Tax Services
Jan and Neil discuss the domestic and international tax services provided by Allen Barron.
In this episode, the conversation focuses upon the wide variety of tax related services provided by Allen Barron, Inc. This includes preparation of California (and other US states), IRS and international tax returns. It is important to carefully plan and structure not only when income is realized, but where and how it is characterized. Jan discusses the use of PIGs and PALs as well as entities to recharacterize income in a manner which reduces tax exposure.
Jan
Welcome to AB cast integrating legal tax accounting and business solutions. I’m Janathan Allen.
This is an introduction to our tax services.
Neil
It’s good to be with you again, Jan.
Jan
Absolutely.
Neil
Let’s begin with an overview of the tax services provided by Allen Barron.
Jan
We do domestic tax planning and compliance, international tax planning and compliance, transactional planning, the tax perspective of a transactional plan. We do expatriate tax filings. That would be your foreign reporting. We do audit controversy with the internal revenue service and the California FTB as well as other tax controversies, such as liens, levies, and garnishments
Neil
From a domestic tax planning point of view. What is the essence of tax planning when you’re working with someone who is here in California, or an entity or individual who has interest across the United States?
Jan
Domestic tax planning is probably one of the most underutilized tools that individuals have, but fail to take advantage of. Tax planning is a tool that people can utilize in order to minimize their taxes, but time and time again, year after year clients, even really good tax clients, when we send out requests for doing domestic tax planning, fail to act. So from our perspective, it is an unsung process that can help you save dollars on your next tax bill.
Neil
And what are some of the elements of an effective tax plan?
Jan
Tax planning goes back to when it is that revenue’s going to be recognized, how much of that revenue’s going to be recognized, and in what entity or in what year is it going to be recognized. So there are a number of components that go into tax planning, but it’s also the associated expenses that may be utilized against that income as well. It’s really putting together a comprehensive plan or a roadmap so that you know, what it is that you’re going to end up being taxed on at the end of the year.
Neil
And generally speaking, Jan, how is that accomplished?
Jan
Well, that’s accomplished by utilizing varying entities, trusts and estate planning.
Neil
You’ve also spoken a lot recently about the characterization of income and the importance of what you call PIGS and PALS. Can you tell us a little bit about how PIGS and PALS apply to tax planning and what happens if people have different assets or different income in different states?
Jan
Well, of course that’s where tax planning comes in because differing states have differing tax rates. But then again, how it is that income is taxed in that state and how it will impact an individual living in California needs to be planned. So for our domestic tax planning purposes, we go back and we take a look at whatever income from whatever source that the individual has and utilize the tools at our disposal, whether it’s entities trusts or water’s edge elections, to ensure that the tax paid on that individual’s tax return is the lowest it can be.
Neil
Okay, if we turn for a moment to international tax, what are some of the additional complications an international tax plan must address?
Jan
There are several aspects to foreign tax reporting, some of which are in the compliance category. And some are in the reporting category. As we discussed in an earlier podcast, the FBAR requirements, which is foreign bank account reporting isn’t necessarily additive in terms of tax, but it is in terms of reporting requirements. On the other hand, when you go back and you look at something like the ownership of a foreign asset or the ownership of foreign stock in a company, the ownership of a company itself, ownership of real estate that’s outside of the country, all have differing types of reporting requirements that are additive to the normal reporting cycle in the United States.
Neil
And how have FBAR implications complicated the lives of US taxpayers who have international assets and income?
Jan
I think to the degree that whether you’re a US expat or you’re a foreign national, and you have foreign bank accounts, the impact of the reporting requirements are generally overlooked and they’re overlooked because the underlying assumption is if it’s earned outside of the United States, it can’t be taxed here and that’s not true. Again, the United States citizen is going to be taxed on their income worldwide. It doesn’t matter where in the world that it’s earned, but from going back to an international tax planning perspective, the ownership of foreign assets have additional foreign reporting requirements that make the normal tax reporting on a yearly basis, far more complicated and complex.
Neil
So what does an individual US taxpayer with an offshore asset such as a home or even bank accounts need to know?
Jan
They need to know that those assets need to be reported and may be taxed. For example, if you have foreign real estate and you are renting that foreign real estate, the real estate income that’s earned will be taxable here in the United States. So there are mitigating circumstances such as the utilization of bilateral tax treaties. That will mean you may not be taxed on that income because of the bilateral tax treaty, but that does not mean that the income is not reported. So the chief takeaway here is for foreign and international tax planning is if you have foreign income or foreign assets, please ensure that you’re utilizing a firm that has the experience and expertise to properly report the foreign income and assets that you may have.
Neil
Oh, I can hear it now. “Oh, but Jan, I’m just small potatoes. How is the IRS ever going to know about my offshore assets or bank accounts?”
Jan
The IRS through the program of FATCA where the IRS and treasury garnered acquiescence among other countries in the world to exchange information relating to individuals such as us citizens that are living outside the United States or who hold accounts outside of the United States. So for the majority of Americans who feel that they may be successfully hiding information from the internal revenue service, the signators of FATCA will go back and report any accounts that are reported in an American’s name or a US citizen’s name outside of the country.
Neil
So the IRS has also gone back and required information even from cryptocurrency platforms.
Jan
So individuals that are looking to go back and presume that the investment in a cryptocurrency platform or a cryptocurrency investment is not going to be easily reportable may have some surprises in store since the IRS has gone back and required those platforms to report individuals that have made investments on those platforms. So the IRS has its ways, whether it’s through the FATCA signator, whether it’s through commandeering or requiring information from companies that are taking US investments from US taxpayers and reporting it back to the internal revenue service so that they can match it with an individual’s tax return. And of course, when the match doesn’t occur, that’s when the audit letters go out.
Neil
Yeah. Ouch.
So Jan, tell us about our tax services for expatriates.
Jan
We have a number of expats that we are currently servicing in terms of tax and estate and trust planning as well. The expat tax adventure, I guess I will call it, requires again, the fact that if you are living outside of the United States, that does not mean that you are not required to follow US tax return. We get calls into the office every day about individuals that didn’t realize they had to report their income, that they earned in a foreign country in the US. Again, the utilization of bilateral tax treaties may mean that there is no tax that’s paid after the tax return is filed because of the tax attributes in the tax regulations. But that doesn’t mean that the tax or that the income is not reported. And I can’t stress that strongly enough income, regardless of where in the world it’s earned will be reported on a US tax return. It does not necessarily mean that there will be tax that will be paid on it if there’s been tax that’s been paid in a foreign country on the same income. So again, it’s the utilization of our knowledge of international taxes reporting requirements and how it is that we utilize the differentiating tools given to us by the internal revenue service to mitigate and minimize the taxes on that income for someone living outside of the us
Neil
And expats may be interested to know that Jan writes every other month for a publication out of the UK called the American, which is expressly for US Expats. Jan is a featured author and you can see these articles either at The American or on our own website at allenbarron.com.
Jan
Yes, indeed.
Neil
So we’ve talked about transactional planning to minimize tax exposure, to reduce risk and to characterize income. I think transactional planning has a special place in this conversation. What can you tell me about transactional planning from a tax perspective?
Jan
Transactional planning is the tool that we utilize to, again, aggregate income into the types of buckets that we want in order to obtain the tax rates that we’re looking for. For example, if we go back and we have real estate and real estate is by regulation, a passive income type, then is there a potential or a way to go back and change passive income into active income and through the utilization of differing entities, transference contracts of income, say from a rental to a management company, for example, that income can change its characterization from passive to active? So the transactional planning from a tax perspective is the overall tool that we use in order to go back and put together the comprehensive plan. That again goes back and does two things: mitigate risk and minimize tax.
Neil
Jan, we’re going to turn the conversation to audits. It wouldn’t be a tax department without the ability to handle audits. So we’re talking about IRS audits and California tax agency audits. Let’s focus on the IRS. What’s probably the most important thing that someone who’s been contacted by the IRS needs to know.
Jan
The most important thing to know is not to panic. I think too many times people will go back and get a notification, whether it’s from the IRS or the FTB and clients generally have one of two responses: One is they either set the envelope or the mail aside and attempt to forget about it, or two, they panic. And I don’t think that either response is necessarily justified. And essentially when we go through and we review most notices, the notices may be delinquent. They may be out of date. They may be just plain erroneous. So until you really understand what it is that you’re dealing with, it’s important to go back and read the documentation, read the notice that you’ve gotten, and then find someone that can assist you with whatever the issue is. I will note that the audit notices that we’re getting, the IRS has recently indicated that it will stop sending notices primarily because of the lack of capability at this point to issue and continue harboring and, and watching these notices. So since the IRS is still attempting to finalize tax returns that were filed in 2021 during the October tax season, the notices, at least in the near term will not be issued at least for a while. So again, when an individual gets a notice, I think it’s important to understand that they need to understand what they’re dealing with and find assistance in terms of being able to understand what it is that the notice is really saying.
Neil
So Jan, a lot of times the IRS is asking for specific information and the taxpayer goes overboard, trying to look like they’re a good person with the IRS, and that’s just not in their interests. What advice would you give to people about providing information to the IRS and even speaking with the IRS directly?
Jan
What we see in terms of we’ll call them office audits will be a notification and then a request for information. And with a request for information taxpayers, again, generally have two responses. One is I’m not going to give them anything. And two is I’m going to give them everything to show that I have nothing to hide. And again, I don’t think either response is necessarily justified. Again, you need to understand the issue that the IRS is attempting to get to. Number two, you give the information that is necessary for the IRS to make the determination that they need to make. And three, you don’t want to go back and necessarily give additional information that’s not required or needed by the IRS,
Neil
Which they may then use to expand the scope of the audit.
Jan
It can be. And generally that’s the utilization of information that they receive above and beyond what it is that they’ve asked for.
Neil
So, Jan, I think many taxpayers are surprised to learn that they don’t even have to talk to the IRS.
Jan
Yes, that’s true. In those instances where you’ve hired tax council, such as our firm, essentially by utilizing a power of attorney, the attorneys in our firm will go back and take over the discussions on your behalf with the internal revenue service or the FTB. So there are instances where you don’t have to necessarily talk and, or even interact with the taxing authorities that have notified you.
Neil
And how does that affect a taxpayer’s stress and emotional burden of dealing with an audit?
Jan
I think for some individuals, with the idea that they no longer have to communicate with the IRS and the FTB that it takes a burden off of them, I’m not certain it stops the worry because of course I’m not certain I can stop the worry. Some people are just prone that way, but it eliminates one of the stress factors in people’s lives because they don’t have to worry about the next communication with the taxing authority or whether or not they’re saying something right or wrong.
Neil
And another thing we can help them to understand is the process of the audit itself…
Jan
Absolutely, getting notices from the IRS while it may seem to be a scary thing is really an ordinary occurrence. And it’s something that occurs simply because we file tax returns. So there can be a number of issues, some of which may be benign, some of which may be more serious. And again, it’s really important that the taxpayer understand what it is that they’re dealing with prior to any panic setting in, as I tell many of my clients, I’ll let you know if we need to run to the border!
Neil
So what are the California agencies who conduct audits and what are the types of audits we help individuals and businesses with?
Jan
The agencies in the state of California that can conduct audits are the Franchise Tax Board, the EDD and the CDTFA, which is the former Board of Equalization. The FTB of course, is income tax in the state of California, the EDD conducts payroll and employment audits, and the CDTFA will do the sales tax type audits that a company may have if they’re selling products within the state of California,
Neil
Do you look at FTB audits in the same light as what we just discussed with an IRS audit?
Jan
Yes. The same analysis that I used for the internal revenue service, we could go back and analogize to the FTB as well. They’re both income tax audits, they’re taxing authorities. And they’re generally looking at the, at the same things. So the thing that I would go back and admonish our listeners is that if you are being audited by the Internal Revenue Service, you can be sure that upon the completion of that audit, there could be a change to your FTB tax return or vice versa. So if you’re being audited by one of those two taxing authorities, you can be assured the other will piggyback on whatever findings the other agency finds.
Neil
How can we help with that?
Jan
By acknowledging that when you’re in negotiations with the IRS or the FTB, that there is going to potentially be another audit so that it’s not, it doesn’t come as a surprise. And that the taxing authorities understand that there is an impact to what it is that the completed audit will have on the individual or the business and how that’s going to impact them with a state or a federal taxing authority.
Neil
The EDD audits California employers on a regular basis, every three years. What is it that they’ve been looking for in recent audits?
Jan
The EDD is primarily concerned with two things: One is the classification or misclassification of employees, and the other is ensuring that SDI is fully funded. So when they go in and they do an audit for on a business, they’re looking for the types of individuals that are being paid, whether or not those individuals are being paid as employees or outside contractors, is there a misclassification? And if there is a misclassification, are there unpaid FUTA and disability taxes that need to be reimbursed to the state for the misclassification?
Neil
Many of our listeners may not realize that a recent Supreme court decision changed a basic California presumption. So that here in California, we now presume all workers are employees and that it’s up to the employer to prove otherwise,
Jan
Yes, there was a recent case that changed essentially the elements of how it is that you go back and classify an employee. I’m certain that the litigation is really not over relating to that particular case. I think there will be ongoing cases, but as of right now, the methodology that we utilize to determine whether or not an employee is an employee for EDD classification is whether or not the services provided by that individual are additive to the revenue stream of the entity. That’s a far cry from the other 21 criteria that we used to go back and apply that we could go back and we could change or utilize or define to suit an individual’s needs. And it gets fairly murky. So I’ll try and give you a quick example. If, I have a client that goes back and let’s say has a dance studio and they go back and they charge the parents to go back in and take dance classes within that studio. And they pay the dance instructors. Although the instructors are not fulltime, they may be, they may be once a week. They may be once a month under the old regime, under the old classification criteria, those dance instructors, would’ve been outside contractors under the new regime. They’re going to be deemed employees because what it is that they’re doing and the services that they’re providing, allow that studio to bring in income. If we turn that example on its head and what the individual that owns the studio does instead is rents the studio out to the dance instructor on an hourly basis. And the dance instructor picks up the fees from the students and then pays rent to the studio owner. Then that particular instructor will no longer be deemed an employee. So again, it comes down to a type of planning on how it is that you can categorize the types of employees or vendors or outside contractors. You have, again, based on a transactional plan.
Neil
So why should an employer care if they have misclassified employees and they have 1099 workers or independent contractors, and they’re found to be misclassified by the EDD? How big of a deal is it?
Jan
The misclassification audits are probably the most pronounced that, of the audits that we see in our office and the misclassification audits generally lead to increased taxes, penalties, and fees. And when you go back for a three year period, it’s not necessarily a small number. In addition, after that misclassification audit and whatever the results are and whatever it is that’s agreed to, then the IRS will come back in and follow suit so that if you haven’t paid federal income tax and you haven’t paid FUTA or Social Security or Medicare, then suddenly now you have a series of taxes and penalties and interest simply because these outside contractors are now being classified as employees.
Neil
So right now, if you have 1099 workers or independent contractors as part of your strategy as a business here in California, you really need to get in touch with us to learn about your exposure and potential remedies.
Jan
Absolutely. It becomes critical to the health of the organization. We’ve seen audits that have come through for organizations that have several outside contractors and the reclassification of those outside contractors to employees can be incredibly expensive.
Neil
Enough to end the business?
Jan
Potentially. Yes.
Neil
What services do we provide to businesses that are either dealing with the CDTFA or who may be facing an audit?
Jan
I think sales tax is another one of those areas where planning can often go a long way in terms of mitigating potential tax penalties and interest sales tax is a fairly robust segment in terms of taxation in the state of California. And it’s important that if your organization, your company is subjected to sales tax, or you as an individual even are selling, let’s say on the internet, that sales tax is a really critical component of the elements of doing business and knowing one how to report it. And two, how to obtain reseller certificates if you’re not selling into the final user and three, how it is to file sales tax reports in a timely manner. So the sales tax audits are generally comprised of individuals that one didn’t withhold sales tax, but two may not have had to have withheld sales tax. So it’s important when you get a notification that you may or may not be subjected to that sales tax, and it’s critical to know whether or not your business is subjected to California sales tax.
Neil
So Allen Barron can help any individual or business who’s dealing with a domestic or international tax issue or an audit with the IRS or any California agency.
Jan
Yes, that’s right. In terms of controversy, we address controversies and we assist with controversies from all taxing authorities.
Neil
And finally, under controversies, we also help people who are facing liens, levies, or garnishment, but with a bit of a caveat…
Jan
The caveat would be it’s far better not to have a Lean, levy or garnishment. And so when we go back and we started talking initially about notices for those individuals that have a tendency to put their head in the sand, it’s better not to do that because the IRS and the FTB will not garnish or lien or levy anything without sufficient notice. So if you suddenly pop up and you’re now being garnished, or you have something that’s being levied, then the issue is somewhere along the line, you have not been able to receive the notices that by law are required to go out. That could be because of a change of address and your failure to change the address with the appropriate taxing authorities, but in terms of going back and dealing with them, yes, we have the, we have the ability to deal with individuals or companies that are being leaned or levied and or garnished.
Neil
We’ve been talking about the tax services of Allen Barron, but you’re a tax attorney. So one of the little known weapons you have, or greatest advantages you provide to our clients is the attorney client privilege. Can you share with us what the attorney client privilege is and how that really affects the relationships our clients have with Allen Barron, as well as with your firm, Janathan L. Allen APC,
Jan
The attorney client privilege is a privilege that exists between an attorney and their client. And that means that an attorney is not allowed to go back and disclose all of the information that they know about an individual client. As a matter of fact, uh, generally by virtue of regulations relating to the California bar, you are unable to do that. So it’s important to note that the information that you give to an attorney is not necessarily discoverable. That’s not to say that not everything is undiscoverable, but the fact is when you’re dealing with an attorney, as opposed to say a CPA or an enrolled agent there’s information given to an attorney that will not be given or cannot be given to any other outside agencies.
Neil
And if the IRS wants to ask your tax preparer or your CPA, or your financial advisor for information about you, they must comply?
Jan
By law. They are required to comply.
Neil
So you can learn more about the attorney, client privilege and the tax services of a barren by visiting Allen barren.com. Thank you for listening today. Jan. Thanks so much.
Jan
Thanks Neil.
Learn more about our integrated legal tax accounting and business solutions and visit Allen barren.com or call (866)631-3470 to schedule a free consultation.
Contact Us To Learn More About Allen Barron's Services
For more information or to discuss your tax, legal and accounting needs contact Allen Barron or call 866-631-3470 for a free and confidential initial consultation. Learn about the importance of integrated business strategy and coordination across legal, tax and accounting systems.
Offices of Allen Barron, Inc.
Main Office
16745 West Bernardo Drive, Suite 260
San Diego, CA 92127
Phone: 858-304-0947
Phone: 866-631-3470
Fax: 858-376-1410
San Diego Office
5720 Oberlin Drive
San Diego, CA 92121
Phone: 866-631-3470
Fax: 760-741-1410
Las Vegas Office
333 South Sixth Street, Suite 230
Las Vegas, NV 89101
Phone: 702-749-4430
Fax: 702-933-1748
San Diego Office
750 B Street, Suite 2610
San Diego, CA 92101
Phone: 619-702-8356
Fax: 619-923-8356
San Francisco Office
300 Montgomery Street, Suite 410
San Francisco, CA 94101
Phone: 415-481-0475
Fax: 415-762-1539
Phoenix Office
40 North Central Avenue
Phoenix, AZ 85004
Phone: 602-903-7018
Fax: 602-357-1655