Awards & Recognition
At the Tax Law Office of David W. Klasing, we are Santa Barbara tax lawyers with decades of experience providing tax audit representation, California and IRS appeals representation, criminal tax defense representation, federal tax litigation representation, business tax services, and international tax services to entities and individuals with passive income streams. If you are a California real estate professional or business owner with passive income, our award-winning tax professionals can advise, counsel, and guide you regarding any civil or criminal tax matter. Contact us online to schedule a reduced rate consultation, or call our Santa Barbara office at (805) 200-4053 today.
What is Passive Income and What Are Some Examples?
Some taxpayers, such as real estate professionals, earn “passive” income, which the Internal Revenue Service (IRS) treats differently from “active” or ordinary income. Passive income is derived through inactive participation in income-generating activities or investments. For example, selling e-books, selling ad space, or renting out property are some common methods of earning passive income.
Can Reporting Passive Income, Activity, or Losses Trigger a Tax Audit?
Simply reporting passive income to the IRS will not necessarily trigger a tax audit. On the other hand, you are almost sure to be audited if you fail to report passive income, making it imperative to file timely and accurate tax returns. Hiring a reputable, qualified tax preparer gives you peace of mind that your returns are completed and filed correctly, that no money-saving tax breaks are overlooked, and that all possible steps to eliminate or mitigate tax penalties have been taken.
Failing to report some or all of your passive income is not the only action that will increase your odds of being examined. Your likelihood of being chosen for a tax audit will also be increased by factors such as:
- Failing to file state and/or federal income tax returns, employment tax returns, sales tax returns, or other tax or information forms, including the FBAR (FinCEN Form 114) and/or Form 8938 (Statement of Specified Foreign Financial Assets)
- Failing to pay taxes, interest, and/or penalties owed the IRS, Franchise Tax Board (FTB), or other taxing authorities
- Filing tax returns that contain serious errors, especially if the errors appear to be deliberate (“willful”), such as falsely claiming dependents or falsely padding deductions
- Owning your own business
- Reporting an unusually high or low amount of active ordinary income
- Repeatedly filing late tax returns
Note: As long as a taxpayer that has willfully committed tax crimes self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax prosecution, the taxpayer can be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously receive a break on the civil penalties that would otherwise apply. It is imperative that you hire an experienced and reputable tax defense attorney to take you through the voluntary disclosure process. As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, Kovel CPAs and EAs, our firm provides a one stop shop to efficiently achieve the optimal and predictable results. See our Testimonials to see what our clients have to say about us!See our Non-Filer Q and A Library See our 2011 OVDI Q and A Library See our FBAR Compliance and Disclosure Q and A Library See our Foreign Audit Q and A Library
What if I Disagree with the Results of a State or Federal Tax Audit?
The federal and California tax authorities often get either the law or facts wrong in concluding an audit. You have the right to disagree with an auditor’s findings, provided you adhere to certain time limits and rules. If you disagree with the results of a tax audit – for instance, if you disagree with the IRS or FTB as to the amount of additional tax allegedly owed – you may start an IRS tax appeal with the IRS Independent Office of Appeals (or, if the dispute involves a California tax, with the Office of Tax Appeals). To appeal successfully, you must present your disagreement in a clear, cohesive manner, providing ample support in the form of court rulings, legal statutes, financial records, and/or IRS regulations that align with your position.See our Tax Litigation Q and A Library See our IRS Appeals Q and A Library
Santa Barbara Tax Lawyer for Passive Income Individuals + Real Estate Professionals
If you rent out an apartment or home, or if you have made other investments in passive activities or businesses, it is in your best interests to discuss tax compliance with an experienced tax professional. Legal counsel is especially critical if you have been selected for a passive income audit, if you wish to appeal the results of a tax audit, or if you have been placed under federal investigation and charged with tax crimes. Communications with your tax attorney are, with some exceptions, protected by the attorney-client privilege, which does not extend to your accountant or return preparer.
Whether you are concerned about an IRS tax audit, need help reporting passive activity losses incurred by your real estate business, or you simply have questions about how passive income is taxed in California, trust the Tax Law Office of David W. Klasing to provide clear answers and skillful guidance. To arrange a reduced-rate consultation, contact the Tax Law Office of David W. Klasing online, or call (805) 200-4053.
Please note meetings at our Santa Barbara tax office are by appointment only.
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:See our Audit Representation Q and A Library
Passive Income Tax FAQs
- How are losses and liabilities in a divorce handled under IRC 1041?
- How are passive activity expenses and losses characterized?
- How do taxes on non-business income earned by nonresidents work?
- Is there a special allowance for rental real estate activities?
- What are the basic tax rules for passive foreign investment companies?
- What are the conditions of a passive activity deduction?
- What are the passive loss limitation rules?
- What is passive activity gross income?
- What is the real estate professionals exception?
- When can real estate professionals deduct real estate rental losses?
