Your tax matters can be handled in a sophisticated and cost-effective manner by Susan Berson. A former Senior Trial Attorney with the Tax Division of the U.S. Department of Justice, Susan has two decades of experience in all phases of administrative, audit, enforcement, collection, appeals and regulatory action. She is also the author of the treatise, Federal Tax Litigation (Law Journal Press), which she is responsible for updating twice a year.
Susan draws on her experience representing the IRS early in her career to help clients understand the IRS playbook. Susan advises clients in a variety of industries, markets and professions about tax audits, tax compliance and reporting obligations, entity selection and developing best tax practices, and recent legislative changes which impact their industry-specific practices, professions and wealth preservation opportunities. When litigation is on the horizon, Susan is also admitted in state and federal district, bankruptcy, and tax courts to handle such matters. Accounting, financial and legal professionals also retain Susan for consultations about audit strategy, responding to IRS information and document requests, appealing agency determinations, pursuing administrative relief, litigating issues in court, analyzing the tax consequences of entity selections, mergers/sales, loan transactions, severance, settlements, judgments, dischargeable tax debt in bankruptcy, tax-related investments, wealth management and preservation strategies/proactive retirement planning measures.
Audits. Many taxpayers mistakenly plunge into an audit flying solo, without the aid of an attorney or other professional. However, negotiating and responding to IRS information/ document requests is an important part of an audit process. It is imperative that a balance be attained between providing the information that the IRS may legitimately need, while protecting taxpayer privileges and limiting information requests to a rule of reason. The IRS has increasingly been involving its attorneys early on in the audit examination process. Because of this, our experience has been that it can be crucial to a taxpayer’s success to have legal counsel before revealing information to the government. In that regard, we have experience planning for, and managing audits, as well as various audit issues such as responding to information document requests, complying with formal document requests, quashing summonses, controlling statutes of limitation, establishing document retention procedures, and identifying and protecting privileged documents. This practice area includes experience with various special IRS programs such as the Coordinated Examination Program, the Large Case Program, the Industry Specialization Program, the Market Segment Specialization Program, the Early Referral Program, the Appeals Coordinated Issues Program, the Advance Pricing Agreement Program, and the Tax Preparer and Tax Promoter Programs.
Withholding Taxes, Sales Taxes, Use Taxes. The IRS and state departments of revenue routinely focus on withholding requirements for businesses and employers. This is especially pertinent to service industry professionals --from attorneys, doctors, dentists, to cash-based businesses, such as restaurants, spas and salons to technology and “IT” contractors—where an IRS revenue agent or state tax auditor is statutorily charged with the responsibility of carefully scrutinizing the withholding and proper payment of taxes practices employers may implement when hiring independent contractors and employees. Susan Berson has significant experience handling IRS audits and state sales and use tax audits, appeals and controversies. From pre-planning review to implementation of proper record keeping practices to handling actual audits, appeals, and defending officers who may be surprised to find that the government is assessing them for the unpaid tax liabilities of their businesses. If you are the owner, officer or director of a business facing audit scrutiny from the IRS, or states of Missouri and Kansas, Susan can help you evaluate your circumstances, including an honest analysis of the most cost-effective options to move forward and continue with your operations’ goals.
Troubleshooting Tax Planning, Trusts and Wealth Preservation Matters. Tax issues can arise from business transactions, investments, trusts, and even certain accounting practices. We consult with financial professionals such as accountants, C.P.A.‘s, certified financial advisors, investment and wealth managers, as well as their beneficiaries and customers, respectively, concerning the potential consequences of bequests, entity selections, mergers/ sales transactions, severances, settlements, tax-related investments, and proactive planning measures. Evaluating potential adverse tax consequences that can harm the tax, financial management and wealth preservation goals of a financial professional’s customers, including trust beneficiaries, respectively, are matters in which Susan can help.
Analysis of Pre-Bankruptcy and Post-Bankruptcy Options. We provide advice concerning the dischargeability of IRS and state tax debts to bankruptcy lawyers who represent business debtors, lenders and/or institutional creditors.
A summary of the 2019 and 2020 federal income tax brackets, deductions and credits for businesses is here: PDF.
The following changes in tax law, which occurred in 2018, can provide your business with significant tax savings:
Section 199A - Qualified Business Income Deduction. Discussions about the type of business entity that business owners, entrepreneurs and start-ups should select for their operations should include reviewing whether new Section 199A applies. This provision allows the potential for a write-off of 20% of net income for sole proprietors, owners of S Corporations, and members of partnerships or limited liability companies ("LLCs") by wages paid. There is a formula for determining the income eligibility and calculation of wages paid to owners in deduction eligibility. It is expected that the additional modifications and interpretations will be drafted by the IRS or U.S. Department of Treasury on how Section 199A can be used. For now, as the tax legislation is written, it appears that pass-through entities and structures include: sole proprietorships (no entity, Schedule C), S corporations, trusts and estates, REITs and qualified cooperatives, real estate investors (no entity, Schedule E), disregarded entities (single member LLCs), partnerships, and multi-member LLCs (with partnership treatment or Subchapter S election).
Section 179 - Deduction for Qualifying Property. Eligible taxpayers can deduct the entire cost of qualifying new or used depreciable property and most software in Year 1, subject to certain limitations, under Section 179. The new tax act permanently enhances the Section 179 deduction for qualifying property placed in service in tax years beginning in 2018. Under the new tax act, the maximum Section 179 deduction is increased from $510,000 to $1 million, and the phaseout threshold amount is increased from $2.03 million to $2.5 million. Later years will have the threshold amounts indexed for inflation. For purposes of determining eligibility for these higher limits, property is treated as acquired on the date on which a written binding contract for acquisition is signed.
Depreciation Changes for Certain Property. For qualified property placed in service between September 28, 2017, and December 31, 2022 (or by December 31, 2023, for certain property with longer production periods), the first-year bonus depreciation percentage is increased to 100% under the new tax act. A 100% deduction is allowed for both new and used qualifying property. Qualified film, television and live theatrical productions placed in service on or after September 28, 2017 also are allowed the 100% deduction. Productions are considered placed in service at the time of the initial release, broadcast or live commercial performance.
Bonus depreciation, under the new tax act, is scheduled to be reduced as follows for other later years:
• 80% for property placed in service in 2023.
• 60% for property placed in service in 2024.
• 40% for property placed in service in 2025.
• 20% for property placed in service in 2026.
Important: For certain property with longer production periods, the preceding reductions are delayed by one year. For example, 80% bonus depreciation will apply to long-production-period property placed in service in 2024. By comparison, before the new tax act, prior law allowed a 50% first-year bonus depreciation deduction for qualified new assets that your business places in service in 2017. Used assets also didn't qualify.
The definition of qualified real property improvement costs was expanded under the new tax act. It now includes:
• Certain improvements to interiors of leased nonresidential buildings;
• Certain restaurant buildings or improvements to such buildings;
• Certain improvements to the interiors of retail buildings;
• Certain improvements to nonresidential real property including roofs, HVAC equipment, fire protection and alarm systems, and security systems.
Certain depreciable tangible personal property used predominantly to furnish lodging is also included in the new tax act.
Tax benefits for business passenger vehicles are also included under the new act. Specifically, for new or used passenger vehicles that are placed in service in 2018, and used over 50% for business, the maximum annual depreciation deductions are as follows:
• $10,000 for Year 1.
• $16,000 for Year 2.
• $9,600 for Year 3.
• $5,760 for Year 4 and thereafter until the vehicle is fully depreciated.
These amounts will be increased for inflation for later years.
R&D Tax Credit. The Research and Development tax credit (commonly known as "R&D" tax credit) has been preserved for use in the new tax act signed into law on December 22, 2017. This is important because, when calculated and used properly, the R&D tax credit is a financial tool that business owners can use to save on their taxes, and help boost operational cashflow. For those who are unfamiliar, basically, the legislative history of the R&D tax credit shows that Congress sought to provide an incentive or otherwise reward those businesses which are providing innovative products or processes.
Small business owners, start-ups and contractors which engage in the following activities may find it worth reviewing whether they are eligible for the R&D tax credit:
• Developing new or improved products;
• Functionally enhancing an existing formula or product;
• Developing or improving a production processes;
• Providing technical problem-solving assistance to customers;
• Developing or improving software that is offered for sale or use; and,
• Applying for patents.
In conjunction with the R&D tax credit, it is important to note that the new tax act eliminated the alternative minimum tax (AMT) for corporations so that businesses can use the R&D tax credit and not worry about the AMT subsequently eliminating its benefits. Likewise, the new tax act makes it clear that all costs associated with software development are deemed R&D costs. (It is expected that among the guidelines and regulations that the IRS must draft for the new tax law changes, Rev. Proc. 2000-50, which currently addresses the tax treatment of software costs, will be somehow revised.) The new tax act provides that all software costs fall within the new amortization rules, so these type of costs are also subject to the 5 year/15 year amortization rules which take effect in 2022. (The new tax act provided amortization of R&D expenditures over a 5 year period, and a 15 year period for foreign R&D costs.)
Calculating the credit amount, and properly documenting the eligibility of the deduction are the keys to complying with the applicable tax regulations and laws applicable to the use of the credit. If you are interested in determining whether a business is a potential viable candidate for taking advantage of the credit, or reviewing the sufficiency of documentation supporting the credit for purposes of achieving IRS compliance, please feel free to contact Susan or Dave.
A Subchapter S election can offer significant tax benefits to a corporation’s stockholders, but is subject to certain restrictions and ongoing compliance requirements.
Tax Advantages. Upon properly electing to be taxed as a Subchapter S Corporation (“S Corp”), a Kansas or Missouri corporation generally no longer has to pay any Federal income tax or state income tax. Instead, each stockholder of the corporation will be responsible for paying income tax on the stockholder’s proportionate share of the corporation’s income.
As an S Corp accumulates earnings, those earnings will be added to the tax basis of the stock owned by the stockholders. Consequently, in the event of a future sale of a stockholder’s shares at a price greater than the stockholder’s original cost basis, the stockholder may realize a tax savings.
Tax Disadvantages. Because an S Corp is treated as a “flow-through entity” for tax purposes, the S Corp must annually provide each stockholder with a Schedule K-1. Stockholders of Subchapter S corporations are subject to personal income tax on their pro rata share of the entire earnings of the corporation, regardless of whether the Board of Directors of the S Corp distributes sufficient dividends to them to pay their tax. S Corp stockholders must also generally make quarterly estimated tax payments on their share of the S Corp income.
The IRS assesses a corporate-level built-in gain (“BIG”) tax on assets of an S Corp that are sold within 5 years after the effective date of the S Corp’s conversion from a C Corp. The BIG tax is assessed on the amount by which the value of the S Corp’s assets exceed their tax basis on the effective date of the S election.
S Corps are taxed on passive investment income that annually exceeds 25 percent of gross receipts, and will lose their S Corp status if they exceed this limit in three consecutive years.
Most Common Barriers to Making a Subchapter S Election. In order to be eligible to be taxed as an S Corp, a corporation has to have fewer than 100 stockholders, have all of its stockholders provide their written consent to the election and comply with other significant stockholder eligibility restrictions. The restrictions that most frequently stop a corporation from making an S Corp election are (i) certain of the corporation’s stockholders are companies or non-qualifying trusts, (ii) the corporation’s subsidiary is not eligible to be a Qualified Subchapter S Subsidiary (“QSSS”), because it is not 100% owned by the corporation, and (iii) if the subsidiary is a bank, the bank’s directors qualifying shares (“DQS”) are subject to an impermissible type of buy-sell agreement. However, theses issues can be resolved by conducting a a reverse stock split or squeeze-out merger transaction and by amending the terms of the DQS buy-sell agreements.
Importance of a Subchapter S Stockholders Agreement. A corporation that is making an S Corp election should require all of its stockholders to sign a stockholders agreement that (i) prohibits the sale of stock to any person that would void the subchapter S election and (ii) provides for quarterly distributions to the corporation’s stockholders (subject to the corporation’s ability to pay and applicable regulatory requirements) to assist the stockholders in making their estimated tax payments.
You are a small business owner and cash flow problems have caused you to miss a few employment tax payments.
Falling behind in employment taxes can start a never-ending cycle of accruing penalties and interest. Employment taxes are one area where the IRS is the most aggressive in enforcement. Our law firm can help determine whether it is possible to negotiate an installment agreement or other solution to help you pay the taxes owed and minimize your financial exposure to penalties, including a Section 6672 assessment which can be made against owners. An owner of a small business is personally liable for employment taxes that are not paid by the business, and may be assessed tax penalties until such taxes are paid in full to the IRS.
Tax shelters are often promoted as opportunities to invest in potentially lucrative deals while getting a tax break. Though they take different forms and can utilize many structures, analysis of the investment is crucial in determining whether your tax return will survive IRS scrutiny. Some of the questions the IRS will ask about the tax shelter are the same ones you should ask before investing.
Is it profitable? The IRS will likely disallow a tax shelter that is based solely on deductions of interest and depreciation with only a remote possibility of earning revenues. To determine the tax shelter’s actual profit potential, measure the potential after-tax return against the after-tax cost. By doing so, you can compare the cost of a tax shelter opportunity with other investment vehicles such as stocks and bonds that are acquired with after-tax dollars. Also, factor in how long it will take to get the yield from the after-tax dollars. For example, a three-to-one return ($3 of cash received for each $1 invested) will not pass muster with the IRS if it takes several years longer to realize the full profit. Practically speaking, look at the time value of your money coupled with the fact that longer term returns will be less predictable than shorter term returns.
Does the Prospectus Detail a Deal with Economic Substance? The prospectus provides a summary of the investment opportunity. It should detail the history of the participants, and provide a legal opinion letter or memorandum about the projected tax consequences. Read the prospectus thoroughly. Don’t make the mistake of just reading the summary that is in the front of most prospectuses. Review the section detailing the sources and intended uses of the proceeds. It should tell you who receives what and how much of the proceeds will be distributed to promoters and their affiliates versus being invested in the primary objective of the partnership. Most importantly, review the tax risks and considerations section very carefully; consider even obtaining your own second opinion from a lawyer independent of the tax shelter about the various tax considerations set forth in the prospectus and the veracity of those statements as they relate to you as an investor.
Promoters usually have a varied history of success, so examine the promoter’s track record. In addition, examine the financial statements of the general partner and learn what the arrangements are for front-end fees of the general partner. The general partner’s share of revenues should be reasonable in comparison to the services provided to the program. If the program allows for additional assessments to be paid, it must be disclosed in the prospectus. Additional assessment disclosures should include: (i) the maximum amount of additional capital that the general partner can assess for unexpected expenses; (ii) when the assessment can be made; (iii) the tax consequences of meeting the assessment; and (iv) the penalty, if any, should you fail to comply.
The level of risk of the IRS disallowing a tax shelter significantly increases if any of the following factors exist:
Lack of Economic Substance. A lack of economic risk or potential for gain occurs when you are making a significant investment, yet the risk of loss or gain is illusory.
Inconsistent Financial or Accounting Treatment. Financial accounting treatment of a shelter item is inconsistent with its federal income tax treatment.
Novel Investments. Complexity, coupled with unnecessary steps or novel investments, usually occurs with the creation of entities or use of structures to achieve the desired tax result such as with corporate tax shelters that use innovative financial instruments to facilitate the exploitation of tax law inconsistencies.
Unfavorable Promoter Activities. An example would be promoters who are aggressively selling the shelters as "products" to a varied clientele or network to maximize their own return, as opposed to an offering to a few clients in the circumstances of tax planning.
High Transaction Costs. These can include fees paid to the promoter and expenses incurred in connection with the shelter activity.
Risk Reduction Arrangements. These are arrangements where contingent or refundable fees are in place to reduce the risk to the participants.
Will the tax shelter trigger an audit? When considering whether to invest in a tax shelter, do not ignore your own audit-comfort level. Many people are not temperamentally suited for investments that increase the possibility of an IRS audit. Therefore, it is important for you to decide whether you can live comfortably with this added potential risk.
In sum, if the tax deductions control the decision to invest in a tax shelter, then it is likely that the IRS will disallow those same deductions if you are audited. So, be prepared to explain why the factors above do not apply to your investment if your tax returns are audited.
You haven’t filed tax returns or paid taxes for a few years and are not sure how to get squared away with the government.
Failing to file returns when required to do so can result in the IRS beginning its collections process against you (e.g., levy against your wages, bank account and other assets). It can also result in a criminal offense. There are certain circumstances where it may be possible to file returns without incurring criminal penalties, presuming that the IRS has not contacted you already about the failure to file. In some cases, Our law firm may be able to help you determine whether you qualify for the Voluntary Disclosure program and get proper and accurate returns on file to bring you back into compliance. Sometimes you may find that upon filing the past due returns you are unable to pay the full amount that is due. In these circumstances, sometimes it is possible for our law firm to help you negotiate a reasonable monthly payment plan with the IRS.
The IRS has sent you a notice that a previous year’s tax return is under audit. Though you had an accountant prepare your return, you are concerned that you may have allowed the return to be filed with inflated deductions or understated your income.
At this stage, it is likely that the civil side of the IRS is only involved, not the criminal. However, revenue agents who are employed on the civil side are specifically trained to spot red flags for potential fraud and can refer taxpayers to the Criminal Investigation Division. You will probably be asked by the IRS to not only provide additional information, but documentation. For this reason, it is wise to consult with an attorney before responding to the questions and requests for documents. This includes any information you might have the urge to share with your accountant that prepared your return selected for audit. There is no legally recognized accountant-client privilege for criminal matters and your accountant will become concerned that she or he could be hit with a return preparer penalty or investigation by the IRS for any omissions on your return.
Two Special Agents from the IRS or FBI have appeared unannounced at your door, flashing gold badges and asking to speak to you about your tax return and other financial information.
Special Agents from the IRS Criminal Investigative Division and the FBI are authorized to carry gold badges as well as firearms. (These are two clues that you are dealing with a criminal investigator instead of civil audit or agent). Also, when Special Agents from the IRS Criminal Investigative Division or FBI visit, it is usually a surprise. You should be advised by the Agents that (i) you are not required to speak with them and (ii) that you are entitled to have an attorney present. Take the Agents up on this advice. When Special Agents show up, it means someone is under criminal investigation and it could quite possibly be you. It is unwise to speak or provide any information to the Agents without consulting a lawyer first. Politely and respectfully inform the Agents that you wish to consult an attorney and that they should leave the premises. Under some circumstances, even answering questions with the little word "no" to a Special Agent can be grounds for prosecution as a felony false statement so be very cautious.
You have been cooperating with IRS Special Agents without consulting with a lawyer. Cooperating seemed much easier and cheaper since it looks like they really don’t know what you have done and have not done. You know that you have not been completely accurate in the information you have provided to the government in the past, but the IRS Agents are way off base on the questions they’ve asked you.
First, do not underestimate IRS Agents, as they are specially trained to gather information, including admissions you may have unknowingly made that are not in your best interest. Second, you should be aware that the Fifth Amendment protects you from having to provide any further information to the government. Third, you should be aware that it is a felony to lie to a government agent. This means that the government can and has prosecuted taxpayers for providing false statements. It is wise to consult with an attorney before going any further. If a criminal investigation of your financial records and returns is underway, your cooperation may have put you in serious trouble. However, there are circumstances where Our law firm may seek to have the statements and/or information suppressed which would not allow the government to use it against you in court.
Copies of your bank records and statements have been requested by the IRS or a Grand Jury through the local United States Attorney’s office.
Grand jury investigations and IRS criminal investigations indicate that the possibility exists that criminal tax offenses may be asserted against you. Certain privileges and defenses may be available in certain circumstances that would protect your records from being turned over. The federal Right to Financial Privacy Act restricts the manner in which federal government authorities may obtain your bank records. Depending on the circumstances involved, it is possible that our law firm may be able to ask a court to quash the summons.
This website provides general information about legal issues and developments in the law. Such materials are for informational purposes only and may not reflect the most current legal developments. These informational materials are not intended, and must not be taken, as legal advice on any particular set of facts or circumstances. You need to retain an attorney for advice on specific legal issues.