Financial Analysis
IRS Resolutions, Loan Modifications, and Bankruptcy
By Steven A. Leahy

My office helps businesses and families resolve their financial problems. We focus on IRS problems, but we also help with foreclosure defense and bankruptcy. Resolving all of these problems has a similar approach.

We begin by gathering information about each new client. Everyone is unique, and has a unique financial situation. Our investigation employs a three step process. First, we inventory all the client’s assets. Next we register all their income. Finally, we catalog all their expenses.

First, we inventory all our client’s assets – Do they own a home, a car, stocks, bonds, or other financial instruments? Do they own a summer cottage, a boat, motorcycle or other large assets? We include bank and financial institution accounts, IRAs, ERISA, pensions, annuities, insurance policies and profit sharing plans. We list home furnishings, utility and landlord deposits, clothing, jewelry, computers, and audio/visual equipment. We catalog collections (stamps, coins, etc.), antiques, intellectual property (patents, copyrights, etc.), business equipment, and interests in partnerships, corporations or other business entities.

The second step is to register all their income, from whatever source. Common income sources include: wages, business profits, interest & rental income, annuities, retirements, pensions, etc.

Finally, we catalog their expenses. This is the critical step. Often the expenses used by creditor institutions are not real expenses, because IRS standards are substituted for actual expenses. This is true for IRS resolutions, but it may also be true for determining disposable income in Chapter 13 bankruptcy, and loan modifications. For example, the IRS has standards for housing and utilities, apparel and services (including shoes and clothing, laundry and dry cleaning, and shoe repair), food, housing supplies & personal care products. There are also standards for transportation expenses, including ownership, maintenance and public transportation expenses.

In addition to the IRS standard expenses, our clients often have additional expenses, not accounted for in the IRS list. These expenses are often disallowed by the IRS, another element that will add to an artificially high disposable income number.

If our client’s actual expenses are higher than the IRS standards and/or they have unclassified expenses, as is often the case, the “game is afoot.” Determining what you can actually pay, not what these false numbers dictate, takes time and effort. Each and every expense must be documented, reviewed and verified. Convincing the court, bank or IRS that they should use our numbers, rather than theirs is more an art than a science, but will make the difference between success and failure.

Subtracting expenses from income reveals your disposable income – the higher your expenses, the lower your disposable income, and vise-versa. Disposable income is the determinative variable. For example, an IRS installment agreement, offer-in-compromise or currently not collectible status, or your monthly trustee payment under chapter 13, are each decided based on disposable income.

Remember, defining disposable income is the critical factor. NEVER speak with the IRS or any creditor without conducting a full investigation. A disposable income number that is too high will ensure failure and more problems in the future. It’s that important. So, if you are experiencing financial problems, you should work with a local law firm that will fight to have your actual expenses considered. Better, you should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. I want to help! Call NOW to set up your FREE Consultation.

Can My Hobby Be A Business?

By Steven A. Leahy

 

Do you use deductions for a side business to reduce your tax liability?  The IRS makes a distinction between business activity and activity that is a hobby, therefore not a business activity.    If the activity qualifies as a business, the taxpayer can deduct ordinary and necessary expenses used to conduct that business. However, if the activity is determined to be a hobby, losses from the activity cannot be used to offset other income.

Most side businesses are undertaken because the taxpayer enjoys the activity – being allowed to deduct the expenses for that activity is just a bonus.  The best way to qualify your hobby as a business is to earn a profit.  Generally, if an activity is undertaken with a reasonable expectation of earning a profit, it qualifies as a business.  The rule of thumb is – if the activity makes a profit during at least three of the last five years, including the current year, the activity is business activity.

This rule is not hard and fast.  For example, a documentary filmmaker – who lost money six years in a row, was permitted to deduct hundreds of thousands of dollars in film making expenses against her income as an attorney.  Tax Judge Kroupa recognized that some industries have longer start up periods than others, and the rule of thumb doesn’t account for those industries.

If you haven’t made a profit, here are some things you can do to demonstrate your intentions that this activity is for profit, rather than just for fun:

First, offer evidence that you expect to make a profit in the future.  As in the documentary filmmaker case, losses as a result of a slow start-up may be deductible if you can show that a profit in the future is possible.

Next, expend time and effort into the activity.  The more time and effort you demonstrate, the more likely the IRS will agree that the activity is a business.  For example, you should document the time you spend on the activity, open a separate bank account, keep accurate records, advertise the business, and comply with local, state and federal business requirements (i.e. permits, licensees, etc.).  All of these efforts demonstrate your intentions to make the activity profitable.

Finally, if the activity is not profitable, work on making it profitable. You can do this by changing the method of operations to attempt to make the activity profitable, seeking help from an expert to learn how to make the activity profitable, demonstrate an expertise in the activity – experts generally command a higher price.

There is a Tax Court case involving a track coach.  The coach lost money for eight years, and the IRS denied his deductions under section 183 of the tax code “activities not entered into for profit.” The Tax Court looked at his attempts to make his activity profitable, including those mentioned in this article, and decided his activities were intended to make a profit.

The best time to present these arguments is at the audit.  However, if a deficiency is assessed, the fight need not be over. So, if you are under audit, or have already had a deficiency assessed based on disallowed expenses for activities not entered into for profit, you should work with a local law firm that will fight the IRS findings on your behalf. Better, you should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649.  I want to help! Call NOW to set up your FREE Consultation.

Do I Have to File My Tax Return?

By Steven A. Leahy

Many of my clients are non-filers. Meaning, they haven’t filed a tax return for some years. Non-filers are not the same as tax protesters. Tax protesters do not file tax returns under the mistaken belief that there is not a legal obligation to file a tax return. Many do not understand that failure to file a tax return is a crime, punishable by up to one year in prison for each unfiled return. Other, more serious felony counts may also be charged – tax evasion and tax fraud.

Non-filers are not often prosecuted for failure to file. Tax protesters are routinely prosecuted for failure to file, because of the willful nature of their non-filing. There are at least eight different arguments tax protesters cite as reasons filing a tax return is not required.

1. There is no law requiring you to pay federal income taxes;
2. The Internal Revenue Code is not law;
3. Income tax is voluntary;
4. Wages are not income;
5. First Amendment;
6. Fifth Amendment;
7. Thirteenth Amendment, and;
8. The Sixteenth Amendment.

These eight arguments can be divided into two basic categories – Interpretative arguments and Constitutional arguments. Interpretative agreements relied on by tax protesters interpret the IRS Code, court opinions and the Constitution very narrowly. For example, tax protestors contend that there is nothing in the Code that makes ordinary citizens “liable” for income taxes. It is true, the word “liable” is not used in the IRS Code to describe citizens’ obligations. But the IRS Code does use many other words that mean the same thing – “obligation,” “impose,” “shall pay,” etc.

Another Interpretive argument is that the IRS Code refers to “taxpayers” having an obligation to file tax returns and pay taxes. Tax protesters argue, if a person does not file tax returns or pay taxes, they are not a “taxpayer” and therefore not required to pay taxes. There are many other examples of these interpretative arguments; all have been dismissed as “frivolous” by Courts across the country.

The second category points to Constitutional problems as reasons why tax returns are not mandatory for US Citizens. First Amendment arguments citing religious objections, Fifth Amendment arguments complaining of self-incrimination, Thirteenth Amendment objections to taxes making slaves of citizens, Sixteenth Amendment validity arguments, all have been described as “frivolous” by courts. The Sixteenth Amendment argument is the most common argument. Tax protestors point to variations of the amendment approved by different states, punctuation differences, spelling differences, formatting differences, etc. The time to argue ratification has long since past. ALL Courts recognize the validity of the Sixteenth Amendment.

One very famous case of a tax protester refusing to file tax returns and pay taxes involved Wesley Snipes, a movie actor. Mr. Snipes was recently released from a three year misdemeanor prison term, after being acquitted of felony conspiracy and tax fraud charges and three additional counts of failure to file. He bought into many of the tax protester arguments listed here, and had a team of lawyers working to convince the courts of his position. While he avoided the more serious felony charges, the Court sentenced him to the maximum term available under the misdemeanor statute.

Some of these arguments are interesting. But understand, once charged, a judge will not entertain these arguments in any serious way – and you very well may end up in prison like Wesley Snipes.

So, if you have unfiled returns, you should work with a local law firm that will work to get your late returns filed and avoid jail. You should give me a call – Opem Tax Resolutions & The Law Office of Steven A. Leahy, PC (312) 664-6649. Call NOW to set up your FREE Consultation.