The IRS audit rate for individual returns filed in fiscal year 2010 was 1.1 percent, according to statistics released by the agency in 2011 (IR-2011-27). This represented approximately 1.6 million returns out of the approximately 143 million returns filed by individuals. The audit rate for individual returns with positive income of $1 million or more was 8.4 percent for FY 2010. The FY 2010 audit rate for small corporations (corporations with assets below $10 million) was 0.9 percent. The FY 2011 audit rate for large corporations was 16.6 percent.
The majority of individual audits in FY 2010 were correspondence audits. Nevertheless, a trend toward in-person audits for both individuals and businesses seems to be growing. The Treasury Inspector General for Tax Administration (TIGTA) reported in 2011 that the number of IRS revenue agents and tax compliance officers who conduct audits increased by four percent from FY 2009 to FY 2010. TIGTA also called for increased and more sophisticated audit strategies in connection with small businesses in which the noncompliance rate in some sectors is above 50 percent.
The IRS has announced it holds $153 million in undelivered refund checks owed to nearly 100,000 taxpayers, representing an average of $1,547 per taxpayer (IRS News Release IR-2011-113). The IRS has been unable to deliver the refunds due to mailing address errors.
Taxpayers who wish to check the status of their refund and/or resolve an incorrect or outdated mailing address may use the IRS online tool “Where’s My Refund?” Taxpayers may also contact the IRS at (800)-829-1954.
The IRS does not notify taxpayers by e-mail of pending refunds and cautioned taxpayers who receive purported emails from the agency to report these scams.
To prevent refunds from returning undelivered to taxpayers, the IRS recommended that taxpayers file their tax returns electronically, which reduces errors and also speeds the delivery of refunds. Additionally, taxpayers can reduce mailing errors by taking advantage of the direct deposit option for refunds.
Mark D. Leitner was sentenced to 30 months in prison after pleading guilty in July to filing false liens against federal law enforcement employees and corruptly endeavoring to impede and impair the Internal Revenue Service (IRS), the Justice Department announced. Northern District of Florida Senior District Court Judge Lacey A. Collier presided over the hearing at the U.S. District Court in Pensacola, Fla.
Leitner apologized for filing false liens against the former U.S. attorney for the Northern Dis-trict of Florida, the former clerk of court and numerous assistant U.S. attorneys, department trial attorneys and an IRS Criminal Investigation special agent involved in a 2010 tax fraud prosecution against Leitner.
Leitner was previously a defendant in a criminal trial, United States v. Hirmer, et. al., in the Northern District of Florida in March 2010. During that jury trial and after the jury returned the guilty verdict, Leitner publicly filed false maritime liens against the property of the prosecutors, investigators and court personnel involved in the criminal trial. The liens falsely claimed that Leitner was owed $48.489 billion from each individual. On five of the seven false liens, Leitner publicly disclosed individuals’ correct social security numbers and other personal identifying information. Leitner also filed and mailed numerous harassing and frivolous documents to the courts and personnel involved in this case.
Leitner will serve this prison sentence consecutive to the five-year prison sentence he received for his 2010 tax fraud conviction.
A covenant not to compete or other agreement with a employer will mean the personal relationships with clients become property of the employer. In 1972 Dr. Howard began practicing dentistry, and by 1980 he incorporated his practice. In 1980, Dr. Howard, the sole shareholder, entered into an employment agreement and a covenant not to compete with his wholly owned corporation. The agreement stated that for three years after he holds any stock, he was not to engage in any way in any business that would compete within 50 miles of his city. The agreement did not state whether he or the corporation owned the goodwill.
The practice was sold in 2002. The sale agreement allocated $549,900 to the practice good-will and $16,000 for a covenant not to compete with the new owner. The IRS sent notice indicating the sale of goodwill as a corporate asset and the receipt of the money is a dividend to Dr. Howard. He paid the amount due on the notice and soon filed suit.
Dr. Howard presented Washington case law to support the idea that professional goodwill is a community property right in dissolution cases. This was a good argument had the doctor not signed a non-compete agreement, giving it personally created goodwill. The court ruled that Dr.Howard signed away any right to what he created over the years while he was under a non-compete agreement. As such, all goodwill belonged to the corporation. This means that the capital gains became subject to double taxation, taxed at both the corporate and shareholder levels.
The IRS may consider a debt written off or settled as taxable income. Form 1099-C is used to report income from real estate, business debts, or personal debts. Any financial institution that forgives or writes off $600 or more of a debt’s principal must send the taxpayer and the IRS a form 1099-C at the end of the tax year. Taxpayers will need to determine what the in-come was for, and whether it has recourse.
There are steps to take when you receive a Form 1099-C:
1) Determine the type of debt.
2) Determine if the debt is recourse or nonrecourse to the taxpayers.
3) Determine if the taxpayer can exclude the income.
4) Determine what forms are required.
These can get a bit complicated when it comes to real estate foreclosures and short sales. This is where you should probably seek the help of a tax professional.
Richard Rocchio and his siblings inherited their mother’s half of the outstanding corporate stock in their New York S-Corporation. Their father was the other 50 percent shareholder. After several years, the father remarried, and bickering ensued. The father and his wife were using all of the corporation’s funds to support a life of luxury, not allowing the children to benefit from the success of the business.
In 2006, the children filed for judicial dissolution of the corporation under NY business corporate law. The father then made an election to purchase the children’s shares in 2007. They could not agree on the selling price of the shares, so the issue went before the courts. The father finally purchased the shares in August of 2009.
Richard received a K-1 for tax year 2007, but did not include the income on this individual tax return. He contended that since they had filed for judicial relief, and the father agreed to purchase their shares, he was no longer a shareholder for tax year 2007. He argued that he was not liable, since his interest was frozen under statute, and he never received the money for the income reported to him. The IRS and tax court disagreed.
Nothing in the NY statutes were specific on the cessation of ownership interest based on his filing. The NY supreme court held that a shareholder remains until payment is made for fair value of the shares. The courts ruled that an S-corp must report, and a shareholder must take into account, the shareholder’s pro rata share, whether or not it was distributed to them.
Under Section 311, a corporation that distributes appreciated property to its shareholders must recognize gain at the corporate level and pay income tax on the gain as if the property was sold for fair market value. The shareholder must recognize the distribution as a dividend to the extent of the corporation’s accumulated earnings and profits (AE&P).
A recent case dealt with this issue. In 2004, a building contractor corporation deeded a home and lot to the shareholders. Neither the corporation nor the shareholders reported this transfer on their tax returns. The corporate and personal returns for 2004 were audited by the IRS. The shareholders’ tax was increased by $190,093 and were assessed an accuracy-related penalty of $27,192. The corporation was issued a notice of deficiency in the amount of $130,408 plus an accuracy-related penalty of $27,192.
In tax court, the taxpayers could not produce evidence to support their assertion that they built the home out-of-pocket. They asserted that only the vacant lot was purchased by the corporation. The court upheld the tax assessments and the notices of deficiency for the cor-poration and shareholders.
