Tuesday, December 30, 2008

Adult Film Star Janine Sentenced to Six Months in Prison.

On July 17, 2008, the adult film star known as “Janine” (Janine Lindemulder) was charged with a misdemeanor count for willfully failing to pay tax (a violation of Internal Revenue Code section 7203). In August she pleaded guilty to the charge. Yesterday, the District Court of Oregon sentenced Ms. Lindemulder to six months in prison followed by one year of supervised release which could include up to six months in a halfway house.

Because the section 7203 willful failure to pay tax is a misdemeanor, we knew the prison sentence would be less than one year (a crime becomes a felony when the potential sentence carries potential prison time of more than one year). However, she likely received a reduction in her sentence under the United States Sentencing Guidelines for “acceptance of responsibility.” This means that if she had forced the case to trial and been convicted, she likely would have received a longer sentence. Keep in mind that while her sentence is only six months and she is likely to serve her time in a minimum security prison camp, it is still six months in prison.

In light of the more serious charges dealt with by Janine's celebrity counterparts: Richard Hatch (of CBS’ “Survivor fame) and Wesley Snipes (“Blade” movies) and the Joe Francis (creator of the “Girls Gone Wild” video series) prosecution, Janine Lindemulder’s sentence is not much of a surprise.  What these prosecutions show is that the IRS and Department of Justice are not deterred by celebrity in enforcing the tax laws.

Related news articles: here, here and here.

Monday, December 29, 2008

IRS Appeals – The Appeal.

The IRS appeals process is not terribly mysterious. The proceedings are informal. The taxpayer or representative meets with the Appeals Officer, they sit across the table from one another and discuss the facts, the proof of those facts, the law and whether the law supports the taxpayer or the IRS.

The facts of a case are fixed, how those facts are proven, however, will vary from case to case. Perhaps the taxpayer had the foresight to keep detailed books and records. Perhaps more unconventional documents will be needed to establish certain facts. If the taxpayer has witnesses that would testify on their behalf, those witnesses could provide affidavits attesting to the truth of the taxpayer’s position.

Based on these aspects of a case, the taxpayer and appeals officer will likely find some basis on which to settle the case. Any such settlement will be agreed to and documented by the IRS and taxpayer. Following that documentation, both sides will be able to rely on the settlement in any situation related to the years and items at issue in the case.

Friday, December 26, 2008

Friday's Tax Quote

“If you drive a car, I’ll tax the street.
If you try to sit, I’ll tax your seat.
If you get too cold, I’ll tax the heat.
If you take a walk, I’ll tax your feet.
Well, I’m the taxman.
Yeah, I’m the taxman.”

- The Beatles (“Taxman”)

Monday, December 22, 2008

IRS Appeals – Deciding Which IRS Letter to Appeal.

Following an audit, the IRS auditor will issue a 30-Day Letter outlining the IRS’ position on an asserted liability (and creating a right to appeal) before issuing the more formal 90-Day Letter (creating the right to appeal via a Petition the Tax Court). However, a taxpayer may request that the 30-Day Letter procedure be bypassed and that a 90-Day Letter be issued promptly. Alternately, if the taxpayer ignores the 30-Day Letter, the auditor will issue a 90-Day Letter.

Appealing after receiving a 30-Day Letter may be advantageous because it does not start a Tax Court proceeding. If additional information is submitted with the Protest, the auditor may make additional favorable adjustments before transferring the case to the IRS Appeals Division. These additional adjustments may eliminate the need to appeal the case. Moreover, while the appeal must be filed within 30 days, the auditor can retain the case for further consideration while the right to appeal can be preserved.

Appealing a 90-Day Letter may be advantageous because it may lead to a more speedy resolution of the case. Appealing a 90-Day Letter requires filing a Petition with the Tax Court. A Petition to the Tax Court will first transfer the case to the Appeals Division (if not already considered in Appeals). However, after a Petition to the Tax Court is filed, the Appeals Division will only have jurisdiction over the case for a limited timeframe. At the latest, once the Tax Court places a case on the Trial Calendar, Appeals is supposed to transfer the case to IRS attorneys and may no longer have power over the case. The limited time in which to act can be an incentive for the Appeals Division to resolve a case more quickly.

Conversely, when a 30-Day Letter is appealed, the Appeals Division obtains jurisdiction over a case without the pressure of a pending Tax Court trial. This may result in a lower prioritization of the case and it may take longer to have an appeals settlement conference.

In deciding whether to appeal the 30-Day or 90-Day letter, the factual backdrop of a case should be considered. If time considerations require a quicker resolution to a case, appealing the 90-Day Letter may be appropriate. However, as I wrote in a previous post, if a taxpayer wants to position him or herself to make a later claim for attorney’s fees, the 30-Day Letter must be appealed.

Friday, December 19, 2008

Friday's Tax Quote

“A tax can be a means for raising revenue, or a device for regulating conduct, or both.”

- Felix Frankfurter

Wednesday, December 17, 2008

IRS Appeals – The Right to Appeal Following an IRS Audit.

A taxpayer has the right to request a conference in the IRS Appeals Division following a tax audit and the issuance of an audit report (i.e. a 30-Day Letter or a 90-Day Letter).

A 30-Day Letter constitutes the auditor’s outline of items on a tax return that are under attack. A taxpayer can request an appeals conference after receiving a 30-Day Letter by filing a Protest of the proposed adjustments with the auditor within 30 days of its issuance.

A 90-Day Letter (a.k.a. Statutory Notice of Deficiency) constitutes a formal IRS determination of a tax deficiency. The 90-Day Letter may be appealed by filing a Petition to the United States Tax Court. The Petition begins a proceeding in the Tax Court, however, if the matter has not yet been considered in the Appeals Division (following a 30-Day Letter), the case will first be sent to Appeals. The Petition must be filed within 90 days of the issuance of the 90-Day Letter.

A protest of a 30-Day Letter or Petition following a 90-Day Letter can either be (1) a “skinny” document that simply satisfies the formal requirements of an appeal or (2) or a “fat” document that details a wealth of information and a thorough explanation of why each issue should be decided in favor of the taxpayer. The decision to file a skinny or fat Protest/Petition is largely a strategic decision that turns on the nature of the case and complexity of the issues in the case.

Friday, December 12, 2008

Friday's Tax Quote.

“Almost all taxes on production fall finally on the consumer."

- David Ricardo

Tuesday, December 9, 2008

The IRS Appeals Process

A taxpayer has the right to appeal the results of an IRS tax audit. There are two principal ways that taxpayers end up in the Appeals Division following an audit. Generally this right arises after the taxpayer receives one of the following:

1. 30-Day Letter (an audit report giving the taxpayer 30 days to file a written protest of the audit results), or
2. Statutory Notice of Deficiency (also known as a 90-Day Letter that formally asserts a deficiency in tax).

When deciding whether to appeal the result of an audit, a taxpayer should consider that the Appeals Division settles approximately 90% of the cases before it. This is largely because the Appeals Division has broader settlement authority than an auditor. An auditor can only resolve a case based on the law as applied to the facts. An Appeals Officer, however, can settle a case based on the “hazards of litigation” that a case presents.

The rule governing appeals settlements is: “Appeals will ordinarily give serious consideration to an offer to settle a tax controversy on a basis which fairly reflects the relative merits of the opposing views in light of the hazards which would exist if the case were litigated.” It is important to note, however, that no settlement will be made based on the nuisance value of a case.

During an appeal, if a taxpayer makes a good faith but unacceptable offer to settle a case, the appeals officer should respond in a manner that gives the taxpayer an idea as to what would constitute an acceptable settlement.

Ultimately, the appeal of an audit is a settlement negotiation. The negotiation turns on the law, the facts and the relative risks of pushing the case into litigation. It is up to the taxpayer, or representative, to explain the merits of the particular case in a way that encourages settlement.

Friday, December 5, 2008

Friday's Tax Quote

“Unquestionably, there is progress. The average American now pays out almost as much in taxes alone as he formerly got in wages.”

- H.L. Mencken

Wednesday, December 3, 2008

Recovering Attorney’s Fees and Costs from the IRS – Part 2

One of the requirements of recovering attorney’s fees in a tax case is that the taxpayer must have exhausted its administrative remedies. To exhaust administrative remedies, the taxpayer must participate in an IRS Appeals conference before a Petition is filed with the Tax Court. This opportunity is often missed because an audited taxpayer is often unaware of the requirement or procedural right to an appeal.

At the end of an audit, the IRS auditor will issue an initial report that outlines the additional tax that the auditor believes is due. This letter gives the taxpayer a 30 day time frame in which to appeal a case. As an acknowledgement to the creativity of tax professionals, this letter is known as a “30 day letter.” Submitting additional information after the issuance of a 30 day letter may result in additional reductions in the asserted tax, but only a written protest requesting an appeals conference will have the case transferred to the IRS appeals division.

If the 30 day letter window to appeal expires, the auditor will issue a Statutory Notice of Deficiency giving the taxpayer 90 days to file a Petition to have the case heard in the Tax Court (the Statutory Notice of Deficiency is also known as a “90 day letter” – again, clever).  Unless an appeal has already happened, filing a Petition with the Tax Court will also cause the case to be transferred to appeals.
Unfortunately, if the 30 day letter appeal option is missed, an audited taxpayer will not be considered to have exhausted its administrative remedies and, as a result, will be unable to recover attorneys fees regardless of the successful outcome of the case.  Appealing the 90 day letter is not enough because (even though the case will go to appeals before actually going to the Tax Court), the rules on collecting attorney's fees require that the taxpayer goes to appeals before filing a Peition with the Tax Court. 

The message? If you are audited and have a good case, the taxpayer should consider challenging the case in appeals following the 30 day letter rather than waiting for the 90 day letter. Note, there may be strategic reasons for ignoring the 30 day letter appeal period and waiting to file the case in the Tax Court after a 90 day letter.  The point to remember, however, is that the 30 day letter vs. 90 day letter appeal right should be deliberately considered.

Monday, December 1, 2008

Recovering Attorney’s Fees and Costs from the IRS.

It may be a little known fact, but, in certain circumstances, an audited business or individual may recover attorney’s fees and costs from the IRS/United States if it successfully challenges a case into the Tax Court process.

To do so, the taxpayer must be a “prevailing party” and the government must not have been “substantially justified” in its position. If the taxpayer is a prevailing party it must also satisfy the requirements of Internal Revenue Code section 7430. This means that the taxpayer must have:

(1) exhausted its administrative remedies,

(2) substantially prevailed in the controversy,

(3) satisfied certain net worth requirements at the outset of the case,

(4) not have unreasonably protracted the proceedings and

(5) the amount of the costs must be reasonable.

All of these requirements must be met to recover attorney’s fees. If the taxpayer does not satisfy all of them, it cannot recover fees and costs.

Friday, November 21, 2008

Friday's Tax Quote.

“The power to tax the exercise of a privilege is the power to control or suppress its enjoyment.”

- William O. Douglas

Monday, November 17, 2008

IRS Financial Reporting Suffers from Serious Internal Control Issues.

The GAO (Government Accountability Office) has reported, with an obvious sense of irony, that the IRS financial statement process is in need of work. According to the GAO report “serious internal control and financial management systems deficiencies continued to make it necessary for the IRS to rely on resource-intensive compensating processes to prepare its financial statements.” Moreover, the internal controls used by the IRS do not give sufficient assurances that losses, misstatements, and noncompliance with the law would be prevented or detected on a timely basis.

What this means is that the IRS is spending extra manpower, time and taxpayer dollars to make sure that its financial statements are correct. While the GAO noted a number of strides the IRS has made to update the process, the outdated and obsolete systems used “could have serious implications on [the GAO’s] ability to determine whether IRS’s financial statements are fairly stated.”

Friday, November 14, 2008

Friday's Tax Quote.

“Taxation is, in fact, the most difficult function of government and that against which their citizens are most apt to be refractory.”

- Thomas Jefferson

Wednesday, November 12, 2008

A Trip Through the IRS Audit, Appeals and Court Procedures

When dealing with an IRS audit, my clients often ask: What is the IRS going to do?  What happens next?  What happens if we don't agree with the position that the IRS is taking?

Certainly, some IRS procedures are counter intuitive and can be confusing.  However, the movement of a case from the start of an audit, through appeals and into the court system does not have to be confusing.  At least not if you have the flow chart below.  I have had this flow chart for years.  It was handed down to me by someone who said that it came from an old IRS publication.  Whether it is old doesn't matter, because it is still accurate and clearly explains how a case moves through the audit/appeals/court process.

So, if you are currently going through an audit and what to know what happens next or how far you can challenge the case, look at the flow chart below. 

Tuesday, November 11, 2008

Veteran's Day

On November 11, 1918, an Armistice was signed bringing an official end to World War I. This Armistice Day concluded an unfortunate chapter in world history with peace. Sadly, the peace did not last. Following World War II, Armistice Day was renamed Veteran’s Day to honor all U.S. Veterans that have served in the Armed Forces.

It is on this day that we honor their service and have the opportunity to say thank you. So…Thank you.

*photo courtesy of Meghan Arnold - accidentalwisconsinite.blogspot.com

Monday, November 10, 2008

Choosing the Right Representative to Help with Your Tax Problems

Choosing the right person to help you sort out the tax problems that you or your business is facing shouldn't be as hard as solving the tax issue itself.  Navigating the sea of tax professionals can, however, be tricky.  To help people sort through some of these issues, I have recently written a guest post for the Tax Guy blog.  The post, aptly titled "Choosing the Right Representative to Help You with Your Federal Tax Problems", is part of a series by the Tax Guy he prepared on choosing tax professionals in a variety of situations from return preparation to tax controversies.  The discussion on the topic can be found by clicking here.

Friday, November 7, 2008

Friday's Tax Quote

“We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. ‘At least,’ as one man said, ‘there’s one advantage about death; it doesn’t get worse every time Congress meets.’”

- Erwin N. Griswold

Wednesday, November 5, 2008

Sales Tax- Challenging Successor Liability

If successor liability is asserted against the successor business, the challenges are similar to those of dealing with an initial tax liability. There will likely be a determination of the amount for which the buyer could be liable. This provides an opportunity to resolve the issue before the Department determines that a successor should be responsible for the tax. The analysis will include a consideration of the amount of the purchase price that was paid, the amount of the tax due by the predecessor and possibly whether statutory requirements for a Sales Tax Clearance Certificate were satisfied. If the opportunity to resolve the matter with the Auditor is unsuccessful or missed, the same or similar issues can be addressed at the Resolution/Appeals Unit of the Department of Revenue.

When dealing with successor liability for Wisconsin sales or use taxes, the best method for resolving an issue is to avoid having it in the first place. Where that is not possible, it is important to respond and react to the Department of Revenue’s actions to provide the broadest variety of resolutions possible. There are, however, several opportunities to try and resolve the debt before it becomes final and it is always a good idea to take advantage of the procedures in place to solve existing or potential problems.

Tuesday, November 4, 2008

The Next President: Barack Obama

Barack Obama has won the 2008 U.S. Presidential Election. Congratulations are certainly in order. He has certainly accomplished something that few before him have been able to do.

As a tax lawyer, I am most interested in what the Obama administration will bring to the tax laws, tax policy and tax administration. Throughout his campaign he has made promises about certain changes in tax policy that he would like to see in place. With the democrats in control of both the legislative and executive branches, I expect that we’ll see some swift changes (including to the tax laws) in his first 100 days. I am looking forward to seeing how those changes take shape.

Don't Forget To Vote.

Today is an important day for our nation.  It is the day on which we choose those who would lead us for the next four years.  Regardless of your politics and whether you find social, economic or tax policy the driving force in the decision on whom to vote for, it is important that you make your voice heard.

Monday, November 3, 2008

SALES TAX - Successor Liability - Collecting the Unpaid Tax of a Predecessor Business

When the purchaser of a business faces the prospect of successor liability for Wisconsin Sales taxes, he or she (or it) may complain that the business first owing the tax should first be liable for the unpaid debt. This certainly seems like a reasonable complaint that is addressed in the Wisconsin Administrative Code.

The Administrative Code provides that the Department of Revenue should direct its collection efforts against the party that originally owes the tax. Case law has determined, however, that the party that originally owes the tax means the business that charged the sales tax in the first instance. It is this business that is the predecessor. Predecessor does not include any individuals that could have been personally responsible for the payment of the tax under the personal liability provisions of the sales tax statutes. That is, the Department of Revenue does not have to pursue the prior owners, officers or employees of a business that could be or are personally responsible for the predecessor’s taxes. While they must go after the predecessor business before seeking to collect the tax from the successor, the Department is under no obligation to pursue personal liability from the owners of the predecessor before seeking to recover from the successor business.

A practical reality is that the selling business is often no longer in business and therefore has no cash or assets available to pay the tax. Therefore, often the only real resort is ultimately to collect the unpaid sales tax from the successor.

Friday, October 31, 2008

Friday's Tax Quote

“You have to be oblivious to common sense to believe that taxing people who do work and paying people who don’t work results in more people working. That’s just not the way the world works.”

- Arthur B. Laffer

Wednesday, October 29, 2008

SALES TAX – Obtaining a Sales Tax Clearance Certificate

When someone buys a business, he or she (or it) faces the prospect of becoming liable for any unpaid sales tax liability of the predecessor business. The Wisconsin Statutes provide a procedure to obtain a Sales Tax Clearance Certificate which will limit the successor liability for sales taxes to that amount determined by the Wisconsin Department of Revenue. The procedure requires that a portion of the purchase price be withheld to pay any potential sales tax liability and that certain disclosures be made to the Department. Doing so sets in motion a fixed timeframe in which the Department may make the determination as to the amount of any additional sales tax owed by the seller.

The Sales Tax Clearance Certificate can only be requested or received following the sale of the business. This is because the Department of Revenue is looking for a final end date as to when any sales tax obligations of the seller would cease.

To obtain a Sales Tax Clearance Certificate, the buyer of the business should make a written request for the certificate and provide the following information:

1. The name of the seller

2. The seller’s permit number of the seller

3. The current mailing address of the seller

4. The name of the buyer

5. The seller’s permit number of the buyer

6. The mailing address of the buyer

7. The date of the sale

8. The sale price

Furthermore, it is prudent to include information concerning the amount of the purchase price that has been withheld to cover any additional sales tax due.

Once the request for a Sales Tax Clearance Certificate is made, the Department of Revenue has 90 days to determine whether additional sales tax is due. If the Department does not act within that 90 day time period, the buyer is relieved of any successor liability.

After receiving notice from the Department of Revenue of the amount of sales tax that the seller owed, any amounts that are escrowed may be paid to the Department and the balance to the seller of the business. No further successor liability will arise. Absent a Sales Tax Clearance Certificate, however, no such procedural guaranty will apply to relieve the buyer of a business from potential successor liability.

Tuesday, October 28, 2008

SALES TAX - Avoiding Successor Liability

Determining whether the successor liability rules could subject the buyer of a business to its existing Wisconsin sales tax liability may require some legwork. Unfortunately, because the amount of a seller’s tax liability is usually not public information, it can be difficult to determine the exact exposure for the successor liability of sales taxes when buying a business or its assets.

The best way to avoid a successor liability problem is to conduct adequate due diligence. The purchaser of a business should request copies of all sales tax returns for a period of time sufficient to establish a degree of comfort with the amount of sales taxes that were owed. Additionally, seek information establishing that the amounts owed were, in fact, paid. If the seller is too resistant in providing this information, it could be a warning sign that the business should not be purchased.

If a sales tax liability is uncovered or expected, the parties to a business sale can agree to withhold (in escrow) a portion of the purchase price for payment to the Department of Revenue. Doing so is part of the process of obtaining a Sales Tax Clearance Certificate that provides a legal safeguard against the successor liability rules. If the escrow exceeds the actual sales tax liability the balance can be paid to the seller.

Friday, October 24, 2008

SALES TAX - Extent of Successor Liability for Sales Taxes

Under the Wisconsin sales tax laws, the purchaser of a business can be subject to the predecessor business’ unpaid sales tax liability. The extent of successor liability for sales taxes, however, is limited to the amount of the purchase price paid for the business. Therefore, if someone pays a half-million dollars for a business that has a million dollar sales tax liability, the purchaser’s exposure for the unpaid tax will be limited to a half-million.

It follows, therefore, that if there is no purchase price, there is no successor liability. Further, the successor liability is tied to the location of the business purchased. If only one location of an existing chain of businesses is purchased, successor liability is limited to the sales tax liability attributable to that one location.

It is important to note, however, that while the successor liability is limited to the amount of the purchase price, the “purchase price” consists of any value that is paid for the business. This purchase price includes not only cash or installment payments but also value of any property transferred in exchange for the business and the assumption or payment of any debt on behalf of the purchased business. Using the above example, even if the entire half-million dollar purchase price is paid to secured creditors of the business, the purchaser can still face successor liability to the extent of that half-million dollars.

Friday, October 17, 2008

Friday's Tax Quote.

“A citizen can hardly distinguish between a tax and a fine, except that the fine is generally much lighter.”

- G.K. Chesterton

Friday, October 3, 2008

Business Solutions with Diane Chamness

On October 25th and November 1st, Attorney Barry White will join Diane Chamness on her Saturday radio program "Business Solutions With Diane Chamness." In both shows, Barry will be holding "Open Mic" sessions where he will be answering legal questions that listeners have. Tune in for both segments on WISN 1130 in Milwaukee from 1-2 pm CST.

If you are outside of the listening area, you can tune in and listen live by visiting Diane Chamness' website at http://www.dianeonbusiness.com/ Diane's show runs on a weekly basis at the same time and addresses various issue relevant to business owners.

Friday's Tax Quote

“My father has a great expression: ‘The capital gains tax has created more millionaires than any other government policy.’ The capital-gains tax tends to make investors hold longer. That is almost always the right decision.”

- Chris Davis

Tuesday, September 30, 2008

The Original Form 1040

As a bit of fun, today I provide an aged copy of the original Form 1040, Return of Annual Net Income of Individuals.  While the United States had on other occassions imposed an income tax, the history of the modern income tax arises from the ratification of the 16th Amendment to the United States Constitution.  The 16th Amendment was ratified on February 3, 1913.  Shortly thereafter, we had the Form 1040 pictured below.  This original 1040 was only 4 pages long...including instructions.  My how far we have come.

Sunday, September 28, 2008

Milwaukee Brewers Make The Playoffs!

Readers of this website know that I am a Wisconsin based tax lawyer.  More specifically, I work out of Milwaukee.  Living in Milwaukee has been particularly thrilling as the Milwaukee Brewers have marched towards the playoffs.  Who could ask for a more exciting ride...the playoffs come following a series of losses and with a victory against the rival Cubs in the final game of the regular season. Wow...really.  Wow.

Good luck Brewers.  Keep Milwaukee famous.

Legal Podcast - 501(c)(3)s: Obtaining and Maintaining Your Organization's Tax Exempt Status

For a non-profit organization or charity to obtain exemption from the federal income tax under Internal Revenue Code section 501(c)(3), the organization must satisfy certain requirements.  In this Legal Podcast, I provide a brief overview of many of the requirements that must be met by prospective 501(c)(3) organizations to receive and maintain a federal tax exemption.

Friday, September 19, 2008

Friday's Tax Quote.

“Unquestionably, there is progress.  The average American now pays out almost as much in taxes alone as he formerly got in wages.”

- H.L. Mencken

Monday, September 15, 2008

Blogging Lawyers

A relatively small group of lawyers use blogs to provide information to the public.  However, it is my personal opinion that more lawyers should do so.  For that reason, I recently co-wrote an article on setting up a legal blog with Attorney Jon Groth, a personal injury attorney and author of the Wisconsin Personal Injury Attorney Weblog.  The article will appear in this month's Wisconsin Lawyer magazine published by the Wisconsin State Bar. 

The article can be found here.

Friday, September 12, 2008

Friday's Tax Quote

“Our Constitution is in actual operation; everything appears to promise that it will last; but nothing in this world is certain but death and taxes.”

- Benjamin Franklin

Wednesday, September 10, 2008

Announcing the Wisconsin Law Forum

I am pleased to announce the creation of the Wisconsin Law Forum Blog.  Throughout the existence of the Tax Law Forum, I have considered it appropriate to address certain non-tax issues that I thought are relevant to Wisconsin based readers.  These non-tax commentaries will now be found on the Wisconsin Law Forum.  I have moved the articles previously appearing on this blog to the new webpage.  Hopefully this change provides some clarity to visitors looking for information on Wisconsin business law, employment law, estate planning or litigation developments.  No longer will they have to look to a blog focusing on tax law to find information and learn about these areas. 

Without further ado, I encourage you to visit the
Wisconsin Law Forum!

Tuesday, September 9, 2008

SALES TAX - What is Successor Liability for Wisconsin Sales Taxes?

The buyer of a business should be aware that if the seller has an outstanding liability for Wisconsin sales or use taxes, the buyer can become personally liable for the unpaid tax of the seller if the proper steps are not taken. With careful planning, however, the buyer can avoid the successor liability problem.

The successor liability rule, found in Wisconsin Statute Section 77.52(18), is:

“If a retailer liable for any sales or use tax sells his business or inventory or otherwise quits business, the retailer’s successors or assigns are required to withhold a sufficient amount of the purchase price to cover the tax obligations until the seller produces either (i) a receipt showing that the tax was paid or (ii) a certificate stating that no tax is due.”

This means that the buyer of a business or a stock of goods, including furniture, fixtures, equipment, and inventory must withhold purchase price money from the seller until the buyer receives a:

1) Receipt from the seller showing the tax was paid, or
2) Certificate stating that no tax is due.

If the buyer does not withhold purchase money until one of the two above is received, the buyer will be personally liable for unpaid tax to the extent of the purchase price.

This provision puts the burden of making sure that tax gets paid on the buyer of the business. The buyer must make sure that the taxes are paid or become liable for the debts. The buyer and seller cannot get rid of successor liability by contract. Successor liability is determined by law and no agreement between buyers and sellers can change this. Of course, a buyer and seller can agree that if the buyer ends up having to pay the seller’s tax, the seller will indemnify the buyer. This indemnification, however, gives the buyer recourse against the seller. It does not do anything to protect a buyer from liability to the Department of Revenue.

Friday, September 5, 2008

Friday's Tax Quote

“Death and taxes and childbirth. There’s never any convenient time for any of them.”

- Margaret Mitchell

Thursday, September 4, 2008

SALES TAX - From Personal Liability for Wisconsin Sales Taxes to Successor Liability.

I have written many posts on the issue of how the Wisconsin Department of Revenue can collect a business' sales tax liability from the individuals owning or operating that business. I also explained that the personal liability of any responsible person will survive the dissolution of a business. Liability for unpaid sales taxes will also survive the sale of a business.

For example, if a business owner sells the assets or the stock of his corporation (or other business form) but the business has not paid all of its sales taxes, that owner could still be personally responsible for the payment of the sales tax. Unfortunately, however, the buyer of the stock or assets of the business can also be responsible for the unpaid sales tax if he/she/it is unaware of the liability or does not take the right steps to avoid this “Successor Liability.”

In a series of posts that will follow, I will address successor liability for Wisconsin Sales Taxes and the procedures for avoiding this potentially costly obligation.

Tuesday, September 2, 2008

SALES TAX - What can be Done if the Wisconsin Department of Revenue Asserts Personal Liability for Sales Taxes?

Under the rule imposing personal liability for Wisconsin Sales Taxes, a person must be required to collect, account for or pay the amount of sales tax due and willfully fail to make that payment. Further, before an individual can be held personally liable for the sales taxes, the business itself must be established not to be able to pay the amount to the Department.

When an individual receives a notice from the Department of Revenue that it intends to pursue collection of a business’s sales tax liability from the person himself or herself, the first analysis that takes place is whether the Department of Revenue can, in fact, collect the sales tax from that person under the law.

In conducting the analysis, we will look to the specific facts and circumstances surrounding that person and their involvement with the business. We will look to the relationships of the parties, any governing documents and other circumstances that may have led to the assertion of the sales tax against that individual. Based on the specific facts and circumstances of a case, a variety of information may be useful in demonstrating that a person should not be liable for the sales tax, including documentation, explanations and sworn affidavits.

If this information is unavailable, another option may exist. The Statute imposing personal liability requires that the principal (i.e. the business) is unable to pay the amounts due. Therefore, if an arrangement for payment between the business and Department of Revenue is made (possibly an installment agreement), the Department of Revenue will withhold from collecting the Sales Tax from an individual pending the business’s payment of the tax.

This may mean that the person who could be liable for the Sales Taxes needs to allow the Department additional time to consider the personal liability issue. In most instances where this is required, the extension of time does not prejudice the person and prevents the personal liability from being assessed. Without an assessment of the tax, there should be no liens, levies, garnishments or other collection action taken against that person unless the business fails to pay the tax.

Friday, August 29, 2008

Friday's Tax Quote

“America’s tax laws are similar to the writings of Karl Marx and the writings of Sigmund Freud in that many of the people who loudly proclaim opinions about these documents have never read a word of them.”

- Jeffery L. Yablon

Thursday, August 28, 2008

SALES TAX – Personal Liability for Wisconsin Sales Taxes, What if a Business that first had the Tax Liability is Dissolved?

Most businesses are formed as corporations or LLCs. This is done to provide liability protection to the owner of the business from the risks, debts and obligations of the business. Absent special circumstances (for example, “piercing the corporate veil” or personal guaranties of debts) creditors cannot look past the corporate entity to recover unpaid obligations. Because of Wisconsin Statue Section 77.60(9), the Wisconsin Department of Revenue can look past the liability protection of a business and pursue business owners or employees for unpaid sales taxes.

Dissolving a business does not absolve the owners of their personal liability for the sales tax due. In fact, the statute allowing for personal liability for Wisconsin Sales Taxes specifically provides that the personal liability will survive the dissolution of the business. Dissolving a business may speed up the Department’s collection efforts against the potentially liable persons because there is no longer the ability for the business to pay the debts.

Tuesday, August 26, 2008

SALES TAX – Personal Liability for Wisconsin Sales Taxes, How Does it Happen?

This post continues prior writings in which I discuss the Wisconsin Department of Revenue’s assertion that an individual should be personally liable for sales taxes. This post gives some generic examples as to how this can happen.

While the circumstances leading to the non-payment of sales taxes often come from entirely different directions, the consistent part among all of these situations is that the Department of Revenue believes that sales taxes that are owed and have not been paid. This could be the result of an audit that increased the amount of sales tax owed, a busy start-up business has a proprietor that simply was unable to keep up with his sales tax obligation due to a heavy workload or a struggling business decides to use the sales tax collected to pay suppliers rather than the State.

In tougher economic times, a business that is struggling to maintain its operations may make the decision to use the collected sales tax to pay its suppliers. This may be understandable, after all, if it does not pay its supplier, it will not be able to continue operating and, therefore, could not pay the sales tax that is owed. Their belief is that if they buy additional supplies, they will generate sales great enough to pay off the now past due sales tax liability and any sales tax that arise from that weekend. Unfortunately, often the following weekend is not as successful as the business had hoped and now sales taxes cannot be paid again. This problem often cascades into an unwieldy amount of tax, interest and penalty due and the result is that the business cannot pay what is owed.
As the Department of Revenue gets wind of the problem, they will take action to collect the liability from the business. When those efforts prove unsuccessful, they will look to any person who could possibly be responsible for the liability.

I can say, in no uncertain terms, that the above scenarios are not the result of good business decisions. Regardless of whether it seems like a good source for a bridge loan, using sales taxes to operate a business is not, and cannot come to good. The taxing authorities have collection powers that are the envy of all creditors. Unlike many creditors, the Wisconsin Department of Revenue can (by virtue of a specific statute) look right through any corporate or LLC liability shield to collect tax from individuals.

The point is, if you want to avoid having to hire someone like me to keep the Department of Revenue out of your personal lives, make sure that the sales taxes you or your business collect get turned over to the state. If it is too late for that, there can be several options for resolving the problem, but it is best to avoid the issue in the first place.

Friday, August 22, 2008

Friday's Tax Quote

“No taxes can be devised which are not more or less inconvenient and unpleasant.”

- George Washington

Thursday, August 21, 2008

SALES TAX – Who can be Liable Under the Rule Imposing Personal Liability for the Wisconsin Sales Tax?

Under the rule imposing personal liability for Wisconsin Sales Taxes, a potentially liable person includes an officer, employee or other responsible person of a business that is under the responsibility for collecting, accounting for or paying over sales taxes.

What this definition of a “person” essentially boils down to is that it is not only the owner of a business that can be personally responsible…but any person, including employees, can be caught up in the personal liability net if their name appears on the bank signature card, if they write checks to pay bills for the company or they sign the company’s tax returns. These things don’t necessarily mean the person will ultimately liable for unpaid taxes, but it does mean that they may be put in a position to have to prove to the Department of Revenue that they should not be liable.

Therefore, even if your husband or wife or even children provide nominal services to your family-run business, if they are authorized to make payments on behalf of the company or sign any checks, handle bookkeeping functions or sign tax returns, they can be caught up in a Wisconsin Department of Revenue personal liability problem even though, from a practical family perspective, they never had any power to make sure that sales taxes got paid.

The point is that if you have apparent authority to make sure that sales taxes get paid, you should work to make certain that the taxes are paid. If the taxes are not paid, it could mean a big headache to prove that you were not responsible for the taxes.

Tuesday, August 19, 2008

SALES TAX – Challenging an Assertion of Personal Liability for the Wisconsin Sales Tax.

In previous posts on Wisconsin Sales Taxes, I have written about how a person responsible for making sure that Wisconsin Sales Taxes are paid can become personally liable for the taxes.

Wisconsin Statute Section 77.60(9) imposes personal liability through the following language:

“any person who is required to collect, account for or pay the amount of sales tax imposed and who willfully fails to collect, account for or pay to the Department, shall be personally liable for such amounts, including interest and penalties thereon, if that person’s principal is unable to pay such amounts to the Department.”

If the Wisconsin Department of Revenue is asserting that a person should be personally liable for the sales tax, that person can look to this rule to determine how to challenge the potential liability. For purposes of challenging the assertion of personal liability for Wisconsin sales tax, this rule can be broken down into many parts.

1. Who is a person?

2. Is that person required to collect, account for or pay the amount of sales tax to the State?

3. If that person failed to collect, account for or pay the amount of sales tax to the State, did they do so willfully?

4. Is that person’s principal unable to pay the amount to the Department of Revenue?

Any one of these items can form the basis for challenging a personal liability assessment or at least provide an opportunity for a resolution short of the person dipping into their own pocketbook.

Friday, August 15, 2008

Friday's Tax Quote

“Pothinus: Is it possible that Caesar, the conqueror of the world, has time to occupy himself with such a trifle as our taxes?

Caesar: My friend, taxes are the chief business of a conqueror of the world.”

- George Bernard Shaw (“Caesar and Cleopatra”).

Thursday, August 14, 2008

SALES TAX - Payment/Collection of the Sales Tax

In a previous post, I wrote about the imposition of the Wisconsin sales tax on retail sales of tangible personal property and certain services (click here). Generally, business owners are at least loosely familiar with the rules concerning the imposition of the sales tax and the fact that the sales tax exists. Further, they are aware that when the retailer charges the sales tax, the consumer is the one ultimately must pay the tax. Obviously, the tax is not paid by the consumer directly to the State of Wisconsin but is collected by the retailer at the time of the sale. Thereafter, it becomes the retailers obligation to make sure the sales tax that is collected (or was supposed to be collected) is paid over to the State of Wisconsin.

The trouble arises, however, when a retailer has, in fact, collected the sales tax, but has failed to pay that amount to the State. The sales tax collected can be considered to be held in trust by the retail business that collected the tax in the first instance. The funds in that trust belong to the State. If they are not paid to the State, the business will become responsible for making up those amounts plus corresponding penalties and interest when the payments are made, whether they are made following an audit or voluntarily. (The same problem arises where the business fails to collect sales tax.)

Liability for the Wisconsin sales tax, however, does not stop with the business. Wisconsin Statute §77.60(9) provides for personal liability for unpaid sales taxes by the owners, operators or employees of a business that are connected with the sales tax function. That is, if a business does not pay what it is supposed to pay, the people involved with the business that are responsible for making sure that the tax gets paid, can become personally liable for the debt.

The official rule is that “any person who is required to collect, account for or pay the amount of sales tax imposed and who willfully fails to collect, account for or pay to the Department, shall be personally liable for such amounts, including interest and penalties thereon, if that person’s principal is unable to pay such amounts to the Department.”

Therefore, if you are responsible for making payments of sales tax to the State of Wisconsin, do what you can to make sure that the tax gets paid. If not, the Department of Revenue may look directly to your pocket book if they can't collect from the business

Wednesday, August 13, 2008

"Business Solutions" with Diane Chamness: Avoid Personal Liability for Your Business Taxes

Back in May 2008, I was invited to talk with Diane Chamness on her radio program "Business Solutions" with Diane Chamness. The topic was potential personal liability for Wisconsin Sales Taxes. During the program, Diane and I also took calls concerning any tax issues about which listeners had questions. Many callers had questions concerning employee vs. independent contractor issues.

I have previously written on both of these topics on this blog. For personal liability for Wisconsin Sales Tax issues, click here. For employee vs. independent contractor issues, click here.

Diane Chamness has begun posting recordings of her program online as podcasts. Click the link below to listen to the May program and to hear a variety of other programs covering topics which may be of interest.

"Business Solutions" with Diane Chamness: Avoid Personal Liability for Your Business Taxes

Tuesday, August 12, 2008

SALES TAX – Wisconsin Sales Taxes are Imposed on Retail Sales of Tangible Personal Property and Certain Services.

The State of Wisconsin, through Wisconsin Statute 77.52 imposes a sales tax on retail sales. The sales tax is imposed at a rate of 5% under the Statute. Certain local municipalities also impose additional sales taxes to create a variation among counties.

The tax applies to the sale of all tangible personal property (that is, anything that is not real property) unless there is a specific exemption that excludes the item of tangible personal property from the sales tax. Exemptions include items such as caskets and burial vaults, food products (unless specifically excluded from the exemption), newspapers, items falling under an occasional sales exemption and more. As a general rule if a business sells tangible personal property, sales tax should be charged unless the Wisconsin Statutes specifically provide otherwise.

Conversely, only certain services are subject to the Wisconsin. These services are specifically identified in the Wisconsin Statutes (in Chapter 77). Examples include cable TV services, landscaping, dry-cleaning or photography services. Therefore, a service business must only collect sales taxes on the services that it provides if that service is specifically identified as taxable in the Wisconsin Statutes.

Whether a business sells tangible personal property or provides a service, the business owners should always check the sales tax statutes to confirm whether the item or service is subject to the sales tax. Failing to do so can result in severe financial consequences (tax, penalty and interest) to the business and its owners, officers and employees if sales tax is due and not paid.

The complete chapter of the Wisconsin Statutes governing the sales tax can be found by clicking here.

Monday, July 28, 2008

Blogs, Podcasts and the Internet: What you need to know to get started with viral marketing to further business development

Regular visitors to this blog will know that I am a big proponent of using online audio podcasts to convey information about the law to people across the Internet. To that end, on October 24, 2008, I will be speaking at the Wisconsin Solo & Small Firm Conference on the issue of setting up and maintaining a podcast program.

In the presentation, entitled - Blogs, Podcasts and the Internet: What you need to know to get started with viral marketing to further business development, I will be speaking with Attorneys Jon Groth and Chris Moander about the value of using blogs, podcasts and the Internet to get the word out to clients about important issues that they may be facing.

You can visit the conference website to see what other presentations will be given by clicking here. The conference will be held in the Wisconsin Dells Kalahari resort from October 23rd - 25th, 2008.

And Now...Another Celebrity in Trouble

As yet another commentary on how taxes can be interesting to everyone, this post is mostly just a link to another tax law blog. The Tax Girl blog has recently posted a story about even another celebrity of sorts that is facing tax trouble. The story (which can be read by clicking here) announces that Joe Francis (founder of the Girls Gone Wild video series) has recently pleaded not guilty to two counts of tax evasion.

Enjoy the commentary and short AP video clip on the story.

Friday, July 18, 2008

Another Celebrity Charged With Tax Crimes

As the author of a tax law blog, I quite often feel that taxes are interesting. I understand that not everyone may always feel this way, but sometimes tax related stories hit the news that have broad appeal. Recently, we have had the story of Richard Hatch (winner of the first season of the reality show contest "Survivor") and Wesley Snipes (of the "Blade" movies fame). Both were convicted of tax crimes. Now there is a celebrity of yet another sort that is facing tax trouble.

On July 17, The Smoking Gun web site announced that adult film star Janine Lindemulder had been charged with a misdemeanor count of willfully failing to pay tax due in violation of Internal Revenue Code section 7203.

While a misdemeanor carries a smaller penalty than a felony charge, a misdemeanor can still mean prison (just ask Mr. Snipes who was convicted to three years in prison - one year for each misdemeanor on which he was convicted). This will certainly be an interesting case to pay attention to, however, I expect that if she is convicted, her single misdemeanor count will help her fair much better than her celebrity counterparts. I am curious however as to whether her "different" kind of celebrity will bring any benefit.

The information document that charges her with the offense was filed on June 18 and can be found on The Smoking Gun web site.

Previous posts relating to Richard Hatch and Wesley Snipes can be found by clicking here.

Friday's Tax Quote.

“Taxation, for example, is eternally lively; it concerns nine-tenths of us more directly than either smallpox or golf, and has just as much drama in it; moreover, it has been mellowed and made gay by as many gaudy, preposterous theories.”

- H.L. Mencken

Thursday, July 17, 2008

Stopping IRS Penalties and Interest by Making a Deposit

As a tax lawyer, I am often asked how a client can stop interest and penalties from growing on an overdue tax debt. To do so, a client can (1) pay the debt or (2) make a “deposit.” In this post, I discuss using a “deposit” to stop the growth of penalties and interest. This post is not about how to remove already existing penalties (although there are procedures for doing that as well).

Let’s say that you are currently going through a tax audit. Based on how the audit is going, you know that you are going to owe additional tax, but you disagree with the IRS as to how much. Because you are going to owe, you want to stop additional and unnecessary interest and penalties.

The Internal Revenue Code (in section 6603) and Revenue Procedure 2005-18, provide that a taxpayer may make a “deposit” in lieu of a payment of tax. Once a deposit is made, and if the deposit is ultimately used to pay tax, the deposit will retroactively be treated as a payment of the tax on the date that the deposit was made. This effectively cuts off any additional interest on the amount of tax ultimately due as of the deposit date.

Should a taxpayer want the deposit returned, all he/she needs to do is make a written request for a return of the monies. The IRS is required to return the money unless it determines that returning the deposit would jeopardize its ability to ultimately collect the tax.

Another benefit of making a deposit is that (provided certain requirements or a safe harbor is satisfied) interest may be earned on the deposit. To earn interest, the deposit must be attributable to a "disputable tax" for the tax period at tissue. Interest will only grow on the amount that relates to the disputable tax. A "disputable tax" must be further attributable to a "disputable item."

The determination of whether something is a disputable tax or disputable item has certain requirements and is subject to some safe harbor rules. Therefore, before making a deposit, it is essential that you make certain that the money you send in qualifies as a deposit. Just as important is clearly designating in writing that the money sent is to be used as a deposit.

If you have questions as to whether you qualify to make a “deposit” be sure to consult a professional. If you don’t follow the proper procedures, you may end up making a “payment” instead of a deposit. This is bad because it can cut off future challenges to the amount that tax the IRS says is due.

Friday, July 11, 2008

Friday's Tax Quote.

“Taxation, in reality, is life. If you know the position a person takes on taxes, you can tell their whole philosophy. The tax code, once you get to know it, embodies all the essence of life: greed, politics, power, goodness, charity.”

- Sheldon S. Cohen

Thursday, July 10, 2008

Legal Podcast - Business Succession Planning

Many small and midsize business owners are successful because they pay attention to the details. The owner will structure the businesses affairs so that the business is ready for changes in the market, technology and other trends. Unfortunately, often these same business owners fail to adequately plan for one inevitable change: the day that they are no longer involved in the business.

Leaving a business can mean passing the reigns (and eventual ownership) to a sibling, child or even a loyal employee. It could also mean selling the buisness to another business owner. Regardless of what the exit strategy is, it is important to have an exit strategy (i.e. a business succession plan).

Attorney Mike Berzowski has recording a podcast discussing the importance of developing a business succession plan. A successful business succession plan will provide for the effective transfer of a business to future owners and an exit strategy for the current owners. This podcast includes a discussion of the key steps in developing such a plan and can be found by clicking here.

Friday, June 27, 2008

Friday's Tax Quote.

"The sales tax seems to be more politically acceptable than the income tax."

Raymond C. Scheppach

Legal Podcast - Forcing Out Minority Shareholders in Wisconsin.

It is not uncommon for attorneys to get involved in matters where a majority shareholder (or a group of shareholders constituting a majority) is looking to force out minority shareholders from the corporate ownership. Whether you are looking to get rid of a troublesome minority shareholder or dealing with an oppressive majority, there is plenty to know about how to force someone out and how to respond to such strategies.

Attorney Jim Swiderski has recorded a series of podcasts on these situations. The first provides a general overview of information for shareholders on either side of the issue. The second and third podcasts outline the issues specific to one side or the other. The podcasts can be listened to by clicking below.

Forcing Out Minority Shareholders in Wisconsin: An Overview.
The goal of this podcast is to provide an overview of techniques utilized by majority shareholders to force out minority shareholders in a Wisconsin corporation and possible responses by minority shareholders to those majority shareholder squeeze-out efforts. Examples of the techniques and responses are provided and include mergers, reverse stock splits, lawsuits for breach of fiduciary duty and petitions for judicial dissolution. (Click here to listen.)

Forcing Out Minority Shareholders in Wisconsin: Majority Shareholder Squeeze-Out Techniques.
This podcast introduces the listener to various techniques utilized by majority shareholders to force out troublesome minority shareholders in Wisconsin corporations. The techniques covered by Jim Swiderski include mergers (statutory, short-form, and triangular and reverse triangular), reverse stock splits, and voluntary corporate dissolutions. (Click here to listen.)

Forcing Out Minority Shareholders in Wisconsin: Minority Shareholder Rights.
This podcast introduces the listener to possible responses by minority shareholders to majority shareholder efforts to force minority shareholders out of a Wisconsin corporation. The responses discussed include asserting dissenter's rights, filing a lawsuit alleging breach of fiduciary duty and petitioning the court to judicially dissolve the corporation. (Click here to listen.)

Jim Swiderski
is an attorney with the law firm Weiss Berzowski Brady LLP. His professional biography can be found by clicking here.

Thursday, May 8, 2008

Stimulus Payment Delays

This post is in addition to the post I wrote yesterday. In that post (click here), I addressed some of the events that could reduce the amount of a stimulus payment that you receive. I wrote that an audit should not affect the amount of your economic stimulus payment. That is still correct but I want to add some addtional thoughts.

If you are currently undergoing an audit for years prior to 2007, that audit should not affect the stimulus payment. Conceptually, however, if your 2007 return has been selected for review prior to its official processing, your stimulus payment could conceivably be held up because the IRS will not have determined what your stimulus payment should be.

Lets say for example, that the social security numbers of your dependents doesn't match what the IRS has on file. Maybe you wrote it wrong, maybe they read it wrong, it doesn't matter, just assume the numbers don't match. If that is the case, the IRS cannot complete the processing of your return. If they can't complete the processing of your return, they can't make a determination on how much your stimulus payment will be. As such, your stimulus payment could be delayed until they have it sorted.

There are a great number of items on a return that the IRS may want to confirm during the processing of your return. This could mean a delay in the stimulus payment if what they are looking into relates to your 2007 return.

Unfortunately, there is no telling how long the delay will be. It is a question of how long it takes for them to resolve the issue. In the meantime, if you receive a letter from the IRS asking for information, don't ignore it. If they are asking questions that you can answer yourself, do so. If they are asking questions that are more complicated than you are comfortable with, consult a legal advisor.

Wednesday, May 7, 2008

What Affects the Amount of an Economic Stimulus Payments?

This month the Economic Stimulus payments are being mailed or electronically deposited in your account. This post addresses some of the common questions that people have about what can affect their stimulus payment and why it could be reduced.

Generally, if people had $3,000 or more in earned income in 2007, they qualified for the stimulus payment. If you made over $75,000 (for an individual) or $150,000 (for married filing jointly) the amount you receive can be reduced gradually until it is completely eliminated.

So assuming that you qualified, you are now asking "What can affect whether I receive the economic stimulus payment?"

PAST DUE TAXES: If you owe past due taxes, the stimulus payment that you should receive will be reduced by the amount of the tax you owe. If you owe more than the stimulus payment that you are entitled to, the IRS will apply all of the payment to that debt. That is, you may not receive any cash in hand. Your tax debt, however, will be reduced.

OTHER UNPAID DEBTS: If you have unpaid student loans or past due child support obligations, the IRS may apply your stimulus payment to reduce the amount of those debts. If the amount you owe for these debts is larger than the stimulus payment you would receive, you will not recieve the stimulus payment.

If the IRS applies the stimulus payment against past due taxes, student loans or child support, you can expect that the IRS will send you a notice explaining what they have done a couple of weeks after they have done so.

AUDIT: The IRS should only capture your stimulus payment if it is already established that you owe the IRS additional past due taxes. When you are undergoing an audit, the IRS is investigating whether you owe additional tax. No determination as to additional tax owed is made until after an audit is complete (and if the audit is appealed, not until the appeal or related actions are complete). Essentially, the IRS should not intercept your stimulus payment just because you are going through an audit. That is, if you are being audited, you should still receive your stimulus payment.

INCARCERATION: Whether a person is incarcerated and sitting in jail or prison should not affect their stimulus payment. This, of course, depends on whether they were eligible for the stimulus payment in the first place. Recall that in most instances a person had to have earned income (of $3,000 or more) in 2007 to be eligible. If someone was in prison for all of 2007, it is unlikely that they would have initially qualified to receive the stimulus payment. But if an incarcerated person did qualify for an economic stimulus payment, they should receive it either by direct deposit or at their last known address.

Ultimately, the only things that should really affect your receipt of a stimulus payment are (1) whether you qualified in the first place and (2) whether you owe money to the government or certain other past due debts (for example, child support).

Tuesday, May 6, 2008

Employee vs. Independent Contractor Podcast

One of the hot issues that the IRS is looking into these days is the "worker classification" issue. That is, the IRS wants to know whether businesses are properly classifying workers as employees or independent contractors.

The consequences of classifying a worker as one or the other relate principally to whether the business has to withhold income tax, social security tax and medicare tax from a worker's wages. A business must do so if the worker is an employee. Further, if a worker is an employee, half of the social security and medicare tax liability falls on the business' pocket book.

If the worker is an independent contractor, all of the responsibility for paying income tax and social security/medicare tax (that is, self employment tax) falls on the worker. Usually this means the independent contractor must save enough money to pay the taxes due and make quarterly estimated tax payments.

I have recorded a podcast that discusses these and other issues that arise in the employee vs. independent contractor setting. I encourage you to listen to it. If you have follow up questions, certainly let me know. (rbt@wbb-law.com)

The Employee vs. Independent Contractor podcast can be found by clicking here.

Friday, April 25, 2008

“Business Solutions with Diane Chamness”

On a monthly basis, attorney Barry White and others from the law firm Weiss Berzowski Brady LLP talk with Diane Chamness on her radio program. The show, called "Business Solutions with Diane Chamness" is broadcast on WISN 1130AM from 1:00-2:00 CST.

On Saturday, May 3, 2008, I will be talking with Diane about personal and successor liability for Wisconsin sales taxes. We will also take calls concerning tax audits, appeals and collection matters. We hope you can listen in.

If you are outside of the listening area, you can tune in and listen live by visiting her website at http://www.dianeonbusiness.com/. Diane's show runs on a weekly basis at the same time and addresses various issue relevant to business owners.

Friday's Tax Quote.

"People who complain about taxes can be divided into two classes: men and women."


Thursday, April 24, 2008

Wesley Snipes Will Go To Prison

The Wesley Snipes tax evasion case was certainly the most high profile criminal tax case brought by the government in years. In spite of victories that he had in the trial court (acquittal on all felony charges). Mr. Snipes today learned what his sentence would be on the remaining three misdemeanors (failure to file) on which he was convicted.

A misdemeanor is a crime for which someone can be incarcerated for up to one year (a felony can result in a prison sentence of over one year). Today we learned that Wesley Snipes would serve the maximum sentence for his failure to file tax returns. Three Misdemeanors = Three Years.

That Snipes received the maximum sentence available suggests that while his attorneys were able to cleverly obtain acquittals of the felonies from the jury, the judge didn't agree with the arguments that were made. The judge would likely have handed down a lesser sentence if he had thought that the crime was limited to the misdemeanors. However, Wesley Snipes had avoided/evaded a substantial amount of taxes through teaming up with a group of people that are also facing their own consequences. The judge was certainly aware of how much went unpaid and how it was done. To hand down the maximum sentence, we can assume that he found Mr. Snipes' conduct eggregious.

One must wonder if the judge felt handicapped in handing down his sentence because he could only give three years. For this reason, Mr. Snipes should be very grateful for the acquittals that his lawyers got for him. If they hadn't done so, he could have been sitting for a much longer sentence.

If the $5 million dollar payment that Wesley Snipes has paid constitutes the tax, penalties and interest due, this case leaves two last interesting questions:

1) Will Wesley Snipes be sent to a minimum security prison camp (as is common in criminal tax cases) or will he end up in a more "prison-like" prison?

2) What is going to happen to all of the other people that participated in the same scheme that Snipes did?

It is not likely that each participant in the schemes will face criminal prosecution, rather, these other people can consider themselves to have benefited from Wesley Snipes' celebrity. However, we can safely assume that the government now has a list of names of all those people that participated in the American Rights Litigators and Guiding Light of God Ministries promoted schemes. These people will have to use the established IRS procedures to resolve their debts. Fortunately for them their, consequence will likely be limited to writing large checks made payable to "The United States Treasury."

Wednesday, April 23, 2008

IRS Summonses

A summons is an administrative tool used by the IRS to collect information concerning a taxpayer. A summons is best described as a forceful request by the IRS for documents or information. To enforce a summons, the IRS must bring an enforcement action in the District Court. When the matter is before the court, a judge will determine if the summons was properly issued, whether there are any valid defenses to the production of the documents and whether the summons must be complied with. Of course, in many circumstances, complying with a summons before court intervention is a good idea. For example, if there is no valid defense to producing the summoned information (attorney-client privileged, right against self-incrimination, etc.), the information should be provided. There is no need, however, to provide more information than is asked for in the summons. If you do receive an IRS summons that asks for your own information, it is likely well past the time for consulting a legal advisor. At this point, the IRS likely feels that you have been ignoring them.

When a summons is issued to a party other than the taxpayer being investigated (a third-party summons) the IRS must notify the target of the investigation of the issuance of the summons. The target has the right to bring a motion to quash the summons if he/she/it believes that some principal (attorney-client privilege, right against self incrimination, etc.) should prevent disclosure of the requested information. The recipient of the third- party summons should also consider whether the information requested by the summons should be disclosed. To make this determination, each request in the summons should be analyzed separately. A third party that receives a summons should make certain that it is required to turn over the information so that it is not violating a duty to the subject of the information.

Friday, April 18, 2008

John McCain's Tax Returns

As is probably clear, this blog is dedicated to discussing tax issues. In addition to talking about income, deductions, audits and tax problems, I will also write about current events. One of the big buzz tax related items recently in the news has been the release of the tax returns of the presidential candidates. In a previous post, I provided links to the tax returns of Hillary Clinton and Barak Obama (click here).

As promised in the prior post, I am now providing a link to John McCain's tax returns as available on his campaign website (click here).

Friday's Tax Quote.

"Because of the income tax, a penny saved is more than a penny earned."

- Jeffery L. Yablon

A Primer on IRS Tax Audits

A letter from the IRS rarely brings good news. Frequently the letter explains that your personal or business tax return has been selected for audit. This post contains information about the audit process that can help reduce anxiety during the IRS’ examination.

An audit will most often be conducted by an IRS Revenue Agent. A Revenue Agent is not concerned with the person’s or business’s ability to pay the tax asserted, rather, their focus is simply on the determination of what they believe is the proper amount of tax due.

Generally, when an audit occurs, it may be categorized as a compliance center audit, office audit or field audit. A “compliance center audit” is conducted by letter and generally concerns a discrepancy in information on the records of the IRS and the information on a tax return. An “office audit” is typically also a correspondence audit and concerns certain specific issues on a specific tax return. A “field audit” will take place at a taxpayer’s place of business or at a representative’s office. Field audits are not limited to specific issues or tax years.

When the IRS conducts an audit, it will request information by several means, including information document requests (“IDR”), summons, third party summons or a taxpayer interview.

In an IDR, the IRS requests documentation and asks questions concerning items on the tax returns. When the IRS issues a summons, it is making a more forceful request for information that can be enforced in a proceeding in the federal district courts. This gives the taxpayer an opportunity to challenge the summons on certain grounds. Similarly, a taxpayer has the chance to challenge summonses issued to third parties. Taxpayer interviews can only be required following the issuance of a summons. Knowing what information the IRS is looking for provides an understanding of the tax issues in which the IRS has interest.

Once an audit is concluded, the Revenue Agent will issue a report of his or her findings. These items in the report may be resolved with the Agent based on the tax laws. The Agent cannot resolve the case based on the chance that the IRS could ultimately lose the issue in court. If a resolution cannot be reached, the Agent will issue either a “30-day” or “90-day” letter which provides the taxpayer another opportunity to settle the case with the Appeals Division of the IRS before having to proceed to court.

Monday, April 14, 2008

Tax Issues in Starting A Business: Doing It The Right Way Can Help Avoid Tax Problems In The Future

Starting a business can be one of the most exciting times in one’s life. However, it can also be one of the most time consuming. Because starting an entrepreneurial venture can require so much time to insure its success, many times the owners of new businesses will overlook certain aspects of starting a business that should be addressed early on. These issues can lead to larger problems in the future. One of the most important aspects of starting a new business is insuring that the business is set up properly. From this perspective, it is immaterial whether the business is organized as a limited liability company, a partnership, a corporation or otherwise. Rather, the important part is to make sure that whatever entity you choose is formed properly. This is particularly true where there is more than one owner of that business. Proper formation is important because later disputes between owners can be very costly to the success of a business if the structure for resolving those disputes is not spelled out in advance. Another costly oversight can be the decision to avoid dealing properly with tax obligations.

When it comes to taxes, most business owners are aware that income, employment, sales and use taxes exist; however, not everyone is aware of their obligations with respect to those taxes. The best way to resolve any future potential tax problem, is to avoid having the problem in the first place. This means that all new businesses should develop a relationship with an accountant that can advise them on the business’s tax obligations and assist them in fulfilling those obligations. The new business owner should also maintain appropriate records of income, expenses, sales, purchases and other items. A skilled accountant can use this information to assist your business in complying with tax laws.

Unfortunately, however, it is a fact that not all businesses do avoid future tax problems by addressing the tax compliance issues at the outset of a venture. It is also possible that a prior interpretation of the tax laws is reinterpreted or interpreted for the first time by the government so that your business now owes tax for something it previously believed did not owe tax on. Regardless, when one of these problems arises, there are procedures in place at both the federal and state levels for resolving tax disputes. While conceptually straight forward, based on the complexity of the business venture, its income, its expenses, its assets and its liabilities, it may be appropriate to hire a professional to assist you in resolving tax problems. These issues may include an inability to pay an income or employment tax liability, the filing of unfiled tax returns (known as non-filers), the personal assessment of employment or sales taxes against an officer of the business, the availability of entering into a deal with the government for less than the total amount of tax due (Offers in Compromise) and so forth.

While procedures exist to resolve tax issues that a new business may face, avoiding these issues in the first place is always the best part of a new business plan.

Friday, April 11, 2008

Legal Podcasts

A regular visitor to this blog will note that I am a big proponent of using legal podcasts as a means to communicate important legal information to clients and the general public. To that end, I direct your attention to an article recently published in the April 7th edition of the Wisconsin Law Journal. The article analyzes the emerging trend of legal podcasts and can be found here.

Friday's Tax Quote.

"The taxpayer - that's someone who works for the federal government but doesn't have to take a civil service examination."

- Ronald Regan

Thursday, April 10, 2008

Legal Podcast - Tips and Techniques to Avoid the Wisconsin Real Estate Transfer Fee

Attorney Jim Swiderski has recorded another podcast. The topic of his real estate legal podcast is Tips and Techniques to Avoid the Wisconsin Real Estate Transfer Fee.

In the podcast Jim introduces the listener to various techniques which may be utilized by the seller of real estate to avoid payment of the Wisconsin real estate transfer fee. The discussion includes such techniques as, (1) selling the business entity which holds the real estate instead of selling the underlying real estate and (2) employing the use of multi-step transfers of the property utilizing statutory fee exemptions.

Presidential Candidate's Tax Returns

For a while now there has been a lot of discussion about Barack Obama's and Hillary Clinton's tax returns. As this website is dedicated to addressing tax issues, it is only appropriate that I try to make access to this information a little easier. So, here they are:

Barack Obama's Tax Returns (the taxprof blog provides links to the Obama returns)

Hillary Clinton's Tax Returns (scroll down to the bottom of that page to find links to the returns)

As for John McCain's tax returns, I will make sure to include a post that links to his returns when they become available. According to the story Now What About McCain's Tax Returns? found on the MSNBC website, the John McCain camp has said that they will release his returns after April 15th.

Friday, April 4, 2008

Friday's Tax Quote.

“We shall now embark on a voyage through the various sections of the Income Tax Regulations which are enough to boggle the mind of an English speaking U.S. Citizen.”

-William A. Goffe

Thursday, April 3, 2008

Wisconsin Just Became a Little Less Taxing

On April 1, the Wisconsin Department of Revenue sent out a reminder that, as of January 1, 2008, Social Security benefits would no longer be subject to the Wisconsin Income Tax. While not effective until the beginning of this year, the law making this change was actually the 2005 Wisconsin Act 25.

Prior to 2008, Social Security benefits were taxable in Wisconsin for single taxpayers that received more than $25,000 in income in a given year or for joint filers whose income exceeded $32,000. Persons exceeding these thresholds would have 50% of their Social Security benefits taxed as income.

The recent Wisconsin Department of Revenue notice served as a reminder of the 2005 Act's provisions and stated:

"Effective for taxable years beginning in 2008, social security benefits will no longer be taxable for Wisconsin income tax purposes. This will be reflected on the 2008 Wisconsin income tax forms.

For federal income tax purposes, up to 85 percent of social security benefits may be taxable. Prior to 2008, if social security benefits were taxable on an individual’s federal income tax return, the social security benefits were also taxable on the individual’s Wisconsin income tax return. However, Wisconsin did not tax more than 50 percent of the benefits.

Individuals who previously had taxable social security benefits and make Wisconsin estimated tax payments may want to adjust their 2008 estimated tax payments to account for the fact that their social security benefits will not be taxed. Form 1-ES is used to make estimated tax payments. A worksheet is included in the 2008 Form 1-ES instructions for estimating 2008 taxable income. The Form 1-ES and instructions are available from the department’s website at http://www.revenue.wi.gov/html/08forms.html.

Note: Even though social security benefits will not be taxable for income tax purposes, they must still be included in household income for homestead credit. "

This change will only impact a certain segment of the Wisconsin taxpayers so its overall impact on the Wisconsin population at large, is limited. Yet, this is still good news for those receiving Social Security benefits.

Tuesday, April 1, 2008

The Offer In Compromise Is Not The Only Option.

Often, the first question asked by people and business owners that have tax problems is “What about an Offer in Compromise?” As I have recently posted on this blog, the percentage of accepted Offers in Compromise is not exactly staggeringly high. In fact, many people and businesses simply will not qualify for an Offer in Compromise.

When facing tax problems, the Offer in Compromise is not the only option. I am not suggesting that the possibility of a compromise should be ignored. Rather, I strongly suggest that a compromise financial analysis be conducted. That said, where a compromise is not an option, other possibilities exist for resolving a tax debt and preventing a tax levy on a bank account and wages.

Principal among these options is the installment arrangement. Where an individual’s tax debt is less than $10,000 the IRS will automatically accept an installment agreement. As the liability climbs above that threshold, the IRS will require a more in depth analysis of a financial statement prepared by the taxpayer. Under the American Jobs Creation Act of 2004, the IRS is even allowed to accept an installment arrangement that would pay less that the full amount of tax, penalties and interest due.

If an installment agreement is not right for you, there may be additional options based on

 the nature of your tax debt (income vs. employment taxes),
 the responsibilities you have concerning the payment of business employment taxes,
 the structure of your business (sole proprietorship, LLC, corporation),
 what you own or how you own it,
 and more.

The point is, you should not limit the resolution of your tax debts to an Offer in Compromise or even an installment arrangement. Your particular circumstances may allow for a much broader range of solutions.

Monday, March 31, 2008

New Legal Podcasts

Recently, a few lawyers at Weiss Berzowski Brady LLP (the law firm I work with) recorded a few new podcasts concerning various business law issues. As I believe the legal podcasts address issues that may be relevant to readers of this blog, I include information about the podcasts (and links) below.

The first legal podcast was recorded by Attorney Jim Swiderski on March 27, 2008.

This podcast introduces the listener to various techniques utilized by majority shareholders to force out troublesome minority shareholders in Wisconsin corporations. The techniques covered by Jim Swiderski include mergers (statutory, short-form, and triangular and reverse triangular), reverse stock splits, and voluntary corporate dissolutions. Click here to go to the podcast.

The second legal podcast was recorded by Attorney Mark Siler on March 28, 2008.

Mark Siler discusses the flexibility of a limited liability company (LLC) operating agreement and the Wisconsin Limited Liability Company Law (WLLCL). Despite the flexibility of this business form, additional issues may arise, as illustrated by the case Kasten v. Doral Dental USA, LLC (2007 WI 76). (Click on the case name for the written decision.) Click here to go to the podcast.

Friday, March 28, 2008

Friday's Tax Quote.

"Taxes: Of life's two certainties, the only one for which you can get an automatic extension."

- Anonymous

Tuesday, March 25, 2008

“Pay Pennies on the Dollar” or Something Like That (thoughts on picking a tax professional to help you resolve your tax debts).

If you have ever stayed up later than you should on weeknight, you have seen the commercials promising that if you call their company, you won’t have to pay all of your tax debts. They say that you can settle your tax debts for “Pennies on the Dollar.” Unfortunately, you can’t get out of all of your tax troubles for “Pennies.”

What these commercials are talking about is the Offer in Compromise program. Under the program, a person that qualifies can resolve their tax liabilities for less than the full amount. The program exists but the catch is that you have to qualify. Not everyone qualifies, in fact, most do not.

If you are going to investigate the Offer in Compromise option, you will want to consult with a reputable tax lawyer or accountant. That tax professional should give you an honest assessment as to whether you stand a chance at a compromise. If you blindly sign up with the company that promises the most, beware, you may end up paying a large fee for a compromise application that is doomed to fail.

When considering whether to file an Offer in Compromise, you should be aware of the following statistics:

-- Generally, only 25% of all filed offers are accepted by the IRS. (While the acceptance percentage has remained somewhat consistent since 2005, the total number of filed offers have dropped.)

-- Since 2005, the number of offers submitted has dropped by almost 38%.

-- Since 2001, the number of offers submitted has dropped by 63%.

-- The total number of accepted offers in 2007 was only 11,618. This is down from 19,080 in 2005 and 38,643 in 2001.

(see chart below for additional statistics.)

What does all of this mean? It means that it is becoming more and more difficult to get an accepted compromise of tax debts. It also means that you should be careful in choosing a professional to help you. Before you submit an Offer in Compromise based on an inability to pay, your representative should review a financial analysis of your circumstances. If they do not, you will want to ask plenty of questions as to why they believe you would qualify for a compromise. Make sure that you are comfortable with what you are being told and that you don’t buy in to promises that are too good to be true.