Quick Answers Tax Lawyer helping fight IRS audits and tax collections

Here are answers to questions asked. For updates, please check my Weblog

Question: Non-filing of taxes

I have a friend who has not filed tax returns for a lot of years. All of his income comes ''under the table''. I want to help him get out of this situation. He wants to, but says at this point he will end up in jail. What is the best course to follow?

Reply:
Your friend should IMMEDIATELY contact a Tax Attorney. Because of the potential for criminal liability, your friend needs an attorney and not an accountant. Your friend would have attorney-client privilege.

Tell your friend not to speak with the IRS.

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Should an Extension be Given to the IRS to continue an Audit?

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Question:
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Category: Tax and Taxation Law
Location: MA
Subject: Audit Extension

The IRS has been auditing my 2001 Federal return since April, 2003. After no communication since May, 2003, I received a letter last week requesting an extension through December, 2005. The 3-year limit ends in April, 2005. Should I give the IRS the extension?

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Reply:
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Category: Tax and Taxation Law
Location: MA
Subject: Re: Audit Extension

You should definitely discuss this matter with a tax attorney prior to signing the extension. It all depends on the type of audit. For example, if the IRS is reviewing every document for a Taxpayer Compliance Audit, an extension would probably be inadvisable. The tax attorney could review the documents and determine the risk. Usually, the denial of the extension results in the issuance of a Notice of Deficiency which means you must file in US Tax Court within 90 days. There is also an administrative review prior to the actual trial. Please see my website at http://www.taxesq.com for further information.

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IRS to Audit More Small Businesses

A restructuring announced by the Internal Revenue Service recently could mean that more small businesses see audits of their income tax returns.
The IRS said it would be adding 2,200 new positions to its enforcement, or audit, operations in 2005, having consolidated or cut back in other divisions. The agency noted that between 1996 and 2002, its enforcement personnel declined by more than a quarter.

Expect more audits of small companies and their owners in 2005 for the 2002 and 2003 tax years. Although the staff won't be full increased until next year, agents can still look back at prior-year returns.

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Question: Selling gifted property.

20 years ago I received a portion of recreational land as a gift from a relative. Now I am ready to sell. The property has greatly appreciated. What are the tax implications? How do I compute cost basis?

Reply:

Because you received a gift, your basis in the property for tax purposes is a "carryover" basis from the grantor. Essentially, whatever the grantor paid for the property, any improvements, and any gift taxes paid would increase your basis. Since it is land only, there would not have been depreciation. You would be subject to Capital Gains Tax rates and possibly the Alternative Minimum Tax

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Question: Business Law: Sole Proprietorship.

My husband started his own construction/handyman business 3 years ago. It's an LLC and only his name is listed. He originally did not add my name to the business because he just didn't think to do it. Should he add my name to the business? Why or why not?Thank you for your assistance.

Reply:

The answer is ABSOLUTELY CLEAR. You do NOT want to be a member. The idea of the LLC is to insulate the family assets from business liabilities. Even if a creditor or the government can successfully attack your husband, your assets would be protected. As a member of the LLC you would have potential liability for Sales and Use Tax, State and Federal Employment Taxes and NJ Disability and Unemployment contributions.
If you would like further information on the tax and legal issue, there is free information on my website http://www.taxesq.com

I hope this helps!

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Question: Incorporation

Should an independent software consultant (independent contractor) incorporate himself?

Reply:

Probably not. The better choice in most states would be to set-up a Limited Liability Company. This is a disregarded entity for Federal tax purposes. The LLC "member" would simply file a Schedule C as part of the 1040 rather than an 1120 Corporate Income Tax Return. Please see my web site http://www.taxesq.com/ for more information on the best legal choice of entity.

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Can Creditors take a Bankrupt's IRA?

In a unanimous decision, Rousey v. Jacoway, the Supreme Court held that creditors may not reach IRAs for petitioners who file bankruptcy. This means IRA's are treated the same as other pension type plans for Bankruptcy purposes. As a basis for its decision, the US Supreme Court relies upon the access restriction to IRA assets under federal law. Specifically, the Court looks at the 10 percent excise tax penalty for premature withdraws prior to age 59 1/2 to say that, while the assets in the IRA are vested, the penalty is sufficiently draconian that the full value of the assets contained in the IRA is only available "on account of age" so it is excludable from the bankruptcy estate under 11 USC 522(d)(10)(E).

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Can a Parent be claimed as a Dependent?

If you are caring for your mother or father, you may be able to claim your parent as a dependent on your income taxes. This would allow you to get an exemption (currently $3,100) for him or her.

There are five tests to determine whether you can claim a parent as a dependent:

The person you are claiming as a dependent must be related to you. This shouldn’t be a problem if you are claiming a parent (in-laws are also allowed). Keep in mind, however, that foster parents do not count as a relative. To claim a foster parent, he or she must live with you for a year as a member of your household.

Your parent must be a citizen or resident of the United States or a resident of Canada or Mexico.

Your parent must not file a joint return. If your parent is married, he or she must file separately. There is an exception if your parent is filing jointly, but has no tax liability. If your parent files a joint tax return solely to get a refund, you can claim him or her as a dependent.

Your parent must not have a gross income of $3,100 a year or more. Gross income does not include Social Security payments or other tax-exempt income.

You must provide more than half of the support for your parent during the year. Support includes amounts spent to provide food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Even if you do not pay more than half your parent’s total support for the year, you may still be able to claim your parent as a dependent if you pay more than 10 percent of your parent’s support for the year, and, with others, collectively contribute to more than half of your parent's support. To receive the exemption, all those supporting your parent must agree on and sign the applicable Multiple Support Declaration (Form 2021).
If you cannot claim your parent as a dependent because he or she filed a joint tax return or has a gross income above $3,100 but you have been paying your parent’s medical expenses, you may be able to deduct those expenses from your taxes.

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Can Trust Fund Penalties be Discharged in Bankruptcy?

Some employment tax obligations are dischargeable in Bankruptcy. For instance, a proprietor employer's share of FICA tax more than 3 years old at time of bankruptcy petition would be dischargeable. 11 USC 523(a)(1), referencing 507(a)(8)(D).

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Question:

My accountant recommends an "S" Corporation rather than a LLC because LLC's are taxed as partnerships and that is more complex. What do you think?

Answer:

The LLC offers more flexibility than an S corp. Remember only qualified persons can hold S stock whereas anyone or any entity can own a membership unit of an LLC. There is a limit on the number of shareholders an S corporation can have (75). While both an S and an LLC are generally small in number, the LLC can have an unlimited number of members.

An S can only have voting and nonvoting stock, which must otherwise have all other similar rights. An LLC can create whatever kind of membership interests it wishes, so long as the economics are properly reflected in each member's capital account.

Further, if you intend to put real property into a corporation, you will be subject to the problem of double taxation on the appreciation, whether it is a C or an S. The problem with having real estate in an S corporation arises when the
owners refinance the property and want to take out the cash. If the
property has appreciated in value, the cash that they want to take out will
be taxable to the extent it exceeds the basis of the S corp stock and the
shareholders get no basis in their stock for the corporation's debt to the
lender. With a partnership or LLC taxed as a partnership, the partners get
basis for the partnership's debt to the lender so the cash taken out will
not be currently taxable.

More critical to many lawyers is the fact that an LLC has a charging order that prevents a multi-member LLC from having its assets seized or the entity liquidated whereas an S corp. does not have this same benefit of a charging order and can become a shareholder with voting rights without the consent of
the other shareholders. With a single member LLC it is a moot issue as the courts will take the LLC membership interest, give it to the creditor and the creditor can liquidate the LLC.

Yes partnership taxation is more complex, but it is something to learn as you will indeed need to know it. Further, as far as the partners are concerned, the subtitles of partnership taxation can be easily handled by their tax lawyer and accountant.

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Does a Single Member LLC offer Liability Protection?

There is no reason to believe that as to liability arising from within the LLC, such as a slip and fall on the premises being held, that a single-member LLC will offer any significantly less protection from liability to the member than a sole shareholder corporation would to its shareholder.

In most states, the law relating to sole shareholder corporations is relatively well-defined and is found in the corporate veil piercing and alter ego cases. While the "unity of ownership" element is obviously met in the case of a sole shareholder corporation or single-member LLC, there are other criteria which usually must be met (entity undercapitalized for its liabilities or used to perpetrate a fraud, etc.), such that historically sole shareholder corporations have actually stood up pretty well to prevent the liability from flowing to the shareholder.

So, while the use of a single-member LLC is not ideal from a liability standpoint (although it is better than a sole proprietorship) it should afford the single member owners a significant layer of protection from claimants of the entity in most cases.

But I'll note that if dark clouds start appearing on the horizon, one might to well to start trying to diversify the ownership. The question "At what point do you test whether it is a sole shareholder corporation?" is almost totally unsettled and seems to confound even the few persons who profess to be experts on the topic (or at least those who I have talked with about it). I presume that confusion would apply to an SMLLC as well.

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Question:
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Category: Probate, Trusts, Wills & Estates
Location: NJ
Subject: My Mother Died without a Will

My Mom died in 2003 w/o a will. My siblings appointed me administrator, i am one of 9. The only property to be divided is the house. which comes with it's on set of problems,their is not a clear title. There are liens against the property, we were able to get $90,00 cleared with just a few thousand left.My husband and I would like to buy the property, we had it appraised and are able to pay cash to each of my siblings. 6 of us have signed QuitClaim Deeds.There are 3 hold outs (emotional hold outs)They feel my sister should have the house. she has no $ and can't get a mortgage. I believe that my job is to settle it fairly 1/9 split is fair. It has been 20 months since my mom died and now the homeowners insurance is a problem, we have been dropped by the co. we were with for 30years. i found another co. for double the cost and short term,we must have a buyer soon.No company wants to insure an estate. Can I as administrator settle this estate w/o all 9 in agreement? My plan is to go to settlement and have the $ for the three hold outs put in an escrow account. Can I do this? I am out of time, and at wits end. I would greatly appreciate any help you can give me.
Eileen

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Reply:
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Category: Probate, Trusts, Wills & Estates
Location: NJ
Subject: Re: My Mother Died without a Will

Unfortunately, this is the type of matter that will end up in court. When it comes to money, formerly friendly family members frequently fight and argue. Although the estate is small, you have not choice but to hire a good estate lawyer that understands these types of disputes.

You will need to institute a suit in the Chancery Division, Probate Part of the Superior Court asking to approve the sale and the accounting of the estate. Please see my web site www.SaveYourEstate.com for further information.
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IRS Increases Audits 2/23/05

The IRS announced today that it is increasing audits. Even though a taxpayer reporting an income of $100,000 or more only has a 2% chance of a full audit, the IRS is aggressively using computer record matching to do "mini-audit" type tax adjustment letters.

Some of the most common problems that generate letters can be avoided by filing electronically and letting the computer check for valid Social Security numbers and math errors. If you fill out the forms by hand, make sure to double- and triple-check your work.

The IRS has no single formula that determines which tax returns will be audited. The agency audits some taxpayers by mail and others in face-to-face meetings, depending on the complexity of the return.

Audits can be defended. Please click here for further information.

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How do I Change a Partnership to a LLC?

Hi Ron
My husband and I started a small business two years ago, as a partnership, and we would like to change it to an LLC. Could you provide advise as to how to go about doing this.
Thanks

Answer:

Have you filed US Partnership Tax Returns - form 1065, or do you file a Schedule C on your 1040? THe steps would be to:
1. Establish a LLC
2. Use the same EIN as the partnership
3. Transfer the business assets into the LLC.

Depending upon filing, there should be no Federal Tax. You may be subject to state and local taxes and registration fees depending upon the assets.
I would be happy to help you!

Ron Cappuccio

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Can IRS Garnish Wife's Wages for Taxes Owed only by Husband?

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Question:
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Category: Tax and Taxation Law
Location: IN
Subject: Back Taxes owned by Spouse

My husband owes back federal taxes. This occurred before the marriage. Can the IRS take money from my wages to pay for my husbands past debt?

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Reply:
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Category: Tax and Taxation Law
Location: IN
Subject: Re: Back Taxes owned by Spouse

The IRS cannot garnish your wages. Nor can the IRS levy against your separately owned property. Nevertheless, the IRS take all of your joint bank accounts and jointly titled assets. In addition, the IRS can file a Federal Tax Lien against your husband which becomes a lien on any jointly owned real estate. This would make it difficult to sell without paying the IRS.

Also, if upon your death, you leave any of your assets to your husband, or if he is the beneficiary of any life insurance policies, the IRS can take this.

If you file a joint return, the IRS will take all of the refund and make you fight to get your portion back. This may not be economically feasible. The smartest move would be to have the tax situation immediately analyzed by a tax attorney.

My web site contains further information: http://www.taxesq.com/

I hope this helps!

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7 years of non filing with the IRS

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Question:
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Category: Tax and Taxation Law
Location: TX
Subject: 7 years of non filing with the IRS

I've learned that my husband of 8 years has not filed taxes with the IRS (married filing jointly). He continues to say that ''it's ok'', but I have always been the responsible person prior to this marriage. This is causing me great stress and he doesn't seem to care. What kind of trouble can I get into with the IRS for non-filing of taxes? What are my options now?

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Reply:
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Category: Tax and Taxation Law
Location: TX
Subject: Re: 7 years of non filing with the IRS

You can be in significant trouble both criminally and civily. You should file a tax return every year. If you had income, you are responsible for filing your own tax return. Filing jointly is an option for married couples; it is not required.

The first thing you need to do is contact a tax lawyer, not an accountant. There is confidentiality for your communications with a lawyer and not the accountant if there is a potential criminal prosecution. If you are called by the IRS, just get the name and telephone number. Do not answer ANY questions. Even an innocuous sounding question such as "don't you know you did not file your taxes" could get you convicted.

Please see more information on my web site http://www.taxesq.com

Question: Liability for spouses past due income tax

My husband did not file a tax return for several years. The IRS has contacted him regarding his failure to file in 1996, 1997, and 1998. They have put a lean against his property in the amount of $110,000. We were married in August of 1998. We have never filed a joint return. During the years where i earned income, I filed separately. He has no reportable income at present, but I do. Furthermore, he told the IRS agent where I work. Will they (or can they) attach my wages? Am I responsible for any portion of his debt? What if we were to divorce? Please advise. Thank you.

Reply:

You are not liable for your husband's taxes prior to your marriage. Your husband should immediately contact a tax lawyer and file his tax returns for all outstanding years. The IRS has prepared returns for him which usually maximize the amount of tax due. Filing accurate returns will typically significantly reduce the penalties and interest due the IRS. You should also be concerned about state income tax because your husband probably did not file those returns as well.Another concern is if you have jointly held bank accounts or real property, the IRS can possibly levy the entire balance. Also, if you file a joint return, the IRS will seize the refund.The best thing you can both do is consult with a tax attorney to resolve these liabilities and issues.Please check my web site http://www.taxesq.com/ for further information

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Marrying a Man who owes Past-Due Taxes

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Question:
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Category: Tax and Taxation Law
Location: VA
Subject: Tax law if married a man who owes taxes

I want to marry a man who owes back taxes.i am not sure if i do, will i be held for his back tax debt to i IRS since i married him?
if you has outstanding debts, will i have to pay any of that either?

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Reply:
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Category: Tax and Taxation Law
Location: VA
Subject: Re: Tax law if married a man who owes taxes

You will not be liable for the taxes owed by your future husband. Nevertheless, when you get married, if you file a Joint Income Tax Return, the IRS may keep any potential refund that you would otherwise have coming to you. This can be disputed, but takes time and effort. I suggest that you and your fiancee consult a tax attorney prior to your marriage. If you have further tax questions, see my web site at http://www.taxesq.com

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Not Filing Tax Returns Costs Taxpayers Billions in Lost Refunds

Nearly 2 million students, retirees and other taxpayers stand to lose $2.5 billion in refunds if they don't act quickly to claim the money.

The Internal Revenue Service said Monday that anyone who should have gotten a refund for taxes paid in 2000 but didn't file a return must file and claim the money by April 15.

Half of those taxpayers could claim refunds of $529 or more, the IRS estimated. That calculation does not include the earned income tax, which could make the refund even larger for some low-wage workers.

Don't wait until it's too late!

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Do you have to live/work in the same state that you incorporate?

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Question:
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Category: Business Law
Location: NJ
Subject: Forming a Corporation

Question: Do you have to live/work in the same state that you incorporate? So, If I were to buy/rent a mailbox from a UPS store (the mail box would have a street address) would I be able to incorporate in a different state from where I live simply by using that address as the corporate address? This question comes from the fact that I want to start an e-commerce website so there wouldn't really be a brick and mortar store. I currently live and work full time in NJ but if I file to incorporate a business in say Delaware or any other state that has more favorable tax structure, would I then have to file a Non-Resident state income tax in Delaware?

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Reply:
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Category: Business Law
Location: NJ
Subject: Re: Forming a Corporation

No. As long as you have a local registered agent and registered office, you do not need to live or work in a state to set up a corporation or LLC. Nevertheless, you will be responsible for income tax on salary payments and pass-through income. Most likely, your business should be a limited liability company rather than a corporation.

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LLC vs. S Corporation

Question:

My accountant recommends an "S" Corporation rather than a LLC because LLC's are taxed as partnerships and that is more complex. What do you think?

Answer:

The LLC offers more flexibility than an S corp. Remember only qualified persons can hold S stock whereas anyone or any entity can own a membership unit of an LLC. There is a limit on the number of shareholders an S corporation can have (75). While both an S and an LLC are generally small in number, the LLC can have an unlimited number of members.

An S can only have voting and nonvoting stock, which must otherwise have all other similar rights. An LLC can create whatever kind of membership interests it wishes, so long as the economics are properly reflected in each member's capital account.

Further, if you intend to put real property into a corporation, you will be subject to the problem of double taxation on the appreciation, whether it is a C or an S. The problem with having real estate in an S corporation arises when the
owners refinance the property and want to take out the cash. If the
property has appreciated in value, the cash that they want to take out will
be taxable to the extent it exceeds the basis of the S corp stock and the
shareholders get no basis in their stock for the corporation's debt to the
lender. With a partnership or LLC taxed as a partnership, the partners get
basis for the partnership's debt to the lender so the cash taken out will
not be currently taxable.

More critical to many lawyers is the fact that an LLC has a charging order that prevents a multi-member LLC from having its assets seized or the entity liquidated whereas an S corp. does not have this same benefit of a charging order and can become a shareholder with voting rights without the consent of
the other shareholders. With a single member LLC it is a moot issue as the courts will take the LLC membership interest, give it to the creditor and the creditor can liquidate the LLC.

Yes partnership taxation is more complex, but it is something to learn as you will indeed need to know it. Further, as far as the partners are concerned, the subtitles of partnership taxation can be easily handled by their tax lawyer and accountant.

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My Mother Died Without a Will

IRS Liens and Gifts to Children

Category: Tax and Taxation Law
Location: FL
Subject: IRS Liens & Gifts to Children

My father is old, sick, under med care, no longer working, has no assets, no real estate but owes the IRS approximately $30k due mistakes his accountant made in 95, 96, 97 & 98. Dad has been paying off this debt for years in installments. He can no longer pay. I want to put the debt into ''non-collectible status''. He has some money in a savings account due to the money my sister and I have been giving him over the years and some of which he saved on his own. I don't want the IRS to attach my dad's savings. As my sister and I will need it to take care of him further. Can he gift some money to me and some to my sister so the IRS will not seize it? It's really our money for taking care of him financially for so many years.

Thank you.

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Reply:
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Category: Tax and Taxation Law
Location: FL
Subject: Re: IRS Liens & Gifts to Children

Unfortunately, you did not get legal advice before making the gifts! First, immediately have your Dad withdraw the money from the accounts and use it to pay his necessary bills. The IRS usually levies bank accounts as its first source of "enforced" collection.

Do not make any more gifts to your Dad. If he has no money, make payments to his creditors directly.
Depending on the amount of the accounts, your Dad may qualify for either a Bankruptcy or Offer in Compromise. Please check my website http://www.taxesq.com/

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Bartering is Taxable
Tax laws apply to bartering! The IRS says that you must include in your income the fair market value of property or services you receive through bartering, at the time received. Typically, you must report his income on Schedule C or Schedule C-EZ. Because there are some gray areas in bartering, any small business owner expecting to generate significant income this way should consult with a tax lawyer. There's no sense trading services to save money if you're only going to pay penalties to Uncle Sam later.

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Should I Incorporate in Nevada?

This is a question I received today and is similar to many questions I receive:
I found your web site yesterday, and would like your opinion. I and my partners are interested in incorporating in Nevada for the purpose of privacy. We have been talking to Nevada Corporate Headquarters, and they assure us that a Nevada Corporation with Nominee service will ensure us complete privacy. Of the four partners, two would like to remain "silent". One concern is that, in the event of a lawsuit, would Nevada law prevail and protect the names of these partners? Our business would actually be in Washington and surrounding states.
This is my answer:
Thank you for the note. Frankly, nothing will do what you want - complete privacy. Let's make an example:
You setup Nevada Corp - Nevco. Inc. and want to do business in WA. You must file as a foreign corporation in WA. Even if there is a nominee owner, who will be the officers? Suppose the corporation is charged by a governmental agency with fraud. The officers and employees are arrested. In order to get bail, the court orders them to reveal the equitable ownership of the company. Your privacy scheme fails!

The best solution is to choose an appropriate entity in the state(s) in which you intend to do business

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Watch out for the IRS "Sneak Attack."

Revenue Officers (the IRS collection team) calls your tax attorney at lunch time and then immediately calls you saying "I could not speak with your attorney." Simply tell the IRS to call your tax attorney and do not say anything other than "You will have to speak with Mr. Cappuccio." Do not tell them anything because it could be used against you!

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Same-Sex Partners Both have Parental Responsibility

The California Supreme Court ruled this week that both partners in a lesbian relationship may qualify under state law as parents of a child born to one of them.

"We conclude that a woman who agreed to raise her children with her lesbian partner, supported her partner’s artificial insemination using an anonymous donor, and received the resulting twin children into her home and held them out as her own, is the children’s parent under the Uniform Parentage Act and has an obligation to support them," Justice Carlos Moreno wrote in the court’s opinion.Please see Elisa B. v. the Superior Court of El Dorado County