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San Jose tax evasion defense lawyerIf you are being investigated for tax evasion, you may feel lost, confused, and concerned about the possible penalties you may face. The federal offense of tax evasion occurs when an individual or corporation intentionally and systematically attempts to avoid paying taxes. The offender may falsify documents, fail to report income, or use other illegal tactics to reduce his or her tax obligations. In the last decade, countries around the world have worked together to prevent individuals from concealing income in foreign banks. Tax evasion can include any procedures that allow assets, financial instruments, or revenue to go untaxed or be taxed at a lower rate. The potential penalties for tax evasion can include heavy fines and incarceration. If you are being audited by the IRS, you should know how federal laws may affect you.

Federal Law Regarding Tax Evasion

Tax evasion is a willful act. Simply making mistakes on your tax return will not result in tax evasion charges. Section 7201 of the Internal Revenue Code describes the offense of tax evasion. In order for the IRS and other authorities to prove that a party engaged in tax evasion, they must prove that:

  • The party has an unpaid tax liability.
  • The party intentionally took actions to evade or avoid taxes.
  • The party had “specific intent” to evade his or her duty to pay a certain tax.

Because tax evasion is a criminal matter, prosecutors must prove these elements beyond a reasonable doubt to convict a person for tax evasion.

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San Jose, CA small business tax attorney employee classificationCalifornia Assembly Bill 5, also called AB 5, has many business owners wondering how compliance with the new law will affect their business. The bill will significantly limit employers’ ability to classify workers as independent contractors. Many workers will now need to be classified as employees of the company, and they will be entitled to the associated benefits, such as workers’ compensation, minimum wage, overtime, rest breaks and meal periods, protection from anti-discrimination and retaliation laws, and reimbursement for business expenses incurred during the course of their job. Employers will also be required to pay payroll taxes on the workers classified as employees. AB 5 takes effect on January 1, 2020, so employers only have a short period of time to make any changes necessary to stay compliant with the new law.

AB 5 Makes the California Supreme Court Decision Regarding Worker Classification State Law

In 2018, the California Supreme Court announced its decision regarding Dynamex Operations West, Inc. v. Superior Court of Los Angeles. The landmark decision established a test called the “ABC test” for determining whether a worker is an independent contractor or an employee. Under the new rule, a worker can only be classified as an independent contractor if the hiring agency can establish each of the following criteria:

  • The worker is not under the direction and control of the hiring agency with regard to the performance of the work.
  • The worker performs duties that are outside the hiring agency’s typical course of business.
  • The worker is engaged in an independently established occupation, trade, or business of the same nature as the work he or she does for the hiring agency.

California employers are already subject to the rules established by the Supreme Court Decision. The purpose of AB 5 is to clarify exactly how the ruling should be implemented in practice and identify industries that are exempt from the new rules. Doctors, psychologists, dentists, veterinarians, insurance agents, lawyers, accountants, architects, stockbrokers, real estate agents, state-licensed engineers, and private investigators will not be forced to comply with the new worker classification law. Newspaper delivery companies must comply, but they will be given an extra year before being required to classify their paper carriers as employees.

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San Jose tax law attorney for estate taxes and TCJAWhen a large amount of money is transferred as a gift, there are certain gift taxes that apply. Similarly, funds left to heirs after an individual passes away are subject to estate taxes. Typically, a unified rate schedule is applied to an individual’s cumulative taxable gifts and/or estate in order to reach a net expected tax. The tax owed is determined after a credit contingent on an exclusion amount is applied. The basic exclusion amount (BEA) is first applied to the gift tax. Any remaining credit is then applied to the estate tax. The Tax Cuts and Jobs Act (TCJA) has instituted several major changes to the way gift tax and estate tax are calculated. If you are considering making a large gift in the next several years, read on to learn more about how these changes may affect you.

How the TCJA Changed Gift Taxes and Estate Taxes

The Tax Cuts and Jobs Act made far-reaching changes to United States tax law. One of these changes involves the basic exclusion amount that is applied to gift taxes and estate taxes. The TCJA temporarily doubled the BEA for the years 2018-2025. The BEA rose from $5 million to $10 million, or $11.18 million when adjusted for inflation. In 2026, the BEA is expected to return to the amount (after being adjusted for inflation) that it was before 2018. This means that you may currently leave just over $11 million to heirs without paying federal estate or gift tax. The annual gift exclusion remains $15,000.

IRS Clarifies How the Increased BEA Will Affect Taxpayers

Many taxpayers have expressed concerns about what will happen once the BEA returns to the pre-2018 amount. They worry that taking advantage of the increased BEA might negatively impact them in the future. In response, the IRS has issued a clarifying explanation. There is a special rule that allows estate tax credits to be calculated using either gifts made during a person’s life or the BEA applicable on their date of death – whichever is higher. If you want to make a large gift before 2026, you do not have to worry about losing the benefit of the increased BEA. Even if the basic exclusion amount has reverted to a lower dollar amount when a person dies than it was when s/he made a large gift, the gift tax portion of the estate tax calculation is still based on the higher BEA that previously applied.

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San Jose, CA tax attorney for corporate taxes and TCJAA C Corporation is a separate legal entity that protects a business owner’s assets from creditor claims. All corporations are C corporations by default until a business owner files for S corporation status. In a C corporation, business income and expenses are taxed to the corporation. When a business owner or owners receive profits from the business as dividends, the owner(s) must also pay income tax on the profits – creating a double taxation situation. On the other hand, S corporations are “flow-through” entities, meaning business income is treated as owner and investor income for tax purposes. This may make it seem as if operating your business as an S corporation is a better choice than operating it as a C corporation. However, major changes to U.S tax law were established by the 2017 Tax Cuts and Jobs Act (TCJA) that may influence your decision regarding corporation status.

The Qualified Business Income Deduction

The TCJA initiated sweeping changes to tax law, including the new qualified business income deduction, which is also called the Section 199A deduction. This deduction allows certain individuals the opportunity to deduct up to 20 percent of their qualified business income. However, business income generated by a C corporation is not eligible for this deduction. The TCJA also enacted a flat 21 percent tax rate on C corporations, which is much lower than the previous rate of 35 percent. Because income from an S corporation is taxed at the personal level instead of the corporate level, S corporation income does not qualify for the 21 percent tax rate. S corporation income flows through to the shareholders’ personal tax returns and can therefore be taxed at rates as high as 37 percent.

Potential Issues Regarding Switching From S Corporation to C Corporation Status

The Tax Cuts and Jobs Act included provisions to help make the transition from S corporation to C corporation easier. Section 1371(f) extends the time period during which an eligible terminated S corporation can make tax-free distributions from its accumulated adjustments account. Business owners should keep in mind that there is a time constraint regarding the transition relief offered by the TCJA. An eligible terminated S corporation must revoke its S election no more than two years after the TCJA is enacted. This means that reversals after December 22, 2019, will not qualify.

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San Jose tax lawyer for amended tax returns

In previous blogs, we have discussed the many consequences of not paying your taxes in full. However, sometimes a person has the opposite problem: the overpayment of taxes. If you have inadvertently or mistakenly paid more than your fair share of taxes, you may wonder if there is a way to get that extra money back. Whether or not the IRS will refund your money is based on many factors. Read on to learn about your options if you have overpaid your taxes and how a qualified tax lawyer can help.

Getting a Refund From the IRS

If you have overpaid the Internal Revenue Service (IRS), you may be able to receive a refund. If the IRS is aware that you overpaid, the agency may correct the issue by refunding you the extra balance. For example, if your tax return shows that you owe $2,000, and you send the IRS a check for $3,000, the IRS may refund you the extra $1,000 without issue. However, the situation becomes more complicated when the IRS is not aware of the overpayment. 

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