Texas Tax Talk

Texas Tax Talk

IRS Announces Information Sharing Agreement with Australia and the UK to Combat Tax Evasion

By David C. Gair on Posted in Criminal Tax, Tax Planning

The IRS continues to aggressively pursue offshore tax evasion.  Another example of which is plan to share tax information with Australia and the United Kingdom.  The announcement says that the target is trusts and companies holding assets on behalf of residents throughout the world.

Popular countries used to create of trusts and other entities according to the IRS are:

  1. Singapore
  2. British Virgin Islands
  3. Cayman Islands
  4. Cook Islands

No doubt that when the IRS sees a trust or entity formed in these countries it assumes something nefarious is afoot.

But there is nothing wrong or illegal about holding assets in offshore entities – as long as it is properly reported.  The IRS has a multitude of reporting requirements for offshore activity (FBARs, Form 8938, etc.).

It is absolutely vital to get a knowledgeable tax professional to help make sure you are complying with the laws.  The rules are far from intuitive.  For instance, FBARs require the reporting of Foreign Bank and Financial Accounts.  Do you think a foreign life insurance policy fall into this definition – answer is YES.

Failure to report these accounts can be financially devastating and can lead to criminal prosecution.  There are ways to mitigate the damage – if you act quickly.

Basics of Stock Redemptions

By David C. Gair on Posted in Tax Planning, Uncategorized

Closely held corporations often have issues come up about succession planning and also about how to structure transactions in the most tax advantageous way possible.  Corporate redemption of a shareholders stock is always something to consider.

Hypothetical  - Bob and Jim created an oil and gas services company back in the 1970s as 50-50 owners.  That company has grown to be a big player and has been wildly successful.  The company has built up a large cash reserve.  Jim now wants to retire and spend his time sailing his boat in California.  Can he do a redemption?

A stock redemption lets you take cash out of a corporation in exchange for stock.  The advantage of structuring the redemption properly is that you are only taxed on the gain (redemption price less your stock basis).  This is just like selling the stock – but the company is the purchaser.

Like most things with taxes, redemptions are not simple.  But, there are two safe harbors to be aware of in planning a redemption so that you don’t run afoul with the IRS.  Those safe harbors are:

  1. The Substantially Disproportionate Redemption Test; and
  2. The Complete Termination of Interest Test


Substantially Disproportionate Redemptions.  For a redemption to qualify as substantially disproportionate (and not as a dividend) two elements must be satisfied:

  1.  Your interest after the redemption (in both all voting stock and all common stock) must be less than 80% of your interest before the redemption, and
  2. you must possess less than 50% of the voting power of all voting stock after the redemption.

In my hypothetical , this test is satisfied if, after the redemption, Jim’s interest is less than 40% (80% times 50%).   Jim’s will also possess less than 50% of the voting power. 

Beware, however, attribution rules apply that can make interests that family members or controlled entities own – constructively owned by you for purposes of the test. 

Complete Termination of Interest.   A redemption is also treated as giving rise to a sale, rather than a dividend, if it completely terminates your interest in the corporation.

In my hypothetical, were Jim to completely redeem his interest this test would be satisfied (assuming Bob is not related).

Note that the attributions rules still apply with this test, but there is an exception for family attribution if you don’t have any interest in the corporation as a shareholder, officer, director or employee after the redemption. 

Guide to Deducting Meals and Entertainment Expenses

By David C. Gair on Posted in Tax Planning

The Internal Revenue Code provides the ability to take business deductions for meals and entertainment.  You can take out a client to a restaurant or to a baseball game and deduct a portion of the expense.

The Internal Revenue Code, however, also requires you to jump through hoops to qualify the expense as deductible and is subject to limitations.

Nevertheless, if you pay careful attention to the following four rules outlined below, the expenses should qualify as deductible.

  1. Ordinary and necessary business expenses. All business expenses must meet the general requirement of being “ordinary and necessary” in carrying on the business.  Generally, this boils down to whether it is reasonable for the business to entertain clients.
  2. “Directly related” or “associated with.”  Next, a second stage of tests must be satisfied.   Under these, the business meal or entertainment must be either “directly related to” or “associated with” the business.   “Directly related” means involving an “active” discussion aimed at getting “immediate” revenue.  Thus, a specific, concrete business benefit is expected to be derived, not just general goodwill from making a client or associate view you favorably.   The principal purpose for the event must be business.  If the “directly related” test cannot be met, the expense may qualify as “associated with” the active conduct of business if the meal or entertainment event precedes or follows a substantial and bona fide business discussion.   This test is what you can use to if the purpose is to get new business or encourage the continuation of a business relationship.
  3. Substantiation.   Estimates will likely not stand up to challenge.  You really need to be able to establish the amount spent, the time and place, the business purpose, and the business relationship of the individuals involved.  No one lies doing this, but keeping organized and detailed records saves you money in the end.
  4. Deduction limitations.  Be careful, expenses that are “lavish or extravagant” are not deductible.  But what is lavish and extravagant is based on the facts and circumstances.    Most importantly, however, once the expenditure qualifies, it is only 50% deductible.

IRS worker classification – what is the common law test?

By David C. Gair on Posted in Tax Planning

A common mistake for new business owners is how it classifies its workers.  Many people think you can just elect to treat people as independent contractors and thus avoid the cost and headache associated with having employees.  That is incorrect.

If the person is an employee the business may have to:

  • Withhold federal income tax, social security taxes, and federal unemployment taxes on wages it pays workers who are employees.
  • Provide employees with the same fringe benefits and retirement plan coverage available to its other employees.
  • pay state tax obligations.

By contrast, if you have independent contractors the business simply cuts them a check for their services and sends a Form 1099-MISC.

Under the “common law” rules developed by the courts, a worker generally is an employee for federal tax purposes if the employer has the right to control and direct the worker regarding the job he is to do and how he is to do it.

The following factors from Revenue Ruling 87-41 are considered in whether the IRS  the right to direct and control the worker:

  1. Instructions: If the person for whom the services are performed has the right to require compliance with instructions, this indicates employee status.
  2. Training: Worker training (e.g., by requiring attendance at training sessions) indicates that the person for whom services are performed wants the services performed in a particular manner (which indicates employee status).
  3. Integration: Integration of the worker’s services into the business operations of the person for whom services are performed is an indication of employee status.
  4. Services rendered personally: If the services are required to be performed personally, this is an indication that the person for whom services are performed is interested in the methods used to accomplish the work (which indicates employee status).
  5. Hiring, supervision, and paying assistants: If the person for whom services are performed hires, supervises or pays assistants, this generally indicates employee status. However, if the worker hires and supervises others under a contract pursuant to which the worker agrees to provide material and labor and is only responsible for the result, this indicates independent contractor status.
  6. Continuing relationship: A continuing relationship between the worker and the person for whom the services are performed indicates employee status.
  7. Set hours of work: The establishment of set hours for the worker indicates employee status.
  8. Full time required: If the worker must devote substantially full time to the business of the person for whom services are performed, this indicates employee status. An independent contractor is free to work when and for whom he or she chooses.
  9. Doing work on employer’s premises: If the work is performed on the premises of the person for whom the services are performed, this indicates employee status, especially if the work could be done elsewhere.
  10. Order or sequence test: If a worker must perform services in the order or sequence set by the person for whom services are performed, that shows the worker is not free to follow his or her own pattern of work, and indicates employee status.
  11. Oral or written reports: A requirement that the worker submit regular reports indicates employee status.
  12. Payment by the hour, week, or month: Payment by the hour, week, or month generally points to employment status; payment by the job or a commission indicates independent contractor status.
  13. Payment of business and/or traveling expenses. If the person for whom the services are performed pays expenses, this indicates employee status. An employer, to control expenses, generally retains the right to direct the worker.
  14. Furnishing tools and materials: The provision of significant tools and materials to the worker indicates employee status.
  15. Significant investment: Investment in facilities used by the worker indicates independent contractor status.
  16. Realization of profit or loss: A worker who can realize a profit or suffer a loss as a result of the services (in addition to profit or loss ordinarily realized by employees) is generally an independent contractor.
  17. Working for more than one firm at a time: If a worker performs more than de minimis services for multiple firms at the same time, that generally indicates independent contractor status.
  18. Making service available to the general public: If a worker makes his or her services available to the public on a regular and consistent basis, that indicates independent contractor status.
  19. Right to discharge: The right to discharge a worker is a factor indicating that the worker is an employee.
  20. Right to terminate: If a worker has the right to terminate the relationship with the person for whom services are performed at any time he or she wishes without incurring liability, that indicates employee status.

There is no litmus test for exactly how many of these factors must be satisfied  The factors are also no  uniformly applied.  A detailed review of the facts and circumstances is required.

The earlier you catch a potential problem – the better of you are.  The IRS currently has a great voluntary classification settlement program that can save you thousand of dollars and lots of headaches.

 

Top Ten Tax Mistakes for Restaurant Owners

By David C. Gair on Posted in Tax Planning
If you are thinking about getting into the restaurant business there are a multitude of issues that you need to consider. One of the most important is taxes.  By this I mean, doing the appropriate advanced planning and also running the business properly. Here is my top ten list of mistakes restaurant owners make:
  1. Employee Classification – Misclassifying workers as independent contractors and not employees can be  terrible problem.  Restaurant workers (chefs, waiters, dishwashers, etc.) are employees.  Employers don’t get to arbitrarily pick classifications.  The underlying question is whether the worker is under your “direction” and “control.”  Good news is that if you have misclassified there are a variety of solutions.  For instance the IRS has a voluntary classification settlement program that can mitigate damages if you act quickly enough.
  2. Choice of Entity – This is an important decision that needs careful thought.   Proper choice of entity can save you tax if the company is profitable and shield you from tax liability if it is not.  For instance, certain types of limited liability entities can shield you from discharge of debt income (a common problem for restaurants) – others cannot.
  3. Failure to Pay Employment Taxes – Many companies in distress find that in order to keep the company going they have to delay payment to certain creditors.  A favorite is not paying employment taxes.  This is usually a HUGE MISTAKE.  The IRS not only hits the company with huge penalties – but the responsible persons can be liable for the Trust Fund Recovery Penalty in their individual capacity.  The trust fund recovery penalty is also not dischargable in bankruptcy.
  4. Failure to Maintain Good Standing with Secretary of State - It is very common for business owners to fail to observe responsibilities with the Texas Secretary of State and/or the Texas Comptroller.  This can lead to loss of limited liabilty.  For instance, Texas law provides that if a company fails to file a report or pay a tax or penalty – each director or officer of a company will face personal liability for any debt of the company.
  5. Paying Sales Tax - Failure to pay the appropriate sales tax will lead to personal liability for these taxes.  Additionally, the Texas Comptroller does not take kindly to this failure and can and will shut the restaurant down.
  6. Tip Reporting - There are IRS tip reporting requirements for both employees and employers.  You need to have a system in place that properly accounts for this.
  7. Structuring Deposits - Generally, when a deposit of cash is made into a bank of greater than $10,000 a Currency Transaction Report (CTR) must be filed.  For restaurant owners dealing in cash is a normal operation.  And large deposits are not uncommon.   Many people think that the CTR will raise red flags.  The bigger red flag is when you attempt to avoid the requirement by depositing less than $10,000 on a regular basis.  This is a felony!  To avoid this problem altogether you can actually apply for an exemption with the government.
  8. Failure to Employ Qualified Professionals – Running a restaurant is not a do-it-yourself type operation.  There are legal/accounting issues that come up that simply require help.  Gaining good advice and assistance will generally help you make money.
  9. Not Keeping Good Records - Not many people like to go to the trouble of keeping detailed records.  The Internal Revenue Code permits various business deductions – but only if you follow the rules.  The major  rule is maintaining documents that show you paid the expense and also demonstrating that the expense was business related.  If you are too busy – find a qualified bookkeeper.  The bookkeeper will save you money.
  10. Property Taxes – Generally, restaurants will lease a location to operate the business (as opposed to buying the property).  It is important to have a well written lease that clearly delineates who will be responsible for paying property taxes.

IRS Phishing Fraud – What Can You Do?

By David C. Gair on Posted in Criminal Tax, Tax Practice

Every year the IRS publishes there Dirty Dozen tax scams.  These are common scams that taxpayers face, but are most prevalent now during tax season.

Number two on the list is a scam called Phishing.  Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information.  The criminal now armed with this information can commit identity theft or financial theft.

An example of a Phishing email is one that appears to come from the IRS and states that “We identified an error in the calculation of your tax …. In order for us to return the excess payment click here.”

Other examples of IRS Phishing emails are:

Example One

Example Two

In this information age it might seem reasonable that the IRS would send emails to taxpayers.  But this is decidedly NOT TRUE.  The IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

The IRS will never request detailed personal information through email or send any communication requesting your PIN numbers, passwords or similar access information for credit cards, banks or other financial accounts.

Obviously, the best way to avoid the hardship caused by Phishing is to not allow yourself to get lured in – but what do you do if  you make a mistake?

Here is a list of initial action items:

  1. If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS report it by sending it to phishing@irs.gov.
  2. Request a Fraud Alert be placed on your credit report.  The alert will remain on your credit reports for 90 days. You only have to contact one of the three major credit reporting agencies to place an initial alert and it will notify the other two – like Equifax or Experian.
  3. Possibly request a Security Freeze on your credit report with the credit reporting agencies.
  4. You also need to request copies of your credit reports immediately and carefully review for unauthorized activity.
  5. Create an Identity Theft Report to the Federal Trade Commission.
  6. Tirelessly monitor progress on the ID Theft.  The FTC has important recommendations on how to do this.

 

 

New IRS Offshore Voluntary Disclosure Forms

By David C. Gair on Posted in Criminal Tax

In past offshore voluntary disclosures initiatives under the famed OVDI program – the IRS has continually adjusted the information it seeks from Taxpayers.

The IRS has just come out with formal IRS Forms to take the place of the Word documents used before.  The new forms are:

Form 14457 – Offshore Voluntary Disclosure Letter

Form 14454 - Offshore Voluntary Disclosure Program Letter Attachment

The information requested in these disclosures is used, in my view,  for three central purposes:

1) Provide information to the IRS regarding the Taxpayer to be able to confirm that the person is eligibile for the program

2) Begin to collect information for the examiner to help guide his/her investigation

3) Collect data for purposes of ensnaring promoters of offshore evasion.

 

Tax Time is Coming – Avoid Penalties and Problems

By David C. Gair on Posted in Uncategorized

April 15th is quickly coming up.  This can be a stressful time of year – preparing your taxes is simply not a  lot of fun.  However, it is important to file your return  on time.

 Why is important to file and pay on time?

  1. First, not filing or paying can be a crime.  The willful failure to file a tax return or pay tax is a misdemeanor under IRC § 7203.
  2. The IRS will almost certainly hit you with big civil penalties.

You could end up with penalties that add up to about 50% or more of the original tax plus interest.  Here is a summary of the penalties:

 

Failure to pay.  Separate penalties apply for failing to pay and failing to file. The failure to pay penalty is the “gentler” of the two, running at 1/2% for each month (or part of a month) the payment is late. For example, if payment is due April 15 and is made May 20, the penalty is 1% (1/2% times 2 months (or partial months)). The maximum penalty is 25%.  The failure to pay penalty is based on the amount shown as due on the return (less credits for amounts already paid, e.g., via withholding or estimated payments), even if the actual tax bill turns out to be higher. 

 

Failure to file. The failure to file penalty runs at the more severe rate of 5% per month (or partial month) of lateness to a maximum of 25%. If you obtain an extension for your filing due date, you are not filing late unless you miss the extended due date. However, a filing extension does not apply to your responsibility for payment.  Lesson – if nothing else make sure you file your extension by April 15th – use Form 4868.

If the 1/2% failure to pay penalty and the failure to file penalty both apply, the failure to file penalty drops to 4.5% per month (or part) so the total combined penalty remains at 5%. The maximum combined penalty for the first five months is 25%. Thereafter the failure to pay penalty can continue at 1/2% per month.

 

What can you do if you get hit with these penalties?

These penalties are actually pretty hard to get abated for a perpetual offender.

Reasonable cause. Both penalties may be excused by IRS if your lateness is due to “reasonable cause.” Typical qualifying excuses include death or serious illness in the immediate family, postal irregularities, or bad advice (e.g., you needn’t file), given to you by your tax advisor or IRS itself.  

Administrative Waiver.  Penalty relief can also be obtained for those who make a one time mistake and otherwise have a good compliance history of filing and paying their tax.

 

Gambling in Oklahoma – What are the tax responsibilities for Texans?

By David C. Gair on Posted in Tax Planning, Uncategorized

Hit the jackpot this past weekend in Oklahoma?  Wondering what this means for your taxes?  Are there any ways to reduce the tax hit?

Here are the basics:

How lottery winnings are taxed.

  • First, you should be aware that lottery winnings are taxable for federal tax purposes. This is the case for cash winnings and for the fair market value of any noncash prizes you may win, such as a car or vacation.
  • Your lottery winnings may also be subject to state income tax.   But we live in Texas – so no tax right?  Wrong.

Oklahoma requires that a non-resident of Oklahoma file a  511NR Income Tax Form if he/she has Oklahoma source gross income of $1,000 or more. You might then ask are gambling winnings considered “Oklahoma source gross income”? The answer is yes, income received from all sources of “wagering games of chance or any other winnings from sources withing Oklahoma” are taxable.

 So What can you do to limit your tax  hit?

  •  For Federal purposes you are entitled to a tax deduction for any gambling “losses” you had.  These are taken as an itemized deduction but cannot exceed your winnings.
  • Gambling losses aren’t subject to the 2%-of-adjusted-gross-income floor on miscellaneous itemized deductions. Nor are they subject to the overall limitation on itemized deductions.
  • To establish your entitlement to a deduction for gambling losses, you should keep documentary evidence of the costs of your wagers—including both the cost of your lottery tickets and of any other wagering you do, such as betting on races, casino games, etc.
  • The evidence should consist of receipts for tickets, wagers, cancelled checks, credit card charges, losing tickets, etc.
  • In some cases, taxpayer estimates have been allowed, but you shouldn’t rely on this. Documentary evidence is preferable by far.

US and Switzerland sign agreement to combat tax evasion.

By David C. Gair on Posted in Criminal Tax

The IRS has been clear that it is very serious about US taxpayers with foreign financial assets being compliant with tax reporting requirements.  There have been three rounds of the Offshore Voluntary Disclosure Initiative.  It is not too late to enter into the program.

Anyone with an undisclosed foreign account should seriously consider entering the program.

The U.S. Department of the Treasury announced today that it has signed a bilateral agreement with Switzerland to facilitate the implementation of the information reporting and withholding tax provisions commonly known as the Foreign Account Tax Compliance Act (FATCA).

Acting Secretary of the Treasury, Neal Wolin stated, “[t]oday’s announcement marks a significant step forward in our efforts to work collaboratively to combat offshore tax evasion … [w]e are pleased that Switzerland has signed a bilateral agreement with us, and we look forward to quickly concluding agreements based on this model with other jurisdictions.”

FATCA targets non-compliance by U.S. taxpayers using foreign accounts.  This law requires that foreign banks report directly to the United States about financial accounts held by U.S. Taxpayers.

Switzerland is now one of various  countries that have signed or initialed an intergovernmental agreement which helps to facilitate the effective and efficient implementation of FATCA.

Other countries with agreements with the US related to FATCA include, Ireland, Mexico, Denmark and United Kingdom