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Tax Audit Red Flags

At this time every year our tax attorneys are inundated with questions from clients regarding what they should look out for to ensure they don’t send any red flags to the IRS that would trigger an audit.

With the deadline for filing your tax return rapidly approaching, we thought it would be a great idea to ask our tax attorneys about some of the most common red flags that the IRS is looking for when they’re deciding to audit someone. Note: this blog is not intended to be legal advice, and was designed solely to inform the public on common mistakes that lead to tax audits.

Failure to Report all Income

This one seems obvious, but you might be surprised how easy it is to forget to report a source of income.

This is especially true for people who do freelance work. Any company a freelancer does work for is required to send the IRS 1099 and W2 forms that report all the income they earned. They are also supposed to send these forms to you – but it’s not out of the ordinary for these to get lost in the mail, or have incorrect figures on them.

Keeping your own books is crucial to make sure that you’re reporting the appropriate amount, and that someone else’s error doesn’t increase your tax liability.

A typical issue that plagues many high tech workers in the San Francisco Bay Area is the double counting of income from stock options, or employee stock purchase plans that is reported on both W2 and a 1099B from the brokerage house that handles the trades.  Anyone selling stock must make sure to report the sales and take credit for the basis, or gain that has been reported on the W2.  San Francisco tax attorneys are often asked to step in and resolve the erroneous tax bills issued to Silicon Valley employees due to this issue.

Charitable Deductions

This is one of the most common deductions that people take on their taxes; and subsequently one of the most common that people abuse.

The IRS may examine your total amount given to charity in relationship with what you make each year. Then they’ll compare that to what other people in your tax break donate each year. If you have donated much more than people with similar income, this could potentially trigger an audit.

A tax attorney in San Francisco says “I’m sure it’s no surprise to you that documentation is huge for these deductions. If you’ve donated something that isn’t monetary, you need to be able to prove the value. If you have donated money, it’s crucial to get a receipt from the organization you’ve donated to.”

Home Office

One of the most common deductions people get wrong is the home office deduction. The rules for taking the home office deduction are very specific, and can be tricky for people who aren’t professional tax preparers.

One tax attorney in San Jose said “There are a lot of people

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Courtney Love’s Tax Troubles

The former front lady for the band “Hole” has been hit with a $320K tax lien. Courtney Love’s latest financial dilemma mirrors the tax troubles she had in 2014. In fact, she lost a $96,000 judgment in a Los Angeles court this past week. According to the IRS, the widow of Kurt Cobain and co-star of Man on the Moon also had a tax lien filed against her in 2009. While she did pay that amount of $324,335.21 off, the latest round in the financially-challenged singer’s life stems from a tax bill she received for $266,861.01 in 2017.

This past Tuesday, Love was ordered by an LA Superior Court judge to pay $96,000 to Dawn Simorangkir. The latter is a professional fashion designer who accused Love of defamation of character on Twitter. While the initial lawsuit saw the Judge order a payment of $450,000 – Love only paid about $350,000. This resulted in additional fees being assessed for Love to pay to Simorangkir.

Most of Love’s earnings stem from loyalties and other monies from Cobain’s estate. However, the popular singer also made substantial revenue from her acting career and global tours with Hole. Sadly, Love has mismanaged her funds in recent years — putting the blame on unscrupulous accountants.

On a positive note, Love claims to be sober since 2007. The blonde bombshell struggled with drug addiction — especially after the loss of her husband, Kurt Cobain. However, she admitted to Vanity Fair — back in November 2011 — that she had financial troubles even when Curt was alive.

Love stated that up to $250 million of Nirvana’s earnings were lost over the years. Similarly, she said that Kurt was promised $11 million for his — and the band’s — appearance at Lollapalooza. According to Love, she claims that money could not be found — and that too has resulted in her current financial troubles and woes.

In 2012, Frances Bean Cobain — Courtney and Kurt’s daughter — took control of End of Music, LLC. The latter is the company that earns revenue from the deceased rocker’s publicity rights. Frances claims her estranged mother asked her for a $2.75 million loan — from her trust fund — in 2010.

With no end in sight for Love’s financial struggles, a rep for Courtney refused to comment on the current situation.

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Collecting Unclaimed Tax Refunds

hand full of cashEach year, a percentage of taxpayers do not file a tax return. Some choose not to file because they owe money; however, a surprising number of people are due to receive a refund and do not file. Billions of dollars worth of unclaimed tax refunds are amassed every year. It is extremely easy to claim a refund from a prior tax year; however, this must be done within three years of the due date.

Who is Due a Refund

Taxpayers who overpaid estimated tax or those who had more tax withheld than required could be due a refund. Lower-income taxpayers may also be eligible for the Earned Income Tax Credit, which can result in a refund regardless of whether or not taxes were overpaid. Conversely, taxpayers who are behind on child support payments, or have student loans in default may find that their return has been seized by the IRS. However, it is still important to file to avoid breaking any laws and to reduce debt obligations.

Filing a Prior Year’s Return

In order to claim a refund for a prior tax year, a return must be filed. There are a couple of different ways to accomplish this task. The Internal Revenue Service (IRS) has downloadable tax forms for prior years on their website. These can be completed and filed by mail. A tax preparation service can also assist with filing previous year’s returns, for a fee.

Filing Needs

Filing a prior year’s return requires some attention to detail since tax laws and requirements are always changing. Be sure to gather all W-2’s or 1099 forms and other tax documents before starting to prepare the return. For taxpayers who itemize deductions, receipts or other proof of expenses must be gathered and organized. It can be a challenge to locate all documents from a prior year, but with a bit of effort, this can be easily accomplished. Since employers file all W-2’s and 1099 forms with the IRS, this information can be obtained by request.

Taxpayers must file a return on the form from the year they are filing for, for example, if filing a tax return for the tax year 2016, the 2016 forms should be used. Also, the instructions for that year must be followed. If the form is correct, but the instructions are not, the return may have to be filed again. It is vital to file returns for all missing years and to file soon, returns not claimed within the three-year deadline become the property of the IRS.

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Beware: The Latest Tax Refund Scam

You should definitely exercise caution and assume it might well be a scam if you receive an unexpected refund check for your taxes from the IRS, or you notice a deposit has been made in your bank account.

This latest scam works by having the fake refund deposited into a real bank account, after first stealing the financial and personal information of taxpayers to file taxes. The IRS released a statement in the middle of February, warning taxpayers of this latest scam.

Keeping alert is important to avoid being taken in by this scam, as the way in which it is carried out is always changing. At the moment, the scammers contact the unsuspecting taxpayer and pretend to be debt collectors. They point out that the deposit has been made to their account by mistake and a collection agency is seeking repayment of the incorrect amount.

Other versions of this scam reported by taxpayers advise that the taxpayer will be threatened with arrest and charged with fraud unless they pay back the amount they received. Victims are given a phone number and a case number in order to repay the money.

Of course, you really will need to return the money to the IRS if you have a deposit in your bank account that you aren’t entitled to, supposedly for last years taxes. You don’t want to incur the wrath of the IRS or the risk of penalties for not paying it back, making it important to follow these steps.

Returning a Bogus Refund To the IRS

If you received the bogus tax refund deposit by direct deposit, your bank’s ACH, or automated clearing house will need to return the money to the IRS. You should also call the IRS and let them know you have a fake refund amount and are returning it. Businesses should call 800-829-4933, while an individual taxpayer should call 800-829-1040.

You should return any uncashed check to the IRS as soon as possible, if your fake refund was received in the form of a check. You should include a note explaining why you are returning the check, write ‘void’ on the back of the check, avoid bending or stapling the check, and make sure you send it to the appropriate location, as indicated below.

You will need to mail the IRS a personal check or a money order for the amount of the fake refund if you already cashed the check. You should also call the IRS at the same numbers listed above to let them know you are returning the check, and why. You will need to put some key information on the back of the check or money order to make sure it is processed efficiently and as quickly as possible – your taxpayer ID or social security number, the applicable tax year that you are receiving a refund on your taxes, and the words ‘payment of erroneous refund.’ However, you may incur additional interest if you have cashed the check and then

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Ndamukong Suh Complains About Being Heavily Taxed

As one of the most controversial stars in the National Football League, Ndamukong Suh is not one to mince words. In a recent interview with Business Insider, Suh went on record with his displeasure regarding the amount of taxes he is expected to pay as a professional athlete.

A breakdown of the Tax structure

As per the law, athletes in the U.S pay 37% of their gross income as taxes. On top of that, individual states also charge taxes. Players also pay what is commonly referred to as “jock tax”. This is tax paid by an athlete to individual states where the athlete has played during the year. Additionally, taxation also applies to bonuses an athlete earns even if they were competing overseas.

According to Ndamukong Suh, if you factor in all these taxes and add other expenses such as agent fees, close to half of a player’s salary is accounted for before they end up seeing a dime.

Implications of the exorbitant tax structure

According to Ndamukong Suh, an athlete can easily end up broke even if they earn a 9 figure salary with such a tax structure in place.

In Ndamukong Suh’s view, the effects of high taxation also trickle down to family members. Many athletes are bread winners and their families rely on them for a living. With the government taxing athletes at such rates, it is putting the lives of many of their dependents at risk.

The Backlash

As you can imagine, there was a substantial amount of citizens who did not appreciate Mr. Suh’s point of view. One gentleman commented “Let’s assume his income truly is cut in half. That reduced amount is still exponentially more than I could make in my entire life time. I don’t feel bad for him in the slightest, and I think it’s incredibly tone deaf for him to complain about a contract worth well over $100 million.”

Supporters

The response to Suh’s comments was not all negative. In fact, there were multiple people on social media who came out in support of Suh’s statements.

One Facebook user stated “If you take the fame and the amount of the contract out of the equation, this is just a guy who is unhappy that he is losing nearly half of his paycheck to the government. I think that’s something that most of us could relate to, and we should celebrate that a public figure has come forward to initiate a conversation about how heavily we are taxed.”

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Tax Reform Bill Riddled With Errors

Tax code sheetsPresident Donald J. Trump speaks often about his tax reform bill that became law in December of 2017, creating a $1.5 trillion tax cut for a broad swath of American taxpayers. However, the legislation contains numerous unintentional errors that may prevent the bill from having the effects intended.

Our San Francisco tax attorneys believe that dozens of errors made the final edit of the new bill, each of which have the potential to dramatically alter the legislation’s ultimate impact.

Worse, many of the errors occur in the most controversial sections of the law. This could make it more difficult to secure the votes necessary to rectify these unintentional errors.

For example, lawmakers intended to create a short-term tax deduction that retailers, restaurants, and real estate firms could use to deduct the costs of expansion and renovations from their federal tax returns. According to a New York Times report, however, a typo requires these businesses to spread the tax break out over a period of up to 39 years instead of claiming it all immediately, removing the financial incentive for expansion lawmakers intended to include.

Ironically, President Trump’s own real estate empire is expected to be adversely affected by this mistake.

Another error creates an unintentional loophole allowing money managers to get around provisions intended to limit their access to potentially lucrative tax breaks. This will allow them to pay a lower marginal tax rate than typical wage earners on some of their income despite the fact that many money managers are already independently wealthy.

Congress could fix all of these errors by passing a “technical corrections bill” to amend the previous legislation, but Republicans would need votes from Democratic senators to pass it. The original bill did not receive a single Democratic vote, and reports indicate that Democrats are in no hurry to help their colleagues out on this issue.

For instance, Senator Sherrod Brown, D-Ohio, recently told Politico that his party has no interest in fixing the tax reform law’s typographical errors when they feel the law itself is fundamentally flawed. Sen. Brown sits on the Senate Finance Committee responsible for writing tax laws, so his opinion is likely valid for the vast majority of his Democratic colleagues.

Alternatively, the Treasury Department could issue “regulations” to fix some of the errors in the existing legislation. However, experts note that it is impossible to alter the underlying statute in this manner. Any attempt to do so could also invite litigation pertaining to what was actually intended in the legislation, potentially creating a lengthy legal battle.

Lawmakers and taxpayers alike are confused about how President Trump’s reform bill has so many errors in the first place. Legislation typically contains a few typographical mistakes, but the tax reform law has many more than the average bill.

Some experts have argued that the rush to get this bill in front of congress is to blame for the high volume of errors. The last bill to make a comparable number of changes to existing

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