Frederick Focke Mischler, Attorney

Trust Fund Recovery Penalties

If you own, or want to own, a business that has employees, you should know about this issue.  The Trust Fund relates to the employment taxes that employers withhold from their employees' paychecks.  It is a trust fund because the employer simply holds this money in trust for the employees until it is sent to the IRS to pay their taxes.  It is not the employer's money.  Ever.  And because it is held in trust, the employer can be held to fiduciary standards regarding the money.

So, if you are an employer, be sure to get the employment taxes withheld from employees' wages paid out to the IRS every month.  This is critical to your continued existence as an employer.

If this does not happen, then the penalty can be applied by the IRS.  The tax law gives the IRS the authority to go after any and every "responsible person" in order to collect the unpaid employment taxes that were not paid by the business.  If you are a responsible person in your business, you could be held personally liable for these taxes.  This is true even if you did not have direct day-to-day control or decision-making authority over the payment of liabilities in the business.

There is no "bright line" definition of who a responsible person is.  The IRS will look at various factors like who is active in the day-to-day management of the business, who has knowledge or control of the payment of liabilities, who owns the business, who has check signing authority, and who has knowledge or control of the hiring and firing of staff.  Sometimes these functions will be handled by a staff person.  Such people can also be held responsible even if they report to the owner or another person in the management team.

Identity Theft

Identity theft is a topic that has gotten increasing amounts of attention in recent years due to the rise of new ways to perform transactions, especially on the internet.  The damage caused has been increasing many fold as well.

In the past, we were all told to protect our credit cards and checkbooks from thieves.  It's not hard to figure out how they might be able to steal from you if they have your credit cards or checkbook.  But now, with increasing use of Social Security numbers as identifiers, that too needs to be closely protected, as well as bank account numbers, and all manner of other personal information.  There are 2 prime ways to be an identity theft victim:

1) account takeover
This refers to the theft of existing bank or credit account information and the use of that information to complete purchases or obtain cash.
2) true identity theft
This involves the theft of a Social Security number or other identification which is then used to open other accounts to obtain financial gain.

It has been shown to be very easy to get personal information about people.  Some of the ways it is done include dumpster diving, that is digging through trash at the dump, or even outside your own home, stealing mail from your mail box, taking credit card copies left at a store or restaurant, and  getting information from internet sites.

There are ways to protect yourself that are very easy to do.  The most important is to examine the bank and credit card statements for your accounts.  They are not just garbage, they are your key to keeping track of your money.  This leads to the second excellent way to protect yourself: rip up or shred ALL documents that contain private information.  If you are going to throw away a bank statement, shred it first.  Here's one that almost got me.  Almost every credit card statement I receive includes a page of checks that I can use to pay bills to transfer the balance to my credit card.  Well, if you just throw that away, someone can pick it up and write themselves a check (or pay one of their own bills) and it goes on your credit card.  SHRED everything that has your personal information!  This also includes credit card applications you get as junk mail.

Anymore, every application I get is preprinted with my name, and almost certainly with some kind of code to attach that application to my credit report.  Someone filling this out and signing my name with their address will get a card in my name, and I would never know it until the card company tracks me down to say I owe them thousands of dollars.  Shred those applications when you throw them away.  (As I strongly suggest you do!)

Get your credit report from all three credit reporting agencies at least once each year.  Check it for errors and follow up on all errors to be sure they get corrected.

Another way to protect yourself is to be VERY careful who gets to see your private information.  Take your SS# off your driver's license and checks; don't let identification, like driver's license, social security card sit around unattended or open to other's to see; be sure to keep all credit card reciepts and rip them up if you don't intend to keep them

Now, to be sure, there have been some protections against identity theft written into law.  But the first defense is your own wisdom in protecting yourself.  Even if you can't be legally responsible for someone else's theft, you still have to deal with the creditors banging on your door, or calling you demanding money.  You might even have to hire a lawyer to represent you, which can be very expensive.  So, the cheapest and most effective way to protect yourself is to use your head and keep an eye on everything that might have your personal information on it.  Rip it up if you don't need to keep it, and keep it in a safe place if you do need to keep it.

Do you want to be a homeowner?

2 points about buying a home:

Most poeple don't realize that as a buyer, they are going to be the one paying for the title work to be done.  This is generally done by a title company, who researches the ownership history of the property to determine if there are any problems with that history.  Sometimes there can be problems, such as a prior owner giving or selling all or part of the property in question to someone and this transaction is not recorded.  If this happens and then the owner sells the property again to another person, now there are 2 people who have a claim on the property.  This can cause a whole bunch of significant problems, and you don't want to get involved in a piece of land like this.  So, title companies try to figure out if there are any such problems.

So, here's the important point: since the buyer is paying for the title research, they can also designate which title company to use.  Many people are not going to care and will just let the lender choose the title company.  But, if you are the buyer, you are paying for it, so you have the right to choose.  Exercise that right if you think it is important.  Find out who the title companies are in your area and interview them or meet their representatives.  Like any other situation, you are going to find some that you like better than others, for reasons important to you.  Might as well pay someone you like or whom you trust to do a good job.

Another issue to recognize in Ohio is that real estate agents can be "dual agents".  This means they can represent both the buyer and the seller in a residential sale.  This also means one agent gets all the commission on the deal.  Sounds fine, right?  Well, again, you are the important, and the interested party in your own purchase or sale.

In my view, as with any agency relationship, it is very difficult for an agent to be objective to both sides of a deal.  When you are buying an $80,000 or $100,000 house, do you want to put all your trust in someone that is getting paid by the other side?  Now, don't get the impression that I think real estate agents can't be trusted, because that is not my point.  All the agents I know are fine upstanding members of the community.  But, that is irrelevant.  If you are a buyer, then it is the other side that is paying the sales commission and it is only natural for any of us to give attention and influence to the person paying the fees.

If you are going to visit houses on the market, one thing a selling agent will ask you to sign is a form  which says you accept that agent as the only agent for that house.  This is not a contract with the agent, but it does say that you agree not to use another agent if you choose to buy that house.  I will not sign that form.  The agent can show me the house and answer my questions, but if I want to later get another agent to represent me in the purchase of that house, I should not sign the form that the selling agent asks me to sign.  Get your own agent and let the negotiations begin.

Do you have the entrepreneurial fire?

Starting a business requires motivation, dedication, and stamina.  Most research indicates that starting a business demands some common traits in the business owner, especially good planning and organization.  If you are interested in being your own boss, consider your strengths and weaknesses carefully. 

Can you motivate yourself?  It will usually be up to you and only you to get the business going each day.  Are you able to connect with and relate to a variety of people?  You have to deal with all the good and bad that each customer, vendor, and employee brings to work each day.  Can you make decisions constantly?  Often the business owner has no one to turn to for help or guidance, must make a decision with limited information, under enormous pressure, and with little time to consider the consequences. 

Can you work 12 hours a day for 6 days a week?  Even this might not be enough when important deadlines are looming on the horizon.  Can you put together a plan and work to stick with it?  Good planning is important to identifying and achieving your goals.  Is your personal life stable so that you may focus on your business without straining your relationships?  There can be financial and emotional sacrifices to be made in starting a business.

On the positive side, you get to be your own boss, your work benefits you directly rather than your employer, there can be large earnings and growth potential, and running a business will provide constant variety, challenge, and opportunities to learn.  For the right person, the advantages of business ownership can easily outweigh the risks.

If you have a business idea, and you have decided to pursue it, the next question is: "What form of entity should I have?"  There are several types, and some of these have subtypes.  Many people are Sole Proprietors.  This means the business is not separated from the owner as a person.  A sole proprietor runs the business and his personal life together.  An example of how this works is the income tax paid by the owner.  The business income and expenses are shown directly within the owner's personal income tax (i.e. schedule C for federal income tax). 

A Partnership is another form of entity.  They can be easy to get started, something like a sole proprietorship, but with one or more business associates.  The traditional partnership has 2 or more partners who have equal say in all the affairs of the business.  But, each partner can be held 100% responsible for the acts of the other partners, including some acts that are more of a personal nature than business.  This is not always a good idea.

A Corporation can be set up that will separate the business activities from the personal life of the owner (the stockholder).  This also provides liability protect for the owner.  Under many circumstances, if the corporation is properly operated, a lawsuit against the corporation cannot affect the stockholder's personal life except for the amount of investment by the stockholder in the corporation.  That is, the stockholder could lose the entire investment in the corporation but that is all.   

Finally, Limited Liability Companies can provide some of the ease of a sole proprietorship, but also with the liability protection of a corporation.  This is the newest business form and is available in all 50 states.  It is a good form for many small businesses.  However, keep in mind that the best form for a business will depend on a numerous factors, including the type of business, the risks associated with that business, the preferences of the owner, and any of a number of other factors.

For any business idea, it is essential that a business plan be written for the proposed idea.  The business plan should examine in detail the idea and the business that is necessary to turn the idea into a viable business.  Among many other things, the plan will describe the product or service to be created, the marketing strategy, the physical assets, the knowledge and experience of the owners and others involved, and it will include financial statements and analysis covering the first 3 to 5 years of the business life.  A good plan is a necessity if the business owner intends to borrow money to get the business going.

These are just a few of the many questions that a prospective business owner needs to think deeply about before embarking on the business.  I highly recommend to my clients that they find a good team of advisors when the get started.  This includes an insurance agent, a CPA, a financial planner, and an attorney.  Depending on the business, there might be other advisors as well, but virtually every business will need the advice of these four.

The IRS "Dirty Dozen"

[from the IRS website]

WASHINGTON — The Internal Revenue Service unveiled its annual listing of notorious tax scams, the “Dirty Dozen,” reminding taxpayers to be wary of schemes that promise to eliminate taxes or otherwise sound too good to be true.

The “Dirty Dozen” for 2005 includes several new scams that either manipulate laws governing charitable groups, abuse credit counseling services or rely on refuted arguments to claim tax exemptions. The agency also sees the continuing spread of identity theft schemes preying on people through e-mail, the Internet or the phone, sometimes with con artists posing as representatives of the IRS.

“The Dirty Dozen is a reminder that tax scams can take many forms,” IRS Commissioner Mark W. Everson said. “Don’t be fooled by false promises peddled by scam artists. They’ll take your money and leave you with a hefty tax bill.”

Involvement with tax schemes can lead to imprisonment and fines. The IRS routinely pursues and shuts down promoters of these scams. But taxpayers should also remember that anyone pulled into these schemes can face repayment of taxes plus interest and penalties.

Persons who suspect tax fraud can call the IRS at 1-800-829-0433.

The Dirty Dozen - The IRS urges people to avoid these common schemes:

   1. Misuse of Trusts. Unscrupulous promoters for years have urged taxpayers to transfer assets into trusts. They promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. However, some trusts do not deliver the promised tax benefits, and the IRS is actively examining these arrangements. More than two dozen injunctions have been obtained against promoters since 2001, and numerous promoters and their clients have been prosecuted. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering into a trust.

   2. Frivolous Arguments. Promoters have been known to make the following outlandish claims: that the Sixteenth Amendment concerning congressional power to lay and collect income taxes was never ratified; that wages are not income; that filing a return and paying taxes are merely voluntary; and that being required to file Form 1040 violates the Fifth Amendment right against self-incrimination or the Fourth Amendment right to privacy. Don’t believe these or other similar claims. Such arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law.

   3. Return Preparer Fraud. Dishonest return preparers can cause many headaches for taxpayers who fall victim to their ploys. Such preparers derive financial gain by skimming a portion of their clients’ refunds and charging inflated fees for return preparation services. They attract new clients by promising large refunds. Taxpayers should choose carefully when hiring a tax preparer. As the saying goes, if it sounds too good to be true, it probably is. No matter who prepares the return, the taxpayer is ultimately responsible for its accuracy. Since 2002, the courts have issued injunctions ordering dozens of individuals to cease preparing returns, and the Department of Justice has filed complaints against dozens of others, which are pending in court.

   4. Credit Counseling Agencies. Taxpayers should be careful with credit counseling organizations that claim they can fix credit ratings, push debt payment agreements or charge high fees, monthly service charges or mandatory “contributions” that may add to debt. The IRS Tax Exempt and Government Entities Division has made auditing credit counseling organizations a priority because some of these tax-exempt organizations, which are intended to provide education to low-income customers with debt problems, are charging debtors large fees, while providing little or no counseling.

   5. "Claim of Right" Doctrine. In this scheme, a taxpayer files a return and attempts to take a deduction equal to the entire amount of his or her wages. The promoter advises the taxpayer to label the deduction as “a necessary expense for the production of income” or “compensation for personal services actually rendered.” This so-called deduction is based on a misinterpretation of the Internal Revenue Code and has no basis in law.

   6. “No Gain” Deduction. Similar to “Claim of Right,” filers attempt to eliminate their entire adjusted gross income (AGI) by deducting it on Schedule A. The filer lists his or her AGI under the Schedule A section labeled “Other Miscellaneous Deductions” and attaches a statement to the return, referring to court documents and including the words “No Gain Realized.”

   7. Corporation Sole. Since September 2004, the Department of Justice has obtained six injunctions against promoters of this scheme and filed complaints against 11 others. Participants apply for incorporation under the pretext of being a “bishop” or “overseer” of a one-person, phony religious organization or society with the idea that this entitles the individual to exemption from federal income taxes as a nonprofit, religious organization. When used as intended, Corporation Sole statutes enable religious leaders to separate themselves legally from the control and ownership of church assets. But the rules have been twisted at seminars where taxpayers are charged fees of $1,000 or more and incorrectly told that Corporation Sole laws provide a “legal” way to escape paying federal income taxes, child support and other personal debts.

   8. Identity Theft. It pays to be choosy when it comes to disclosing personal information. Identity thieves have used stolen personal data to access financial accounts, run up charges on credit cards and apply for new loans. The IRS is aware of several identity theft scams involving taxes. In one case, fraudsters sent bank customers fictitious correspondence and IRS forms in an attempt to trick them into disclosing their personal financial data. In another, abusive tax preparers used clients’ Social Security numbers and other information to file false tax returns without the clients’ knowledge. Sometimes scammers pose as the IRS itself. Last year the IRS shut down a scheme in which perpetrators used e-mail to announce to unsuspecting taxpayers that they were “under audit” and could set matters right by divulging sensitive financial information on an official-looking Web site. Taxpayers should note the IRS does not use e-mail to contact them about issues related to their accounts. If taxpayers have any doubt whether a contact from the IRS is authentic, they can call 1-800-829-1040 to confirm it.

   9. Abuse of Charitable Organizations and Deductions. The IRS has observed an increase in the use of tax-exempt organizations to improperly shield income or assets from taxation. This can occur, for example, when a taxpayer moves assets or income to a tax-exempt supporting organization or donor-advised fund but maintains control over the assets or income, thereby obtaining a tax deduction without transferring a commensurate benefit to charity. A “contribution” of a historic facade easement to a tax-exempt conservation organization is another example. In many cases, local historic preservation laws already prohibit alteration of the home’s facade, making the contributed easement superfluous. Even if the facade could be altered, the deduction claimed for the easement contribution may far exceed the easement’s impact on the value of the property.

  10. Offshore Transactions. Despite a crackdown on the practice by the IRS and state tax agencies, individuals continue to try to avoid U.S. taxes by illegally hiding income in offshore bank and brokerage accounts or using offshore credit cards, wire transfers, foreign trusts, employee leasing schemes, private annuities or life insurance to do so. The IRS, along with the tax agencies of U.S. states and possessions, continues to aggressively pursue taxpayers and promoters involved in such abusive transactions.

  11. Zero Return. Promoters instruct taxpayers to enter all zeros on their federal income tax filings. In a twist on this scheme, filers enter zero income, report their withholding and then write “nunc pro tunc”–– Latin for “now for then”––on the return.

  12. Employment Tax Evasion. The IRS has seen a number of illegal schemes that instruct employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such advice is based on an incorrect interpretation of Section 861 and other parts of the tax law and has been refuted in court. Recent cases have resulted in criminal convictions, and the courts have issued injunctions against more than a dozen persons ordering them to stop promoting the scheme. Employer participants can also be held responsible for back payments of employment taxes, plus penalties and interest. It is worth noting that employees who have nothing withheld from their wages are still responsible for payment of their personal taxes.

Other Scams Still Lingering

The IRS removed four scams from the Dirty Dozen this year: slavery reparations, improper home-based businesses, the Americans with Disabilities Act and EITC dependent sharing. The agency has noticed declines in activity in some of these schemes. But taxpayers should remain wary because the IRS has seen old scams resurface or evolve.

Moreover, the IRS reminds taxpayers to be vigilant about cons that may not be on the Dirty Dozen list. New tax scams or schemes routinely pop up, especially around tax time.

Creating or Reviewing An Estate Plan

The Top Ten Reasons to Stop Delaying

10. Your money goes to unintended people.  In other words, if you allow your state law to determine who gets your stuff, the result may well be unintended and you are not around to fix the problems.  An estate plan ensures that you decided who gets what, and when they get it.  You stay in control of your stuff.

9. Uncle Sam will become your beneficiary.  If your estate is taxable, the testator may be able to pass significantly more property to heirs with proper planning and executed documents.  Taxes and probate costs can eat up a good bit of your estate.

8. Your business could go to people who can't work with each other. What will happen to the business then, after all the years you spent building it?  You know that key people who can’t or won’t work together will end up destroying your hard work.  Estate planning examines how to keep the business going with the least amount of disruption.

7. The court gets to help run your family business.  A properly composed will in most states permits the estate, including your family business, to function without court supervision over daily details of running the business.

6. Your kid(s) finances will get very complicated.  If property passes to minors, court required guardianships will be involved in disbursement decisions, accountings, etc., not to mention that the testator may not want the person most likely to be the guardian, such as an ex-spouse, to be the guardian.  Trusts can solve most or all of your problems with passing property to you’re young children.

5. Your son will be able to buy a Ferrari.  In the absence of a properly composed will (and perhaps a trust), most heirs get the inheritance at age 18.  That is when the auto dealers drool and the money is wasted away, etc.  Protect your family’s future from unscrupulous salespeople and from half-baked ideas.

4. Your kids may end up paying taxes on the life insurance collected by your sister.  If the estate is taxable, without planning here all kinds of unintended results can occur.  Life insurance can be a great protection for their future, but it can be done well or poorly.  Estate planning examines the options to ensure you get the most out of your life insurance investment.

3. Your soon-to-be-ex-son-in-law will get a big chunk of your assets.  With no will, your child most likely takes at age 18 and if the property is not in trust it is available for, to pick one example, your child's husband's scheme to have a chain of tanning salons.

2. Your neediest child gets shortchanged.  A will can permit the trustee to disburse more sensibly than with mathematical parity.  Children with special needs can be provided for at a level that ensures they too have a high quality of life.

1. Your final message to your family is “I don't care”.  Need more be said? 

0. Regardless of whether the estate is taxable, a properly drafted will means there are fewer total costs, final wishes get honored, and it all gets done more quickly than if everything is handled according to the state law on distribution of inheritances.