Tax Guru – Ker$tetter Letter

Q:

I have been reading your blog and your site for some time now.  I am an accountant, but not a tax cpa.
 
My question is:
 
If I rehab house for future sale, I will probably be classified as a dealer.  I have 3 other partners providing capital and services.  Should I record those sales in a C, S, or an LLC that is classified as a partnership.  I will have some rental income as well form some of the properties, but the majority of the positive cash flow will  come from the sale of the rehabed residences.  Each sale will net 50-75 K with about four per year.
 
Any quick insites would be very helpful, but if you can’t thanks for your site and ideas.

A:

I hope my previous writings have made it clear that there is no such thing as a “one size fits all” for situations such as yours and the services of a tax pro to set up a customized game plan would be well worth the cost.

Having said that, I will share what I have seen work in many cases.

For profitable businesses owned by just one person or a married couple, a C corp usually makes the most sense.

For businesses that have multiple owners who are not married to each other, LLCs have been very effective for keeping everything straight for that specific business.  Each owner then has to decide wither to own his/her shares in the LLC in their own personal name or through a C corp that they own themselves.   There are a lot of benefits to using  layers of ownership, both in regard to taxes as well as liability.

Good luck.  This should give you a starting point when consulting with your own tax pro.

Kerry Kerstetter

Phony government grant scam

I sent the following to a client who was asking if I would have their 2003 tax returns finished by the 12/15/04 extended due date:

I am hoping to have your returns done by the 15th.  If not, I’ll file another extension.

I hope you’ve had a chance to catch the recent info on my blog about why it is so important to take our time to do the original returns as perfectly as possible.  IRS has started a policy of opening full blown audits on anyone who files an amended return requesting a refund.  This has changed my mind set that just getting a tax return in on time is fine because we then have three years to correct any mistakes.  With this new IRS policy, we really only have one chance to get it  right. 

One of the big reasons I have been running so far behind with 2003 tax returns is the fact that I have had to work on audits that started from very basic amended tax returns, and IRS decided to go on fishing expeditions into other years and issues that weren’t even part of the amended returns themselves.  I am doing my best to protect all of us from having any more of these occur.

Kerry

I also added the following to be printed on the cover letter that accompanies all 1040s I prepare.

Please review the enclosed tax returns closely and notify us if you find any significant errors before you send the returns in.  It is in all of our best interests to make sure the original tax returns we submit are as close to perfect as possible because IRS has recently started a policy of initiating full blown audits of any person who files an amended return requesting a refund.  This has changed the mind set that just getting a tax return in on time is fine because we then have three years to correct any mistakes.  With this new IRS policy, we really only have one chance to get it  right.

As someone who has been advising people for over thirty years as to the futility of trusting in the Social Security system for our retirement protection, I got a kick out of the quotes from California Congresswoman Nancy Pelosi (aka Miss America) as played on Rush’s show yesterday. 

 
PELOSI: There are those who set out to undermine Social Security and one of their tactics was to introduce privatization of Social Security, introducing these private accounts. I have questions about them, but as I said, I’m willing to go to the table with no preconditions. You know what the right wing of our country did on this subject. About a generation ago, in their interest to eliminate Social Security, they developed an age warfare. They undertook a multi-multi-multi-million dollar initiative to convince young people that they wouldn’t see a dime of Social Security [sic].

I never considered myself to be part of any conspiracy.  I have just been stating the black and white facts as a financial professional.  As I’ve mentioned on several occasions, I can still remember the financial analysis we did of the Social Security program in my very first accounting class in college back in the Fall of 1973.  It was proven to be a terrible investment back then, and all of the changes made to the system since then have made it even worse.  It’s no conspiracy. It’s just the truth.  As I’ve long said, any financial pros who advise that their clients pay in as much as possible to the SS system and don’t help them use the many legal methods of avoiding flushing money down this rat-hole are guilty of professional malpractice.

Rush explained it very well:

“They undertook a multi-multi-multi-million dollar initiative to convince young people they wouldn’t see…” You know who figured this out first? The young people! When they get into the job market and they start to see what their FICA deduction is and they start adding things up and Ms. Pelosi, this is not a multi-multi-million dollar effort. This is one of the cheapest efforts in the world. It’s called “the truth.” It’s un-fundable now. People paying into Social Security are not getting their own money back; they’re getting the money paid by current taxpayers. Now, let me give you the numbers. Right now, it takes the payroll taxes of four workers in this country to provide benefits for one Social Security recipient. It used to be 12. It used to be 15. It used to be that no taxpayer had to fund a recipient’s Social Security because his own contributions came back to him. But that ended years ago when the numbers of workers and retired got to a certain level where there were more retirees than workers and bammo! The truth is the truth. Right now the burden of providing benefits per beneficiary is four workers. In 20 or 30 years, without changes, that burden is going to be down to two workers.

A Republican Senator pushes Social Security tax increases – Attack of the RINOs

Gail Buckner’s Last-Minute Tax Tips for 2004

Three Major Retailers to Pay $2.4 Million in Back Sales Taxes to Illinois For Internet Sales

Deficits, Tax Reform Create ‘Important Moment’ for IRS, Everson Says

Tax shelter promoters need to start worrying about going to prison.  With more than 400 investigations of tax shelter promoters under way, Everson said he ultimately expects to see criminal indictments of promoters, “some of whom have been leading practitioners and have crossed a line that they should not have crossed.”

For the past few years, Dana Stahl and I have been discussing the comments that frequently pop up in left wing news stories (New York Times, et al) claiming that all the horror stories about IRS abuses over the years were bogus and that IRS has nothing but the sweetest people working for it and should be allowed to have much more money and power to carry out its function of bringing in money for the exalted Federal government.  That is of course a big load of donkey crap.  I have personally seen many examples of those things that were covered in the news stories and congressional hearings.  If anything, those stories downplayed the true horror of what some people had to endure due to some power-mad IRS personnel.

I liked Dana’s latest take on this.

Yesterday, I attended an Edward Jones tax seminar for year-end tax planning, which was a nationwide telecast.  One segment featured Sheldon Cowan, a former IRS Commissioner.  You may recall the 1997 IRS abuse hearings held by Congress.  Comm. Cowan mentioned those hearings in this interview.  His comment was that the hearings were on the “supposed abuse by the IRS.  And they were just that: supposed.”  He went on the claim these abuses didn’t happen, even citing how lawsuits filed over IRS abuses resulted in no settlement for Taxpayers and in proving there were no abuses.  During the call-in portion of the seminar, I tried to get thru so I could ask the panel (since Cowan wasn’t there) if:  1). why didn’t Cowan give some specific examples of false charges of abuse,  2). what % of the charges were proven to be untrue (10%, 20%, 30% – all of them???), & 3). why weren’t the accusers then charged with perjury, since I understand false testimony before Congress is under oath and subject to various perjury laws.  Unfortunately, the line was busy, but the EJones rep sent a wire instead.  I’m supposed to get a response.  Anyway, just like some prior articles you & I have discussed about how the IRS abuse hearing had false charges leveled against IRS, this matter continues to pop up sometimes.  Nonetheless, I’m interested if anybody will put his money where his mouth is and cite some real examples accordingly.  I’d sure like to find the truth about this matter.

Ohio CPA Dana Stahl has been doing some inquiring of his own to see if the IRS in his state is targeting all 1040Xs with refunds due for full blown audits as they are doing here in Arkansas.  He sent me the following reports over the past few days. 

Mr Guru – I spoke to a TAS rep located in Cleveland whom I’ve worked with previously.  I believe she has integrity and is honest.  She said she has no knowledge of any IRS policy to target 1040X’s w/large refunds.  Her comment was that it has always been IRS policy to review such 1040X’s anyway, but no new trend concerning 1040X’s is afoot inside the IRS, as far as she knows.  So, I guess the mystery deepens.  At least I’ve obtained some evidence from local IRS personnel here in Ohio.

Let’s see what anybody else comes up with.  Based on what my TAS contact said, I’ll carry on with my planned 1040X’s for my problem IRS clients.

 

Let me know,

DS, CPA

Sandusky, OH

This 1040X/audit issue is really getting murky.  My TAS contact from Cleveland seemed to have no idea there was any controversy about this, but you’ve talked directly to IRS people in your neck of the woods who confirmed the IRS is moving into a hard line position with 1040X’s.  Perhaps it really does boil down to the part of the country one resides in.  I’m planning to prepare 1040X’s as part of my process for some IRS problem clients.  As a matter of fact, I prepped one today for a client who had been denied the EIC for her son.  We found that the son’s SS# was incorrect on Sch EIC, so I made the correction on the 1040X.  I can’t imagine this would get my client audited.

We’ll talk again.  Thanx for the heads-up.

DS, CPA

The 1040X/audit controversy doesn’t appear to exist in my part of the country.  As I told you, neither of the IRS people I talked to about this have any idea something brewing within IRS to give a 1040X “the audit treatment”.  What are practitioners saying in other areas of the USA?