The subject of corporation tax benefits is a complicated one. Most types of business entities – sole proprietorships, partnerships, subchapter S corporations, and limited liability companies - that have not elected to be taxed as regular (or C) corporations have taxes that pass through the business. These taxes appear later on when the owners file their individual tax returns. A regular C corporation and any LLC that elects to be taxed like a corporation are separate tax entities that have to file their own tax returns and pay their own taxes.
In the previous decade, the IRS issued its so-called “Check the Box” regulations. Effective beginning 1997, these regulations allow taxpayers to choose the tax status of a business entity without regard to its corporate (or non-corporate) character. Thus, a business entity with more than one owner can elect to be classified as either a partnership or a corporation in order to gain corporation tax benefits. An entity with only one owner can elect to be classified as a corporation or a sole proprietorship. In the event of default (that is, where taxpayer does not make an election), multiple-owner businesses are classified as partnerships and single-person businesses as sole proprietorships.
A business entity that is actually incorporated under state law or one that is required to be a corporation under federal law will have access to corporation tax benefits. Limited liability companies are not automatically treated as being incorporated under state law, which is why they must elect either corporation or partnership status.
Corporation tax benefits under Federal income taxation may acquire more meaning if compared with the treatments to individual taxpayers.
The gross income determination for corporations and individuals is done in the same manner. This includes income derived from business, compensation for services rendered, gains from dealings in property, interest, rents, dividends, to name but a few. Individual and corporation tax benefits contain certain inclusions of gross income, but corporate taxpayers are allowed less exclusions. For instance, both classes of taxpayer may exclude interest on municipal bonds from gross income.
Gains and losses from property transactions are treated similarly. Where non-taxable exchanges are concerned, individual and corporation tax benefits allow non-recognition of gain or loss on a like-kind exchange. Both may defer recognized gain on an involuntary conversion of property. Neither corporations nor individuals are allowed to deduct losses on sales of property to related parties or on wash sales of securities (with certain exceptions). The business deductions of corporations also parallel those of individuals, although certain credits that are personal in nature, like child care credit, are not available to corporations.
A further corporation tax benefit is that corporations pay federal income tax at a rate lower than that of most individuals for the first $75,000 of their profits – 15% of the first $50,000 of profit and 25% of the next $25,000. Professional corporations are charged a flat 35% tax rate. All allowable corporate deductions are treated as business deductions, making the determination of adjusted gross income, which is so essential for individual taxpayers, of little relevance to the corporation. Corporate taxable income is computed simply by subtracting from gross income all allowable deductions and losses. Individuals, on the other hand, have to consider itemized deductions or the standard deduction.
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The civil fraud penalty is the IRS’s most drastic civil remedy for forcing taxpayers to comply with our tax laws, yet very little is written about this penalty.
The civil fraud penalty is imposed on taxpayers when the IRS believes that the taxpayer filed a false or fraudulent document with the IRS. The civil fraud penalty is equal to 75% of the tax underpayment that is attributable to fraud. A tax underpayment is basically the amount of tax that the taxpayer would have paid absent their attempt to defraud the US Treasury. This usually consists of a taxpayer failing to report certain items of income or claiming a tax deduction and/or credit that they were not entitled to.
The IRS generally only has to prove that the taxpayer unerreported one particular item, and if proven, fraud is presumed for all other items. For example, if a Schedule C small business owner reports $100,000 of taxable business income when the business owner actually had $200,000 of taxable business income, then the IRS only has to prove that $1 of income was not reported. If proven, the fraud penalty will be based on the $100,000 that was not reported - not merely the $1.
Once the fraud penalty is imposed, the penalty and interest on the penalty will be begin to accrue from the date of the underpayment. There is no statute of limitation or time period for the IRS to assert the fraud penalty if the IRS is able to prove that fraud actually occurred.
The IRS is usually able to prove that fraud occurred by relying on circumstantial evidence or “badges of fraud.” “Badges of fraud” include a taxpayer’s history of failing to file or underreporting income, claiming false deductions or improperly deducting personal expenses, using false documents to support tax positions, failing to keep records or dealing in cash, and failing to cooperate during an IRS audit or examination.
Taxpayers have a number of options for dealing with the civil fraud penalty. The best way to resolve IRS fraud penalty issues is to show that the underlying tax liability or tax understatement was not owed. For example, the fraud penalty can be eliminated or minimized if a taxpayer can show that his or her tax liability was zero or less than that asserted by the IRS, even though the taxpayer had falsely claimed a $100,000 tax deduction. In this example, if the $100,000 tax deduction would have saved the taxpayer $20,000 in taxes, the taxpayer will need to come up with $20,000 of additional legitimate tax savings to offset the $20,000 understatement.
Taxpayers may also be able to defend against civil fraud penalty claims by asserting that they relied in good faith on the advice of tax counsel or they made an honest mistake or error. These defenses will generally negate mental state that is required for the penalty.
In the event that the taxpayer is successful in avoiding the civil fraud penalty, the IRS will likely seek to impose an accuracy related penalty. The accuracy penalty is substantially smaller than the 75% civil fraud penalty.
Taxpayers who think that they may be subject to the civil fraud penalty should immediately hire an experienced tax attorney to discuss their tax matter.
Not every one will need the use of a tax attorney but their usefulness cannot be underestimated when you do need to hire one. First understand that there is a big difference between a tax attorney and a person who prepares taxes, such as a CPA or bookkeeper. If you hire an attorney, anything you say to them is completely confidential. Unlike a CPA or bookkeeper that can be called to testify against you in court should you ever be audited and brought to trial. There are several reasons you may need to hire a tax attorney.
The first and most common reason to hire a tax attorney is that you are in trouble with the IRS. Being audited and dealing the IRS is many people’s worst nightmare. If you get in this situation, it means that your figures didn’t add up and the person who has prepared your original tax filings has at the least made an error or at worst was completely incompetent. By hiring an attorney, he/she will be able to give you the best legal ways of working with the IRS so you can come to a mutually agreed upon conclusion.
Another reason to hire a tax attorney is they understand that the tax laws are not just black and white. There are many shades of gray between the two. He/she can give you many different legal ways to solve the problem and get the IRS of your back.
He/she will also act as a go between you and the IRS. Everyone knows the intimidation tactics the IRS will use to try and get you to cooperate. A good lawyer understands these tactics and how to “fight” them on good legal reasoning. He/she is on your side and basically; he/she will fight your battles for you.
If you owe a significant amount of money in back taxes hiring a tax attorney is your best option. People who try to take on the IRS alone usually end up paying more than those who are legally represented. With attorney-client privilege, you will be able to honestly talk to your attorney about exactly what went wrong so they can find the absolute best options for you. He/she knows the tax law inside and out and can come up with a solution for both the short term and the long term. You cannot underestimate the bully tactics of the IRS. If you ignore them, they will pursue you even more aggressively.
If you own a business or have a larger estate, you should also consider consulting with a tax attorney. He/she will make sure all your assets are set up according to the required tax laws. This can save you thousands of dollars in tax deductions and give you the peace of mind that everything you are doing is above reproach.
The above situations are good reasons to hire a tax attorney. Not every person needs a tax attorney. For instance, if the IRS sends you a letter saying an error was made and you owe such-and-such amount, just pay it.
Visit tax here for information on criminal and IRS tax attorney’s, as well as, to locate a tax attorney in your area.
