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Tuesday
May262015

Tax Evaders May Be Fair Game For More Than the Three-Year Limit. Tax Attorney Rob Wood Explains

One sure way to get in trouble with the IRS is to engage in tax evasion. Of course, getting away with tax evasion (ignoring the illegality of it, for the moment) is the challenge, and for how long. Tax Attorney Rob Wood discusses the question in this report and in his Forbes article “How Far Back Can IRS Claim Tax Evasion?"

 

Wood points out that tax evasion is not the same as “aggressive tax preparation.” Wood says he doesn’t have a one-line definition, but there is a difference, just as tax avoidance is not the same as tax evasion. The difficulty in drawing the line between what is legal and what is not is a good reason to consult a tax professional. For example, whether a particular expense is deductible will depend on facts that may be unique to one particular taxpayer. All the problems, Wood opines, are reasons why the tax code needs to be rewritten and simplified.

One distinction that stands out is the difference between hiding income and claiming deductions to which one may not be entitled. Not reporting income is almost impossible to justify. The line between what must be reported and what is exempt can be fuzzy. Damage awards from lawsuits illustrate the problem. Damages for physical injuries are clearly exempt from taxation. On the other hand, damages received in an age discrimination action will probably be taxable. On the other hand physical injuries that result from discrimination, as in Parkinson v. Commissioner, may be nontaxable.

Generally, the IRS has a three-year period in which to catch tax evaders. However, the period can be lengthened for several reasons. But if you fail to report twenty-five percent or more of your gross income, the IRS has six years in which to catch you. Omitting information about a foreign account also triggers the six-year limit. And while you may be safe after six years, if your conduct is viewed as a “continuing violation,” the IRS has a longer time yet.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Tuesday
May262015

The $83 Million Verdict in KC: the IRS Will Get a Lot of It. Tax Attorney Rob Wood Explains

 

A jury in Kansas City recently returned a punitive damages verdict of $83 million against a debt collection company for trying to collect a small debt from the wrong person. Portfolio Recovery Associates LLC, one of the biggest debt buyers in the country, spent fifteen months pursuing Maria Guadalupe Mejia for a debt of about $1,000 that was actually owed by a man with a similar name. After they sued her, a Kansas City law firm filed a counterclaim on the woman’s behalf, alleging malicious prosecution and violation of the Fair Debt Collection Act. Tax Attorney Rob Wood discusses the case in this report and in his Forbes article “Woman Billed $1,000 For Credit Card Error Gets $83 Million Verdict, But IRS Gets Last Laugh.”

 

At the outset, Wood notes that collecting the jury award is not a sure thing. There are questions whether the verdict will stand and whether there will be an appeal. However, Wood’s primary interest is the world of taxation, and he says that “the tax rules . . . are quite strange,” and punitive damages in particular are treated “harshly” by the tax code. Punitive damages are taxable, so the plaintiff who recovers punitive damages will have to pay taxes on them. And there will be attorney’s fees to be paid as well, probably on a contingent fee basis. Wood says that, because alternative minimum tax treatment is possible, a plaintiff could actually end up losing money.

That probably will not be the outcome in this case, but Wood says that the plaintiff will end up with less net damages than most people would expect. Wood’s guess is that she will end up with about $15 million, assuming the damages are actually paid. “That’s . . . better than a poke in the eye,” but much less than the average person would guess.

But it is all income to the plaintiff, even if the lawyer collects it first and deducts the fee before giving the balance to the plaintiff. The plaintiff will have to pay taxes on the portion the lawyer keeps as a fee. Wood’s estimate assumes a one-third contingent fee. If the fee were forty-five percent, for example, the plaintiff’s share is much less. Wood recounts a complicated wrongful death some years ago where there multiple layers, including appellate lawyers’ fees, the total fees came to seventy-two percent. In that case, the plaintiff actually lost money after paying taxes.

And, Wood notes, the attorney’s fee in this case would be income and taxable to the lawyer who receives the fee. So the IRS gets to double dip.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Saturday
May232015

Maryland's Double Taxation of Residents Struck Down by Supreme Court. Tax Attorney Rob Wood Reports

 

On May 18, the Supreme Court decided a Maryland case involving double taxation. Maryland’s tax code does not give full credit to residents who also pay taxes in states where they work. The Court sided with the taxpayers, and the decision may cost some states and cities millions of dollars. Tax Attorney Rob Wood discusses the case in this report.

 

Wood characterizes the decision as “astounding.” This is another 5-4 decision, but the Court did not line up the way it often does in 5-4 cases. The decision is certainly bad news for Maryland. The decision could cost the state $200 million in tax losses and refunds. Another big issue is the effect the ruling will have on other states and cities around the country. Wood wonders how many claims and lawsuits will be brought in other places because of this case.

The tax approach used by Maryland is not unique, Wood says, noting that he is a Californian and has heard many of his fellow citizens complain that they don’t get credit for taxes paid elsewhere. Because of all sorts of things happening at state and municipal levels, it is not uncommon for people to be taxed twice on the same income and to receive no credit for the taxes paid. Wood opines that many taxpayers will be wondering whether the new case will provide some leverage for them in dealing with tax issues in their own locales.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Friday
May152015

Cleveland's "Jock Tax" Is Struck Down by Ohio Supreme Court. Tax Attorney Rob Wood Explains

 

Visiting professional athletes are perceived by many states and cities as heaven-sent revenue sources. Since they don’t live there, politicians don’t have to care what they think. But a city can go too far, as Cleveland, Ohio did with its “jock tax.” The Ohio Supreme Court struck down the tax in lawsuits filed by some retired NFL players. Tax attorney Rob Wood discusses the tax in this report based on his Forbes article, “Pro Athlete 'Jock Tax' Is Struck Down.”

 

Wood notes that the Cleveland tax was an attempt to go a little too far. The usual basis for taxation is the amount of performance time by the athlete in the city or state imposing the tax. This has been an issue in the past for Manny Pacquiao, whose tax problems have been the subject of a Rob Wood article. The question the Ohio court considered was whether the tax was based on work actually done in Cleveland or was the city “scooping up other income;” the Ohio court found that the latter was the case.

Wood says that he sees a lot of the professional athlete taxation in his home state of California, where money is chronically short. States are getting more aggressive in going after taxes from professional athletes. New York has changed its law so as to go after funds paid by trusts set up to bypass the state’s tax on professional athletes. Wood opines that, while the life of a professional athlete has many things about it that are pleasant, the tax affairs of any pro are complex and require careful handling.

Wood says that the same problem applies to professional golfers, who pay taxes on winnings they make in a state. State taxes, says Wood, are one of the reasons so many golfers life in Florida, which has no state income tax.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Tuesday
Apr142015

Want to Audit Proof Your Tax Return? Tax Attorney Rob Wood Tells You How

April 15th is almost here. Tax attorney Rob Wood has some suggestions for how to file a tax return that will survive a tax audit. He explains it in this report, based on his Forbes article “Five Ways To Audit Proof Your Tax Return Against The IRS.”

 

Taxpayers are perhaps less at risk of being audited today because the IRS has had its budget cut. Wood says that the reduced budget may be a factor in reducing the likelihood that someone will be audited, but taxpayers should not let this cause them to “do all sorts of creative things on their taxes. . . . Audit rates have always been low.” Less than 5% of returns have traditionally been audited, so the reduced budget may not be a big factor.

Wood suggests that the tax code has become complex enough that many taxpayers should consult professionals to prepare their returns. However, another good option is the use of tax preparation software. Wood looks at many returns, and he believes that the software is a good solution for many taxpayers. Organization is a very important step in preparing a return, and software can help with that by walking a taxpayer through the preparation process. Even the IRS Commissioner has positive things to say about the software approach.

Wood also emphasizes that taxpayers should not disclose too much information in the return. “A tax return is meant to be for numbers.” It is not an essay exam. Wood says that there may be things that require explanation, such as a Form 1099 that shows a payment of twice the amount that was actually made—such as receiving a payment of $10,000 that shows up as $20,000 on a 1099. If you can’t get a new form from the payor, you need to explain the error on your return, but “do it succinctly.” Don’t attach a lot of photocopies to prove that the correct amount is $10,000.

Wood says that it is also important to deal properly with 1099 forms. A taxpayer should collect them, keep them safe, and account for them. However, a taxpayer should avoid asking for a 1099 that doesn’t arrive when the taxpayer knows about the income ($10,000, to use the previous figure). The taxpayer should simply list the income and go forward. The key is matching. You need to list all the 1099 income you have, and what you report should match the 1099s you have received. However, it is not a “mismatch” problem if you report more income than the forms disclose.

If you are interested in the subject, you may want to look at Wood’s follow-up article, “Five More Ways To Audit Proof Your Tax Return Against The IRS.”

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.