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Showing posts from April, 2012

IRS Loses in Supreme Court - cannot extend Statute of Limitations

The IRS has a 3 year statute of limitations to conduct an audit. This can be extended to 6 years for the under-reporting more than 25% of gross income. In an attempt to extend the statute of limitations, a taxpayer that correctly reported gross income, but overstated the basis in assets sold as part of the "Son of BOSS" tax shelter. the IRS claimed it had a 6 year period to audit. The Supreme Court said the IRS was wrong and the taxpayer could not be audited more than 3 years after filing the tax return.

Please see: United States v. Home Concrete & Supply LLC

IRS Increases Auditors - Makes Audits Tougher

The IRS keeps hiring "Revenue Agents" (the IRS term for Auditor). In the last few years, there has been a massive increase of auditors for Large Businesses (the is is called the LB&I - Large Business and International group). Now the IRS is going after Small Businesses. The Small and Mid-Sized Business section ("SMSB") is growing rapidly.

More auditors means not only increases in the numbers of audits, it is resulting in more intense and longer audits. Revenue Agents now want to see practically every document - not just bank statements and a sample of bills. They are locating at every invoice, calendars, credit card statements and anything to show an under-reporting of gross income.

Revenue Agents are also attacking independent contractors, especially if they are not given 1099's.

For more information see Tax Audits and Collections.
US Tax Court - Interesting and Different


Most people have not heard of the US Tax Court. It was founded in 1969 and is the only Court that will hear tax case prior to payment of tax. It has strict rules - you must file within 90 days of the date of an IRS Notice of Deficiency or you lose your right to Tax Court. You then have to pay the tax, file a Claim for Refund and go to the Court of Federal Claims or US District Court, a much more expensive process.

Here is a good article on the history of the US Tax Court.


Engineers Going to Jail - Not Paying Employment Taxes

In U.S. v. DeMuro  the Federal 3rd Circuit Court of Appeals upheld the conviction of husband and wife engineers for the failure to pay employment taxes. The business owners failed to pay $500k in taxes and penalties and the IRS attacked. They were found guilty and sentenced to more than 4 years prison. The Appeals Court confirmed the conviction. The sentence will be reviewed by the District Court.

Once again, this shows the exceptionally aggressive position by the IRS in attacking small business owners that cannot pay all of the payroll taxes. Many States are also criminally prosecuting business owners for payroll tax claims.

Filing Amended income tax returns

Suppose you made a mistake on your income tax return? For example, if you excluded income from a 1099 or K-1 that arrived after you filed your return, it is usually not necessary to file an amended return. Usually the IRS matching system catches these errors and the IRS will automatically adjust the amount of tax due and send you a computerized notice. Similarly, if you notice that there was a mathematical error and is also going to be adjusted by the IRS and is not reason for filing an amended return.

If you reviewed your return and noticed that a substantial amount of income was excluded, or was mistakenly left off your return, you should file an amended return as soon as possible.

If you do file a 1040 X, you must file this within 3 years of the date of filing your original return, or within 2 years of the date of payment, whichever is later. The return must be filed as a paper return rather than E-filed.


New Tax changes hurts rental real estate

For tax years beginning after Dec. 31, 2012, a 3.8% Medicare tax will be charged on net investment income. This applies to individuals with modified adjusted gross income in excess of $200,000 ($250,000 in the case of married persons filing jointly). Net investment income includes interest, dividends, annuities, royalties, rents, other income from a passive activity. This tax also applies to any gain from selling investment property.


Because rental income is generally considered passive income, rental income could be subject to the 3.8 percent tax. This could significantly decrease the rate of return for rental real estate. This 3.8% tax on top of Pres. Obama's planned increase in Capital Gains rates after the election will force a further decline in business property values.
Watch Out for the Big Advertisers for Tax Matters


They usually advertise on Cable Stations such as Sports and Home Shows. "If you owe more than $10,000 in taxes we can help." Or they inundate you with letters and calls after a Federal Tax Lien is filed. They promise relief and give glowing testimonials of clients paying "pennies on the dollar." Unfortunately, these companies frequently victimize the taxpayers who can least afford it. Whether it was "American Tax Relief, Roni Deutch, J.K. Harris, and now Tax Masters, each company has taken client money and left them in a lurch.

Tax lawyers cannot advertise and make false promises like these fraudsters. Tax lawyers are not going to chase you for your business. New phony companies are popping-up all the time. Beware!