Tag Archive for: New Orleans Tax Attorney

Does the IRS Allow Deduction of Expenses Incurred While Looking for Employment?

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While the sad reality is that many Americans have been unemployed or struggling financially as they accept low pay or part-time employment in an economy that continues to struggle, there is good news for those looking for employment when it comes time to file a federal income tax return.  If you meet the necessary requirements, you can deduct certain expenses associated with your job hunting.

The criteria for deducting a job search-related expense include the following:

  • The job must be in the same profession or occupation as your current employment.
  • The job will not be your first position so many new college graduates and other young people are out of luck.
  • A substantial period of time cannot have elapsed between leaving your last job and searching for a new position.

Job search expenses are included with other miscellaneous itemized deductions; you then may deduct any amount that exceeds two percent of your adjusted gross income.  While there are a wide range of job-related expenses that may be deducted, you may not deduct any expense for which you receive reimbursement from your employer or a third-party.  Some examples of expenses that may be deducted as job search expense include but are not limited to the following:

  • Travel expenses if the excursion is primarily to hunt for a job
  • Mileage at the standard mileage rate of 56.5 cents per mile during the 2013 tax year
  • Costs associated with the preparation of a CV or resume
  • Postage costs for sending resumes and job applications
  • Fees paid to job search agencies, job placement firms and headhunters

While those who are unemployed or underemployed may need every dollar, few job searchers realize that job search expenses may be deducted when filing a federal income tax return.  This is just one illustration of the way that many people cheat themselves when dealing with the IRS because they do not have legal advice.  Whether you are preparing a federal income tax return, facing an IRS audit, fighting a tax assessment or challenging an IRS decision on whether something is deductible or constitutes income, you can benefit from the legal advice of an experienced tax attorney.  If you have IRS tax questions, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949.

Common Questions Asked by Louisiana Taxpayers with IRS Problems [Part II]

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This is the second installment of our two-part blog post, which is intended to answer many common questions posed by those with IRS problems.  We recommend that you read Part I before reviewing this information.

Since I cannot afford to pay my taxes, I assume it would be better not to file a tax return and draw attention to my non-payment?

This is a misconception that many people make when they know that they have no ability to pay their federal income taxes.  The penalties for non-filing are extremely harsh so you should always file your federal tax return even if you cannot afford to pay the taxes.  Anyone who does not file a federal tax return is subject to a penalty of five percent per month until a maximum of 25 percent is reached.  The statute of limitations that bars enforcement through collection procedures also does not begin to run until you have filed your return.

How should I handle an audit?

While notice of an IRS tax audit can strike fear in the hearts of many, proper preparation and legal representation can help you prevail.  When you discover that you must participate in an audit, you should contact an experienced New Orleans tax law firm, which can evaluate what specific issues the IRS is raising.  A tax lawyer can help you prepare the proper documentation to address the issue and make sure that the proper legal basis for your position is asserted.  Although you should take a tax attorney to your audit to assist you in presenting your position, you also need the tax attorney to shield you from providing too much information that opens the door to new issues that were not initially raised by the IRS representative.

Should I file a tax return even though I do not owe any tax and will not receive a return?

An important rationale for filing a tax return is to trigger the start of the statute of limitations.  The IRS can pursue an assessment and try to collect underpaid tax many years after the year that the taxes were due.  If you do not file a tax return, you cannot use the statute of limitations to protect you from this scenario.

Can the IRS garnish my wages or put a lien against my real estate for a tax debt that my husband owed before we were married?

If your spouse incurred the tax debt prior to marriage, the IRS cannot file a wage assignment against your paycheck and generally cannot place a cloud of title on a home that you owned prior to marriage.  However, you need to be careful about filing a joint tax return with your spouse because the IRS may intercept your tax return.  The IRS can seize the entire amount of the refund even the portion attributable to your income.  While you may be able to petition to get your portion of the refund back, this is a situation that you are better off avoiding in the first place.  It is also possible that you can place assets in jeopardy if they are titled jointly.  If you have concerns about structuring your financial affairs to provide protection from your spouse’s tax debt, you should speak with Mr. Grego about particular actions that should be avoided.

If you have other IRS tax questions, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

Common Questions Asked by Louisiana Taxpayers with IRS Problems [Part I]

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The IRS represents the most brutal debt enforcement agency in the country with the power to seize your assets, place liens on your real estate, close your business, garnish your paycheck and otherwise cause financial chaos and hardship in your life.  While many fear the IRS, they do not take aggressive action to fight the powerful federal agency because they presume that the agency generally does not proceed on an illegitimate basis when auditing taxpayers or employing tax enforcement remedies.  Given the recent reports about the abusive tactics of certain IRS officials, taxpayers should have more motiviation than ever to take on the federal taxing agency.

New Orleans Tax Attorney Paul A. Grego recognizes that the best way to empower taxpayers to fight back is to arm them with the information they need to understand their legal rights and options.  Mr. Grego has provided answers to general questions that may be relevant to those who face a multitude of IRS issues including the following:

  • Failure to file tax returns
  • Unpaid tax
  • IRS enforcement tools
  • Audits

Can the ability of the IRS to enforce a tax debt through a wage assignment or other remedies be barred by the statute of limitations?

The statute of limitations for enforcement of tax obligations is ten years from either the date the return was due to be filed or the date the return was filed whichever occurred later in time.  However, this period can be extended if you request an offer in compromise or file bankruptcy.

Are federal income taxes subject to bankruptcy discharge in Chapter 7 or Chapter 13?

If three years have passed since the taxes were due or filed (whichever is later) before you file Chapter 7 or Chapter 13, the taxes usually will qualify for bankruptcy discharge.

May the IRS arrest me for owing unpaid taxes?

Generally, the failure to pay income taxes is not a crime though intentionally lying or misrepresenting your income and expenses may be a criminal act.  If you are concerned about potential criminal liability for an IRS issue, you should immediately speak to an experienced New Orleans tax lawyer.

Are there any potential adverse personal income tax consequences if I short sale my home or exercise a deed in lieu to avoid a foreclosure on my credit report?

If you are considering this type of foreclosure alternative because you cannot pay your mortgage, it is important to consult with a Louisiana tax attorney because the IRS may pursue you for cancellation of indebtedness income.  This can leave you in a much worse position than foreclosure because the IRS has much more powerful tools for enforcing a debt than mortgage lenders.

If you have additional questions about IRS issues, we invite you to read Part II of the FAQ blog.  If you have more specific tax questions, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

Should I Pay My Spouse for Working in the Family Business?

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If you are a professional like an attorney or doctor with your own practice or you run another type of family business, there is a good chance that your spouse works for the family owned enterprise.  Experienced Louisiana tax attorney Paul A. Grego often receives questions about the tax implications and merits of paying one’s spouse a salary.  Many people simply elect not pay their spouse a salary to avoid the payroll taxes because the income/profit will end up in a joint bank account so there is no justification for incurring the additional payroll tax obligation.  However, Mr. Grego has provided some reasons that it may be worth paying your spouse a salary:

Deduction of Medical Insurance Premiums: If the business owner is currently deducting family medical expenses on the first page of the 1040, a tax savings can be generated by making one’s employee spouse the insured.  This makes the medical insurance a business expense that may be reported on Schedule C.  When this slight adjustment is made, the parties receive a 3.8 percent savings on the Medicare portion of the self-employment tax.

Maximizing the Dependent Care Credit: The parties cannot qualify for the dependent care credit unless both spouses have earned income.  If you pay your spouse a salary, you may claim the earned income credit of up to $1,200.

Increasing Future Social Security Benefits: The amount of social security payments received by a person is based on his or her 35 highest earning years.  The income paid through the family owned business may be factored in with income during other years to increase this benefit level.

Building Credit: This situation may be relevant if the parties switch roles as the primary breadwinner in the future.  The owner of a professional practice may decide to take time out of the workforce for pregnancy or to care of young children.  In this situation, the fact you paid your spouse made a salary may make it easier for the spouse to qualify for credit later in the relationship.

These are just a few ways that slight changes in the structure of your professional practice or family business can yield positive tax consequences.  Mr. Grego frequently assists clients in structuring their business in a manner to minimize their tax burden and increase their take home pay.  If you have questions about optimizing your business structure to maximize tax avoidance, Mr. Grego provides effective business planning.  If you have tax questions, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

Will Correcting a Mistake on My Tax Return Trigger an IRS Audit?

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While there are a great many special days on the calendar that people enthusiastically anticipate, April 15 is not one of those days.  Many people hurriedly trying to file their taxes on time later discover that they have made an error when rushing to get their tax return completed by the filing deadline.  Some people are hesitant to correct their error because they fear that they will draw attention to the mistake and by subject to a dreaded IRS tax audit.  The IRS official position is that those who make a mistake in their return should simply “come clean” as soon as possible by filing a 1040X amended return that corrects the error.  The question we often receive at our New Orleans tax law firm is whether this will automatically result in an IRS tax audit.

While an amended tax return will not automatically “red flag” the taxpayer for an audit or get the taxpayer placed in the pool of returns from which returns are randomly selected, it will trigger an extra layer of scrutiny that could result in an audit.  It is important to understand there are situations where discovery of an error does not make it necessary to file an amended tax return.   For example, the IRS computer software will catch simple mathematical mistakes so there is no need to file a 1040X which will trigger closer review.  However, mistake like failing all of your income or listing the correct number of dependents should be corrected with an amended return.

The IRS does not disclose the precise formula or evaluation process used to red flag tax returns for an audit, but the federal taxing authority does indicate that the mere filing of an amended return is not sufficient to cause an audit.  The IRS will compare the old return to the new return, which means a closer examination so  potential issues that might trigger questions leading to an audit are more likely to be discovered.  One way to mitigate this risk might be to submit supporting documentation.  If you forgot to include a source of income or list a deduction for a business advertising expense, you might be able to prevent close scrutiny by attaching the W-2 or 1099 that evidences the additional income or an invoice and payment records for the additional expense.

If you are worried about a mistake on your tax return or you have questions about tax audits, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

The Importance of Documenting IRS Tax Deductions for Charitable Contributions

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The failure to keep vital documents that substantiate the validity of deductions can be extremely costly even when these documents are nothing more than a letter or receipt that you write to yourself from your own non-profit organization.  A taxpayer who was running an animal rescue learned this costly lesson when she had almost $10,000 in deductions to charitable organizations disallowed because she could not produce documents that she did not receive any consideration in exchange for the contribution.

In the U.S. Tax Court case of Villareale v. Commissioner, the taxpayer was the president of a non-profit animal rescue organization and managed all of the non-profit’s financial affairs.  She claimed a charitable giving deduction of $12,386, but most of the deduction was disallowed, which resulted in the IRS claiming a tax deficiency.  While the IRS conceded that the non-profit was a permissible charitable organization and that the taxpayer made the contributions, it rejected the deduction because Villareale could not produce documents that substantiated she had not received any goods or services in exchange for her contribution.

The tax court upheld the IRS decision to disallow the deduction, indicating that a charitable contribution of $250 or more must be supported by a written acknowledgement of the contribution from the charitable contribution at the time it is made.    While the taxpayer was able to provide bank records from both her personal bank account and the animal rescue establishing that the contributions were provided to the non-profit, the tax court ruled that these documents were inadequate because they did not indicate whether any goods or services were received in exchange for the funds.

While that taxpayer presented the intuitive argument that it made no sense to produce such a document because she was the party on either side of the transaction, the tax court held that the IRS could properly demand such a document.  The tax court reasoned that a “specific statement regarding whether goods and service were provided in consideration for the contributions . . . is necessary.”  Therefore, the IRS had a right to deny the deduction because the documentation was not provided.

This mistake is one that many taxpayers could easily make because it seems counter-intuitive to write a memo or receipt to yourself indicating that you did not receive valuable consideration for a donation you make to your own non-profit organization.  However, this type of documentation can be the key to prevailing when you have deductions challenged by the IRS.

If you have questions about whether you have the appropriate documentation to support a deduction, you should contact experienced Louisiana tax attorney Paul A. Grego.  We offer a free initial consultation so that we can answer your questions and provide an initial assessment of your situation.  Call us today at 504-302-4949 or email us.

What Should You Do If You Are Facing an IRS Tax Audit?

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While no person wants to be the target of an Internal Revenue Service (IRS) audit, there are ways to make the experience less painful – notice we did not say painless.  There are essentially three ways that an IRS audit may be conducted: (1) an office audit, (2) field audit or (3) correspondence audit.  An office audit involve appearing at the IRS office to produce receipts and other documents responsive to the inquiries raised by the IRS while a field audit involves the agent actually coming to your place of business or home to conduct the audit.  The least intrusive form of audit is a correspondence audit where the document requests and responses to these requests all occur by mail.  We have provided some key guidelines for reducing the potential risks associated with an IRS audit.

Do Not Encourage a Fishing Expedition: There are usually certain specific questions that an IRS agent will have about your tax return and claimed deductions.  It is important to inquire about these specific issues prior to meeting with the IRS agent.  The documents responsive to these requests should be identified, isolated and organized.  The goal is to ensure that the proof that your claimed deduction is easily accessible so that the audit agent has no reason to engage in a broad search of other documents that may raise issues that did not originally exist.

Do Not Volunteer Extra Information or Documents: While you are legally obligated to provide documents that substantiate the information in your tax return, this does not mean that you should produce more than is requested.  The documents you provide should be precisely what is requested and nothing more.  Non-responsive information will not help you obscure missing information but could open up new areas of inquiry.

Prepare for the Audit: When you receive notification of an audit from the IRS, you should both consult with the accountant or tax preparer who helped you prepare your return as well as an experienced tax attorney.  They can provide insight into the specific issues raised by the IRS and advise you about specific actions to take or avoid.  While you are not required to have a tax attorney present, this may be a cost-effective decision is you believe you may be facing substantial additional tax liability or even criminal liability.  If you need more time to located documents for the audit, you should request an extension rather than show up without the requested documents.

Responding to Questions during an Audit: While the best alternative is to have an experienced tax attorney who can influence the scope of the audit and help you avoid potential tax liability traps, you should be careful how you respond if you are not represented by counsel.  The answers you provide should be concise and brief without volunteering any extra information.  If you have a feeling that the audit is going poorly, you should not hesitate to ask for a break to consult your tax attorney or accountant.

If you are facing an IRS tax audit, you should contact experienced tax attorney Paul Grego.  We offer a free initial consultation so that we can evaluate your situation and explain your options.  Call us today at 504-302-4949 or email us.

Effective Strategy for Small Business Owners to Mitigate Self-Employment Tax Liability

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Those who are self-employed generally are subject to higher Medicare and Social Security taxes, which together are alternately referred to as self-employment taxes.  Someone who has employee status pays only a portion of self-employment taxes, but self-employed individuals pay the entire amount of self-employment taxes.  This issue is particularly important because the expiration of the payroll tax holiday means that the total amount of self-employment tax reverts from 15.3 percent back to 13.3 percent with the expiration of the payroll tax cut.

While self-employment tax imposes a heavier tax burden on small business owners than if they were employees, this higher tax burden can be mitigated by selecting an S-Corp as one’s business form.  Someone who is self-employed can use this strategy to reduce tax liability based on the same level of net income.  When structuring your business as an S-Corp, a portion of revenue can be divided between distribution and salary.  Although the portion of revenue designated as salary will still be subject to self-employment tax, the portion designated as a distribution will be subject to ordinary income tax.  This can result in substantial saving because of the reduced employment tax burden.

If you are interested in converting your business to an S-Corp or initially forming your business as an S-Corp, you should seek legal advice from an experienced tax attorney because there is a potential risk associated with this strategy.  The IRS scrutinizes S-Corps more closely because of the potential for abuse.  While this is a legitimate tax planning strategy, the division of revenue between salary and distribution must be reasonable.  If the business generates a million dollars in income after other expenses and only $40,000 is allocated to salary, this may trigger an IRS inquiry because the amount of self-employment tax avoided.  The fundamental principle is that the amount designated as salary must be “reasonable.”

Admittedly, this is a fuzzy concept, but a knowledge tax attorney can provide guidance regarding what might satisfy this standard given your unique circumstances.  While this can result in a significant reduction in the amount paid in self-employment tax, the benefit of this strategy may be undermined if it is not done correctly because it may expose the taxpayer to liability for underreported income, penalties and interest.

There are other costs associated with S-Corps, but a knowledgeable tax attorney can provide information so that you can make an informed decision about whether the self-employment tax savings justify the risk and costs associated with an S-Corp.  We offer a free initial consultation so call us today at 504-302-4949 or email us

Seeking Innocent Spouse Relief for Tax Liability Arising from a Joint Tax Return

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Most married couples select “married filing jointly” for their federal income tax filing status because it will typically result in a reduced tax liability.  Despite this financial advantage, filing a joint tax return also has a disadvantage because you are financially responsible for any unpaid tax, penalties and interest if there are inaccuracies when you sign a joint tax return.  Even if your spouse owns a business that generates all of your household income, the IRS can pursue its harsh enforcement penalties and seek the entire amount owed from you.

When signing a joint tax return, you should carefully review every line of the tax return to confirm its accuracy.  If you are not involved in a spouse’s business and have separate bank accounts, you may have no idea that the information on the joint tax return is inaccurate because of an inadvertent error or intentional misrepresentation by your current or former spouse.  The Internal Revenue Code is designed to protect a spouse in this type of situation, but this exception to joint and several tax liability is extremely narrow so it is difficult to qualify.

The conditions that must be met to qualify for innocent spouse relief include:

  • The understated tax liability is a result of an error by the spouse of the requesting party, such as undisclosed income, inapplicable credits and deductions or underreported earnings.
  • The party seeking innocent spouse relief did not know and did not have reason to know that the return underreported tax liability when the return was signed.
  • It would be unfair to impose liability for the tax on the requesting party under the surrounding circumstances.

There are a few nuances that impact eligibility under the above criteria.  If a spouse was aware of the understated tax under the second criteria above but not the extent of the underpayment, the taxpayer may qualify for partial relief for responsibility for the unpaid tax.  The IRS will also consider whether the party seeking relief benefited from the underreported tax obligation in the form of a more affluent standard of living and whether the parties who signed the joint return were later separated or divorced.

The IRS may also grant two other forms of relief beyond innocent spouse status: (1) relief by separation of liability and (2) equitable relief.  Relief by separation of liability involves allocating the unpaid tax liability between the spouses.  This form of relief may be authorized if the parties are separated or no longer married or the parties were not members of the same household during the year covered by the tax return.  If the IRS is able to establish that the party requesting this form of relief had actual knowledge of the erroneous information on the tax return or colluded with his or her spouse, this form of relief will not be granted.

When neither innocent spouse status nor relief by separation is an option, a spouse may seek equitable relief.  When there has not been any fraud, the taxpayer may be granted relief based on fairness.  The factors that the IRS may consider in assessing whether relief is appropriate may include economic hardship, separation and divorce and other factors bearing on the unfairness of imposing liability on the requesting spouse.

If you are facing tax liability based on a joint return and have questions about innocent spouse status, you should contact experienced tax attorney Paul Grego.  We offer a free initial consultation so that we can evaluate your eligibility for tax relief and explain your options.  Call us today at 504-302-4949 or email us.

Why Small Business Owners Must Exercise Care When Classifying Workers

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One of the primary ways small business owners end up in trouble is to avoid the expense and complexities of payroll taxes by classifying workers as independent contractors. Generally speaking, you are responsible for withholding income taxes, withholding and paying Social Security and Medicare taxes and paying unemployment taxes on all wages paid to your employees. Independent contractors, on the other hand, are responsible for paying their own taxes. As the small business owner you are responsible for determining whether your employees are, in fact, “normal” employees or whether they can legitimately be classified as independent contractors.

To correctly determine the classification of each person who works for you, you must first have a good grasp of the type of working relationship shared by yourself as the small business owner and the person supplying services for your business. First ask yourself a few questions regarding the degree of control you exercise over the person in questions. As far as behaviors, does your small business exercise any management regarding how the worker completes his job? Are you in control of how the worker is paid, who provides tools and supplies or whether expenses are reimbursed?

Do you have a written contract with the worker or does he or she receive regular benefits such as those enjoyed by most regular employees such as health insurance, vacation pay and a pension plan? There is no magic formula which will instantly tell you whether your workers are employees or independent contractors therefore you must look at the entire relationship the worker has with you and your small business. If you are unsure, but want to classify a worker as an independent contractor, protect yourself and your business from a future audit by doing the following:

  • Enter into a written contract which clearly spells out responsibilities of both parties and how payment will be determined for each job.
  • Require the independent contractor to provide all tools, equipment and materials needed to complete the job
  • If possible, have the independent contractor perform the majority of the work at his or her own place rather that at your place of business.
  • Have it clearly understood that as an independent contractor, your worker is free to offer his or her services to others.
  • Pay for the work by the job rather than monthly, hourly or weekly pay and insist upon invoices from the independent contractor prior to issuing payment.
  • Ensure your independent contractor has a business license and insurance and ask for proof that the independent contractor is properly reporting to the IRS what you pay.

Never simply cross your fingers and hope you will never be audited so you can avoid the hassle and expense of having employees on a regular payroll. This is the number one way small business owners get into trouble, and the number one thing the IRS looks closely at. If you have any doubts about whether your workers are regular employees or independent contractors, seek the advice of an experienced tax attorney who can help you stay out of trouble with the IRS.