Tax Pitfalls


Employee Misclassification:


There are many tests utilized to determine who is an employee or independent contractor.  Most revolve around the simple question of the common law right to control.  The common law asks whether the person for whom services are performed has the right to control and direct the individual who performs the services, regarding not only the result but also the details and means of accomplishing the result. Home workers are automatically classified as employees when all materials or goods are supplied by an employer and that must be returned to them when the work is completed. Given the growing tendency for independent contractors to work from home (or at least off-site) using telecommuting and Internet technologies, it is possible that many more future workers will be classified as statutory employees.

    
Taxation of  Injury Awards:


Attorney Fees Are Taxable: The gross amount of a judgment or settlement is taxable income to the recipient. This includes any attorney fees that will be paid on a contingency basis from the award.  Recipients are not afforded a deduction for the fees paid to their attorney, when those attorney fees are not incurred as an ordinary and necessary expense of the plaintiff's trade or business. 


Personal Injury Awards are Tax Exempt:  Personal injury awards, including compensatory damages based on emotional distress or mental/emotional injury attributable to a physical injury or sickness, for physical injuries are tax exempt. However, non-physical injury awards will be included in the recipient's gross income.  


Insurance Proceeds:  Life insurance policy proceeds are not included in gross income. Long-term care insurance contracts are treated as accident and health insurance contracts and amounts received from them (other than policyholder dividends or premium refunds) are excludable from income as amounts received for personal injury or sickness. 

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"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."
Judge Learned Hand

 

IRS TAX MATTERS

Marc J. Soss, Esq.


(941) 928-0310 | mjs@fl-estateplanning.com

Estate Planning | Probate | Business | Corporate | Guardianship | Asset Protection


Surviving an IRS Tax Audit 

While the thought of an IRS audit may be a scary, there is really no need to panic. The first thing one must do is find out exactly what the IRS is looking for?  The IRS will scrutinize your business practices and check for any errors you may have made in the filing process to make sure you've paid every dime you owe.  The following areas are those most typically gone over with a fine-tooth comb:
 
Unreported Income.  The IRS will first target any amounts that were left off of your federal income tax return (even amounts not reported on a W-2 or 1099 statement), accidentally or intentionally, and assess tax, interest, and penalty charges on any missing amounts.  If the IRS auditors find proof of significant fraud, you could find yourself facing criminal prosecution and jail time.  

 
Personal vs. Business Expenses.  The maintenance of good records (receipts, detailed expense logs, business calendar, etc.) will be necessary to prove that all costs you have claimed as business expenses were actually business-related and not for your personal use.  IRS auditors will scrutinize deductions categorized as entertainment, meals, travel, and transportation.   All tax records should be maintained for at least 6 years after the tax return is filed.


Employee or Independent Contractor?  The IRS will verify that your businesses independent contractors are truly “independent contractors” and not an employee.  Many businesses try to disguise employees as an independent contractor to avoid paying payroll taxes on that individual.  The test is whether the business controls (i) where, (ii) when, and (iii) how the individual works for the business. The misclassification of an employee as an independent contractor can result in increased taxes, interest, and penalties--making your mistake an even more costly one.


Taxation of  Injury Awards:Attorney Fees Are Taxable: The gross amount of a judgment or settlement is taxable income to the recipient. This includes any attorney fees that will be paid on a contingency basis from the award. Recipients are not afforded a deduction for the fees paid to their attorney, when those attorney fees are not incurred as an ordinary and necessary expense of the plaintiff's trade or business.  


Personal Injury Awards are Tax Exempt:  Personal injury awards, including compensatory damages based on emotional distress or mental/emotional injury attributable to a physical injury or sickness, for physical injuries are tax exempt. However, non-physical injury awards will be included in the recipient's gross income.  


Insurance Proceeds:  Life insurance policy proceeds are not included in gross income. Long-term care insurance contracts are treated as accident and health insurance contracts and amounts received from them (other than policyholder dividends or premium refunds) are excludable from income as amounts received for personal injury or sickness.