The IRS agrees… to a point. They believe that some business owners are circumventing their responsibilities by filling roles with contractors when they should be filled with employees. The result? A worker classification audit by the IRS to ensure that each business owner is correctly playing the taxes they should be paying (on employees) and not avoiding those taxes (by calling them “contractors” instead).

Moreover, the IRS may run this audit at the same time as a tax audit or it may choose to perform a tax audit afterward, if it feels that there are unpaid taxes to be found.

What is frustrating is the lack of clear rules around what the IRS considers a “legitimate” reason to have a contractor instead of an employee. The rules aren’t always clear. In fact, this Inc. Magazine article by Matt Quinn tries to outline the guidelines the IRS has in deciding whether or not the roles they are investigating should be filled by employees or contractors and it’s clear from the article that it’s not clear to the IRS! (Read the article here).

Check out Quinn’s step-by-step suggestions and make sure you’re ready because the IRS is coming. They’re randomly selecting 6,000 businesses to audit. I believe that if they find enough businesses that are breaking their poorly defined rules, we’ll see even more of these audits in the future.

This is just another way that current tax laws make life uncertain for business owners.

[Image source: Velkr0]

Related posts:

1. The IRS Gets Lazy, Wants You To Self Audit
2. Jerry Seinfeld and His IRS Tax Audit

That’s right! He requested a bribe in exchange for a favorable audit result. Fortunately, the quick-thinking businesspeople met again, recorded the conversation, and brought it to the attention of the authorities.

Coombs was arrested early in June and, if found guilty, could serve up to 15 years in prison. (Read the full story about the us IRS officer being bribed here).

This is a shocking news story but it prompts me to think further. Coombs only started working for the IRS in June 2009. If this was his very first foray into bribery, it took him a total of 11 months. Eleven months! Was this guy not vetted before his job? Did he have a squeaky-clean record and only turned bad in less than a year? Is this, in fact, his first attempt at stealing from taxpayers?

Another thing I’m prompted to think about is this: There are about 120,000 people working for the IRS. This is one story of one tax agent who was caught. How many more are there are operating a successful bribery scam? I’m sure it is incredibly tempting for anyone facing an income tax audit and a lot of money owing to the IRS to instead give a small amount to an agent to make the situation go away.

The last thing I’m prompted to think about: If the businesspeople in the story really do owe $60,000 in back taxes, is the IRS still going to send in an auditor to finish the job? These people did the right thing in the face of a very tempting crime. Their possible reward might be an actual audit!

[Image source: AMagill]

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Everyone hates an audit and one of the only things that makes us feel better about being audited is knowing that the auditor has to look through tons of boring, number-filled receipts to try and squeeze more money out of us.

But now the IRS has just gotten lazier. Much, much lazier.

Thanks to new rules that are currently being explored and discussed, businesses that file taxes will need to list the areas where the IRS might disagree, and those businesses will also need to write in the amount that the IRS will need to be paid if it turns out that the IRS is correct in their assessment.

In short, if these new rules go through, the IRS will basically be asking businesses to do the work for them by requiring them to do a preliminary “self-audit” that will raise red flags for the IRS. That’s like walking up to a thug and saying: “If you hit me here and here, you’ll easily be able to take the $10 I have in my wallet.”

BusinessWeek.com brought this to our attention and they quote one tax lawyer who correctly calls this what it is: a revenue-grab for the IRS. They want to increase their auditor’s efficiencies (who currently spend 25% of their time looking through documentation) and they want to find new opportunities to make money. Instead of using auditors to do the heavy lifting, they are requiring businesses to announce what they could owe if the IRS pressed the issue.

This is terrible news for taxpayers. While it is still currently in discussion and will initially only affect businesses, I can foresee this becoming a widely used tool by the IRS to have taxpayers announce to the IRS: “This is the upper ceiling of what you can audit me for, and here are several ways that you can audit me.”

If this rule goes through, it will be a sad day for American business… And some day it will be a sad day for individual taxpayers, too.

(Image source: John-Morgan)

Related posts:

1. Jerry Seinfeld and His IRS Tax Audit

Here’s what happened

Edith Squillace, of San Pablo, borrowed $3,750 from someone. (Documents don’t name who but we can safely assume it wasn’t a bank. Possibly a friend or family member). Seems like it was a regular loan for the kinds of things that we might all need loans for. Nothing out of the ordinary.

Later, Edith tried to get out of repaying the loan. That is not an unusual circumstance, either.

But here’s where it gets funny: Edith Squillace was an IRS employee. Her job was pretty mundane, actually: She answered tax questions from tax payers. However, in trying to get out of paying back the loan, she committed a felony: She threatened the lender with a tax audit if they didn’t forgive the loan.

Fortunately, the lender knew better than to take Edith’s tax audit threat seriously. Edith was indicted with a charge of attempted extortion by a federal grand jury. It turns out, you can’t use the pretense of your job to extort people (which is something I’m sure most of us knew already).

Now, I freely criticize the IRS and many of their tax enforcement policies, but I can’t hold the IRS at fault for the actions of a foolish employee.

I can only hope that Edith is no longer working for the IRS. And if she is, you can be sure that she’s going to watch what she says when her mortgage is up for renewal!

Read the full tax news article at SFGate.com.

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April 14 tax stress
In the weeks and months leading up to the April 15 tax deadline, you (and most other Americans) will be facing the stress of tax preparation. There’s the effort of gathering paperwork, pouring through difficult-to-understand tax forms, juggling paper and a calculator, and hoping desperately that you don’t have to pay taxes this year. The stress comes from finding the time to do taxes and then from trying to figure out each separate line in your tax return.

April 15 tax stress
No sooner is that stress over then the next stressor appears: April 15 is tax deadline day. Most Americans just barely squeak their tax returns in on time and the stress of trying to get it done and rushing through those last minute calculations feels rushed. Did you get everything? What if you didn’t do something correctly? You vow to do your taxes earlier next year (but who has the time?)

April 16 tax stress
Fortunately, not everyone feels this stress, but many people do. If you owe tax and you have to pay it, guess what: your bank account may be drained on this day to cover the check you wrote for your taxes. That’s stressful as you watch your tiny nest egg now devoured. Goodbye to that new sofabed you were hoping for.

April 17 tax stress
Have you ever played roulette and hoped desperately that the ball lands on your number? April 17 tax stress is the opposite: It’s audit stress. You hope desperate that you don’t get picked for the probing and invasive procedure known as the tax audit. And realistically, this stress doesn’t go away on April 18; it hangs over us like a cloud every single day.

If you’re facing these stresses, you’ll find some good advice for handling the April 14 and April 17 tax stress in this article at CNN Money called “A guide to avoid an IRS tax audit“. And if you want to avoid the April 16 stress, give our office a call.

Related posts:

1. Mark Your Calendars For Tax Payment Deadlines

He’s right: tax audits are not pleasant. Watch the video for a lighthearted take on tax audits:

While you or I can do nothing to completely remove the chance we won’t someday be audited, there are some basic things we can do to make the process less painful, and less costly.

A basic tip, that many folks ignore, is to keep very good records to document any business expenses or home deductions.

What do I mean by “good” records? I mean that they should be complete and well organized. While this may sound simple, it actually takes real effort. This is a task none of us want to do, but it’s best if we do it anyway.

This is another one of the “joys” of being a taxpayer. Thanks IRS!

Related posts:

1. Sobering Odds of Being Selected for and IRS Audit

In my last post I talked about two stunning statistics and referenced that someone was trying to poison Woody Allen. Today, I want to give you some advice on becoming a good statistic.

On the IRS statistics page, the government writes the following (and I’m just quoting selected passages to keep you from falling asleep):

“An estimated 2.7 million U.S. adults in 2004 had gross assets of $1.5 million or more. In total, these top wealth holders owned nearly $11.1 trillion in assets.”

“57.0 percent of top wealth holders were men, while just under 1.2 million were women”

“Women’s portfolios contained a greater proportion held in personal residences and publicly traded stock than those of men. Conversely, men’s portfolios were made up of proportionately more closely held stock and business assets. In each wealth and age class, male top wealth holders had a higher ratio of debts to assets than female top wealth holders.”

And, in a spreadsheet from the same page entitled “Top Wealth Holders by State of Residence”:

There are only 1000 people in Alaska and North Dakota who each have over $1.5 million in net worth.

Not surprisingly, there are 428,000 wealth holders (+ $1.5 million) in California and 199,000 wealth holders in D.C.

And, in a spreadsheet from the same page entitled “Top Female Wealth Holders by Age”

There are 303 wealth holders under 50 and 410 between the ages of 50 and 65.

More Sobering Statistics:

You have one chance in 280,000 of being struck with lightning (according to the National Lightning Safety Institute)

You have one chance in 146,107,962 to win the Jackpot in Minnesota’s Powerball (MN state lottery)

You have one chance in 100 of having your tax return examined by the IRS (IRS.gov)

These statistics help you create a profile about developing lifestyle and career goals that can align you with some of America’s wealthiest people:

1. In today’s economy, you need to be a wealthy woman, since the wealthy men’s portfolio is now worth about half of what it was a year ago.
2. And, it wouldn’t hurt to be between the ages of 50 to 65.
3. If you want lots of peers, become an actress and move to California or become a politician and move to D.C. If you want to be one of the wealthiest people in the state, become a hunter or trapper and move to North Dakota or Alaska.

You probably shouldn’t gamble if you want to keep your wealth, and you’re probably okay to be outside when it’s raining. Remember, I’m here to help if you need me.

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