Wednesday, December 21, 2011

Section 6038D is Alive

Yesterday the IRS issued the final Form 8938 and accompanying instructions for reporting foreign financial assets under the Hiring Incentives to Restore Employment Act (HIRE). In essence, the new IRS form and instructions implements the compliance requirements of Section 6038D and has commonly been referred to as FATCA. The new form will be filed beginning with the 2011 tax return disclosing covered assets. A copy of the final form and instructions can be obtained by clicking of the links below.

If you have any questions regarding a potential FATCA reporting obligation, feel free to contact this Office.

Wednesday, December 7, 2011

Money Matters: LWC on the Radio!

Check out Lindsey's latest radio show below! As you know, Lindsey is a regular contributor to the Money Matters radio show, which airs Saturday mornings on FM 94.3 here in Charleston. Be sure to tune in.

Monday, November 14, 2011

Increasing the Burden: FATCA Reporting Requirements for 2011

In addition to foreign account disclosures filed through FBAR reports, taxpayers now carry the additional burden to disclose additional financial assets held outside of the United States when they file their annual tax return. The Foreign Account Tax Compliance Act (FATCA) requires taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report information about these assets on a new Form 8938 beginning with their 2011 taxable year tax return. Failure to report these assets timely means big trouble: A penalty of $10,000.00 and additional penalties up to $50,000 for willful failure after IRS notification. Underpayments of tax relating to the undisclosed foreign accounts will be subject to a penalty of 40 percent of the tax owed, plus other additional penalties such as the substantial understatement penalty. In sum—do not ignore this new disclosure requirement!

FATCA further imposes a burden on your foreign financial institutions (FFI) themselves. In order to adequately monitor your offshore assets, these institutions must directly report certain information about financial accounts of U.S. taxpayers to the IRS. Indeed, these financial institutions will police potential violators of the new law. If you do not provide information to the IRS on your foreign assets, your financial institutions will do it for you.

To facilitate these disclosures, FATCA “invites” all FFIs to enter into a contract. Pursuant to this contract, the FFI agrees to identify accounts held by US persons and provide the IRS information regarding those accounts and their owners. To facilitate the transfer of this sensitive information, FFIs must also require their customers to sign a waiver permitting the FFI to release such information to the IRS. A 30% withholding tax is deducted from payments related to U.S. sources to foreign financial intermediaries which do not enter into a contract with the IRS and to recalcitrant account holders who do not sign a waiver. In other words, the FFI is going to turn over the information to avoid the 30% withholding.

The IRS’ definition of a “foreign financial institution” includes your typical bank—savings and depository banks, commercial banks, credit unions, and thrifts. It also includes broker-dealers, trust companies, custodial banks, and entities acting as custodians for employee benefit plans, entities trading in securities, mutual funds, and hedge funds. Essentially, if you hold assets in an offshore account, your account information will end up in the hands of the IRS.

The definition of “you” is also extensively defined in the new code sections. You, a U.S. taxpayer, are featured as an all inclusive definition with only exceptions explicitly provided. Exceptions to the definition include publicly traded corporations, tax-exempt organizations or individual retirement plans, several types of trusts and banks. The information disclosed to the IRS shall include your name, address, social security number, account number, account balance/value, gross receipts and gross withdrawals/payments from the account, and any “further information as requested by the IRS.”

FATCA impositions are in addition to, not in replacement of, any FBAR requirements you may be subject to. FBAR requires United States persons to disclose offshore assets if they had a financial interest in, or signatory authority over, at least one financial account outside of the United States if the aggregate value of the accounts exceeds $10,000 at any time during the calendar year. FBAR, unlike your FATCA form, is not filed with your tax return but must be received by the IRS on or before June 30 of the year in which your return is due.

These new requirements may result in hefty fines if you fail to comply. Be sure to discuss these FBAR and FATCA requirements with your accountant or tax attorney to see if you must report.

IRS CIRCULAR 230 NOTICE: Internal Revenue Service regulations generally provide that, for the purpose of avoiding federal tax penalties, a taxpayer may rely only on formal written advice meeting specific requirements. Any tax advice in this message, or in any attachment to this message, does not meet those requirements. Accordingly, any such tax advice was not intended or written to be used, and it cannot be used, for the purpose of avoiding federal tax penalties that may be imposed on you or for the purpose of promoting, marketing or recommending to another party any tax-related matters.

Wednesday, October 5, 2011

Money Matters: LWC on the Radio!

Listen to LWC's latest radio show which aired September 11th below. You can catch LWC's show Saturday mornings on News Radio FM 94.3.

Wednesday, September 28, 2011

Tax Update: U.S. Supreme Court to Review Statute of Limitations Circuit Court Split

In two previous blog posts, we discussed the hot issue of whether an overstatement of basis triggers an extension of the three year statute of limitations for assessing tax.  The U.S. Court of Appeals for the Fourth Circuit, where our humble state resides, previously ruled in Home Concrete & Supply, LLC v. U.S. that a partnership’s overstatement of its basis did not constitute an “omission” subject to the six year statute of limitations for tax assessment.  The Fourth Circuit, along with the Federal and Ninth Circuits and the U.S. Tax Court all held that an overstatement of basis does not trigger the extended period of time to assess tax.  However, both the Fifth and Seventh Circuits found differently, providing that the six year statute of limitation does apply, resulting in a confusing circuit court split.  The circuit disparity primed the issue for arguments in front of the Supreme Court.

While petitions for certiorari were filed in connection with opinions of the Fourth, Seventh and Federal Circuits, the Supreme Court granted the petition relating to Home Concrete & Supply.  The government’s brief is due November 14, and the case will likely be heard early next year with an opinion issued by July.  We will keep you updated with the latest.

Monday, September 26, 2011

LWC on the U.S. Peace Corps

LWC discussed his two-year service in the Peace Corps in today's issue of The Post & Courier.

To read the article, check out the link below:

Post & Courier: Peace Corps turns 50

Monday, September 19, 2011

LWC on President Obama's Tax Proposal

"I was quoted in the Washington Post on September 16th in Karen Hube's article about the President's new tax proposal.  This proposal is very important from a tax perspective to many people whom I consider to be the upper middle class in America and doesn't really tax the truly wealthy."

Click Here for The Washington Post 

If you'd like to read the proposal, see the link below. 

Click Here for a Section by Section Analysis of the American Jobs Act of 2011

Additional articles quoting LWC on Obama's tax plan:

Obama Fires Up the Debate Over Who Is Wealthy-- The Fiscal Times

Couples Earning $250K/Yr Aren't "Millionaires and Billionaires Abusing Tax Loopholes"-- Business Insider

Wednesday, September 7, 2011

Friday, August 5, 2011

Money Matters: LWC on the Radio!

Check out Lindsey's latest radio show below:

Tuesday, July 26, 2011

Freedom for the Innocent: IRS Relaxes Innocent Spouse Relief Qualifications

The IRS, in a dramatic announcement yesterday, finally repealed the regulations prohibiting the consideration of an application for innocent spouse relief made more than two years after the IRS’ initial attempt at collection. The new rule permits taxpayers to apply for innocent spouse relief at any time during the statute of limitation for the collection of a tax liability, which usually lasts 10 years.

Pursuant to Section 6015 of the Internal Revenue Code, a taxpayer may seek relief from joint and several liability associated with filing joint returns in certain circumstances. Under subsection (f), a taxpayer could seek equitable relief from understatements and underpayments when relief is not otherwise available. This section allows the IRS broad power to reduce or eliminate certain penalties when an appropriate case presents itself. However, this relief was dramatically limited by the Treasury Regulations, which placed a two-year window in which a taxpayer may seek such relief.

As part of the announcement, the IRS also stated that previously rejected applications for innocent spouse relief would be reconsidered, as long as the taxpayer re-files the IRS Form 8857 and the collection statute of limitations for the tax years involved has not expired. Taxpayers with cases currently in suspense will automatically fall under the new rule and do not need to reapply. Further, the IRS will not apply the two year limitation in pending litigation, and may suspend collection on certain judgments.

If you believe you may qualify for relief pursuant to the innocent spouse rules, download and file IRS Form 8857 found at

Tuesday, July 19, 2011

Accrued Taxes During Bankruptcy Not Included in Bankruptcy Estate: Tenth Circuit Joints in Circuit Court Split

Last month we told you about the circuit court split involving the understatement of basis. This month, the Tenth Circuit joined in a split regarding whether taxes incurred during the sale of certain farm assets during a Chapter 12 bankruptcy proceeding are part of the Bankruptcy estate, or are instead incurred by a debtor personally, outside of the protections of the bankruptcy. The court held in U.S. v. Dawes that federal income taxes resulting from the sale of farm assets are not incurred by a Chapter 12 bankruptcy estate.

The facts of the case did not fare well for the taxpayers. Mr. and Mrs. Dawes had a history of not paying their income taxes; specifically, they pled guilty to the crime for taxes due in 1981, 82, and 83. They also failed to pay their taxes for the years 1986, 87, 88 and 1990. This caused the IRS to seek and obtain a judgment for the unpaid tax. The judgment also found that the Daweses had fraudulently conveyed certain assets in an effort to avoid the IRS and other creditors. After the judgment was obtained, the IRS notified the Daweses that it intended to seize certain assets. Before it could, the couple filed Chapter 12.

During the bankruptcy, the Court permitted the Daweses to sell several tracts of farm land to pay off debt, which created certain income tax liabilities. These new tax liabilities were incorporated into their plan for reorganization, which sought to place them in the category of unsecured debt, paid only to the extent funds might be available after priority claims were satisfied.

The Dawses hoped to take advantage of Section 1222, which provides that certain claims otherwise entitled to priority payment (such as claims filed by the IRS), but which are owed to the government as a result of the sale of farm assets, are downgraded to unsecure claims and deemed eligible for discharge. They argued that because the federal income taxes at issue are owed to the IRS as a result of a farm asset sale and were “incurred by the estate,” they may be treated as general unsecured claims.

The issue- whether income taxes flowing from the sale of a farm asset during a Chapter 12 bankruptcy are taxes “incurred by the estate and so subject to downgrade and discharge—is the subject of a circuit court split. The Eighth Circuit says yes; the Ninth says no. The United States Supreme Court granted certiorari on June 13th. Considering the split, the Tenth Circuit found that the taxes incurred due to the sale of the property were the individual liability of the debtor, not of the bankruptcy estate. As such, the Dawses were not allowed to take advantage of Section 1222 and discharge the owed tax.

Do not fail to consider the tax consequences of certain property transfers if you are seeking bankruptcy protection under Chapter 12. The Fourth Circuit has not decided the issue so be sure to discuss this potential problem with your Bankruptcy attorney.

Thursday, June 16, 2011

NY Judge Fails to Recognize Lap Dance as Art

Earlier this month, a New York court ruled that entertainers at strip clubs are subject to sales tax, and their performances are not considered choreographed artistic performance eligible for tax exemption. In 2005, “Nite Moves,” an adult establishment in Latham, New York, was audited by the state Division of Taxation and assessed close to $125,000 in sales tax and interest. The club argued that its performances constituted art, and therefore fell within an exception found in the state’s tax code and were not subject to the tax. The state’s assessment was upheld in a unanimous decision by the court.

The nine-page ruling cited numerous elements of tax case law and went into extreme detail defining dramatic or musical arts, choreography, and analyzed whether Nite Moves qualified as a “place of amusement.” At the hearing, the club presented testimony from a cultural anthropologist, who researched exotic dance, visited the club and viewed DVDs of the dancers’ performances. She stated that the shows at Nite Moves, and the lap dances performed in private rooms, were “unequivocally live dramatic choreographic performances.”

The court disagreed. It found that dancers were not required to have formal training, instead relying on videos or tips from other dancers to learn their moves. It ruled that the dances offered at the club did not constitute “’live dramatic or musical arts performances’ within the meaning of the statute.”

So if you are heading up to New York for some adult entertainment, remember to bring some extra George Washingtons to pay your sales tax.

Money Matters: LWC on the Radio!

Lindsey's latest appearance on Money Matters is uploaded below:

Listen to Lindsey's radio show below which originally aired in May:

Monday, May 16, 2011

Insurance Policy Holders & Demutualization= IRS Tax Refund

Originally published in the November/December 2008 issue of South Carolina CPA Report, below check out an article discussing the tax implications of insurance company demutualization:

Millions of people and entities own insurance policies in one form or another. And if you owned a policy in the late 1990s or the early 2000s, your ownership may entitle you to a tax refund.

In the not so distant past, many insurance companies were owned by the policy holders who were entitled to receive company dividends and vote. These were called "mutual insurance companies.” USAA, for example, retains this current corporate structure. But many of these mutual insurance companies restructured themselves from policy holder owned to stockholder owned in the late 1990s and the early 2000s.

As part of the restructuring, individuals who owned policies were distributed new stock in the insurance companies when it transformed to a publicly owned company. This transformation from policy holder owned into publicly owned is called "demutualization.”

In the past, the IRS required that taxpayers, who received stock as part of a demutualization, pay capital gains tax on the 100 percent of the value of the stock when it was sold. But a recent court decision shot down the IRS's position and, in fact, said that the taxpayer owed no tax at all. This decision has widespread ramifications for individuals, professional associations and business entities that owned insurance policies.

Some of the largest insurance companies - in America demutualized in the last decade, including MetLife Inc. and Prudential Financial Inc. Between MetLife and Prudential alone, there were approximately 22 million policyholders at the time oftheir demutualization that occurred in 2000 and 2001, respectively. Indeed, when this tax treatment issue was shared with a South Carolina accountant, he advised that the one of the largest malpractice coverage providers in South Carolina for accountants was Prudential. No doubt, millions of individuals and entities received stock in insurance companies as a result of demutualization. More importantly, if the stock was sold, these individuals and entities paid tax on the sale. As it turns out, it appears that no tax was owed.

In August 2008, the Court of Federal Claims issued a decision in Fisher v. United States. The court held that tax is only owed on the sale of the demutualization stock to the extent that the sale proceeds exceed the cost basis in the taxpayer's policy. Because the stock was sold for $31,759 and the taxpayer had paid over $194,000 in premiums, the cost basis in the policy far exceeded the proceeds from the sale of the stock. As such, no taxable event occurred, and no tax was owed.

Let us review certain issues that could, affect a taxpayer's ability to receive the benefits of this decision. The ability to claim refunds by filing amended returns is limited to those claims filed within three years of filing the income tax return for the year in which the sale of the stock occurred, or two years after payment of the tax—whichever is longer.

If a taxpayer timely filed and paid, they are effectively limited to filing claims for refund for the 2005 to 2007 tax years, unless an agreement to extend the statue of limitations was entered into. If enough money is at issue, the taxpayer may consider bringing an action under the Tucker Act that provides for a six year statute of limitations. Please note that South Carolina follows the Federal Law for timely filing claims for refund, and refunds for South Carolina income tax should be available as well. As Certified Public Accountants whether practicing in public or private practice, this ruling has potential for great refunds. No need to make unintended gifts to the IRS.

NOTE: The opinion in Fisher was subsequently affirmed on appeal. See 333 Fed. Appx. 572 (Fed. Cir. Oct 09, 2009).

By Lindsey W. Cooper Jr., Esq. and Robert Baldwin, CPA, PFS, AEP.
Both authors work in Charleston, SC, at the Law Offices of L.W. Cooper Jr., LLC, and Baldwin and Associates LLC, respectively. Robert Baldwin is a former president of SCACPA.

Friday, May 6, 2011

Easy Money for Easements No More

With over 700 registered properties in an area which covers the majority of the peninsula on which it’s located, Charleston is one of several cities in the country protected by city, state, and federal law through its designation as “historic.” Beginning in the 1930’s, the city of Charleston drafted and enacted city ordinances aimed at preserving the architectural importance of these historic neighborhoods.

In furtherance of this aim, Charlestonians wishing to further protect the significance of their homes have begun donating historic easements to organizations such as the Preservation Society of Charleston, which alone holds over 75 exterior easements in the city. While these easements preserve the cultural significance of these buildings, they also offer an attractive tax incentive for home owners: charitable deductions. However, with a recent wave of U.S. Tax Court decisions restricting charitable tax deductions for conservation easements, this added incentive may all but disappear.

Charitable Deductions for Conservation Easements

The Internal Revenue Code provides tax incentives for individual seeking to make charitable donations, which may cover monetary contributions to your local church or dropping off clothing at Goodwill. While subject to limitations, Section 170 allows taxpayers to deduct the amount of charitable contributions they make within the taxable year on their tax returns. Section 170(f)(3)(B)(iii) specifically extends this deduction to donated “qualified conservation contributions,” which is defined as a contribution of a qualified real property interest, to a qualified organization exclusively for conservation purposes. It is this simple definition that is getting taxpayers in hot water.

A “qualified real property interest” is further defined as “a restriction (granted in perpetuity) on the use which may be made of the real property.” The Code clarifies that a contribution shall not be treated as “exclusively for conservation purposes” unless the conservation purpose is protected in perpetuity. Therefore, Congress made it clear that in order to receive the tax benefit of your contribution, the easement must essentially exist and be protected forever. But what about properties which are mortgaged?

While protecting an easement in perpetuity sounds great, technical problems arise when a bank holds a first priority mortgage on the property. The Treasury Regulations attempted to provide a loophole for this situation by providing that banks may subordinate its rights in the property to the rights of the organization to enforce the conservation purposes of the gift in perpetuity. Sounds easy enough, but, here is where it gets tricky.

The Regulations further require that, at the time of the gift, the property owner must agree that the donation of the easement gives rise to a property right, immediately vested in the donee organization, with a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time. Simplified, the easement must immediately vest a property right in the organization holding the easement which shall be enforceable against all third parties. This property right and the perpetuity requirement are two essential provisions of the charitable contribution which the IRS recently started to scrutinize.

Kaufman v. Commissioner

Enter Kaufman. In 1999, Lorna Kaufman purchased property located in Boston’s South End historic district with the help of a home loan with Washington Mutual. In 2003, Kaufman granted a façade easement to the National Architectural Trust (NAT) while seeking the benefit of a federal tax deduction. In order to satisfy the requirements relating to mortgaged property, Washington Mutual executed a Lender Agreement whereby it agreed to subordinate its rights to that of NAT for the purpose of carrying out the easement in perpetuity. However, the agreement also provided that the bank would have priority to all insurance proceeds and all proceeds of condemnation until the mortgage is paid in full. An appraisal occurred and the Kaufman’s took over $220,000.00 of deductions on their 2003 and 2004 returns relating to the donation of the façade easement.

The Tax Court disallowed the Kaufman’s deductions in their entirety for failing to meet the provisions of Treas. Reg. §1.170A-14(g)(6)(i) and (ii)—the crucial rule requiring an immediately vesting property right. The bank retained priority to all insurance and condemnation proceeds of the property by virtue of the Lender Agreement, precluding any right of NAT to its proportionate share. Therefore, the façade easement failed as a matter of law to comply with the enforceability-in-perpetuity requirements of Treasury Regulation § 1.170A-14(g)(6).

The implications of this case are staggering. What Kaufman tells us is that if a property is subject to a mortgage, and the property owner wishes to donate an easement and take a tax deduction, the bank must agree to waive its rights to the portion of the property covered by the easement. With banks in trouble and homes under water, these financial institutions will be hard pressed to forego any proceeds it may be entitled to pursuant to a mortgage. Without this subordination, your federal tax deduction will be challenged and disallowed. While some homeowners may be able to satisfy Kaufman’s requirements, or if they own their property outright, there is still a more difficult Tax Court holding to swallow for us Charlestonians.

1982 East, LLC v. Commissioner

The opinion in 1982 East was issued just one week after Kaufman. In 1982 East, an entity purchased property in 2002 in New York City’s Metropolitan Museum Historic District, making it subject to the city’s landmark and zoning laws. As in Kaufman, the property was subject to a mortgage held by Wachovia and the property owners sought to grant a façade easement to NAT. In order to donate the easement seemingly compliant with the Tax Code, Wachovia entered into a Lender Agreement featuring the same language as that in Kaufman. The entity completed an appraisal and took a $6.5M charitable deduction on its 2004 partnership return relating to the donation of the easement.

The Tax Court found that the Kaufman holding prevented the entity from taking the charitable deduction on its return. The façade easement was not protected in perpetuity because the organization did not obtain a vested property right as required by Treas. Reg. §1.170A-14(g)(6).

The Tax Court went further in its holding to determine that the easement also failed to meet the provisions of I.R.C. §170(h)(4). This section provides that the definition of “conservation purpose” for purposes of the façade easement means “the preservation of an historically important land area or a certified historic structure.” The Court stated that the entity’s deduction also depended on whether the transfer of the donated property in fact preserved the subject property, regardless if the provisions of Treas. Reg. §1.170A-14(g)(6) were met.

The Court found that it did not. New York City law made it unlawful for the entity to alter the subject property unless the Landmarks Preservation Commission approved it. Because local law and the rules of the Landmarks Preservation Commission preserved the subject property, not the rights which NAT possessed pursuant to the easement, the easement failed to meet the requirements of I.R.C. §170(h)(4).

Charleston, like many other historically significant towns, created their own ordinances and Board of Architectural Review to govern and manage the proposed alteration of historically significant properties. These properties are protected by these provisions regardless of whether a façade or any other type of conservation easement is given to charity. The Court in 1982 East found that any additional protections provided by the grant of an easement to such an organization are not meaningful enough to meet the requirements of the Tax Code. It does not “preserve a historically important structure” because the laws of the City of Charleston already protect it. People in this city who live under these BAR restrictions may not be able to take a charitable deduction on their federal returns if they choose to grant an easement on their property.

These two Tax Court opinions nearly eliminate any incentive for a homeowner to donate a preservation easement on their property. While the taxpayers in Kaufman and 1982 East were not subject to penalties for their erroneous deductions due to the Court’s first impression of the issue, future taxpayers will not be so lucky. Taking such a deduction may result in not only the disallowance of your deduction, but also accuracy related penalties and penalties for the substantial understatement of income tax, plus interest.

Of course, nothing prevents you from donating an easement out of the goodness of your heart. Just don’t plan on feeling the benefits in your wallet.

Tuesday, April 26, 2011

Money Matters: LWC on the Radio!

          Check out Lindsey's first radio show on Money Matters, which originally aired in February of this year, hosted by Rick Durkee on Saturday mornings on Charleston News Radio 94.3 FM. 

Check out Lindsey's second show, which aired in March of 2011:

Check out Lindsey's most recent show, which aired in April:

Update: U.S. Tax Court Sides with Fourth Circuit on Statute of Limitations Circuit Court Split

           On April 5th, we gave you the gritty details on the Fourth Circuit’s side of the Circuit Court split when it comes to the issue of the statute of limitations and the overstatement of basis.  Yesterday, the United States Tax Court handed down its ruling in Carpenter Family Investments, LLC v. Commissioner of Internal Revenue which serves another blow to the IRS. 

            Like the Fourth Circuit, the Tax Court ruled that the general three year statute of limitations for assessing tax applies when a taxpayer is determined to have overstated his basis.  The facts in this case centers on the sale of shares of stock by an Oregon-based partnership.  In 2000, the partnership sold certain shares of stock and reported a modest gain of just over $6,000.00.  The partners timely filed its 2000 joint income tax return and properly reported the gain from the sale of stock.  In October 2008, the IRS issued a final partnership administrative adjustment (FPAA) asserting that the partnership had participated in transactions that artificially stepped-up the inside basis, resulting in an omission from gross income pursuant to Sections 6229 and 6501 of the Internal Revenue Code and application of the extended six-year statute of limitations for assessing the unpaid tax.  According to the IRS, the partnership adjustment was timely.  The taxpayers begged to differ. 

             The Tax Court ruled in favor of the partnership and found that Colony v. Commissioner, the 1958 Supreme Court case, controlled.  The Tax Court also relied on the Ninth Circuit’s interpretation of Colony in Bakersfield Energy Partners, L.P. v. Commissioner, decided in 2009.  See  568 F.3d 767.   In the U.S. Tax Court and Ninth Circuit Court of Appeals, the standard three year statute of limitations applies to the assessment of tax when a taxpayer is found to have understated basis. 

            Based on the Circuit discrepancies in interpreting the statute and case law, we may soon see a petition for certiorari granted by the U.S. Supreme Court.  We will continue to keep you updated.

Thursday, April 21, 2011

Apples and Oranges: The IRS Targets the Misclassification of Contractors.

As reported in the ABA Journal, the Internal Revenue Service will randomly audit 6,000 businesses over the next three years to determine whether they misclassified workers as independent contractors when they should be treated as employees for tax purposes.  When properly classified, using independent contractors as opposed to employees allows businesses to escape unemployment, Social Security and Medicare taxes and overtime pay.

            These benefits may not outweigh the risk.  If a business is caught misclassifying workers, they will be subject to taxes, interest and penalties after a lengthy and expensive audit.  Determining whether a worker is an employee or independent contractor for tax purposes is a fact intensive inquiry involving the weighing of (count ‘em) twenty factors.  Some factors may be more important than others in the context of the services the individual is performing.  Because there is no cut and dry test, the audit process can get heated. 

            What triggers a potential IRS audit of your business?  Issuing the same individual a W-2 and a Form 1099.  The most common scenario occurs when   retiring employees cuts back on hours and, as a consequence, are changed to contractor status.  While this is not against the rules per se, be careful—if your new independent contractor is performing the same exact job and holds the same duties and responsibilities as they did during their “employment,” the classification could be challenged. 

            A great way to protect yourself is to put it in writing.  Draft up an independent contractors agreement setting forth your contractor’s duties and detailing policies and procedures.  This way you will have a concrete agreement to show the IRS when they knock on your door.  

            If you have questions on whether your workers may be classified as employees rather than independent contractors, talk to your tax attorney, financial adviser or Certified Public Accountant.

Money Matters: LWC on the Radio!

To check out the New York Times article on why people pay taxes, visit:

Wednesday, April 6, 2011

The Best Part of Being Rich? The Audit.

            According to the IRS’ recently released statistics, the percentage of taxpayers who were audited in 2010 increased in every category of AGI above $500,000 compared to a year earlier.  The most dramatic increase came in the $10M income bracket, of which 18% of individual earners of $10M or more suffered through audits in 2010 compared to only 11% in 2009.  For individuals earning between $500,000 and $1M, audits increased from 2.8% to 3.4%.

            While the total number of audits skyrocketed in recent years, at least 70% of all individual examinations by the IRS are conducted through correspondence rather than an agent. Some audits, however, involve detailed scrutiny and can run some taxpayers upwards of tens of thousands of dollars in CPA and legal defense fees. 

            The increase in affluent audits could be a result of IRS Commissioner Doug Shulman’s “wealth squad”, formally known as the IRS’ Global High Wealth Industry group, created in 2009.  Coupled with the formation of the wealth squad was an IRS announcement providing limited amnesty for taxpayers with hidden offshore accounts. 

            How can you head off a possible audit?  Consider over-disclosure.  Speak with your CPA about providing more than the minimum-required information when disclosing a potentially audit-triggering transaction.