New Higher Business Expense Deduction May Decrease IRS Audits

The IRS often audits small business tax returns with the aim of denying deductions for business expenses, including lodging, meals, and other incidential expenses.

The IRS pursues these audits becuase taxpayers often do not keep adequate recrods to substantiate the deductions that they claimed on their tax returns. This allows the IRS to open audits to look for other issues, with the assurance that the audit will at least uncover "improper" business expense deductions. This is why many taxpayers may benefit from new Revenue Procedure 2006-41 without even knowing about it.

Revenue Procedure 2006-41 raises the per diem rates and it eases the documentation requirements for expenses incurred while a taxpayer travels away from their home.

Generally self-employed taxpayers and employees (whose expenses are not reimbursed) can deduct expenses incurred while traveling away from home for business purposes. However, the deductions for food, beverages and entertainmenet is limited to 50% of the otherwise deductible expense for most taxpayers. These expense deductions are only allowable to the extent that the taxpayer retains sufficient records to prove the amount of the expense.

There are a number of exceptions from these substantiation requirements. For example, employers can offer a per diem allowance rather than reimbursing employees for actual expenses. Taxpayers generally do not have to substantiate payments that meet the per diem rules in order to be entitled to the expense deduction.

The per diem amount has to be equal to or less than the federal per diem rate or a flat rate that does not exceed the actual expenses or the anticipated actual expenses.

If the taxpayer elects to us a flat per diem rate, pursuant to Revenue Procedure 2006-41 (and starting on Ocotober 2006) employers can deduct up to $246 for high-cost localities and $148 for low-cost localities for lodging, meals and incidental expenses (the Revenue Procedure details what localities are high and low-cost localities).

While these rates are still not adequate to cover the reasonable and actual expenses incurred by most taxpayers, it does get a little closer. As such, the IRS might not be as confident about opening IRS audits with the aim of denying business expenses and the hope of finding other issues....

IRS Appeals Arbitration Program

The IRS recently released Revenue Procedure 2006-44, which sets out the rules for the finalized IRS Appeals Arbitration program. This new program presents some new opportunities that taxpayers must consider.

The new IRS Appeals Arbitration program provides yet avenue to appeal factual issues that are cannot be resolved by the IRS appeals process. The program is not available for legal issues, issues that the IRS wants to litigate, and some collection issues. The program is available for factual issues related to rejected offers in compromise and responsible persons for purposes of the trust fund recovery penalty.

Both the taxpayer and the IRS must mutually agree to submit to arbitration and the issues, questions, and amounts can be limited in the arbitration agreement between the IRS and the taxpayer.

The taxpayer may initiate arbitration by submitting a written request, after consulting with the IRS appeals office that is handling the case. The Revenue Procedure specifies that the Appeals Team Manager “will” respond within two weeks (this is somewhat humorous, as it often takes months for a team manager to even return a phone call).

The IRS Revenue Procedure says that IRS refusal to arbitrate is not subject to judicial review (which may or may not be true).

The Revenue Procedure then says that after the IRS okay’s the request to arbitrate, the parties “will” enter into a written agreement to arbitrate. The Procedure does not specify what happens if the parties cannot agree on the arbitration terms.

The parties can then select an arbitrator, which can be an IRS Appeals Officer from a different Appeals Office or an outside third party who is registered with “any local or national organization that provides a roster of neutral [arbitrators].” (Just FYI: I might be willing serve as an arbitrator in this type of proceeding, so please contact me if you need this service). The Revenue Procedure also provides that the IRS and the taxpayer are to pay for the cost of arbitration, regardless of which party prevails.

This new program raises a number of issues. First, this new program seems to be an admission by the government that the IRS Appeals process is flawed. By law, the IRS Appeals Office is supposed to provide an independent third party review. There are even specific prohibitions on ex parte communications between the IRS and the IRS Appeals Office, etc. That begs the question of “why the unbiased third party IRS Appeals Office needs to bring in an unbiased third party to handle an IRS appeal?”

Second, if the IRS and taxpayer agree to enter into arbitration, what happens to the statute of limitations for the IRS to assess additional taxes or for the IRS to collect taxes? For example, the statute of limitations for collecting the underlying tax is suspended if the case is before the IRS Appeals Office pursuant to a collection due process hearing request. Is the IRS going to merely not issue a final determination in the collection due process hearing until after the arbitration hearing in order to extend the statute of limitations for collection beyond what is already provided for? If this is the case, is the IRS going to notify taxpayers about this issue in advance?

Can taxpayers use this program to delay IRS collection efforts? We all know that taxpayers are going to try this, yet the IRS Revenue Procedure does not provide any guidance on this. Does this invite taxpayers to use this new program to delay IRS collections?

By the way, are IRS collection efforts going to be suspended during the time that the arbitration hearing is pending (my guess is that in most cases it will not be suspended).

Third, can taxpayers use the new procedure as a sword and not merely a shield? For example, can taxpayers use the arbitration proceeding to get a ruling that the IRS’s position had no basis in fact or law to entitle the taxpayer to an award of attorney fees? Or can taxpayers get a ruling that an IRS employee has violated our tax laws and/or IRS policy (such as the Revenue Restructuring Act of 1998) which requires that the IRS employee be fired?

Even with these questions, the new program may be helpful for taxpayers who find themselves unable to get a fair appeals hearing because the IRS appeals officer has failed to comply with our tax laws and/or IRS policy. I personally have worked a number of cases where the IRS appeals employees’ have failed to give any consideration to any law or fact (In fact, in one case I had an IRS appeals employee tell me that she would not consider anything that was presented and she was going to deny the taxpayers claim – and that was before the taxpayer had an opportunity to submit any evidence, make any arguments, or even say one word).

While this new proceeding might be helpful in these types of cases, my guess is that the IRS will simply refuse any request to arbitrate in these types of cases – i.e., the types of cases for which the program was intended for.

French Exempt Low Wage Employees from Payroll Taxes: Could it Work in the US?

It is always interesting to hear about how other countries address tax issues.

Like the United States, the French government collected higher than expected tax revenues last year. Where the United States government opted to keep the tax revenues, the French government has proposed to use the tax revenues to exempt minimum wage employees who work for small companies from the French payroll tax.

Perhaps it is not a fair comparison as the French deficit is reported to be only about 3% of its gross domestic product, but exempting minimum wage employees who work for small businesses from US payroll taxes is an interesting proposal.

US payroll taxes really can be onerous for small businesses, especially if the business employs a lot of low wage employees. This is especially true for businesses whose employee’s rely mainly on tips or gratuities or for temporary employment agencies.

Currently the federal payroll tax includes FICA (Social Security and Medicare taxes) and FUTA (unemployment taxes). The FICA tax is 7.65% of the employees’ wages up to $94,200 of wages, which is paid by both employers and the employee. The FUTA tax is 6.2% on the first $7,000 of employee wages, less the state unemployment tax credit of 5.4%.

Congress and the Treasury Department have often commented on the burdens that payroll taxes pose on small businesses. In fact, the IRS recently put forth Form 944 to help streamline the process for a few small businesses (those with less than $1,000 in employment tax liabilities). While this measure does help a few small businesses, it really doesn’t help that many small businesses and it does not help the lower wage employees of those businesses.

The French proposal would help many thousands of small businesses and the tax exemption might very well be much more meaningful for lower wage earners than increasing the national minimum wage.

If the French proposal could pass Constitutional scrutiny here in the US, perhaps it is worth considering....

Tax Resolution Firm Job Posting: The Industry Needs to be Regulated....

I thought that I would share with you this CraigsList post that one of my clients forwarded to me:

TAX RESOLUTION ASSOCIATES

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Tax resolution associates wanted for Boulder financial company. ATTENTION: YOU DO NOT HAVE TO HIT A $25k OR $30k FOR BONUS!!!!!!!!!!!We pay 15% at $15k, 20% at $20k and 25% at $25k. Also you will receive a bonus for hitting $15k, double bonus for hitting $20k and a triple bonus for hitting $25k. We're not greedy like the other companies and we pay our employees well in addition to treating them as professionals. No screaming or yelling at our place of business. Put the emphasis on your clients first instead of pulling money for your company.


Job location is BOULDER, CO
Compensation: $2100 base plus comm & bonus; Salary range $40-96,000.

Note the absence of any qualifications or experience requirements in the job posting. Maybe it is just me, but this is not the type of person or firm that I would want to help my friends or family (or anyone else) with anything -- yet alone a tax problem. While I applaud this firm for not permitting "screaming or yelling at [their] ... place of business," this posting highlights some of the problems in the "tax resolution" industry.

As I have mentioned on this blog before, I often encounter taxpayers who hire "tax resolution" firms to "resolve" their tax troubles only to find that the so-called "resolution" firm (1) merely submit basic forms to the IRS, (2) do not advise the taxpayer of all of their options, (3) fail to respond and/or keep in contact with the taxpayer, and (4) charge the taxpayer several thousand dollars for this "service."

There are a lot of non-lawyer and non-CPA professionals that hold themselves out as "tax resolution experts." There seems to be a few new firms everyday. Unfortunately there is little to no regulation over these firms -- other than bringing civil suits against them, an option that is most often cost prohibitive.

This is particularly troubling because many taxpayers who end up using these firms do so after recovering from several years of financial hardship and all they really want is to come into compliance with our tax laws.

There can be little doubt that this industry needs regulation. Much of the problem seems to stem from these firms working on a volume basis and their paying employees on a commission payment arrangement.

By volume basis, I mean that these firms focus all of their efforts on marketing and very little effort on providing tax related services. One cannot type the word tax into a search engine without seeing these firms' advertisements.

I myself have called a few of these firms to see what services they offer, etc. In one conversation I asked the representative who "had handled thousands of cases," how many tax related court cases he had read recently and whether he could cite any tax code section by number. The answers from this guy were: "tax case, what are you talking about. I don't read tax cases" and "code section, we don't do code sections here." The conversations usually go down hill from there. If you ever get the time and you want a laugh, you should try calling these firms....

As for commissions, it is not proper for anyone to work on a commission basis to help taxpayers come into compliance with our tax laws. The commission work structure incentivizes employees (1) to use hard sale tactics to convince taxpayers to sign up or continue with the firm and (2) to charge up unnecessary hours or expenses or charge outrageously high flat fees.

In an average month I am approached by about five to ten clients who ask me to review their cases as they are not happy with the work a "tax resolution" firm has performed. Upon reviewing these cases I often find that my rates are a fraction of what these other non-lawyer firms charge, and the "service" from the non-lawyer firm was "incomplete" at best (and that is the polite version).

For example, after reviewing cases from these firms I often find that: (1)the IRS did not properly assess the underlying tax therefore no tax was due, (2) the statute of limitations for collecting the tax had long since expired so no tax was collectible, (3) the IRS had recorded the incorrect tax information, when corrected showed no tax due, and (4) the tax liability was fully dischargeable in bankruptcy which puts the taxpayer in the superior negotiating position with the IRS, which was never mentioned in the negotiation process.

The IRS has long complained about these firms as well. In fact, the problem is so bad that IRS employees will often grant huge concessions to taxpayers merely because the taxpayer was formally represented by and harmed by a "tax resolution" firm. Often when I mention that my clients were formally represented by these firms to IRS employees, the typical IRS employee response is "not another ______________ [company] client, that is the ________ [number] of these taxpayers this month."

So I am not sure where that leaves us. Personally I think that it is morally wrong to take advantage of taxpayers when they are just trying to get back on their feet. Maybe someone will read this and start talking to their legislators....