Delinquently

A Connecticut state lawmaker was suspended from his leadership post Friday amid reports he could face a criminal charge in the death of a barefoot woman who died of hypothermia after fleeing from his car this past winter.

There are only a few court decisions that address the issues facing a bar in a sales and use tax audit. Those courts have found favorably for the state. The state is using this success to expand its approach in the sales and use tax audits of bars. Historically, the state would only reject the taxpayer’s reported figures and apply an indirect audit method when the bar being audited had poorly maintained business records. Now, the state applies its indirect audit methods in any situation, even when the bar’s records are good and match its returns. Bar owners should be prepared for this.

The most common indirect audit method that the state uses to determine a bar’s total alcoholic sales is the unit and volume method. This method begins with the auditor determining the amount of liquor and beer the bar purchased over a period of time. These amounts are usually obtained from the bar’s suppliers. The auditor then divides the amount of beer and liquor purchased by a number that is supposed to be representative of one serving of beer and one serving of liquor. Auditors will usually use twelve ounces of beer per serving and one ounce of liquor per serving. When the total number of estimated servings the bar could have made is determined, the auditor multiplies these totals by the average price of a serving of beer or liquor at that particular bar, and then adds the two amounts. 

This sum represents the estimated total sales the bar would have if every drink were made and served perfectly.  Fortunately, this is not the end of the analysis.

The courts have decided that, because the world is not perfect, the unit and volume method should allow for a percentage of the alcohol purchased to be considered lost due to “spillage.” This percentage is meant to account for the liquor and beer that is lost during the storing, making, and serving of the drinks. The percentage the courts generally subtract from the bar’s total estimated servings ranges from 5% to 10%.

In addition to the spillage rate, there is a “shrinkage” rate. The shrinkage rate is the difference between what the bar uses as its serving size versus the state’s standards. There is no standard shrinkage rate that courts apply. Bars that “free-pour” their drinks will find that too often the amount of liquor they use to make one serving far exceeds the state’s standard. Some other reasons to justify the shrinkage rate are the drinks that are given away for promotions and employee or owner consumption.

Convincing the state to consider the spillage and shrinkage rates is the most difficult, but also most important, obstacle a bar faces when confronted with this indirect audit method. Without considering these percentages, the state’s total estimated sales during a period can look dangerously high. This can result in a burdensome sales tax obligation and, even worse, a personal obligation for the bar owners for unreported income. To avoid this result, it is important that the bar gives the state enough information to support the bar’s proposed shrinkage and spillage rates.

 Many taxpayers are fortunate enough to turn a hobby or an activity they are passionate about into a business. The IRS, however, too often determines that the taxpayer’s business is not a “real business” when the business loses too much money. While sometimes the IRS determination is right, many times the IRS will incorrectly re-characterize a legitimate business as a hobby. This can result in a significant loss of deductions and increased tax liability.

The IRS is most suspect of taxpayers who continue to operate a business which loses money over many years. Common sense suggests that the taxpayer should close the business to avoid future losses. Therefore, if the taxpayer continues to operate the business, the IRS concludes that it must be for a non-business reason, like deducting the expenses of their hobby. Some common targets of IRS audits include: dog, horse, and other animal breeders; race car drivers; artists; and “direct” or “multi-level” marketing businesses.

The practical effect of the IRS determining that a business is not being operated for profit is twofold. First, the IRS will disallow any deduction amounts for expenses which were greater than the business’s gross receipts. This creates a tax deficiency. Second, the taxpayer will lose the ability to carry the excess losses back to previous years or forward to future years to offset income. The consequences of these adjustments can be devastating to a small business owner.

Pursuant to Internal Revenue Code Section 183, the “hobby loss rule,” the IRS presumes that an activity is for profit when the gross receipts for that activity exceed the deductions for 3 years out of any 5-year period. If, however, the losses have continued for multiple years, the IRS will assume that the activity is not engaged in for profit. This puts the burden on the taxpayer to prove his or her profits motive. Please visit the IRS’s website for more information on the “hobby loss rule.”

When auditing a business for profit motive, the IRS considers a number of factors to determine whether a taxpayer had a reasonable expectation of making a profit. These factors are listed in the Treasury Regulations at section 1.183-2 on the Code of Federal Regulations website. In the event the Revenue Agent makes an unfavorable determination and the taxpayer believes they have the required profit motive, the taxpayer should appeal to either the IRS Appeals Division or United State Tax Court.

Even taxpayers who report many years of business losses can overcome an IRS determination that their activity was not engaged in for profit. For example, in Allen v. Comm’r, 72 T.C. 28 (1979), the U.S. Tax Court held that the taxpayer, who operated a skiing lodge and reported losses on the Schedule C to his Form 1040 tax return for 11 consecutive years, was engaged in an activity for profit because he operated the company in a business-like manner. He kept meticulous books and records, advertised, and reasonably expected the lodge to appreciate in value.

The Minnesota Department of Revenue (MDR) also re-characterizes business deductions as hobby losses if it finds that a business was not operated for profit. An MDR audit can come either before or after an IRS audit, and the MDR is not bound by any previous IRS determination.

For the first time in more than three decades, Social Security recipients will not get any increase in their benefits next year and likely also in 2011, federal forecasts show.

On Monday, April 27, 2009, at around 11:50 a.m., an unidentified man, John Doe, was confronted by two suspects as he stood on 53rd Street east of Vermont Avenue.  During the encounter one of the suspects pulled out a gun and pointed it at Doe.

Doe tried to run away from the suspects, but only made it a short distance before one of the suspects fired multiple shots, striking Doe in the back.  Doe fell between two parked cars.  As he lay dying, the suspect who shot Doe then proceeded to search his pockets and rob him, while a second suspect stood watch at the corner.  Both suspects were last seen running northbound through an alley east of Vermont Avenue, then east on 52nd Street.

Doe was transported to a local hospital where he was pronounced dead.  He is a Hispanic man, approximately 25-years of age.  He had no identification on him and the Coroner is in the process of making a positive identification.

Suspect #1 is as a male, Black, 20-30 years of age, 5 ft. 10 in. to 6 ft. tall, 170 lbs. and was wearing a black, white and red shirt tank top and blue jeans.  

Suspect #2 is a also a male, Black, 15-17 years of age, 5 ft. to 5 ft. 3 in., 140-160 lbs and was wearing a grey sweat shirt.

Detectives believe the motive for the shooting was robbery.

On December 25, 2008 at about 5:10 a.m., a car traveling north on Reseda Boulevard crossed the southbound lanes and hit a pedestrian walking westbound on Reseda south of Devonshire Boulevard.  The victim is a 33-year-old female that is now paralyzed because of her injuries from the hit-and-run.

The car that hit the victim left the front bumper at the scene and is believed to be a dark green 1995-1997 Mercury Grand Marquis. A picture of what Detectives believe the hit-and-run vehicle looks like is attached.

The Los Angeles City council has approved a $50,000 reward for information leading to the identification, apprehension and conviction of the person or persons responsible for this crime.

Many taxpayers are unable to timely file their returns or timely pay their obligations. When this happens, the IRS will usually assess penalties against the taxpayer. The penalty for filing the return late is 5% per month, up to 25% of the unpaid obligation. The penalty for paying the tax late is .5 % per month, up to 25% of the unpaid obligation. When the two penalties run together, the late filing penalty will be reduced to 4.5% per month, up to 22.5% of the unpaid obligation. These are stiff penalties.

One common reason taxpayers fail to file their return or file their return late is that they do not have the money to pay the tax and they are afraid of what the IRS will do when it receives a return without full payment. They are concerned that as soon as the return is filed, the IRS will begin pursuing them by levying their bank accounts or their wages. This can happen, but a 25% late filing penalty is a steep price to pay for some additional time to pay the tax. It is usually better for the taxpayer to file the return and, either before or after the IRS contacts them, propose a payment plan or an Offer in Compromise to resolve the obligation. Having filed the return, they have avoided a significant penalty and start their negotiations with a much smaller liability.

Unfortunately, there are many instances when a taxpayer simply cannot file the return or pay the tax on time. Late filings and late payments are often the result of difficult and stressful situations which overwhelm the taxpayer. The IRS recognizes this, and will abate the penalties when the taxpayer can demonstrate that he or she had reasonable cause for failing to timely file the return or pay the obligation.

To prove reasonable cause, the taxpayer must demonstrate that he or she exercised ordinary business care and prudence but was still not able to comply with the filing and payment requirements. The IRS will take into account all the facts and circumstances of the taxpayer’s situation. Internal Revenue Manual (IRM) 20.1.1.3.1.2.

The IRS provides examples of when a taxpayer has reasonable cause in IRM 20.1.1.3. These are only examples. They are instructive, but they are not the only circumstances that amount to reasonable cause. We encourage taxpayers to ask the IRS to abate the penalties in any situation where they believe they had reasonable cause for the late filing or late payment.

A taxpayer may ask for a penalty to be abated by filing a Form 843. The instructions for this form and more information about the penalties are available at the IRS website, www.irs.gov.

The Minnesota Department of Revenue (MDR) has similar penalties and procedures for abating those penalties. Information about the MDR procedures can be found in the MDR Collection Manual. We will address the state’s version of these penalties in our next posting.

The Orlando Sentinel reported Sunday on Casey Anthony's attorney, José Ángel Baez who was unable to practice law for eight years after he graduated from law school.

The Supreme Court agreed with the Florida board's decision to restrict Baez from practicing law. The order was issued in 2000 that documented 'extravagant' spending, unpaid bills, and unpaid child support. 

On April 23, 2009, at around 4 p.m., victim went shopping at Target Department store located at 3535 South La Cienega Boulevard.  The victim had secured her dog to a bench located in the front of the store and when she returned about 30 minutes later, she found the dog missing.

Detectives’ investigation revealed that a male Black suspect sat on the bench, removed the dog and entered his car.  The suspect then drove off in an unknown direction.

The suspect was about 50 years of age, 6 feet tall and weighs 175 pounds.  He was last seen wearing a dark hooded jacket.  His vehicle was described as 4-door white car.

The victim’s dog is 1 ½ years old half Havanese/ShihTzu.  The dog is about 15 pounds and brown in color.

On April 24, 2009, during late night hours and through early Saturday morning, a business building located in the 20500 block of Ventura Boulevard was burglarized.  The office building has approximately 75 businesses operating in its 60 interior offices.  The preliminary investigation indicates that as many as 26 of these businesses were the victims of this burglary.  The thieves focused on computer equipment, and in many instances removed stand alone computers from these offices.  

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