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Small Business Owners Who Cheat The Tax System Can Face Serious Charges

There’s no question that small business owners are good for the economy and our country as a whole. They create jobs and provide helpful services and products for consumers. However, some small businesses may not have the resources or staff available to handle their finances and accounting procedures in the company, which makes the actual owners themselves man the books, and do as they please with earned capital.


Some may be tempted to falsify earnings since they’re handling all of the calculations. This causes many business owners to not satisfy tax obligations, whether it’s accidental or purposeful, that they’re required to follow.


Last August, Thomas G. Klocker was fined $500,000 and sentenced to 6 months in federal prison due to tax evasion. The IRS investigation that followed showed that he used business money for expensive vacations and other personal expenses not related to the company.


In Thomas Klockers’ case, his actions weren’t due to lack of knowledge, it was done purposefully. According to the judge who was over the case, his actions were “very calculated and made to cheat the system.” According to prosecutors, Klocker committed tax evasion by lying to his tax preparers by telling them his family vacations were business trips and reporting fake losses.


Klocker purposely misused company money for his own comfort and lied about the use. His tax attorney tried to argue that he was a man of the community and did lots of charitable work, which he did. However, that didn’t stop him from being sentenced to 6 months in federal prison, along with a $500,000 fine.


No one wants to be Thomas Klocker in this case. Especially when you have to face a highly experienced and aggressive prosecutor from the federal government. He also paid more than $1.2 million dollars in restitution before being sentenced. With that being said, it’s best to understand the tax obligations that all businesses must obey and follow. The lavish lifestyle and additional income is not worth facing months or years in federal prison, along with a hefty fine and restitution that has to be paid.

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Tax Controversies: Limited Rights

The Internal Revenue Service (IRS) loves to give the impression that taxpayers have many rights to IRS actions. This stands as true. However, they fail to mention how limited these rights are. In other words, they’re less than desirable. The tax system works against taxpayers. It’s as simple as that.


The IRS has been granted a massive amount of authority to assess and collect taxes, even without a judge or jury having to be involved. Many people tend to turn to the individual who prepared their tax return when battling a tax controversy or an audit. This method is fine, because it does solve majority of tax disputes.


However, tax controversy procedural rules, and correctly advising taxpayers of their limited rights to court hearings are all things you should want your representative to know. For this reason, going back to your; tax preparer, certified public accountant, or enrolled agent isn’t a good idea. If your rights aren’t correctly exercised, the IRS has the right to collect on taxes without a true fight.


Once the audit is done, the IRS will deliver a Notice of Deficiency if the IRS believes the taxpayer still owes them money. Often times, accountants and clients still believe they can work with the auditor on various issues. This couldn’t be further from the truth. The Notice of Deficiency acts as the final decision made by the IRS and cannot be taken back in most cases. If, for whatever reason, the Notice is rescinded, then it has to follow the procedures set forth in Revenue Procedure 98-54.


The Notice of Deficiency is considered legally assessed after 90 days and the IRS will certainly begin collecting on it, if the taxpayer doesn’t properly contest the Notice of Deficiency that is.


The only two options at this point will be to either; dispute the matter in tax court, or pay the tax for now, and file a claim for a refund in federal court later. Of course, tax court is the most appropriate for taxpayers. They even offer an extremely simplified process for small cases. However, the catch is that small cases are not able to be appealed.


Cases that do not make it to the Tax Court must be brought to Federal District Court or the U.S Court of Federal Claims, which is very expensive. Where does that leave the taxpayer? That leaves them having no choice but to pay since federal court doesn’t make financial sense.


The “Flora Rule”, which is a huge rule that works against taxpayers, states that the taxpayer must pay the tax believed to be owed before a federal court will take on their case. Lawsuits filed against the IRS in federal court every year is only a few hundred, while tax court has tens of thousands.


It’s clear that the system has put up many barriers that prevent the taxpayer from getting a fair trial. Due to this, every notice that you receive from the IRS should be taken seriously and handled with urgency.


If you feel as if you are getting audited after receiving notice from the IRS, it’s crucial to see a professional who has extensive experience in tax controversies immediately. An experienced tax attorney will help you go over all of your available options, and guide you to the most appropriate solution.

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Do You Need A Tax Attorney?

Many businesses and individuals fall victim to IRS penalties due to lack of knowledge. There’s no doubt that the IRS has lots of rules and regulations that may be confusing to some who are new to it. If this is the case for you, you most likely need the services of an experienced tax attorney.

Making an investment in a tax attorney can save yourself and your business from; criminal charges, interest, and IRS penalties that can sneak up on you. Tax attorneys are simply lawyers with extensive knowledge in the very complicated and technical field of taxes.

When is the right time to hire a tax attorney?
1. If you have taxable estate and need to file an estate tax return, you definitely need a tax attorney. You will lose out on lots of money if you don’t have a tax attorney in your corner to help you with complicated estate planning strategies.

2. If you’re starting a business, especially an LLC or corporation, you will find a tax attorney useful for legal counsel. This will also help you decide on which business structure will make the most sense for you, from a financial standpoint, in the beginning stages.

3. When conducting business internationally, you are entering into different territories where the laws and regulations are different than that of the USA. With that being said, having an attorney handy will help you with creating appropriate contracts, and other legal matters related to business.

4. When bringing a case to the IRS. Many cases brought to the IRS usually falls on death ears. An attorney will make the process easier and give you a fighting chance.

5. When there’s a criminal investigation against you brought by the IRS, this shouldn’t even be up for discussion. There’s a 100% chance a tax attorney will be needed.

6. If you commit tax fraud (which we don’t encourage), a tax attorney can help with protection on privilege.

7. When you want independent review of your case in front of the US Tax Court, an attorney is needed 100% of the time.

What does a good tax attorney look like?
At the minimum, tax attorneys have a Juris Doctor degree and should be admitted to the state bar. However, you want a tax attorney with in depth training in tax law. There are some that may even have a master of laws degree in taxation. Simply put, the more education and expertise your attorney has in taxes, the better. Choosing a good tax attorney can save you a prodigious amount of money, while hiring a basic lawyer can cost you money.

When handling business in general, you need a tax attorney. This is especially true if you have something to lose, which most of us do. This can be personal finances, business revenues, or your freedom (if you’re fighting a fraud case that could lead to jail time). Either way, make sure you understand when it’s time to hire a tax attorney, and how to pick a good one.

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7 Critical Errors That Can Get Your Small Business Audited

There’s no doubt that a small business owner has an overwhelming number of responsibilities that are all calling for your attention at once. However, being pressed for time isn’t a good thing because you tend to ignore the little things that can cause more stress in your life. Yes, we’re referring to an audit. While an audit isn’t something “little”, the mistakes that can bring about an audit are minor. The thought of an audit makes small business owners cringe inside. Although, it isn’t guaranteed that you can stop an audit from ever happening, there are some steps that you can take as a small business owner to stop it from happening in the meantime.

An audit typically involves the IRS going through your income and expenses to make sure that the amounts reported are actually accurate. During an audit, the IRS are mainly looking for; exaggerated deductions, and unreported or under-reported income. You are obligated to provide all documentation as requested by the IRS.
In order to avoid the unnecessary hassle of an audit, here are 7 red flags that should be avoided at all costs to reduce the risk of your small business being audited.

1. Having a net loss profit for 3 out of 5 years
Your business must be able to have a profit for at least 3 years out of a 5-year period. If not, the IRS will become really interested in why you’re not returning a profit but manage to stay in business.

2. Late filing and late payments
Not meeting deadlines is against your obligation and will create unwanted attention on your business, along with additional money (penalties) that will need to be paid. Always try to pay on time or at least inform the IRS that a payment will be late.

3. Shareholders who are also employees getting paid big salaries
All employees should be given reasonable salaries based on their; skills, type of industry, and experience. Paying excessive salaries simply because they’re shareholders is a surefire way to the IRS wondering what else you may be up to.

4. Prodigious Deductions for entertainment, food, etc.
The best way to prove that your deductions are accurate consists of keeping all receipts. If receipts and extensive documentation isn’t available, that automatically makes you look guilty in the IRS eyes. Especially since this is a very common method individuals used to get out of paying taxes.

5. Transferring income to tax exempt organizations such as nonprofits
This is a form of tax evasion in its finest form. Giving away money to charities isn’t an issue. However, it becomes an issue when it’s solely for the purpose of getting out of paying taxes on it. The IRS will be more than happy to send an audit your way and see if your “charitable” donations check out.

6. 100% Vehicle Business Use
Again, the IRS wasn’t born yesterday. Deducting money for business vehicle use is one of the oldest tricks in the book. If the vehicle isn’t designated for complete business use, it’s good to keep logs of mileage and the purpose of each trip.

7. Majority Cash Businesses
This is where places like car washes, barbershops, and bars have to be really careful. No matter what precautions you take, you’re always going to be under the magnifying glass of the IRS due to the easiness of hiding and underreporting income.

Small business owners are already up to their necks with busy work. However, it is important to document everything you do and keep receipts. You can even potentially create a system that only important files for compliance are uploaded to.
The last thing you need is the IRS knocking at your door for an audit. If you do receive a notice, do not ignore it like some businesses do. It’s in your best interest to contact a tax lawyer. Although these steps do not guarantee the IRS will audit you, it doesn’t hurt to try your best to prevent the hassle.

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How Far Back Can You Be Audited By The IRS?

According to CBS News, filing your tax returns could raise the question of how long you should keep them, just in case the IRS decides to audit. If you come across this issue, it is important to be aware of the three types of statute of limitations. This is found under the Internal Revenue Code, provided by Section 6501.

The first is a three-year statute of limitation on tax audits. Filing a tax return on extension has the downside of also extending the time your return is subject to an audit. For example, filing a tax return for 2011 on April 15, 2012 would give the IRS exactly three years to audit it. However, if you request an extension and file on Oct. 15, 2012, the IRS will still receive exactly three years after that date to audit your return.

Section 6501 also states a second statute of limitations. Overestimating your cost basis or holding securities for a long period of time could bring forth underreported income. This could result from taxpayers neglecting a gross income that surpasses 25 percent of what was originally stated. In this case the three-year limit is doubled to six years.

Assessing a tax return has no time limit if a return is false or fraudulent according to the third statute of limitations. This will also occur if no tax return is filed at all.

Having a good understanding of these three bills as well as an effective tax attorney, can prevent future questions or frustrations with filing tax returns.

Tax problems? Call us today for a free consultation. We are a team of Lawyers, CPA’s and Enrolled agents who Specialized Exclusively in Tax Audit Representation with over 15 years of experience. We are located in Beverly Hills, California. Our services are nationwide. We work with all IRS offices throughout the nation. Because the IRS is a Federal Agency, we can request your case to be transferred to a local IRS office (Los Angeles, California).

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What Is A Tax Audit And Why Is It Done?

A tax audit is when the IRS decides to examine your tax return a little more closely and verify that your income and deductions are accurate. Typically, your tax return is chosen for audit when something you have entered on your return is out of the ordinary.

There are three main types of IRS audits:

  • A Mail Audit simplest type of IRS examination and does not require you to meet with an auditor in person.
  • An Office Audit is an in-person audit conducted at a local IRS office which are more in-depth than mail audits and usually include questioning by an audit officer about information on your return.
  • Finally, a Field Audit in which case an IRS agent will conduct the audit at your home or place of business.

The IRS might select you to be audited if:

  • There are mistakes or math errors on your tax files.
  • You fail to include a Form 1099 or additional income.
  • You claim too many charitable donations.
  • You Report too many loses on a Schedule C.
  • You claim too many business expenses.
  • You claim a home office deduction.
  • You repeatedly use neat and rounded numbers.

If the IRS imposes an audit on your tax returns, contact a tax attorney for IRS audit help.

Tax problems? Call us today for a free consultation. We are a team of Lawyers, CPA’s and Enrolled agents who Specialized Exclusively in Tax Audit Representation with over 15 years of experience. We are located in Beverly Hills, California. Our services are nationwide. We work with all IRS offices throughout the nation. Because the IRS is a Federal Agency, we can request your case to be transferred to a local IRS office (Los Angeles, California).

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How Does The IRS Notify You Of An Audit?

How Does The IRS Notify You Of An Audit?

The IRS will always notify you by mail, if you are being audited. states that they will never notify you over a telephone call, so if you receive a call, chances are it is a scammer trying to deceit you.

If you are selected for an audit it is not always suggested that there is a problem and it can be resolved with the help of an IRS tax attorney. The IRS uses several methods when selecting tax payers for audits.

One method is random selection and computer screening. In this case, it could be likely that your return is selected based on a statistic formula. The National Research Program, conducted by the IRS, compares your tax return against “norms” for similar returns. These “norms” are developed from audits of a statistically valid random sample of returns.

The IRS also looks into your returns if you are involved with issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit. This method is called Related Examinations.

After you are selected for audit, an experienced auditor reviews the return and decides whether or not to accept it. If something questionable is noted, the auditor forwards the return for assignment to an examining group.

Tax problems? Call us today for a free consultation. We are a team of Lawyers, CPA’s and Enrolled agents who Specialized Exclusively in Tax Audit Representation with over 15 years of experience. We are located in Beverly Hills, California. Our services are nationwide. We work with all IRS offices throughout the nation. Because the IRS is a Federal Agency, we can request your case to be transferred to a local IRS office (Los Angeles, California).

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Should You Represent Yourself vs. the IRS?

Most people question whether they should represent themselves in an IRS audit or hire a tax attorney to represent them. The answer is simple: hire a tax attorney. Taxpayers will benefit tremendously from securing a professional tax expert to represent them before the IRS. Even if the tax expert doesn’t bring you a successful outcome, they often reduce, if not eliminate, any additional fee the IRS expected you to promptly pay.

Another reason not avoid represent yourself is because you might say something that will be self-incriminating and not even realize, until it is too late. Hiring a tax attorney will help you avoid making that mistake. Tax attorneys are experienced in dealing with the IRS and understand and practice tax law as a career. There is no better representation then that of a tax attorney. Auditors will also word phrases intentionally to trick you into confessing something you otherwise would not have, whereas if you had a tax expert representing you they could be ignorant to some of the questions asked, consult with you and then respond to the auditor.

Protecting your rights is another reason why you should not represent yourself. IRS auditors know that taxpayers who represent themselves are not knowledgeable of their rights and they will use that to their advantage. With a tax attorney on your side, your rights will always be protected. This can be crucial because taxpayers never want to overexpose themselves and expand the scope of their audit. Not only is it more time consuming, but it also adds more unnecessary stress to your already busy life. There are times that representing yourself can be beneficial, but for the most part having a licensed professional representing you is the best shot you have to have a successful IRS audit.

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IRS Form 1099 Or Form W-2?

Ever wonder what the difference between a 1099 Form and W-2 Form is? Well, you are definitely not alone because most people don’t know the difference, since there are so many tax forms that it is so easy to get confused. W-2 Forms are for employees and include information about tax withholding, payments to the IRS and state taxing authorities. 1099 Forms on the other hand, show the reported payments to independent contractors. Both forms are submitted to the IRS in February for review.

It is very important to correctly identify your company, as well as yourself, as either the employee or the independent contractor. This is important because the IRS will audit you if you unintentionally make an error. Furthermore, you may also get sued by the other party (either employee or employer) who will claim that you misclassified them as “employers” when they were in fact “employees”.

Another helpful form is the 8919 Form that is available on the IRS website. Some people who file a W-2 might need a 8919 Form, so it important to understand what the form is and why the IRS might require you file it along with your W-2. With an IRS Form W-2, the IRS is recognizing you as an employee who has had deductions with every paycheck. With independent contractors, there are no deductions therefore they will owe the IRS money. These tips scratch the surface of what you need to know before you file your W-2 and 1099 Forms. It is fundamental that you seek a professional opinion if you are unsure what form you need to file and what supporting documentation you need to make sure you file correctly.

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Gov. Brown Sued By Taxpayers’ Group For Passing Law That Allows Public Financing Of Campaigns

Patrick McGreevy of the LA Times claims that a taxpayer group filed a lawsuit against the governor of California for passing a new law that will allow for public funds to finance political campaigns.

The lawsuit in question was filed in the Sacramento Superior Court by the Howard Jarvis Taxpayers Association. Accordingly, they claim that such a law violates Proposition 73, which was approved by voters over 20 years ago and prohibits public funds being used to fund political campaigns.

Jon Coupal, president of the Howard Jarvis Taxpayers Association claims that “It runs directly contrary to the expressed language of the Political Reform Act”. Moreover, he states that the law cannot be changed without another vote of the people. He further argues that using public funds to finance political campaigns is far from fair because “it’s the power of government skewing the political process”. Governor Brown declined commenting on the matter.

On the other hand, Ben Allen, the congressman representing the district of Santa Monica declared that such a law would help reduce the influence of special interests in political campaigns and “anything we can do to empower communities to reduce the influence of money in campaigns is a good thing”. He stated recently that he believes the bill will survive the legal attack.

He argues that without the law, “we are powerless to offer candidates an alternative to the current reliance on special interest dollars”. Where do we, as taxpayers stand on such an issue?

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