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Chronicles of Tax Advisors

Thorough Understanding of Tax Law Brings Tremendous Refunds

Posted by Todd Ancona Posted on Nov 04 2016

In this case, we helped our client correct a mistake made by another firm. Our client worked overseas in the oilfield industry, so they had foreign earned income and could be eligible for Foreign Earned Income Exclusion or Foreign Tax Credit.

The Foreign Tax Credit can be used as a dollar for dollar reduction in taxes due if the taxpayer paid taxes to the foreign government and those taxes paid were included as part of their income. This was not the case here.

For the Foreign Earned Income Exclusion, the prior preparer only checked to see if our client met the Physically Present test for the exclusion. The preparer neglected to check if client met the Bona Fide Residence Test. The difference between the two is this. Physical presence requires that the taxpayer be out of the country for 330 days or more during a 12-month period. Bona Fide Residence does not have the 330-day requirement but does consider residency of taxpayer in foreign country and length of contract. So, if the taxpayer has a foreign resident card and their contract does not indicate a definite end to the contract they can subjectively be considered a Bona Fide resident. There are a few other requirements.

Due to IRS statute of limitations on refunds, we amended the last three years for our client yielding over $50,000 in refunds from the federal and state tax authorities.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Is Your Income Truly Taxable?

Posted by Todd Ancona Posted on Jan 04 2016

2015 was a great year! A new tax season is here, so let the blog today be the last time we reflect on our cases in 2015 before we restart our regular blog schedule in mid 2016. This will be about a case where Louisiana state legislature affected the outcome of the federal tax return. Our client is employed as a school bus driver. Louisiana legislature states that the 1099-MISC received for bus rental is actually a reimbursement for operation expenses for independent school bus drivers and are not considered wages for self-employment. The driver receives a W2 as an employee for driving and a 1099-MISC for operation reimbursement of annual bus costs.

Our client’s returns were prepared by a CPA that did not understand how to report this on the return. As a result the client had paid taxes on several years that they did not need to. Unfortunately, IRS statutes allow you to go back only three years for amended return refunds. There were two tax years that we could amend. The taxpayer had paid taxes in those two consecutive years of over $5500 and $9300, respectively. We amended those two years applying the state code to the federal returns. As a result, we were able to secure over $13,000 in federal refunds and over $1,000 in state refunds.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

On Edge with Tax Laws Till the Last Minute

Posted by Dave Motes Posted on Dec 18 2015

Here we are near the end of 2015, and already again politics has stirred up the “uncertainty” atmosphere we have experienced during recent year ends. The government waits till the very last moment to continue the ‘Bush tax cuts’ or ‘tax extenders’ that has been renewed each year since Bush left the White House 7 years ago. The two branches, the legislative (Congress) and the executive (the President), bicker amongst themselves and with each other until the proposed continuance is passed. This can make tax planning a tough job.

Uncertainty about whether a tax provision continues on to a new year complicates many questions. One of such is: is it wise to buy a big piece of equipment or a vehicle in the last quarter of the year? The ability to deduct the entire purchase price of the equipment through Section 179 is a major factor in one's decision to buy. So can I use bonus depreciation on that new truck if I buy it in December? It is another question that really cannot be answered until the extenders have been passed.

However, the consensus is the extenders will be passed for 2015 (which is a good thing since the year is almost gone). The current debate now is do we make these “temporary” extenders permanent. This uncertainty then gives rise to the question of when or how often we should reform our tax code.

Tax accountants actually love tax reforms. In fact, these attempts should be named neither tax simplification nor tax reform, but “tax accountants’ income security act.” Whenever the government makes an attempt to simplify anything it controls, that process inevitably becomes more complicated, and taxpayers painfully cry out to their accountants for help. Probably, about the only thing certain with the tax code is, if you owe the government money, the IRS will come after you!!! If that happens to you, though, we at Tax Advisors will tell you not to sweat it. We deal with these guys all the time.

Let me leave you with this: Have a very Merry Christmas and Happy, Prosperous New Year!!!  

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

Outstanding Client Service Across Companies

Posted by Todd Ancona Posted on Nov 30 2015

Here is a case in which we employed the help of our sister company Wealth Advisors LLC. We prepared a client’s return which included a taxable retirement distribution of $65,000. The client emphatically refused to believe all of that distribution was taxable. They explained that after the distribution had been made, they returned it back to the retirement plan. The client had no documentation showing the return of the funds. We made several attempts to reach the distributing retirement plan but to no avail.

Then, together with Wealth Advisors LLC, we were able to confirm with the retirement plan that $60,000 of the funds had in fact been returned to the plan. Thus, we reported that portion as a rollover with no taxable effects. In addition, we requested additional documentation from the servicing retirement plan in order to verify any later potential requests by the IRS. The collective efforts of Wealth Advisors and Tax Advisors to serve our clients above and beyond saved this client almost $15,000 in taxes.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Unlock "Indepent Contractor" Status

Posted by Dave Motes Posted on Nov 23 2015

Uncle Sam wants his money up front! That is the primary reason the government challenges the validity of an independent contractor status. When you are an employee, the employer is required to withhold payroll taxes from your payroll check. The government gets its money on a current, ongoing basis when you receive a paycheck. If you are an independent contractor, you must account for the financial activity of your own business, and the customer you contract with is not required to withhold any taxes from his payment to you for services you perform (as long as you provide that contractor with a W-9).

During the last two decades the IRS has gone back and forth in their aggressiveness in attacking the independent contractor status. At one time, they were inclined to respect established business practices of an industry, but were not required to do so. An example of this was their recognition of how newspapers treated their carrier force as independent contractors. 

The key determining factor in whether the IRS will treat you as an employee or independent contractor is ‘CONTROL’. That is, does the business that contracts with you supervise the detail of the work you do? Or does that business only point you to the work it wants done and expect you to complete the task in the manner you see fit? If the business supervises the detail of the work, you will probably be classified as an employee of that business. 

So, if your intent is to be classified as an independent contractor, aka independent business man, then there are a few things you can do to ensure the IRS will respect that intent. First and foremost, you must control how you perform the work that you accept from the customer. You should negotiate and consummate a contract with your customer. The terms of that contract should lay out the general work you are to perform, how you are to submit invoices to the customer, who is to provide liability and workers compensation insurance for the work you do, and other common terms of a contract, including termination of the contract. You should also apply with the IRS for an EIN (employer identification number) and file a W-9 with each customer you do business with. With this on file, payments to you should not be subject to any income tax withholding.   

As an independent contractor you should receive a 1099 from every customer who paid you at least $600 by January 31 of the following year (you should receive all your 2015 1099s by January 31, 2016). This information is reported to the IRS. You aggregate the total amounts from all 1099s and typically report this as your business income, against which you apply all legitimate business expenses incurred to arrive at taxable profit. 

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

Relief on Late S Corporation Election

Posted by Todd Ancona Posted on Nov 06 2015

The conversion from filing as a Sole Proprietor to filing as an S Corporation can sometimes be tricky. You must meet several requirements, some of the more common ones being: there mustn’t be more than 100 shareholders, no nonresident alien shareholders allowed, only one class of stock allowed, and the request must be timely filed. You must file an S Election request no later than two months and 15 days after the beginning of the tax year the S Election should take effect. However, there is relief for failure to meet this timely filing requirement.

We had a client whose income had increased substantially during the course of the current tax year. The client, who was a sole proprietor listed as an LLC, decide they wanted to convert to an S Corporation for the current tax year. As a sole proprietor, they would have paid self-employment taxes on over $500,000. That translates to $30,149 in self-employment taxes alone. Since S Corporation Income is not subject to self-employment taxes, the conversion would present itself as a great tax savings. The only problem was that the filing deadline had already passed ten months earlier. We requested relief for Late S Corporation conversion.

Election using IRS Revenue Procedure Election codes for the prior year was granted the conversion to an S Corporation. Next we had to report W2 income for the single shareholder since the IRS will not allow you to completely avoid Self Employment or Social Security Taxes. From the $500,000 net income we reported W2 wages paid to the shareholder of $100,000 on their personal return, the remaining $400,000 flowed through to the shareholder’s personal return as ordinary income subject to the taxpayer’s regular tax but not self-employment tax. The shareholder effectively paid $15,300 in social security taxes between their W2 and the S Corporation. In conclusion, the S corporation conversion saved the taxpayer $14,849 in taxes for that year, and we were also able to request waiver of late S-corporation election.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Posted by Admin Posted on Oct 26 2015

The Truth About IRS Letters

Posted by Dave Motes Posted on Oct 26 2015

When you receive a notice from the Internal Revenue Service, what do you do?  Do you simply hide it, or worse yet throw it in the trash can and believe you did not receive it? Probably the worst thing you can do is to ignore it and not respond or communicate with the IRS.  So many tax issues can be resolved by simply communicating with the IRS immediately after you receive that first notice. 

Although many times the notice is almost cryptic and confusing, it should be reviewed carefully.  And at the minimum, if you do not forward the letter to your tax expert, which is something you should always do, pick up the phone and communicate with the Internal Revenue Service.  When you are finally connected with an IRS representative (be prepared to hold from 15 minutes to an hour plus; my experience this tax year has been an average of about 42 minutes), make sure to write down the agent’s name and identification number.  Most agents blurt this information out as quickly as they can, and if you fully comprehend all they are saying, then you are fast!  Make sure you slow the agent down and have them repeat their name and ID number to you; read those back to them so they can confirm. Last but not least, write down the date and time and TAKE NOTES. 

The first thing you should ask the IRS agent is to explain the notice to you. Then, confirm your understanding of her explanation by restating it to her. Again, try to jot down some notes while you talk.  Ask the agent what you need to do to resolve the issue.  If either you or she is unsure, then you need to consider consulting with a tax professional for help. 

The important nugget of truth to grasp from this article is to timely communicate with the IRS when they communicate with you by mail.  BE CAREFUL of tax scams by telephone. The IRS will not call you by telephone until they have at first communicated with you by regular mail. So if you get a menacing, threatening phone call, you can count it as a scam. In that case, jot down the information from the phone message and report the call and caller to the IRS. Never provide personal information such as social security numbers, credit card numbers, bank information, etc. over the phone to someone who purports to be an agent of the IRS.

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

File Taxes Late? Here's an Important Penalty Waiver

Posted by Todd Ancona Posted on Oct 19 2015

Here is a case where a new client came to us to prepare their taxes. After the initial review, we discovered that they were a partner in a partnership whose return was not properly filed in the prior year. The return was originally due by March 15 but was not filed until the following year. So we prepared and filed the partnership return and the return was 11 months late. According to law, the IRS assesses a $195 per partner per month penalty for up to 12 months maximum in case of late filing of partnership returns.

Just as we expected, the IRS sent out a notice for late filing penalty several months later. The penalty assessed was for 11 months and for the two partners. Thus, the total penalty came to $4,290. We knew this would be coming and knew exactly how to handle it. The IRS allows a First Time Penalty Abatement program, which waives penalties such as these if you meet their criteria. First, there must not be any penalties in the preceding 3 years. Second, all returns prior to and after the one that causes the penalty must have been filed. Third, taxpayer has paid or arranged to pay any taxes that may have been due. The client met all three of these criteria. Thus, we were able to call the IRS and had them administratively waive the whole penalty for our client.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

It's Never Too Late to Claim Your Foreign Tax Credit

Posted by Dave Motes Posted on Oct 06 2015

The foreign tax credit offers substantial tax savings when it is calculated properly. Sure, there are many twists and turns in the calculation of the foreign tax credit. If done properly, however, it can substantially reduce or even eliminate your personal income tax liability, and it can work against even self-employment tax. Normally, if you are a small business owner, the credit will not reduce any self-employment tax calculated on your profit. If you are working in a country with a ‘totalization agreement’, however, even self-employment tax can also be substantially reduced or eliminated.

In one case, we had an individual visit our office who had worked most of her three prior three years in various foreign countries. She had paid substantial foreign income tax to those foreign countries. By careful application of the tax law, we were able to generate refunds for her of over $100,000 for the years 2012 and 2013. We see an even larger tax refund for her for 2014.

Many taxpayers who pay substantial foreign tax yet fail to fully take advantage of the credits available for them in any given year don’t realize they can AMEND their tax returns as far back as ten years. This means that taxpayers can go back TEN years and capture all the refunds they are due. At Tax Advisors, we put our expertise at work for you and make sure you receive all the refunds you are entitled to.  

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

Remarkable Credits Easily Missed: Energy Credit

Posted by Todd Ancona Posted on Sept 21 2015

In this case our client came to us asking about energy credits. They had purchased and installed a solar panel system on their home for $25,000 and heard that there was tax credit available. We informed the client that there are many tax credits available to taxpayers. For the federal return we were able to get a $7,500 credit against their taxes due. By reducing the taxes due, their refund was increased because of what they had already withheld from their payroll. For the State return, we were able to get a $12,500 refundable credit. That meant that regardless of whether there was taxes due or not, the full amount of the credit was refundable. The client had originally paid $25,000 for the solar panel system; with $20,000 in credits, the system ended up costing only $5,000. Those savings on top of the later utility savings was an incredible value for the client.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Exploiting All Possible Resources for Clients

Posted by Todd Ancona Posted on Sept 11 2015

In this case, our client provided us with a document from the Health Insurance Marketplace that was incorrectly prepared. When we first saw the document, we were not sure about its accuracy, especially when the Affordable Care Act is new to the tax preparation arena. Thus, we reached out to our sister company Insurance Advisors LLC for help. With the client’s permission, our insurance agent was able to go to the market place and determine the correct information for the marketplace form. As a result, the new numbers yielded a tax savings of over $2,800. The client was so thankful that we knew where to go to regarding the Affordable Care Act and the confusing insurance market place.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Sizeable Savings Almost Foregone

Posted by Dave Motes Posted on Sept 04 2015

A young, single mother came to us for assistance with the first-time homebuyer’s credit. The credit was essentially a government loan in the form of a tax credit to encourage first-time homebuyers to buy a home. Originally, this credit was to be repaid to the government in annual installments over 15 years beginning in 2009. Subsequent law, however, revised the repayment agreement. Now, only taxpayers who bought their houses in 2008 and benefited from the credit have to repay it, whereas those who purchased their houses in 2009 and later do not.

The single mother received a credit against her 2008 tax return that had to be repaid to the Federal government over the next 15 years at $500 per year. Ironically, she closed on her home on 12/31/2008. Had she closed on January 1, 2009, she would have received the credit but would NOT have had to repay it. Is that terrible or what? To compound that unfortunate circumstance, she lost her home to foreclosure two years later.

Nevertheless, we found multiple ways to help this young Mother. First, there is an exception to repayment of the first time homebuyer’s credit of 2008.  In the event you lose your home due to foreclosure, and if that foreclosure results in a loss greater than the unpaid balance of the credit, you do NOT have to repay its remaining balance, as long as the loss is reported properly to the IRS. In fact, very seldom will a foreclosure result in gain. In this young Mother’s case, she incurred a $20,000 loss; upon reporting this loss on form 5405, she will be forgiven the unpaid balance of the credit. 

Secondly, we reduced her tax liability with the child care tax credit. The child care tax credit exists to help parents who work offset childcare expenses. In her case, she sent her two-year old son to a learning center and incurred substantial tuition and other care costs. She did not think she could use the tuition as an eligible expense toward the child care credit. We informed her that she could and calculated a substantial child care credit for her. 

It ALMOST ALWAYS PAYS to seek out professional tax assistance. Let us help you!

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

Fascinating Overturn of an IRS Strike

Posted by Todd Ancona Posted on Aug 25 2015

This is another case in which we saved a client hundreds of thousands of dollars. An IRS audit of his previous tax years yielded a $150,000 increase in taxes and over $50,000 in interest and accuracy related penalties. After walking away from his prior CPA, who was unable to grasp what was required by the IRS, the client came to Tax Advisors. With extensive knowledge and experience in these types of cases, we were able to reverse the damages of the audit through an audit reconsideration process. The case involved the client’s two businesses as well as his personal return. The IRS was at first dismissive in our pursuit to reopen the case. However, as we pointed out that not all information had been provided for them to make a truly informed decision, the IRS agreed to consider our argument. We walked the IRS through each adjustment and confirmed as we proceeded their agreement to that adjustment. In the end, our client only owed approximately $10,000. On the other hand, the client actually received interest income from one of the audited years since it produced a refund. Additionally, subsequent tax returns yielded more than enough refunds to wipe out the remaining debt from the audit reconsideration, and interest income was awarded on those refunds as well. In the end, the client walked out of the deal unharmed and tremendously grateful.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Compare Schedule C and S-Corporation Return

Posted by Dave Motes Posted on Aug 10 2015

A client came to Tax Advisors in early March with the financial results of his business for 2014. His business revenue had more than doubled from the prior year. In reviewing his total tax picture, we advised that he exercise the Subchapter S Corporation election. We worked at an extreme level of efficiency to file his 1120S (Sub S return) by March15, 2015, which included a Form-2553 election that allowed him the Sub S treatment for all of 2014. Thanks to our efforts, his tax savings amounted to approximately $10,000.

Amazed by the tax-saving effect of S Corporation election, this client referred a relative with a similar issue. This was a wise decision because the relative's business had also experienced substantial growth in 2014 compared to 2013. Upon his agreement to the election, we again hustled the preparation of his return and completed it by the March 15 deadline. In total, we saved the relative approximately $20,000 in taxes

In conclusion, S Corporation election can produce substantially better tax outcomes than sole proprietorship treatment. One of the advantages of conducting business as a Subchapter S Corporation is the reduction of self-employment taxes, which are social security taxes paid on the profits of a sole proprietorship. An S corporation does not pay self-employment taxes on profits, whereas a sole proprietor does. Thus, the tax savings can be substantial, as in the two cases above.

Whenever there is growth in a sole proprietorship, a Subchapter S election should be considered. We can readily provide clients with a calculated tax liability comparison between the two methods to assist them in making an informed decision. 

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Dave Motes, CPA

Authorized to practice before the Internal Revenue Service

A Certified Public Accountant (CPA) is a federally authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections, and appeals. 

Amazing Foreign Tax Credit Savings

Posted by Todd Ancona Posted on July 29 2015

Here is a case where we have saved tens of thousands of dollars for our client. Originally, the client came in due to an IRS Audit of their 2012 tax return which resulted in a tax liability of $62,000. The original return prepared by another tax preparer had understated sole proprietor income by $254,000. Usually, this would have created a substantial increase in tax liability on both federal and self-employment earnings. However, after an initial interview and thorough analysis of the original return, we were able to determine that a very important tax credit had not been taken.

The client had worked in a foreign country and the company he worked for had paid income taxes on his behalf to that foreign country.  Because of this, a Foreign Tax Credit could be taken on his tax return. We amended the return with the increase in income and the Foreign Tax Credit, then sent it in to be reconsidered by the IRS. Despite the fact that his reportable income had increased by $254,000, the Foreign Tax Credit greatly reduced his tax liability. Instead of owing the IRS $62,000, he received a refund of $4,660.

The Foreign Tax Credit can be used to amend returns as far back as 10 years. It is one of only a few exceptions to the IRS’ three year rule to amend and receive refunds. Knowing this, we decided to check the client’s prior years for the Foreign Tax Credit. By applying the Foreign Tax Credit to amended prior year returns, we were able to help him bring home tax refunds of over $92,000.

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Todd Ancona, EA

Licensed to practice before the Internal Revenue Service

An Enrolled Agent (EA) is a federal authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service for audit, collections and appeals.

Welcome to Our Blog!

Posted by Admin Posted on Nov 08 2011

This is the home of our new blog. Check back often for updates!

 

 

Disclaimer: The information in this blog is for general informational and educational purposes only, including any comments provided by blog visitors. All stories described are accounts of actual experience with actual clients of Tax Advisors. Postings are not solicitations or legal advice. This information is not intended to create and receipt of it does not constitute an agent-client relationship. The reader should not rely or act upon any information in this site without seeking professional legal counsel or advice from his or her tax professional.