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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.

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.

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.

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.

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.

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.

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.

 

 

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.