Innovative Strategies For Winning Tax Controversies, Business Structuring And Estate Planning

Topical Questions On Tax Law

I provide answers here to questions I am frequently asked about tax law and businesses for your information. For legal advice, call my office, Ronald J. Cappuccio, J.D., LL.M. (Tax), in Cherry Hill at 856-665-2121 or text me at 856-745-4330 for an appointment. You may also email me to schedule a consultation.

Should I hire a tax attorney or a ‘tax resolution’ company?

My company owes back taxes (payroll) to IRS and EDD, and I am getting calls from these tax resolution companies. Can someone please tell me the differences between a tax resolution company and a tax attorney? My gut says to go with a tax attorney but would appreciate an unbiased comparison (unless tax resolution companies are truly that bad).

The answer is simple. Tax attorneys have a bachelor’s degree and a Juris Doctor, pass the bar examination and have usually completed a Master of Laws in taxation (LL.M.). Tax attorneys are the true experts in taxation law and fighting the IRS. Unfortunately, tax attorneys are not allowed to solicit and make grandiose claims like the so-called “tax resolution” companies filled with nonlawyers. If you were having surgery, wouldn’t you want the best trained, most experienced surgeon you could get?

Retain a tax attorney!

When should a tax attorney get involved in the tax audit process?

I just received a notice that my business is being audited by the IRS. I am afraid that if I hire a tax attorney the IRS will think I have something to hide. Can’t I just wait until the audit is done and have the attorney file any appeals or go to court?

STOP!!! First, revenue agents expect to have tax attorneys leading the audit team in large business audits, and tax attorneys are frequently involved in small and midsized business audits. Anyone who tries to convince you not to be represented from day 1 does not have your best interest in mind.

I never let my client meet or talk directly with the IRS (without me being present.) There is nothing a taxpayer, or its controller/CFO can say that will help the case. That is why I like to conduct the audit in my office, away from the business and taxpayer. The company’s accountant and I sit in with the auditor, and all requests must be in writing.

For large business audits, the IRS sends a “team” to the initial meeting. Typically this includes the revenue agent, manager, IT person, appraiser and subject matter specialists. I lead the team in an isolated conference room with the company’s CPAs, CFO and any technical support.

If you receive a notice of audit, call me right away!

I want to start a new business. What should I do?

A limited liability company is the most flexible form of organization for both tax and business purposes. Most likely that would be a smart choice. First, if set up right by a good tax and business lawyer, the LLC can add a layer of protection that can insulate your personal assets from business liabilities. (Please note this is not perfect and if you personally perform an intentional act, or have personal responsibility – such as driving a company-owned vehicle and getting into an accident, you will have personal liability.)

The LLC can be established to be a disregarded entity for federal tax purposes. This means you would file a Schedule C with your 1040 Income Tax Return, the same as a sole proprietorship. When you start a new business, you should always obtain legal advice, so the cost of forming an LLC versus a sole proprietorship is well worth the cost.

My new husband owes past taxes. Am I liable?

Technically, no, but if you and your new husband file jointly, the IRS can take the entire refund due, even the part owed to you. You can file an “Innocent Spouse Claim,” but that is cumbersome and lengthy. I would suggest that you file married filing separately. Also, reduce the withholding taken from both you and your new husband (file a new W-4 with your employer.) This will lessen, or hopefully eliminate, any refund. Check with your tax preparer concerning how many exemptions you should take.

Can taxes be discharged through bankruptcy?

Personal income taxes that were filed or due (whichever is later) more than three years from the date of filing the bankruptcy petition can usually be discharged. “Trust fund” or civil penalties (for an employer, withholding or sales and use taxes) are usually not dischargeable.

Who’s liable?

Can an officer of a legal corporation be held responsible for sales tax collected after the business was sold? The corporation has since been dissolved.

It is possible that an officer may be liable. The reason is most states require sales tax to be determined and paid on an accrual basis (even if the company is on a cash basis). Therefore, an officer may be liable when the item is sold or the tax is actually collected.

The IRS has filed a levy against my wages. This is from my 1992 tax return. Has the statute of limitations run out on this?

The statute of limitations on collections by the IRS is 10 years from the date of filing or the date the return was due, whichever is later. This can be extended by bankruptcy, consent or filing a request for an offer in compromise. You should immediately review this with a tax attorney.

I just received a bill for $4,000 for cigarettes I ordered online seven years ago. Is there a statute of limitation on that?

Were these for personal use? If so, and if you filed a New Jersey Form 1040, that is also a USE tax return. Therefore, there would be a three-year statute of limitation from the date of filing. You should contact a tax lawyer to handle this matter for you.

The IRS claims I owe $20,000 in back taxes. I am unemployed and have no assets. Can they put me in jail?

No. The failure to pay taxes is usually not criminal. In law, there are always exceptions, but this should not be a concern for you. The first thing you should do is contact a tax attorney. The tax attorney will review the documents and determine at what stage the IRS collection has progressed. By hiring a tax attorney, the IRS will speak with the attorney and not you. This will protect your rights.

What are the advantages and disadvantages between LLC and owner-operator for a truck driver? When becoming LLC, is workers’ compensation required?

A limited liability company adds an extra layer of legal protection. Nevertheless, if you are the driver and are in an accident, you will be sued. But, if you are not the driver, the LLC would be sued and you may POSSIBLY avoid personal exposure. In New Jersey, you may opt-out of workers’ compensation insurance for you in the LLC.

I want to start an LLC In New Jersey. Can you help me?

I am considering starting a website that matches manufacturers with stores in the U.S. Everything will be done online and through email. I will be paid a commission from manufacturers based on the total sales of a successful match. I would like to form an LLC. Do I need to register or do anything in other states? The manufacturers and chain stores are located all over the U.S.

First, you have a nice idea but it is already being done by large companies such as Walmart and independents. You should investigate the marketplace before entering the business. Also, you might be classified as providing “information services.” This may be subject to sales tax in New Jersey. Therefore, you should consider setting up the LLC in another state.

How does taxation work if I am on a talk show with advertising?

I host a radio show on BlogTalkRadio, and I do it from my apartment. I have not registered it as a business, because I do not own BlogTalkRadio, but I do host a show on it. If people pay me to advertise on my show, should I get that taxed when I receive those payments or wait until the end of the tax year? Also, is it considered a business if I am running it out of my apartment, but do not have documents saying it’s a business? Am I allowed to write off certain business expenses?

Yes, you are in business. Your classification is a “sole proprietor.” You will need to file a Schedule C on your U.S. Form 1040 and attach it to your state income tax return. You should establish a separate business checking account. Deposit all advertising and other income into the business account and pay your business expenses from this account. You should consider getting Microsoft Money or QuickBooks to keep track of your expenses. Formerly, having had a radio talk show, I know how interesting it can be and also how difficult it is to get established. Good luck with your show!

Can you help me with an aircraft sales tax question?

In New Jersey, is the “casual sale” of an aircraft between two individuals (with no dealers involved) still exempt from sales tax or has that the law changed? State Bill S-2210 from 2005 was going to resend the exemption; I don’t know if it ever became law.

Sales of an aircraft to a NONRESIDENT, who does not operate a business in New Jersey and who will not hangar the aircraft in New Jersey for 12 months is exempt.

Will my son go to jail for unpaid taxes?

My son owes $60,000 in past IRS taxes. He needs to pay it by Oct 29, 2007. What can he do to stay out of jail? No way he can come up with that much money.

Owing taxes to the IRS is not criminal. Therefore, the IRS cannot put your son in jail just because he owes money to the IRS. The best thing your son could do is to immediately hire a tax attorney to negotiate with the IRS. Rather than your son speaking with the government, the tax attorney will represent him.

To operate as a sole proprietor, will I be required to complete a certificate of formation or any other legal form to open a bank business account?

If you operate under your own name, you do not have to file a certificate of formation. You would simply complete an SS-4 with the IRS to get a taxpayer identification number and Reg-1 with New Jersey. You should consider discussing this with a tax and business lawyer. A limited liability company is usually the entity for operating a business.

When someone owes the IRS unpaid, withheld employment taxes and the IRS has been retaining the personal income tax refund due to the taxpayer, how is the 10-year statute of limitation determined?

The answer depends on whether you are a sole proprietor or a corporate or business officer. If you are a sole proprietor, the 10-year statute of limitations on collections starts from the date the 941 Tax Return was filed or due, whichever is later. If you are a corporate officer, the IRS can assess a tax as a “responsible person.” The statute of limitations on collections begins to run from the date of assessment against you, not the date against the corporation. You should contact your tax lawyer for guidance.

Can you answer a question about someone else doing our taxes?

My husband hired a woman who works out of her home to keep his books for his two companies. She is not a licensed accountant, but yet she charges him $3,000 a month and does his taxes, but then states that it is SELF-PREPARED like she never did them. Like my husband prepared them. Isn’t this illegal?

This is not technically tax fraud. The tax return preparer MUST sign the returns she prepares. SHE is subject to preparer penalties. It sounds like you are paying a lot for the services. You should call your attorney to review the work and to determine if the bookkeeper is legitimate. Unfortunately, I have seen many clients who have had poor work done for them, and it was only discovered when they received the IRS audit notice.

My fiancé owes the IRS. If we get married, will this affect me? He collected these debt years before we got together.

You are not liable for the debt of your fiancé when you get married. Nevertheless, if you file a joint income tax return, the IRS will keep any refund even the part that should be yours. You would then have to file to try to get the money back. The smart thing to do is for you and your fiancé to discuss this with your tax attorney right away.

Can the wife’s property be liened for the husband’s tax debt?

No, a wife’s independently owned and acquired property cannot be attached by a federal tax lien. Please note, if the property is in JOINT names or was transferred from the husband, the IRS can seek to impose a lien or transferee liability. You should talk to your tax lawyer about this.

Can we give independent contractors a W-2 instead and not have to offer them benefits?

Giving an independent contractor a W-2 makes them an EMPLOYEE. You MUST withhold federal and state taxes, and provide the benefits you give to other employees in similar circumstances. Frankly, most businesses would prefer to operate with independent contractors rather than employees. The workforce also likes the additional deductions. DO NOT DO THIS before you talk to your tax attorney.

What about capital gain on a vacation property?

I currently have two homes. I moved into my primary residence in Hillsborough, New Jersey, 14 months ago, but can no longer afford the expenses due to personal circumstances. I also have a townhouse in Point Pleasant, New Jersey, which I purchased seven years ago. I will lose about $50,000 on the Hillsborough property if I sell it now but may make over $250,000 on the Point Pleasant property. Will I get creamed by the IRS in capital gains taxes if I roll that money into a more expensive home OR pay off my mortgage in Hillsborough?

If your townhouse was your principal residence prior to acquiring your Hillsborough property, you are in luck! If you have a property that is your principal residence for two of the past five years, it can have $250,000 excluded from capital gains tax. My suggestion is you talk to your tax lawyer to make sure your Point Pleasant townhouse is your principal residence and meets the requirements of the Internal Revenue Code.

After the government has seized property for a tax auction, who is responsible for the remainder of the mortgage loan?

Normally, a federal tax lien is like any other judgment. Presuming the mortgage was recorded prior to the tax lien, the person buying the property would take the property subject to the mortgage. The mortgage company could also sue any of the note signers. Because this is such an extremely fact-sensitive matter, you should immediately speak with a local tax attorney.

Should I file my taxes if I owe money but cannot pay?

What would happen if I do not file taxes after I found out that I owed money. I didn’t go through the process because I knew I would not have the money to pay the taxes and the accountant.

ALWAYS file your tax returns on time. First, failure to file causes a 5% per month penalty (up to 25%) and failure to pay is 1/2% per month (up to 25%). Further, the statute of limitations on assessment and collection does not start running until you file your return. You should hire a tax lawyer to help you negotiate an installment agreement or any other collection remedy.

How do I start a business with a partner?

I am interested in starting a business with a partner. We will try to get an SBA loan. I have sufficient collateral but need equity (cash). The total loan needed is $1 million. The problem is that I need $200,000 cash for equity from a partner. They will not have much to do with running the business. I have the relationships to guarantee the business. What is fair in terms of ROI to partner and possible ownership in the business. They will be a silent partner in a business that will net $1 million yearly. Can you help provide insight or guidelines to move forward?

This is the traditional problem in a new business “what is the return to a capital investment vs. the operating people.” Frankly, in my experience, there is a high likelihood that both sides will ultimately feel cheated. The investor will say “I took all of the risks, why shouldn’t I get the reward.” The operating person says “I did all the work, why shouldn’t I get all the reward.” There are several possible creative solutions. One is to simply borrow the money from the investor. This will provide a fixed (and probably high) rate of return without having to deal with the equity issues. Another way is to provide a higher rate of return to the investor until the investment is paid back, then the rate of return is reduced. You need a good tax and business attorney to help find a solution. I hope this helps!

How can I find a pro bono attorney in South Jersey for a small church in need of a lawyer?

Tax attorneys who perform services for nonprofit organizations and churches need to be paid for their services. Every nonprofit takes the position because they are nonprofit and they would love to have free services. Unless you have a church member who is a lawyer with nonprofit expertise, I would suggest that you realize your church needs to hire an attorney.

What do I do if I have never filed for taxes?

The failure to file tax returns means the statute of limitation on assessment and collection never begins to run. Even 20 years from now, the IRS can assess, audit and collect taxes since you did not file. Because the failure to file tax returns for three years or more creates a presumption that you WILLFULLY failed to file, you could be criminally charged. You should immediately call a tax lawyer (not an accountant). You will have an attorney-client privilege.

Can the IRS keep my refund?

Can the IRS keep my refund if I file jointly with my wife who owes unpaid student loans from before we were married? She does not work now, and our joint return shows no income. What are my options?

The IRS will keep your refund unless you file an Innocent Spouse Claim. This is a problem with all joint returns where one of the taxpayers owes the IRS. You should seek the help of a tax attorney.