|
Western Tax Service |
|||||||
|
|
If you had your 2000, 2001 and/or 2002 Federal and/or State income tax returns prepared by Western Tax Service or DeAngelo Tax Service, please read this next section very carefully. Most of these returns are through the examination process by now, but a few may be lingering around - so I will continue to leave this information on my web site for the rest of 2006. The Department of Justice (DOJ) issued a press release in early 2003 in which they alleged this firm prepared returns with inflated or non-existent deductions. Here is a link to a copy of the DOJ news release. Just over a year later, on April 14, 2004, the Department of Justice issued another press release announcing an indictment against seven individuals involved with Western Tax Service and DeAngelo Tax Service. Here is a link to the DOJ announcement of the indictment. What does this mean to you? It means that if your 2000 or later returns were prepared by either firm, you are extremely likely to be audited by BOTH the IRS and FTB. As of 4/15/2006, the statute on a calendar year 2002 timely-filed Federal income tax return expired - meaning, that if you had not received a Notice of Deficiency (discussed later) on or before 4/15/2006 for your timely-filed 2002 Form 1040 return, the IRS is very unlikely to audit it now. HOWEVER, the FTB has a four (4) year audit statute, and can still audit a calendar year 2001 Form 540 until 4/15/2006! If your returns were filed late or on extension, both agencies will have additional time to audit them. If you omitted 25% or more of your gross income, the IRS 3-year statute becomes a 6-year statute! How will you be notified of an audit? As long as sufficient time remains on the statute, the IRS Memphis, TN Service Center (where the audits were centralized) will send you a letter asking you to mail within 30 days copies of all your records supporting your Schedule A deductions, as well as an explanation to further clarify the deductions claimed. If you miss the 30-day deadline, then you can expect to receive another letter that will propose additional tax, interest and maybe the Accuracy Related Penalty. The tax is determined by disallowing ALL of your contributions and miscellaneous deductions. The Accuracy Related Penalty, if asserted, is computed at 20% of the tax due. This second letter - often called the "30-day letter" - gives you exactly 30 days to file a formal protest to have your case considered by the Appeals Office. If you have received, or do receive, this letter, I strongly recommend you seek professional assistance from me or another qualified representative in its preparation. The FTB is taking a similar approach in its audits. They typically send Western Tax Service clients a letter telling them what was claimed for contributions and miscellaneous expenses, and asks the taxpayer to write in the "actual" amount that should have been claimed for each category based upon your receipts. If you fail to respond timely, then they will send you a letter proposing the additional tax, and give you a time period within which to file an Appeal with the Board of Equalization (who hears appeals of FTB proposed tax deficiencies). It is very important to understand that how completely (and convincingly) you respond to these inquiries will influence the decision of each agency as to whether or not to assess penalties against you for filing an inaccurate return. I strongly recommend that you retain an IRS experienced Enrolled Agent, CPA or Tax Attorney to prepare your response. This is important as the IRS and FTB are more likely to accept from a licensed preparer the revised amounts and the reasoning for NOT asserting the accuracy related penalty. The tax agencies know that when a professional reviews the taxpayer's records and assists in the preparation of the response, that the preparer is putting his or her license on the line that the information is accurately presented. What is a Notice of Deficiency? If the statute of limitations expires within six or fewer months, or if you failed to respond to the letters from the IRS, they will issue a Notice of Deficiency - or a "90-day letter." It is referred to as a "90-day letter" because this document gives you EXACTLY 90 days from its date to file a Petition with the UNITED STATES TAX COURT. This is VERY IMPORTANT!!! The 90 day period CANNOT be extended. If you fail to file your Petition timely, the proposed tax, penalty and interest WILL BE ASSESSED. Generally, you will have to pay all of the tax, penalties and interest, and then file a claim for refund if you want to contest any portion of the tax and/or penalty. I have received a number of calls from potential clients who failed to file a petition timely - and now they are faced with a big tax bill. Unfortunately, it was too late for me to help them with an administrative review in IRS Appeals. They were faced with paying the entire assessment plus additions before filing a claim for refund - or go through the expensive offer in compromise process (either as to Doubt as to Liability or Collectibility). Please - do NOT ignore the letters or the time frames contained in them. It will almost always adversely affect you financially in the long run. Generally, the quicker you address a tax controversy, the more easily (and less costly) it is resolved. For your further information, if the IRS does not allow your claim for refund within six months, then you can file suit in the District Court or United States Court of Federal Claims. This is a time-consuming process. Further, it is usually more costly to litigate your case in either of those courts than in Tax Court. As mentioned previously, an alternative to litigation would be to file an Offer in Compromise (OIC) based upon Doubt as to Liability. This is an expensive process that should be a last resort. What happens when an appeal or petition is filed for a WTS tax audit? If you have filed a timely and acceptable protest with the Appeals Office, your representative will have the opportunity to meet with an Appeals Officer and present your records with the objective of reducing the tax the IRS is seeking to collect, and to convince the Appeals Officer to concede the Accuracy Related Penalty (if proposed by the Service Center or an Examination Group). I have been successful in negotiating the concession of this penalty in WTS audits at the IRS Appeals level. So far, the FTB has accepted my reasoning for not asserting the penalty against my clients for whom I have prepared their response. Please understand that there is no guarantee that I can, in all situations, convince the IRS and/or FTB to either not raise the penalty, or to concede it upon appeal. Each case consists of a separate set of facts and circumstances. In the unlikely event an acceptable settlement is not reached in Appeals, the IRS will issue a Notice of Deficiency. This allows you (or your representative) to file a Petition with the US Tax Court allowing you to litigate your case in that forum. If the proposed tax and penalty is less than $50,000 for any one year (which is almost always the situation for these Western Tax Service cases), you can elect to have your case tried under the Small Tax Case procedure. This is a less formal process, but the Tax Court decision will be final! This means that neither you nor the IRS can appeal the Tax Court decision to a higher court.. If the IRS issues a Notice of Deficiency and it is petitioned timely (remember the 90-day rule...), AND if you have not had an Appeals hearing previously, then you should still have an opportunity for your representative to meet with an Appeals Officer to try and work out a mutually acceptable settlement. If a settlement is not negotiated, then you still can proceed to have your case tried in the US Tax Court. Are there specific things I should look for on my tax return? From my review of my clients' Western Tax Service prepared returns, almost every return contained a deduction for a home computer. This is a major red-flag for the IRS. It is very difficult for an employee to meet the requirements for deducting the purchase and/or the operational costs for a home computer. Here is link to a page on this web site where I discuss the deduction of a home computer in detail. Please read it if you are thinking that you are entitled to have claimed a deduction for a home computer! In addition, I have seen inflated or unallowable deductions for:
What if I had my returns prepared by Western Tax Service, but I have not been contacted yet by either the IRS or FTB? If you were a client of Western Tax Service, I recommend that you quickly review all returns they prepared for you. If your review discloses, for any of those returns that are not under audit, that there were inflated figures entered for your itemized deductions (typically, contributions and employee business expenses), I recommend that you amend (correct) those returns as soon as possible. If you would like my help in preparing accurate amended returns, please contact me as soon as possible. You are less likely to be subjected to a full-blown audit and the imposition of the accuracy related penalty if your amended returns (correcting the overstated deductions) are filed quickly, and are prepared by an Enrolled Agent, CPA or Tax Attorney. Whether you amend your returns or just wait for the IRS/FTB to audit them, you will owe the tax and interest resulting from the overstated deductions. The BIG difference is that if you wait for the IRS or FTB to initiate an audit, you will need representation for the tax controversy. Almost without exception, this will end up costing you significantly more than the cost of amending your returns. Why not minimize the likelihood of having to pay $1,500 - $2,000 or more for representation to fight penalties - on top of the tax and interest you owe - by amending your returns now? In my opinion, it is not a question of if the IRS/FTB will audit you - it is a question of when! The IRS interest rate increased from 7% to 8% effective July 1, 2006. This is no bargain rate in today's economy when savings interest is hovering around 4-5%. The sooner you file your amended returns and pay the tax (or work out an installment agreement or Offer in Compromise), the less interest you will pay. If your review of your Western Tax Service's prepared returns disclose that they require amending, and if you would like my help in doing so, please give me a call (818-842-5927). I will be pleased to prepare your amended returns. Doing this task before you get contacted for an audit is important because you are less likely to have to deal with the IRS and FTB on other possible issues present in your return. Remember that the cost for representation after the audit begins is usually much greater than the cost of preparing amended returns.
|
