Tax Guru – Ker$tetter Letter

Q:

Subject: question for blog

 

Kerry:

 

Someone (my girlfriend) had the poor sense  to work in a start-up and the start-up fails (all within the tax year) and the business is closed and the  owner (who registered with the IRS via an EIN) did not report/deposit all withholdings (this is probable as there is no W-2 to be had) :

 

I know how to file her tax return using the last paystub and the appropriate IRS self reporting form in lieu of a W-2; but my question is will she be liable for payroll and withholding taxes deducted but not remitted by this so-called fiduciary/agent  employer (if of course all wages were not appropriately reported/deposited)

A:

Unless your girlfriend was in a position within the company to have some control over the payment of bills, she shouldn’t have any problem with IRS.  It is the responsible parties within the company, those who chose to use the money for other things than paying IRS, who will receive the wrath of the IRS and be hit with major penalties.  IRS considers those people to be thieves, who stole the employees’ tax money, and will act very aggressively to recover it from them.  The powerless employees whose money was stolen will not be penalized, and will receive the same credits with the government as if the full amount of the taxes had been forwarded to IRS.

If your GF did have any power over the company checkbook, she should retain the services of an attorney and work on negotiating the scope of her liability with IRS.

If she attaches Form 4852 (Substitute For W-2) and includes an explanation of what happened and how her figures were determined, she shouldn’t have any problem and her 1040 will be processed just as if she had her actual W-2. 

Kerry Kerstetter

 Follow-up:

Thanks Kerry

 

 

Employer-Reimbursed Medical Benefits Excludable by Employee, Deductible by Employer; Burden of Proof Shifted to IRS – I have long worked with small business owners and explained many of the lucrative tax benefits of hiring their own kids and spouses, such as employee benefits, including medical costs and education assistance which are deductible on the business schedule, but not income to the family employees.  This case is a good example of how that works, including a common misconception that I have had to fight with IRS over on a number of occasions, that benefits can be in lieu of actual wages.

The amounts paid to the husband, which were in lieu of compensation, were reasonable because they were substantially less than the wife would have had to pay someone else to perform the same duties.

 

 

Tools That May Make Tax Time Easier for Property Owners – While this article from the WSJ speaks highly of the Quicken Rental Property Manager program, I am still adamant that QuickBooks is a much better double entry accounting system for keeping track of all kinds of business activity, especially rentals.  I prepare hundreds of tax returns a year for clients who use the Class function in QB to easily get a P&L for each separate property, making it a very easy task for me to enter the details into Schedule E and Form 8825.

IRS Updates Tax Gap Estimates – No surprise here because IRS had earlier told us to expect a new SWAG from them. It’s also not surprising that so many others are swallowing these figures as gospel, such as TaxAnalysts.  The fact that these higher tax gap calculations are being used to justify more money and power for IRS couldn’t possibly have influenced their measurement of something that is inherently impossible to measure with any precision, could they?

Feds bust father & daughter tax preparers in Wichita for claiming bogus deductions on their clients’ returns.

Despite Federal Tax Credits, Solar Power Isn’t for Tightwads

Even with the new federal credit, it often takes 20 or more years to recoup the initial investment through energy-bill savings.

Taking Inventory of Your Home To Get Adequate Insurance – Dealing with insurance adjusters can often be worse than IRS auditors.

Q:

Subject: Illinois State Taxes

 

Kerry Kerstetter: We are considering moving to Illinois and I find their residential real estate taxes are double ours in KS. Is there a site or resource that has a net, bottom line analysis of all state’s total taxes, so one can compare them to determine the most expensive/least expensive? Thanks! 

A:

Check the following that I found via a quick Google search

http://www.stateline.org/live/ViewPage.action?siteNodeId=136&languageId=1&contentId=28297

http://www.taxadmin.org/fta/rate/tax_stru.html

http://www.taxfoundation.org/publications/show/335.html

http://www.retirementliving.com/RLtaxes.html

Good luck.

Kerry Kerstetter

Q:

Subject: Tax question about vehicle

 

 I have my own business and I want to be able to write off mileage and my cost for he vehicle.  If I have advertising signs on my vehicle are my mileage allowances still subject to percentage use rulings?  That is the primary use of the vehicle is to advertise my business and get to and from appointments.

A:

If you are serious about running your business properly, you will engage the services of a tax professional who can give you guidance. 

Any competent tax pro will tell you that just placing a sign on a vehicle doesn’t make the vehicle’s costs deductible.  Any deductions for that vehicle will be based on the business miles driven, either via the IRS’s standard per mile allowance or based on a pro-rata percentage of actual costs. 

Good luck.

Kerry Kerstetter

Q:

Subject: Preparing 1065 & K1’s the Year of Partners Death

Kerry, I came across your website and Blogs while I was doing research regarding the preparation of this Partnerships 1065 & K1’s.

 I work for a partnership founded in 1946.  The percentage of ownership was as follows:

Founder – 10%

Partner 1 (Son) – 20%

Partner 2 (Son-in-law) – 20%

Partner 3 – 16.667%

Partner 4 – 16.667%

Partner 5 – 16.667%

As of June 28^th 2005, our founder passed away.  He held 10% of the ownership at the time of his passing.  His percentage was absorbed by his son and son-in-law who now own 25% each of the company.  How do you suggest I set up Turbo Tax?  Am I required to do the first half 2005, second half 2005, and then a final combined return?  If you could please advise I would greatly appreciate it “oh Grand TaxGuru of ours”.

Best Regards,

A:

I don’t use TurboTax, so I can’t give any specific data entry advice on it.

However, it sounds as if you may need to make manual allocations of the 2005 K-1 info between the various partners, including the deceased one, to account for the proper split.  The actual computation of the allocation can be done various ways. 

In similar cases that I have worked on, I have figured the P&L for the time with the old ownership (1/1 to 6/28 in your case) and figured that split.  Then, I did the same for the rest of the year with the new ownership percentages and then totaled the two figures to get the full allocations for the year.   The method used should be designed with the input of all of the surviving partners, the deceased partner’s survivors, as well as all of their personal tax and legal advisors.

You only need to do one 1065 for the entire year of 2005, with proper notation on the K-1s of the beginning and ending ownership percentages of each partner.

Good luck.

Kerry Kerstetter

Q:

Subject: THANKS FOR THE S VS C ARTICLE

HERE IN FL. MOST SMALL CONTRACTORS WORKING ALONE HAD TO REVERT TO CORP. STATUS TO BE ABLE TO CONTINUE IN BUSINESS DUE TO WC.

WE CHOSE S CORP.  HOPE WE MADE THE RIGHT DECISION. 

THANKS AGAIN  

A:

If you made that decision based solely on what you read on the web, I would have no faith in your conclusion.  You absolutely must work with a competent tax professional who can take all of the particular factors into consideration.

Good luck.

Kerry Kerstetter