IRS Urges Business Owners to Consider New Tax Law Changes

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    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists businesses with representation in tax examinations, audits, appeals, and civil litigation with the Internal Revenue Service (the “IRS”) and the Ohio Department of Taxation. As part of that representation, our tax attorneys advise businesses of the effects of new and emerging changes to federal tax law. The Tax Cuts and Jobs Act (“TCJA”) that was passed in December 2017, is the most recent and substantial change in federal tax law, and will affect how nearly all businesses file their 2018 tax returns.

The Tax Cuts and Jobs Act to Affect Small Businesses

    On October 9, 2018, the IRS published a news release urging small business owners to familiarize themselves with the new tax changes as a result of the TCJA before the end of the year. IR-2018-197. According to the IRS, the TCJA will affect almost all business owners when it comes to tax rates, quarterly estimated tax payments, and allowed deductions and credits. The IRS indicated that it will continue to provide resources to help ensure small businesses and self-employed taxpayers meet their tax responsibilities. The IRS, however, has already provided taxpayers with significant guidance regarding the TCJA on its website. The amount of information and awareness being provided by the IRS should be a signal to taxpayers that come time to file their tax returns, the IRS will expect businesses to be knowledgeable of their tax obligations.  

How Will the TCJA Affect the Bottom Line?

    As a follow-up to the October 9, 2018 publication, the IRS issued yet another news publication that provided guidance to businesses on the effects of the TCJA. On October 16, 2018, the IRS offered several examples on how the TCJA may affect the bottom line of many businesses. IR-2018-203. The IRS provided the following examples:

1. The Qualified Business Income Deduction. Under IRC §199A, sole proprietors, partnerships, trusts and S corporations may now deduct 20 percent of their qualified business income.

2. The 100 Percent Depreciation Deduction. The TCJA made several amendments to the allowance for additional first year depreciation deductions in IRC §168(k)—such as increasing the additional first year depreciation deduction percentage from 50% to 100%—for qualified property placed in service after September 27, 2017, and before January 1, 2027.

3. Fringe Benefits. The TCJA has changed what business may deduct for certain fringe benefit expenses. This includes business expenses for things such as, meals and entertainment, transportation, moving, and employee achievement awards. For example, before the TCJA, IRC §274(n)(2) allowed businesses a 100% deduction for de minimis meal expenses, however, the TCJA modified the statute to only allow a 50% deduction for de minimis meal expenses. The TCJA takes it a step further for deductions related to entertainment expenses, by eliminating business deductions for entertainment expenses altogether, regardless if the expense is directly related to, or associated with the business. IRC §274(a). For more information on deducting certain fringe benefits such as, transportation, lodging, and meal expenses, see our previous blog article.

4. Estimated Taxes. Due to the numerous changes to the Internal Revenue Code (the “IRC”), the IRS suggests that individuals, including sole proprietors, partners, and S corporation shareholders, consider paying quarterly installments of estimated tax—unless the taxpayer owes less than $1,000 when they file their tax returns or if they had no liability in the prior year. IR-2018-203. According to the IRS, the number of taxpayers who are subject to penalties for underpayment of taxes, continues to increase. For example, the IRS saw a 40% increase in penalties between 2010 and 2015.

    This list serves only as an example of the types of changes the TCJA has made to the IRC. Before filing their 2018 taxes, businesses are responsible for doing their due diligence to understand how the TCJA may affect their particular business. Because the TCJA is long, nuanced, and is affecting taxpayers for the first time, it is important to seek guidance from a legal professional.

Contact Nardone Limited

    Nardone Limited represents employers with federal tax issues, including changes as a result of the TCJA. If you are unsure how the TCJA will affect your business, you should contact an experienced tax attorney before filing your taxes. Nardone Limited’s tax attorneys and professionals are well experienced with representing businesses regarding federal tax issues. Contact us today for a consultation to discuss your case.

October 19, 2018

Tax Attorney Vince Nardone Speaks at the 2018 Cleveland Accounting Show

    On October 18, 2018, tax attorney Vince Nardone spoke at The Ohio Society of CPAs (OSCPA) Cleveland Accounting Show at the I-X Center. Mr. Nardone presented the topic “When Tragedy Strikes: How to Navigate Client Issues” to a large group, consisting mostly of CPAs and accountants from the Cleveland area. The discussion was geared towards the necessity of business succession planning and having the necessary system and structure in place to allow for that proper transition, including a buy/sell agreement or practice continuation agreement.

    The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the 2018 Cincinnati Accounting Show was a great opportunity for CPAs to learn about the latest advancements on a variety of important topics in the industry. We appreciate and thank The Ohio Society of CPAs’ accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate.

    After the presentation, Mr. Nardone and Caitlin Davies, Nardone Limited’s client relations coordinator, stopped by the new Fat Head’s Brewery in Middleburg Heights. Highly recommend stopping there if you are ever in the area. The food, drinks, and service were fantastic!

 

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October 10, 2018

Internal Revenue Service Penalties for Improper Worker Classification

    The tax attorneys at Nardone Limited often assist taxpayers throughout the Internal Revenue Service (“IRS”) auditing and examination process. Frequently, IRS audits and examinations involve worker classification issues. Despite government efforts to end misclassification through increased enforcement efforts, the misclassification of employees as independent contractors persists. For tax purposes, this means that the employer—because it classified a worker or group of workers as independent contractors—did not withhold any employment taxes. This is okay, as long as the IRS also agrees that the worker or group of workers are in fact independent contractors and not employees. But, if the IRS finds that the employer had no reasonable basis for classifying the employee as an independent contractor, the employer may be held liable for employment taxes for that misclassified worker.

Penalties for Unintentional Failures to Pay and Withhold Employment Taxes

    If an employer fails to deduct and withhold income tax on an employee’s wages by reason of treating the worker as an independent contractor, the employer’s liability for income tax withholding is limited to 1.5% of the wages. IRC §3509(b)(1)(A). But, the IRS may increase that liability to 3% if the employer did not meet the applicable requirements, such as filing Form 1099-MISC. IRC §3509(b)(1). Further, the employer is also responsible for unpaid social security tax, at an assumed rate of 20%. IRC §3509(a)(2). But, the assumed rate of 20% will increase to 40% if the IRS finds that the employer failed to meet the applicable requirements. IRC §3509(b)(1)(B). The IRS, however, will grant relief to employers who can show that it had a reasonable basis for classifying the worker as an independent contractor. The employer must show that it exercised ordinary business care and prudence in determining its tax obligations, but nevertheless failed to comply with those obligations.

“Reasonable Basis” Relief

    Section 530 of the Revenue Act of 1978 provides relief to employers for unpaid employment taxes if the employer is able to meet a three part test. For an employer to be granted relief under §530 it must prove the following:

  1. Reporting consistency;
  2. Substantive consistency; and
  3. Reasonable basis.

    An employer may demonstrate reporting consistency, by showing that it timely filed the requisite information returns consistent with the employer’s treatment of the worker as an independent contractor. Secondly, the employer must show that it treated the worker and any similar workers, as independent contractors. If the employer treated similar workers as employees, §530 relief may not be available. Finally, the employer must have had a reasonable basis for not treating the workers as employees. The IRS has listed the following as acceptable justification for showing reasonable basis: (i) the employer reasonably relied on a court case or a ruling issued to the employer by the IRS; (ii) the employer was previously audited by the IRS at a time when the employer treated similar workers as independent contractors and the IRS did not reclassify those workers; and (iii) the employer relied on advice provided by an attorney or accountant. IRS Pub. 1976 (Rev. 1-2017).

    The laws regarding worker classification are complex and unclear. Misclassifying a group of workers for an extended period of time could lead to substantial and unexpected payments to the IRS if the employer is unable to show that it had a reasonable basis for misclassifying an employee or group of employees. Employers must not only consider the possibility of the IRS conducting an audit, they must also consider the possibility that a worker may file a complaint. Workers who suspect they have been misclassified by an employer are able to file a complaint with the Department of Labor. The filing of a complaint by a misclassified worker, or group of workers, may give the IRS cause to audit the employer. For these reasons, it is necessary that employers understand the associated risks of classifying workers and the importance of seeking guidance from a legal professional when making those decisions.

Nardone Limited Comment: Although the laws regarding worker classification are complex, there are instances where the law is very clear on determining whether certain workers are employees or independent contractors. As an example, see our prior blog on treating dental hygienists as independent contractors versus employees.

Contact Nardone Limited

    Nardone Limited represents employers with federal tax issues, including proper worker classifications for IRS audits and examinations. If your business is subject to IRS taxes and penalties for improper worker classification, you should contact an experienced tax attorney today. Nardone Limited’s tax attorneys and professionals are well experienced with representing clients before the IRS. Our experienced tax attorneys will thoroughly review your case to determine what options and alternatives are available. Contact us today for a consultation to discuss your case.

September 28, 2018

Tax Attorney Vince Nardone Speaks at the 2018 Cincinnati Accounting Show

    On September 27, 2018, tax attorney Vince Nardone spoke at The Ohio Society of CPAs' Cincinnati Accounting Show.  Mr. Nardone presented the topic “When Tragedy Strikes: How to Navigate Client Issues” to a large group, consisting mostly of CPAs and accountants from across the state of Ohio. The discussion was geared towards the necessity of business succession planning and having the necessary system and structure in place to allow for that proper transition, including a buy/sell agreement or practice continuation agreement.

    The Ohio Society of CPAs is the #1 provider of CPE for Ohio CPAs year after year, and the 2018 Cincinnati Accounting Show was a great opportunity for CPAs to learn about the latest advancements on a variety of important topics in the industry.  We appreciate and thank The Ohio Society of CPAs’ accounting learning manager, Amber McAuliffe, for inviting us and allowing us to participate.

September 20, 2018

Taxpayers May Have a Difficult Time Proving Their Failure to Report Foreign Financial Accounts Was Due to Non-Willful Behavior

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    Nardone Limited’s tax attorneys advise taxpayers about U.S. tax reporting requirements and obligations regarding foreign financial accounts and the importance of reporting previously undisclosed foreign accounts. If a taxpayer has a financial interest in or signature authority over a foreign financial account and the account exceeds certain threshold amounts, the taxpayer may be required to report the account annually by electronically filing a FinCen Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”). But, if a taxpayer has failed to file the FBAR, the Internal Revenue Service (“IRS”) offers various programs that allow taxpayers to disclose offshore accounts and resolve any tax and penalty obligations.

Background Regarding Foreign Accounts and Voluntary Disclosure

    The Offshore Voluntary Disclosure Program (“OVDP”) and the Streamlined Filing Compliance Procedure Program (“SFCP”) offer taxpayers who have undisclosed foreign accounts a way to become compliant with U.S. tax law. The OVDP was created for taxpayers with exposure to potential criminal liability and substantial civil penalties due to a willful failure to report foreign financial assets and to pay the tax due on those assets. The SFCP, on the other hand, was developed to provide relief for taxpayers whose failure to report foreign financial assets and pay due taxes, did not result from willful conduct. But, taxpayers must use caution when considering whether their failure to disclose foreign accounts was due to willful conduct. 

NL COMMENT: It is important to note that the Offshore Voluntary Disclosure Program is ending on September 28, 2018. The IRS has indicated that additional information on the voluntary disclosure process will be forthcoming. But, if a taxpayer is concerned that their failure to report foreign income was due to willful conduct, it is important that they contact a legal professional to discuss their options.

The Standard for Willfulness in the Civil Context

    Failure to file an FBAR can have significant civil or criminal penalties, depending on whether the violation was non-willful or willful. For non-willful violations of the FBAR requirements, the maximum penalty is $10,000. The maximum civil penalty for a willful violation is the greater of $100,000 or fifty-percent of the balance in the account at the time of the violation. The statues and regulations, however, do not define “willfulness.” Thus, it is up to the courts to determine how to interpret the term willful.

    Every federal court that has considered the willfulness standard for civil FBAR cases has concluded that the civil standard applies. See Bedrosian v. United States, No. CV 15-5853, 2017 WL 4946433. Further, the courts are consistent with regard to the burden of proof for civil FBAR penalties, concluding that the government must prove the civil FBAR penalty by a preponderance of the evidence. IRS Program Manager Technical Assistance (PMTA), 2018-013. Unfortunately, for taxpayers this means that taxpayers will have a more difficult time convincing the courts that their non-compliance was due to non-willful behavior, while the government will have an easier time proving a violation.

    In the criminal context, the Supreme Court has narrowly interpreted the term “willful,” limiting it to knowing violations. But, the standard for civil FBAR cases includes “willful blindness” and “recklessness.” PMTA 2018-013. The government can establish willful blindness by evidence that the taxpayer made a conscious effort to avoid learning about reporting requirements. United States v. Williams, 489 F. App’x 665. Further, the reckless standard can be met if the government can show that the taxpayer clearly should have known that there was a grave risk that withholding taxes were not being paid and if the taxpayer was in a position to find out for certain very easily. United States v. Vespe, 868 F.2d 1328. Thus, if utilizing the SFCP, it will be more difficult for taxpayers to claim that they did not know of the requirements, especially when the internet and computers are so easily accessible.

Conclusion

    We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their financial foreign accounts, even if they have not done so in the past. The IRS offers options to non-compliant taxpayers when it comes to disclosing unreported foreign financial accounts. Ultimately, if you have a foreign account and are concerned that your failure to report income, pay tax, and submit the FBAR was due to willful conduct, we encourage you to contact Nardone Limited at 614-223-0123 to discuss your options.  

 

September 10, 2018

State of Ohio Unclaimed Funds Audits and the Impact on Our Businesses

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    The tax attorneys at Nardone Limited in Columbus, Ohio routinely advise clients regarding their holding responsibilities as mandated by the Ohio Division of Unclaimed Funds (“Division of Unclaimed Funds”). Subject to certain exceptions, all businesses located in Ohio, who: (i) maintain account balances; (ii) write checks; or (iii) hold funds in escrow are required to file an Annual Report with the Division of Unclaimed Funds. With the exception of life insurance companies, the annual reporting deadline for businesses is November 1st. Further, even if a business is not holding any unclaimed funds for a specific year, the business is still required to file a negative report with the Division of Unclaimed Funds. Failure to report the required funds may result in civil and criminal penalties. Further, if a business is the keeper of any unclaimed funds, then the business may be subject to an audit by the Division of Unclaimed Funds.

Criteria for the Division’s Selection of Businesses for Audit

    Unclaimed funds include monies or the right to monies that may have been dormant in a checking or savings account, uncashed checks, dormant payroll checks, credit balances, and unclaimed wages. When a business maintains unclaimed fund, the Division of Unclaimed Funds may select the business for audit. Businesses are selected for audit first on a random basis and then based upon the application of certain non-exhaustive factors, including: (i) the business’s assets or sales volume; (ii) the business’s past reporting history relative to other entities of the same size or industry; (iii) evidence or complaints of failure by the business to conduct due diligence as required by the Division of Unclaimed Funds and Ohio law; (iv) filing negative annual reports for consecutive years; and (v) simply never being subject to an audit.

A Business’s Rights During an Unclaimed Funds Audit

    Like any administrative action, an audit by the Division of Unclaimed Funds is governed by notice and other procedural requirements under Ohio law. The Division of Unclaimed Funds must send the business written notice of the audit. The notice will contain information including: (i) the auditor, (ii) the scope of the audit, (iii) the identity of all participating states, and (iv) notice of the right to appeal. After the Division of Unclaimed Funds has sent the notice, the Division of Unclaimed Funds will send an initial request relating to the records required for review. Upon receipt of the initial request, a business has 60 days to make the requested records available, unless the Division of Unclaimed Funds and the business agree to an extension.

The Audit Process

    During the audit, the auditor will review the documents provided by the business. Ultimately, the Division of Unclaimed Funds will issue preliminary findings based upon the auditor’s review of the documentation.  The business is then required to respond to the preliminary findings by either agreeing to the preliminary findings or providing the necessary documentation to dispute the preliminary findings. The Division of Unclaimed Funds will then review the additional documentation and will issue its final findings, including any assessed penalties. It is important that businesses know that their policies regarding the retention of records and unclaimed funds may not meet the requirements under Ohio law, and any inadequacies may result in the Division of Unclaimed Funds assessing civil and criminal penalties, plus interest.

Potential Penalties

    If a business fails to properly report unclaimed funds, then the business may be subject to: (i) two civil penalties of up to $100.00 per day and (ii) criminal penalties of up to $500.00 per day, plus interest at a rate of 1% per month on the balance of unclaimed funds due. See R.C. 169.12 and 169.99. Thus, it is very important that businesses comply with the Division of Unclaimed Funds’ reporting requirements.

Conclusion

    The tax attorneys at Nardone Limited in Columbus, Ohio routinely represent businesses in matters regarding the Division of Unclaimed Funds requirements and audits. If your business has been contacted by the Division of Unclaimed Funds for an audit, we encourage you to contact one of our tax attorneys.

August 30, 2018

When is a U.S. Taxpayer Required to File an FBAR to Report Signature Authority on a Foreign Account?

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    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation and tax examinations, tax audits, appeals, and civil litigations with the Internal Revenue Service and the Ohio Department of Taxation. As part of that representation, our tax attorneys routinely advise taxpayers on their U.S. reporting requirements relating to signature authority on foreign accounts. If a taxpayer has a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account exceeding certain threshold amounts, the taxpayer may be required to report the account annually by electronically filing a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”), as discussed further below.

    A U.S. person is required to file a FBAR if: (i) the person had a financial interest in or signature authority over at least one financial account located outside of the United States, and (ii) the aggregate value of all foreign financial accounts exceeded $10,000.00 at any time during the calendar year reported. To determine whether the taxpayer’s account exceeds the $10,000.00 threshold, the account’s balance must be over $10,000.00 at any time during the calendar year. For purposes of triggering an FBAR filing requirement, it does not matter what the ending balance or beginning balance is on a particular day or in a particular month. The threshold is met as long as the account balance goes over $10,000.00 at any point during the day, on any day during the year. As an example, let’s assume that a foreign account begins the day with a $0.00 balance. The foreign account receives deposits of over $15,000.00 during the day, but then $10,000.00 is immediately transferred out for purposes of paying expenses. As a result, the account’s end of day balance is $5,000.00. If a U.S. person has signature authority over that account, that U.S. person is required to file an FBAR relating to the foreign account since the balance was over $10,000.00 during the day, even though the day’s beginning and ending balances were under $10,000.00.

Consequences of Failing to File FBARs

    If you are a U.S. person and you meet the criteria for filing an FBAR, as detailed above, then you are required to file an FBAR electronically. Please note, the FBAR is not filed as part of your Form 1040 U.S. Individual Income Tax Return. But, the deadline for filing the FBAR does coincide with the federal income tax return filing deadlines. Thus, the due date for the 2017 FBAR was April 15, 2018. But, the IRS grants automatic six-month extensions to October 15th to provide taxpayers with ample time to file their FBARs. Further, taxpayers are not required to make a specific request for the six-month extension. Ultimately, it is very important that taxpayers with foreign accounts, or signature authority over foreign accounts, understand the FBAR filing requirements to ensure that they are compliant with U.S. tax laws. Otherwise, the penalties and consequences of failing to file an FBAR can be steep. And, the IRS may assess penalties for failing to file required FBARs, including criminal and civil penalties.

Conclusion

    We strongly encourage our clients to be compliant with any and all U.S. reporting requirements relating to their financial foreign accounts, even if they have not done so in the past. There are a few options for taxpayers: (i) to disclose offshore accounts, including offshore accounts where the taxpayer is simply a signature authority on the account, and (ii) to resolve any tax liabilities and penalties relating to the foreign accounts. Specifically, the IRS offers the Offshore Voluntary Disclosure Program and the Streamlined Filing Compliance Procedure Program as ways for U.S. persons to become compliant with tax laws. But, it is important to note that the Offshore Voluntary Disclosure Program is ending September 28, 2018. Ultimately, if you have a financial interest in or signature authority over a financial account, we encourage you to contact Nardone Limited at 614-223-0123 to ensure that you are compliant with any and all U.S. reporting requirements.

August 03, 2018

Recent U.S. Tax Court Case Finds Taxpayers' Reliance on Accountant was Unreasonable and Denies Request for Penalty Abatement

US Tax Court

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation and tax examinations, tax audits, appeals, and civil litigation with the Internal Revenue Service and the Ohio Department of Taxation. As part of that representation, our tax attorneys routinely advise taxpayers regarding potential penalty abatement requests relating to penalties assessed by the IRS and the Ohio Department of Taxation. Many times when a taxpayer’s return is examined by an IRS Revenue Agent, the IRS will assess accuracy-related penalties under Internal Revenue Code Section 6662 on any underpayment of income tax attributable to a taxpayer’s negligence or disregard of rules and regulations, or to a substantial understatement of income tax. Generally, the IRS will abate these penalties if the taxpayer can show that the taxpayer’s failure to file an accurate return was based upon reasonable cause and not willful neglect.

IRS Assesses Accuracy-Related Penalties for Improper Deductions Regarding Life Insurance Plan Payments

    In a recent U.S. court tax case, Jerry L. Keenan, et ux v. Commissioner, the taxpayers participated in a Benistar 419 plan. Further, the taxpayers deducted the Benistar 419 plan payments, totaling over $3 million, on their federal income tax return. But, the accountants listed the deductions as cost of goods sold, rather than reporting as an employee benefits on their return. After the IRS’s examination of the taxpayers’ 2003 Form 1040, U.S. Individual Income Tax Return, the IRS issued a Notice of Deficiency for $882,936.00, and assessed an Internal Revenue Code Section 6662(a) penalty of $176,587.20. Ultimately, the IRS disallowed the deductions claimed by the taxpayers as a pass through loss from their S corporation. In Keenan, the U.S. Tax Court found that contributions made by the participating company were not ordinary necessary business expenses deductible under Internal Revenue Code Section 162(a). Further, in cases regarding the same issue of improper deductions relating to Benistar 419 plan payments, the IRS has held that the taxpayers are liable for the Section 6662(a), accuracy-related penalties.

            Taxpayers Argue They Relied Upon Accountants in Good Faith

    Here, the taxpayers argued that they relied, in good faith, on the advice of their accountants. But, the U.S. Tax Court held that reliance on a professional advisor is, not by itself, an absolute to negligence. Further, the U.S. Tax Court confirmed that there was little reason for the taxpayers to believe that their accountants were authorities on the tax treatment of welfare benefit plan contributions, or that they had sufficiently researched the issue. In fact, according to the U.S. Tax Court, the accountants advised the taxpayers that the accountants had solely relied on a letter that was included in promotional materials for the Benistar 419 plan. The letter included in the promotional materials specifically stated that the IRS may disallow taxpayer deductions based upon a finding that the contributions is not necessary and ordinary expenses. The U.S. Tax Court found that the taxpayers did not conduct the necessary investigations sufficient to avail themselves of a good faith defense.

    The taxpayers argued that they did not graduate high school or attend college, and had no tax background. Further, the taxpayers discussed the plan with their estate planning lawyer and licensed insurance sales man. Ultimately, the taxpayers relied on their accountant, as well as their lawyer, in making a decision to adopt a Section 419 plan and to deduct the contributions regarding the same on their tax return. The accountants deducted the payments relating to the 419 plan as cost of goods sold, rather than the employee benefit on the return. Further, the accountant acknowledged that they deducted the payments as cost of goods sold to lessen the chance of an audit by an IRS revenue agent.

    Ultimately, the U.S. Tax Court found that the taxpayers’ arguments failed to demonstrate that they acted with reasonable cause and in good faith. According to the U.S. Tax Court, the most important factor is the extent of the taxpayer’s effort to assess his proper tax liability in light of all the circumstances. See Brinkly v. Commissioner, 838 F.3d 657,669. The U.S. Tax Court held that the taxpayers blindly delegated their responsibility relating their 419 plan, including the deductions regarding the same, to their accountants and lawyers. The taxpayers did not review the 419 plan, promotional materials, and did not review their tax returns. At the end of the day, the U.S. Tax Court held that the taxpayers did not show any genuine attempt to assess their proper federal tax liabilities for the year at issue. Thus, the U.S. Tax Court upheld the IRS’s assessment of the Section 6662, Accuracy-related Penalties against the taxpayers.

Nardone Limited Recommendation

    In light of the Keenan case, taxpayers should ensure that the professionals they hire are experienced in the subject area that the taxpayers are hiring the tax professionals for. Thus, if the taxpayer is seeking guidance relating to employee benefit plans, it is important that the taxpayers hire professionals who have experience in employee benefit plans. At the end of the day, reliance on professional advice is not, in and of itself, an absolute defense to negligence. If there is little reason for the taxpayers to believe that the tax professionals are authorities in a particular subject area, or that the tax professionals have not sufficiently researched the issue, then—according to the U.S. Tax Court—the taxpayers have not relied in good faith on the advice of their tax professionals. And, if the taxpayers did not act with reasonable cause and in good faith, then the IRS, and the U.S. Tax Court, will likely deny the taxpayer’s request for a penalty abatement.

    In sum, it is important for taxpayers to hire knowledgeable and experienced tax professionals, when doing any type of tax planning, as well as for preparing their tax returns. Further, it is important that the taxpayers rely on their tax professionals in good faith. Generally, all taxpayers are not required to understand complicated tax issues, when it comes to preparing their tax returns; however, taxpayers are required to conduct the necessary due diligence in hiring qualified professionals and asking the necessary questions. At the end of the day, it is the taxpayer’s responsibility to file an accurate tax return to avoid further scrutiny by Revenue Agents during IRS examinations.

July 31, 2018

IRS, Including Revenue Agents and Appeal Officers, Closely Scrutinize Settlement Agreements

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    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation in tax examinations, tax audits, appeals, and civil litigation with the Internal Revenue Service (“IRS”). As part of that representation, our tax attorneys routinely advise clients, and their advisors, to be proactive and anticipate unintended tax consequences of entering into a transaction or settlement. By being proactive and anticipating unintended tax consequences, we avoid the scrutiny of the revenue agent or IRS Appeals Officer when being examined or audited by the IRS.  One area where we see taxpayers, and their advisors, fail to be proactive and fail to anticipate unintended tax consequences, is in the area of settlement agreements dealing with both physical and emotional injuries and damages.

Background and General Law

    When dealing with settlements of both physical and emotional injuries, we have to closely scrutinize and determine whether or not the damages awarded are included in the taxable income of the person harmed. If we wait until the settlement agreement has been executed, and the case settled, we likely missed our opportunity to plan, and certainly missed our opportunity to ensure that the settlement was entered into in the most tax-efficient manner.  The determination of whether or not the damages awarded are included in the taxable income of the person harmed, requires us to analyze Internal Revenue Code Sections 61 and 104.

    Section 61 provides, in general, that gross income means all income from whatever source derived. Section 104(a)(2) provides that except in the case of amounts attributable to (and not in excess of) deductions allowed under Section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include the amount of any damages (other than punitive damages) received (whether by suit or agreement) on account of personal physical injuries or physical sickness.  Section 104 also provides that for purposes of Section 104(a)(2), emotional distress shall not be treated as a physical injury. But, Section 104 also provides that the preceding sentence shall not apply to an amount of damages not in excess of the amount paid for medical care (described in Section 213(d)(2)(A) or (B)) that is attributable to emotional distress.

    Treasury Regulation Section 1.104-1(c) provides, in part, that the term "damages received (whether by suit or agreement)" means an amount received through prosecution of a legal suit or action based upon tort or tort type rights, or through a settlement agreement entered into in lieu of such prosecution.  In Commissioner v. Schleier, 515 U.S. 323 (1995), the Supreme Court of the United States ("Court") held that two independent requirements must be met for a recovery to be excluded from income under former Section 104(a)(2):

  • First, the underlying cause of action giving rise to the recovery must be "based upon tort or tort type rights." In United States v. Burke, 504 U.S. 229 (1992), the Court concluded that in order for the first requirement to be met, the relevant cause of action must provide the availability of a broad range of damages, such as damages for emotional distress, pain, and suffering.
  • Second, the damages must be received "on account of personal injuries or sickness." In Schleier, the Court illustrated the application of the second requirement by way of an example in which a taxpayer who is injured in an automobile accident sues for (1) medical expenses, (2) pain, suffering, and emotional distress that cannot be measured with precision, and (3) lost wages. The Court explained that the second requirement would be met for recovery of (1) the medical expenses for injuries arising out of the accident, (2) the amounts for pain, suffering and emotional distress, and (3) the lost wages as long as the lost wages resulted from the time in which the taxpayer was out of work due to the injuries sustained in the accident.

    Rev. Rul. 85-97, 1985-2 C.B. 50, concerns a taxpayer who received damages in settlement of suit for injuries he suffered when he was struck by a bus. The taxpayer’s complaint alleged that as a direct result of being struck by the bus he had been unable to pursue normal employment activities and had lost wages, had suffered and would continue to suffer great pain of body and mind and loss of earning capacity, and had incurred and would continue to incur hospital and doctors' bills. The ruling concludes that the entire amount of the settlement received by the taxpayer was excludable from gross income as amounts received on account of personal injuries under former Section 104(a)(2).

Change in the Law Regarding Settlement Agreements

    Section 1605 of the Small Business Job Protection Act of 1996 (the "1996 Act") restricted the exclusion from gross income provided by Section 104(a)(2) to amounts received on account of personal physical injuries or physical sickness. [Emphasis added.] H.R. Conf. Rep. No. 737,104th Cong., 2d Sess. 301 (1996), provides the following explanation of the amendment made by the 1996 Act:

“The House bill also specifically provides that emotional distress is not considered a physical injury or physical sickness. Thus, the exclusion from gross income does not apply to any damages received (other than for medical expenses as discussed below) based on a claim of employment discrimination or injury to reputation accompanied by a claim of emotional distress. Because all damages received on account of physical injury or physical sickness are excludable from gross income, the exclusion from gross income applies to any damages received based on a claim of emotional distress that is attributable to physical injury or physical sickness. In addition, the exclusion from gross income specifically applies to the amount of damages received that is not in excess of the amount paid for medical care attributable to emotional distress.”

    Footnote 56 of the Conference Report states, "It is intended that the term emotional distress includes symptoms (e.g., insomnia, headaches, stomach disorders) which may result from such distress." H.R. Conf. Rep. No. 737 at 301.

    The term "personal physical injuries" is not defined in either Section 104(a)(2) or the legislative history of the 1996 Act. But, we believe that direct unwanted or uninvited physical contacts resulting in observable bodily harms such as bruises, cuts, swelling, and bleeding are personal physical injuries under Section 104(a)(2). See Black's Law Dictionary 1304 (Rev. 4th ed. 1968) which defines the term "physical injury" as "bodily harm or hurt, excluding mental distress, fright, or emotional disturbance."

Recommendations from Nardone Limited

    Recognizing that the term “physical” is very important to the ultimate determination of the proper tax treatment, we have to be cognizant of the original claim raised by the plaintiff at the earliest aspect of the case and properly and consistently communicate with all parties involved regarding the proper terminology. The origin of the claim must be a physical injury. So, the wording involved, both orally and in writing, throughout the controversy and settlement stages, needs to ensure that we are discussing and focusing on the physical aspects of the injury, to the extent they exist. And, we have to ensure we properly evaluate and allocate the damages based upon the actual facts and circumstances, after involving the necessary experts, and not relying solely on what we would like the tax treatment to be in a particular instance.   It is all about the objective and proper documentation after considering all the facts and circumstances.  We do not want to wait until after the transaction is complete.  It needs to happen from the outset.

Contact Nardone Limited

    Nardone Limited frequently represents individuals and businesses in state and federal tax matters, including taxpayers who are subjected to an IRS audit or examination. If you are facing an IRS tax audit or examination, or if you wish to learn more about proper documentation regarding settlement agreements to avoid the inclusion of income, contact one of our experienced tax attorneys today. We will thoroughly review your case to determine what options and alternatives are available. 

July 06, 2018

Maintaining Mileage Logs relating to Business Travel Expenses – There is an App for That!

    As tax attorneys in Columbus, Ohio, Nardone Limited routinely assists taxpayers with representation in tax examinations, tax audits, appeals, and civil litigation with the Internal Revenue Service and the Ohio Department of Taxation. As part of that representation, our tax attorneys routinely advise sole proprietors regarding when taxpayers may deduct certain transportation expenses relating to business travel on Schedule C of their Form 1040 U.S. Individual Income Tax Return. This article is a follow-up to our prior articles, including our most recent article, Recordkeeping Relating to Business Travel Expenses. Specifically, this article addresses various smartphone apps that a taxpayer can use to maintain proper documentation for their business travel expenses. As discussed in our prior articles, it is important for a taxpayer to maintain the proper records to avoid additional scrutiny by Revenue Agents during an IRS examination.

Tracking Business Mileage Expenses

    As discussed in our most recent article, Recordkeeping Relating to Business Travel Expenses, to deduct travel expenses on their tax returns, including business mileage and expenses, taxpayers are required to keep adequate records to substantiate the expenses. Generally, a taxpayer must prepare a written record for the documentation to be considered adequate. But, many times taxpayers fail to maintain the proper documentation, including a mileage log. As a result, taxpayers do not have the necessary documentation to properly report mileage deductions on their tax returns.

Nardone Limited Comment: From Nardone Limited’s perspective, the mileage expense and the business owner’s use of the vehicle, is one of the biggest abuses that exists when it comes to taxpayers.  They routinely fail to maintain the proper documentation and the tax return preparers routinely ignore this issue.  In fact, when you talk with many tax return preparers, they are concerned about losing clients if they do not deduct the automobile expenses regarding mileage, even if the taxpayers do not have proper documentation.  According to the tax return preparers, the clients routinely advise the tax return preparers that other accountants will do this for them.  But, we should be wary of those particular clients.

In our prior article, we provided detail regarding using the Standard Mileage Rate versus actual expenses, when deducting business mileage expenses. For both methods, it is important that the taxpayer maintains the proper documentation and records to avoid further scrutiny by IRS Revenue Agents. Fortunately, with updates in technology, there are apps that a taxpayer can download to his smart phone to make keeping the proper documentation relating to business travel expenses easier.

Apps for Tracking Business Mileage

    For a practical and easy way to track mileage, there are several apps that a taxpayer can download to their smart phone to track their mileage. Many of the apps, including MileIQ, are applications that you can download on your phone that run on the background of your phone. Then, the apps will note each time that you get into your car, and automatically track the mileage as you drive, without the taxpayer having to even open the app. Further, several of the apps give the taxpayer the option to swipe right or left to categorize the drive as a personal or business trip. The app will track the details regarding the taxpayer’s various trips, and then the taxpayer will be able to download monthly or annual mileage reports. The taxpayer simply has to input certain data, after downloading the app, including the odometer readings, to get started. Ultimately, some apps give you the option to edit and add additional information regarding each separate trip, including the specific purpose of the trip and any other necessary notes. We would certainly recommend that taxpayers add detail regarding the business purpose of each trip, to avoid further scrutiny by Revenue Agents during an IRS examination. Additionally, some of the apps give the taxpayer the option to take photos of receipts to keep track of other expenses, such as gas. This option would be helpful if you were using the actual expense deduction method when preparing your tax return instead of the Standard Mileage Rate method, as discussed further in our prior article.

Mileiq_dashboard
An example of the MileIQ dashboard.

    At the end of the day, whether a taxpayer is manually keeping a log or using an app, it is important for the taxpayer to maintain the proper documentation. That documentation should specify the business purpose of the trip, the addresses where you started and stopped, the date, and the odometers readings. Again, an app on a smart phone would track that information automatically for you.

    Further, the option to download an app and keep track of mileage is a great option for many business owners. That is, business owners have a host of other items to focus on, including running their business. Thus, if an app can be used to properly maintain documentation, as well as to make a business owner’s life a little easier, then we would encourage a taxpayer to use an app. Many apps have free versions. But, there are also premium options available for a monthly or annual fee. At the end of the day, an investment into an app, to maintain the proper documentation, is well worth it. We would encourage taxpayers to look into various apps used to track business mileage expenses, including MileIQ, TripLog, Hurdlr, or Mileage Expense Log. These are just a few of the apps that are available to taxpayers to use on their smart phone.

Conclusion

    In sum, it is important for a taxpayer to maintain proper documentation when deducting business travel expenses, including mileage expenses. That is, it is important for sole proprietors to understand what business travel expenses are deductible and to maintain proper documentation regarding the expenses, to avoid further scrutiny by Revenue Agents during IRS examinations. If you have been contacted by the IRS or the Ohio Department of Taxation, contact the Nardone Limited tax attorneys at 614-223-0123.

June 14, 2018

Withdrawing a Notice of Federal Tax Lien Filed by the IRS

form_12277

    The tax attorneys at Nardone Limited in Columbus, Ohio routinely advise taxpayers who have been contacted by an Internal Revenue Service (“IRS”) Revenue Officer. If a taxpayer neglects to pay a federal tax liability, the IRS has broad authority and tools to collect delinquent taxes, which includes the filing of a Notice of Federal Tax Lien. A Notice of Federal Tax Lien can cause a taxpayer significant financial harm, so it is crucial that taxpayers are aware of the various ways to obtain relief when an IRS Revenue Officer files a Notice of Federal Tax Lien.

What is a Notice of Federal Tax Lien?

    A Notice of Federal Tax Lien is the notification to a taxpayer’s creditors that a lien has been placed by the U.S. Government on all of the taxpayer’s current and future assets. See Internal Revenue Code (“I.R.C.”) §6321. Unless the IRS files a Notice of Federal Tax Lien, the existence of the lien is kept private. A Notice of Federal Tax Lien can impact a taxpayer in a number of ways, such as disrupting the taxpayer’s employment or business, negatively affecting credit scores, and preventing the taxpayer from securing loans or lines of credit. Despite the negative impact a Notice of Federal Tax Lien may have, the IRS is reluctant to withdraw a Notice of Federal Tax Lien because the Notice of Federal Tax Lien protects the IRS’s interests in bankruptcy or litigation and ensures secured-creditor standing for the IRS. Ultimately, there are several ways for a taxpayer to resolve a lien issue, including: (i) paying your tax liabilities in full, then the IRS will release your lien within 30 days; (ii) requesting a Certificate of Discharge of Notice of Federal Tax Lien for specific property; (iii) requesting a Certificate of Subordination of Notice of Federal Tax Lien; and (iv) requesting a withdrawal of a Notice of Federal Tax Lien. We will be following up with additional articles to discuss the various resolutions relating to Notice of Federal Tax Liens. This article focuses on a withdrawal of a Notice of Federal Tax Lien.

Withdrawing a Notice of Federal Tax Lien

    A withdrawal removes the public Notice of Federal Tax Lien and assures that the IRS is not competing with other creditors for your property, however, you are still liable for the amount due. The IRS may withdraw a Notice of Federal Tax Lien under certain circumstances despite the existence of outstanding taxes. See I.R.C. §6323. Specifically, these circumstances are limited to:

  • If the notice was filed prematurely or not in accordance with IRS procedures;
  • The taxpayer entered into an installment agreement to satisfy their liability for which the lien was imposed, and the agreement did not include the filing of a Notice of Federal Tax Lien;
  • Withdraw of the Notice of Federal Tax Lien would help facilitate the collection of the tax liabilities owed; or
  • Withdraw of the Notice of Federal Tax Lien is in the best interest of the taxpayer and the government.

    A request for withdraw of a Notice of Federal Lien may be made by using Form 12277, Application for Withdrawal of Filed Form 668(Y), Notice of Federal Tax Lien. But, because of the protection the Notice of Federal Tax Lien provides, the IRS will likely be reluctant to withdraw a Notice of Federal Tax Lien. To increase the likelihood that the IRS will withdraw the Notice of Federal Tax Lien, a professional should carefully review the taxpayer’s specific facts and circumstances. Specifically, the taxpayer’s professionals should review applicable ethics standards, employment agreements, business dealings or any other business or personal situation, which demonstrates that the Notice of Federal Tax Lien will directly negatively impact the taxpayer’s ability to pay the IRS. If the IRS agrees, then the IRS will issue Form 10916(c), Withdrawal of Filed Notice of Federal Tax Lien. See Internal Revenue Manual (“I.R.M.”) §5.12.9.2. Ultimately, a withdrawal only removes the effect of a Notice of Federal Tax Lien and does not extinguish the underlying tax lien.

    If the IRS ultimately withdraws the Notice of Federal Tax Lien, then upon the taxpayer’s written request, the IRS will also make reasonable efforts to notify credit reporting agencies, and any financial institution or creditors of the withdrawal, when their names and addresses are specified in the taxpayer’s request of the withdraw. I.R.C. §6323(j)(2). But, it is a good idea for the taxpayer to ultimately follow up with any credit reporting agencies and financial institutions to ensure they received the necessary correspondence from the IRS.

Contact Nardone Limited

    Nardone Limited represents individuals and businesses with federal tax matters, including resolving issues relating to a Notice of Federal Tax Lien. If you have been contacted by an IRS Revenue Officer, contact one of our experienced tax lawyers today.

October 19, 2018

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August 30, 2018

August 03, 2018

July 31, 2018

July 06, 2018

June 14, 2018

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