on Monday, March 21, 2011, along with other locations, including Valdosta, Georgia, Montgomery, Alabama, Spartanburg, South Carolina, and four North Carolina locations. These particular Hooters locations were all operated by the company, Owl Eyes.

Reporter, Rick Allen spoke with regional supervisor for Owl Eyes, Brian Greene.  Greene indicated there had been some disagreement between Owl Eyes and Hooters of America over who would assume the franchise fees owed by the previous franchisee when Owl Eyes acquired the locations.

Although the turmoil within the franchise may have played

a role in closing these Hooters’ locations, Alachua County Tax Collector Von Frasier’s bright orange NOTICE plastered onto each entrance tells a different story.

The Tax Notice states that all unpaid taxes owed pursuant to Florida law will be a lien on the property and if taxes remain delinquent on April 1, 2011, all property will be levied, seized and sold to pay the Hooters’ outstanding tax liability.  Unfortunately, that is exactly what’s about to happen.  A second Tax Notice on the doors states that “Alachua County Tax Collector Will Auction” all of the tangible personal property of Hooters of Gainesville on Saturday, April 16, 2011.

The Notice of a Tax Auction Posted on the Gainesville Hooter's Entrance

Owl Eyes was allegedly “surprised and caught off guard” upon receipt of the letter telling them to “close the doors.”  The letter is speculated to have came from Hooters of America; however, it’s likely “the letter” was courtesy of the Alachua County Tax Collector – warning that Hooter’s property was about to be seized.

The upside – local Hooter’s fans now have the opportunity to buy all sorts of coveted Hooter’s memorabilia!  The Alachua County Tax Collector will be auctioning off the goods this Saturday, April 16, 2011 at the former Hooter’s location – 3265 SW 34th Street in Gainesville, FL.

Ironically, www.hooters.com is currently advertising an “instant relief for tax day…buy 10 wings, get 10 free.”  Looks like the “tax day relief” will come a little too late for the Gainesville, Florida Hooters!

For more information, see Rick Allen’s coverage of the closing here: http://www.gainesville.com/article/20110323/GUARDIAN/110319547

Not So Professional...Residents of Lincoln Estates found Liberty Tax Service marketing scheme to be "racist, disturbing and disrespectful"

Last week I spoke about the raid and bust of On Time Tax Consultants for allegedly scamming low income taxpayers.  Unfortunately, On Time Tax Consultants are not the only local tax preparation service targeting lower income individuals in our community.  

Liberty Tax Service, located at 3320 Southwest 35^th Boulevard, Gainesville, Florida, has also been under investigation for preying on low income individuals.  Although Liberty Tax Service has not been charged with doing anything illegal, they are still being scrutinized by the community.

As part of a marketing scheme to attract minority, low income customers in the Lincoln Estates Neighborhood, Liberty Tax Service allegedly made insinuations of compensating their customers with a $50 bill and DRUGS in exchange for utilizing Liberty’s Tax Services. The promotional “mailers” consisted of a baggie filled with a realistic-looking fake fifty dollar bill and two rocks, resembling crack cocaine.

Lincoln Estates has battled a reputation for being a lower income demographic with a persistent drug problem, but has recently partnered with law enforcement to revitalize their community and distant themselves from the drug problems.  Accordingly, residents of Lincoln Estates became concerned and contacted police after seeing the baggies, believing that such had been mistakenly left behind by a drug dealer.   Residents were outraged after learning the baggies were a marketing ploy from a tax service on the other side of town – allegedly targeting a particular demographic.

After complaints from Lincoln Estates residents whom were concerned the baggies contained real drugs, the Gainesville Police became involved and the mailers were pulled.  See the full story and what residents and Gainesville Police had to say about the situation:

http://www2.wjbf.com/news/2011/feb/17/tax-service-florida-hot-water-crack-promotion-tax–ar-1476840/

ANSWER:  Depending on your particular situation, there are several options.  If you are going through a financial hardship, the IRS may be willing to suspend collection activity to allow you the opportunity to get back on your feet.  This process is explained below.

Economic Hardships

You may have the funds to pay the tax you owe the IRS, but if you used those funds to pay your income taxes you may not be able to afford your necessary living expenses and other bills. If you can show that collection of the taxes would cause you or your family financial hardship, the IRS may classify your account as “currently not collectible” and not pursue collection against you. This will allow you to improve your financial condition so that paying income taxes is not an economic hardship. In order to request this status, you must file IRS Form 433-A (employees and self-employed individuals) and/or 433-B (for businesses). Note the following aspects which apply to the suspension for economic hardship:

• Collectability Reviewed Every Year. “Currently not collectible” accounts are reviewed each year. If your financial situation improves during the year, the IRS may remove the suspension and initiate collection of payments. The IRS then may also enter into a compromise agreement with you to satisfy your full tax liability.
• Penalties and Interest Continue. During the period that collection on your account with the IRS is suspended, penalties and interest continue to accrue on the amount of the tax. Even though you do not have to make payments toward the tax liability during the suspended period, it is costing you money in penalties and interest to keep collection at bay during the period.

Keep in mind, the IRS is the most powerful creditor in the United States. If you owe the IRS taxes, as a creditor they can levy on almost any asset or account that you have.  You do NOT want to give the IRS reason to use this power against you, therefore you must report all assets and property to the IRS.  Failure to report all assets may even expose you to liability for tax fraud, which is a CRIMINAL OFFENSE you do not want to defend against!

The most important advice I can give, is urge you to stay in contact with the IRS and keep them informed with your situation and your intent to pay your tax liability.

ANSWER: Yes!

Taxpayers will have until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15.   By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.  You can find out more about the date change for the filing deadline on the IRS’s website.

ANSWER: YES, YES, and YES!

Even though you will not be able to pay the full amount of your taxes when you file your Income Tax Return, you should still file on time to prevent the 5% per month Late Filing Fee.

Extension to File. You can also file an IRS Form 4868 “Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.” Filing Form 4868 must be done by the regular due date for your return and gives you an additional six months to file your income tax return. Although this extension for time to file extends the period for you to file your return without incurring Late Filing Fee penalties, your payment of income tax is considered due on the regular due date for your return. This means that you may still owe interest and penalties for Late Payment.

Remember, if you do not file anything by the regular due date for your return, you will owe both Late Filing AND Late Payment penalties. And most importantly, failure to file income tax returns is a CRIMINAL ACT which you do not want to catch up to you!

Understanding why the IRS is contacting you can help expedite the process and get the IRS out of your life as quickly as possible.  Furthermore, understanding the correspondence will help you decide whether it’s necessary to enlist the services of a tax attorney.

In some situations, the IRS sends correspondence after an audit without any prior communication.  Alternatively, the IRS correspondence may serve as notice that they are planning to audit your return.

The following explains various types of audit letters and notifications:

• IRS Form 566(CG): Correspondence Audit. A correspondence audit is requested when there are questions regarding specific items on your tax return. This is the most common type of audit, and is conducted by correspondence with the IRS through the U.S. Mail. This type of audit is triggered by the IRS computer systems when there is an error in computing the tax contained within the tax return itself. This is usually due to a mathematical error on the tax return, and you will be either issued a refund or assessed additional tax accordingly. The IRS may also request through Correspondence Audit additional information or documentation from you to substantiate such items as income, deductions, credits, and expenses claimed by you on your tax return.

• IRS CP 2000: Automatic Adjustment Notice. In most cases, this letter from the IRS is simply a Request for Information. It will contain a proposed change to your income tax return which may propose that you owe additional tax. This proposed change is generated by a “matching error,” which is a discrepancy between information you provided on your tax return and information provided to the IRS by other sources. The IRS compares the income, payments, credits, and deductions you provide on your tax return with the information your employers, banks, businesses, and other payers report to the IRS. If the information you provided on your tax return and the information provided by other sources do not “match,” then the IRS sends the CP 2000 Letter. This letter proposes any corrections and changes in the amount of your tax liability based upon the information provided by other sources. If you agree with the proposed changes to your return, then you can accept the changes by paying the amount of tax owed. However, if you do not agree with the proposed changes, you may provide documentation to the IRS to prove or explain any discrepancies which triggered the changes. If you do not respond to the CP 2000 Letter, the IRS will treat the proposed changes as correct and continue to assessment of the additional amount of tax in the proposal. For a step-by-step guide to answering questions concerning the CP 2000 letter, see the IRS website: http://www.irs.gov/individuals/article/0,,id=136857,00.html

• IRS Form 3572: Audit at the IRS Office. These types of audits are usually directed at self-employed persons and small businesses. This type of audit requires the taxpayer to gather and provide requested information and documentation at a meeting with a field agent at the local IRS office. This type of audit is usually conducted to allow a taxpayer to prove certain deductions, credits, or business expenses. In this situation, it is the duty of the taxpayer to provide documented proof of any item questioned by the IRS.

• Field Audit. This type of audit is the most comprehensive form of IRS audit, and is most common for businesses. In conducting this audit, the IRS will send field auditors to the business owner’s home or business and conduct an on-site examination of the business’ records. The field auditors’ main objective in a Field Audit is to determine whether your deductions are accurately stated on your tax return. Usually the field auditors not only inspect business records, but also the business facility and physical items claimed as deductions, expenses, etc. Field Audits usually require several visits from the auditors and are the most complex and difficult to resolve.

“Red Flags” for Audit

Only one percent of all individual income tax returns filed each year are audited, and only three percent of returns for individuals makings $200,000 or more are audited each year. Although this number is far lower than most people think, there are a few common items known as “Red Flags” which draw attention to your tax return.

• Excessively High Itemized Deductions. If your deductions are disproportionately high compared to your income, then the IRS computer system will flag it for review. Generally, you should itemize your deductions in the following situations:
• If you do not qualify for the standard deduction, or the amount you can claim is limited.
• If you had large uninsured medical and/or dental expenses during the year. These can be claimed if they are in excess of 7.5% of your Adjusted Gross Income (AGI).
• If you paid interest and taxes on your home.
• If you had large unreimbursed employee business expenses or other miscellaneous deductions.
• If you had large uninsured casualty or theft losses.
• If you made large contributions to qualified charities.
• If you have total itemized deductions that are more than the standard deduction to which you are entitled.

• Non-Cash Charitable Contributions. If you have made non-cash contributions to a qualified charity in excess of $500, then you must fill out IRS Form 8283 in order to claim the deduction. This form itself will raise a red flag in the system. You will likely be required to provide supporting documentation of your donation from the charity.
• Home Buyer Credit. If you are claiming the Homebuyer Tax Credit, you must fill out your income tax return on paper and cannot file electronically. You must also include with the income tax return itself IRS Form 5405 along with additional documentation listed on that form. If Form 5405 and supporting documentation are not included in filing your original income tax return, then the credit may be disallowed and your return flagged for audit.

• Home Office Deductions. In order to claim this deduction, the area in your home used as your office must be used regularly and exclusively for the purpose of business. If the amount you deduct for your home office is disproportionately high (based upon the amount of square footage of the home itself compared to the amount of square footage of the office space), then your return may be flagged for audit.

• Job Expenses. In order to claim this deduction, the job-related expenses must exceed 2% of your Adjusted Gross Income (AGI) and must be expenses that have not been reimbursed by your employer.

• Rental Losses. Unless you are actively participating in in the business of renting properties as your business, it is most likely that the IRS will consider your rental properties as a source of Passive Rental Income or Loss. The Passive Loss Allowance maximum is $25,000; therefore if you attempt to claim Rental Losses near the $25,000 limit, then your tax return is likely to be flagged for audit.

• Small Business Losses. If you report losses on your small business, then you are highly likely to be audited. You must be able to prove these losses by documentation, and must also be able to prove that the business venture has been established legitimately to make a profit.

• Schedule C Business Expenses. If you report expenses of your small business, then you are highly likely to be audited. You must be able to prove ordinary and necessary business expenses by documentation and often by proof through physical inspection of the business facility, equipment, etc.

If you have further questions, please contact me for a consultation where I can  review your return and tailor a tax plan to your specific needs.

This IRS screw-up could be costly for the unfortunate taxpayers affected.  When the First-Time Homebuyer’s Tax Credit appeared in 2008, it was structured as 15-year, no interest loan, with the 1st of the 15 installments due at the time of filing the taxpayer’s 2010 tax return.  The Credit in 2009 and 2010, however, does not require repayment unless either the home is sold within 36 months of the purchase date or the home ceases to be the taxpayer’s primary residence.

The problem arises if the IRS recorded a 2008 purchase date for a home purchased in 2009 or 2010.   Accordingly, the IRS will be trying to collect the first installment payment by April 15, 2011 from the 2008 first-time homebuyers–including those with an improper 2008 purchase date.

Finally, here’s a few pointers for those of you who took advantage of the Credit in 2009 or 2010 and receive a deficiency notice from the IRS:

1. Don’t freak out!
2. Contact the IRS immediately.
3. Find out where the tax assessment is coming from (i.e. your 2007 1040).
4. Be prepared to dig up your closing documents to correct the recording date.
5. If you cannot resolve the issue by following the above steps, you may need to contact a tax attorney.

“have you or someone you know taken the drug Acutane… if so, you may be entitled to cash compensation… call 1800-bad-drug…”

So what are the tax consequences of receiving compensation for your damages?

Well, it depends… Some damages and settlement proceeds are tax exempt under IRC § 104(a)(2) while other damage awards or settlement proceeds are fully taxable.

For example, say you sued the brokerage firm that embezzled $200,000 from your account.  The brokerage firm ends up settling and agrees to compensate you $300,000.  Initially, It may appear that you have recovered your original loss of $200,000, plus an additional $100,000 for the hassle and headache of the whole ordeal.  As you can see from the illustration, your bottom line will not look so rosy.

Thus, if you receive compensation from another party by virtue of filing a lawsuit, qualifying as member of a class action, or become entitled to a payout from an existing settlement fund, ask your attorney about the tax consequences.

Here’s a further rundown of the basics, thanks to Law.com:

5 Things Every Plaintiffs Attorney Should Know About Tax Law

While tax law may seem dull and irrelevant to most attorneys’ day-to-day practice, in order to better serve their individual clients, plaintiffs attorneys should always keep the following five basic tax laws in mind, and advise their clients accordingly.

1. Attorney Fees Are Taxable
2. Awards for Personal Physical Injuries Are Exempt From Tax
3. Insurance Proceeds
4. Lump Sum or Structured Settlement Payments
5. Reporting of Awards