BLOG

Sale of a Principal Residence with Nonresidential Use

Houston Tax Attorney

0

Sale of a Principal Residence with Nonresidential Use

You want to sell your primary residence, but you rent part of it and don’t know how that affects your taxes. Or you’ve converted your residence to rental property or vice versa. How will you be taxed on the sale of the property? Here are various situations you may find yourself in. Read more

IRS “Dirty Dozen” Tax Scams for 2016

Houston Tax Attorney

1

IRS “Dirty Dozen” Tax Scams

I was inspired to create this post by a few clients that contacted us recently. Read on to learn how to protect yourself from IRS scams. The names below are fictitious to preserve client confidentiality.

Client #1 “Bob”: Bob went to a tax return preparer named “Jimmy” to have his 2015 tax return filed. Bob heard from a friend that Jimmy was a tax pro and would get him the biggest refund. As agreed to, Jimmy prepared the tax return and went over it with him. The preparer then had Bob sign a “refund anticipation loan” so that the refund would be directly sent to the preparer. In exchange, Bob would get his refund immediately from the preparer (minus a small fee) rather than having to wait for the IRS to process the return. A few months later, Bob needed to request a return transcript from the IRS as required for a loan. When he received the transcript he noticed that the refund amount on the transcript was larger than the refund that was on his copy of the return. After a consultation, Bob learned that he was a victim of tax preparer fraud. Jimmy prepared two tax returns for Bob – a fake return and the one he actually filed with the IRS. The fake return had a significantly smaller refund amount than the actual return. And the actual return had overstated deductions that Bob did not qualify for. The preparer pocketed the difference of the refund amounts.

How do you protect yourself from this type of fraud? First, be sure you pick the right tax professional. Second, do not rely solely on word of mouth. Many tax return preparers are popular with their clients because they maximize clients’ refunds by claiming erroneous deductions and credits. Second, steer clear of refund anticipation loans (RAL). Be especially wary of return preparers that are pushy with RALs. Third, review the documents that you are signing and ask questions if you’re not sure.

Client #2 “Jane”: Jane received a phone call from someone claiming to be from the IRS fraud department. The caller told Jane that she was past due on her IRS debt and that if she did not pay immediately, she would be arrested in 45 minutes.

How do you protect yourself from this type of fraud? First, do not give out any personal information to anyone claiming they represent the IRS. The IRS generally does not initiate phone calls to taxpayers, and they certainly will not call threatening to arrest you. IRS communicates through mail, unless you are in the IRS collections process. Even then, this wouldn’t be the first time the IRS has reached out to you regarding past due taxes. You would have received numerous letters from the IRS before IRS collections calls you. Additionally, the IRS would not ask you to wire money or demand payment over the phone. If in doubt, hang up and call the IRS 1-800 number on the latest IRS correspondence you received.

You should report telephone scams to the Treasury Inspector General for Tax Administration. Use TIGTA’s IRS Impersonation Scam Reporting web page to report the incident. You should also report it to the Federal Trade Commission using the FTC Complaint Assistant. Please add “IRS Telephone Scam” to the comments of your report.

The IRS “Dirty Dozen” List

The IRS released their yearly Dirty Dozen tax scams for 2016. The above cases are just a few of the many different types of scams out there. Here’s the rest of them.

Identity Theft: Taxpayers need to watch out for identity theft especially around tax time. The IRS continues to aggressively pursue the criminals that file fraudulent returns using someone else’s Social Security number. Though the agency is making progress on this front, taxpayers still need to be extremely careful and do everything they can to avoid being victimized. (IR-2016-12)

Phone Scams: Phone calls from criminals impersonating IRS agents remain an ongoing threat to taxpayers. The IRS has seen a surge of these phone scams in recent years as scam artists threaten taxpayers with police arrest, deportation and license revocation, among other things. (IR-2016-14)

Phishing: Taxpayers need to be on guard against fake emails or websites looking to steal personal information. The IRS will never send taxpayers an email about a bill or refund out of the blue. Don’t click on one claiming to be from the IRS. Be wary of strange emails and websites that may be nothing more than scams to steal personal information. (IR-2016-15)

Return Preparer Fraud: Be on the lookout for unscrupulous return preparers. The vast majority of tax professionals provide honest high-quality service. But there are some dishonest preparers who set up shop each filing season to perpetrate refund fraud, identity theft and other scams that hurt taxpayers. Legitimate tax professionals are a vital part of the U.S. tax system. (IR-2016-16)

Offshore Tax Avoidance: The recent string of successful enforcement actions against offshore tax cheats and the financial organizations that help them shows that it’s a bad bet to hide money and income offshore. Taxpayers are best served by coming in voluntarily and getting caught up on their tax-filing responsibilities. The IRS offers the Offshore Voluntary Disclosure Program (OVDP) to enable people catch up on their filing and tax obligations. (IR-2016-17)

Inflated Refund Claims: Taxpayers need to be on the lookout for anyone promising inflated refunds. Be wary of anyone who asks taxpayers to sign a blank return, promises a big refund before looking at their records, or charges fees based on a percentage of the refund. Scam artists use flyers, advertisements, phony store fronts and word of mouth via community groups where trust is high to find victims. (IR-2016-18)

Fake Charities: Be on guard against groups masquerading as charitable organizations to attract donations from unsuspecting contributors. Be wary of charities with names similar to familiar or nationally-known organizations. Contributors should take a few extra minutes to ensure their hard-earned money goes to legitimate and currently eligible charities. IRS.gov has the tools taxpayers need to check out the status of charitable organizations. (IR-2016-20)

Falsely Padding Deductions on Returns: Taxpayers should avoid the temptation of falsely inflating deductions or expenses on their returns to under pay what they owe or  possibly receive larger refunds. Think twice before overstating deductions such as charitable contributions and business expenses or improperly claiming such credits as the Earned Income Tax Credit or Child Tax Credit. (IR-2016-21)

Excessive Claims for Business Credits: Avoid improperly claiming the fuel tax credit, a tax benefit generally not available to most taxpayers. The credit is generally limited to off-highway business use, including use in farming. Taxpayers should also avoid misuse of the research credit. Improper claims generally involve failures to participate in or substantiate qualified research activities and/or satisfy the requirements related to qualified research expenses. (IR-2016-22)

Falsifying Income to Claim Credits: Don’t  invent income to erroneously qualify for tax credits, such as the Earned Income Tax Credit. Taxpayers are sometimes talked into doing this by scam artists. Taxpayers are best served by filing the most-accurate return possible because they are legally responsible for what is on their return. This scam can lead to taxpayers facing big bills to pay back taxes, interest and penalties. In some cases, they may even face criminal prosecution. (IR-2016-23)

Abusive Tax Shelters: Don’t use abusive tax structures to avoid paying taxes. The IRS is committed to stopping complex tax avoidance schemes and the people who create and sell them. The vast majority of taxpayers pay their fair share, and everyone should be on the lookout for people peddling tax shelters that sound too good to be true. When in doubt, taxpayers should seek an independent opinion regarding complex products they are offered. (IR-2016-25)

Frivolous Tax Arguments: Don’t use frivolous tax arguments in an effort to avoid paying tax. Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims Even though they are wrong and have been repeatedly thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes. The penalty for filing a frivolous tax return is $5,000. (IR-2016-27)

Incorporating your Small Business

Houston Tax Attorney

0

Incorporating your Small Business

Why Should you Incorporate?

So you’ve set up your small business or sole proprietorship and you’re ready for business. The last things on your mind are taxes or potential lawsuits. But as they say “an ounce of prevention is worth a pound of cure.” Advantages of incorporating your small business are:

  1. Personal asset protection. The owner(s) have limited personal liability for corporate debts and obligations and generally are only subject to lose their investment in the business, but not their personal assets.For example: an independent cab driver who is sued for negligent driving would be personally liable if the damage exceeds what the insurance would cover. His personal bank account, investments, and other assets are at risk. Now if he had incorporated his business (e.g., L.L.C.), only his business assets would be at risk. His cab, business bank account, etc.
  2. Tax benefits. Losses are fully deductible for corporations, but for a sole proprietorship (i.e., an unincorporated business) his losses may be limited. There are also other tax benefits associated with various forms of corporate entities. Your attorney can determine which type of entity would be best for you.
  3. Business credibility. Adding the magic three letters, Inc. or L.L.C. after your business name adds instant legitimacy and credibility.

How do you Incorporate?

You must file the appropriate documents, such as the certificate of formation or bylaws, with the Texas Secretary of State.

In the certificate of formation, Texas requires the name of the corporation, initial directors (if applicable), purpose, duration, and the name and address of the corporate registered agent. You can choose who you designate as your registered agent, but it is beneficial to appoint your attorney as the agent. With a lawyer serving as the registered agent for your corporate entity, you will have the peace of mind that you will receive timely and prompt notice if your corporate entity is served with a summon and an attorney will be able to immediately to review and assess the lawsuit and provide you with legal advice on how to answer the summons.

LP, LLP, LLLP, LLC, Inc…what do I choose?

There are several ways of incorporating your small business.

Sole Proprietorship

A self-employed individual by default is a sole proprietorship. If you have not incorporated you are operating as a sole proprietor and have full personal liability for your business. Running a business without limited liability protection is like driving a car without insurance.

General Partnership

If you are a partnership and have not incorporated, you are by default a general partnership. Each partner in a general partnership is personally jointly and severally liable for their business liabilities. Owners report their share of income/losses on their own tax return and they are personally liable for their business. Just as a sole proprietorship, this not a recommended form since there is no liability protection for the owners.

Limited Partnership

A limited partnership consists of general and limited partners. General partners have personal liability for business debts but can raise funds without having outside investors manage their business. However, the general partners can limit their liabilities by forming a limited liability limited partnership. Limited partners are also protected from personal liability as long as they do not participate in management of the business. This form is commonly found in companies that invest in real estate because it is more attractive to lenders. Lenders do not like limited liability because it provides them less protection for their investment in your company.

Corporation

Fringe benefits can be deducted as business expenses and owners can split profits among themselves and the corporation. This is generally the most expensive and burdensome to set up. It is rarely recommended for small businesses.

Limited Liability Partnership

This is similar to a limited partnership, except general partners are only liable for their own debts, and not the actions or debts of their fellow partners. This may be a good option for professional services firms where the members operate independently but under the same trade name.

Limited Liability Company

An L.L.C. is a hybrid of partnership and corporation that combines the best aspects of both entities. It offers the most flexibility in terms of operation and tax planning, as well as limited liability protection for all member(s). Also, unlike an L.L.P, an L.L.C. can have just one member. If it is a sole member L.L.C., you can choose to have it taxed as a separate entity or have the income and expenses “flow through” to your personal tax return. This is often the most recommended type of structure for self-employed individuals and small businesses.

The Best Structure for Your Business

Ultimately the best option for incorporating your small business will depend on a number of factors, such as the number of owners, type of business, how the owners wish to allocate business income/losses, long-term goals, whether you will raise capital through debt or equity, etc.

Beware of companies that will incorporate your business for a low fee using cookie-cutter templates. They will fill out the necessary paperwork, but they will not be able to advise you on the best entity formation for your needs. You need a qualified attorney that will review your situation to tailor the best choice for your business.