Frequently Asked Questions

Individual tax returns are generally due on April 15th of each year.

This document provides essential insights into IRS audit processes, common triggers, and taxpayer rights, emphasizing the critical role of professional representation.

Key Takeaways: Importance of Professional Representation: While taxpayers can attend audits alone, it's strongly advised to seek professional assistance. IRS Revenue Agents are trained to identify additional tax liabilities, and the complexity of tax law puts unrepresented individuals at a significant disadvantage.

Common Audit Triggers: Information Discrepancies: Mismatches between income reported on Forms 1099/W-2 and the taxpayer's return are primary causes. Schedule C (Sole Proprietorships): High potential for audit due to issues like unreported cash income, significant or continuous losses (potential hobby reclassification), and unrecorded bartering transactions.

Worker Classification: IRS efforts to reclassify independent contractors as employees can trigger employment audits.

Audit Procedures & Notices: Mail Audits (e.g., CP 2000): These notices propose changes based on third-party information. Taxpayers typically have 30 days to agree, partially agree, or dispute the changes. Professional representation can be authorized for these notices.

Field Audits (In-Person): Involve direct interaction with a Revenue Agent, where taxpayers have the right to choose a reasonable time/place and to be represented by a tax professional.

Audit Preparation & Strategy: The most effective preparation involves anticipating the auditor's perspective, scrutinizing questionable deductions, and ensuring all claimed items are well-documented and organized. A qualified tax preparer is invaluable in this process.

Audit Outcomes & Appeals: No Change: If accepted as filed, a "no change letter" is issued. Disagreement: An "unagreed" case leads to a "30-day letter," offering options to agree or appeal. Failure to respond results in a "90-day letter" (Statutory Notice of Deficiency), allowing petition to Tax Court or payment/refund claim.

Appeal Rights: Taxpayers can appeal proposed changes through supervisor meetings, IRS mediation services, or the local IRS Appeals Office. Key Considerations: Professional Conduct: Maintain a serious and professional demeanor with IRS employees; threats or jokes are taken seriously.

Repeat Audits: An audit for the same items in the two prior years with no proposed change may be discontinued. Conclusion Proactive planning, diligent record-keeping, and especially professional guidance are crucial when facing an IRS audit. Contacting a tax professional promptly for advice on significant tax-affecting life events or audit notices is highly recommended

Buy-sell agreements are a cornerstone of effective succession planning for closely held companies. They provide essential protection for owners' financial interests, their heirs, and the overall stability of the business during significant life events. This summary addresses common questions about these vital agreements.

A buy-sell agreement is a key part of a succession plan, designed to safeguard the financial interests of closely held company owners and their heirs, while also preserving the company's stability in the event of major occurrences such as an owner's death, disability, or retirement.

These agreements are most frequently funded using life insurance policies. The two primary structures for this funding are a cross-purchase agreement or a stock redemption agreement.

In this scenario, the company itself takes out life insurance policies on each of its owners and is the beneficiary. When an owner passes away, the company uses the insurance proceeds to buy out the deceased owner's interest.

Key Advantages
Simpler to administer with fewer policies required compared to cross-purchase, policy costs are evenly distributed among owners, and for a C corporation, the insurance proceeds are not taxable income to the corporation

Key Disadvantages
For C corporations, insurance proceeds increase earnings and profits (E&P), which can result in taxation if distributed to shareholders as dividends; rules surrounding stock redemptions can be complex; and remaining owners do not receive a step-up in basis.

Company valuation can fluctuate rapidly, making it crucial for the buy-sell agreement to be flexible and accurately reflect changes in value. In a cross-purchase, the company has no interest in the life insurance proceeds, whereas in a stock redemption, the proceeds are included in the business's value, and the redemption price typically incorporates a portion of these proceeds.

Beyond buy-sell agreements, business owners should also evaluate:

Key Person Life Insurance: Helps cover business debts (especially those with personal guarantees), fund the search for a replacement for a deceased owner, or meet obligations to an owner's spouse. Premiums are not deductible, and proceeds are not taxed.

Disability Insurance: Protects the earnings of employees and owners by providing income if a disability prevents them from working. This includes both short-term (e.g., 0-14 day delay, up to 2 years coverage) and long-term (e.g., 3 weeks-3 months delay, generally to age 65 coverage) options.

Professional Liability Insurance: Provides coverage for claims arising from professional errors or malpractice, commonly used by professionals such as physicians, attorneys, and accountants. The costs are deductible to the business owner and enhance liability protection.

Early Retirement Distributions refer to withdrawals taken from retirement plans, such as 401(k)s or IRAs, before you reach age 59½. While these withdrawals are generally subject to ordinary income tax, they are also typically assessed an additional 10% early withdrawal penalty, unless a specific exception applies. This can significantly reduce the amount of income available to you.

The SEPP strategy is an IRS-approved exception that allows individuals under age 59½ to take regular, calculated distributions from their retirement accounts without incurring the 10% early withdrawal penalty. To qualify for this exception, very specific and strict rules must be followed regarding the payment amount and duration.

You are required to continue SEPP distributions for a minimum of five years, or until you reach age 59½, whichever period is later. If you discontinue or modify your SEPP distributions before meeting this duration, all prior distributions, as well as the current year's distribution, may become retroactively subject to the 10% early withdrawal penalty, unless another exception applies.

There are three IRS-approved methods for calculating your substantially equal periodic payments:

1. Required Minimum Distribution (RMD) Method: The annual payment amount is re-determined each year based on your account balance and a life expectancy table.
2. Fixed Amortization Method: A fixed annual payment is determined once at the outset by amortizing your account balance over a specified number of years, using a life expectancy table and a chosen interest rate. This payment remains constant each year.
3. Fixed Annuitization Method: A fixed annual payment is calculated by dividing your account balance by an annuity factor derived from a mortality table and a chosen interest rate. This payment also remains constant each year.

You are permitted a one-time switch from either the fixed amortization or fixed annuitization method to the Required Minimum Distribution method in a subsequent year. Once this change is made, you must continue with the RMD method for all future payments. It's crucial to note that no other contributions or non-taxable transfers can be made into or out of the specific account from which SEPP distributions are being taken during the SEPP period. If you wish to make new contributions, you would need to establish a separate IRA account.

If, as a result of following an accepted SEPP calculation method, your IRA assets become exhausted, you will not be subject to the 10% early withdrawal penalty. The cessation of payments due to depletion is not treated as an impermissible modification of the series of payments.

The SEPP rules offer very little flexibility. Once you begin, extreme caution is necessary for any changes to the distribution amount or frequency. It is absolutely vital to meticulously document all calculations used to determine your distributions, as well as any changes made. Tax courts have consistently assessed the 10% early withdrawal penalty for taxpayers who could not substantiate that their distributions were, in fact, based on SEPP calculations.

The SEPP strategy can be a valuable tool for early retirees needing to access retirement funds. However, due to its strict regulations, it is highly advisable to seek professional tax advice to ensure proper setup and adherence, avoiding potential penalties and ensuring your financial well-being.