March 2011 Archives

March 29, 2011

Electronic Filing Becoming the Norm

If the IRS has its way, paper tax returns will soon become a thing of the past.

If your return is put together for you by a "specified tax return preparer," get ready to step into the 21st century and start "e-filing," if you haven't already.

A "specified tax return preparer" is a preparer of 100 or more "covered returns" in calendar year 2011 (11 or more in 2012 and thereafter). And a "covered return" is any return of income tax imposed by subtitle A of the Internal Revenue Code on individuals, estates, and trusts, such as Forms 1040, 1040A, 1040EZ and 1041. (Some forms cannot presently be e-filed and are, obviously, exempt from these requirements. But the forms generally filed by most individuals are covered.)

But what if you don't like the idea of e-filing? Say, for example, you're a little goosey about computer security -- a reasonable position to take. What does your preparer do in that event?

Well, it really shouldn't be a problem for him or her. Your preparer has to simply document your choice to file in paper format, and retain a signed statement from you to that effect, including a representation from you that your preparer did not attempt to influence your decision to go with paper filing. Also, your preparer will attach Form 8948 ("Preparer Explanation for Not Filing Electronically") to your paper filed return.

And what if your return is more complicated than most, which often necessitates any number of documents (other than the government forms themselves) to be attached in support of tax return items. Well, there's an "out" for your preparer in this area as well -- an "administrative exemption" to use the IRS's very own words. In this instance, paper filing is acceptable. And some returns can be e-filed and the attachments mailed to IRS using a transmittal Form 8453.

Get more information from Nolo on getting your personal income tax and business tax returns together.

March 23, 2011

Odds of an Audit: Interesting IRS Stats

So you're thinking about playing the old "audit lottery," and wonder what the stats show regarding your chances of getting caught, and what the consequences might be.

Check out the IRS 2010 Data Book (Publication 55B) which is supposed to be printed by mid April. The info there covers IRS fiscal year 2010, and covers not only tax audit rates, but other items, such as the categories of returns which interest the IRS most, and collections efforts.

In terms of the overall changes of being audited, only about 1.1% of all individual returns filed in the fiscal year were audited -- up from 1.0% in the prior year. And only 21.7% of the individual audits were actually conducted by revenue agent folk. The other 78.3% were correspondence audits.

Here are some key stats regarding individual audits (other than audits of taxpayers claiming the earned income tax credit):

  • Business returns (other than farmers) showing total gross receipts of $100,000 to $200,000: 4.7% audited
  • Business returns showing total gross receipts of $200,000 or more: 3.3% audited
  • Farmers (Schedule F filers): 0.4% audited
  • Individuals with adjusted gross income (AGI) between $100,000 and $200,000: 0.71% audited
  • Individuals with AGI between $200,000 and $500,000: 1.92% audited
  • Individuals with $1 to $5 million AGI: 6.67% audited

As for corporations (other than those filing Form 1120S), 1.4% were snagged for audit overall. But small corporations with assets of $1 to $5 million experienced a 1.7% audit rate.

Some more interesting stats: the total number of individual returns actually filed dropped 2% from the year before. When times are bad, the number of filers drops off. Nonetheless, IRS continues to find a way to penalize very many filers -- the top three penalties in percentage terms were 57.3% for failure to pay, 27.3% for underpayment of estimated taxes, and 13% for filing taxes late.

And beyond the common civil penalties, the stats show that crime doesn't pay -- IRS initiated 4,706 criminal investigations in 2010, and of those convicted, 81.5% were incarcerated - up from 81.2% the year before.

Learn how to stay off the IRS radar -- and get tips on what to do if you are audited -- in Nolo's articles How to Reduce the Chance of an Audit and Top 10 Tips for Surviving an Audit.

March 14, 2011

Got Offshore Income? IRS Announces New Disclosure Initiative

Ever on the lookout for international tax evaders, IRS recently announced yet a second special program to allow folks with previously undisclosed income from hidden offshore accounts to fess up. Not exactly what you would call an "amnesty," but still probably better than risking the alternative of continued silence, and later getting caught.

The new voluntary disclosure initiative will be available until August 31, 2011. "As we continue to amass more information and pursue more people internationally, the risk to individuals hiding assets offshore is increasing," noted IRS Commissioner Shulman recently. "This new effort gives those hiding money in foreign accounts a tough, fair way to resolve their tax problems once and for all. And it gives people a chance to come in before we find them."

The new initiative is different, in some ways, from its precursor in 2009. The overall penalty structure under the new program is higher than before, so that folks who did not come forth before will not be rewarded for remaining silent in the mean time.

For the 2011 initiative, there is a new penalty framework that requires individuals to pay a penalty of 25 percent of the amount in the foreign account(s) in the year with the highest aggregate account balance during the 2003 to 2010 period. Some taxpayers will be eligible for 5 percent or 12.5 percent rates of penalty. All participants will be required to pay all back taxes and interest, as well as the appropriate late payment and delinquency penalties.

IRS continues to discourage what it calls "quiet disclosure," by which a taxpayers may just file amended returns on their own, and pay related tax and interest for previously unreported offshore income without otherwise notifying IRS in a formal way.

Folks trying this approach run the risk of being examined and potentially criminally prosecuted for all applicable years. That's right -- "criminal" sanctions loom on the horizon and are generally not "pretty." IRS says it has identified, and will continue to identify and closely review amended returns coming their way which report increases in income.

This is a difficult and touchy area -- even though it appears in some sense that IRS is expressing some degree of leniency, perhaps the best approach for anyone with problems of this nature is to consider consulting with tax legal counsel, particularly if the amounts involved are large.

For more information on income earned abroad and how to handle back taxes you owe, check out Nolo's Filing a Tax Return When You Live Outside the U.S. article and Nolo's Back Taxes & Tax Debt section.

March 3, 2011

'S' Corporations and Employees, Round 2

A recent Tax Court decision (Donald G. Cave a Professional Law Corp., TC Memo 2011-48) reminds us once again of employment tax considerations associated with "S" corporations and their shareholders, as well the more general topic of distinguishing between employees and independent contractors.

In this case, the law corporation reporting entity did not view associate attorneys working for the firm as employees, but instead considered them independent contractors, and issued them Forms 1099-MISC for the years in question. And the same went for a law clerk. Further, even though the sole corporate shareholder worked actively in the business, the corporation issued to him neither a Form W-2 nor a 1099-MISC, thus allowing all of the bottom line to flow to his personal return as "S" corporation dividend distributions, presumably thereby escaping employment taxation altogether.

The age old issue of who is an employee as opposed to an independent contractor is not without guidance in the literature. Specifically, the Fifth Circuit (which would govern if an appeal ensues from the Tax Court's decision) considers the following primary factors as relevant to the question:

1. The degree of control the principal has over the worker
2. The worker's investment in the tools of his trade
3. The worker's opportunity for profit or loss resulting from his efforts
4. The permanence of the relationship between worker and master
5. The skill required of the worker

The bottom line for the Tax Court, relative to the classification of the associate attorneys and the law clerk, was the conclusion that all of these folks were "common law employees," to whom Forms W-2 should have been provided, and regarding whom appropriate employment taxes should have been considered.

And as for the sole corporate shareholder, the corporation's president, who made virtually all corporate decisions, for which he was compensated, the same conclusion ensued: employee status.

Bottom line -- corporation shells out the employment taxes for the years in question, plus the usual penalties, of course!