Ronald J. Cappuccio, J.D., LL.M.(Tax)

Ronald J. Cappuccio, J.D., LL.M.(Tax)
Tax Attorney and Business Lawyer

Saturday, August 02, 2014

Hiding receipts by cash is a Tax issue

Cash is a good way to get clobbered for taxes!

For many years, small restaurants, bars, pizza parlors, ice cream stands, and other food establishments have used all cash systems to hide their income and not pay sales tax and income tax on the full receipts. In New Jersey, the Division of Taxation has created a very aggressive system where they make up excessively high mark ons from food and liquor purchases, and absolutely slaughter businesses that don’t keep good records.

The way this tack works by the New Jersey division of taxation is they subpoena the records from the major food suppliers and liquor distributors. The tax authorities then compared the expenses listed on the tax return to what these third-party sellers reported. Often a business that is trying to hide income lessons the income reported but also lessens expenses but only slightly. The division of taxation then takes the actual expenses and uses very high multiples of the expenses to with the growth should be. Using these high multiples they then decide a phony gross income far beyond the real gross income, add sales tax and corporate or personal income tax. The result is a total disaster for the business that does I keep good records.

In New Jersey and some aggressive states, businesses use sophisticated point-of-sale systems, so the business owner can then prove with the actual income is versus the claims by the Division of Taxation. In fact the division of taxation is far behind that of many small businesses. For example, during a recent audit, a client with a very sophisticated point-of-sale system had every kind of record imaginable kept electronically. The division of taxation was upset that the actual food tickets for each order were not kept in paper format. I simply had my client prepare a computer printout report listing each item sold for the period requested. Because the information was so large, rather than printing out thousands of pages of copies of food tickets, even the auditor agreed that receiving the information in computerized format is easier.

Also, the Internal Revenue Service is far behind current practices. I have many clients, including small pizza restaurants, where 80 to 90% of their business is credit card. The IRS cannot believe that they are not hitting some cash. Nevertheless, go into any fast food restaurant, for example your local McDonald’s. Credit card machines at each cash register for the customer simply to swipe the card. Many people swipe a card for buying a soda or other very small order.

What is even more interesting, is that in some parts of our country, food service business owners are not catching on. For example, in the Poconos in Pennsylvania, many restaurants and food service establishments simply will not accept credit cards. They typically have a sign that says “cash only” and many have an ATM machine in their restaurant. Typically they either do not use their cash register or write out handwritten receipts and clearly keep poor records to hide the gross receipts. My prediction is that these businesses are going to be attacked with a vengeance because of the poor record-keeping and are going to be suffering huge expense in both audits, potential fraud claims and taxes. When any of these businesses get an audit notice from the IRS or state tax authority, they should immediately contact their tax attorney. The tax attorney will have attorney client privilege and can work with their accountant or bookkeeper in fighting the audit.

Friday, May 16, 2014

IRS Letter 5043 - Attacking Small Businesses that Receive Too Much in Credit Cards

IRS Letter 5043 - New way IRS Attacks Small Business

Attempt to get "Cash" businesses

The IRS has been pushing for many years to capture cash income of small businesses and force him to pay taxes.  That is one of the reasons that the IRS is requiring credit card merchant service companies to report a 1099-K for businesses to the IRS.  This form lists the amount of credit card payments made to the business by its customers.  The IRS then takes this information, comparing it to the gross sales of the business.  If the business has too high of a percentage of credit card sales, the IRS issues a letter 5043.

This letter starts out that "your gross receipts may be underreported."  This is the beginning of a long series of letters and correspondence which could eventually lead to an audit in an attempt to force businesses to report cash income.  Most of the letters seem to be going out to clients that are restaurants, pizza parlors, bars and other small retail businesses.

New Trend Attacking Service Businesses

Now, a new trend has started.  The IRS is going after many types of businesses that typically does not have a lot of cash, such as law firms, accounting firms, other professional practices, and general service businesses such as IT support and construction.  The real problem is the IRS is way behind the times!

Upscale restaurants typically have 90% or more of their sales by credit cards.  Even small food businesses such as pizza restaurant's and fast food restaurants have over half of their sales by credit card.  Frequently, consumer oriented attorneys, accountants, and other service providers are having higher percentages of their gross receipts paid by credit card.  Cash payments or declining, checks are decreasing and credit cards or increasing.

The end result of this notice is that the IRS is chasing after cash that does not exist and causing extensive heartache and expense for many small businesses.

If you Receive a 5043 Letter

If you receive a notice from the IRS demanding the explanation. you immediately should retain a tax attorney. Your tax attorney will prepare a response reviewing your income reported on the tax returns as well as your accounting and bank statements records.  IRS letter 5043 is not something that should be ignored.  If you do not respond you will be audited!

Tuesday, April 01, 2014

Senate Misses the Boat - US High Taxes force Businesses to Move to Other Countries.


Once again, Congress is focusing on businesses that have used smart planning in order to avoid the excessive US corporate and personal tax rates as well as the extremely complex compliance costs.  Instead of focusing on how to lower US taxes and make tax compliance easier and less expensive, the US Senate is now picking on Caterpillar as a so-called "tax dodge".

The US has extremely high corporate tax rates of 35%.  This means if a corporation makes a $100 profit, it pays $35 federal tax (plus State tax which could be 10% or higher).  The remaining money when distributed to the shareholders gets taxed again at the shareholders rate which could be up to 39 1/2% plus State tax. So for example $100 of earnings would be $35 of federal tax, $10 of State tax leaving $55.  The $55 would be taxed at the individual level with a combined federal and State tax of approximately 50% yielding about $28 on an earnings of $100.  No wonder businesses are trying to do everything possible to avoid this horrible tax scenario.

On top of it, there is the high cost of IRS audits.  Unlike individuals and small businesses where audits, although painful, can be contained, large businesses suffer year in and year out audits that end up costing them large dollars and in internal staffed to prove that their tax return is correct.  In addition they have to pay tax attorneys and accountants and other professionals.

This convergence of high tax cost and high compliance court's has resulted in the US being uncompetitive.  No matter what studies Congress will try to show to prove whatever they want, the fact is major corporations are moving intellectual property outside of the US primarily for tax reasons and compliance reasons.  We are world economy and Congress needs to recognize this.

See Reuters Article:

Caterpillar's Swiss unit dodged $2.4 bln of U.S. taxes -Senate panel

By Patrick Temple-West and James Kelleher
WASHINGTON (Reuters) - Caterpillar Inc avoided paying $2.4 billion in U.S. taxes from 2000 through 2012 by moving profits from sales of replacement parts through a low-tax unit it set up in Switzerland, a congressional panel said on Monday.
In the latest example of a major U.S. corporation's offshore tax strategies going under the congressional microscope, the Senate Permanent Subcommittee on Investigations issued a report focused on a complex 1999 restructuring by Caterpillar. The world's largest mining and construction equipment maker's restructuring negotiated a low tax rate with Switzerland for a unit it set up there to book taxable profits from sales of Caterpillar-branded replacement parts made by third parties under contract with the Peoria, Illinois-based company.
"This is a prime example of a tax avoidance strategy, whichis costing the U.S. Treasury billions of dollars," said Senator Carl Levin, the Democratic chairman of the subcommittee, which has a hearing scheduled for Tuesday on the report's findings. Caterpillar makes no replacement parts and has no warehouses in Switzerland, but 85 percent of its parts business's profits went through the Swiss unit, where the company pays a tax rate of between 4 percent and 6 percent, the subcommittee said. The top U.S. corporate tax income rate is 35 percent.
Caterpillar's Swiss structure continues to save the company about $300 million a year in U.S. taxes, the subcommittee said. In a response to the Levin report, Caterpillar said its Swiss unit, known as Caterpillar Sarl, or CSARL, has a large marketing and sales presence in Geneva, Switzerland. "CSARL is no mere shell, but rather a major operating company employing hundreds of personnel in Geneva," said Julie Lagacy, vice president of Caterpillar's finance services division, according to prepared testimony released ahead of the hearing.

Along with three Caterpillar executives, representatives of Big Four accounting firm PricewaterhouseCoopers LLP (PwC), which advised Caterpillar on the restructuring, are expected to testify. A spokeswoman for PwC defended the firm’s tax advice to Caterpillar. "We stand by the work we did for them," the spokeswoman said in a statement. Levin's panel has also held hearings on the tax strategies of Apple Inc, Hewlett-Packard Co and MicrosoftCorp. "This (Caterpillar) investigation demonstrates just how shifting profits to a tax haven is not just the province of high-tech companies," Levin said.

Tuesday, March 25, 2014

The Continuing Tax Mis-Adventures of Ms Lauryn Hill

Lauryn Hill is out of Jail, but the IRS keeps Hounding

Singer songwriter Lauryn Hill was thrown into jail for 3 months for tax evasion, with another 3 months of home confinement.  This is all based upon her following some scheme by phony tax advisors claiming that she did not need to file and pay income taxes.  Like many people, from physicians to celebrities, she fell prey to the tax protesters coaxes.

The IRS had a great time spending tens of millions of dollars prosecuting her but got incredible amounts of publicity to scare other people into filing their tax returns.  That is the basis of our "voluntary" tax system. Without people being scared of being thrown in jail, the system would collapse.

Now, just before the tax filing deadline, the IRS is using Lauryn Hill's name to keep scaring taxpayers.  This time they are announcing the filing of federal tax liens.  Even though she already had tax liens and obligations, the refiling of these to include additional periods and amounts is enough to get the IRS the publicity it seeks.

If anyone says you do not need to file tax returns or the income tax is unconstitutional, please tell him to "go away".  Every adult should file tax returns every year to start the statute of limitations running.  Even if your income is technically too low to file you should file anyway.

Lauryn Hill tax lien filing

Sunday, March 23, 2014

Marriage Penalty - if you are Married on December 31, you are Married for Tax Purposes

Are you Married for Tax Purposes?

You are married for tax purposes as of December 31. So, if you were married on or before December 31,  2013, you would be single (or head of household depending upon the circumstances for the 2012 tax year, but you would be Married for 2013. Even if you were married on December 31. 2013, you are married for the entire year.

As a married person. you may file jointly with your husband or wife, or as married filing separately

You may not file as single or head of household.

Note, if you and your spouse are both employed, especially if your income is similar, you may end up paying more tax being married (especially if you previously filed as head of household.) This is called the "marriage penalty."

Here is a handy marriage penalty calculator:

Marriage Tax Penalty Calculator

Friday, March 21, 2014

Beware of Scam calls claiming to be from the IRS

Scam IRS Calls!

I am getting many calls from clients and potential clients saying the are getting calls from the “IRS” and are given strange numbers to call.  These are scam telephone calls trying to get personal information such as social security numbers, dates of birth, bank account information so that they can take money from your accounts and uses information as part of identity theft rings.  One typical sign of the scam fraud is the caller stating “you were going to jail”.

You will Never Get a Call from IRS without First Receiving a Letter

In fact, you will never get a call from the IRS threatening you in any way about jail, criminal matters or demanding that you give them information over the phone right away .  Before you get such a call, you will get a written notice from the IRS.  These notices will demand payment of tax and will either be from the IRS/ACS which does have 800 numbers, or from a local “Revenue Agent” who is in IRS employee and collector.

Never Give Information Over the Telephone!

Never give any information over the phone.  Rather, get the persons name, address, telephone number and IRS employee number.  You should then immediately call your tax attorney.  If you in fact owe tax, your tax attorney will file a power of attorney with the IRS and the IRS will contact the attorney rather than you.

I have had many panicked clients call me with this information and it turns out that they are just scams.  If for some reason it is real, then I deal with the matter directly.

Never, ever, give your information to anyone claimed to be from any taxing authority over the telephone!  

Click for article

Tuesday, February 04, 2014

Rob Andrews Resigning from Congress

Once again, New Jersey is being unnecessarily dragged through the mud. First, the unfounded attacks against Gov. Christie. Then, not correctly attributing the SuperBowl to the correct State (the Meadowlands is in NJ, not NY), and now Rob Andrews is getting the "tommy-gun" from the press in an attempt to ignore the real issues in our Federal Government.

Rob Andrews is resigning from Congress under an ethical cloud.   This is unfortunate since he certainly has been a highly energetic and active Congressmen for Southern New Jersey.  Even though I disagree with many of his viewpoints, he certainly always had an open door to me and any other constituents.

Years ago, I sponsored a dinner honoring James Corbett, a retiring member of the Camden office of the SBA.  Rob was gracious enough to come speak at the event, and lend his staff for event assistance.

He was a hard-working Freeholder Director before he got into Congress and he never forgot how important local government is. Many Congressman get into office and forget that what they do has a great impact on the States and Local Governments, including our school systems.

I believe in term limits and certainly 23 years in Congress is long enough, but it is a true shame that he has to resign under an ethical cloud.  It is hard for me to believe that any action he could have done was worse than the typical activities taking place in Washington, especially the unreasonable Obama taxes of small businesses and individuals that have foreign bank accounts, NSA surveillance, and totally ignoring the Constitution!

Good luck, Rob!

Friday, December 06, 2013

New Jersey Division of Taxation Closes Restaurant - leaving employees and customers stuck

NJ Division of Taxation seizes Melange Cafe

Holidays in Haddonfield are Dreary without Melange @ Haddonfield

As the holidays approach us, we renew our quest for a delicious meal that awakens the palate served in a relaxing atmosphere far removed from the hustle and bustle of garish chain restaurants serving mediocre food slapped on a plate. As the town of Haddonfield, NJ brings to life its Christmas shopping season filled with candlelit streets, we are left without its shining star, Melange @ Haddonfield café. Why? Because Chef Joe Brown did not have an attorney that understood his need to be a chef – and his struggles as a restaurateur. After owning Melange Café in Cherry Hill, NJ and achieving much success, Chef Joe Brown opened his Melange @ Haddonfield in 2008, eventually focusing full time on the Haddonfield location and closing the Cherry Hill location.

With those moves and multiple issues that could have arisen (and obviously did arise), Melange received a Division of Taxation Judgment of nearly $72,000 in unpaid taxes which resulted in a state seizure. Brown issued a wrongly written e-mail that blamed the economy rather than providing his fan base with a promise for a future, thus effectively hurting his own future. If Brown had a working system for running his business, he would’ve never had to write such an e-mail in the first place.

Rather than feel sorry for Brown or justified on behalf of the state, this case is one that should be examined and reexamined. What Brown needed was an attorney, like me, with a good working relationship with his accountant. He needed a marketing company that understood the need for a real Point of Sale system and also had a working relationship with his accountant and attorney. Brown’s Epicure Corp, citing himself and his wife as officers, needed oversight that he either may not have received or may not have been willing to have. Perhaps he didn’t want to spend the money on a good attorney, perhaps it seemed easy to run his business (many websites attempt to convince people of this) or perhaps he just didn’t even know what he had. In any case, we will miss his mussels and crème brûlèe.

Thursday, December 05, 2013

NFL Superstar Freddie Mitchell duped into Tax Fraud

Freddie Mitchell Dropped The Ball and the IRS Catches him

My daughter is an avid, ahem rabid, Eagles fan. At 5 ft, barely 2 inches, she can go head to head with the big guys and knows football inside and out. Me? I hate football. I don’t get why people love such violence. Its nasty and I don’t want my son playing it. But, as December 6th approaches and Freddie Mitchell, former WR for the Philadelphia Eagles, a simply presented tax fraud case is anything but simple.

After taking a plea deal and receiving 37 months in prison for playing a role in a tax fraud scam, Freddie Mitchell presented medical documentation stating he has CTE, chronic traumatic encephalopathy, a possible result of his 8 documented concussions. CTE can have symptoms of memory loss, motor skills impairment, depression, aggressive behavior and confusion.  As it is in the research stages, not everyone agrees that CTE can be properly diagnosed unless postmortem. Mitchell clearly states that he did not want a plea deal and yet took one anyway on his attorney’s advice.

This scam involved more than Freddie Mitchell. It involved an IRS agent making promises while clearly trying to defraud the government. It involved an NFL player with a big ego (something found commonly in professional sports) that had more people saying “yes” to him than clearly offering sound advice.

What do we know about this case?
1.      Freddie Mitchell did have concussions.
2.      Those concussions could’ve led to the development of CTE. But, that is not enough to prove bad decision making was caused by CTE and nothing else.
3.      An IRS agent was part of this tax fraud scam – and clearly did not get punished enough! Why aren’t we going after the IRS?
4.      Never trust an IRS agent.
5.      Call an attorney before you sign ANY document.
6.      Never let your ego be bigger than your paycheck. People want to take your money!

 For More information on this story, click here

Wednesday, December 04, 2013

Do it now: Small Business Tax Planning 2013 Expirations (and large businesses too!)

Expiring in 2013

The tax credit for Research and Development (R&D) is set to expire in 2013. Even if you are not a tech company, this credit could apply to your business. New processes and developments could count toward this credit. Check with a qualified tax attorney. This credit has been extended before, but why hope and wait to see if it will be extended again?

Drastic Changes in the Section 179 Deduction

Waiting until the new year to buy a new truck for your business? Don’t. Need new servers and computers? Waiting for the after Christmas sales? If you snooze, you lose. Your items must be purchased and used/installed before the end of 2013 to potentially qualify for the 2013 $500,000 deduction. This deduction will be reduced to $25,000 in 2014.


The First-year bonus depreciation for equipment is set to expire, so make sure you  have your attorney review your 2012 and 2013 purchases.

Saturday, October 12, 2013

Columbus - Taxes, the government shutdown and ObamaCare

Columbus - taxes, the government shutdown and ObamaCare

Today is Columbus Day. Growing up it was an important holiday but now Columbus is being derided for all of his various faults. My son, who is in 8th grade and has an extremely inspiring history teacher, came home and told me that "Mrs. M does not think we should celebrate Columbus Day." He went on to tell me that Leif Erickson actually discovered America and that Columbus spread disease and tortured Native Americans.

What he didn't say was that Columbus also demanded tribute from the Indians, stole their gold, enslaved some of the Indians and brought them back to Spain as objects of curiosity. He also didn't discuss the brutality and all of the other negative things that can be brought up about Columbus. Thank heavens!

Those who pooh-pooh Columbus bring up the fact that most educated Europeans in the late 15th century knew that the world was a sphere and not flat. But the fact was, like the great inventors and explorers of humanity, Columbus took theoretical knowledge and applied it. Yes, there were some professors in the universities of the time talking about astronomy and geography, and postulating a variety of theories. Columbus took that theory and said that he was going to discover a shorter route from Europe to India to get at the spices, gold and other valuable items less expensively and safer than going around the Cape of Africa. While the intelligentsia was simply talking, Columbus was doing.

Leif Erickson, obviously a great Viking explorer, went from Northern Europe to North America more than 400 years before Columbus. He simply went home and did nothing about it. On the other hand Columbus, not only the explorer and adventurer, knew that he had to go home to Spain with something. He gathered the gold that he could find, he capture a few Native Americans, and returned to Spain which caused a rapidly spreading conflagration of enthusiasm for the "New World." Without Columbus, it might have been centuries before the eventual exploration and settlements in North America would take place.

After Columbus came a variety of explorers from Portugal, Spain, France and England. Eventually the English settlements prospered and after a Revolution (and the 2nd revolution known as the "War of 1812") we had our great country, the United States of America. It is true that the founding fathers, yes all men, did not invent the idea of representative government, were imperfect by allowing slavery, and made many compromises. But with the Articles of Confederation, and eventually the Constitution, they implemented the ideas of freedom and the rights of the individual versus the right of the king or a government. As Thomas Jefferson said in the Declaration of Independence, "we hold these truths to be self evident, that all men are created equal, that they are endowed by their Creator with certain inalienable rights." It was not a king that created these rights. It was not a government that created these rights, rather these rights were the natural rights of men and some of these rights were delegated from men and given to the government. These were not new ideas for their time, yet like Christopher Columbus, these men took the ideas and made them practical and implemented them.

Yes it is true that many of the other great Americans came up with ideas, but more importantly implemented those ideas. Thomas Edison did not invent electricity. He did not even invent the concept of a light bulb. He just made it work and made it practical for industry and eventually for individuals.

The Wright brothers did not invent heavier than air flight. There were many professors and thinkers who had all types of theories and postulations concerning flight. The Wright brothers simply implemented it in their flights at Kitty Hawk The automobile was not invented by Ford. There were many automobiles in existence, but they were all individually handcrafted luxury items. Ford took the ideas of the automobile and worked on manufacturing to make an inexpensive Model T which eventually made automobiles available to every American, and much of the world.

The computer was not invented by Steve Wozniak and Steve Jobs, they just made it practical for individual businesses and home users to have all the benefits of computers. This is spread around the world and is change the lives in the direction of humanity forever.

Yes it is true that our government has expanded far beyond the grounds envisioned by the Founding Fathers and outlined in the Constitution. Yes it is true that the same people who protested England's half percent tax on tea are probably rolling in their graves that most Americans are paying 50% of their income in a variety of federal, state and local taxes. They could never imagine a government so large that a shutdown of some of the agencies would cause economic dislocations and concern around the world. They could never imagine that average Americans would not be up in arms protesting over the loss of freedom, individuality and the increased government control caused by ObamaCare.

Yes, if Christopher Columbus did not decide to embark upon his adventure we would not have these problems. So when you see the news, instead of celebrating Columbus, we should blame it all on him!

Friday, October 11, 2013

IRS Temporarily not issuing Tax Liens and Levies during Shutdown

The IRS has finally announced that it will stop the automatic issuing of federal tax liens, levies and executions during the government shut down.  Unfortunately, many automatic levies have been issued by the IRS and there is no one in the IRS to talk to or negotiate with to set up installment agreements or take other actions to remove the levy.  This results in great hardship for taxpayers.

The IRS has been issuing notices, some dated October 7, 2013, even though the office was to be shut down by October 1, 2013.  It is hard for me to believe that this was not designed to have maximum impact upon taxpayers.  In fact all the IRS services that normally assist taxpayers, whether its at a service center, or on the telephone, as well as the normal collection and auditing function, have been terminated during the shutdown.  This intentional design clearly is to put a maximum negative impact upon taxpayers.

Because of the complaints, the IRS is now issued a revised listing of its operations during the government shut down where it indicates that it is stopping to send future tax liens and levies until that section of the IRS reopens.  Unfortunately many people are still caught in the middle with little recourse.

Click here for the IRS Notice