Frequently Asked Questions
FAQs Index | Full FAQs
Taxation Frequently Asked Questions
1. What should I do if I am audited?
If you are notified that you will be audited, first resist the impulse to panic.
An audit simply means that some items on your return seem questionable, and the IRS
wants you to clarify them. As long as you prepared your return correctly from the
documentation you have, and retained that documentation as proof of your income and
deductions, you should not have a problem.
The majority of IRS audits are conducted through the mail. For example, they
will ask you to prove a deduction, and you send them a photocopy of that proof. (Note:
NEVER send your original documentation to the IRS or let them keep it in an office
audit. Provide copies ONLY.) Other audits might be conducted at an IRS office, or
at your home or business.
In either case, you should only need to provide information about the specific
items that the audit notice lists as in question. Do not "volunteer" any additional
information that is not being questioned. If your return was prepared professionally,
it would be wise to consult with the preparor for additional guidance.
If you have an in-person audit, you have the right to have an advisor accompany
you or, in the case of a CPA, enrolled agent, or attorney, appear in your place as
your representative under a Power of Attorney
2. How do 'Offers in Compromise' work?
Contrary to popular belief, the IRS does not have an "amnesty" program for those
who owe back taxes they cannot pay. However, if you are current on filing your returns,
they sometimes may be willing to settle for less than what you owe, if you meet the
criteria for the Offer In Compromise (OIC) program.
An OIC is only feasible if you have access to funds that the IRS cannot otherwise
touch, AND you would be unlikely to pay the taxes you owe within five years. In general,
the sum of the resale value of any assets they can seize from you, plus the present
value of the payments they could expect to receive from you for the next 5 years,
would be the MINIMUM offer amount that they would likely consider. If you have an
offer approved, you are also making a contract with the IRS that you will not be
delinquent in taxes for any reason for the next five years; if you are, the offer
is rescinded retroactively.
If you feel that you may qualify for an OIC, your best alternative is to contact
Mr. Cohen and let him advise you. If you cannot afford to use a tax professional
for guidance, call your local IRS office and ask to meet with someone to discuss
the possibility of an OIC. You will need to provide the person helping you with copies
of your most recent tax bills, plus complete financial information about your assets,
liabilities, and current income/expenses.
The Internal Revenue Service receives in excess of 100,000 Offers in Compromise
each year. Unfortunately, it rejects, or refuses to even consider, a very large number
of these. The reasons range from gross inadequacy of the offered amount, to failure
of compliance with filing or other rules, to simple procedural mistakes. Because
of Mr. Cohen's familiarity with Internal Revenue Service regulations as well as his
years of experience in negotiating offers, the vast majority of the offers that he
files for clients are processed and accepted. Mr. Cohen will not waste a client's
time or money by filing an offer, which he does not expect to be accepted by the
IRS.
There are a few new types of offers that are now being considered by the Internal
Revenue Service. They will now accept long-term deferred payment offers, as well
as those involving unusual hardship. After Mr. Cohen reviews a client's situation
and history in detail, he can evaluate whether or not a client is a good candidate
for an offer, and approximate the amount to offer under the formulas being used by
the IRS.
3. What If I Cannot Pay What I Owe?
If you cannot pay the balance due with the return, FILE IT ON TIME anyway, paying
whatever you can with the return. This prevents the late filing penalty, which is
ten times that of the late payment penalty. You will be billed for the tax and related
interest and penalties.
If you will be unable to pay the remaining balance due within a reasonable period-of-time
after filing, you may want to apply for an Installment Agreement, using Form 9465.
This method requires that you indicate how much you can pay per month, and what date
of the month the payments will be made. There is a user fee of $43 for such an agreement,
which will be billed by the IRS with your first installment due. [NOTE: If you are
on an installment agreement, be sure that your CURRENT year taxes are being paid
on time. If you end up owing money you cannot pay for the current year, your previous
year installment agreement may be voided.]
4. What if the Internal Revenue Service places a lien on me?
Once someone owes in excess of $10,000 and does not pay in full within 30 days
of a demand notice, they can expect the IRS to routinely file a tax lien in the local
courthouse. We have been successful in special circumstances in requesting the Internal
Revenue Service to not file a lien if it would harm the taxpayer's ability to earn
income or to pay off a tax bill. You do not, however, have to let the lien put you
in a Catch-22 situation. It is normal for us to arrange on your behalf to have a
lien subordinated to your bank, or to even be discharged completely, if the IRS will
be paid in full or in part upon the discharge or release of the lien. Additionally,
we can help you plan to make the best in the event a lien has been filed, and to
plan your affairs in advance of an expected lien.
5. Can the Internal Revenue Service's actions be appealed?
The new Taxpayer Bill of Rights provides for many more situations in which a taxpayer
can appeal IRS decisions. However, the deadlines can vary for each type of appeal,
and the legal procedures must be strictly followed. The appeals process can be of
significant value in ensuring fairness in the assessment and collections process.
Mr. Cohen strongly urges taxpayers to contact an attorney as early as possible during
any dealings with the Internal Revenue Service to assure there is ample time to file
any necessary appeals. If a taxpayer's Offer in Compromise is rejected, filing a
timely appeal offers another chance and a fresh perspective.
6. My taxes are old. Is there a statute of limitations?
The Internal Revenue Service is prohibited from trying to collect on taxes that
are more than 10 years old in most cases. In addition, there are a variety of statutes
of limitation in existence to help taxpayers. Mr. Cohen always determines a case
to see if the tax was assessed against the client after the assessment statute of
limitation, and he examines if the IRS is attempting to collect after the expiration
of the Collections Statute Expiration Date. Mr. Cohen's extensive experience with
the IRS informs him that the IRS cannot be trusted to calculate the statute of limitations
voluntarily or competently, nor to inform a taxpayer when they are taking advantage
of him or her in this area.
7. What should I do if a Special Agent visits me?
The Internal Revenue Service has a Criminal Investigation Division, the sole purpose
of which is to put people in jail. They will investigate leads from various sources,
and recommend certain cases for criminal prosecution by the U.S. Justice Department.
Their conviction rate is very high, and the appearance of a Special Agent is extremely
serious. Under no circumstances should you talk to the CID---just take their business
card, close the door, and call your attorney. Everyone thinks he or she is innocent;
but the IRS is not paid to believe you!
8. The business I own (or just work for) owes employment taxes — what should
I do to protect myself?
Even if your business is incorporated, you can be held PERSONALLY liable if the
business fails to pay over to the Internal Revenue Service the taxes withheld from
employees. The IRS will attempt to assess all of the owners and officers of such
a business, as well as mere employees who work in the financial or managerial division
of the business, with the Trust Fund Recovery Penalty. If you are assessed with this
tax, you will have a limited period of time to appeal or challenge the assessment.
Mr. Cohen has been very successful in having this type of assessment thrown out or
reduced. Many variables come into play, and you likely will need a tax attorney to
help you avoid or reduce the sting of this type of tax. If you are a responsible
person at a business that is behind in its employment taxes, be forewarned that the
government will not permit you to continue such unauthorized "borrowing."
9. I am divorced, but the IRS keeps trying to collect taxes that my EX should
be paying. Can you help?
The Innocent Spouse provisions of the Internal Revenue Code have been in force
for years, but only in the past few years have they been liberalized. In fact, the
Internal Revenue Service has recently been inundated with such Innocent Spouse claims.
The law is technical, and the time period for such claims and appeals is very lengthy.
If it involves a good deal of money or you are sure the taxes are a result of the
dealings of your former spouse, please contact Mr. Cohen to assess whether or not
your Innocent Spouse claim has a chance of succeeding.
10. Do I need to pay estimated taxes?
Although your tax return is not "due" until April 15th of the following
year, you are generally required to prepay your tax during the year.
In order to avoid an underpayment penalty when filing your return, you must pay
in at least the lower of (1) 90% of your current year's tax liability or (2) 100%
of your previous year's tax liability all over again. (Note: If your adjusted gross
income (AGI) last year was $150,000 or more - or $75,000 if married filing separately
- change the 100% figure to 108.6% for 2000 and 110% for 2001.) These payments may
be made by having income tax withheld (in any proportion during the year), or by
making four estimated tax payments with Form 1040-ES.
If you need to re-compute your withholding, obtain a copy of Form W- 4 from your
employer. This form contains a worksheet that allows for most circumstances, and
tells you what withholding status and how many "withholding allowances" to
claim. Note: your status on Form W-4 could very well be different than your marital
status, and the allowances different than the exemptions you are allowed to claim
on your actual return. Form W-4 explains how this is done. Generally, if a couple
is married filing jointly and both work, the number of allowances they claim in total
will be less than they claim on the return itself.
If you have income that is not subject to withholding, and your tax shortfall
will be more than $1,000, you need to file Form 1040-ES and make estimated tax payments
during the year. These payments are due on April 15, June 15, September 15, and on
January 15 of the following year (If a payment date falls on a weekend, the next
Monday is the due date). The worksheet that accompanies the form explains the calculations.
Generally, each payment should include the taxes you will owe for the period that
ended the previous month; for example, the June 15 payment is for the two months
ending May 31.
11. Why is a tax return audited?
If you report wages, other income items or mortgage interest that differs from
the amount reported to the IRS, you might receive a "correction notice" that
simply asks you to explain the discrepancy. These computer-generated notices do not
constitute an audit. Returns are actually audited for a variety of reasons. In most
cases, your return may contain one or more items that make it stand out from the
statistical information that the Internal Revenue Service has gathered about the "average" taxpayer
in your income bracket. The audit will generally cover only those items that appear
to be questionable on your return.
Corporate Law Frequently Asked Questions
1. What is a corporation?
A corporation is an artificial legal entity, typically chartered by a state, generally
formed to operate a business. Once chartered, the corporation is completely separate
from its owners, has its own life, and is liable for its own debts and must pay its
own taxes.
2. How can I set up a corporation?
All states have a General Corporation Law or Business Corporation Law that allows
virtually anyone to obtain a charter to conduct most businesses. (Certain types of
corporations, such as banks, insurance companies, and public utilities often have
to be formed either by act of the legislature or under special laws. This is a throwback
to the days when all corporations were formed by a charter issued by the King of
England, and later by a special act of a state legislature.)
The actual formal mechanics of creating a corporation is known as "incorporation." The
process involves completing and filing a "Certificate of Incorporation" or "Articles
of Incorporation" and paying a filing fee. Each state has its own set of laws
governing the process of incorporating. In most cases, it is best to have an attorney
prepare the incorporation papers.
3. Why would I consider an LLC or limited liability company form of business
organization?
A limited liability company (LLC) is a hybrid organization that has characteristics
of both a corporation and a partnership. Its members (comparable to corporate shareholders)
receive interests in the LLC in exchange for property, money, or services.
Like a corporation, it is a separate legal entity for purposes of limited liability
of its members. It has the tax benefits, however, of a partnership. It also has the
freedom from some of the legal formalities that govern corporations.
To create an LLC, members file articles of organization with the state and pay
filing fees. Members should also have operating agreements, similar in concept to
a partnership agreement that explains the operation and management of the business.
Again, an attorney will be necessary to properly prepare and understand these documents.
There has been a lot of fanfare regarding this form of business enterprise and
the law is still germinating. Each state has its own set of statutes governing LLCs-which
must dovetail with IRS guidelines, which are in constant evolution. For this reason,
it is a necessity to have the advice of an attorney to determine how the LLC law
in your state best applies to your situation.
4. Which type of entity should I be filing?
That will depend on the nature of your business, how many others will be participating
in the business with you, how you'll be raising capital, your entrepreneurial objectives,
the type of operation you want to run, tax considerations, personal liabilities,
and the state(s) in which you'll be operating.
Mr. Cohen will explore with you all of your plans and concerns about your new
business entity in order to help you choose the best entity form for you, and the
optimal structure for that entity. The best type of entity is different for every
organization. One type does not fit all. Your priorities and concerns are unique.
Mr. Cohen will discuss your needs and explain how the following factors may affect
the type of business entity you choose:
- Nature of the business
- Number of owners and employees
- Types of assets
- Financial particulars
- Amount of borrowings and liabilities
There are several other factors to consider before deciding how to form your business
structure, whether a corporation, partnership, limited liability company, limited
partnership, or an S-corporation. Each of these decisions will have a long-term impact
on you and your business and should therefore be given serious consideration by you,
your attorney, and certified public accountant.
5. I am planning on buying/selling a business. Can Mr. Cohen help me?
Mr. Cohen has 17 years of experience in the area of business acquisitions, working
with buyers, sellers, and business brokers. He will guide you through the process
of negotiating the letter of intent, dealing with other parties and attorneys in
the drafting of the purchase agreement and other documents, and the closing of the
transaction. Because your acquisition or sale is going to be extremely important
to you and your family, and employees, you should have an experienced corporate attorney
working with you throughout the entire process. Mr. Cohen has over the years developed
a philosophy of constant communication with his clients and with the business brokers
to reduce the chances of misunderstandings, missed expectations, and problematic
closings.
6. What is the law in Georgia on covenants not to compete?
These restrictive covenants appear both in employment contracts and in connection
with the sales of businesses. Businesses need protection against former employees
transferring internal knowledge to competitors. Buyers of businesses want to ensure
that sellers do not use specialized knowledge for the benefit of a new or competing
business. Georgia law is not in favor of these restrictions and requires them be
very carefully drafted in order for them to be enforceable. Although it is somewhat
easier to enforce restrictive covenants in the sale of a business, the courts will
still look at them carefully. If a covenant is not drafted correctly, the court will
not enforce it. Mr. Cohen has substantial experience with these covenants, having
drafted them both for business sales and for employment agreements. You should never
sign an agreement containing these provisions without first having your attorney
review it.
7. Do I need a buy-sell agreement with my business partners?
Buy-sell agreements, also known as shareholder agreements, are common between
business partners. Smart business owners will include a buy-sell when forming an
LLC or corporation. The buy-sell will govern what will happen in the event of a dispute
between owners, the death of a partner, the disability or retirement of a shareholder,
or the desire of an owner to sell his interest to a third party. Without a buy-sell,
your partners could sell part or all of their shares and when an unknown brother-in-law
shows up for work and claims to be another officer, you could not complain. Without
a buy-sell, there is no assurance that your family would continue to receive income
from the business after your death, or even receive money for your interest in the
business after your death or retirement. Mr. Cohen highly recommends using buy-sell
agreements in almost all cases of multiple business owners both to protect the remaining
owners, as well as the family of a deceased partner. Without a well-drafted shareholders
agreement, the parties could easily wind up spending large sums of money fighting
these issues in court.
8. Can I set up a corporation or limited liability company without a lawyer?
Yes. The Georgia Secretary of State's office makes it relatively easy. However,
it has been Mr. Cohen's experience that a surprisingly large number of people, who
have incorporated or drafted contracts without the assistance of a lawyer, have encountered
some degree of difficulty and problems at some time in the future. Self-drafted contracts
might be adequate if the business is owned by one person, and is not sued or audited
by the IRS. Otherwise, given the important role that the business entity will have
in your life, the risk is too great to try to save money by incorporating yourself.
Mr. Cohen will be happy to explain the various complexities of the law in this area
to you at no charge.
9. How can a tax and corporate attorney help me in the sale or acquisition of
a business?
A good attorney will review a sales transaction for the seller to maximize the
opportunity that the seller will receive full payment for the business, and to make
sure the least amount of taxes are imposed. On the buyer's side, an attorney can
suggest ways of structuring the transaction to protect your new business, and to
get the most out of tax deductions. Mr. Cohen will explore with you the possibility
of having some of the sales proceeds treated as a capital gain, rather than ordinary
income; installment-sale treatment, rather than recognizing all the gain immediately;
and expensing the investment immediately, rather than amortizing it over a period
of one year and avoiding depreciation recapture. Paying attention to such issues
with your attorney and certified public accountant working as a team will make for
a more successful transaction.
10. I am selling my business. How can I make sure the buyer pays me?
Mr. Cohen will use his 17 years of handling the sales of businesses to suggest
to the seller the variety of mechanisms available to increase the likelihood of receiving
the payment required by the contract. Due diligence on the buyer's background, personal
guarantees, security interests in the buyer's other assets or businesses, penalty
provisions, and a security interest and financing statement on the business being
sold, are some of the typical ways to ensure payment. Each transaction is unique,
however, and will require that the attorney and client discuss all the risks, and
all the possible methods of reducing the risks, before finalizing the documents.
