Well the reality of the situation is there are tremendous opportunities and the opportunities exist because most people aren’t doing this correctly. What we’ve seen at our firm is we’ve seen a huge lapse in the number of CPAs that are catching these issues when they’re filing companies’ normal federal income tax returns. Everybody is focused on the federal and compliance in the state that they’re in and nobody is concerned about potential planning opportunities that exist outside of that state’s borders. So we deal with this a lot in California, because here we’ve got a nice high over 13 percent tax rate for state income and everybody is trying to get out of paying that level of income tax either on the corporate level or on the individual level. So the reality of the situation is for companies in California, they want to try and bifurcate as much of their sales outside the state of California as they can. California makes it really tough for a variety of reasons but the reality of the situation is that most entities have presence in different states in one way or the other so particularly for large organizations with either multiple offices that are spread out, manufacturers with maybe a manufacturing plant, people that are storing inventory in various locations or a variety of ways that people touch different states you might have an argument.
Key Takeaways
Well the reality of the situation is there are tremendous opportunities and the opportunities exist because most people aren’t doing this correctly.
The Nexus of your company goes beyond your state’s borders and there’s a variety of planning opportunities just based on an arbitrage of your state tax rate instead of paying 13 percent. What if we paid a blended tax rate of 7%.
if I Discover I’m out of Compliance for a Multi-State sales and Use Tax or Multi State Income Tax Issue? Should I pursue a voluntary compliance program? The answer to this question is maybe and what drove me crazy your back when wayfarer was a huge issue and when companies were scrambling to try and deal with this his everybody was talking about let’s enter into a voluntary disclosure program as quickly as possible the reality of those programs is they were great deal from the states because they were raising revenue and collecting all sorts of taxes but they were bad news for most businesses just because you do business in multiple states doesn’t mean you have all this free cash flow to support paying a whole bunch of back tax liability but a bunch of people panicked a bunch of people registered for these voluntary compliance programs in these states in order to avoid penalties and maybe get a potato production of the interest rate but to what effect so the more practical and concern is is rather than whether.
Key Takeaways
if I Discover I’m out of Compliance for a Multi-State sales and Use Tax or Multi State Income Tax Issue?
I know it’s a big issue, I know there’s potentially a lot of liability on the table but the important thing is let’s not go crazy.
So the most important thing that you can do is cut off communications with the company to the auditor meaning the company should not be communicating with the auditor directly.
Okay so the first thing that you do is not panic. I know it’s a big issue, I know there’s potentially a lot of liability on the table but the important thing is let’s not go crazy. So the most important thing that you can do is cut off communications with the company to the auditor meaning the company should not be communicating with the auditor directly. The more information that the company provides the auditor, the more likely that the auditor will issue an assessment not in the company’s favor. This is particularly true for companies that have historical Nexus in a state for multiple years and that have maintained some sort of presence there via the activities of their employees or holding inventory or whatever. So you need a third party representative because a third party representative, specifically an attorney, will be able to deflect the questions of the auditor and be able to mitigate any immediate danger. The first thing that I would tell an auditor in the situation where I have a client that’s not in compliance is going through an audit is hold off while we assess the situation. This gives the company enough time to breathe, gives enough us enough time to investigate the data and going back to the whole rule, how big is the hole, how do we measure it, and then it allows us to put a plan in place to strategize how we’re going to control
So by segregating this into buckets, you’re going to look at what your exposure is in different categories.
But the long and the short of it is, that’s how you beat the EDD at their own game.
How do I beat the EDD at their own game? So, beating the EDD at their own game is very tough because California, with the passage of AB5, has essentially regulated independent contractors outside of California. In order to be in a true independent contractor relationships, you need to either fall under the definition of AB5 or be engaged in a true business-to-business relationship where the person isn’t involved in being integral to the generation of your revenue.
So for example, I’m a law firm in California and I contract with a bookkeeper or a video production company. That is a bona fide independent contractor relationship. But the reality of the situation is if you come under a payroll tax audit and you have independent contractors in California, which is the subject matter for most payroll tax audits, it’s going to be difficult to beat the EDD because the EDD is locked on this issue and they know exactly what they’re looking for.
With that said, there are some tactics that you can use during the course of the audit to help you out. The first thing that I would recommend is of your independent contractors, separating people out by job category and by what these people do. So this may be a situation where you just have one class of workers, and if so, the strategy will not work for you. But to the extent that you employ multiple independent contractors, and they do multiple things, you want to try and bifurcate them into different buckets. Then within each bucket, you want to relate your level of risk. Certain buckets, you know you’re probably not going to be able to get past the owner. These are people that look like employees. They maybe students. They may be lower skilled workers, whatever they are. But there’s certain buckets that are probably going to be on the fence. And then there may be other buckets that are completely and totally an independent contractor relationship.
So by segregating this into buckets, you’re going to look at what your exposure is in different categories. And the key with beating the EDD at their own game is not necessarily to get out of the audit unscathed, but to get out with as little liability as possible. So there’s no harm in conceding to the independent contractors you know are going to get reclassified ahead of time.
So if you offer that up to the auditor, it’ll make things a lot easier. Then when it comes to the independent contractors that are on the feds, anything that you can do to establish those people as true independent contractors, you want to do that. Do you look at their LinkedIn? Can you see their LinkedIn profiles? Do they have insurance? Do they have a business card? Do they maintain their own websites? Do they advertise themselves? What do these independent contractors do to maintain their own business? All of that is very, very important. So that’s really how you beat the EDD in these situations.
The other way you beat the EDD is through the application of penalties. So the EDD is very severe when it comes to the penalty structure for misclassifying workers or for not filing the appropriate payroll tax returns. Even informational returns. You know, we’ve seen situations in our firm where we’ll have an amount of taxes due and the penalties will be five times or more in excess of the amount of tax.
So it’s really important that when you go into these audits, that you focus on beating the penalties as much as you do, beating the tax. So by developing a narrative at the beginning of the law, by defeating willfulness, by removing yourself from some of these harsher penalties, you’ll do a lot better for yourself. The actual tax itself, when you look at it from a payroll tax perspective in California, isn’t that much. So even workers with a pretty high payroll aren’t paying that much in actual tax, particularly if you have workers that are filing their own returns and paying their personal income taxes, because then you can get a debate it.
But the long and the short of it is, that’s how you beat the EDD at their own game. You go on it to strategically, you go in trying to mitigate your risk, and you go in trying to mitigate any penalties that are associated with that. And that’s how you can be successful in an EDD audit.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute call.
An IRS tax lien attaches to all of your property — real property included — the moment it arises. Under IRC § 6321, a federal tax lien attaches to all property and rights to property belonging to the taxpayer once a tax has been assessed and notice and demand for payment has been made. If you have unpaid federal taxes with a lien on record, that lien will show up in a title search and will complicate any real estate transaction.
The practical problem is this: a federal tax lien is a claim against the property that must be dealt with before a lender will fund a purchase loan, and before a title company will insure the transaction. If you are the buyer, lenders will generally not approve a mortgage when you have an outstanding federal tax lien. If you are the seller, you cannot deliver clear title while a lien is in place. Either way, the transaction stalls unless the lien issue is addressed directly.
There are three tools the IRS uses in real estate transactions. The first is a full lien release, which happens when the debt is paid or otherwise resolved. The second is a certificate of discharge, which removes the lien from a specific piece of property — done on IRS Form 14135 — and allows you to sell that property free and clear even if the underlying debt remains. The IRS will typically approve a discharge when the sale proceeds will be applied to the tax debt. The third is a certificate of subordination, which causes the lien to drop behind a specific mortgage — this can make a refinance or a purchase loan possible even with an active lien.
The discharge process under Form 14135 takes time — typically 45 days or more from submission, assuming the application is complete. If you are in a transaction with a hard closing date, start the process early.
One more thing worth knowing: a Notice of Federal Tax Lien is a public record. It affects your credit, your ability to get financing, and your ability to enter into certain contracts. Resolving the underlying tax debt — through payment, an offer in compromise, or a formal installment agreement with a request for a lien withdrawal under Rev. Proc. 2011-48 — is the cleanest long-term outcome.
If you are trying to buy a home, refinance, or sell a property and a federal tax lien is in the way, we can work through the options with you. Book a free 15-minute call or reach us at (619) 378-3138.
So in January of 2020, California Legislature passed AB5 which governed the relationship between companies and their workers. Basically what AB5 states is that unless a hiring entity can prove that a worker is truly independent according to three specific factors, that worker will be deemed to be an employee of the company itself. The factors are number one, the company must not have in any condition of control over the work. Number two the worker services must be outside the core business or the hiring entity and number three the worker must maintain their own separate and independent business. So this was all raised with much fanfare and rightly so was called the death of independent contractors in California because unless you qualify for one of the exemptions that’s under the statute, pretty much all workers fall within an AB5 framework and they can be deemed employees. It’s only those that are providing true outside services like they have bookkeeper or CPA or law firm or videographer that really qualify outside the scope of AB5. The statute really is meant to pull as many people as possible into the employee relationship however from a tax perspective despite all the fanfare on the labor side, it doesn’t really have any impact. The reality of the situation is that the EDD has been using an AB5 framework for quite some time. So what I mean by that, well the reality is that when you go through an employment tax audit, EDD is already looking at control. Control was a previous factor under the old past and now really
Key Takeaways
So in January of 2020, California Legislature passed AB5 which governed the relationship between companies and their workers.
what the EDD is focused on is is the worker integral to the revenue generation function of the particular business.
So the EDD in California operates under a lead system and what I mean by that is the EDD has a computer system that generates leads for its district offices in order to follow up on from an audit p…
So there’s lots of things that can trigger a lead.
So the EDD system works a lot like that in that there’s lots of things that can trigger a leak.
So the EDD in California operates under a lead system and what I mean by that is the EDD has a computer system that generates leads for its district offices in order to follow up on from an audit perspective. So there’s lots of things that can trigger a lead. The way I equated is if you look at the movie Minority Report, you have these three Precog people that would basically be able to predict crime and so every time they predict a crime you’d have a little ball that would roll out of the machine with somebody’s name on it. So the EDD system works a lot like that in that there’s lots of things that can trigger a leak. For example unemployment claims trigger EDD leads all the time and subject the hiring entities to payroll tax consequences or at least payroll tax bonds. You can have a lead issue for issuing too many 1099s over W-2s and what is too many is anybody’s guess. You can have a lead issue for being in a certain type of industry. You can have a lead issue for somebody calling and saying that you’re employing employees as independent contractors. There’s a variety of things that make up the this lead system but here’s the issue from a statutory perspective. The EDD is required to follow up on any leads it gets so even if the lead is bogus they’ll follow up on somebody. Usually they follow up on these by sending a pre-audit questionnaire and making the decision whether or not to pause so you need to be very careful if you receive a pre-audit questionnaire because what it likely means is that a lead was generated in the EDD assistant and they’re following up for you in order to assess your viability for a payroll tax audit.
Have a Tax Question or Notice?
If you’re dealing with an IRS audit, collection action, California state tax matter, or any other tax issue, we can review your situation in a free 15-minute call.
Topic: What Are the Differences Between the Federal System and the State of California?
Read the full article below for complete details on this topic.
What Are the Differences Between the Federal System and the State of California? So the IRS tends to get a lot of flack but the federal system for tax is actually pretty well developed and here’s why the IRS is an administrative agency so as an administrative agency it makes rules interpreting the way that it’s going to enforce the tax law and it makes rules to govern what will happen if you get into a dispute with the IRS so the IRS is essentially a rulemaking Authority but in addition to the IRS you’ve got a Tax Court and what the Tax Court does is the Tax Court is a judicial system you’ve got judges it’s a court and you’ve got people in all 50 states who are litigating tax issues in court and there’s a series of judicial opinions that come out and what happens is those judicial opinions function as a check against the IRS so the IRS isn’t allowed to just ignore a judicial opinion so what happens is you’ve got this system of pools that’s created on the administrative level and then you’ve got this judicial check which functions against those rules so you’ve got this really well-defined harmony between the administrative system and the judicial check the system that operates and enforces the IRS rules and you can see that and a lot of the procedure that’s come out of the IRS level is it’s very well shaped by the courts in California you don’t have as good of a judicial system number one if you’ve ever been to court in California you know how difficult it is to get in there in.
Read the full article below for complete details on this topic.
So I Want to Talk About the Recent Case history that has impacted the multi-state landscape and how we got to the place that we’re at today so the first case I want to talk about is complete auto transit versus Brady so complete auto transit versus Brady basically set up a system where the states are free to make independent judgments about what goes on in their state borders absent any sort of federal preemption so what that means is if the federal government hasn’t ruled that something is a national activity and it falls under the Commerce Clause of the Constitution that essentially the states can control what’s in their own borders so that was the first major case because it gave the states the power to basically operate as they see fit within their borders the second case is a case called quill quill was a Supreme Court case in the nineties and quill is significant because well basically ruled that unless a company or an individual had sufficient minimum contacts with a state that the state couldn’t charge sales or use tax and so this was significant because for the first time it mandated that company at least had to have some basic physical presence or some substantial contact in order for a state to mandate that a charge sales and use tax so quell was an extremely unpopular decision it states.
Multi state tax issues don’t just impact businesses. In fact they impact people probably a lot more than they impact businesses. The reason for that is people move around a lot more than businesses do. So think of it this way. You have a situation where you have a client who’s in one state and they travel back and forth frequently between let’s say California and Texas, California has a 13.3% individual income tax rate, Texas has a 0% individual income tax rate. So the amount of tax that the taxpayer pays based on their movements between different states is going to depend on the residency of the particular taxpayer. Now residency is closely tied with domicile, which is a legal term. The domicile is essentially somebody’s home base so once you move into a home and take steps to establish your domicile in one state, that state becomes your tax home however until you establish a domicile in that state or until you more specifically move your domicile outside of a state, that’s where you run into problems. So take for example California that’s been super aggressive in dealing with some of these issues.
Key Takeaways
Multi state tax issues don’t just impact businesses. In fact they impact people probably a lot more than they impact businesses. The reason for that is people move around a lot more than businesses do. So think of it this way.
In order to survive a residency audit for California you’re going to need to prove that you are a resident of that particular state that you took steps to establish the domicile. So there’s a variety of factors that go into this.
