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Individuals who earn passive income should be aware of the tax implications that differ from active income. While the cash in your pocket may feel the same regardless of the source that it comes from, we can assure you that the government does not share that perspective when it comes to taxation of passive versus active income. If you make a substantial amount of passive income in California, you deserve to get the facts from our Los Angeles Passive Income Tax Attorneys.
If you are a California resident with one or more sources of passive income, or if you are an out-of-state resident with California-source passive income, you should work with an experienced tax compliance attorney in Los Angeles to ensure that you are reporting your income correctly. If you have made compliance errors in the past, your tax attorney can defend you in the event of a civil audit or criminal tax investigation. If you are a non-filer a tax attorney can identify strategies for you to reenter the tax system with minimal damage and risk.See our Real Estate Professional Q and A Library At the Tax Law Office of David W. Klasing, we are Los Angeles tax lawyers CPAs & EAs who have decades of experience representing individuals, corporations, LLCs, and partnerships in tax audits, IRS and FTB disputes, and related matters involving passive income or passive activity losses. Whether you have been chosen for an IRS audit, wish to appeal the results of a completed audit, or have questions about how passive income should fit into your personal or business tax strategy, turn to the Tax Law Office of David W. Klasing for dedicated, 24-hour support across the LA region.
What is Passive Income?
Passive income is money derived from a source in which the recipient of the income is not actively involved. This runs contrary to the other two key forms of income, active and portfolio income. Active income is income derived from affirmative, substantial, and continuing effort on the part of the recipient. A paycheck from a job would be an example of active income. Portfolio income is income derived from investments which the recipient is deemed to have control over.
Passive income, on the other hand, is derived from endeavors in which the recipient has less of a say. Examples of passive income sources include ownership of rental property and limited or silent partnerships in a business.
The first step in determining how your income will be taxed is to figure out into which of the three categories the income properly fits. A tax lawyer for passive income individuals can help you properly categorize your income according to IRS requirements and help you determine whether you will need to submit certain documents in conjunction, such as CA Form 3801 or IRS Tax Form 8582.
How is Passive Income Taxed?
Certain taxpayers who sustain losses from their passive activities may be able to reduce their taxable passive income, where applicable, by claiming passive losses. To report passive income and passive losses to the IRS, taxpayers should file Form 8582 (Passive Activity Loss Limitations), which should be attached to the taxpayer’s U.S. personal income tax return, or Form 1040, making Form 8582 due April 15. To claim the passive activity tax credit, eligible taxpayers should file Form 8582-CR (Passive Activity Credit Limitations).
Keep in mind that the state of California enforces its own set of passive activity reporting requirements, which are separate from the IRS-enforced federal laws contained in the Internal Revenue Code (IRC). For example, individual taxpayers may need to file Form FTB 3801-CR (Passive Activity Credit Limitations), while corporations file Form FTB 3802 (Corporate Passive Activity Loss and Credit Limitations). FTB refers to the Franchise Tax Board, which, just as the IRS enforces federal income tax laws, rigorously enforces California’s income tax regulations. If you are deriving income from rental properties and are sustaining losses, you might want to look into California’s passive rental loss income limitations.
To determine where, when, and how to file your passive activity loss forms, you should speak with one of our Los Angeles passive income tax attorneys. The Tax Lawyers and CPAs at the Tax Law Offices of David W. Klasing have years of experience ensuring that our passive income individual clients meet the letter of state and federal tax regulations.
Los Angeles Tax Audit Lawyers for Individuals + Businesses with Passive Income
Our LA tax audit attorneys have extensive experience representing taxpayers in tax audits of all varieties, including IRS and FTB tax audits, field audits, desk audits, correspondence audits, eggshell and reverse eggshell audits, individual tax audits, and corporate tax audits. Moreover, lead attorney David W. Klasing was a public auditor for over 10 years, affording our team an invaluable insider perspective on IRS audit strategies and procedures.See our Audit Representation Q and A LibrarySee our Criminal Tax Law Q and A Library Though we work diligently to minimize and prevent criminal tax exposure, our seasoned tax defense attorneys are prepared to fight tirelessly against misdemeanor or felony charges, including tax evasion, willful failures to file or pay taxes, tax obstruction, and tax preparer fraud. We thrive under pressure and are uniquely suited to deal with high-stakes tax cases in federal or state court.
Passive Income Audit Appeals Representation in LA, California
If you disagree with the results of a tax audit, you may be able to successfully challenge the auditor’s initial findings by filing an appeal with the appropriate agency, such as the IRS Independent Office of Appeals or the California Office of Tax Appeals (OTA). However, your success in this complex process – which, for the reasons explained in detail here, should always be guided by a tax appeals attorney – is contingent on your adherence to certain rules and criteria for appealing a tax determination.
For example, you must meet the appeal-by deadline provided by the IRS or FTB. You must also support your appeal with factual evidence and clear, objective reasoning based on sources such as legal statues, previous court rulings, or IRS manuals. Our office can help you start an IRS appeal if you believe that your auditor made a mistake when examining your passive income returns.See our Tax Litigation Q and A Library See our IRS Appeals Q and A Library
Los Angeles Tax Lawyer + Accountant for Passive Income
Passive income is reported and taxed differently than ordinary income, creating a unique – and potentially hazardous – set of financial considerations for taxpayers with passive income streams. Failure to properly file and pay taxes on passive income can lead to an IRS tax audit or California state tax audit, even if the reporting error was purely accidental. Unfortunately, an audit has the potential to result in costly fines, additional tax and penalties, or even an IRS criminal tax investigation or California criminal tax investigation if tax fraud is suspected.
In some cases, the initial results of an audit may not even be accurate. This makes the careful review of an audit by a seasoned Los Angeles passive income tax attorney all the more important. If you hope to avoid the shady and sometimes even deceitful tactics of IRS and state auditors examining your passive income tax statements and returns, your best bet is the assistance of one of our tax attorneys that work with passive income individuals.
Our tax professionals possess dual Licensing as Tax Attorneys and CPAs. Therefore, we are well-educated at all levels of tax law, from simple filing procedures to defending against criminal tax charges. We are your one-stop shop for defending yourself against the government’s prying eyes and we ensure that you and your passive income are fully protected.
To arrange a reduced-rate consultation with an experienced LA tax attorney-CPA for California, out-of-state, and international taxpayers, contact the Tax Law Office of David W. Klasing online, or call our LA tax office at (310) 492-5583. Please note meetings at our Los Angeles location are by appointment only.
Passive Income Tax FAQs
Federal tax regulations around passive income are located at IRC 469 and related statutes. The following passive income tax FAQs explain some of the basics that taxpayers should know about.
- Do passive losses receive special treatment under IRC 1041 in a divorce?
- How are passive activity expenses and losses characterized?
- Is there a special allowance for rental real estate activities?
- What are passive loss limitation rules?
- What are some tax basics around real estate and divorce?
- When can real estate professionals deduct real estate rental losses?
