Landscaping plays an integral part in shaping our environments, from our lawns and gardens to our downtowns and offices. You might consider the taxation issues involved in the landscaping industry to be of not much significance, but nothing could be further from the truth. Success in the landscaping business requires excellent tax management, and landscaping companies must keep in mind the need to properly address their complex tax compliance and record keeping requirements.
Imagine that one day you go to open your mailbox and pick up an envelope addressed to you with a return address from The U.S. Treasury – Internal Revenue Service stamped Official Business. You open the envelope and read the dreaded words: “Dear Taxpayer.” We understand the dread and outright terror you might feel at that moment if you failed to file tax returns for one or more years or took a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation. That is where we come in!
We advise you to seek legal guidance from a dually California licensed Tax Attorney and CPA immediately if you or your business entity (S Corp, C Corp, LLC, Partnership, etc.) have received an audit notice from the IRS or a California taxing authority, such as Franchise Tax Board (FTB), the California Department of Tax and Fee Administration (CDTFA) and the Employment Development Department (EDD) concerning a tax audit. Depending on what the federal or California auditor finds, an examination of your business and personal tax filings could lead to devastating outcomes, including an unexpected tax assessment, costly accumulated interest, and/or substantial civil penalties—none of which even begins to approach the danger involved in an IRS or California criminal tax investigation. If the government believes there is strong enough evidence to prosecute you for tax evasion or related offenses successfully, you will be at risk of jail time, in addition to much higher financial fines and criminal restitution.
The IRS and California taxing authorities, such as FTB, EDD, or CDTFA, have increased the use of fraud technical advisors, who are posted throughout the United States and attached to examination and collection groups. The purpose of fraud technical advisors is to assist revenue agents and revenue officers with 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.
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).
Informants. Tipsters and other third parties, such as soon to be ex-wives / husbands or disgruntled employees / business partners, provide a wealth of information to the Criminal Investigation Division. Many of these tipsters are motivated by revenge or a desire to seek the reward of up to 25 percent of the tax and penalty ultimately recovered by the Internal Revenue Service.
Undercover Activities. “Sting” cases such as those involving insurance, Medicaid fraud, or other types of fraud routinely involve allegations of tax improprieties.
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.
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.
You should know that the confidentiality extended to certain communications between an accountant and a taxpayer does not exist in the context of a criminal tax case. As uniquely qualified and extensively experienced Criminal Tax Defence Tax Attorneys & KovelCPAs, our firm provides a unique platform to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and your net worth. Your accountant may feel comfortable handling examinations and other tax controversy matters. However, when the examination involves overtones of fraud or false statements, it is critical that an specially trained tax defence attorney handle the examination / investigation.
David Klasing is a former public auditor and dual-licensed Tax Attorney and CPA who understands and can anticipate federal and state auditing / investigatory practices and methodology. He can use this knowledge to develop responsive strategies to the all of the potential civil and criminal tax issues you face. All of the Tax Lawyers and CPAs of the Tax Law Offices of David W. Klasing are experienced in federal and state tax controversies and can fight for you in an aggressive and strategic manner, and many have a decade or more of tax experience.
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