Category Archives: Taxation

THE IMPORTANCE OF ESTATE PLANNING & ASSET PROTECTION

By:  Coleman Jackson, Attorney & Certified Public Accountant

May 1, 2023

So many Americans died during the Covid-19 Pandemic!  Many families learned during this period of hardship and lost that estate planning and asset protection is not merely for the powerful and well-to-do but is for everyone.  You see, we are not born to stay here and everyone need to plan their exit most importantly spiritually but also temporally.  We are all passing through.  We are all fellow travelers on this journey towards life.  We form relations; we impact other’s lives for the good or bad; we amass property and other things during this journey.  Estate planning embodies our goals and objectives as to how we desire to protect our love ones and pass our personal legacy and property and things to our love ones, charities and whoever else we choose.  Estate Planning allows us to choose when beneficiaries inherit or receive our wealth.  Estate planning allows us to plan for incapacities that might come our way.  Estate Planning and Asset Protection is very important. It is the responsible thing to do!

Many Americans learned during Covid-19 that they or their love ones failed to properly plan for being incapacitated for long-periods of time or their sudden deaths.  Many Estate Planning, Tax and Asset Protection Lawyers have seen an uptick of families and individuals with these type matters on their heart and in their minds these days.  They are determined not to make the mistakes of their elders in failing to plan for their incapacities and demise. I think the public needs to know about asset protection and estate planning.

That is why I am writing this blog on estate planning and asset protection today.  It will be published and free of charge to anyone who goes to our law firm’s website www.cjacksonlaw.com and click on our blog page.  Incapacity, death and taxes impacts all of us one way or another eventually regardless of our economic station in life, or our cultural background or any other particular as it relates to us.

What is Estate Planning and Asset Protection:

  • Definitions: Estate Planning– Proper estate planning allows you to plan for yourself and your loved ones (which include your family, your church and community) without giving up control of your affairs. Your estate plan should allow for the possibility of your own disability. It should give what you own to whom you want, when you want, and the way you want at the least amount of costs.

Estate Planning is so important that you cannot afford not to do it and when you do it you cannot afford not to hire competent legal representation.  Estate Planning and Business Structuring are state specific which means that state law impacts your estate plan.  That means that if you are a resident of Texas; you should strongly consider hiring a lawyer licensed in Texas.  Federal tax law is implicated so you should consider hiring a lawyer skilled in the relevant sections of the Internal Revenue Code.

Some general things you could possibly talk to your estate planning lawyer about during your initial consultation:

There are five common ways to pass assets to your intended loved ones –

  • Wills
  • Trusts
  • Beneficiary designations (e.g., life insurance, pensions, IRAs, etc.)
  • Joint property arrangements
  • Life estate deeds
  • Non-probate Assets
  • Joint tenancy with right of survivorship
  • Payable on death accounts
  • Joint Accounts
  • Life Insurance

 

  • Tax Issues– The specter of taxes is always there (so, you cannot ignore the tax ramifications of dying. Some of the basic tax considerations that you need to discuss with your estate planning attorney about during your initial consultation are as follows:
  1. Federal Unified Tax Credit
  2. Estate Taxes
  3. Gifts and gift tax
  4. Community Property vs Separate Property—Texas is a community property state and the impact of that reality on estate planning cannot be underestimated.
  5. Property Taxes—Texas property taxes are some of the highest in the nation. Many elderly people fall behind on their property taxes and lose their property due to delinquent taxes. And often time those who inherit property in Texas is unaware of these delinquent tax problems until they are faced with foreclosure procedures. Due diligence is required to investigate the various ways property of an estate is encumbered.

Some more things to talk about during your initial consultation with your estate and asset protection lawyer.  It is very helpful if your estate planning and asset protection lawyer is schooled in federal tax issues because federal taxes are always around potentially impacting the value of your estate.  You should consider asking about—

  1. Importance of Having a Will
  2. Basic Types of Wills
  3. Community property laws in Texas
  4. Will and testamentary trust
  5. Special provisions and things unique to you
  6. Executors
  7. Execution of Wills
  8. Revocation of Wills
  9. Effect of Divorce on Wills and Trusts and Community Property
  10. Effect and Implication of Immigration Status, the United States of America is a land of immigrants and many immigrants have family, business interest and property in their native countries; therefore, effective estate planning and asset protection must consider these facts and circumstances. Pre-immigration planning in some cases is critical. Immigration status cannot be ignored in estate planning and tax planning.

What else might you consider bring up during your initial consultation with your estate planning and asset protection lawyer.

  • Ancillary Documents: So, what are these all about? Dying is not all you have to think about.  During Covid-19, folks were in the hospital for months-and-months-and months.  Who was to handle their household affairs?  Who was to handle their business affairs?  Who was to take care of their minor children?  Incapacity issues are also part of effective estate planning and asset protection.   Estate planning is about planning for your being unable to care for yourself, your minor children and your financial affairs.  Some tools estate planning lawyers use in consideration of your incapacity to act for yourself are as follows:
  1. Durable Powers
  2. General Powers
  3. Special Powers
  4. Revocation of POAs
  5. Health Care POAs
  6. Directive to Physicians
  7. Trusts
  8. Creation of trusts
  9. Purpose, Types and Taxes with respect to Trusts
  10. Community Property Agreement and Pour-over Will
  11. Crummey Powers
  12. Termination of the Trusts
  13. Marital and Bypass Trusts
  14. When Trust are not advisable
  15. How Trusts work
  16. Living Trust
  17. QTIP Trusts
  18. Charitable Remainder Trusts
  • Guardianships
  • What about Long-Term Care? (Elder Care, such as Social Security, Nursing Homes,

SSI, Medicare, Medicaid and Hospice).  These matters too are addressed in comprehensive estate and asset protection.

CONCLUSION:  ESTATE PLANNING AND ASSET PROTECTION IS NOT ABOUT THE DOCUMENTS

Estate planning is not about the documents!  Estate Planning is all about your goals and objectives in passing your legacy, values and property to who you want and how you want and when you want with the least amount of spillage such as for taxes, court costs and other expenses as possible.  It is dangerous to pull documents off the internet or obtain them from friends, relatives or others because law is complicated and what you find on the internet or elsewhere might not accomplish your goals and objectives.  A counseling attorney is critical for effective estate planning, tax planning and asset protection.  These plans need to be within the bounds of all applicable international, federal, state and local laws and ethical principles.  What are your goals and objectives in such matters as these?

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

THE IMPORTANCE OF ESTATE PLANNING & ASSET PROTECTION

By:  Coleman Jackson, Attorney & Certified Public Accountant

April 26, 2023

Giving in the United States creates tax obligations on the giver

So many Americans died during the Covid-19 Pandemic!  Many families learned during this period of hardship and lost that estate planning and asset protection is not merely for the powerful and well-to-do but is for everyone.  You see, we are not born to stay here and everyone need to plan their exit most importantly spiritually but also temporally.  We are all passing through.  We are all fellow travelers on this journey towards life.  We form relations; we impact other’s lives for the good or bad; we amass property and other things during this journey.  Estate planning embodies our goals and objectives as to how we desire to protect our love ones and pass our personal legacy and property and things to our love ones, charities and whoever else we choose.  Estate Planning allows us to choose when beneficiaries inherit or receive our wealth.  Estate planning allows us to plan for incapacities that might come our way.  Estate Planning and Asset Protection is very important. It is the responsible thing to do!

 

Many Americans learned during Covid-19 that they or their love ones failed to properly plan for being incapacitated for long-periods of time or their sudden deaths.  Many Estate Planning, Tax and Asset Protection Lawyers have seen an uptick of families and individuals with these type matters on their heart and in their minds these days.  They are determined not to make the mistakes of their elders in failing to plan for their incapacities and demise. I think the public needs to know about asset protection and estate planning.

 

That is why I am writing this blog on estate planning and asset protection today.  It will be published and free of charge to anyone who goes to our law firm’s website www.cjacksonlaw.com and click on our blog page.  Incapacity, death and taxes impacts all of us one way or another eventually regardless of our economic station in life, or our cultural background or any other particular as it relates to us.

 

 

What is Estate Planning and Asset Protection:

 

  • Definitions: Estate Planning– Proper estate planning allows you to plan for yourself and your loved ones (which include your family, your church and community) without giving up control of your affairs. Your estate plan should allow for the possibility of your own disability. It should give what you own to whom you want, when you want, and the way you want at the least amount of costs.

 

Estate Planning is so important that you cannot afford not to do it and when you do it you cannot afford not to hire competent legal representation.  Estate Planning and Business Structuring are state specific which means that state law impacts your estate plan.  That means that if you are a resident of Texas; you should strongly consider hiring a lawyer licensed in Texas.  Federal tax law is implicated so you should consider hiring a lawyer skilled in the relevant sections of the Internal Revenue Code.

Some general things you could possibly talk to your estate planning lawyer about during your initial consultation:

There are five common ways to pass assets to your intended loved ones –

  • Wills
  • Trusts
  • Beneficiary designations (e.g., life insurance, pensions, IRAs, etc.)
  • Joint property arrangements
  • Life estate deeds
  • Non-probate Assets
  • Joint tenancy with right of survivorship
  • Payable on death accounts
  • Joint Accounts
  • Life Insurance
  • Tax Issues– The specter of taxes is always there (so, you cannot ignore the tax ramifications of dying. Some of the basic tax considerations that you need to discuss with your estate planning attorney about during your initial consultation are as follows:
  1. Federal Unified Tax Credit
  2. Estate Taxes
  3. Gifts and gift tax
  4. Community Property vs Separate Property—Texas is a community property state and the impact of that reality on estate planning cannot be underestimated.
  5. Property Taxes—Texas property taxes are some of the highest in the nation. Many elderly people fall behind on their property taxes and lose their property due to delinquent taxes. And often time those who inherit property in Texas is unaware of these delinquent tax problems until they are faced with foreclosure procedures. Due diligence is required to investigate the various ways property of an estate is encumbered.

 

Some more things to talk about during your initial consultation with your estate and asset protection lawyer.  It is very helpful if your estate planning and asset protection lawyer is schooled in federal tax issues because federal taxes are always around potentially impacting the value of your estate.  You should consider asking about—

 

  1. Importance of Having a Will
  2. Basic Types of Wills
  3. Community property laws in Texas
  4. Will and testamentary trust
  5. Special provisions and things unique to you
  6. Executors
  7. Execution of Wills
  8. Revocation of Wills
  9. Effect of Divorce on Wills and Trusts and Community Property
  10. Effect and Implication of Immigration Status, the United States of America is a land of immigrants and many immigrants have family, business interest and property in their native countries; therefore, effective estate planning and asset protection must consider these facts and circumstances. Pre-immigration planning in some cases is critical. Immigration status cannot be ignored in estate planning and tax planning.

 

What else might you consider bring up during your initial consultation with your estate planning and asset protection lawyer.

 

  • Ancillary Documents: So, what are these all about? Dying is not all you have to think about.  During Covid-19, folks were in the hospital for months-and-months-and months.  Who was to handle their household affairs: Who was to handle their business affairs?  Who was to take care of their minor children?  Incapacity issues are also part of effective estate planning and asset protection.   Estate planning is about planning for your being unable to care for yourself, your minor children and your financial affairs.  Some tools estate planning lawyers use in consideration of your incapacity to act for yourself are as follows:

 

  1. Durable Powers
  2. General Powers
  3. Special Powers
  4. Revocation of POAs
  5. Health Care POAs
  6. Directive to Physicians
  • Trusts
  1. Creation of a Trusts
  2. Purpose, Types and Taxes with respect to Trusts
  3. Community Property Agreement and Pour-over Will
  4. Crummey Powers
  5. Termination of the Trust
  6. Marital and Bypass Trusts
  7. When Trust are not advisable
  8. How Trusts work
  9. Living Trust
  10. QTIP Trust
  11. Charitable Remainder Trusts
  • Guardianships
  • What about Long-Term Care? (Elder Care, such as Social Security, Nursing Homes,

SSI, Medicare, Medicaid and Hospice).  These matters too are addressed in comprehensive estate and asset protection.

 

 

CONCLUSION:  ESTATE PLANNING AND ASSET PROTECTION IS NOT ABOUT THE DOCUMENTS

Estate planning is not about the documents!  Estate Planning is all about your goals and objectives in passing your legacy, values and property to who you want and how you want and when you want with the least about of spillage such as for taxes, court costs and other expenses as possible.  It is dangerous to pull documents off the internet or obtain them from friends, relatives or others because law is complicated and what you find on the internet or elsewhere might not accomplish your goals and objectives.  A counseling attorney is critical for effective estate planning, tax planning and asset protection.  These plans need to be within the bounds of all applicable international, federal, state and local laws and ethical principles.  What are your goals and objectives in such matters as these?

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

 

 

FACTS MATTER! TAXPAYERS CAN WIN WILLFUL FAILURE TO FILE FBAR CASES IN COURT!

FACTS MATTER!  TAXPAYERS CAN WIN WILLFUL FAILURE TO FILE FBAR CASES IN COURT!

By Coleman Jackson, Attorney, CPA

March 16, 2023

Upcoming Beneficial Owners Information Reporting Requirements

Under United States law an annual reporting and disclosure responsibility is placed on any United States person with any financial interest in or signatory authority over, a bank, brokerage, stock, or any other financial account in a foreign country.  See 31 U.S.C. Sec. 5314(a) and regulation 31 C.F.R. Sec. 1010.350(a).  The Bank Secrecy Act (“BSA”), U.S.C. Sec. 5311, et seq., requires U.S. persons to keep records and file reports with respect to their foreign bank account holdings.  United States Person is defined in the statute and regulations as U.S. citizens, resident aliens, trusts, estates, and domestic entities that have an interest in foreign financial accounts and meet the reporting threshold under the statute.  The reporting threshold is bank account(s) with balances of $10,000 at any time during the calendar year in either one financial account or any combination of financial accounts.  U.S. citizens and lawful permanent residents of the United States are included in the definition of U.S. persons regardless of where they actually reside in the world, so long as, their U.S. citizenship has not been forfeited, or LPR’s Green Card status has not been administratively or judicially revoked or abandoned.  Moreover, resident aliens of U.S. territories and U.S. territory entities are also subject to FBAR reporting.

Currently the FBAR is filed on Form 114 each April 15th with the Financial Crimes Enforcement Network.  The civil penalties vary depending upon whether the U.S. person who failed to timely file Form 114 acted in a non-willful manner or whether they acted in a willful manner.  Non-willful violations of the FBAR filing requirements result in a maximum penalty of $10,000.  However, the penalty for willfully violating the FBAR reporting requirements can result in a civil penalty of the greater of $100,000 or fifty percent of the highest balance in the account at the time of the violation.  See 31 U.S.C. Sec. 5321(a) for a full discussion of permitted penalties that can be exacted on U.S. persons who violate the FBAR reporting requirements.    The U.S. Congress has written the FBAR statutes in such a way, well the best way to describe it is like this—strict liability.   In the case of willful violation; upon conviction it is strict liability for sure because there is no reasonable cause defense available to a taxpayer who willfully violates the FBAR disclosure requirements.  But as we disclose later in this blog, facts and circumstances matter in willful failure to file cases.  But as for the non-willful cases, let’s make clear right now:  Reasonable Cause is a possible defense for non-willful violations of the FBAR statutes.  If the U.S. person did not fail to file or the failure to timely file was attributable to a reasonable cause (such as reliance on accountants or professional tax preparers or other credible reasons), there should not be an FBAR penalty and any attempts by the IRS to collect a penalty would be a violation of the statute.  See White Mountain Apache Tribe, 537 U.S. 465, 477 (2003) and 31 U.S.C. Sec. 5321(a)(5)(B)(ii)(I)

In this blog, we will focus on the alleged willful violation of the FBAR reporting requirements.  First the taxpayer need to remain silent because the Courts have said the burden of proof is on the Internal Revenue Service to prove that the taxpayer willfully violated the FBAR reporting requirements.    MAKE NO ADMISSONS that you had the requisite intent to violate the law.  An admission to an IRS examiner, agent or officer will be difficult to overcome even with the most skillful legal team.  So the best thing is to remain silent, seek legal counsel and fully cooperate with the IRS.  That does not include making uninformed admissions. The law governing FBAR (when is actions non-willful, inadvertent as opposed to willful) is complex and what the taxpayer may think is an honest statement or rendition of facts, may not be the whole truth and nothing but the truth.  It is hard and perhaps impossible to unravel half-truths, errors, misunderstandings or outright lies without unintended legal consequences.  Lies tumble into more lies and unless the taxpayer is into gymnastics, its best to leave the tumbling to the experts.

What is willful behavior in federal tax law?  Willful conduct is clearly something more than negligence or inadvertent actions. The United States Supreme Court stated over ten years ago that “where willfulness is a statutory condition of civil liability, it is generally taken to cover not only knowing violations of a standard, but reckless ones as well.”  The U.S. Supreme Court case of  Safeco Ins. Co. of Am. v Burr, 551 U.S. 47, 57 (2007) controls what the IRS must prove if they hope to prevail in a civil ‘willful violation of the FBAR reporting requirements case’.    Note that negligence or inadvertent actions are not included in the U.S. Supreme Court’s ‘willful’ definition.  Negligent and inadvertent failure to comply with the FBAR reporting requirements are classified as ‘non-willful violations’; and in those cases the offending U.S. person should raise all reasonable cause defenses that might be plausible under the circumstances.  The taxpayer should not pay any more penalty than they lawfully owe after considering all the facts and circumstances.  Beware:   repetitive violations of the FBAR reporting requirements could possibly be construed as ‘willful behavior’.  Multiple inadvertent errors may not pass the smell test—this reckless behavior could be the stench of willful snubbing the tax system, and could very likely lead to a ‘willful violation’ charge and even possibly a tax evasion charge.  If those are the facts and circumstances, a reasonable cause defense is seriously jeopardized.  Recklessness is but a few steps from intentional.  The more education U.S. persons have regarding the things discussed in this blog; the closer on the ‘decision continuum’ they come to ‘recklessness and intentional’ when their subsequent behavior doesn’t conform to their level of knowledge.  Good moral character matters in tax law- and everywhere else in a civil society.

The best way to look at this is in what I refer to as a “decision continuum “; in the case of ‘failure to timely comply with the FBAR reporting requirements’ that decision continuum – goes from negligence to one or more inadvertent actions on to many more inadvertent actions to intentional actions resulting in failure to comply with the FBAR reporting requirements.  The proper civil penalty, if any, depends upon the U.S. person’s culpability in failing to comply with the law.  The actual penalty paid could range from zero dollars in the case of a successful reasonable cause defense in a non-willful violation case to millions or more dollars in high dollar foreign bank accounts with willful violation of the FBAR reporting requirements.  A penalty based on a percentage of the foreign bank account balance can become enormous quickly!  In reality the FBAR penalties coupled with other tax penalties and interest could erase a taxpayers’ wealth and upon conviction take away their liberty.  Taxpayers should never concede anything in these cases because the monetary exposure can be extremely high!  There are also potential criminal exposures for FBAR violations; we have written about criminal exposures resulting from FBAR violations in one or more of our previous blogs; the standards of proof and burdens in criminal matters are different than in those civil cases.  We will skip that discussion here.    Best initial strategy in FBAR cases is silence until the U.S. person and their legal team can figure out what they are dealing with and develop the ideal legal strategy under the circumstances.

If the IRS attempts to impose the ‘willful violation penalty’ which is the greater of $100,000 or fifty percent of the account balance at the time of the violation, remember; in a civil penalty case the government must prove your actions were ‘willful’.  They must prove by a preponderance of the evidence (more likely than not) that you willfully did something other than sign your tax return.   Nor does checking the box “NO” concerning foreign bank accounts on the tax return constitutes  prima facie evidence of ‘willful intent to violate the FBAR reporting requirements’.  Often in the past the IRS has made these arguments about the signature and the checked boxes on the taxpayer’s tax return.  But Courts have repetitively stated that “a taxpayer’s signature on a return does not in itself prove his knowledge of the contents”.  A competent court will examine all the facts and circumstances then apply the applicable laws which mean that there is room for argument and putting forward a vigorous defense.  In a case United States v Mohney, 949 F.2d 1397 (6th Cir. 1991), the Court describes the nuance that courts goes through when analyzing these types of tax cases.   By the way, these cases can be tried in federal district court, federal claims court or in the U.S.  Tax Court.  Cases can be tried in the tax court without first paying the penalty; however, in the district courts or federal claims court, taxpayer’s must first pay the civil FBAR penalty and any other related tax penalties and interest.

An FBAR penalty case decided in April 2017 in the United States District Court for the Eastern District of Pennsylvania ( Case 2:15-cv-05853-MMB, Arthur Bedrosian v The United States of America, Department of the Treasury, Internal Revenue Service) should  give taxpayer’s struggling through IRS allegations of willful violation of FBAR reporting requirements  heart.  In Bedrosian case, the taxpayer won against the U.S. government’s willful failure to file FBAR allegation in court!  Taxpayers can win willful failure to file FBAR cases in court!  As reported by the Court in the Bedrosian case, Bedrosian, a Chief Executive Officer in the pharmaceutical industry was a United States citizen who had two foreign bank accounts.  For years on the advice of his accountants, he failed to disclose these accounts on his tax return and he did not file the required FBAR reports for either account although the reporting threshold of $10,000 was met in those years.  In 2007 after going to another accountant for his tax work, he was advised that he had FBAR filing issues.  He disclosed one of the accounts but not the other in his 2007 FBAR filings.  To be brief:   the IRS sent him a letter on July 18, 2013 stating that it was imposing a penalty for his willful failure to file TDF 90.22.1.   The FBAR reporting Form in 2007 was Form TDF 90.22.1; it is now Form 114.  Anyway, the IRS proposed to access a penalty of $975,789.17 which was 50% of the maximum value of the account ($1,951,578.34) which is the largest permitted penalty under the statute.    Bedrosian filed suit in federal district court in October 27, 2015.  The thing to note in the Bedrosian case is that the Court said facts matter in willful failure to file FBAR cases!  The government must prove Bedrosian willfully failed to submit an accurate FBAR report in 2007; Bedrosian’s knowledge concerning his FBAR reporting requirements are relevant facts, and his relationship with his accountants are also relevant facts; even though, there are no reasonable cause defense in ‘willful failing to file FBAR cases’.   FACTS MATTER!  TAXPAYERS CAN WIN WILLFUL FAILURE TO FILE FBAR CASES IN COURT!   The point of this case is U.S. persons may have hope in court in willful failure to file FBAR cases because the IRS must prove that the taxpayer willfully violated the FBAR statute.   This is true even though ‘a reasonable cause’ exception only exist for non-willful violations as shown in 31 U.S.C. Sec. 5321(a)(5(C)(ii).   Intent to violate the statute  or reckless disregard of the disclosure requirements (don’t give a hoot attitude) must be proved; what someone’s intent is can be proven by direct evidence; such as an admission against interest, credible witness testimony, contemporaneous letters or documents; but most likely, the courts will decide these type of cases on all the facts and circumstances.  The government must prove that the taxpayer violated the statue willfully, which has been defined by the U.S. Supreme Court and subsequent courts as ‘knowing intent or reckless behavior’.  If the facts are on the U.S. person’s side, taxpayers can win willful failure to file FBAR cases in court.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

THE U.S. SUPREME COURT OPINED THAT THE REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS MAXIMUM NONWILLFUL VIOLATION PENALTY IS $10,000 PER FBAR NOT PER ACCOUNT

THE U.S. SUPREME COURT OPINED

THAT THE REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS

MAXIMUM NONWILLFUL VIOLATION PENALTY IS $10,000 PER FBAR NOT PER ACCOUNT

By:  Coleman Jackson, Attorney & Certified Public Accountant

March 6, 2023

Upcoming Beneficial Owners Information Reporting Requirements

The Bank Secrecy Act (BSA) and its implementing regulations require certain individuals to file annual reports with the federal government about their foreign bank accounts. The statute imposes a maximum $10,000 penalty for nonwillful violations of the law. But recently a question has arisen in the U.S. Supreme Court. Does someone who fails to file a timely or accurate annual report commit a single violation subject to a single $10,000 penalty? Or does that person commit separate violations and incur different $10,000 penalties for each account not properly recorded within a single report? Because the Ninth Circuit read the law one way and the Fifth Circuit the other, the U.S. Supreme Court took the case and recently decided in favor of the taxpayers.

BSA simply requires those who possess foreign accounts with an aggregate balance of more than $10,000 to file an annual report on a form known as an “FBAR”—the Report of Foreign Bank and Financial Accounts. 31 U. S. C. §5314; 31 CFR §1010.306 (2021). These reports are designed to help the government “trace funds” that may be used for “illicit purposes” and identify “unreported income” that may be subject to taxation separately under the terms of the Internal Revenue Code.

9th Circuit case: Jane Boyd, an American citizen, held 13 relevant accounts in the United Kingdom. Because the aggregate amount in Ms. Boyd’s accounts exceeded $10,000 in 2009, she should have filed an FBAR in 2010. Neglecting to do so, she corrected the error in 2012, submitting a complete and accurate report at that time. The government acknowledged that Ms. Boyd’s violation of the law was “non-willful”, and imposed a $130,000 penalty—$10,000 for each of her 13 late-reported accounts. Ninth Circuit vindicated Ms. Boyd’s view, holding that the BSA authorizes “only one nonwillful penalty when an untimely, but accurate, FBAR is filed, no matter the number of accounts.” 991 F. 3d, at 1078.

5th Circuit case: Alexandru Bittner was born and raised in Romania, but immigrated to the United States at a young age in 1982 and became a naturalized citizen. After the fall of communism, Mr. Bittner returned to Romania in 1990 where he launched a successful business career. Like many dual citizens, he did not appreciate that U. S. law required him to keep the government apprised of his overseas financial accounts even while he lived abroad. Shortly after returning to the United States in 2011, Mr. Bittner learned of his reporting obligations and engaged an accountant to help him prepare the required reports—covering five years, from 2007 through 2011. Under governing regulations, filers with signatory authority over or a qualifying interest in fewer than 25 accounts must provide details about each account, but individuals with 25 or more accounts need only check a box and disclose the total number of accounts. 31 CFR §1010.350(g). Mr. Bittner and his new accountant volunteered details for each and every one of his accounts—61 accounts in 2007, 51 in 2008, 53 in 2009 and 2010, and 54 in 2011. 19 F. 4th, at 738.  Because the government took the view that nonwillful penalties apply to each account not accurately or timely reported, and because Mr. Bittner’s late-filed reports for 2007–2011 collectively involved 272 accounts, the government thought a fine of $2.72 million was in order. Mr. Bittner challenged his penalty in court, arguing that the BSA authorizes a maximum penalty for nonwillful violations of $10,000 per report, not $10,000 per account. The district court agreed with Mr. Bittner’s reading of the law, United States v. Bittner, 469 F. Supp. 3d 709, 724–726 (ED Tex. 2020), but the Fifth Circuit upheld the government’s assessment, 19 F. 4th, at 749.

 

U.S. Supreme Court decision: To resolve who has the better reading of the law, U.S. Supreme Court begins with the terms of the most immediately relevant statutory provisions, 31 U. S. C. §5314 and §5321. Section 5314 (Secretary of the Treasury “shall” require certain persons to “keep records, file reports, or keep records and file reports” when they “mak[e] a transaction or maintai[n] a relation” with a “foreign financial agency.”) does not speak of accounts or their number. The word “account” does not even appear. Instead, the relevant legal duty is the duty to file reports. Whether a report is filed late, whether a timely report contains one mistake about the “address of [the] participants in a transaction,” or whether a report includes multiple willful errors in its “description of . . . transaction[s],” the duty to supply a compliant report is violated. As a baseline, §5321(a)(5) authorizes the Secretary to impose a civil penalty of up to $10,000 for “any violation” of §5314. The law still does not speak of accounts or their number. Also, the law authorizes the Secretary to impose a maximum penalty of either $100,000 or 50% of “the balance in the account at the time of the violation”—whichever is greater. §§5321(a)(5)(C) and (D)(ii). So here, at last, the law does tailor penalties to accounts. But the statute does so only for a certain category of cases that involve willful violations, not for cases like ours that involve only nonwillful violations. When Congress includes particular language in one section of a statute but omits it from a neighbor, we normally understand that difference in language to convey a difference in meaning (expressio unius est exclusio alterius). The government’s interpretation defies this traditional rule of statutory construction. Therefore, the Supreme Court held that the BSA’s $10,000 maximum penalty for the non-willful failure to file a compliant FBAR should be calculated on a per report, rather than a per account, basis. The decision, which was issued on February 28, 2023, was a close vote, 5-4, with Justice Barrett writing in the dissent, “The most natural reading of the statute establishes that each failure to report a qualifying foreign account constitutes a separate reporting violation, so the Government can levy penalties on a per-account basis. Nevertheless, the Supreme Court reversed the Fifth Circuit and remanded the case back to district court.

 

What does the Supreme Court’s Decision in Bittner Mean to Foreign Bank Account Holders:

What is not clear is what this means for taxpayers who have paid civil fines for unintentional account violations in the past. The ruling also raises the question of whether the IRS will be more aggressive in characterizing violations as willful now that differences in penalty calculations will be more significant.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

 

 

Federal Taxation of Real Estate Investment Trusts REITs and FINCen’s Beneficial Owner Reports

By:  Coleman Jackson, Attorney & Certified Public Accountant
January 17, 2023

Federal Taxation of Real Estate Investment Trusts REITs

General Definition of Real Estate Investment Trust:

For federal tax purposes, Internal Revenue Code Section 856 defines the term real estate investment trust as any corporation, trust, or association which is managed by one or more trustees or directors where the beneficial ownership is evidenced by transferable shares, or by transferable certificates of beneficial interest which would otherwise be taxed under the Internal Revenue Code as a domestic corporation.  Financial institutions and insurance companies does not qualify as real estate investment trusts (REITs) under the Internal Revenue Code (26 U.S.C. Chapter 26).  REITs must have more than five beneficial owners.

Real Estate Investment Trust

Some of the other requirements to qualify for tax treatment as a REIT are as follows:

Pursuant to IRC Sec. 856(c), a corporation, trust, or association is not to be considered a REIT for federal tax purposes for any taxable year unless-

1) It files with its return for the taxable year an election to be a real estate investment trust or has made such election for previous taxable year, and such election has not been terminated or revoked under subsection (g);

2) At least 95 percent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions) is derived from-

  • Dividends;
  • Interest;
  • Rents from real property;
  • Gain from the sale or other disposition of stock, securities, and real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1);
  • Abatements and refunds of taxes on real property;
  • Income and gain derived from foreclosure property (as defined in subsection (e);
  • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);
  • Gain from the sale or other disposition of a real estate asset which is not a prohibited transaction solely by reason of section 857(b)(6); and
  • Mineral royalty income earned in the first taxable year beginning after the date of the enactment of this subparagraph from real property owned by a timber real estate investment trust and held, or once held, in connection with the trade or business of producing timber by such real estate investment trust;

3) At least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from –

  • Rents from real property;
  • Interest on obligations secured by mortgages on real property or on interests in real property;
  • Gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(a)(1);
  • Dividends or other distributions on, and gain (other than gain from prohibited transactions) from the sale or other disposition of, transferable shares (or transferable certificates of beneficial interest) in other real estate investment trusts which meet the requirements of this part;
  • Abatements and refunds of taxes on real property;
  • Income and gain derived from foreclosure property (as defined in subsection (e));
  • Amounts (other than amounts the determination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property);
  • Qualified temporary investment income; and

4) At the close of each quarter of the taxable year-

  • At least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including receivables), and Government securities; and
    • (i) not more than 25 percent of the value of its total assets is represented by securities (other than those includible under subparagraph (A),
    • (ii) not more than 20 percent of the value of its total assets is represented by securities of one or more taxable REIT subsidiaries,
    • (iii) not more than 25 percent of the value of its total assets is represented by nonqualified publicly offered REIT debt instruments, and
    • (iv) except with respect to a taxable REIT subsidiary and securities includible under subparagraph (A)-
      • Not more than 5 percent of the value of its total assets is represented by securities of any one issuer,
      • The trust does not hold securities possessing more than 10 percent of the total voting power of the outstanding securities of any one issuer, and
      • The trust does not hold securities having a value of more than 10 percent of the total value of the outstanding securities of any one issuer.

Obviously Internal Revenue Code Section 856 is an extremely complicated tax accounting provision and requires an extensive understanding of accounting concepts and practices.  Organizations who might qualify under IRC Sec 856 will have to go through the various factors and accounting analysis that is depicted above.  In addition, there are additional nuisances about qualifying for REIT tax treatment that I cannot go into in this blog.  And before I turn to discussing the tax benefits from REIT tax treatment, take note that IRC Sec. 856 refer often to the term ‘beneficial owners’ of the organization.

Upcoming Beneficial Owners Information Reporting Requirements

Upcoming Beneficial Owners Information Reporting Requirements:

As we have seen so far during our discussion of United States taxation of Real Estate Investment Trusts pursuant to Internal Revenue Code Sec. 856, the term “beneficial owner” is extremely important for federal tax purposes since a Real Estate Investment Trust is a near pass-through entity.  What I mean is that normal corporate tax status applies to REITs income as computed by the rules set forth in the Tax Cuts and Jobs Act of 2017.  Typically, the bulk of a REITs income is passed through to the beneficial owners and are taxed at the beneficial owners’ personal tax rate.  The tax effect of this favorable treatment is the avoidance of double-taxation.  Remember, corporate earnings are taxed at the entity level and again when the earnings are distributed to the beneficial owners of the corporation.  REITs avoid this double taxation by electing to be taxed as Real Estate Investment Trust.  This in a nutshell is one of the main reasons why it’s extremely important to know the identity of the ‘beneficial owners’ for federal tax purposes.  Now let’s talk about a legal development that every REIT and those who structure them must be fully aware.

On September 30, 2022, the Financial Crimes Network, “FINCen” issued a final rule requiring certain entities to file with FINCen beneficial owner reports that identify two categories of individuals: (1) the beneficial owners of the entity, and (2) individuals who have filed an application with specified governmental authorities to create the entity or register it to do business.  These final FINCen regulations implement Section 6403 of the Corporate Transparency Act (CTA) enacted into law as a part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), describes who must file a report, what information must be provided to FINCen, and when the beneficial owner reports are due.  The effective date of the rules is January 1, 2024.  So beneficial owners and those who help them structure their entities, such as attorneys and other advisors must comply with these FINCen regulations effective January 1, 2024.

This upcoming change is important since many states’ business entity organizational codes do not require disclosure of beneficial owners when, say articles of organization are filed with, say the Secretary of State or some equivalent state agency in formation of, say a corporation, limited liability company or other legal entity structure.  The term beneficial owner is defined in the FINCen rules as “the individuals who actually own or control and entity – or individuals who take the steps to create an entity.  The Public Policy expressed in implementing the Corporate Transparency Act and these new FINCen regulations is stated to “help prevent and combat money laundering, terrorist financing, corruption, tax fraud, and other illicit activity….”  FInCen is a department of the United States Treasury.  FInCen is the same organization where financial interest in certain foreign bank accounts are reported annually pursuant to the Bank Secrecy Act.  Those reports are known as FBARs and they are filed with FINCen on April 15th of each year.  In recent years there has been an automatic extension for FBAR (Form 114) to be filed.  Remember, FINCen and the Internal Revenue Service are not the same federal agency; although over the years, they work together on FBAR and foreign account matters.  As for the beneficial ownership reports, it is to be seen how closely the two agencies will work together with respect to these new ‘beneficial owner” reports.  But it is clear, FINCen reports do not enjoy the privacy protections afforded tax returns filed with the IRS. They can be shared throughout the government and perhaps be made public.   Therefore, the beneficial owners’ reports are likely to give the IRS very useful information when investigating tax fraud and tax evasion cases.  Corporate transparency is the goal; so lots of organizations, agencies and individuals could benefit from the exposure on beneficial owners of American businesses.  These recent legal and regulatory development are very important for anyone doing business in the United States subject to the new FINCen beneficial owner regulations and those who are starting new entities and their advisors, past, present and future.  The beneficial owner regulations even apply to the smallest of companies if they are structured under a state’s business entity structuring laws, such as, mom and pop limited liability companies.  For right now, let’s turn to discuss some specifics regarding how REITs are currently taxed under the Internal Revenue Code.

Federal Taxation of Real Estate Investment Trusts REITs

Federal Taxation of Real Estate Investment Trusts “REITs”:

The most significant thing about the taxation of REITs is that they are not taxed like regular corporations.  Unlike regular domestic corporations, REITs are not taxed on its regular taxable income.  Instead, REITs are tax on several categories of income at normal corporate tax rates applicable for the specific annual reporting period.  Since The Tax Cuts and Jobs Act of 2017, REITs taxable income is the organization’s taxable income with the following adjustments and considerations:

  1. Exclude net capital gains;
  2. Required to comply with Internal Revenue Code Sec. 443(b);
  3. Include dividends paid deduction for amounts paid to beneficial owners, but excluding net income contributed to foreclosure property transactions;
  4. Exclude net income contributed by sales or transactions related to foreclosure property;
  5. Exclude any income associated with REIT prohibited transactions;
  6. Exclude dividend received in computation of REIT taxable income; and
  7. Deduct taxes paid pursuant to Internal Revenue Code Sec. 857(b)(2).

Conclusion:

Real Estate Investment Trusts are just a business model used by real estate investors to pool their resources to invest in real property.  The legal structure typically used by these real estate investment businesses are corporation, or limited liability company or trusts.  Our federal tax laws treat REITs primarily as pass-through entities; similarly, to, but to a lesser extent, the way our federal tax laws treat partnerships, where the majority of the increments in wealth associated with REITs are passed-through to the beneficial owners and taxed presumably at the more favorable tax rates of the individual beneficial owners of the REIT.  There is an awful lot of tax policy and tax accounting involved in structing and operating a business using this business model.  And the new FINCen rules governing beneficial owners and those that aid in structuring them could likely make structuring an entity and operating in the REIT business model much more complex and cost intensive.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432 | Portuguese (214) 272-3100

EPISODE 3: Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports

Coleman Jackson, P.C. | Transcript of Legal Thoughts
Published December 26, 2022

Overview:  

Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, contract litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Alexis Brewer, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.” You can listen to this podcast by clicking here:

If you enjoy this podcast, make sure to stay tuned for more episodes from the taxation, litigation, and immigration Law Firm of Coleman Jackson, P.C. Be sure to subscribe. Visit the taxation, litigation and immigration law firm of Coleman Jackson, P.C. online at www.cjacksonlaw.com.

 

TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

 

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, contract litigation and immigration law firm based in Dallas, Texas.

In addition to myself, we have Alexis Brewer – Tax Legal Assistant, Leiliane Godeiro – Litigation Legal Assistant, and Johanna Powell – Tax Legal Assistant.

On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Alexis Brewer, will be interviewing me on the important topic of: Starting Your First Business in Texas. This is a series of podcasts, and today’s episode will focus on: “State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Hi everyone, my name is Alexis Brewer and I am a Tax Legal Assistant at the tax, contract litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this hot tax topic: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports.”

Let’s jump right in,

Question 1: Attorney could you give us a quick picture of the type of taxes imposed in state of Texas?

 

Attorney Answer – Question 1:

Hello Alexis.

First and foremost, everyone needs to understand that the State of Texas imposes a series of taxes on individuals and businesses, but there are no income taxes in Texas.  Also, folks, individuals and businesses need to understand that property taxes are levied by local governments, such as, city, county, school districts and etc. throughout the State of Texas.  The law of local property taxes is fairly straight forward and our law firm does not practice this area of law.

  1. So, let me name several of the significant taxes imposed on individuals and businesses. Texas imposed the following taxes, among others:
  2. Limited Sales, Use and Excise Taxes are imposed on individuals and businesses;
  3. Texas Franchise Taxes are imposed on certain types of businesses;
  4. Estate and Generation-Skipping Taxes are imposed on estates;
  5. Unemployment Compensation Taxes are imposed on employers in Texas with employees;
  6. Alcoholic Beverages Taxes are imposed on establishments with such licenses to sell or distribute alcoholic products;
  7. Insurance taxes;
  8. Hotel taxes are imposed on guess of hotels, motels and similar establishments;
  9. Motor fuel taxes

This is just a list of eight types of taxes imposed by the State of Texas which generates the most revenue for the state.  There are a number of other types of taxes that Texas imposes on individuals and businesses operating within the State of Texas.  Anyone wishing to discuss these taxes can contact us with any specifics or follow our Blogs at www.cjacksonlaw.com; or follow our Legal Thoughts Podcasts; or follow our Law Watch videos on our You-Tube Channel where we frequently discuss various topics dealing with taxation, contracts, litigation and immigration matters those folks ought to know about.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

That leads me right into my next question, Attorney –

Question 2: What is the number one type of tax imposed by the State of Texas that everyone in Texas needs to know about?

 

Attorney Answer – Question 2:

Well Alexis, property taxes that are imposed by local governments is clearly a tax everyone in Texas should be aware of since Texas is one of the highest property tax states in the nation.  Property Taxes are taxes imposed by local governments throughout the State of Texas.  All people residing in Texas need to know about the property tax system because this is how public schools are financed as well as public hospitals and health services and a number of other major local and municipal services.

Alexis with that said, the number one type of tax imposed by the state that everyone needs to be aware of is the Texas Limited Sales, Use and Excise tax which is applies to most purchases of goods and some services.

Remember, as I previously stated; Texas does not have a state income tax.  So, our listeners should be asking themselves; so how does the State of Texas pay its bills?   The Limited Sales, Use & Excise Tax is; by far, the biggest tax revenue generator for the State of Texas.  The Limited Sales, Use, & Excise Tax generates about 58% of Texas’ tax revenues annually. This is the first major tax imposed by the State of Texas that everyone in Texas must be aware of.  Anyone operating a business or thinking about starting a business in Texas must do their due diligence with respect to whether their products, goods and services are subject to the Limited Sales, Use, & Excise Tax. If their products and services are subject to this tax; the business-owner is a trustee for the State of Texas and must obtain a sales tax permit, collect the appropriate sales taxes from each transaction and report and submit the monies to Texas Comptroller of Public Accounts, who is the chief tax collector for the State of Texas.  Business owners and other responsible parties can become personally liable for messing with Texas with respect to these sales, use and excise tax matters.

Texas imposes a 6.25% sales and use tax on sales, leases and rentals of touchable movable property (“tangible property”) and on certain specified services in Texas Tax Code Section 151.  Localities are also allowed to impose up to a maximum of 2% sales and use tax with respect to transactions within their jurisdictions.  The maximum limited sales, excise and use tax permitted in the Texas Tax Code is 8.25% of the gross taxable sales amount.

The sales and use tax are complimentary which means that Texas only gets to collect the tax as a sales tax paid by the purchaser at the time of the sale, or as a use tax paid by the merchant in the event the sales tax was not paid by the purchaser at the time of the sale.  Bottom line, the tax should only be paid once either as a sales tax or as a use tax.  Merchants in Texas are required under the Texas Tax Code to collect the tax as a trustee for the state of Texas.  Since the United States Supreme Court’s Wayfair decision, a couple of years ago, out of state merchants selling customers in the state of Texas could be subject to the same Texas Tax Code obligations as brick and mortal merchants operating with facilities and agents physically within the state.  The Texas Comptroller has issued guidance for out of state providers of taxable services and goods selling to customers inside Texas which can be found on the Comptroller’s website.

Any merchant inside the state or outside of the state who conducts a business subject to the Texas Limited Sales, Use and Excise Tax must obtain a sales tax permit from the Texas Comptroller of Public Accounts.  Again, the Texas Comptroller of Public Accounts is the chief tax collector for the State of Texas who administers the Texas Tax Code.  All kinds of useful and informative information can be found on the Comptroller’s website.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Question 3: Attorney, is there any other major tax imposed by the State of Texas that impacts business owners in Texas?

 

Attorney Answer – Question 3:

Alexis, another major tax imposed in Texas is the Texas Franchise tax; which is also known as the Margin’s Tax.  The Texas Franchise Tax is a tax imposed on some businesses for the privilege of doing business in Texas. Anyone interested in this topic can find this tax in the Texas Tax Code.

Several entities subject to the Texas Franchise Tax are:

  • Corporations;
  • Limited Liability Companies (LLC, including single member and/or husband and wife owned LLC);
  • Banks;
  • State limited banking associations;
  • Savings and loan associations;
  • S Corporations;
  • Professional Corporations;
  • Partnerships (general, limited and limited liability);
  • Trusts;
  • Professional Associations;
  • Joint Ventures; and
  • Other business entities not exempt by statute

Entities not subject to the Franchise tax are:

  • Sole Proprietorships;
  • General Partnerships (when ownership consist solely of natural persons or individuals. The partnership cannot have any legal entity owners);
  • Certain grantor trusts , estates of natural persons and escrows;
  • Exempt entities under Tax Code Section 171, Subchapter B;
  • Various other unincorporated passive entities, real estate investment trusts and entities classified under Insurance Code Chapter 2212;
  • Certain trust subject to Internal Revenue Code Section 401(a) or 501(c)(9).

Alexis, the actual computation of the Texas Franchise Tax can be an extremely complicated accounting computation; and any business subject to this tax should hire a very competent Certified Public Accountant who works with business owners who must regularly pay franchise taxes.  Many businesses; perhaps most Texas businesses, who are subject to the Texas Franchise Tax only have to file a no-tax due report each year.  Franchise tax reports are filed annually online with the Texas Comptroller of Public Accounts and there are penalties for failure to file and/or failure to timely pay any franchise taxes that are due for the period.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant
Attorney, so far, we’ve been discussing some of the taxes imposed by local governments, property tax in particular imposed locally, and some of the important taxes imposed by the State of Texas in this podcast – for example, the sales, use and excise tax and franchise tax.  There are some upcoming changes on the federal law horizon that you mentioned to me a few of days ago, and I thinking we should wrap up this podcast by explaining that.
Question 4: Attorney, can you briefly explain the Corporate Transparency Act and its key provisions?

 

Attorney Answer – Question 4:

This is a great question and it’s a very important one!

This past year, Congress passed the Corporate Transparency Act (CTA) as a part of the Anti-Money Laundering Act of 2020 (AMLA). The stated goal of the AMLA was to aid the federal government in detecting and preventing money laundering, tax fraud and other illicit activities.

The Corporate Transparency Act, as a result, imposes new mandatory reporting obligations with the stated intention of catching and stopping this illicit behavior. The FinCEN reports created under this mandatory rule are called, “Beneficial Ownership Information Reports” or BOI reports. The Corporate Transparency Act will require most corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information about their beneficial owners—the persons who ultimately own or control the company, to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN).

The Corporate Transparency Act and its new reporting requirements is a huge change coming for all businesses structured under any state or tribal entity organization structuring laws and impose significant new disclosure obligations on business organizers and business owners of entities structured under state and tribal business organizational laws.  The Financial Crimes Network (FinCEN) is the U.S. Department of Treasury agency authorized to enforce the Corporate Transparency Act.

The final rules implementing the Corporate Transparency Act was published by the Financial Crimes Network (FinCEN) on September 30, 2022 in the Federal Register, and applies to domestic & foreign “reporting companies of all sizes, including the smallest of companies.”

A reporting company is a corporation, limited liability company, or any other entity created by filing entity structuring instruments with a secretary of state or any similar office under the law of a state.

  • For example, in Texas, the term “reporting companies” would include most business entities structured under the Business Organization Code, with the exception of sole proprietorships and general partnerships. If the business filed organizational documents with the Texas Secretary of State, the final FinCEN rules implementing the Corporate Transparency Act applies to them.

A “beneficial owner” under the FinCEN final rule includes any individual who, directly or indirectly:

  1. exercises substantial control over a reporting company, or
  2. owns or controls at least 25 percent of the ownership interests in a reporting company.

 

INTERVIEWER: Alexis Brewer, Tax Legal Assistant

Attorney, these sound like huge changes for business owners!  Do you mean to say that the rules apply to even a mom-and-pop business that operates as an LLC!

Question 5: What kind of information will this mom-and-pop organization and other businesses structured under state law have to file and where will they have to file it?

 

Attorney Answer – Question 5:

Yes, Alexis, that is exactly what I am saying.  The final FinCEN rules do not exempt small business from the obligations imposed on affected business organizations.  The rules apply to the mom-and-pop limited liability company as well as other businesses structured under state and tribal laws.  They all meet the definition of ‘reporting company’ and must comply with the reporting rules.

When a reporting company files a “Beneficial Ownership Information Report,” or BOI report, with the Financial Crimes Network (FinCEN), they are required to identify themselves and report four types of information about each of its beneficial owners:

  1. Name
  2. Birthdate
  3. Address, and
  4. A unique identifying number issued by a jurisdiction in an acceptable document. A copy of this acceptable identifying document must be sent to FinCEN for inspection.  The document must be valid and current.

The FinCEN final rules implementing the Corporate Transparency Act and the related new reporting obligations are effective on January 1, 2024.

  • Reporting companies created or registered before January 1, 2024 will have one year (until January 1, 2025) to file their initial BOI reports
  • Reporting companies created or registered after January 1, 2024, will have 30 days after receiving notice of their creation or registration to file their initial BOI reports.

Alexis, our law firm will continue to monitor developments with respect to the Corporate Transparency Act and FinCEN announcements implementing the BOI rules.  Our office has been filing FBAR reports with the Financial Crimes Network on behalf of taxpayers for years now; and FinCEN is where the new BOI reports will be filed as well.  Any of our listeners should follow our blogs and Legal Thoughts Podcasts where we discuss these types of topics.

 

Interviewer Wrap-Up

Attorney, thank you for siting with me today to explain the tax obligations of starting a new business in Texas. Today the key take aways from this podcast discussion are:

  1. Texas sales & use tax in Texas: This is a major tax imposed by the State of Texas impacting everyone who buys or sales goods and certain services,
  2. Texas Franchise tax: This too is a major tax imposed by the State of Texas on certain business structured under the Texas Business Organization Code and filed with the Texas Secretary of State, and potentially the big federal rule. Attorney even impacting
  3. Corporate Transparency Act: This is a new, big federal rule coming up in 2024. The new mandatory rule issued by the Financial Crimes Network (FinCEN) requires businesses structured under state or tribal entity organizational laws to file “Beneficial Ownership Information Reports” with the Financial Crimes Network. This rule is wide-reaching and will even impact the small mom-and-pop LLCs. Our office needs to watch the BOI report developments and perhaps produce future blogs, videocast and Legal Thoughts podcasts on this topic.

 

To our listeners who want to hear more podcast like this one please subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast. Take care, everyone! And come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

 

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you all for giving us the opportunity to inform you about: “Starting Your First Business in Texas – State and Federal Tax Obligations and the Upcoming FinCEN BOI Reports”

If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

THE IRS COLLECTION PROCESS AND TAXPAYER’S OPTIONS

Coleman Jackson, P.C. | Transcript of Legal Thoughts

LEGAL THOUGHTS:  THE IRS COLLECTION PROCESS AND TAXPAYER’S OPTIONS | Published November 28, 2022

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Legal Thoughts is an audiocast presentation by Coleman Jackson, P.C., a law firm based in Dallas, Texas serving individuals, businesses, and agencies from around the world in taxation, litigation, and immigration legal matters.

This episode of Legal Thoughts is an audiocast where the Attorney, Coleman Jackson is being interviewed by Johana Powell, Tax Legal Assistant of Coleman Jackson, P.C. The topic of discussion is “THE IRS COLLECTION PROCESS AND TAXPAYER’S OPTIONS.” You can listen to this podcast by clicking here: https://anchor.fm/coleman-jackson/episodes/THE-IRS-COLLECTION-PROCESS-AND-TAXPAYERS-OPTIONS–ENGLISH-VERSION-e1ooft6

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TRANSCRIPT:

ATTORNEY: Coleman Jackson

LEGAL THOUGHTS

COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Legal Thoughts

  • My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, contracts litigation and immigration law firm based in Dallas, Texas.
  • Other members of the law firm are Alexis Brewer and Johana Powell – Tax Legal Assistants, Leiliane Godeiro – Litigation Legal Assistant, and Gladys Marcos – Immigration Legal Assistant.
  • On today’s “Legal Thoughts” podcast, our Tax Legal Assistant, Johana Powell, will be interviewing me on the important topic of: “THE IRS COLLECTION PROCESS AND TAXPAYER’S OPTIONS.”

INTERVIEWER: Johana Powell, Tax Legal Assistant

Hi everyone, my name is Johana Powell and I am a Tax Legal Assistant at the tax, litigation and immigration law firm of Coleman Jackson, Professional Corporation. Our law firm is located at 6060 North Central Expressway, Suite 620, right here in Dallas, Texas.

Good afternoon, Attorney; thank you for agreeing to sit with me as I interview you with respect to this interesting topic: “THE IRS COLLECTION PROCESS AND TAXPAYER’S OPTIONS.”

Let’s get started!

Question 1:

Attorney what is likely to happen when a taxpayer files a tax due return with the IRS?

Attorney Answer – Question 1:

Good afternoon, Johana.

When a taxpayer files a tax return with the IRS, they can expect the following to happen in short order:  If a balance is due on the return;

  1. the IRS will— Put the balance due on its books; technically that step is called ‘tax assessment’ under tax law;

the IRS will— Send the taxpayer a bill requesting full payment by a certain date;

In the event the taxpayer fails to pay the first bill in full or contact the IRS to make payment arrangements, the IRS will send the taxpayer a second bill requesting full payment of all taxes, penalties and interest due by a certain date;

  1. In the event the taxpayer fails to pay the second bill in full or contact the IRS to make alternate payment  arrangements, the IRS will pull tools out of its collections tool box and rachet up the heat on the recalcitrant        taxpayer.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Okay attorney; how much heat can the taxpayer expect to be coming their way if they fail to voluntarily pay that tax debt!

QUESTION 2: Explain what collection tools are in the IRS collection’s tool box?

Attorney Answer – Question 2:

Johana, taxpayers who owe the IRS need to understand that the law gives the IRS broad authority and awesome powers to collect delinquent federal taxes, penalties and interest without any involvement of the courts.  In fact, injunctive relief is not available to the taxpayer.  Taxpayers cannot get any court to enjoin the IRS in its collection efforts.  Taxpayers may have the right to seek that federal courts review and quash some of these collection tools that I am about to discuss; but extremely strict rules apply to quashing an IRS action.  The IRS is authorized under the provisions of the Internal Revenue Code; which is codified in 26 United States Code, to collect taxes by use of its collection tools:

1. The IRS is authorized to apply all refunds due to any delinquent tax debt owned by the taxpayer until the delinquent taxes, penalties and interest are paid in full;

2. The IRS is authorized to file a federal tax lien in the property records wherever the taxpayer has property.  The IRS tax lien attaches to all property owned by the taxpayer at the time the lien is recorded in the records and it also attaches to all property of any kind the taxpayer may have in the future until the taxes, penalties and interest are paid in full or the lien is lawfully released;

3. The IRS is authorized to assign a Revenue Officer to physically contact the taxpayer at home or at the taxpayer’s business without notice in an attempt to collect the taxes, penalties and interest owed;

4. The IRS is authorized to summon the taxpayer or third party to appear in the IRS offices to give testimony and produce relevant documents to an IRS Officer;

5.  The IRS is authorized to serve a levy on third parties to collect the taxes, penalties and interest owed by the taxpayer.  For example, the IRS levy and seize the taxpayers bank accounts, wages and other monies owed the taxpayer or held on behalf of the taxpayer; and

6. The IRS collections division is authorized to make criminal referrals to the IRS Criminal Division for criminal investigation and potential criminal tax charges against the taxpayer and others aiding and abetting the taxpayer in violation of U.S. Tax Laws; and finally;

7.  The IRS is authorized to file a declaration with the U.S. Department of State declaring the taxpayer’s account seriously delinquent; thereby, informing the U.S. Department of State that the seriously delinquent taxpayer’s U.S. Passport should be revoked or the taxpayer’s passport renewal should be denied.

Let me point out clearly here; all of the collection tools that I have discussed here can be used by the IRS without any court involvement or supervision what-so-ever!

INTERVIEWER: Johana Powell, Tax Legal Assistant

Well with all that potential heat!  What are the actions that the taxpayer should take when they receive a tax bill from the IRS?

Attorney Answer – Question 3:

  1. The taxpayer should immediately open the correspondence from the IRS as soon as they receive it.  That is the very first thing the taxpayer should do.  Time is of the essence because critical deadlines to act are often in IRS correspondence.  By failing to act, taxpayers can forsake very important rights.  For example, the right to seek relief in the U.S. Tax Court without first paying the taxes, penalties and interest due comes in a 90-day letter from the IRS.  Failure to act within 90 days and you lose that right forever.
  2. Second, the taxpayer should read the correspondence carefully; and if they don’t understand it, they should either contact the IRS and arrange to discuss it with them; or, contact an attorney, accountant or IRS enrolled agent and schedule an appointment and bring the IRS correspondence with them to their initial meeting.
  3. Third thing that needs to happen is that the taxpayer will need to decide what further actions they need to take; that is going to depend upon the following
    1. What actions are the IRS requesting the taxpayer to take in the correspondence, if any;
    2. If it’s a tax bill or notice of tax adjustment where the IRS is requesting a payment by a date certain-
      1. In the event the taxpayer agrees that they owe the taxes, penalties and interest, the taxpayer either needs to pay in full or negotiate some kind of payment arrangement with the IRS;
      2. In the event the taxpayer disagrees with the balance owed or any part of it; the taxpayer needs to exercise its collection due process rights, or the taxpayer’s right to challenge the assessment in court within the deadlines set forth in the IRS correspondence, or exercise any number of other rights the taxpayer may have depending upon all the facts and circumstances.
  1. Taxpayers dealing with the IRS should seriously seek professional representation; especially, if they are certain about what the tax issues are or they are in great civil and criminal exposure.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Question 4: Attorney Jackson, what happens if the taxpayer cannot pay the taxes, penalties and interest in full?

Attorney Answer – Question 4:

Again, the particular options available to a taxpayer is going to depend on all the facts and circumstances.  Facts matters, such as, the type of tax debt; such as, income taxes, business taxes, payroll taxes, excise taxes and things like that.  The amount of the tax debt is very important as to what options are going to be available to resolve the matter.  The taxpayer’s history with the IRS also can matter a lot.  Anyway, all the facts and circumstances matter as to what options are available.  Some of the options that might be available are

  1. Negotiate a full pay or partial pay installment payment arrangement with the IRS. Again, depending on all the facts and circumstances the taxpayer may be able to apply for an installment agreement at irs.gov, on the phone, by mail or by visiting an IRS local office.  Again, whether this can be done is going to depend upon the amount of the tax debt, the tax payer’s prior history, the taxpayer’s current tax compliance, and a lot of other things.  The taxpayer may want to consult and attorney or other professional whenever they are dealing with large tax debts, unfiled tax returns and other times when they have criminal exposure due to their actions or inactions as far as it goes in terms of compliance with U.S. federal tax laws.
  2. The fresh start or offer in compromise might be available for some taxpayers.  There are some options for these taxpayers but they must act promptly once they receive their bills. The taxpayer that cannot pay in full may apply for an installment agreement, which consists in a payment plan so the IRS will allow you to make smaller periodic payments according with your financial capacity. Usually, you can apply for the installment agreement online, by phone, by mail, or in person in one of the local offices, however, this is just possible when it is early in the process. When a taxpayer has a big tax debt or it is past due from several years and has interest and penalties accrued for a long period of time, you should consult with your tax attorney.  An offer in compromise is sought to settle unpaid taxes for less than the full amount owed, the IRS may accept an OIC when the Service believe that the taxpayer’s tax debt might not be accurate, or when the taxpayer has proven to the OIC division of the IRS that the taxpayer does not have sufficient assets and income to pay the tax debt, or because paying the debt would cause the taxpayer undue hardship. In recent years, not many offers in compromise request are approved.  The IRS is more likely to accept a partial pay installment agreement or put the taxpayer’s account in uncollectable status and review it in subsequent years to determine whether the tax debt is collectible.

INTERVIEWER: Johana Powell, Tax Legal Assistant

Attorney, thank you for siting with me today to inform us about the IRS collection process and taxpayer’s options, it is very important for the taxpayers to be aware of this information. In United States all individuals and businesses must prepare tax returns, it is important to maintain records of this returns, and to make them accurate to avoid issues with the IRS.

Our listeners who want to hear more podcast like this one should subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or where ever you listen to your podcast.  Everybody takes care!  And come back in about two weeks, for more taxation, contracts, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., located right here in Dallas, Texas at 6060 North Central Expressway, Suite 620, Dallas, Texas 75206.

English callers:  214-599-0431 | Spanish callers:  214-599-0432 |Portuguese callers: 214-272-3100

Attorney Closing Remarks

This is the end of today’s Legal Thoughts!

Thank you for giving us the opportunity to inform you about: “THE IRS COLLECTION PROCESS.”

If you want to see or hear more taxation, contracts litigation and immigration LEGAL THOUGHTS from Coleman Jackson, Professional Corporation.  Subscribe to our Legal Thoughts Podcast on Apple Podcast, Google Podcast, Spotify or wherever you listen to your podcast.

Stay tuned!  We are here in Dallas, Texas and want to inform, educate and encourage our communities on topics dealing with taxation, litigation and immigration.  Until next time, take care.

 

 

Taxpayer’s Responsibility to Substantiate the Numbers on Their Federal Tax Return

By Coleman Jackson, Attorney and Certified Public Accountant

October 11, 2022

As a general rule a taxpayer is allowed a deduction for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.  This basic tax rule is set forth in Internal Revenue Code Section 162.  The particular tax return that a taxpayer’s file depends upon how the business is structured under applicable state business organizational law and certain timely tax elections that the business owners make.  That sounds wonderful; but don’t move too fast because the Internal Revenue Service is not going to simply take the taxpayer’s word for it.  Generally, taxpayers are required to keep records in sufficient quality to establish the amounts, dates and business purpose of the items recorded on their tax return. Taxpayers generally bear the burden to show that they are entitled to deduct an expense on their tax return.  See Internal Revenue Regulation Section 1.6001.  Sometimes taxpayers can establish that an expense has occurred during a tax period, but cannot establish the exact amount.  When this occurs, the taxpayer must produce sufficient evidence to permit an estimation of the amount deductible on the tax return.  See Vanicek v Commissioner, 85 T.C. 731, 743 (1985).


Internal Revenue Code Section 274 sets forth detailed substantiation requirements to which taxpayers must adhere.  Treasury Regulation 1.274(d) sets out several categories of expenses that require enhanced substantiation.  Generally, the taxpayer substantiates their tax deductions by either adequate records or sufficient probative evidence that corroborates the taxpayer’s statements and opinions concerning the deductibility of the expense.  The substantiation burden only requires that the taxpayer maintain sufficient records and documentary evidence to establish the date, amount and business purpose or use of the expenditure.  The taxpayer’s words alone; however, are insufficient substantiation.  But the taxpayer’s written or oral words are sufficient to substantiate the deductibility of the expenditure if it is supported by credible corroborative evidence sufficiently establishing the deductibility of the expense.  As stated before, the burden to show that expenditures are deductible belongs to the taxpayer at all times. The United States Supreme Court has established this burden issue long ago in a case called New Colonial Ice Co. v Helvering, 292 U.S. 435, 440 (1934).  Yes, that means the taxpayer must prove that the expense is deductible in the first place.  In other words, the taxpayer must always prove deductibility of an expense upon challenge by the IRS.  Moreover, see also Internal Revenue Regulation 1.274. (d) regarding the enhanced substantiation requirements on certain categories of expenses.


For the non-tax lawyer and non-tax professional, this might all seem very esoterically complicated.  Like lifting weights—start with a weight that you can easily lift and graduate to more and more weight until you have achieved your goal.  Our goal here is to explain this in layman’s terms; so that, layman can understand the tax concepts of deductibility, substantiation and burden as these terms apply to their tax return.  Let’s try to explain substantiation in layman’s terms:  to be deductible on the taxpayer’s tax return all expenditures must meet three requirements, and possibly four as follows:

  1. Be incurred in pursuit of a trade or business (this means personal expenses don’t count);
  2. Be an ordinary and necessary expense (this means expenditures common to the taxpayer’s trade, group or industry);
  3. Be substantiated by sufficient records or documentation, which can include the taxpayer’s corroborated written and oral statements; and for some expense categories;
  4. Be subject to enhanced or stricter substantiation, such as, contemporaneous logs, charts, and diaries.

Looking at someone play sports is not the same as actually participating in sports.  Neither is reading about tax substantiation in a blog the same as actually running a trade or business in real time and sufficiently substantiating tax expenditures in preparation for the day when the Internal Revenue Service Auditor knocks on the door.  Like locks on our doors are preparatory; the expenditure substantiating taxpayer don’t expect the auditor’s knock, but is prepared if it comes.  It’s kind of like being prepared when a thief comes by having locks, alarms and even attack dogs.  What might these preparatory things look like?

“Ordinarily, documentary evidence will be considered adequate to support an expenditure if it includes sufficient information to establish the amount, date, place, and the essential character of the expenditure.  For example, a hotel receipt is sufficient to support expenditures for business travel if it contains the following: name, location, date, and separate amounts for charges such as for lodging, meals, and telephone.  Similarly, a restaurant receipt is sufficient to support an expenditure for a business meal if it contains the following:  name and location of the restaurant, the date and amount of the expenditure, the number of people served, and, if a charge is made for an item other than meals and beverages, and indication that such is the case.  A document may be indicative of only one (or part of one) element of an expenditure.  Thus, a cancelled check, together with a bill from the payee, ordinarily would establish the element of cost.  In contrast, a canceled check payable to a named payee would not by itself support a business expenditure without other evidence showing that a check was used for certain business purpose.”  See Internal Revenue Code 274.

If a taxpayer with a canceled check payable to a named payee is struggling to lift the substantiation weight, one can only imagine the plight of the taxpayer who conducts its business in cash.  Cash is a completely inappropriate way to conduct business.  But many foreign immigrants came from societies and cultures where business is routinely conducted in cash.    Cash cannot be substantiated and an IRS auditor is very likely to deny any and all expenditures paid in cash unless the taxpayer has serious corroborating evidence to back up their written or oral word.  When paying contract labor and other expenses by cash, the taxpayer voluntarily places onto themselves and their company’s enormous weight because Internal Revenue Code Section 6663(a) states that if any part of any underpayment of tax required to be shown on a tax return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.  See Tax Court case styled, Petzoldt v. Commissioner92 T.C. 661, 699 (1989).  Construction companies and other taxpayers must be sure to substantiate their contract labor or other labor costs by obtaining accurate and complete Form W-9 from all workers who are independent contractors and Form W-4 for workers who are employees, by filing all Form 1099 Miscellaneous with the Internal Revenue Service for all independent contractors or file Form W-2 for employees, withholding the proper tax amounts when required by law, by paying all workers by check and documenting the labor transactions in their books and records.  Numerous federal courts have stated that dealing in excessive amounts of cash is an indicia of tax fraud.  Courts have said that other indicia of tax fraud are (1) substantial understatement of income, (2) maintenance of inadequate records; and 3) implausible or inconsistent explanations of behavior.  See Bradford v Commissioner, 796 F.2d 303, 307 (9th Cir. 1986).  Taxpayer’s demonstrating two or more of these characteristics are all but certain to be charged with the tax fraud penalty and possibly referral to the IRS Criminal Investigations Unit.  See Otsuki v Commissioner, 53 T.C. 96, 106 (1969) and Solomon v. Commissioner, 732 F.2d 1459, 1461 (6th Cir. 1984).

And for expenses, such as, car and truck expenses, taxpayers must comply with the weightier substantiation requirements of Internal Revenue Code Section 274(d) which requires the taxpayer to substantiate vehicle, entertainment, travel and certain other listed expenses by sufficient evidence corroborating the taxpayer’s own statements.  Under the stricter substantiation rules taxpayers must maintain adequate records, such as, account books, diaries, logs, statements of expense, trip sheets, or similar records prepared contemporaneously with the use or incurrence of the expenditure and documentary evidence such as receipts or bills.  See Jijun Chen and Xiujing Gu v. Commissioner (T.C. Memo 2015-167) a recent Tax Court case dealing with disallowance of personal car and truck expenses.  The IRC 274(d) enhanced substantiation requirements are set forth in Internal Revenue Regulations Section 1.274-5T.  Remember that locks, alarms and attack dogs are to prepare for the thief or robber.  Taxpayers are responsible for substantiating the numbers on their tax returns, and knowing and properly implementing these taxpayer substantiation requirements are preparatory in the event the tax auditor comes knocking.

This law blog is written by the Taxation | Litigation | Immigration Law Firm of Coleman Jackson, P.C. for educational purposes; it does not create an attorney-client relationship between this law firm and its reader.  You should consult with legal counsel in your geographical area with respect to any legal issues impacting you, your family or business.

Coleman Jackson, P.C. | Taxation, Litigation, Immigration Law Firm | English (214) 599-0431 | Spanish (214) 599-0432