What To Do If You Receive An IRS Notice

The most important thing is that you do not panic or ignore the notice. Most of these notices are for simple things like mathematical errors or even for items that you missed on your return that now may result in a favorable outcome to you.

The IRS has an excellent list of things you should know about when receiving a notice in IRS Summer Tax Tip 2009-22.

Item 8 from the list is extremely important. In practice there have been numerous times that clients have had to send in the requested items two or even three times due to paperwork being misplaced at the IRS, a different agent being assigned or that the case has been transferred to a different office.

You should also send any response to a notice via certified mail to prove that you have submitted your response by the specified timeline in the notice.

To access the list please click the following link from the IRS’ website. IRS Tax Tip 2009-22

This article was written by Jay Kossen, CPA at Numerico, PC. Click here to view Numerico’s website.

Forbes.com Article From Stephen J. Dunn

Click here to access a new article from our Tax Attorney Stephen Dunn. The article discusses IRS Audits.

Auditory Response

The risk of an IRS audit is increasing, particularly for small to medium-sized businesses. To a large extent this is driven by an administration that has so leveraged this country financially that they have had to add thousands upon thousands of revenue agents to aggressively pursue taxes as a revenue source. The result will be more audits of both business and individuals.

Many accounting firms are reporting a doubling or tripling of the frequency of audits within their client bases. To prepare for the likelihood of an audit, it’s helpful to review the audit process.

In general, the IRS only has three years to audit a tax return. However, the IRS can ask that the company voluntarily extend the audit period. Therefore, the first step in the audit process is deciding whether or not to give the IRS more time when statutes are about to expire.

If the company refuses to extend the audit period when statutes are about to expire, the IRS may get very picky in auditing the return, disallowing all questionable items on the return. A better strategy would be to offer the IRS a limited extension period, say of 6 months. If a limited extension can be secured, and it usually can, it will force the IRS to get things done more rapidly and minimizes the time they have to scrutinize the return in great detail. In addition, to limiting the time frame of the extension, it is advisable to limit the extension to specific items on the return, rather than extending the audit to cover the entire return

After the extension step, if any, the audit process continues with a meeting between the IRS examiner and your tax adviser. Many times the IRS will require the taxpayer, or its representative, to be present at the initial meeting. The meeting can be used to lay the ground rules for the audit and give the tax adviser a clear idea of what items the examiner is interested in. During this meeting, a good tax adviser will ask for a target date of completion, designated one person in the firm to act as liaison with the IRS, and create a rapport with the examiner.

The IRS examiners will agree to just about anything that will make their work easier and speed the process, without sacrificing the integrity of the audit. For example, Numerico offers to send information to the examiner before the actual meeting to expedite resolving the items the IRS will be looking at and to reduce the amount of time the examiner needs to spend on-site. The pro-active stance helps to reduce auditors’ mistakes and misunderstandings, as well as the tax assessments the company being audited would face as a result of those mistakes. Also, it is more difficult to correct an auditor’s mistake once it has been written up.

Now that the meeting has been set, let’s look at basic audit defense strategy. For the most part, the groundwork has already been laid and the key issues are clear. It’s important to settle these key issues right away, to avoid wasting time. When settling the issues, approach them directly. This is the part where your tax advisor is most effective. IRS examiners are not in the habit of making trades, i.e., overlook item A and we’ll concede items B and C. Therefore, all “gray areas” that the IRS will be focusing on must have proper documentation and it must be presented properly to the examiner to get them to pass on it. A tax adviser with a good reputation and experience in the auditing process can save a company thousands of tax dollars by handling your case pro-actively.

Tax problems are discussed with the adviser before being written up in the audit report. Once the details have been ironed out and the audit is over, the examiner must deliver a written report. From this point, the company has 30 days to bring the case to the IRS Appeals Office, if necessary. The difference between the audit and the appeals is the element of negotiation. You can make deals with the IRS during the appeal process.

Once a case is taken to Appeals, all tax disputes must be resolved. The Appeals Officers judge each case on its technical merits and the risks vs. cost of litigation. This is why Appeals officers are able to negotiate; to avoid costly litigation and the setting of legal precedents. About 85% of all appeals cases end in voluntary settlements.

The appeals process is fairly simple, but requires thorough preparation. A detailed, persuasive presentation of your case should be written up; you won’t meet the person who reviews your case beforehand. Be sure that the Appeals officer understands your position on all issues before attempting to negotiate. Also, as this is a negotiation process, you should only present reasonable arguments to the Appeals Office. Disputing every detail of your case, especially if your argument is weak, is a poor way to begin a negotiation.

To survive the audit process, present a strong case, a good set of books, and retain quality representation. IRS agents are like commissioned-salespeople in that careers are made (and broken) on the amount of revenue (tax assessments) the individual agents produce. If you understand this and pro-actively move through the audit, process, the agent will realize that you’re no “easy sale” and that they should look elsewhere.

This article was written by Gary Field, CPA at Numerico, PC. Click here to view Numerico’s website.

Health Care Timeline & Its Affect on the Tax Code

I recently read an interesting article “Health Care Reform Reshapes Tax Code” by Alistair M. Nevius, J.D. in the April edition of the Journal of Accountancy.

This article provides a good summary of the various tax code changes that you will see between 2010 and 2018.

To view the article please click the following link Health Care Reform Reshapes Tax Code

This article was written by Jay Kossen, CPA at Numerico, PC. Click here to view Numerico’s website.

Michigan Supreme Court Allows Detroit Public Schools to Keep Funds Collected through Unauthorized Tax Levy

The Michigan Supreme Court’s March 30, 2010 ruling in favor of the Detroit Public Schools (DPS) allows DPS to keep millions of dollars that DPS collected improperly, by continuing to charge taxpayers for a millage for three years after it expired.  Briggs Tax Service, LLC v Detroit Public Schools.

In September 1993, voters in Detroit approved a 32.25 mill school operating property tax.  As a result, DPS was authorized to levy and collect property taxes from Detroit property owners until the millage expired on June 30, 2002.  After the expiration of the millage in 2002, DPS continued to levy the tax through 2004.  Taxpayers continued to pay the tax without objection.

In 2005, Briggs Tax Service filed a claim against DPS in the Michigan Tax Tribunal seeking a refund of the unauthorized taxes levied and collected by DPS.

The underlying issue in this case was whether the claim must be dismissed due to lack of jurisdiction (failure to timely file).  Ordinarily, the time limit to file a claim for a refund in Michigan is 35 days after a final decision. MCL 205.735(3).  Briggs did not meet this deadline and the Tax Tribunal initially dismissed Plaintiff’s claim.  The Tax Tribunal then allowed Briggs to amend its petition in order to assert a claim under MCL 211.53a, which has a three year statute of limitations.  Under MCL 211.53a, in order to assert a successful claim, the taxpayer must have been assessed and paid taxes in excess of the correct amount due to either (1) a clerical error or (2) a mutual mistake of fact by the assessing officer and the taxpayer.

There was no clerical error.  The DPS intended to levy the taxes.  Thus, in order for Briggs to successfully assert a claim under MCL 211.53a, Briggs had to prove that there was a mutual mistake of fact by both the assessing officer and the taxpayer.

The Michigan Supreme Court held that although a DPS employee certified the tax levy, a DPS employee is not the same as a tax assessor. Thus, there was no mistake by the assessing officer, because the “assessor” never certified the tax.

The Michigan Supreme Court also held that any mistake was a mistake of law, rather than a mistake of fact. The validity of a tax is a legal issue, rather than a factual issue.

While we find the result of the case somewhat surprising, the Michigan Supreme Court’s decision points out the importance of reviewing tax bills carefully, and promptly objecting to any item on the tax bill that you question.

Click here to download a PDF of the Michigan Supreme Court Opinion in Briggs Tax Service, LLC v Detroit Public Schools.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.

2009 Federal Tax Benefit for Qualifying Contributions for Haitian Earthquake Relief

The Internal Revenue Service is making a one-time, extraordinary allowance to taxpayers who make qualifying contributions for Haitian earthquake relief.[1]

Individual taxpayers who itemize their deductions for 2009 may deduct on their 2009 income tax return cash contributions to qualifying charities for Haitian earthquake relief made after January 11, 2010 and before March 1, 2010.  A “qualifying charity” for this purpose is a charity which is (1) based in the United States, and (2) is either (a) listed in IRS Publication 78 or (b) a bona fide church.

Publication 78 lists charities which have applied for, and been granted, IRS recognition that contributions to them are deductible as charitable contributions for Federal income tax purposes.  An online version of Publication 78 can be found at http://www.irs.gov/app/pub-78/.

To designate that a contribution is for Haitian earthquake relief, you should specify on the memo line of the check or otherwise in the documentation for the contribution that the contribution is for Haitian earthquake relief.

If you have any question about making a qualifying contribution, please feel free to contact us.

[1] IR 2010-12, Jan. 25, 2010.

This article was written by Stephen J. Dunn, Of Counsel to Demorest Law Firm.

Keeping Property Tax Values Capped Upon the Death of a Joint Tenant

Under Michigan law, a property’s taxable value is capped and may not increase by more than the rate of inflation until ownership of the property is transferred.

However, there are certain types of transfers of ownership that are exempt from this rule and will not cause an uncapping of the taxable value.  These no-transfer-of-ownership exemptions are listed in the General Property Tax Act, Section 211.27a(7).

One particular exemption that has been the subject of recent litigation in Michigan is set forth in Section 211.27a(7)(h). This exemption has to do with a transfer that creates or terminates a joint tenancy.  It has been widely assumed that the death of a joint tenant is considered a transfer that “uncaps” the taxable value of a property and is not exempt under Section 211.27a(7)(h).

However, in December 2009, the Michigan Court of Appeals reversed the decision of the the Michigan Tax Tribunal in the case of Klooster v City of Charlevoix, holding that the death of one joint tenant, even though it terminated the joint tenancy, was not a “conveyance” because there was no instrument that affected title.  In that case, husband and wife first acquired property, wife then quitclaimed to husband, husband then quitclaimed to himself and his son as joint tenants, and the husband/father subsequently died.  It is the death of the father as joint tenant that is the issue of the dispute.  The court disagreed with the City of Charlevoix and the Tax Tribunal’s contention that the death constituted a “transfer” under Michigan statutes.

Just this month, the Michigan Court of Appeals in Klevorn v. City of Boyne City, using Klooster as precedent and citing the similarity of the facts, held that the death of one joint tenant (mother) and the subsequent transfer the other joint tenant with rights of survivorship (son) was not a “conveyance”.  Therefore, the Court held that the property value upon transfer to the son should not have been uncapped and he was entitled to the no-transfer-of-ownership exemption in MCL 211.27a(7)(h).

The Klooster decision has been appealed to the Michigan Supreme Court.  In the meantime, there is precedent to argue that upon the death of a joint tenant, the remaining joint tenant with rights of survivorship is not subject to an uncapping of the property’s taxable value.

This article was written by Natalie C. Najarian, Associate at Demorest Law Firm.

New Energy Credits Available on your 2009 Michigan Tax Return

There are two new energy credits available to eligible taxpayers on their 2009, 2010 & 2011 Michigan tax returns. I am frankly shocked that these two credits where maintained during the budget cuts that came out of Lansing in October. In fact the state would have been far better off taking the tax monies from these credits and transferring them to its national award wining “Pure Michigan” advertising campaign.

Home Improvement/Appliance Credit

The credit is equal to 10% of EPA energy star certified appliances; the maximum credit is $75 for single taxpayers and $150 for married tax payers. This credit can be claimed on Michigan form 4764.

Energy Cost Recovery Surcharge Credit:

This non-refundable credit is available to both homeowners and renters who pay electric bills and is capped at $9 per meter in 2009. This credit can be claimed on Michigan Schedule 2.

For more information on these credits, including eligibility and income limitations please visit click here to visit the Michigan.gov taxes page.

This article was written by Jay Kossen, CPA at Numerico, PC. Click here to view Numerico’s website.

When is a License Fee Really an Illegal Tax?

Faced with tighter budgets, Michigan cities and townships are looking for additional ways to raise revenue.  Due to the Headlee Amendment, property tax increases are severely restricted.   However, a municipality may establish or increase a fee without violating the Headlee Amendment.  The question is:  Where is the dividing line between a permissible fee and an illegal tax increase?

A tax is solely to raise revenue.   A permissible fee (typically a permit or license fee) has three characteristics: (a) the fee serves a regulatory purpose; (b) the amount of the fee is proportionate to the necessary costs for the municipality to provide that service, and (c) payment of the fee is voluntary.

Several years ago, we were involved in litigation that resulted in the Wayne County Circuit Court declaring a license fee imposed by Sumpter Township illegal.  The Court decided that the fee for a sand excavation license was really being used by the Township to discourage additional landfills from being located in the Township, and that the amount of the fee was excessive in relationship to the Township’s costs to regulate and inspect sand excavation sites.  The Ordinance was set aside.

On January 21, 2010, the Michigan Court of Appeals issued its decision in Wolf v City of Detroit.    The plaintiff claimed that a new Solid Waste Inspection Fee adopted by the City of Detroit was really just a disguised tax.  The inspection fee was imposed on properties that did not use the City’s Department of Public Works for solid waste pick-up.  The Court of Appeals analyzed the three criteria for a fee and decided that the fee was permissible.   A copy of the Court of Appeals’ decision is attached.

Whenever a municipality imposes a new fee, or dramatically increases the amount of a fee, then one should analyze whether the three criteria for a fee are met.  If not, the fee may be challenged as a hidden tax.

Click here to download a PDF copy of the Court of Appeals Decision.

This article was written by Mark S. Demorest, Managing Member of Demorest Law Firm.

2010 IRS Mileage Reimbursement Rate

Each December, the IRS sets the mileage reimbursement rate for the following year.  If businesses choose to reimburse their employees for work-related driving, this is the rate at which such reimbursement should be done.   The IRS 2010 standard mileage rate is $.50 per mile.

An independent contractor calculates this amount for the IRS each year, based on the “fixed and variable costs of operating an automobile”  in the previous year.  These costs include fuel prices, as well as maintenance.  The 2010 rate is $.05 lower than the 2009 rate of $.55 per mile.  The IRS attributes this reduction to “generally lower transportation costs” as compared to the previous year (2008).

The mileage reimbursement rate has risen dramatically in recent years, mainly due to the sharp increase in gas prices over the past few years.  For example, the rate in 2003 was $.36 per mile; in 2006 it was $.445 per mile; and in the second half of 2008, it was $.585 per mile.

See this article on the IRS web site for more information: http://www.irs.gov/newsroom/article/0,,id=216048,00.html

This article was written by Melissa L. Demorest, Associate at Demorest Law Firm.