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California Tax Attorney + CPA for Landscape Companies

Dual Licensed California Tax Attorney & CPA for Landscape Companies

On March 7, 2019, the Department of Justice posted the following press release on its website:

Florida Landscaper Indicted for Tax Fraud

A residential and commercial landscaper was charged with five counts of filing false corporate income tax returns and five counts of filing false individual income tax returns with the Internal Revenue Service (IRS) that fraudulently understated the total income earned. It was alleged that business income was deposited into corporate bank accounts; however, the landscaper allegedly used money from the business bank accounts to pay his personal expenses, including payments on his personal mortgage and loans, purchases of firearms, home renovations, and jewelry. He also allegedly withdrew more than $2.9 million in cash from the corporation’s bank accounts.

The landscaper faced a maximum sentence of three years in prison for each count of filing a false tax return with the IRS. He also faces substantial monetary penalties and restitution.

Please read on to learn how you can save yourself from becoming subject matter of a similar headline.

Landscaping companies shape our environments, from our lawns and gardens to our downtowns and office parks. However, success in the landscaping industry depends on more than skill and talent. Landscapers also need to address complex tax and financial questions, such as how and when to charge California sales tax, the effects of depreciation on business equipment, whether to purchase or rent industrial gardening tools, and which of your business expenses are tax deductible.

See our Audit Representation Q and A Library

If you own and operate a landscaping business in California, invest in landscaping startups, intend to sell or dissolve your landscaping business, or have plans to start your own landscaping company, you should consult an experienced California tax attorney to ensure that you receive guidance which aligns with your professional goals. However, if you have already been selected for a tax audit especially where you may be at risk for a fraud-related tax crime, a tax lawyer from the Tax Law Office of David W. Klasing can mitigate the resulting fallout, protecting your constitutional rights and counseling you on important business and legal decisions.

See our Entity Selection Q and A Library

See our Business Purchases and Sales Q and A Library

See our Business Succession Q and A Library

Tax Audit Attorneys for Landscaping Companies + Gardeners in California

Failure to comply with state or federal tax regulations can expose your business to criminal tax penalties, single you out for a civil tax audit, and invite an array of fines and sanctions. Careful tax planning and thorough recordkeeping are the best lines of defense against a tax audit – or an criminal tax indictment. If you need assistance preparing for an IRS audit, fighting a tax evasion charge, filing California or federal tax returns, making a voluntary disclosure, appealing the results of a tax audit, or settling another type of tax dispute, our office is always available to provide efficient 24-hour support.

The IRS and California taxing authorities, such as FTB, EDD, or CDTFA, have increased the use of fraud technical advisors, who are posted throughout California and the United States and are known to be attached to examination and collection groups. The purpose of fraud technical advisors is to assist revenue agents and revenue officers with criminal tax case development. We are increasingly seeing a lot of anecdotal evidence that reflects an increase in the imposition of civil fraud penalties and referral of cases to the Criminal Investigation Division. If an IRS auditor discovers badges of fraud in your audit, the procedure is for the examiner to consult with his or her group manager and then contact a Fraud Referral Program advisor as soon as possible for technical guidance and advice. The sole job of the Fraud Referral advisor is to work with the IRS auditor to develop the audit for hand-off to the criminal investigation division of the IRS, which has a 90% conviction rate once it completes a criminal tax investigation.

We know that the IRS conducts potential examinations and collection actions while gathering information about landscaping companies, in part, to bring potential criminal tax cases. Recent events have shown that the Tax Division of the Justice Department is now more prone to conduct civil examinations of taxpayers while simultaneously pursuing criminal investigations. The examination manual nominally requires agents to refer matters to Criminal Investigation once there is a “firm indication of fraud,” but by developing the fraud case on the civil side of the house with the assistance of a fraud technical advisor, the IRS now essentially ignores the “firm indication of fraud” standard. However, having an in-depth knowledge of how the IRS, FTB, CDFTA, and EDD operate allows us to know exactly what to do to get you out of this difficult situation that you find yourself in.

Causes of Audits

The IRS examines tax returns to determine whether taxable income has been accurately reported on the tax return. The IRS has the authority to examine the books and records of a taxpayer, and to interview the taxpayer directly. A number of factors may trigger an IRS examination including, but not limited to:

  • Excessive deductions in relation to income;
  • IRS receipt of conflicting information from a third party (e.g., a 1099 or K-1 which does not match the amounts reported on a taxpayer’s return);
  • Whistleblower complaints;
  • Tips from disgruntled employees or ex-spouses;
  • Taxpayer participation in a particular transaction or type of transaction that the IRS has flagged for review (e.g., a tax shelter);
  • Information obtained by the IRS from a John Doe summons;
  • The expansion of a previously limited audit.

Furthermore, the IRS has recently articulated a renewed emphasis on examining the compliance of high-wealth taxpayers. In addition, the IRS applies internally developed formulas, generally referred to as the Discriminant Function System (DIF), to “score” returns for purposes of determining whether they should be audited. However, ultimately, the initial trigger of the audit is inconsequential in most cases. The IRS may examine a taxpayer merely on suspicion that the law is being violated, or even just because it wants assurance that it is not.

While some audits are conducted solely through correspondence with the IRS, audits that the IRS anticipates will involve relatively complex issues will be handled in the field by revenue agents. Revenue agents do not collect tax; rather, their primary job is to determine whether a taxpayer has accurately reported his or her taxable income, ferreting out issues of potential fraud in the process.

Most often, a taxpayer will first learn of an IRS exam through a notice received in the mail. The notice will often identify the tax years being audited and the issues underlying the audit. However, the scope of the audit is not limited to the issues identified in the initial notice and may expand as the revenue agent obtains more information. Typically, that notice will also include an Information Document Request (IDR) requesting the taxpayer to produce specified documents by a date certain.

How Will I Be Notified if I Am Chosen for a Tax Audit?

If you are selected for a tax audit, you will receive a written notice, such as Form CP06, detailing the reasons you or your business was chosen. The form referenced in this example, Form CP06, specifically pertains to premium tax credits. If another matter has triggered your audit, such as unfiled tax returns or underreported business income, you will receive a different notice appropriate to the situation. You should contact an IRS tax attorney immediately upon receiving such notice, as time is of the essence when preparing for an examination.

Misclassification of Workers Can Lead to Devastating Consequences

The classification of a particular worker as an employee or an independent contractor has significant tax consequences for you as an employer in the landscaping business. Essentially, the determination will define your obligations for the payment and/or withholding of various federal taxes, including federal income tax, social security taxes arising under the Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. As an employer, you have various legal responsibilities with respect to these taxes for your employees that you would not have for independent contractors. As a result, we know that the cost and legal implications of using independent contractors can be attractive to you. That said, however, the legal and financial costs of misclassifying an employee as an independent contractor can be staggering. Therefore, classification determinations need to be made carefully. Let us underscore this point by use of an example.

Suppose you operate a landscaping service. You hire and pay workers on a job-by-job basis, classifying them as independent contractors. Because you considered these workers independent contractors, you did not withhold or pay any federal employment taxes on their salaries. Your business expands and diversifies, and soon you start paying your workers weekly and not by the jobs they were doing. You continue to treat them as independent contractors for tax purposes and do not pay federal or state employment taxes or withhold as required on their compensation. You might be at the risk of having your federal or state employment tax returns audited and getting a determination that your workers were employees rather than independent contractors. The IRS or EDD can then declare a hefty payroll tax deficiency, adding on draconian penalties and interest against you.

Also imagine a landscaping service operating as a cash basis sole proprietorship. They want to treat their workers as independent contractors but are running into difficulties. The workers are not cooperating by attaining the necessary business licenses. To make it appear that workers were independent contractors, they have the workers submit invoices for payment. As the landscaping service contracted for larger jobs, the taxpayers devised a scheme to make it appear that the workers were the employee of a third party. Suddenly, the IRS issues a letter to the landscaping service indicating that it is conducting an “employment tax compliance check.” The letter indicates that the IRS would be looking at employment tax returns and income tax returns. These are the situations where you need the help of experts.

From our experience, we know that the IRS and EDD agents will gather information on your categories of workers, the treatment of these workers, and your basis for the determination of the independent contractor status. They will conduct an in-person interview and look at your employment tax records. This is where you need us in your corner to guide you through these tricky steps. At the Tax Law Office of David W. Klasing, we are dual licensed California Tax Attorneys & CPAs with a long record of success representing landscaping companies in civil and criminal tax audits, Appeals & Litigation before the IRS, FTB, and Office of Tax Appeals (OTA).

Deductions for Landscape Contractors [https://www.cdtfa.ca.gov/formspubs/pub9.pdf]

The installation of plants, trees, and lawns is considered an improvement to realty. Landscape contractors who enter into contracts for landscaping in which they furnish and install plants, trees, and lawns are construction contractors. Sod and flowers are generally considered materials and the contractor is the consumer of these items.

Plants, trees, and shrubs are generally considered fixtures and the contractor is considered the retailer of these items when they are installed in connection with their services. Tax generally applies to the sales price of plants, trees, and shrubs. In the case of lump sum contracts, the selling price of the plants, trees, and shrubs is generally regarded as the cost price to the landscape contractor.

If nurseries install plants, trees, and shrubs which have been grown or produced by them under a lump sum contract, the cost price is considered to be the price at which similar plants or trees in similar quantities ready for installation are sold by the nursery to other contractors.

If the landscaper makes a taxable sale of fixtures, they may be entitled to a deduction for “tax-paid purchases resold prior to use” on their sales and use tax return if they:

  • Purchase plants and trees (fixtures) from nurseries to install in a construction contract;
  • Pay an amount as sales tax reimbursement on those purchases; and
  • Make no use of them prior to installation (other than for retention, demonstration, or display while holding them for resale)

See our Non-Filer Q and A Library

Other than the IRS, which strictly conducts federal tax audits, you may be audited by one or more of the following California agencies:

  • California Department of Tax and Fee Administration (CDTFA)
  • Employment Development Department (EDD)
  • Franchise Tax Board (FTB)

Landscaping companies are known to employ illegal aliens, misclassify employees as independent contractors, and paying workers in cash without issuing 1099 or reporting on W2s.   These issues can easily result in a criminal tax prosecution and are best handled delicately by competent tax counsel.

Misclassification of Workers Can Lead to Devastating Consequences

The classification of a particular worker as an employee or an independent contractor has significant tax consequences for you as an employer in the landscaping business. Essentially, the determination will define your obligations for the payment and/or withholding of various federal taxes, including federal income tax, social security taxes arising under the Federal Insurance Contributions Act (FICA), and Federal Unemployment Tax Act (FUTA) taxes. As an employer, you have various legal responsibilities with respect to these taxes for your employees that you would not have for independent contractors. As a result, we know that the cost and legal implications of using independent contractors can be attractive to you. That said, however, the legal and financial costs of misclassifying an employee as an independent contractor can be staggering. Therefore, classification determinations need to be made carefully. Let us underscore this point by use of an example.

Suppose you operate a landscaping service. You hire and pay workers on a job-by-job basis, classifying them as independent contractors. Because you considered these workers independent contractors, you did not withhold or pay any federal employment taxes on their salaries. Your business expands and diversifies, and soon you start paying your workers weekly and not by the jobs they were doing. You continue to treat them as independent contractors for tax purposes and do not pay federal or state employment taxes or withhold as required on their compensation. You might be at the risk of having your federal or state employment tax returns audited and getting a determination that your workers were employees rather than independent contractors. The IRS or EDD can then declare a hefty payroll tax deficiency, adding on draconian penalties and interest against you.

Also imagine a landscaping service operating as a cash basis sole proprietorship. They want to treat their workers as independent contractors but are running into difficulties. The workers are not cooperating by attaining the necessary business licenses. To make it appear that workers were independent contractors, they have the workers submit invoices for payment. As the landscaping service contracted for larger jobs, the taxpayers devised a scheme to make it appear that the workers were the employee of a third party. Suddenly, the IRS issues a letter to the landscaping service indicating that it is conducting an “employment tax compliance check.” The letter indicates that the IRS would be looking at employment tax returns and income tax returns. These are the situations where you need the help of experts.

From our experience, we know that the IRS and EDD agents will gather information on your categories of workers, the treatment of these workers, and your basis for the determination of the independent contractor status. They will conduct an in-person interview and look at your employment tax records. This is where you need us in your corner to guide you through these tricky steps. At the Tax Law Office of David W. Klasing, we are dual licensed California Tax Attorneys & CPAs with a long record of success representing landscaping companies in civil and criminal tax audits, Appeals & Litigation before the IRS, FTB, and Office of Tax Appeals (OTA).

Deductions for Landscape Contractors [https://www.cdtfa.ca.gov/formspubs/pub9.pdf]

The installation of plants, trees, and lawns is considered an improvement to realty. Landscape contractors who enter into contracts for landscaping in which they furnish and install plants, trees, and lawns are construction contractors. Sod and flowers are generally considered materials and the contractor is the consumer of these items.

Plants, trees, and shrubs are generally considered fixtures and the contractor is considered the retailer of these items when they are installed in connection with their services. Tax generally applies to the sales price of plants, trees, and shrubs. In the case of lump sum contracts, the selling price of the plants, trees, and shrubs is generally regarded as the cost price to the landscape contractor.

If nurseries install plants, trees, and shrubs which have been grown or produced by them under a lump sum contract, the cost price is considered to be the price at which similar plants or trees in similar quantities ready for installation are sold by the nursery to other contractors.

If the landscaper makes a taxable sale of fixtures, they may be entitled to a deduction for “tax-paid purchases resold prior to use” on their sales and use tax return if they:

  • Purchase plants and trees (fixtures) from nurseries to install in a construction contract;
  • Pay an amount as sales tax reimbursement on those purchases; and
  • Make no use of them prior to installation (other than for retention, demonstration, or display while holding them for resale)

See our Sales Tax Q and A library

See our Employment Tax Law Q and A Library

Can an IRS, CDTFA, FTB, or EDD Audit Lead to Tax Evasion Charges?

In short, yes. In fact, not only can a civil tax audit lead to a criminal tax investigation; there are also situations where the reverse occurs, and the taxpayer is placed under audit while being criminally investigated over tax issues. This is known as a “reverse eggshell audit,” whereas a standard eggshell audit involves any substantial misstatement of income, expense or credits on an individual’s or company’s tax returns. If your audit is abruptly terminated, if you lose contact with your auditor, or if third parties (such as your bank) start to receive subpoenas or summonses, be on high alert, as these are classic warning signs that a civil tax audit is transitioning to a criminal IRS investigation.

You should be aware that eggshell audits can lead to criminal tax charges. An “eggshell” audit arises when a taxpayer who has filed one or more false returns in previous years is selected for audit. Although the exam is a civil one, it has the potential for a criminal tax referral. There is a chance that the auditor may never notice the criminal tax problem in the return, and thus you are not presented with the dilemma of responding to that issue. However, you should always prepare yourself for the possibility that the auditor may spot a sensitive reporting issue. In such a scenario, using our decades of experience in the field, we do whatever we can to convince the auditor that the case is best resolved civilly and that your conduct does not warrant a criminal investigation or prosecution. The auditor, however, may make a criminal tax referral. In this situation, we ensure that you do not do anything during the investigation to worsen your position.

What if I Know I Cheated on My Taxes and the IRS or California CDTFA FTB or EDD Wants to Speak with Me?

You should know that controlling and monitoring the documents and evidence is of paramount importance and can mean the difference between containing the audit or facing a criminal tax referral. Our primary goal always is to prevent a criminal tax referral. Our secondary goal is to reduce your potential tax adjustments, penalties, and interest.

You should never speak with the federal or state auditor, and if contacted by the auditor, you should tell them that you are happy to cooperate but have retained representation and do not wish to speak with them without your representative present. Under no circumstances should you speak to persons identifying themselves as special agents carrying guns and badges and handcuffs. Many educated people believe they can talk their way out of a criminal tax case and the investigators will make you feel like there is a simple misunderstanding that you could easily clear up. However, please understand that it is highly unlikely that you would be successfully able to explain your actions to special agents and auditors who may be bent on making a criminal tax fraud referral. Everything you say can be used against you, especially if you are not completely truthful, which can bring additional federal charges as it is a felony to lie to a federal agent. You should understand that special agents would not draw an adverse inference from your silence. They expect silence, especially if you are represented by an experienced, specially trained, and reputable Criminal Tax Defence Attorney.  Their primary goal in catching you off guard with an unannounced in person interview is to get you to lie as it makes convicting you that much easier when they get you in front of a grand jury investigation or a jury of your peers.

If you know you cheated on your tax returns, the biggest mistake you can make is to consult the original preparer regarding the audit or criminal tax investigation as they will be government witness number one against you and have a conflict of interest with you.  They will often bury you when trying to resurrect their own reputation.

Moreover, any third party, including a spouse, can unwittingly become a witness for the government. The third parties who have been contacted by the Internal Revenue Service may get in touch with you to tell you about that contact. You should advise these third parties to contact your dual licensed criminal tax defence attorney and CPA to discuss the government’s contact with you.

See our Criminal Tax Law Q and A Library

Audit Appeals Representation for Landscaping Companies in California

You may contest, or “appeal,” the results of an IRS tax audit, FTB tax audit, EDD tax audit, or CDTFA tax audit. However, you must adhere to certain rules in order for your appeal to succeed. For example, you must file your appeal by the appeal-by date provided on your notices containing IRS, FTB, or CDTFA audit determinations.

Your appeal must be based in fact and supported by concrete evidence to the greatest extent possible, such as previous court decisions, IRS manuals, or statutes within the Internal Revenue Code (IRC) to prove the law and facts are on your side. You may not appeal an audit decision on constitutional, religious, ethical, or similar grounds. It is vital to hire a tax attorney for the IRS appeals process, since an attorney is in the strongest position to represent your interests effectively before an appeals officer. If an appeal fails, the next and final step is generally tax litigation.

See our IRS Appeals Q and A Library

See our Tax Litigation Q and A Library

California Tax Lawyer + Accountant for Landscaping Businesses

Call the Tax Law Office of David W. Klasing at (800) 681-1295 to speak with an experienced attorney-CPA today, or contact us online to schedule a reduced-rate tax consultation. With offices throughout Northern and Southern California, we are conveniently located to serve gardeners, landscapers, suppliers, and vendors statewide.

Note: If you have concerns about the privacy of our initial or subsequent communication and are unable to easily travel to our Irvine / Orange County Main Office, consider scheduling a GoToMeeting to safely and securely establish an initial or maintain an existing attorney client relationship.  With end-to-end encryption, strong passwords and top-rated reliability, no one is messing with your meeting. To schedule a reduced rate initial consultation via GoToMeeting follow this link.   Call our office and request a GoToMeeting if you are an existing client. We are generally happy to travel to any of our appointment only satellite offices for a subsequent meeting in appropriate circumstances once a relationship is established via a signed engagement letter and the payment of an initial retainer or where enough retainer is available where a current client to cover the reasonable travel time and time required for the meeting.

Will it cost me more to hire the Tax Law Offices of David W. Klasing, who’s main office and the vast majority of the firm’s staff is located in Irvine California, but an appointment only Satellite office is close to my location, as opposed to a local company?  Absolutely not!  See our policies that address this issue here.

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