Category Archives: Payroll Tax

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.

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

exercises substantial control over a reporting company, or
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:

Name
Birthdate
Address, and
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:

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,
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
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

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

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

Listen:

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

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;

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;

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:

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.
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.
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.

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

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.
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.

Here’s Why People Filing Taxes Should Be Careful When Selecting A Professional Tax Return Preparer | LEGAL THOUGHTS

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Coleman Jackson, P.C. | Transcript of Legal Thoughts Podcast
Published March 10, 2021.

Legal Thoughts is a podcast 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 particular episode of Legal Thoughts is a podcast where the Attorney, Coleman Jackson is being interviewed by Reyna Munoz, Immigration Legal Assistant of Coleman Jackson, P.C. The topic of discussion is ““Here’s why people filing taxes should be careful when selecting a professional tax return preparer.” You can listen to this podcast by clicking here:

You can also listen to this episode and subscribe to Coleman Jackson, P.C.’s Legal Thoughts podcast on Apple Podcast, Google Podcast, Spotify, Cashbox or wherever you may listen to your podcast.

TRANSCRIPT:

ATTORNEY: Coleman Jackson
Legal Thoughts
COLEMAN JACKSON, ATTORNEY & COUNSELOR AT LAW

ATTORNEY: Coleman Jackson

Welcome to Tax Thoughts

My name is Coleman Jackson and I am an attorney at Coleman Jackson, P.C., a taxation, litigation and immigration law firm based in Dallas, Texas.
Our topic for today is: “Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”
Other members of Coleman Jackson, P.C. are Yulissa Molina, Tax Legal Assistant, Leiliane Godeiro, Litigation Legal Assistant, Reyna Munoz, Immigration Legal Assistant and Mayra Torres, Public Relations Associate.
On this “Legal Thoughts” podcast our public relations associate, Mayra Torres will be asking the questions and I will be responding to her questions on this important tax topic: Here’s why people filing taxes should be careful when selecting a professional tax return preparer.”

Interviewer: Mayra Torres, Public Relations Associate

Good morning everyone. My name is Mayra Torres and I am the public relations associate at Coleman Jackson, P.C. Coleman Jackson, P.C. is a law firm based right here in Dallas Texas representing clients from around the world in taxation, litigation and immigration law.
Attorney today we are discussing a very important tax topic because filing taxes is on folks minds these days. Many people may be filing taxes for the first time this year because of the recovery rebate credit issues involving their economic impact payments and other Covid-19 relief received during 2020.
In this Podcast, we will be discussing the safest, easiest and perhaps cheapest way folks can file their tax returns.

Question 1:

Attorney let’s start with the cheapest way folks can file their taxes for 2020! What options exist for people who do not want to pay a professional tax return preparer? I mean, can people file their tax returns for free?

Attorney Answers Question 1:

Good morning Mayra.
First people can always prepare and file their tax return themselves without hiring and paying anyone.
Second people can go to IRS.gov and select a number of brand-name tax software providers who will permit certain eligible taxpayers to use their software to prepare and electronically file their individual tax return for absolutely free. This particular free tax preparation option might be an excellent option for some taxpayers. Typically, the software providers require people to meet certain income, age and state residency requirements. The software vendors’ individual qualifying requirements can be found at IRS.gov. Most of the free vendors software is in English, but a few are in Spanish. This free file option is certainly an option that taxpayers should explore.
Third people can use possibly find free tax preparer clients hosted by various accounting and legal societies throughout the community. Some churches and business and law schools also provide minimum fee tax advice and counsel. People should contact the professional schools in their communities to inquire whether students in tax law training provide such services to the community. When I attended SMU School of Law, I participated in their tax clinic that provided free or minimum fee tax controversy services by enrolled students under the supervision of the tax clinic professor. People should make inquiries at professional societies, schools, and places of worship to see what’s available.
So to summarize; Mayra, as you can see there are a number of options available for people to get their tax returns prepared at little to no costs.

Interviewer: Mayra Torres, Public Relations Associate

That is an excellent summary of the free or low-cost tax return preparation and filing options that might be available to people this year:

people can prepare and file their returns without using anyone to help them;
People can go to IRS.gov and select a brand-named software provider to prepare and file their return if they meet the provider’s qualification requirements, and
People can search for a free or low-cost professional tax return preparer at local places of worship, or professional accounting or law societies or local law school tax clinics and accounting schools.

Question 2:

Attorney, some people can’t qualify for one of these free or low-cost tax preparation services. Some people just think taxes are very complex; they can’t prepare these complicated tax returns themselves, and they just want to hire someone to prepare the return and file it for them. What characteristics and qualifications should people look for when hiring a tax return preparer?

Attorney Answers Question 2:

Mayra, that is a very good question since people are responsible for the accuracy of their tax return regardless of whether they prepare and file it themselves or hire someone else to prepare and file their return.
These are some of the things that people might should consider when selecting a tax return preparer:
1. Indicial of educational training in tax law and tax accounting. This might be evidenced by a degree from college in taxes, accounting, law, finance, or some related business degree. Return preparer might be qualified with only certificates but with increasing complexity of the tax issues involved, should cause taxpayers to exercise more exacting screening of a tax return preparer before they hire them to work on their return.
2. Professional Tax Identification Number (or PTIN). The PTIN is an annual credentialing issued by the Department of Treasury to professionals authorized to practice before the Internal Revenue Service as paid tax return preparers. To obtain a PTIN, a tax professional must be an attorney in good standing with a State Bar Association, a licensed Certified Public Accountant in good standing with a state CPA licensing authority, an enrolled agent in good standing with the Internal Revenue Service, or a registered tax return preparer under the defunct IRS Registered Tax Return Preparer Program. Taxpayers should look for these types of credentialing when selecting a tax return preparer. In recent years, the annual PTIN fee has been suspended due to Court challenges regarding the IRS’ attempt to regulate tax practice. The IRS’ stated goal when instituting the PTIN program was to improve the integrity and quality of the tax preparation industry. Some tax professionals challenged this attempt in Court. Nevertheless, PTIN credential could be a good metric for the public to use when selecting a tax return preparer. The bottom line is this— when the professional does not have a current PTIN Card; It is possibly a bright red alert to the taxpayer that they could be taking unnecessary risk by hiring an unqualified tax return preparer. Taxpayers are responsible and liable for the accuracy of their tax returns regardless of who prepares or files the return for them.
3. Experience in tax return preparation is critical factor when selecting a tax return preparer. Tax law is constantly changing from year to year, and it is very important that the tax return professional maintains competencies in tax law on an annual basis. The more experience that the tax return preparer has with the type of return involved the better. For example, if you have foreign accounts, you should think long and hard before hiring any return preparer who has never worked with taxpayers with foreign accounts or offshore assets. Over the years, our law firm has seen many taxpayers who have been greatly harmed by tax return preparers who failed to properly counsel and advise them with regards to proper tax accounting for offshore assets and accounts.
4. So to summarize: taxpayers should look for relevant tax law and accounting education, IRS Tax Professional PTIN certificate and tax experience relevant to tax issues related to their particular situation when selecting a tax return preparer.
It is very important to make a wise selection choosing which tax return preparer to hire because taxpayers can be subject to civil penalties and even criminal exposure for inaccuracies and materially false statements and tax positions taken on their tax returns and in their claims for refunds.

Interviewer: Mayra Torres, Public Relations Associate

Bright Red Alert! Before hiring anyone to do your tax return, look at the tax return professional’s educational background… like where did they go to school and where did they learn tax and accounting; look at whether they have a current IRS Tax Professional PTIN certification, and look at whether they have the right type of tax experience to prepare your tax return!
If any of these three things are missing; it’s a bright red alert folks! Attorney, thanks for answering my question so clearly concerning what characteristics people should look for when selecting a tax return preparer.
Did I get the bright red alerts right, Attorney?

Question 3:

Attorney, it sounds like taxpayers can get in very serious trouble on their taxes if they hire an unqualified, incompetent, or dishonest tax return preparer.

Is there any where a taxpayer can turn for help when they suspect that they have been harmed by their tax return preparer?

Attorney Answers Question 3:

The Internal Revenue Service has been given the authority by Congress to maintain the public’s confidence in the federal tax system. Under that authority the IRS maintains advisory committees who establish practices, procedures and policies of the oversight offices designed to enforce regulations governing those authorized to practice before the IRS. The IRS is required under these regulations to maintain a list of individuals and companies who have been disbarred from practice before the IRS; list practitioners with monetary sanctions, and a list of practitioners who have otherwise been sanctioned by the IRS.
In addition to the IRS oversight that I have mentioned; professionals such as attorneys and certified public accountants are accountable to their respective professional licensing authorities in their states. These various professional licensing boards have specific complaint procedures where injured taxpayers can file an official complaint.
Finally, taxpayers harmed by tax return preparers can also turn to the courts for redress by filing a lawsuit for professional liability or other claim.
I should caution here that every tax position taking on a particular tax return may not rise to the level incompetence or malfeasance on the part of the tax return preparer. Judgment is an inherent part of being a tax professional. That intangible characteristic of confidence and trust in your tax professional cannot be overstated.

Interviewer: Mayra Torres, Public Relations Associate

Question 4:

What about the people that have an approved family-sponsorship petition outside of the United States?

Attorney Answers Question 4:

The Internal Revenue Code imposes an entire laundry list of civil penalties and criminal penalties on Tax Return Preparers who are incompetent or engage in disreputable conduct. The names and descriptions of these various penalties can be very informative as what goals the IRS is attempting to achieve in terms of protecting the public, protecting the public’s confidence in the tax system, and maintaining the overall integrity of the U.S. federal tax system. So that I don’t overly complicate this for our none-tax professional listeners, I am going to leave out any references to the specific Internal Revenue Code Section or Treasury Regulation where these penalties are codified. Most of our listeners probably don’t really care to know the actual tax code section and treasury regulation reference numbers for these penalties.
This is a list of some of the types of penalties that the IRS can impose on Tax Return Preparers. Taxpayers should just thing about the item on the list and look beyond what is right in front of them to what the IRS is trying to accomplish by imposing these penalties on incompetent preparers or those engaged in disreputable conduct:
1. Civil Penalties imposed on tax return preparers for failure to meet due diligence requirements for determining eligibility for certain tax benefits, such as, child tax credit, head of household, and earned income credit. Often times, taxpayers take these tax positions in error or with bad advice from tax preparers.
2. Penalties imposed on tax return preparers for failure to sign the return and penalties for failing to supply identifying numbers such as, PTIN etc. Again, often, returns prepared by paid tax preparers appear to be self-prepared.
3. Various penalties imposed against tax preparers for giving false or misleading information to the Department of the Treasury or any of its officers, employees, or agents.
4. Various penalties imposed against tax preparers for aiding, advising or abetting others in violating federal tax law by suggesting or aiding in an illegal plan to evade the proper application and administration of U.S. tax laws or payment of U.S. taxes.
Items three and four can result in civil negligence and civil accuracy related penalties; and willful or reckless violation of U.S. Tax laws could lead to criminal referrals and prosecution of the tax return preparer and the taxpayer.

Penalties imposed on tax return preparer for failure to give the taxpayer a copy of their tax return.
Penalties imposed on the tax return preparer for failure to maintain a copy of the prepared tax return.
Penalties imposed on the tax return preparer for failure to maintain a record of who prepared the return.

Items five through seven is designed to create a contemporary record and to provide a chain of responsibility. Tax return preparer operations are subject to IRS examination and investigation.
These are only a few of the penalties that the IRS could impose on incompetent tax return preparers and those engaged in disreputable conduct.
Taxpayers must be careful when tax return preparers over promise, make claims of abilities to obtain certain refund amounts or tax results, or seek to negotiate taxpayer refund checks. Sometimes dishonest preparers claim that the taxpayer has companies, farms, and factories that the taxpayer themselves never knew they had. Remember you are responsible for the numbers and data on your tax return and the IRS will look for you first to timely pay the correct amount of taxes. Your tax return preparer may or may not ever be held accountable. So, a word to the wise: be careful when you select your tax return preparer.
All these penalty areas that I have mentioned in this podcast should help taxpayers to exercise wisdom and discretion when selecting a tax return preparer. Look for professionals with character and experience even though it might cost you more to have your taxes done. It may cost more in the long run if you choose an incompetent tax preparer, or one engaged in disreputable acts.

Interviewer: Mayra Torres, Public Relations Associate

Attorney, thanks for such a thorough response to my questions about characteristics, qualifications, and other things that people should consider when selecting a tax return preparer. Character and experience always matter!
That’s all the questions I have for now with respect to being wise and prudent when selecting a tax return preparer. It sounds like it’s very dangerous to select the wrong person or firm to prepare your tax return.

Attorney Comment:

Well, those were all excellent questions, Mayra. And I am glad we were able to discuss the importance of exercising wisdom and being prudent when selecting a tax return preparer.

Mayra Torres’s Concluding Remarks:

Attorneys thank you for this comprehensive and informative presentation on selecting a tax return preparer.
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 wherever they listen to their podcast. You can follow our blogs by going to our law firm’s website at cjacksonlaw.com. Everybody take care for now! Come back in about two weeks, for more taxation, litigation and immigration Legal Thoughts from Coleman Jackson, P.C., which is 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 and Portuguese callers: 214-272-3100.

Attorney’s Concluding Remarks:

THIS IS THE END OF “LEGAL THOUGHTS” FOR NOW

Thanks for giving us the opportunity to inform you about the “why people filing taxes should be careful when selecting a professional tax return preparer.
If you want to see or hear more taxation, litigation and immigration LEGAL THOUGHTS from Coleman Jackson, P.C. Stay tune! Watch for a new Legal Thoughts podcast in about two weeks and check our law firm’s website at www. cjacksonlaw.com to follow our blogs. 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.

Federal Tax Developments Related to Covid-19

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By: Coleman Jackson, Attorney & Certified Public Accountant
March 30, 2020

As you can imagine, things are changing and developing fast and furious during this Covid-19 Pandemic. Developments in taxes are no exception! Our law firm desires to keep our clients and others informed with regards to certain tax developments that might impact their businesses. In keeping with that desire, note some of the most significant recent federal tax developments:

Tax Day now July 15, 2020: The U.S. Treasury and Internal Revenue Service automatically extended from April 15, 2020 to July 15, 2020 the federal income tax filing due date. The IRS gives affected taxpayers until the last day of the Extension Period to file tax returns or make tax payments, including estimated tax payments, that have either an original or extended due date falling within the Period. The IRS will waive any interest and late filing and payment penalties related to these late tax returns.
Small and midsize employers can begin taking advantage of two refundable payroll tax credits designed to immediately and fully reimburse them, dollar of dollar, for the cost of providing Coronavirus-related leave to their employees.
The CARES Act of 2020 enacted in response to Covid-19 provides employers with an employee retention credit in the amount of 50% of their wages impacted by closure due to Covid-19. Further the Act which became law on March 27, 2020 extends the due date for paying employer payroll taxes. Taxpayers must carefully review the law and properly compute the amount of payroll taxes that can be deferred; because it is not 100% deferral of all payroll taxes. Note: The Small Business Administration has announced that they are taking applications for disaster relief from small businesses with respect to loans up to two million dollars for monies borrowed to make payroll and pay rent during this Covid-19 Crisis. The application process and details regarding what businesses qualify and the procedures for applying can be found on the Small Business Administration website. The SBA has announced that they have relaxed some of their processing and documentation requirements to expedite the processing of these emergency loans to small businesses impacted by Covid-19. It appears that these SBA emergency loans could be converted to grants under certain condition(s). The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected Covid-19 taxpayers who need them to apply for benefits or to file amended tax returns claiming casualty losses. Watch our blogs as more changes may be forth coming in the area of employer relief due to Covid-19 closures. But for now, this appears to be the game plan regarding employers.
“Existing Installment Agreements –For taxpayers under an existing Installment Agreement, payments due between April 1 and July 15, 2020 are suspended. Taxpayers who are currently unable to comply with the terms of an Installment Payment Agreement, including a Direct Deposit Installment Agreement, may suspend payments during this period if they prefer. Furthermore, the IRS will not default any Installment Agreements during this period. By law, interest will continue to accrue on any unpaid balances.” Source: IR-2020-59, March 25, 2020.
The CARES Act eliminates the 10% early withdrawal penalty for Covid-19 related distributions from retirement accounts and make other rule changes regarding retirement account contributions.
The Act relaxes certain corporate and individual charitable contributions rules and provides for an above the line deduction up to $300 for charitable contributions.
Texas has been declared a Presidential Disaster Area related to Covid-19, so more specific rules and provisions could be developed by the IRS related to individuals and businesses with business operations in Texas or impacted by this particular Presidential Disaster Area Declaration.

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

Thinking About Taxes

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By: Coleman Jackson, Attorney & Certified Public Accountant
March 07, 2020

Thinking about spending that money withheld from employees’ wages to take a tour of the world, pay other business expenses or house payments? Don’t do it before reading Internal Revenue Code Section 7702! Hear those alarm bells ringing! Anyone required to collect, account for, and turn over to the United States Treasury and willfully fails to carry out this duty are subject to severe civil penalties and upon being found guilty of the felony of failing to collect, account for, and turn over can be fined up to $10,000 and spend up to five years in federal prison. Payroll tax fraud is a serious crime that is commonly investigated by the IRS Criminal Investigation (CI) Division. This unit of the IRS investigates all kinds of violations of the Internal Revenue Code. CI along with the Financial Crimes Network investigates FBAR violations (these are U.S. persons with foreign bank accounts and other foreign assets who fail to timely and accurately disclose these holding on Form 114), money laundering (these are individuals or entities engaged in some kind of unlawful activity and endeavoring to get dirty money into the normal banking system) and other financial crimes.

Thinking about not filing that required income tax, gift tax or other federal tax return or providing fraudulent information the IRS? Don’t do it before reading Internal Revenue Code Sections 7207 and 7203! Hear those whistles blowing! Anyone who intentionally gives false documents, which includes returns and any other written representation to the Internal Revenue Service and any of its employees knowing that its materially false or fraudulent is subject to civil fines and upon being found guilty of the felony of giving the Service false returns or other documents can be fined up to $10,000 (if individual) and up to $50,000 (if corporation), and spend up to one year in federal prison. Multiples applies in that cumulative false statements, returns and documents can generate multiplication of the civil fines and additional years to the duration of the prison term.

Thinking about paying fewer taxes than is lawfully owed by engaging in creative accounting, leaving that or this item off the return while adding and dreaming about things that never happened? Don’t do it before reading Internal Revenue Code Section 7201. Hear those gongs clanging! Anyone who intentionally attempts to evade or defeat any tax imposed under the Internal Revenue Code is subject to civil penalties up to $100,000 (if individual) and up to $500,000 (if corporation), and spend up to five years in federal prison upon conviction.

Thinking about taxes? Stay away from the tumbling … lie.

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

Responsible Party Liability for Willfully Failing to Pay Payroll Taxes

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June 12, 2017
Coleman Jackson, Attorney, CPA

The Internal Revenue Code, 26 U.S.C. § 6672 authorizes the Internal Revenue Service to demand collection of unpaid payroll taxes from persons responsible for paying those taxes if those persons willfully fail to pay the payroll taxes in the normal course of running a business. This statutory duty is imposed on “an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act” imposed by the satute. See 26 U.S.C. §6671(b) (2000). Similarly, a member or employee of a limited liability company, or any other form of business entity, with a duty to perform under the statute can likewise be deemed a responsible party under 26 U.S.C. §6672.

Liability for willfully failing to pay payroll taxes is imposed under 26 U.S.C. §6672 on “a person required to collect, truthfully account for, and pay over any payroll tax if the person willfully fails to collect such tax, or truthfully account for and pay over the payroll tax or willfully attempts to in any manner to evade or defeat any such tax or the payment thereof”. A person with responsibility under the statute who fails to perform this duty is subject to a 100% tax penalty, which is a penalty equal to the amount of payroll tax evaded, or not collected or not properly accounted for or not paid over to the Internal Revenue Service. See 26 U.S.C. §6672(a). These officers, members and employees are known as responsible parties under 26 U.S.C. §6672.

The meaning of this tax statute, like all laws in the United States is ultimately determined by the judiciary. Courts are the final governmental body in the U.S. who says what the law is. In a practical sense- what does 26 U.S.C. §6672 mean to businesses, those who own them and those who work for them? It depends upon where in the United States the taxpayer resides because the United States is divided into several federal courts of appeal’s jurisdictions. The laws in the circuits are not always the same, even though, as it is here, the same federal statute is being interpreted. The fifth circuit is the federal circuit where our law firm is located. Anyone outside of the fifth circuit must be abundantly careful because the law where they are could be drastically different with respect to responsible party litigation under 26 U.S.C. §6672.

This blog will discuss the law in the Fifth Circuit Court of Appeals which includes Texas, Mississippi and Louisiana. The taxation, litigation and immigration law firm of Coleman Jackson, P.C. is located in Dallas, Texas. For a long time now, the Fifth Circuit Court of Appeals have said that willfulness under 26 U.S.C. §6672 can be established in two ways: (1) the Internal Revenue Service can prove willful violation of the statute by presenting credible evidence that the responsible person had knowledge that payroll taxes were due the United States and other creditors were being paid; and (2) The Internal Revenue Service can prove willful violation of the statute by presenting credible evidence that the responsible person acted with reckless disregard that the payroll taxes were not being collected, or paid or turned over to the Internal Revenue Service. There is no requirement of ill will or evil intent here. The reckless disregard of risk standard is met when the responsible party clearly ought to have known that there was a grave risk that withholding taxes were not being paid and was in the position to find out with little or no effort. Intentional ignorance or willful ignorance is enough in the fifth circuit to impose the 100% penalty on a responsible party; but negligence is not enough to find a person a responsible party under 26 U.S.C. §6672. See Morgan v. United States, 937 F.2d 281 (5^th Cir. 1991) and its long line of progeny that basically governs the responsible party analysis for taxpayers located in the States within the Fifth Circuit Court of Appeal’s jurisdiction.

Another fifth circuit federal case known as Conway establishes the contours of a potential reasonable defense argument where an officer, member or employee can produce evidence that they relied on professional advice or counsel under certain circumstances. In tax law, reasonable defense arguments must be based in fact and circumstances demonstrating that an owner or member or employee is not responsible, after all, for the business’ failure to collect and timely turn over payroll withholding taxes to the Internal Revenue Service. See Conway v United States, 647 F.3d 228 (5^th Cir. 2011).

This blog only addresses the law in the fifth circuit as it stands today; the law can change without notice. When a Judge sits on the bench and makes a ruling, that ruling is the law in its jurisdiction- and sometimes nationwide, unless that Judge reverses, or until some higher court in its jurisdiction reverses, or the United States Supreme Court rules.

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

WHEN ARE PAYMENTS FOR SERVICES PERFORMED EXCLUDED FROM AN EMPLOYEES GROSS INCOME?

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By Coleman Jackson, Attorney, CPA
May 30, 2017

The term wages are defined in 26 U.S.C. Sec. 3401 as all remuneration (other than fees paid to a public official) for services performed by an employee for his employer, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include services performed under certain circumstances. A lot of special circumstances are listed in this tax statute; but in this blog, we will focus on only a few of the circumstances where compensation for services performed as an employee are not wages and, are therefore, excluded from an employee’s gross income for federal tax purposes. The terms employee and employer are very broad terms, and are not precisely defined in American law. The United States Supreme Court in a case styled, United States v. Silk, 331 U.S. 704, 716 (1947) established several relevant factors in determining whether a worker is an employee or independent contractor (self-employed). Some of the relevant factors on the Silk list indicating that a worker is an employee versus independent contractor are the degree of control the employer has over the worker’s results and procedures in achieving those results, the degree to which the worker can realize a profit or loss, the degree to which the worker must personally perform the work or is permitted to hire helpers (commonly known as sub-contractors); the degree the worker has investment in facilities, equipment and other assets for performing the work, and the degree of permanency of the relationship. This list is not exhaustive; the critical test is to what extent the employer can control the results and the means of achieving the results. The Silk list is called the common law test. The common law test was codified in U.S. tax law in Treasury Regulation 91 and also the State of Texas has codified the Silk test in the Texas Labor Code and the Texas Tax Code for employer-employee situations and payroll tax matters. Wages paid to employees are, typically included in the employee’s gross income for tax purposes and typically American employers must withhold appropriate withholding taxes from employees’ wages. This blog identifies and discusses several circumstances when wages earned by employees are not subject to federal income tax.; therefore, employers do not withhold federal income taxes, nor does the employee include those wages in their gross income. Although we try to make this blog very reader friendly, the reader must not lack the understanding or forget that terms employer and employee can be the subject of intense disagreement with enormous tax and legal consequences. The proper classification of employment relationships are not determined by a single factor or even multiple factors, but by the economic circumstances as a whole.

Payment for services performed outside of the United States by a United States citizen are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(B). Internal Revenue Code Sec 911(a) (2) provides, in part, that where a United States citizen is present in a foreign country for 18 consecutive months or countries during at least 510 full days in the tax period, any amounts paid, other than by the United States or its agency, for earned income attributable to services performed during such 18 month period is excluded from the individuals gross income. The worker must make an election to exclude such wages pursuant to 26 USCS Sec 911(a) (2) on IRS Form 2555 or on a comparable form which is filed with the taxpayer’s federal income tax return or amended tax return for the first year of the individual for which the exclusion election is to be effective.

Payment for services performed on behalf of a foreign government by a United States citizen are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(5). 26 U.S.C Sec 893(a) excludes wages, fees or salary of any employee of a foreign government or of an international organization (including a consular or other officer, or a nondiplomatic representative) received as compensation for official services to the foreign government or international organization. In Abdel-Fattah v. Commissioner, 134 T.C. 190 (2010), the U.S. Tax Court ruled that certification under 26 U.S.C. 893(b) by the U.S. State Department is not a prerequisite for the Sec 893(a) exemption of earned income paid by a foreign government. The exemption from federal U.S. taxation of such wages paid by foreign governments is also exempt from federal income tax withholding statutes which means that the foreign government or international organization does not have any tax withholding obligations.

Payment for services performed by a United States citizen qualifying for the Foreign Earned Income Credit are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(A). The tax policy behind the foreign earned income tax credit is to avoid double taxation that would occur, but for, this foreign earned income tax credit, when U.S. citizens’ foreign source income (income earned abroad) is taxed by both the United States and the foreign country where the citizen works or earns the income. Taxes paid or accrued to a foreign country or a U.S. possession, also known as U.S. territory, qualifies for the foreign income tax credit. Also certain payments in lieu of income taxes paid or accruing to a foreign country or U.S. territory qualifies for the foreign earned income credit. Foreign earned income can be taking by the taxpayer as a credit or deduction, but not both. The basic policy behind the foreign earned income credit is avoidance of double taxation of foreign sourced income earned by U.S. citizens. As in tax law in general, there are exceptions to these general rules.

Payment for services performed by a United States citizen subject to foreign or U.S. possession withholding tax are excluded from an employee’s wages under Internal Revenue Code Sec 3401(a)(8)(A)(ii). The basic tax policy behind exclusion of income earned by U.S. citizens subject to foreign or U.S. possession withholding tax is the same as for foreign earned income tax credit; namely, the relief desired is avoidance of double taxation of U.S. citizen’s earned income that is subject to foreign taxation or taxation in U.S. territories. U.S. territories include Puerto Rico, Northern Mariana Islands, American Samoa, Guam and various Islands, such as, Navassa Island, Wake Island, Baker Island and a couple other Islands in the Pacific Ocean, known as U.S. Minor Outlying Islands.

Gleaned from reading the U.S. Congressional historical record for these various gross income exclusions by U.S. citizens of income earned as employees of foreign governments or while working abroad are designed to avoid double taxation of U.S. citizens. In the legislative records, Congress expresses the sentiment that the exemption policy is one further step toward increasing our foreign trade by excluding from gross income in case of U.S. citizens employed abroad in selling their merchandise amounts received as salary or commission for the sale for export of tangible personal property produced in the United States in respect of such sales made while they are actually employed outside the United States. The U.S. Senate record gives the following justification for such policies:

“For example, many employees of American business in South America do not return to the United States for periods of years. Such persons are fully subject to the income tax of the foreign country of their residence.” See Senate Report No. 1631, 77^th Congress 2d Session 54 (1942).

These types of tax policies are simply designed to remove impediments and national barriers holding back American citizens in fully participating in the global market place with their peers from other countries.

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