• $5,000 First-year Start-up and Organizational Expense Write-off
  • Timely Filing Requirements
  • Qualifying Start-up Expenses
  • Trade or Business Purchase
  • Qualifying Organizational Expenses
  • Expense Write-off Limitations
  • How to Make the Election
  • Other Considerations

Unfortunately, as a result of the COVID pandemic many small firms have gone out of business. However, with the help of vaccines and the waning lethality of the latest versions of the virus, new businesses will be opening as the economy returns to near normal. New business owners, especially those operating small businesses, may be helped by a tax provision allowing them to deduct up to $5,000 of the start-up expenses and $5,000 of organizational costs in the first year of the business’s operation. These types of expenses not deductible in the first year of the business must be amortized (deducted) over 15 years. If a taxpayer who incurred start-up expenses does not make the election, the start-up costs must be capitalized, meaning that the expenses can only be recovered upon the termination or disposition of the business.

Generally, start-up expenses include all expenses incurred to investigate the formation or acquisition of a business or to engage in a for-profit activity in anticipation of that activity becoming an active business. To be eligible for the election, an expense must also be one that would be deductible if it were incurred after the business actually began. An example of a start-up expense is the cost of analyzing the potential market for a new product.

  • Qualifying Start-Up Costs – A qualifying start-up cost is one that would be deductible if it were paid or incurred to operate an existing active business in the same field as the new business, and the cost is paid or incurred before the day the active trade or business begins. Not includible are taxes, interest, and research and experimental costs. Examples of qualified start-up costs include:
    • Surveys/analyses of potential markets, labor supply, products, transportation facilities, etc.;
    • Wages paid to employees and their instructors while they are being trained;
    • Advertisements related to opening the business;
    • Fees and salaries paid to consultants or others for professional services; and
    • Travel and other related costs to secure prospective customers, distributors, and suppliers.

For the purchase of an active trade or business, only investigative costs incurred while conducting a general search for, or preliminary investigation of, the business (i.e., costs that help the taxpayer decide whether to purchase a new business and which one to purchase) are qualified start-up costs. Costs incurred attempting to buy a specific business are capital expenses that aren’t treated as start-up costs.

  • Qualifying Organizational Cost – include fees for legal services, such as for drafting LLC documents, partnership agreements, corporate charter and by-laws; incorporation fees; temporary directors’ fees; and organizational meeting costs.
  • Phaseout – As with most tax benefits, there is always a catch. Congress put a cap on the amount of expenses that can be claimed as a deduction under this special election. Here’s how to determine the deduction: If the expenses are $50,000 or less, you can elect to deduct up to $5,000 in the first year, plus you can amortize the balance over 180 months.
Text Box: Example: Eligible start-up expenses are $6,000 and the business began on July 1, 2022. On the business’s 2022 tax return, the deduction for start-up expenses will be $5,033 ($5,000 + ($1,000/180 x 6 months)).

If the expenses are more than $50,000, then the $5,000 first-year write-off is reduced dollar-for-dollar for every dollar in start-up expenses that exceeds


Text Box: For example, if start-up costs were $54,000, the first-year write-off would be limited to $1,000 ($5,000 – ($54,000 – $50,000)), plus the remaining
$53,000 of costs would be amortizable over 180 months. These limits are applied separately for the start-up and organizational costs.

The election to deduct start-up and organizational costs is made by claiming the deduction on the return for the year in which the active trade or business begins, and the return must be filed by the extended due date.

The decision to write off these expenses should take into consideration other tax benefits available in the first of year of the business, including bonus deprecation and Sec 179 expensing, the Sec 199A deduction, and the overall result in the first year of the business.

If you are starting a business, it may be appropriate to formulate a business plan in advance. If you have questions or would like an appointment to discuss how to establish your business and the types of business structures that are available, please give this office a call.

Don’t Ignore Household Employee Payroll Tax Rules

Article Highlights:

  • Household Employees
  • Tax Avoidance
  • Filing 1099s
  • Correct Procedures
  • W-2s, Payroll Taxes and Reporting
  • Overtime
  • Hourly Pay or Salary
  • Separate Payrolls

If you hire a domestic worker to provide services in or around your home, you

probably have a tax liability that you don’t know about – or one that you do know about but are ignoring. Either situation can come back to bite you. When the worker is your employee, your liability includes both withholding and paying payroll taxes as well as issuing a W-2 after the close of the year.

Sure, it is a lot easier simply to pay your worker in cash so as to avoid federal and state payroll taxes – and all the paperwork that goes with them. Your domestic worker will likely be fully cooperative with a cash deal because he or she can also avoid paying taxes. However, if the IRS or your state employment department finds out about these payments, the result could be very unpleasant for you.

Not everyone who performs services in or around your home is classified as an employee. For instance, a plumber or electrician who makes repairs in your home will generally be a licensed contractor; the government does not classify contractors as employees.

On the other hand, the IRS has conclusively ruled that nannies, housekeepers, senior caregivers, some gardeners and various other domestic workers are employees of the people for whom they work. It makes no difference if you have a written contract with the employee; similarly, the number of hours worked and the amount paid do not matter.

You are probably thinking, “Wait a minute” – perhaps everyone you know pays in cash, and none of them has paid payroll taxes or issued a W-2 for a household employee. However, if a worker gets injured on your property or if you dismiss the worker under less-than-amicable circumstances, it’s a pretty sure bet that your household employee will be the first one to throw you under the bus by reporting you to the state labor board or by filing for unemployment compensation.

Some individuals try to circumvent the payroll issue by treating a household employee as an independent contractor, incorrectly issuing the household employee a Form 1099-NEC.

Here are the correct actions you should take for domestic employees:

  • Obtain a Federal Employer Identification Number (FEIN), which you will use in lieu of your Social Security Number when filing the required reporting forms. Note: If, as the owner of a sole proprietorship business, you already have a FEIN, you should use that number instead of requesting a separate one as a household employer.
  • Obtain a state ID number for unemployment insurance and state tax withholdings.
  • Withhold Social Security and Medicare taxes from the employee’s pay if it exceeds the annual threshold ($2,400 for 2022).
  • Withhold income tax from the employee if requested by the worker and if you agree to do so.
  • File state employment tax returns as required – generally quarterly (although beware that some states require monthly returns) – and make the required deposits for state employment taxes.
  • Prepare a W-2 for the employee and a W-3 transmittal; file them by the end of January.
  • File Schedule H with your federal individual income tax return and pay all the federal payroll and withholding taxes (i.e., the federal taxes that you withheld from the employee’s pay, plus your matching share of Social Security and Medicare taxes plus federal unemployment tax, which is entirely your

responsibility). Limited exception: If you operate a sole proprietorship with employees, you may include the payroll taxes of your household workers with those of the business’s employees, but you cannot take a business deduction for those taxes. Generally, it is better to keep the personal and business reporting separate.

Some additional issues to consider are as follows:

Overtime – Under the Fair Labor Standards Act, domestic employees are nonexempt workers and are entitled to overtime pay after working 40 hours in a week. Live-in employees are an exception to this rule in most states.

Hourly Pay or Salary – It is illegal to treat nonexempt employees as if they are salaried.

Separate Payrolls – If you own a business with a payroll, you may be tempted to include your household employees on the company’s payroll. The payments to the household employees are personal expenses, however, and are not allowable deductions for a business. Thus, you must maintain a separate payroll for household employees; in other words, you must use personal funds to pay household workers instead of paying them from a business account.

Eligibility to Work in the U.S. – It is illegal to knowingly hire or continue to employ an alien who is not legally eligible to work in the U.S. When hiring a household employee who works on a regular basis, you and the employee each must complete Form I-9 (Employment Eligibility Verification). You will need to examine the documents that the employee presents to establish the employee’s identity and employment eligibility.

Other Issues – Special situations not covered in this overview include how to handle workers hired through an agency, how to gross up wages if you choose to pay an employee’s share of Social Security and Medicare taxes, and how to treat noncash wages.

Please call this office if you would like assistance with your household employee tax and reporting requirements or with any special issues that apply to your state.

Vacation Home Rentals: How the Income Is Taxed

Article Highlights:

  • Home never rented
  • Home rented for fewer than 15 days
  • Home rented for at least 15 days with minor personal use
  • Home rented for at least 15 days with major personal use
  • Vacation home sales

If you have a second home in a resort area, or if you have been considering acquiring a second home or vacation home, and with summer just around the corner, you may have questions about how rental income is taxed for a part-time vacation-home rental. The applicable rental rules include some interesting twists that you should know about before you begin renting. Although some individuals prefer to never rent out their homes, others find such rentals to be a helpful way of covering

the cost of the home. For a home that is rented out part time, one of three rules must be considered, based on the length of the rental:

  1. Home Rented for Fewer Than 15 Days – If a property is rented out for fewer than 15 days in a year, the property is treated as if it were not rented out at all. The rental income is tax-free, and the interest and taxes paid on the home are still deductible as part of itemized deductions and within the usual limitations. In this situation, however, any directly related rental expenses (such as agent fees, utilities, and cleaning charges) are not deductible. This rule can allow for significant tax-free income, particularly when a home is rented as a filming location or during a major sports event such as the Super Bowl.
  2. Home Rented For At Least 15 Days with Minor Personal Use – In this scenario, the home is rented for at least 15 days, and the owners’ personal use of the home does not exceed the greater of 15 days or 10% of the rental time. The home’s use is then allocated as both a rental home and a second home. For example, if a home is used 5% of the time for personal use, then 5% of the interest and taxes on that home are treated as home interest and taxes; these costs may be deductible as itemized deductions. The other 95% of the interest and taxes, as well as 95% of the insurance, utilities, and allowable depreciation, count as rental expenses (in addition to 100% of the direct rental expenses). If the rental income less the expenses result in a loss, the loss is limited to $25,000 per year for a taxpayer with adjusted gross income (AGI) of $100,000 or less and is ratably phased out when AGI is between $100,000 and $150,000. Thus, if a taxpayer’s income exceeds

$150,000, the rental loss cannot be deducted; it is carried forward until the home is sold or until there is rental profit in a future year or the taxpayer has gains from other passive activities that can be used to offset the loss.

  • Home Rented For At Least 15 Days with Major Personal Use – In this scenario, a home is rented for at least 15 days, but the owner’s personal use exceeds the greater of 14 days or 10% of the rental time. With such major personal use, no rental-related tax loss is allowed. For example, consider a home that has personal use 20% of the time and is a rental for the remaining 80%. The rental income is first reduced by 80% of the combined taxes and interest. If the owner still makes a profit after deducting the interest and taxes, then direct rental expenses and certain other expenses (such as the rental-prorated portion of the utilities, insurance, and repairs) are deducted, up to the amount of the remaining income. If there is still a profit, the owner can take a deduction for depreciation, but this is also limited to the remaining profit. As a result, no loss is allowed, and any remaining profit is taxable. The interest and taxes from the personal use (20% in this example) are deducted as itemized deductions, which are subject to the normal interest and tax limitations.

Vacation Home Sales – A vacation-home rental is considered a personal-use property. Gains from the sales of such properties are taxable, and losses are generally not deductible.

Unlike primary homes, second homes do not qualify for the home-gain exclusion. Any gain from a second home is taxable unless it served as the taxpayer’s primary residence for two of the five years immediately preceding the sale and was not rented during that two-year period. In the latter scenario, the taxpayer does qualify for the home-gain exclusion, if he or she has not used that exclusion for another

property in the prior two years. As a result, the home-gain exclusion can offset an amount of gain that exceeds the depreciation previously claimed on the home; this amount is limited to $250,000 for an individual or $500,000 for a married couple filing jointly (if the spouse also qualifies).

There are complicated tax rules related to the home-gain exclusion for homes that are acquired in a tax-deferred exchange or converted from rentals to primary residences. Homeowners may require careful planning to utilize the home-gain exclusion in such cases.

As an additional note, when a property is rented for short-term stays or when significant personal services (such as maid services) are provided to guests, the taxpayer likely will be considered a business operator rather than just an individual who is renting a home. If so, the reporting requirements will differ from those outlined above.

As with all tax rules, there are certain exceptions to be aware of. Please call this office to discuss your situation in detail.

Summer Employment for Your Child

Article Highlights

  • Higher Standard Deduction
  • IRA Options
  • Self-Employed Parent
  • Employing Your Child
  • Tax Benefits

Summer is almost here, and your children may be looking for a summer job. The standard deduction for single individuals increased from $12,550 in 2021 to $12,950 in 2022, meaning your child can now make up to $12,950 from working without paying any income tax on their earnings.

In addition, they can contribute the lesser of $6,000 or their earned income to an IRA. If they contribute to a traditional IRA, they could earn up to $18,950 tax free, by combining the standard deduction and the maximum allowed deductible contribution to an IRA for 2022 of $6,000. However, looking forward to the future, a Roth IRA with its tax-free accumulation and distributions would be a better choice. But the contributions to a Roth IRA are not deductible.

Even if your child is reluctant to give up any of their hard-earned money from their summer or regular employment, if you have the financial resources, you could gift them the funds to make the IRA contribution, giving them a great start and hopefully a continuing incentive to save for retirement.

With vacation time just around the corner and employees heading out for their summer vacations, if you are self-employed, you might consider hiring your children to help out in your business. Financially, it makes more sense to keep the family employed rather than hiring strangers, provided, of course, that the family member is suitable for the job.

Rather than helping to support your children with your after-tax dollars, you can instead hire them in your business and pay them with tax-deductible dollars. Of course, the employment must be legitimate and the pay commensurate with the

hours and the job worked. A reasonable salary paid to a child reduces the self- employment income and tax of the parents (business owners) by shifting income to the child.

Text Box: Example: Let’s say you are in the 24% tax bracket and own an unincorporated business. You hire your child (who has no investment income) and pay the child $16,000 for the year. You reduce your income by $16,000, which saves you $3,840 of income tax (24% of $16,000), and your child has a taxable income of $3,050, $16,000 less the $12,950 standard deduction, on which the tax is $305 (10% of $3,050).

If the business is unincorporated and the wages are paid to a child under age 18, the pay will not be subject to FICA (Social Security and Medicare taxes) since employment for FICA tax purposes doesn’t include services performed by a child under the age of 18 while employed by a parent. Thus, the child will not be required to pay the employee’s share of the FICA taxes, and the business won’t have to pay its half either.

Text Box: Example: Using the same information as the previous example, and assuming your business profits are $130,000, by paying your child $16,000, you not only reduce your self-employment income for income tax purposes, but you also reduce your self-employment tax (HI portion) by $429 (2.9% of
$16,000 times the SE factor of 92.35%). But if your net profits for the year were less than the maximum SE income ($147,000 for 2022) that is subject to Social Security tax, then the savings would include the 12.4% Social Security portion in addition to the 2.9% HI portion.

A similar but more liberal exemption applies for FUTA, which exempts from federal unemployment tax the earnings paid to a child under age 21 while employed by his or her parent. The FICA and FUTA exemptions also apply if a child is employed by a partnership consisting solely of his or her parents. However, the exemptions do not apply to businesses that are incorporated or a partnership that includes non-parent partners. Even so, there’s no extra cost to your business if you’re paying a child for work that you would pay someone else to do anyway.

Retirement Plan Savings. Referring to our original example, if the child had a made a traditional IRA contribution of $6,000 the taxable income and the tax would zero. So, it might be appropriate to make a Roth IRA contribution instead, especially since the child has so many years before retirement and the future tax-free retirement benefits will far outweigh the current $305 savings. Of course, some children will not be thinking about retirement at their young age and may object to contributing to an IRA. If that is the case, perhaps you as the parent, or even the grandparents, can make a gift of the IRA contribution, which can grow to big bucks by the time the child reaches retirement age.

If you have questions related to your child’s employment or hiring your child in your

business, please give this office a call.

When Can You Dump Old Tax Records?

Article Highlights:

  • General statute is 3 years
  • Some states are longer
  • Fraud, failure to file and other issues can extend the statute
  • Keeping the actual return

Taxpayers often question how long records must be kept and the amount of time IRS has to audit a return after it is filed.

It all depends on the circumstances! In many cases, the federal statute of limitations can be used to help you determine how long to keep records. With certain exceptions, the statute for assessing additional tax is 3 years from the return due date or the date the return was filed, whichever is later. However, the statute of limitations for many states is one year longer than the federal limitation. The reason for this is that the IRS provides state taxing authorities with federal audit results.

The extra time on the state statute gives states adequate time to assess tax based on any federal tax adjustments that also apply to the state return.

In addition to lengthened state statutes clouding the recordkeeping issue, the federal 3-year rule has several exceptions:

  • The assessment period is extended to 6 years instead of 3 years if a taxpayer omits from gross income an amount that is more than 25 percent of the income reported on a tax return.
  • The IRS can assess additional tax with no time limit if a taxpayer: (a) doesn’t file a return; (b) files a false or fraudulent return to evade tax; or (c) deliberately tries to evade tax in any other manner.
  • The IRS gets an unlimited time to assess additional tax when a taxpayer files an unsigned return.

If no exception applies to you, for federal purposes, you can probably discard most of your tax records that are more than 3 years old; add a year or so to that if you live in a state with a longer statute.

Examples: Susan filed her 2020 tax return before the due date of April 15, 2021. She will be able to safely dispose of most of her records after April 15, 2024. On the other hand, Don filed his 2020 return on June 1, 2020. He needs to keep his records at least until June 1, 2024. In both cases, the taxpayers may opt to keep their records a year or two longer if their states have a statute of limitations longer than 3 years.

Important note: Even if you discard backup records, never throw away your file copy of any tax return (including W-2s). Often the return itself provides data that can be used in future tax return calculations or to prove amounts related to property. You should keep certain records for longer than 3 years. These records include:

  • Stock acquisition data. If you own stock in a corporation, keep the purchase records for at least 4 years after the year you sell the stock. This data will be needed to prove the amount of profit (or loss) you had on the sale. Although brokers are now required in most cases to keep purchase records and report the information to the IRS when the stock is sold, it is still a good idea for you to maintain your own records, as you the taxpayer are ultimately responsible for proving the cost to the IRS if your return is audited.

·         Stock and mutual fund statements where you reinvest dividends.

Many taxpayers use the dividends they receive from a stock or mutual fund to

buy more shares of the same stock or fund. The reinvested amounts add to basis in the property and reduce gain when it is finally sold. Keep statements at least 4 years after the final sale.

  • Tangible property purchase and improvement records. Keep records of home, investment, rental property, or business property acquisitions AND related capital improvements for at least 4 years after the underlying property is sold.

As we become more and more a paperless society, you may wonder if you must keep the paper version of the records mentioned in this article. No, you don’t – the paper documents can be scanned and maintained on your computer or in the cloud. But if you do convert the records to electronic files, be sure to maintain a back-up that can be retrieved if you have a computer crash or cyber attack that takes over your computer.

If you have questions about what records to retain and what you can dispose of now, please give this office a call.

Important Times to Seek Assistance

Article Highlights:

  • When to seek professional assistance
  • Examples of times where tax saving moves can be made

Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse:

  • Receive a large employee bonus or award
  • Become unemployed
  • Change employment
  • Take an unplanned withdrawal from an IRA or another pension plan
  • Retired or are contemplating retirement
  • Moved or otherwise changed your address
  • Sold or purchased a home
  • Exercised or are planning to exercise an employee stock option
  • Have significant stock gains or losses
  • Refinanced or plan to refinance your home mortgage
  • Get married
  • Separate from or divorce your spouse
  • Sell or exchange a property or business
  • Experience the death of a spouse during the year
  • Inherit property
  • Turn 72 during the year
  • Increase your family size through birth or adoption of a child
  • Start a business, acquire a rental property, or convert your home to a rental
  • Receive a substantial lawsuit settlement or award
  • Get lucky at a casino, lotto, or game show and receive a W-2G
  • Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity
  • Plan to gift more than $16,000 to any one individual during the year

In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with this office.

Is Your Will or Trust Up to Date?

Article Highlights:

  • Estate Tax Exclusion
  • Why a Will or Trust?
  • Life-Changing Circumstances
  • Beneficiaries

When was the last time you or your attorney reviewed or updated your will or trust? If it was some time ago before the passage of substantial tax law changes over the past few years, your documents may be out of date. Among the many changes was a substantial revision to the estate tax exclusion.

No doubt your will or trust was prepared with not just estate taxes in mind but so that your assets will be distributed after your death according to your wishes.

However, certain events besides the tax laws being revised can cause these documents to become outdated.

Life’s ever-changing circumstances make estate planning an ongoing process. If you don’t keep your will or trust up to date, your money and assets could end up in the wrong hands. That’s why a periodic review of your will or trust is an essential part of estate planning. Here is a partial list of occurrences that could cause your will or trust to be outdated:

  • Your marital status has changed.
  • Your heirs’ marital status has changed.
  • You have relocated to another state.
  • You’ve had or adopted children.
  • Your children are no longer minors.
  • Your children are now mature enough to handle their own financial matters.
  • Your assets have significantly changed in value.
  • You have sold or acquired a major asset or assets.
  • Your personal representative (executor, trustee) has changed.
  • You wish to delete or add heirs.
  • Your health status has changed.
  • Estate laws have changed.

Are your named beneficiaries up to date on your life insurance policies, IRA accounts, and pension plans? For example, did you forget to remove your ex-spouse or a deceased relative as your beneficiary?

You should never overlook or put off these issues because once you pass on, it will be too late to make changes.

If you have questions about how your changed circumstances may impact your estate taxes, please give this office a call.

Understanding What Innocent Spouse Relief Is, and Whether You Need It

When you got married, you and your spouse pledged your love for each other and promised to stand together through good times and bad, sickness and health. But what happens if your spouse turns out to be a tax cheat, and you signed a joint tax return without realizing it. Can you be held responsible?

Finding out that your spouse has dragged you into their tax evasion is a twofold problem. There’s the emotional aspect that surrounds your relationship and your marriage, and the more pragmatic issue of whether their actions make you subject to fines or penalties, as well as whether you’ll have to pay for their taxes. Though we have no advice for you on the former, there’s good news on the latter. You’re probably eligible for what is known as Innocent Spouse Relief.

Filing Joint Taxes and Innocent Spouse Relief

Most married couples file their taxes jointly. There are plenty of reasons for doing so, including several important incentives for doing so that the government offers. But when you sign a joint income tax return, it makes both you and your spouse equally responsible for the taxes that are due, as well as any fines, penalties, and interest that may accrue. That responsibility is joint – meaning that you owe it together – but it is also able to be collected severally – which means that each individual may be expected to pay the whole.

Joint tax returns are signed by both spouses, and the signature is a pledge that the taxes are accurate. When the IRS finds that is not the case, it has no interest in or ability to establish which spouse is behind the error, or in deciding who should make up the difference. Both spouses are responsible for paying their tax liability, and it is up legally up to them to make it happen. If the shortfall and any related penalties or fines aren’t paid, then both can be pursued legally and financially, together or separately. In fact, the courts have gone so far in support of the IRS’ pursuit of either spouse that they have determined that the agency is not required to abide by divorce decrees and other legally binding agreements meant to divert the agency away from one or the other spouse.

Still, the agency has acknowledged that their equal opportunity pursuit of both signors of a joint tax return is not necessarily appropriate when one of the partners was unaware of their spouse’s wrongdoing. That’s where Innocent Spouse Relief comes in. It specifically grants liability relief to an innocent spouse for any unpaid taxes, as well as associated interest and penalties, for income or wrongdoing about which they were unaware. If there are portions of the tax return that are correct and legitimate, then the co-signer of the return is still responsible and can be pursued for those related taxes and fees.

If you find that your spouse committed some form of tax evasion on your joint tax return and you want to see whether you qualify for Innocent Spouse Relief, here are the basic criteria:

  • Having filed a joint tax return with your spouse
  • The IRS has indicated that the tax liability on your joint tax return is greater than the amount reflected on the form
  • The shortfall in the amount reflected on your tax return was a direct result of an action by your spouse
  • You are able to demonstrate a lack of knowledge about the shortfall on the tax return and had no reason to suspect that such a thing had occurred (the IRS refers to this as an absence of either “reason to know” or “actual knowledge”)
  • The IRS agrees that it would reflect a level of “unfairness” to hold you

responsible for the shortfall created by your spouse.

So how does the IRS establish – or how do you disprove — that you had

knowledge of your spouse’s tax evasion?

It’s all a matter of timing. If the IRS has reason to believe that you knew about the issue when the return was filed (and when you signed), then you cannot be considered innocent. In fact, you would be deemed an accomplice. Of course, proving what somebody knew or didn’t know is a big challenge, so the government only holds itself to the standard of proving that there was “reason to know.” There are a few considerations that go into that test, including:

  • What type of tax deficiency is involved and the amount as compared to other list items in the tax return
  • The couple’s finances
  • The educational background and business experience of the spouse who is claiming innocence
  • How much each spouse was actively engaged in the specific issue that the tax deficiency involved
  • Whether, in a way that is considered reasonable or that would be expected, the spouse claiming innocence questioned the specific items involved in the deficiency on the return when signing it
  • Whether the deficiency made that year’s return significantly different from

previous years’ returns

The basic element that these considerations are proving or disproving is whether the spouse claiming innocence had a reason to know or suspect that there was something amiss on the return at the time that they signed it. And since knowledge is hard to prove, courts limit their decision that knowledge existed to situations where the IRS is able to provide significant evidence that the spouse claiming

innocence actually did know about the wrongdoing. Without strong proof, the innocence plea is generally upheld.

How Would You Prove Yourself to Be Deserving of Innocent Spouse Relief?

If you have filed a joint return that has been found to be evasive and you want to prove yourself eligible for innocent spouse relief, you need to meet three specific criteria. They are:

  • Belief that the discrepancy was a result of a mistake discovered after the tax return was filed
  • Have evidence that you didn’t know about the discrepancy
  • Show that you believe that after all the information is presented to the court,

it will be evident that you shouldn’t be held responsible

Each of these points goes back to whether you had reason to know about the shortfall on your tax return. In some cases, the understated taxes at issue are a result of incorrect calculations – simple math errors or mistakes made regarding credits or tax basis on an asset. But in other cases, it is a matter of unreported income, either from a side business, from cash transactions, or from investments.

If you want to request innocent spouse relief you need to do so within two years of the time that you become aware that the IRS tries to collect the amount that is owed. That two years can be interpreted in a number of ways, including you having become aware of the mistake on the return and suggesting to your spouse that you owe more money; or by having received notification from the IRS that there is a problem with the joint return. It can also be a lawsuit filed against you by the government indicating that you have joint liability or an intent to levy your property. Either way, the application is submitted using IRS Form 9968, Request for Innocent Spouse Relief. You can also qualify for Innocent Spouse Relief if the IRS files a claim saying as much in court if there is a court proceeding such as a bankruptcy filing that you are involved in.

One thing that is important for anybody filing for innocent spouse relief to be aware of is that you cannot do so without your spouse being notified of your filing. This is even true if you are in the midst of a divorce or have been subjected to domestic violence. There is no way to avoid your spouse being involved in the process.

The idea of your spouse including you in their wrongdoing — and possibly subjecting you to action by the IRS — is enough to put any marriage to a significant test. While you may want to seek marriage counseling, or legal action, with regards to how purposeful tax discrepancies impact your relationship, the question of how it impacts your finances is an entirely different story, and one that requires consulting with a tax expert. For information on your options and how you should proceed, contact our office today to set up a time for a conversation.

With a Possible Recession Looming, You May Want to Review Your Cash Flow Process

If you’re a business owner who has been through a recession before, you know that smart cash flow management is absolutely crucial. If you’re a new entrepreneur who hasn’t been through an economic downturn, you may be less familiar with how quickly your finances can be affected.

To protect yourself and keep your business operating, here are the things you need to know about adjusting your cash flow process to match the economic environment.

Evaluate Your Expenses

When cash is short, it’s time to take a magnifying glass to your expenses, both to ensure that you’re being charged appropriately and to determine which of the invoices coming in should not be repeated. It’s easy to spend money when cash is coming in, but once things get tight you may need to adjust your budgetary line items and start chatting with employees about whether specific expenditures are actually needed.

You may also want to think about how spending decisions are approved, limiting authority for purchasing above certain amounts or requiring sign-off from management to ensure that you’re staying within your means and available resources. Though staff may object to losing their travel or entertainment budgets, an economic downturn should reclassify them as luxuries that can be cut back or eliminated rather than necessities. The same goes for meeting expenditures.

Other expenses can be adjusted in a way that limits the impact on your staff but still helps your bottom line. Fixed costs for transportation can be shifted from purchasing new vehicles to contracting for a fleet leasing program. Doing so keeps your capital in your bank account, where it can be put to better use when money is tight.

Vendor relationships can become strained when you find yourself having to either cancel or downgrade a contract and even more so if you’re unable to pay your bills. The best way to approach this is upfront and with honesty. The more open you are about your cash situation, the more likely you will be able to work something out in the short term and maintain or resume the relationship for the long term.

Make It Easier for Your Clients to Pay Their Bills

When you insist on issuing paper invoices and getting paid by check, you automatically slow down the process of getting paid. Make it easier for your clients to pay you by setting up an online payment option and billing them electronically. If you have clients you’ve been allowing to slide in terms of on-time payments, it’s time to have someone within our organization – preferably somebody in management – contact them directly. As for new clients, if you haven’t been conducting credit checks before providing them with goods or services, it’s time to start. It’s better to turn away business that might not get paid for than to get stuck holding an uncollectable bill.

Involve Your Employees

Though your financial challenges are ultimately yours to shoulder and solve, that doesn’t mean that your employees should not be kept in the loop about the realities of your day-to-day situation, and this is particularly true for the core group upon whom you rely most. Not only is it a good idea to talk with them and explain why you’re putting more restrictive policies in place, but in doing so you may find that they have ideas for how to boost revenue, ease cash flow, and save money. It’s the people who are on the ground who see where money is being wasted and where cost-cutting changes to staffing and expenditures can be made. Use this valuable resource!

If you are encountering cash flow challenges and would like additional guidance, contact our office today to set up a time for a consultation.