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Multi-State and International Tax Issues

The way you can very simply think about the services that our firm performs is:

  • We help people/businesses in varying degrees of tax crisis/controversy (our audit, collections, and criminal tax defense practices)
  • We help people/businesses avoid these situations by bringing them into compliance.
  • We help optimize our clients’ tax situations in order to save taxes, accumulate net wealth, and help their businesses grow.

However, within these service areas, perhaps our hottest practice area is in helping multi-state companies and/or those that have some international aspect comply with the laws and utilize their framework to succeed in their business. Increasingly, with the proliferation of technology and enhancement of logistics, more and more companies fall into this definition. A few years ago, you would not have thought of a smaller seller selling books on Amazon as a multi-state business, but the reality of the situation today is that these companies have operational impact well beyond their state’s borders. When they first come to us, our prospective clients do not really see themselves as multi-state businesses, but by the time we are finished with their matters, we have built them and effective and affordable framework for compliance.

The landscape has completely changed and will continue to change. The expansion of concepts such as economic nexus and the rapidly changing state laws and state enforcement priorities almost making writing about this subject a lost cause (the laws are changing that quickly). So, please take what you read here with a grain of salt, as time passes this page may quickly be not entirely accurate. That is not intentional, but you should understand that no legislative process, administrative law, or judicial interpretation is going to move as fast as technology does these days. As soon as the state issues a decision, it is almost obsolete because someone is doing things a different way. From our perspective, it is what makes this area of law so exciting, but in the same breath, it can be terrifying for our clients who are just trying to get compliant and stay out of trouble in an uncertain world. Businesses did not use to need to factor in this kind of fluidity.

Additionally, the states and in particular California, are becoming more and more aggressive in their definition of who has a filing requirement and who owes them tax. At times, it seems like more than half of our clients are out of state businesses who have somehow stepped into a California issue in some way shape or form. The majority of these businesses did so unintentionally, after all, who really thinks about the consequences of their business operations in a state that they are not in? Nevertheless, intent is not a factor in whether or not you are subject to multi-state taxation and because of a variety of factors, you may be operating and accruing liability in California and not even know it.

As mentioned, California is one of the more aggressive states in pursuing businesses that are located outside of its borders for tax revenue. California seemed to realize the fact sooner than other states that it could go after businesses and individuals that may have contact with the state of California, but who actually don’t actually reside in California and who don’t have voting power in California. Did you know that California has actually increased its base of operations and has offices now in New York, Texas and Illinois, which serve as regional jumping off points for out-of-state California tax compliance. That’s right, you can get audited in New York or Texas or any other state by a California auditor and be subject to California state tax.

Challenges for Multi-state Businesses:

  • How do we manage and mitigate risk when the law is unclear or when we operate in different states with different or conflicting laws?
  • How do we stay in compliance in light of a fast moving changes in certain sectors?
  • How do we manage to avoid issues without dedicating substantial resources to our compliance? How can we make this cost effective and build an infrastructure that makes sense for the size of our company?

Multi-State Sales Tax Issue and the Amazon Example:

How complex do these issues get for small and mid-size businesses? Let’s talk about the recent problem of Amazon in the context of how complicated this area of law has become. Even if you are not an Amazon seller or even sell products, if you have customers in other states or employees/service providers, or hold inventory directly or through a 3rd party, you may want to take a minute to read the following.

Let’s paint a picture here. Amazon has been a wonderful thing in many people’s lives. You can get on Amazon, you can order a variety of products and have them shipped to you in about a day. Amazon is amazing in a sense that it has built a seemingly never ending pipeline of products that can be delivered to you with next day shipping, but on the other side of things it has opened the door for many companies to completely revolutionize their sales. Small companies have gone on Amazon and now see regular revenues of ten, twenty, fifty, or even a hundred million dollars. Amazon is big business for some companies, even the only channel for some businesses that sell exclusively on Amazon and utilize its logistical network.

Amazon has also created significant problems from a sales and use tax perspective (and from a state income tax perspective as well). Let’s say you purchase a TV at Best Buy. You go to Best Buy and you purchase a TV, and the TV costs you $1,000, and then you pay sales tax on that TV. It used to be that if you bought the same TV on Amazon and were shipping that product into the state of California, you would not be paying sales tax on that product because it was an interstate transaction. This put in-state businesses at a competitive disadvantage because customers could go online and skip out on the sales tax and purchase the same product for less. As online sales grew and grew, this started to cut into the revenue for a number of states. So, California and a number of states addressed this issue by expanding the concept of what it meant to do business in California (a concept called nexus). One of the ways that they increased nexus in California is by saying that if you held inventory in California, either directly or through a 3rd party, you had nexus with California and needed to collect sales tax from California customers.

So, if you are an Amazon retailer that is located in New York, you may never go to California. Your business is in New York, you ship products out of New York to Amazon warehouses, and you stay in New York. You do not even come to California on vacation. So, if you believe you are a New York company (which you are), why would you think twice about California and the laws that it has on its books?

This is what the law did. These laws opened up and evened the playing field so that California could tax businesses that were not located physically within its borders. For Amazon sellers, a lot of the Amazon sellers will ship their products to Amazon’s warehouse and then they do not really keep track of what happens after they ship to the warehouse. What Amazon does is you can be a New York seller located and shipping goods into a warehouse in Pennsylvania, and that order should fulfill customer demand. Amazon may send those products from its Pennsylvania warehouse to a network of other warehouses that Amazon has. By doing that and as Amazon acting as an agent for you, Amazon essentially creates nexus in a variety of different states. This is exactly what happened in California. Amazon moving their sellers’ product here availed those sellers to California law.

The Fallout from Amazon:

Now here is the problem for the sellers. California put these laws in the books in 2013, so a long time has passed since they were in effect. And this creates a situation where all of these companies were making sales in California and not charging tax or, in other words, accumulating significant past sales tax liabilities. We have seen situations in the firm of multiple millions of dollars, even tens of millions of dollars where sales tax was not being collected. That’s a lot of unpaid tax, not to mention interest and penalties that will continue to accumulate over a multi-year period. The situation can often be worse for smaller businesses. If you only do a couple million in sales per year, your margins probably are not that great, and there is not much left over, if anything, to pay four or five years of sales tax liability.

The Wayfair Case and its Impact on Business

However, at the same time this was going on, the Supreme Court changed the landscape of multi-state taxation forever with the Wayfair vs. South Dakota case.

Without going through the complete history, there was a case in the early 1990s called Quill vs. North Dakota, which ruled that in order to have economic nexus with a state you must have some sort of physical presence. Meaning a state could not tax you for business done with that state unless you had more contact like having a presence there. So the states were capped and a limit was set on where they could tax. However, the states hated the Quill decision because it limited their ability to tax businesses that were outside of their state borders, like Amazon. However, gradually and with the rise in technology impacting interstate commerce, the states tried to find new ways to tax businesses for things that did not involve physical presence.

For example, many states have passed laws that said you can be held liable for sales tax/state income tax if you’re operating through an agent or if you’re conducting significant marketing activities. So, the states turned the argument from physical presence inside a state and made it an argument about the level of contacts with a state. Which, absent a ruling from a federal court, the states are free to make their own laws for matters within their own state. So, the concept that you needed physical presence with a state to be subject to economic nexus there was already starting to disappear. However, finally the Supreme Court overturned the Quill decision and essentially gave their blessing for looser interpretations of economic nexus.

The problem is that, while the Court overturned Quill, it did not really provide any clear indication on what constitutes economic nexus. In the Wayfair case, South Dakota had set a limit that if you do over $100,000 in business in their state, that will constitute as significant activity. So, there is a threshold and a fairly high one to cross before economic nexus has been met. But what about in other situations where states do not have the same types of standards? There are only eight states that mirror South Dakota’s test.

Without judicial restraint here, the states can essentially do what they want. It is very possible, for example, that California’s law could be unconstitutional from a federal perspective. However, without some intervention from the courts of from Congress, there is nothing that limits California’s ability to govern itself internally. Nor is there anything that would prevent the forty nine other states from doing the same thing without any uniform standard. Theoretically, we could have fifty states with fifty different definitions of economic nexus.

The other thing Wayfair did not address retroactivity with respect to this economic Nexus provision. It is fairly certain that going forward that economic Nexus laws will be continue to be upheld at least if they meet the general guideline that South Dakota put forward. What is really unclear is can states go back retroactively and enforce economic Nexus provisions. For example, before 2018, can the states really go back and enforce state sales tax and state income tax laws against out of state entities?

How Things Stand Today:

The real landscape after Wayfair is this: as long as you have some level of minimum contacts with a state like California, you are going to be subject to their jurisdiction. It also means that given the revenue that is being generated from all of the out of state entities, you can expect businesses to be liable for sales tax collection and filing and potentially state income tax payment and filing in a variety of different states. If you are considered to have nexus within a state, even if you are located outside of that state, having nexus is equivalent to essentially having a branch office within that state. They look at it for state income tax purposes and they look at it for a state sales tax purposes.

With respect to compliance, the most important thing going forward is understanding that this issue is not going to just go away. It is something that is going to continue to increase and continue to provide problems for businesses and the people that work for them. The states are going to get more and more sophisticated in enforcing these types of laws.

The important thing is you really need to understand what the problem is. You need to understand what the state knows about you. You need to understand how big your liability is, and you need to make a responsible decision on how to deal with those issues, and that is really, really important. You do not want to rush to judgment or rush to compliance because that’s a really big mistake to make because a lot of times, you are just opening up a problem without really dealing with the problem or by creating a problem that’s much bigger.

Eventually, someone will catch up to you based on your activities. Depending on your level of contacts, depending on your presence outside the state, either online or otherwise, there may be different ways to manage your mitigated risk but the important thing to realize is, eventually, they will try and find you and they probably will find you, because of the emphasis that state revenue departments are placing on this issue. If you have not be caught or contacted yet, now is the perfect opportunity before the states get too sophisticated and before the states increase their enforcement efforts. We recommend getting a compliance or at least manage or mitigate the issue as soon as possible.

In conclusion, multi-state sales/use tax issues can be particularly complicated and difficult for a business to deal with. Many CPAs do not fully understand the issues because many CPAs do not focus on sales tax issues and the same can be said about internal CFOs as well. Because the issue is complicated and so few firms practice this area of law because of the complexity, you really need a specialist to help you deal with these issues. At Brotman Law, we take a novel approach, because our focus is about the health and well-being of our clients’ businesses. We put a cost-effective compliance plan that is easy to manage and gather resources around our clients in order to help them manage their situations effectively.

Multi-State Payroll Tax Issues:

There is a lot of misunderstanding and a lot of confusion with respect to the ways that companies are reporting their payroll tax obligations when they have employees/independent contractors in multiple states. Without oversimplifying the issues, companies should really be looking at where services are being provided.  To the extent that services are being provided in a state, then that particular state where the services are being provided is going to want to collect payroll taxes associated with those services. There are some exceptions to this, but generally speaking where services are being performed, is where tax is going to be permitted and paid.

If you have a situation where you have somebody in California and they are flying to the state of Florida, and they are performing services exclusively within Florida, you are not going to file California payroll tax returns. You are going to file Florida payroll tax returns. Even if somebody is physically living in another jurisdiction, payroll tax liability will extend to the state that services are being performed and where the work is done. You will fall under those states laws, with respect to labor. So it is very important that you understand that and are reporting payroll taxes correctly because most payroll companies do not catch this.

Payroll taxes can also be a problem when you have agents, affiliates or independent contractors located in another state. To the extent that you have independent contractors in multiple states, you may be subjecting yourself potentially to the state payroll taxes and state income tax liability. A quick word about the independent contractors is that the relationship between independent contractor as an individual and a business is being put under scrutiny by a variety of states.

In California for example, there’s a case called Dynamex. And Dynamex essentially boils down independent contractors to a three part test which mirrors the three part test that is in a variety of other states. Many states including California are making a proactive attempt to really narrow the scope of independent contractors. Why are they narrowing the scope of who gets classified as an independent contractor? This is because the states collect payroll tax revenue on people who are considered employees of a business where as they do not collect tax on independent contractors. Traditionally, the way that most employers think about independent contractors is that those people only are working a limited number of hours or they are working from their home location, or they’re providing services to a number of different people. Depending on the state, you may have a different definition of what is considered an independent contractor. So, for example, in California traditionally there was a seven factor test for determining whether somebody was or was not an independent contractor. However, recent court decisions and legislation have made this a little bit simpler.

  • How much control does the employing unit have over the independent contractor?
  • How integral is the job function of the independent contractor to the production of revenue for the business?
  • How well can the employer/taxpayer establish that the independent contractor is truly and independent business?

If you have a business and the production of revenue is dictated by the services being performed by independent contractors, typically those independent contractors are not independent contractors they are employees of that business to the extent that independent contractor services are integral to the core function of the business. There are very broad reaching issues with independent contractors particularly in multiple states.

First, there is obviously a significant payroll tax liability depending on how many independent contractors that you’re using and depending state by state if you’re using a large pool of independent contractors in a particular state you can be cruising for a payroll tax audit. For example, we have a company located in the State of Georgia that was relying on a pool of independent contractors for ancillary services to that business. Those independent contractors were found to be employees within California and created a liability for that client.

Second, depending on the state, if an independent contractor is operating on your behalf in a state that you do not have a physical presence in, then you may be considered doing business in that state and then you are going to have to deal with state income tax filing and compliance issues as well (along with probably owing that state some money).

So, there are a lot of variables to consider for businesses with multi-state work forces. You will need to examine where the labor force is for your business and what services are being performed (i.e. are services being performed in multiple states). However, there are other issues to consider as well. Although the gains are traditionally smaller, there can be optimization benefits (i.e. saving money) along with the importance of making sure you are in compliance to avoid any issues.

The good news is that you have come to the right place for help with this. Our knowledge of these issues and the interaction with other tax and business issues make our firm a great choice to put your company in the best position possible. We understand not only the tax implications, but the practical business implications of having a multi-state workforce and can help you navigate a variety of challenges when dealing with these issues.

Multi-State Income Tax Issues for Businesses:

Traditionally, states have been looking at state income tax from an apportionment standpoint. They have been looking at where the percentage of your revenue is, where your employees are and where your inventory is being held. That is still true for a variety of product related businesses. They are going to look at your level of contacts with a particular state. Then to the extent you have nexus within that state, it will seek to tax all the income associated with their state.

For example, if you are in California and you have employees in California and Illinois. Illinois is going to want the proportionate share of its revenue that is being earned in the State of Illinois or that is being generated by those employees. So, your organization needs to find balance between its activities in different states. If you are principally headquartered in California, for example, you should not be treating all of your income as subject to California state income tax. Rather, you should be allocating it among the different states that you are touching.

This can create a big problem for organizations, but can also create a huge opportunity for significant tax planning. First, the problem. If your California business is reporting all of its income in California and not allocating some toward the state of Illinois, it will face a big challenge when it gets audited by Illinois, especially for years that are past the statute of limitations on getting a refund in California for the tax that you overpaid. Essentially, you are going to pay state income tax twice on the income that you earned, not to mention interest and penalties in Illinois for the underpayments of tax.

With respect to service businesses, mostly States are going to tax you from a state income tax perspective on the location of services that are being performed. This gets a little bit complicated because you could have a situation where services are being performed for particular items generating revenue in a variety of different States. For example, you could have a client in Arizona and you’re in California and you’re doing a certain amount of services in California and a certain amount of services in Arizona.

Really what this comes down to for most states is a balancing task. You’re not going to be able to take a fee for a service project and microscopically split between California and Arizona, but you can just do a general balancing test. The nice thing with respect of State income tax reporting particularly through proactive is you get a chance to take the first position and will probably face little chance of challenge as long as that position is fair.

Now for the good news. Shifting income away from high tax jurisdictions can offer incredible savings for an organization if multi-state income tax planning is being done properly. If you are located in multiple states, does it make sense to base your operations in a high tax jurisdiction like California? Do you have options based on the logistics of your operation to switch your headquarters to a different State? When you are a multi-state company, even for businesses that have not really traditionally thought of themselves as multi-state companies, you have an option where your home base is, and there are certain tax advantages obviously between different States, some tax businesses very high some tax businesses very low on where you want your home base of operations to be. You can have a certain amount of choice of entity and it’s really important multistate tax planning, to figure out how to best navigate your state income tax liabilities.

In conclusion, as you can likely tell from our discussion, the income tax issues that face multi-state businesses can seem overwhelming at first because there are a lot of moving parts. However, the benefits of compliance and more so from the potential tax savings associated with multi-state tax planning are worth the effort. In our experience, we have found that a lot of businesses are not reporting properly with respect to states that they are doing business in. You want to have a very good understanding of where you are reporting to, why you are reporting there, and to make sure that you are taking a position that is most favorable to you. There are going to be situations where there are going to be conflicts among the states in how they believe that you should report. There are also situations where there is a great deal of opportunity as well. Our team can help you navigate these issues for maximum benefit as well as for maximum gain.

Multi-State Residency Issues for Individuals:

Multi-state tax issues do not just impact businesses and, in reality, they impact people much more frequently. People move around a lot, so there are situations where you get residency issues for people who are in different states than their companies, or who tend to travel a lot. Residency laws vary from state to state. It is impossible to cover every single state law, but suffice it to say that, in most states, if you lived in a there for more than six months out of the year, you are going to be deemed a resident of that state. In California, The underlying theory of the regulations is that the state with which a person has the closest connection to during the taxable year is the state of his residence. [CC&R § 17014(b)].

If you are a resident of a particular state like California, then you’re going to be taxed on your ‘worldwide’ income. The state is going to seek to tax you, based on the fact that you were a resident in that state. If you live in California six months a year, and if you lived in Arizona for five months of the year, say for five months and twenty-eight days, then you would be considered a California resident, you pay California tax on all of that income. Actually the way it would work, is that you would pay income tax in Arizona for the income earned there and would receive a credit for that on your California taxes (California has a higher state income tax rate than Arizona). In the inverse of that situation (six months in Arizona), you would pay Arizona income tax as an Arizona resident and only be tax in California for California source income.

From residency perspective you’re going to want to pay attention to where you are, where you are performing services and where you are subject to tax. There obviously are conflicts with a lot of states with respect to taxation schemes just as there is on the corporate side. If you are an officer for example of a company and you do a lot of travelling, you may find it wise to move your home base to a different state other than the one you actually live in. There are obviously practical considerations for people with families and/or children.

This gets challenging for a variety of reasons. First, for states that are very close together, particularly north-eastern states where there’s a lot of movement back and forth where you can cross two or three state lines in a given day. Second, there is a lot that goes into changing ones residency and states can be aggressive when it comes to interpretations of what it means to be a resident of their state. Most states operate on the principle of a domicile.

The term “domicile” has been defined as the one location with which for legal purposes a person is considered to have the most settled and permanent connection. A person may only have one domicile at a time and they retain that domicile until acquiring another one elsewhere. In order to change one’s domicile, a person must actually move to a new residence and intend to remain there permanently or indefinitely. When taxpayers begin making connections with a new location, but do not actually abandon their old location, they will continue to be domiciled in and residents of the first location until they actually move into the new location.

Here are the variety of factors that California looks at when it performs a residency analysis:

  • Location, size, and value of residential real property
  • Location of spouse and children
  • Where do your children attend school (minor children only)
  • Where does the taxpayer claim the homeowner’s property tax exemption
  • Taxpayer’s telephone records
  • The number of days that the taxpayer spends in California vs. other states and the general purpose of those days.
  • The location where the taxpayer files his returns, both federal and state returns, and the state of residence claimed on those returns.
  • The location of the taxpayer’s bank and savings accounts.
  • Origin point of taxpayer’s checking account transactions and credit card transactions
  • State where taxpayer maintains membership in social, religious, and professional organizations
  • State where taxpayer registers his automobiles
  • State where taxpayer maintains drivers licenses
  • State where taxpayer maintains his voter registration and taxpayer’s voting participation history
  • State where taxpayer obtains professional services
  • State where taxpayer is employed
  • State where taxpayer maintains their business and business license
  • State where taxpayer maintains there professional licensure
  • State where taxpayer holds investment property or assets
  • Third party testimony about taxpayer’s residency

In conclusion, you want to make sure from a residency perspective, you are doing things from a tax-efficiency standpoint. There can be major consequences in personal residency situations, such as with sales of a company, capital gains income, and with retirement distributions. The best thing that you can do is plan these income distributions in advance and give yourself enough transition time in between leaving one jurisdiction and establishing domicile in another state to avoid scrutiny. Alternatively, you want to make sure you adequately protect yourself by documenting your change in domicile, and/or fight adverse residency determinations. This is an area where the state tends to place a lot of focus, so having an experienced tax team by your side to navigate these challenges can really make the difference.

Federal Tax Defense: The IRS

 

Who is afraid of the big bad wolf? The IRS has long been an organization that has struck fear in the hearts of many people. Owing money to the government or being the subject of a government investigation conjures up images of agents in your home or raiding your office, hauling you away in front of your family, and throwing you into federal prison. While some of these images are sensationalized and often tied to the actions of the criminal investigative division, the IRS and their agents do have a tremendous amount of power. Our system is set up to maximize their ability to do their jobs, even sometimes at the expense of the individual taxpayer, so the IRS has broad power granted to them to investigate, subpoena, demand records, assess penalties, file liens, seize assets, and, yes, sometimes put people in jail. So when faced with a situation where you are against the full force of the United States Government, you often times will want a skilled tax attorney who will stand up for your rights and get them out of your life as quickly as possible.

 

Not All Tax Firms Are Created Equal

Unfortunately, and perhaps even worse in some sense than the IRS themselves, there is a whole cottage industry that surrounds “tax resolution.” If you have ever watched those ads on late night TV that offer to settle your tax liability for pennies on the dollar, then you will know what we are talking about. Even if you have not, a quick google search on owing money to the government, will reveal all sorts of bad actors. These firms are not law firms, but hold themselves up as experts at tax relief perhaps even stating that they have a team of tax attorneys and CPAs who will fight for you against the IRS. Some of them use fear marketing to get your attention and others will dress themselves up with fake customers reviews, BBB ratings, and stock images of smiling people that you can imagine are now free from their tax debt. These organizations tout their experience and credentialing, but are nothing more than fake lawyers (and are quick to identify that they are not a law firm to avoid getting sued).

In reality, many of these organizations engage in predatory tactics and are a thin disguise of slick marketing and high pressure sales teams that steal their customers money and often times get them into worse shape with the IRS then when they started (they can charge you more if the situation gets worse). The problem is that they are not law firms and not subject to things like licensing requirements or state bar restrictions. Some of them are just lead generation companies who will sell your information or will transfer your live phone call over to the highest bidder. You are then sent to some sales person, who is being paid a commission for converting you, and pitched a tax resolution in multiple phases. Sometimes there is a large vaguely defined but all-inclusive up-front fee for their services, sometimes they engage in “sucker pricing,” where is where they quote you a low fee to start and hit you with high fees through the process or when you need them most. A lot has been written on these firms and the Federal Trade Commission and many state agencies are shutting them down one by one.

We mention this at the outset because we know how effective these organizations are and how dangerous they can be. They prey on people who are in a weakened position and will do or say just about anything to get you to pay them. And it is amazing how many people fall for their tactics and how many messes we have to clean up for people who have been victimized by these companies. That is why, as a starting point, we just want you to know what is out there.

 

CPAs – Why Often Your First Line of Defense is Not Your Best One

First, we love CPAs. They are our channel partners and we rely on them every day in our practice. There are some who are excellent at resolving tax problems. They are often the first line of defense for many taxpayers because, well “why would you not go to the same person who prepares your taxes for help with a tax issue?” There are sometimes a lot of problems with using your CPA to resolve a dispute with the IRS though and some CPAs will create more problems for their clients then they realize when trying to solve a tax issue (and they often do so in good faith).

The primary issue with CPAs is the unrealistic expectations that the general public places on them. Most people equate their accountant with their taxes, so for every tax issue that comes up, they use their accountant as the first line of defense. The problem is that while CPAs may know a lot about tax law, they generally do not know a whole lot about tax procedure. See, people’s expertise is a function of what they do all day long and CPAs prepare tax returns vs. dealing with audits or helping people who owe more to the government than they can pay. That is what “Certified Public Accountant” means. You are certified to prepare financial statements, including tax returns, that the public can trust in.

What hurts the situation is that CPAs are used to their role as the tax person in chief and are used to dealing with unfamiliar tax issues that their clients bring to them and ask for guidance. They are not used to consulting an attorney on a tax issue when they might need help and instead will try and solve the problem themselves. The CPA uses the compliance style approach that they would use prepare a return with and will often times reach out to a government agent with the intent just to give them what they want. The problem is that many IRS agents in collections or examinations will take advantage of the situation to further their own objectives. Most CPAs do not realize that there is often a more client beneficial solution to a problem then just simply doing what the agent wants. And, generally speaking, CPAs are not usually the most confrontational people in the world and are not trained in advocacy, so are frankly not used to the fight that comes sometimes with tax controversy matters.

Our firm prides ourselves on the relationship we have with the CPAs that we work with. Although collaboration in tax is not common, we think it should be, and encourage our CPA partners to reach out to us on tax dispute issues whenever possible (much like a general practitioner doctor would reach out to a specialist if you got sick). They have their swim lanes and we have ours, but it is the collaborative process that is often best for the client. The point is: we may not know your CPA personally, we are sure they are a nice person, but you should make sure that they are the right person to handle your dispute with the IRS.

Why Our Tax System is Often Unfair to Taxpayers

Yes, the deck is seemingly stacked against you when it comes to resolving things with the IRS. The reason the IRS does the things it does and the reason the system operates the way it does is because of something called the tax gap. The tax gap is the concept that there is a “gap” between what would happen if all taxpayers did everything that they were supposed to (i.e. filing correctly and on-time and paying on-time) and the reality of the situation. And the last time that we checked, our US tax gap was somewhere around $485 billion dollars.

That is a HUGE number and, on the enforcement side, the IRS is essentially designed to do everything it can to close that tax gap. So what comprises that is 1) people who do not file, 2) people who do not pay (IRS Collections), and 3) people who underreport their proper tax obligations (IRS Examinations).

So, the IRS realizes that all of this is an issue and, therefore, has created a system designed to combat it as best it can. In reality, the IRS is an organization of limited resources, so it does not have the manpower to send an individual agent after everyone, but it does have experience combating these problems and does have some key advantages on its side.

Let’s start with IRS collections. First, the IRS has access to incredible amounts of information through its own systems, other government systems, and information sharing agreements with all the states. Think about how much of our lives are public information: the IRS has our personal information, it has where we work (it actually knows exactly how we earn all of our money), and, if it wanted to, it could very easily send an agent to where you are right now to come and get you. Or it could visit your bank or your employer, or talk to your neighbors, friends, and family members. Most people are not ghosts, so we are not hard to find if the government wants to come after us.

Second, the IRS has access to technology. With its internal resources becoming limited, the IRS is increasingly leaning on technology to accomplish its objectives (odd as it sounds for an organization that still uses fax machines). However, the IRS can initiate all sorts of actions with a push of a button or, now, increasingly through automation. Have you been receiving threatening letters from the IRS? More than likely, those are the product of a computer and not a human. Equally, the IRS can zap all of your financial accounts with a few programmed instructions and some pieces of paper being sent out. If Amazon can utilize technology to get stuff to your house in an hour, you really think that the federal government cannot use its technology to squeeze you if you owe money to the IRS? And the more technological we become as a society, the better the IRS becomes at shrinking that tax gap through technology.

What prevents the IRS from going nuclear on you is that we are a country that is built on laws and the IRS is bound to follow those laws. Internally, the IRS is also a massive organization that is dictated by processes and procedures. With that said, while we do have a series of measures designed to protect us as taxpayers, you must also understand that our laws are principally written to facilitate tax collections, so that the government can collect the essential revenue that it needs to operate. We need money to fund the military, build schools and keep the lights on in DC. Our laws facilitate the IRS being able to collect money from people and allow them to do it quickly and efficiently. The size and scale of this system is designed to do this for everyone, so it should not come as a surprise that it does not address a lot of individual and business taxpayers concerns or take into consideration their individual situations. Owe money to the IRS? The government’s position is “pay me and do it as quickly as possible, or I will bring consequences upon you.”

We do not mean to over sensationalize the situation, but we think it is equally fair to tell you that IRS policy gives little care for individual situations by instead administering our tax policy with broad brush strokes rather than individual situations. So, for those that do not fit within the IRS’s perimeters, the system can come across as cold and uncaring. IRS payment terms or collections resolutions can seem unreasonable (struggling to deal with common life situations such as divorce, children in college, religious obligations, health issues, etc.) and taxpayers often deal with a high degree of frustration during the process.

 

The IRS and Businesses – A Bad Situation Gets Worse

The a tax problem with the IRS is even worse for businesses and their owners. In a nutshell, the IRS simply does not understand how businesses are run and, therefore, conflicts between a business with tax issues and the IRS happen all the time. To the IRS, it would rather kill the business and looks toward liquidating assets, seizing accounts receivable, levying bank accounts, and otherwise disrupting operations. Particularly with businesses that are cyclical or those delays in payment between the performance of services/delivery of goods and payment, these routine issues will often translate into things the IRS does not understand. For example, a revenue officer examining business operations in the summer when considering a payment plan, often does not take into account the seasonality of a business when mandating a payment amount. So, as you can imagine, conflicts between the IRS and businesses happen all the time.

Some of the worst situations involve businesses with single owners or that are controlled by small groups of people. For example, when a business has payroll tax issues, the IRS will seek to assess the officers personally for the amount of unpaid liability attributable to their employees (in what is called a Trust Fund Recovery Penalty). This leaves both the business and the owners owing a liability to the IRS. The worst part though is then the IRS seeks to collect from both parties, not factoring in the fact that many business owners pay for their personal expenses through distributions. Therefore, the IRS is essentially double dipping by trying to take it on both the business and the personal sides.

Payroll tax collection issues are by far the worst thing for a business and are something taken seriously by IRS. Assignment to a local agent happens much faster on the payroll tax side of things vs. on the income tax side. A business could owe a quarter million dollars in income tax and not elicit attention, but the same business owing two quarters of payroll tax liability could bring about a visit from an agent.

The IRS also tends to go after the self-employed and other independent contractors.

A self-employed person who is not filing then you will have a business that’s operating off the radar and that is a larger source of revenue for the IRS. Not surprisingly, the IRS pursues non-filers who are independent contractors and small businesses because that is more of lost revenue to the Service than a W2 filer who is going, working their job, filing every year, withholding taxes and submitting to the IRS. Non-filers are a really big issue for the government.

 

Payroll Tax Matters – Corporate Collections

Whether at the IRS or the state level, corporate collection issues are often the most challenging and most difficult matters to resolve. Both entities take a very aggressive approach toward corporate collections and often times will jeopardize the health of the business by being overly aggressive. Even though it seems counterintuitive, the “killing the goose that lays the golden eggs” strategy is often the one that collection agents employ by levying business operating accounts and accounts receivable. Often times, they will show no remorse toward your business or your ability to generate a living and provide for you and your employees.

One of the hallmarks of our practice has been in defending businesses against the wrath of the federal and state governments. It takes a business owner to know a business owner and Brotman Law takes a “business first” approach to solving tax problems. Recognizing that businesses are unique, we understand that the goal is not just to protect the business assets, but also to preserve cash flow and not let the tax authorities inhibit growth. We deal with any and all immediate threats to the business and then work to put together a plan that leads to long term business success as well as that will satisfy the taxing agencies.

 

Our IRS Collections Practice

So, to recap, the IRS policy when it comes to collections is to come after people who are either not filing or not paying. Because of this, what you will find with the IRS is a series of actions that speeds up locating delinquent taxpayers, putting pressure on them, and essentially forcing them into compliance by beating them into submission. The laws and internal policies of the IRS are essentially written to help them facilitate that process, even above being particularly flexible to the taxpayer in any individual situation. The consequences are harsh and so an experienced advocate is often a good investment when fighting back against the IRS.

The IRS Collections department often takes a tough and unreasonable approach when you owe a liability to the government. Rather than express sympathy for your situation, they will use harsh standards and make unreasonable demands in order to get the most money out of you per month. The sacrifices that they ask you to make are often too much for most taxpayers to bear. In addition, taxpayers who do not agree to their demands are often subject to forced collection action, wiping out bank accounts, garnishing wages, and generally making it extremely difficult for you to live and support yourself.

Brotman Law eliminates the threat and shifts the focus from the desires of the government to the needs and future goals of our clients. We strategize and plan for financial and personal success, determining the cost of what it takes to maintain your standard of living and then working the IRS into that framework rather than the other way around. Our strategy minimizes client contact with the Service and the intrusion of the IRS into their daily lives. We aim to preserve your standard of living and help you to keep the things which matter most.

Other Frequently Dealt With Collections Issues:

Offers in Compromise

There are times when a tax debt becomes insurmountable given a person’s financial circumstances or where there is a serious doubt as to the liability owed. Although the IRS has created a program to settle a person or business’s tax liability (Offer in Compromise), it has placed stringent restrictions on the criteria that it uses to determine offer acceptance. In addition, IRS personnel are trained to screen offers in compromise and reject or modify offer amounts, which often times make them unworkable for the taxpayer. Taxpayers are often confused or angry at the Service for what seems like an unfair process and the fresh starts promised seem unobtainable.

Brotman Law helps to dispel the mystery from the offer in compromise process. In contrast to many firms, we prescreen offers using the same formulaic methods that the IRS collections divisions uses for acceptance and only submit offers in compromise that we feel have a high chance of acceptance. If a client comes to us and presents circumstances that we do not believe will be approved, we formulate a strategy and work with them to present an offer in compromise that will be acceptable to the IRS. Additionally, we always strive to do what we can to maximize the client’s tax savings and provide with the fresh start that they deserve.

Innocent Spouse Relief

The IRS generally holds both husband and wife liable for the tax liability shown on their joint income tax return. Under normal collections protocol, since both spouses are held jointly and severally liable for the tax liability shown on the return, the IRS will take enforcement actions against both of them and they are held equally responsible for the liability. Innocent spouse relief, although available through the Service, is the exception rather than the rule. This is true in circumstances where only one spouse earned the income associated with a tax liability or in cases of divorce where one spouse has agreed to accept liability for any taxes owed. IRS collections does not honor 3rd party divorce agreements.

You should not be punished for the mistakes or wrongful conduct of your spouse/current spouse. Innocent spouse situations are often very fact specific and Brotman Law takes a deep analytical approach to solving the problem. We analyze the three available avenues of relief that are available through the innocent spouse program and determine which method is going to best meet your needs. The goal is defense. We work hard to preserve your quality of life and your standard of living. Furthermore, we recognize the effect that divorce or marital separation situations affect your normal life and plan for short term needs as well as long term goals.

Penalty and Interest Abatements

If you have ever owed a balance to the IRS and received a statement from them reflecting the total that is owed, you know exactly how much that penalties and interest can add to that liability. Many of our clients are perfectly agreeable to paying the tax that is owed; however, penalties and interest associated with the account can often double or triple that liability. The IRS does not differentiate between the balance that is owed for tax and the balance owed for interest and penalties. It will take the same collection actions to make sure that the total liability is paid in full regardless of the taxpayer’s circumstances.

Brotman Law has had a great track record of success in getting interest and penalties abated through the Penalty Appeals Service Coordinator and through the IRS Office of Appeals. We understand the finer legal points and other criteria that go into the IRS’s determination on whether or not to abate penalties and interest and craft abatements that hit on several of these major issues. Our background the case law as well the more recent court decisions and our knowledge of internal procedure allow us to go much further on the issues presented and we are often successful at getting abatements accomplished on the first attempt.

IRS Audits

Overwhelmingly, the biggest problem that the IRS faces is underreporting. While it is easier to deal with someone who owes you money, because you are at least aware of that fact, underreporting is much more complicated to detect and the IRS does not necessarily know the motivation behind it. One one hand, we may have people who may be making an innocent mistake on one side of the fence, either through their own reporting error or an error that their CPA made (however, just because the CPA made the error, you are not completely absolved of consequences). On the other end of the spectrum, we have people deliberately underreporting and are willfully not paying the correct amount in taxes. And then you have everyone else that just falls into the middle.

The key function of IRS examinations is to target tax returns that have a high propensity for error, or a high propensity for fraud. When dealing with IRS examinations and if you are a practitioner that has done any frequency of IRS audit work, you’re going to start to notice patterns in the types of people that get audited. For example, it’s no surprise that cash businesses get audited, or that attorneys get audited, or that hair-salons and taxi-drivers and restaurants get targeted either. What we often see in our firm is that the same type of industries and businesses tend to get audited over and over and over again for various types of issues.

Receiving an audit notice in the mail or being contacted by an IRS Revenue Agent is a scary experience for many taxpayers. Audits are intrusive, time consuming, and often designed to maximize the revenue that the government receives. The IRS audits those that it feels there is the biggest chance for an adjustment in their favor and can cost a taxpayer thousands, sometimes hundreds of thousands of dollars as a result. Additionally, some revenue agents will take advantage of taxpayers and use their knowledge of the tax code to trap you and/or open up multiple years.

When you file your taxes, the IRS has developed two methods of scoring your return to determine whether or not you are going to get audited. These are called a DIF Score and a UI DIF Score. The DIF Score stands for discrete income function. The score is a measurement of all of your information and what is the risk that your tax return is not accurate based on a variety of factors. Think about it this way. When you file your tax return, your tax return is a treasure trove of information about you. It tells the government who you are, where you work, how much money you earn, how much you pay for the house that you own, etc…There’s a variety of information here that the IRS looks at and uses to create a statistical profile for you. Then that profile gets compared against others who are similar to you.

For example, if you’re an attorney in San Diego, the IRS would look at you in comparison to other attorneys in San Diego (or who live in your zip code) and who make roughly the same amount of income that you do. You and these people will all end up plotted on a graph somewhere and scored based on all of the different factors. With everyone scored, you will end of with people who have a high end score and those who have a low score. It is those people that are more likely to get audited or who may be flagged for manual examination by a person to determine whether or not they are going to be audited. The reason for this is that these people are outliers and their story does not exactly make sense or fall within the “normal” as defined by everyone else. Along with the DIF score, you have the UI DIF score which the UI DIF score is representative for unreported income. It looks at a taxpayer’s return and assesses the potential that they have for unreported income. Those numbers get scored and examined in a very similar fashion.

So, we have people ask us all the time “what can I do to make sure my return does not get audited?” And, you see, the answer is much more complex because it is not just about your return, but your return’s relationship to others in its peer category. A lot of prospective clients get this wrong and will scale back on rightfully entitled to deductions in order to perceive less of an audit risk. “Well, they rationalize, “if I give the government back some money or am less generous with myself, then they won’t audit me.”

We hope you can see the fallacy in that logic now. People do not get audited because they are too aggressive or too conservative. In fact, being conservative often means that you are just paying more in tax to the IRS than you should reasonably be paying. Instead, people  get audited for the reason I just mentioned, is that they fall at the top or the bottom end of that DIF or UI DIF line.

A word of warning. We used to tell clients that audits were nothing to be afraid of. After all, an audit is just simple a routine check of the numbers on your return and you may have just ended up on the wrong side of the DIF score for one reason or another. However, these days, audits mean something else entirely. Because of limited resources, the IRS is left to audit fewer returns in person, so they specially select the ones that they are going to choose for audit. That means, if you get an audit notice in the mail, you should know walking in that the IRS has a strong belief already that they are going to get some sort of an adjustment for one reason or another. This may be a particular issue or just something general about the return, but the operative question to ask at the beginning of an audit is “why me” and to generally expect that you are not walking out of the situation unscathed without a fight. There is nothing more that most agents dislike than to dedicate a ton of time to an audit and not get something out of it. They feel like they missed something or that not making an adjustment to the return means that they did not do their job as well as they should have.

Our firm immediately levels the playing field in an audit. During the initial consultation, we examine the return under audit along with any correspondence received and immediately work to come up with a game plan for effectively dealing with the auditor. We identify categories or items that may be high risk and develop a strategy with our clients for minimizing their biggest issues and moving them out of examination as quickly as possible. Preparation and presentation are the keys to success in any audit. IRS auditors may appear to wield a lot of power, but they are often no match for an attorney with a superior legal knowledge base and a keen understanding of IRS procedure. We utilize our tremendous experience in audits for the benefit of our clients and to yield exceptional results. Our knowledge is your power.

Payroll Tax Matters – Audits

For some businesses that rely heavily on contract labor, the threat of an IRS or Employment Development Department audit is serious and can be potentially crippling to a business. Because of the amounts in controversy, liabilities at the end of payroll tax or independent contractor audits can be in the hundreds of thousands if not millions depending on the size of the business. For the taxation agency revenue agents, often these inquiries will span multiple years and investigations are conducted with the goal in mind of generating revenue for the federal government or the state. In addition, the penalties associated with these matters can be significant.

Determining payroll tax liability and whether a worker is an independent contractor or an employee is a multi-faceted inquiry. Luckily, Brotman Law understands the subtleties involved in the analysis and will work to present the facts in the light that is most favorable to the client. Our knowledge of the law and of the federal/state audit procedure gives us the upper hand in the majority of cases with the tax agencies. We often know the direction of their investigation before they take action, which allows us to plan better and to navigate our clients through the audit process with as much ease and simplicity as possible.

California Tax Defense & Tax Issues

 

When we have a client who is faced with a state tax issue versus a federal tax issue, we usually advice the client to pay down the state liability first and or deal with the state tax issue first because often times even though the liabilities are smaller or the amount in controversy is less, there is more at stake with the state tax issue in terms of resources consumed both in time, energy and money.

California state tax issues are confusing because they rules are not quite the same as the federal system and it is not a user friendly as dealing with the IRS (funny as that sounds.) California is one of the most aggressive states in terms of both examinations (audits) and collections and taxpayers often get frustrated by the process. Additionally, there is a general lack of information available to your average taxpayer on how to resolve California tax issues.

Why You Should Think About Hiring a California Tax Attorney

First, let us get this out of the way. We are often surprised at the reaction that we get from the people we meet outside of our tax world who would never of or had not considered hiring a tax attorney to deal with their California tax problem. When probing this, we have found two general responses: 1) Why should I not handle my California tax problem myself or internally within my company? 2) Why shouldn’t my CPA be the person to handle this issue on my behalf?

Why you should not handle your California tax problem on your own?

  1. Time – California’s administrative tax process is not easy. As mentioned above, the state is aggressive, the system is designed to facilitate tax assessments and collections, there is not a whole lot of information out there to help, and the information out there is not the greatest. Taking it from people who have built a law practice on dealing with California tax issues, the frustration level is often very high in dealing with the California. Whether or not you are “right” on the law, the procedural rigmarole of the process is exhausting and time consuming. And your time is valuable. Hiring us is like taking a hot butter knife through all the red tape, hassle, and headache associated with dealing with the California.

 

2. Money – Wait, lawyers cost money. It would seem that logic dictates that you are saving money by not hiring an experienced California tax attorney to deal with your California state tax issue. In reality, that statement often times could not be further from the truth.

One of the driving principles of our firm is value. We actively screen matters to make sure that the ones we accept will provide value for our clients. This means that whatever your fees are with us will generate a return on investment in terms of tax that we save you or pain that we take away. And we have great track record in that department. The problem with handling your California tax problem internally is that you do not know what you do not know. Particularly in audits, there are lots of little things you can do to substantially reduce the scope of the audit, to drive the bill down to zero, and to even get money back from California.

You do not know what you do not know extends to the amount of pain involved with the process as well. Many prospective clients oversimplify their issue or simply make wrong assumptions about what dealing with California will entail. It is totally false to assume that because you have not done anything wrong that does not mean you do not have anything to worry about.

3. Reputation – Do you have a California collections issue? Do you have an audit that may turn into a collections issue? California a lot of weapons in its arsenal and one of the most effective ones is public shame. First, do you know that both the Franchise Tax Board and the California Department of Tax and Fee Administration keep public lists of their most delinquent taxpayers?

https://www.ftb.ca.gov/about-ftb/newsroom/tax-news/may-2018/top-500-delinquents-taxpayers-list.html

http://www.cdtfa.ca.gov/taxes-and-fees/top500.htm

Second, once you move into collections, California can be very disruptive. They file liens that are a matter of public record. They contact employers, vendors, customers, banks, and even will send local agents out to interview neighbors and employees/co-workers. Yes, there are privacy laws, but they only prevent the government from disclosing the exact nature of the problem and those people above are left to their own inferences about why they are being contacted by the government for a matter on your behalf. In certain cases, California can suspend your professional licenses and even your drivers license.

Our point is this: if you are reading this and have a tax issue, we can give you all the general information in the world on this page about California tax issues, but what you really need is specific information about your situation. There is nothing wrong with picking up the phone and consulting with someone who is both knowledgeable and experienced in dealing with these types of California tax problems. Our clients are doctors, lawyers, entrepreneurs, corporate executives, professional athletes, and a host of other widely successful people. Your success and your personal standing is not marred by the fact that you have a tax issue and even less that you seek counsel of someone who can truly help you and/or guide you toward the best outcome possible.

Why Your CPA may not be the best person to handle your California tax issue?

Many people equate accountants to taxes. If this were Family Feud, we guess that answer would be at the top of the board. And why wouldn’t it? After all, your CPA does your taxes every year, if you got a notice from the State of California, why would they not be your first reach out?

Speaking generally about CPAs (whom we are very fond of because they are a big help to our practice), accountants go to school to learn tax compliance. In a very general sense, it is fill the form out, make sure it is done correctly, and make sure the client does not get in trouble because of it. That is what a CPA is in essence. They are certified to prepare certain types of filings, so that the public and the government has trust in what is prepared. They are not aggressive people by nature, they are not trained in advocacy, and, honestly, most prefer it that way.

Tax attorneys on the other hand share the same knowledge of the tax law that a CPA has (arguably CPAs understand certain issues better than we do sometimes), but tax attorneys (specifically tax controversy attorneys) are trained in 1) advocacy, 2) tax procedure. When your CPA sits down with an auditor, unless they have lots of experience in audits or have otherwise been trained, they can certainly hold their own in a conversation about the law. However, the law is not what wins in an audit. When we sit down with an auditor, the following things are running through our head at any given time (in no order):

    • The tax law that is involved.
    • Who the auditor is? Have we worked with this person before? Do we know their manager? Do we know other auditors in their group? What relationships can we leverage if this person gets out of line?
    • The presentation of the materials we have been given. How will these look not only to the auditor, but to their manager, the territory manager, the appeals officers, the appeals team manager, district or area counsel, and/or a tax court/administrative law judge. Note: when we deal with tax issues, we are constantly thinking several levels ahead so we are better prepared to win at those levels and get what we need to on the record.
    • The procedural issues involved. How can we use the state of California’s procedure to our advantage? We know their playbook (it’s public record). How do we maneuver for the benefit of the client and to maximize our wins in any given situation.

See, it is just different. We love CPAs and rely on them all the time in our practice, but a CPA is not the most appropriate person for the job in certain situations. It would be like if you came to us and asked us to prepare a tax return. We probably could, but that is not what we do all day long.

Why your CEO/CFO/Controller/Bookkeeper is often even a worse choice to handle your California tax issue?

Speaking again in generalities, equating someone’s skill in dealing with financial matters to their ability is solve complex California tax problems is often a huge mistake. Tax is, in and of itself, a much different thing than the issues that the other members of your financial team deal with. Although the various accounting backgrounds these individuals may have can shorten the learning curve, that alone is not going to eliminate it. Just because someone knows what a general ledger is or what goes into a balance sheet does not mean that they understand what a sales tax auditor will glean from that information and the consequences of submitting those items. As such, one of the biggest mistakes that companies make is assuming that the key financial person in the company is somehow apt to deal with a tax controversy. Someone’s access and understanding of your company’s financial records does not necessarily make them qualified as your tax representative. Would you have your CFO/Controller/Bookkeeper prepare your tax return or send them in to negotiate a major dispute between you and another party in an area that they might be unfamiliar with? Then why would you send them outmatched and unprepared into a tax situation that they might not address the full ramifications of. Although we can mitigate some of the damage done by this person in these situations, often times we cannot eliminate it and it often costs the client thousands, tens, or hundreds of thousands of dollars more than if we had stepped in initially and handled the matter ourselves. Again, you do not know what you do not know.

Think of us as a very specific tool to solve a problem, more specifically a California tax problem. We purposely limit or scope of services to just deal with certain issues and we do that because we want to be the very best at resolving those issues for our clients. Businesses and individuals hire us for our experience in these areas because they want to handle the situation once and do it right. So rather than mess with learning curves, rather than enter a situation at an immediate disadvantage in experience, and burn a bunch of time, money, and reputation by fighting California, perhaps you would much rather turn to an experienced tax law firm designed specifically and trusted to deal with these types of situation. The choice is yours.

California Income Tax – Franchise Tax Board

The Franchise Tax Board can be extremely difficult to deal with from a taxpayer standpoint whether through the examination division (audits) or through the collection division. Taxpayers become easily frustrated by California income tax procedures and the level of service received from the Franchise Tax Board. In addition, California has never been viewed as a particularly taxpayer friendly state. Tax procedures are geared to benefit the state and assist it in the collection of revenue. Additionally, California revenue officers and members of their Complex Account Recovery Team (CART) are known to take difficult stances with taxpayers during collection matters.

Unlike many tax firms, Brotman Law focuses on California state tax resolution specifically and navigates our clients through the most difficult of state tax issues. Neutralizing immediate threats, whether in an audit or during the collections process, is especially important because of the tendency of the Franchise Tax Board to take aggressive action when left unchecked. After the danger has passed, we work with the different levels of the Franchise Tax Board (often who do not communicate with each other) to put a resolution in place that best meets your goals. Our familiarity with the Franchise Tax Board helps us implement expedient resolutions to most California income tax problems.

California Payroll Tax – Employment Development Department

The Employment Development Department is the largest tax agency in California. Although it handles a variety of functions (the Employment Development Department has roughly ten thousand employees and a annual budget of roughly twelve million dollars), one of its primary functions is the administration and collections of payroll tax for the approximately seventeen million workers in California. As with the IRS, failure by employers to make payroll tax deposits is perceived to be a huge problem for California and, as a result, the Employment Development Department can take far-reaching and severe actions against businesses that do not meet their obligations.

Brotman Law recognizes the seriousness of the business being involved in a tax dispute with or being investigated by the Employment Development Department. EDD agents are among the biggest threats to California businesses because of the approach they take toward collecting revenue for the state, often to the detriment of the taxpayer. It is important to walk into any dealing with the Employment Development Department with a strategy to achieve the goals and minimize any potential damage that an agent can cause. We use our “business first” approach to solving problems to neutralize risk and protect the ability of your business to earn and generate income.

California Sales Tax – California Department of Tax and Fee Administration

In our professional experience, the California Department of Tax and Fee Administration is the most aggressive and difficult agency to deal with in California. In audits, sales tax auditors use a myriad of complicated tricks and auditing techniques to trap taxpayers and increase their liabilities to the state of California. Unlike income tax audits, the Board’s calculations for determining unreported sales rely heavily on methods that are heavily variable. On the collections side, CDTFA revenue personnel utilize extremely burdensome collection methods which can stifle a taxpayer’s business. Even more frightening is that CDTFA personnel can and will shut down a taxpayer’s business entirely for unpaid sales tax liability.

Brotman Law takes the fight to the California Department of Tax and Fee Administration. We utilize innovative and sound techniques to defeat liability and to make dealing with the CDTFA as easy as possible. In audits, unlike many attorneys, we are skilled in statistically methods and models and use our advanced knowledge of statistics to defeat the CDTFA procedures for assessing liability. Our proven methods have saved our clients millions in liability. In dealing with collections, we shield business and personal assets from collection officers and work to produce resolutions that mitigate even the toughest of collection agents.

Differences between California’s tax administration and the IRS

Most states are modeled after the federal system and California is one of them. There is not a lot of sense in inventing the wheel twice and the federal structure is usually very clear and easy to understand. However, when a state like California tries to duplicate how things are done on the federal level, not all of it will translate over into how the state does things.

Briefly, I want to talk to you about the differences between the federal tax system and the state tax system. First, you should understand that the states have much more limited resources than the federal government, are usually much more dependent on their tax revenue, and, as such, are usually more aggressive in their collections tactics and in their examination tactics than the federal government. A lot of times, when there is a budget short fall, the state will learn on their sales tax bureau, will lean on the payroll tax bureau and will lean on the income tax collections to help mandate collections priorities and help raise revenues either through collecting past due liabilities or examining returns and finding new ones. California’s laws are designed to facilitate collections and designed to give the state an advantage in making tax assessments and collecting money from those assessments; they are not designed to make things easy or fair on the taxpayer.

California Takes Action Against You From a Distance

In general, because of their limited resources, California will rely more on involuntary collections actions initiated at the state level than field representatives. Field representatives more money than computers taking action, mailing out pieces of paper, or having someone sit in a call center. Therefore, California is much more reliant on actions that are initiated from a remote location.

For example, with the Franchise Tax Board (FTB), the body in California responsible for individual and corporate income tax collections, most action is initiated from Rancho Cordova (Sacramento). From their Sacramento office, the FTB will initiate bank and wage levies, phone calls, contact with taxpayers or any other sort of collection actions. California does have collections presence at the local level and they do like to maintain a presence in the community through their local field offices. However, often times, most things are centralized outside the local field office and the local office is only utilized for situations that require the presence of someone locally to administer (a really intensive audit, field visits by collections to track down taxpayers and/or their assets). In a lot of cases, audits are shifting toward becoming correspondence audits through the mail instead of the traditional face-to-face meeting that you might imagine. So as you can see, the theme here is that limited resources at the local office are used sparingly and headquarters serves as the centralized base of operations for many state actions.

Limited and Inflexible Appeals Process

California’s appeals system for tax matters is also much more limited and inflexible than the one that exists on the federal level and one of the main differences between the federal and California systems exists on the appeals level. In 1998, because of a lot of abuses in the system, the IRS overhauled its system through the IRS Reform and Restructuring Act of 1998.

Think about it conceptually. With the federal system, you have a tax court and a very well defined judicial system at the top. When there are disputes with the IRS, which there often are, the US court system operates as a major check and balance against the IRS. Issues from all fifty states are litigated and litigated frequently through the courts and you have this really nice body of judicial decisions for both the taxpayers and the IRS to use as a framework.

That framework guides the IRS appeals process. IRS appeals is a separate and independent body from the rest of the Service. They are set up and designed to be impartial and are a way of settling disputes between taxpayers and the government prior to reaching tax court. When the law is clear, IRS appeals will kick issues out in favor of one party or the other. When it is not, IRS appeals will use its broad settlement authority to achieve resolution. At least in theory (not withstanding some issues with IRS appeals), it is a really great system and designed to administer a variety of tax controversies very efficiently.

California, on the other hand, does not have that same system. For one, the California judicial system sets a really high bar for even hearing tax cases in the first place. Actions may not be brought in California which impede the collection of tax and to get a case all the way through the California court system can take years and is usually prohibitively expensive. So where as the federal system makes access to the courts relatively easy, California’s system actively pushes most things into an administrative resolution.

This has wide ranging effects on the appeals process. First, less court challenges means less case law for the administrative tax agencies to rely on as guidance for their decision making. Less law also means comparatively less statutes when it comes to tax issues and less challenges to those statutes to parse their meaning (it should not surprise you but legislatures often write things that are ambiguous). So, there is a much looser framework in place that is often subject to interpretation and “subject to interpretation” means that there is often less certainty in the California appeals process than exists at the federal level.

The looser framework is not really a good thing for a variety of reasons. First, although the tax agencies in California do try to be fair and have created some measure of checks and balances, this is driven from the people at the top. What gets driven at the top does not always get translated down to the local levels. At the district office for many California tax agencies, there is a head of audit or head of collections and it is their word that governs by in large how that office is run. When their auditors/collections people are follow protocol from their supervisors, they view that as the final word vs. a well-defined system of written judicial opinions, and they generally have more bravado because they feel like actions that they take are “blessed” by the final word. From an appeals perspective, because those appeals functions are being run by the same agencies that they are meant to police, the frustration with a lot of situation in appeals is that it feels like the inmates are controlling the yard and that there is not a lot of oversight. This is not to suggest that the appeals function in California is not impartial or that the system is somehow deliberately rigged (it is not), but taking into consideration that a lot of the hearing officers and appeals employees are graduates of that system, it sometimes feels there is a lot of deference that is given to the State and the burden of proof on the taxpayer is really high.

Let’s place that into context. You are a hearing officer with the California Department of Tax Administration (CDTFA). You became a hearing officer because you made a job transition in the Department and come from a long and decorated background as a sales tax auditor. You have a lot of experience handling audits and, perhaps, you were a supervisor at one point. However, your experience is largely a product of a career spent in one office where you worked under Jane, your District Principal Auditor. Jane liked things done in a certain way and your experience as an auditor and your training was largely governed by her (after all, she’s your boss).

Now, as an hearing officer, the matter of XYZ company is in front of you. XYZ alleges that the method that California used to assess them more than $300,000 in sales tax liability was improper. Because it is a sales tax audit and no one has the resources to go through an entire three year history of a company’s sales, the auditor has used statistical sampling to arrive at his determination. The company argues that position has no basis in reality. Why would it? $300,000 in liability (at an 8.25% tax rate) would mean that the company underreported nearly $3,000,000 in sales. That simply cannot be true.

You look at your audit manual and see that the auditor followed all of the Department’s approved statistical sampling methods. Deep down, in your heart of hearts, you probably know that the taxpayer did not underreport nearly $3,000,000 in sales. However, on the flip side, the Department did everything that were supposed to according to the manual, there are no court cases or other authority to guide your decision, and, as an appeals officer, you are left to rely on your independent skill and judgement as an appeals officer. What do you do?

You can see how that situation could be resolved in either direction. The lack of formal judicial guidance and the fact that the appeals division of these agencies are designed to dissuade people from entering the court system creates this wishy-washy situation that sometimes taxpayers will feel going into the California appeals process. The appeals officer knows that there word will be fairly final on the issue as there is nothing really in writing that could call it into question, absent direct court precedent on the issue and, as explained, there is less of that in the state appeals process. Although California does have the Office of Tax Appeals, which will hopefully provide more of the tax court structure we see on the federal level (and which we are a big fan of), that body is also not without its own problems. For starters, the agency was started in July 2017 and is in its infancy. Second, the pay scale for administrative law judges in California is not the greatest and, as a result, most of the judges come from a government background.

Much Greater Power Bestowed on Auditors and Collection Agents

This looser administrative driven framework is not only an issue at the appeals level, but impacts the regular examination and collections functions in California as well. Guidelines through the procedural manuals for the various state tax agencies are not as well-defined as the federal system and, as illustrated in the previous example, the lower level auditors can be significantly influenced by their superiors with whom they have to work with every day. However the other issue here is more limited oversight, which is driven by the restrictions to resources given to the auditors and collection agents in California.

Traditionally, our experience has taught us that except with junior personnel, California tax agency managers and supervisors are a lot more hands off on the cases that are in the inventory of their people than with the IRS. To be fair, the IRS has much more rigidity baked into the process than with the state of California. Collections cases, for example, can move states or transfer to different districts depending on the geographical movements of the taxpayer. The IRS is also engaging actively in moving resources from one place to another. If the San Diego IRS office gets too backed up, cases could easily get shifted up to Riverside, Laguna Nigel, or Los Angeles to compensate. This happens all of the time. With appeals, cases can and do move all over the country. All of this constant shifting has created a need for uniformity across the way things are done within the IRS and a constant monitoring that is done with individual agents and their inventory and how things are progressing.

It is not to suggest that there is an absence of this on the state level, but it is just less pronounced and less of an issue. As mentioned, California actively consolidates its base of operations to Sacramento, so less stuff moves around at the state level. In addition, things that do get assigned out will usually move to a district office and will stay there. Payroll and sales/use tax cases will move around much less than IRS federal income tax cases because businesses are less portable than individuals. Things stay in the district office and the complexity of some of these matters means that they can hang around those offices for years and that is not something that is out of the norm.

While pressure still exists for front line collections people and auditors to push cases forward, then manner in which they so just is not as uniform. Again, because of the way the appeals system works in California and the time is takes to cycle through appeals, there is not so much immediate pressure on a district office to remain consistent in their outcomes. Problems with the way things are being handled, particularly in audits, may take years to fully surface. By then, it is entirely possible the original auditor is no longer there or has moved on. Front line collections are given a great amount of discretion in what they will and will not accept in their determinations on ability to pay. The collections guidelines and national standards that exist within the federal system are non-existent on the state level. We have had collections people tell our team the craziest things about taxpayer expenses from “maybe they should think about shopping at Walmart” to our client with a strict halal diet, to suggesting taxpayers should buy clothes at Goodwill, to saying that a client who was a doctor that was unemployed could afford to pay $5000 a month because he was “smart’ and “would just figure these things out.” Yes, these are extremes, but the rate in which we get California collections agents comment on our client’s personal living choices vs. the IRS representatives is exceedingly higher.

This is just the system that we have in California. What I mean by that is the auditor or the collection agent is given a lot more latitude in most cases to handle the cases as they see fit as long as it falls within the administrative guidelines. This particularly has an impact on the examinations process. A lot of the times, the auditors are kind of given free reign to define the scope of what the audit is in sales tax audits, but in particular, they can do a really detailed investigation and go through a number of steps that you may not find in the federal process. Generally, their managers are relatively lax about the process and are not really involved in the nuts and bolts either until the case passes on to get reviewed by “technical review” prior to the decision going file (one of the jobs of the manager is to limit the amount of cases that get kicked back from “technical review”). Long story short, the disposition of your California tax matter can be impacted greatly by the person you are dealing with.

Administrative Delay

Again, as a result of fewer resources and less uniformity, the time to resolve California state tax cases and the administrative delay involved is much greater than at the federal level. That is not to suggest that cases do not drag at the federal level too (oh yes, they do), but delays are much more common with California then in the federal system. Remember “technical review” that I mentioned earlier? It can take several months for a case to get reviewed and turn into a final billing, which in turn lags the client getting into the appeals process formally. Getting to an appeals conference? It can sometimes take up to two years to go through that process depending on backlog of cases. The federal system, although not without its own challenges, tends to run much smoother.

Particularly with more complex cases, the state is dealing with a much more limited inventory of people at the higher level who handle those types of cases. California deals with the same staffing challenges as the IRS. People change job functions, go on maternity leave, and retire. However, by having less of these people to begin with at the outset and not having a national inventory to pick through makes it a bigger challenge for the state. An influx of cases on a certain issue makes it a lot easier for someone at the state level to get flooded than with the IRS, who can simply cycle things to another facility.

Less Judicial Intervention

This problem may alleviate somewhat with the creation of the new Office of Tax Appeals in California. The old system for appeals in California was sent to a body called the Board of Equalization, which compromised of a four person panel, elected from four districts and the California state comptroller. Fair or foul, that organization was constantly flagged with criticism for being partisan and having a “pay to play system.” It was not illegal and often was encouraged prior to a Board hearing on an issue to lobby individual members about the merits of your case. Often lower level staff from the Board members offices would call our law office trying to gain information and for us to summarize issues for them prior to hearing. Talk about ex-parte communication!

The grand hope for the tax practitioner community in California is that the new Office of Tax Appeals will function more like the tax court and provide greater uniformity at the state level for decisions in tax cases. One of the chief complaints is not even about the rules and how unfair they are toward taxpayers, but more so that there is no consistency in how those rules are being applied. Between district offices, you can have cases that are virtually identical go through the system and have two completely different results. Try advising a business client concerned about their risk when the outcome of the administrative process at times can feel like a lottery system.

The California state court system has a noted absence of judges who are trained or whom even enjoy hearing complicated tax issues. With no disrespect to the bench, the best outcomes in judicial matters come from those who have experience dealing with both sides of the issue. This is why mediation and arbitration have become such popular methods of dispute resolution as you are often dealing with experienced intermediaries that can cut through the minutia and get both sides closer to resolution in addition to making decisions that are, by in large, the product of someone with a substantial background knowledge on the issue. This is not necessary the fault of anyone in particular, but simply just a byproduct of the system that we have. 1) Tax is complicated, particular to neophytes. 2) Limited resources creates a backlog of the state court system (go ask a litigator). 3) Backlogs lengthen the time things take to go through the court process, 4) Backlogs also sometimes make things prohibitively expensive to obtain a judicial resolution, 5) When things are expensive coupled with the fact that California bars judicial intervention in the collection of tax, it leads to less repetitions for judges at the state court level to become familiar in tax matters.

Greater Importance Placed on Revenue Collection and Enforcement Action

Obviously the revenue generation function of the federal government is important as well. Tax revenues fund things like national defense and areas that are critically important for the function of our United States. However, the pressure ratchets up significantly at the state level and is complicated by the fact that things are smaller. According to a recent statistic, 77% of revenue for California gets raised through taxes and fees (https://calmatters.org/explainers/the-open-secret-about-california-taxes/). So in order for the California government to function properly, it must collect taxes. Additionally, when new legislative proposals come out that cost money or require resources from the state, California needs to find a way to pay for those. The choices are 1) raise taxes (never popular), 2) cut spending (always difficult), 3) collect more tax revenue.

That’s why the tax collection system is designed the way it is in California: to make things as easy for the administrative tax agencies to raise revenue. For example, we have seen a recent uptick in California being more aggressive against out of state businesses, who may step into California in one way or another. Look at what happened with Amazon sellers in California.

California passed a law in 2011, Revenue and Taxation Code 6203, (https://www.cdtfa.ca.gov/lawguides/vol1/sutl/6203-rep.html) which expanded the concept of doing business in the state of California. One of the things that constitutes doing business in California is holding inventory in a warehouse here, either on your own or through a 3rd party. At the time, this was an aggressive expansion of what the federal/constitutional laws are concerning interstate commerce and nexus with a state for the purpose of subjecting yourself to taxation here. At the end of 2018, nearly seven years after the law’s passage, California sent a letter to nearly 4.5 million out of state Amazon sellers informing them that they had sales tax nexus in California, demanding that the register with the state, file past due tax returns and pay all taxes/penalties/interest owed.

You could say that this caused a bit of a kerfuffle. Think of it this way. You are a New York based company selling stuff on Amazon. You don’t even visit California, have no offices or employees here, and don’t even ship product here to get stored in California’s warehouses. As a New York based Amazon seller, you ship to a regional warehouse in Pennsylvania and Amazon is the one moving your product into California without your knowledge (creating sales tax nexus in the process). This continues for the next five years (Amazon only started warehouses in CA in 2013) and you are caught completely  off-guard by California’s demands. Now, inadvertently, you owe sales tax on all sales to California customers over the last five years, which you could have collected or reasonably mitigated, but no one told you.

In fairness to these out of state businesses after significant backlash, the California legislator passed AB 147, which mandated that Amazon started collecting taxes moving forward. However, the bill made clear that no retroactive relief was extended through the bill. Furthermore, after CDTFA (the sales tax agency) came in and made its own relief provisions, they only granted relief before April 2016 and made that relief contingent on filing returns and paying off the balance owed within a three year period.

California did not stop with just Amazon businesses. There’s field offices for the California Department of Tax and Fee Administration in Texas, in New York and in Illinois, and California uses those field offices as jumping off points for doing the regional collection activity. We get clients all the time who have some minimal contact with California, like having a professional license here, but whom are located out of state and whom we have to fight against not having to file tax returns with California. Recently, California passed AB5, which is equivalent to the death of independent contractors in California. With the death of independent contractors in California comes the state being able to collect payroll taxes against the employers.

These are some examples of the system being designed to facilitate revenue collection in California. There are countless others. Throw in hard statutes for the time that you have to appeal matters, increased scrutiny for accepting tax settlements, limited time to receive claim for refunds, and a whole other series of rules that make the playing field uneven and you start to see why California gets a bad reputation as a state for businesses. The fact is that pressure of an imperfect system just keeps getting ratcheted up more and more. To make things worse, most of California’s revenue is tied to personal and corporate income tax collections, meaning as more and more wealthy people and businesses flee the state in search of more tax favorable jurisdictions, things are not going to get any better.

Our California Tax Defense Practice

The point here is that tax administration at the state level and the resolution of tax issues is such a different animal than it is at the federal level. There are lots of tax attorneys and tax firms that focus on federal issues only and will not tackle state issues and we think you can see why now. There is just so much difficulty in dealing with California and so many nuances that you cannot just look up in the case law. Because the system is looser and there is a fluidity to dealing with them, your defense on these matters must be just as fluid.

The chief reason our firm has had so much success with California and resolving tax issues with the state is that we understand that success with them has less to do with the law than in understanding how it will be enforced. In spite of all the challenges and extra levels of complexity that you have with the state, the same things that make them difficulties for us also handicap them in certain respects. There are gaps in how tax laws are written, how they are supposed to be administered, and how they are really enforced. In addition, California has jurisdictional restrictions on their enforcement action and a number of other things that can give a taxpayer the competitive advantage when you are dealing with them. Additionally, the relationships are stronger at the state level with our firm than at the federal level. Small numbers of agent means that we get more interaction with them, their supervisors and their district heads. Often times, we may have multiple cases with one audit group or collections unit going on simultaneously. Other times, even with a new agent, we have familiarity with the supervisor, with other agents in their group, or normally with the people heading the office or overseeing it in Sacramento. The frequency of cases that we handle and our familiarity with these same groups has made the difference in several instances.

 

Tax planning

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It

Criminal tax issues

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It

Multi-state & international tax issues

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It

Federal Tax Defense (IRS)

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It

CA Tax Defense

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It

High Dollar Collections Resolution

In their collections divisions, the ultimate goal of the state of California and the IRS is to collect revenue. It should therefore be intuitive that they focus most of their efforts and take the strongest action against those with high balances. High balance does not always mean high net worth. Often times, individuals can be assessed high liabilities for a variety of reasons. Shockingly, the taxing authorities’ definition of high income earning (approximately $75,000) is not all that high. However, the higher above this income number you earn and the higher your liability, the bigger a target you are perceived to be.

Some of our firm’s biggest success stories and many of our most challenging cases fall into this category. We are seasoned in high dollar/high stakes collections issues and use our wealth of experience to the benefit of our clients. We have a long history of representing those with multi-million dollar liabilities and those in danger of being placed on the state’s 500 most wanted lists (https://www.ftb.ca.gov/aboutftb/delinquent_taxpayers.shtml, http://www.boe.ca.gov/sutax/top500.htm) .

Understanding that the state and the IRS have little sympathy toward perceived high income earning taxpayers, we place the utmost importance into devising a game plan and protecting our client’s prosperity. We work to shield assets and the ability to earn income from the tax agencies and come up with the plan that is going to best meet our client’s goals. Whether we reinitiate the fight with the examination division (through a reaudit) or engage directly with large dollar collections and/or Complex Account Recovery (CART), you can be rest assured that we will provide you with the strongest possible defense.

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Criminal Tax Defense

Despite recent cuts in IRS resources, criminal tax prosecutions and criminal tax investigations are on the rise. Those who face the scrutiny of the IRS Criminal Investigations Division, the Department of Justice Tax Division, or the California Attorney General’s Office need effective counsel who can help them navigate through the criminal investigations process and through the court system. Brotman Law understands that the most effective way to solve a potential criminal matter is to resolve it as early in the process as possible. When diplomacy fails, we have an excellent track record of negotiating plea deals and in obtaining favorable outcomes for our clients in court.

Brotman Law has been lauded by clients and by the government for outstanding work on behalf of those who choose to retain us. We maintain an excellent working relationship with many government offices and are known for our tough, steadfast advocacy on behalf of our clients. Our criminal practice dedicates itself to protecting our clients so that they receive the full presumption of innocence and that their rights are properly respected. We leverage our expertise to develop a strategic approach to solving your issue and to ensure that you get the strongest defense possible.

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California Income Tax – Franchise Tax Board

The Franchise Tax Board can be extremely difficult to deal with from a taxpayer standpoint whether through the examination division (audits) or through the collection division. Taxpayers become easily frustrated by California income tax procedures and the level of service received from the Franchise Tax Board. In addition, California has never been viewed as a particularly taxpayer friendly state. Tax procedures are geared to benefit the state and assist it in the collection of revenue. Additionally, California revenue officers and members of their Complex Account Recovery Team (CART) are known to take difficult stances with taxpayers during collection matters.

 

Unlike many tax firms, Brotman Law focuses on California state tax resolution specifically and navigates our clients through the most difficult of state tax issues. Neutralizing immediate threats, whether in an audit or during the collections process, is especially important because of the tendency of the Franchise Tax Board to take aggressive action when left unchecked. After the danger has passed, we work with the different levels of the Franchise Tax Board (often who do not communicate with each other) to put a resolution in place that best meets your goals. Our familiarity with the Franchise Tax Board helps us implement expedient resolutions to most California income tax problems.

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California Payroll Tax – Employment Development Department

The Employment Development Department is the largest tax agency in California. Although it handles a variety of functions (the Employment Development Department has roughly ten thousand employees and a annual budget of roughly twelve million dollars), one of its primary functions is the administration and collections of payroll tax for the approximately seventeen million workers in California. As with the IRS, failure by employers to make payroll tax deposits is perceived to be a huge problem for California and, as a result, the Employment Development Department can take far-reaching and severe actions against businesses that do not meet their obligations.

 

Brotman Law recognizes the seriousness of the business being involved in a tax dispute with or being investigated by the Employment Development Department. EDD agents are among the biggest threats to California businesses because of the approach they take toward collecting revenue for the state, often to the detriment of the taxpayer. It is important to walk into any dealing with the Employment Development Department with a strategy to achieve the goals and minimize any potential damage that an agent can cause. We use our “business first” approach to solving problems to neutralize risk and protect the ability of your business to earn and generate income.

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California Sales Tax – Board of Equalization

In our professional experience, the Board of Equalization is the most aggressive and difficult agency to deal with in California. In audits, sales tax auditors use a myriad of complicated tricks and auditing techniques to trap taxpayers and increase their liabilities to the state of California. Unlike income tax audits, the Board’s calculations for determining unreported sales rely heavily on methods that are heavily variable. On the collections side, Board revenue personnel utilize extremely burdensome collection methods which can stifle a taxpayer’s business. Even more frightening is that Board personnel can and will shut down a taxpayer’s business entirely for unpaid sales tax liability.

Brotman Law takes the fight to the Board of Equalization. We utilize innovative and sound techniques to defeat liability and to make dealing with the Board as easy as possible. In audits, unlike many attorneys, we are skilled in statistically methods and models and use our advanced knowledge of statistics to defeat the Board procedures for assessing liability. Our proven methods have saved our clients millions in liability. In dealing with collections, we shield business and personal assets from collection officers and work to produce resolutions that mitigate even the toughest of collection agents.

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IRS Audits

Receiving an audit notice in the mail or being contacted by an IRS Revenue Agent is a scary experience for many taxpayers. Audits are intrusive, time consuming, and often designed to maximize the revenue that the government receives. The IRS audits those that it feels there is the biggest chance for an adjustment in their favor and can cost a taxpayer thousands, sometimes hundreds of thousands of dollars as a result. Additionally, some revenue agents will take advantage of taxpayers and use their superior knowledge of the tax code to trap you and/or open up multiple years.

 

 

 

Brotman Law immediately levels the playing field in an audit. During the initial consultation, we examine the return under audit along with any correspondence received and immediately work to come up with a game plan for effectively dealing with the auditor. We identify categories or items that may be high risk and develop a strategy with our clients for minimizing their biggest issues and moving them out of examination as quickly as possible. Preparation and presentation are the keys to success in any audit. IRS auditors may appear to wield a lot of power, but they are often no match for an attorney with a superior legal knowledge base and a keen understanding of IRS procedure. We utilize our tremendous experience in audits for the benefit of our clients and to yield exceptional results.

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IRS Collections – Tax Levy and Tax Lien

The IRS Collections department often takes a tough and unreasonable approach when you owe a liability to the government. Rather than express sympathy for your situation, they will use harsh standards and make unreasonable demands in order to get the most money out of you per month. The sacrifices that they ask you to make are often too much for most taxpayers to bear. In addition, taxpayers who do not agree to their demands are often subject to forced collection action, wiping out bank accounts, garnishing wages, and generally making it extremely difficult for you to live and support yourself.

 

Brotman Law eliminates the threat and shifts the focus from the desires of the government to the needs and future goals of our clients. We strategize and plan for financial and personal success, determining the cost of what it takes to maintain your standard of living and then working the IRS into that framework rather than the other way around. Our strategy minimizes client contact with the Service and the intrusion of the IRS into their daily lives. We aim to preserve your standard of living and help you to keep the things which matter most.

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Offer in Compromise

There are times when a tax debt becomes insurmountable given a person’s financial circumstances or where there is a serious doubt as to the liability owed. Although the IRS has created a program to settle a person or business’s tax liability (Offer in Compromise), it has placed stringent restrictions on the criteria that it uses to determine offer acceptance. In addition, IRS personnel are trained to screen offers in compromise and reject or modify offer amounts, which often times make them unworkable for the taxpayer. Taxpayers are often confused or angry at the Service for what seems like an unfair process and the fresh starts promised seem unobtainable.

Brotman Law helps to dispel the mystery from the offer in compromise process. In contrast to many firms, we prescreen offers using the same formulaic methods that the IRS collections divisions uses for acceptance and only submit offers in compromise that we feel have a high chance of acceptance. If a client comes to us and presents circumstances that we do not believe will be approved, we formulate a strategy and work with them to present an offer in compromise that will be acceptable to the IRS. Additionally, we always strive to do what we can to maximize the client’s tax savings and provide with the fresh start that they deserve.

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Innocent Spouse Relief

The IRS generally holds both husband and wife liable for the tax liability shown on their joint income tax return. Under normal collections protocol, since both spouses are held jointly and severally liable for the tax liability shown on the return, the IRS will take enforcement actions against both of them and they are held equally responsible for the liability. Innocent spouse relief, although available through the Service, is the exception rather than the rule. This is true in circumstances where only one spouse earned the income associated with a tax liability or in cases of divorce where one spouse has agreed to accept liability for any taxes owed. IRS collections does not honor 3rd party divorce agreements.

You should not be punished for the mistakes or wrongful conduct of your spouse/current spouse. Innocent spouse situations are often very fact specific and Brotman Law takes a deep analytical approach to solving the problem. We analyze the three available avenues of relief that are available through the innocent spouse program and determine which method is going to best meet your needs. The goal is defense. We work hard to preserve your quality of life and your standard of living. Furthermore, we recognize the effect that divorce or marital separation situations affect your normal life and plan for short term needs as well as long term goals.

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Penalty and Interest Abatements

If you have ever owed a balance to the IRS and received a statement from them reflecting the total that is owed, you know exactly how much that penalties and interest can add to that liability. Many of our clients are perfectly agreeable to paying the tax that is owed; however, penalties and interest associated with the account can often double or triple that liability. The IRS does not differentiate between the balance that is owed for tax and the balance owed for interest and penalties. It will take the same collection actions to make sure that the total liability is paid in full regardless of the taxpayer’s circumstances.

 

Brotman Law has had a great track record of success in getting interest and penalties abated through the Penalty Appeals Service Coordinator and through the IRS Office of Appeals. We understand the finer legal points and other criteria that go into the IRS’s determination on whether or not to abate penalties and interest and craft abatements that hit on several of these major issues. Our background the case law as well the more recent court decisions and our knowledge of internal procedure allow us to go much further on the issues presented and we are often successful at getting abatements accomplished on the first attempt.

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Payroll Tax Matters – Corporate Collections

Whether at the IRS or the state level, corporate collection issues are often the most challenging and most difficult matters to resolve. Both entities take a very aggressive approach toward corporate collections and often times will jeopardize the health of the business by being overly aggressive. Even though it seems counterintuitive, the “killing the goose that lays the golden eggs” strategy is often the one that collection agents employ by levying business operating accounts and accounts receivable. Often times, they will show no remorse toward your business or your ability to generate a living and provide for you and your employees.

 

One of the hallmarks of our practice has been in defending businesses against the wrath of the federal and state governments. It takes a business owner to know a business owner and Brotman Law takes a “business first” approach to solving tax problems. Recognizing that businesses are unique, we understand that the goal is not just to protect the business assets, but also to preserve cash flow and not let the tax authorities inhibit growth. We deal with any and all immediate threats to the business and then work to put together a plan that leads to long term business success as well as that will satisfy the taxing agencies.

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Payroll Tax Matters – Audits

For some businesses that rely heavily on contract labor, the threat of an IRS or Employment Development Department audit is serious and can be potentially crippling to a business. Because of the amounts in controversy, liabilities at the end of payroll tax or independent contractor audits can be in the hundreds of thousands if not millions depending on the size of the business. For the taxation agency revenue agents, often these inquiries will span multiple years and investigations are conducted with the goal in mind of generating revenue for the federal government or the state. In addition, the penalties associated with these matters can be significant.

 

Determining payroll tax liability and whether a worker is an independent contractor or an employee is a multi-faceted inquiry. Luckily, Brotman Law understands the subtleties involved in the analysis and will work to present the facts in the light that is most favorable to the client. Our knowledge of the law and of the federal/state audit procedure gives us the upper hand in the majority of cases with the tax agencies. We often know the direction of their investigation before they take action, which allows us to plan better and to navigate our clients through the audit process with as much ease and simplicity as possible.

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Offshore Voluntary Disclosure, FBAR Delinquent Filings, and Penalties

One of the hot areas of enforcement for the IRS is in the area of undisclosed foreign assets and foreign bank accounts. Through FATCA, the IRS has been working to collect a treasure trove of information from foreign financial institutions and information sharing between these institutions and the IRS is at an all-time high. As such, the IRS has been enforcing a series of penalties, audits, and other actions designed to target those not reporting foreign income or disclosing foreign assets. Even in cases where the mistakes involved are insignificant, the IRS has been known to heavily punish taxpayers for non-compliance by issuing a series of draconian penalties.

Brotman Law understands the complex nature of foreign asset holdings, including determining the value of these assets due to currency fluctuations and other factors. We work to analyze an immediate risk to the client as a result of non-compliance and advocate for a solution that is going to preserve assets and well as to mitigate any potential liability. Whether through the Streamlined Voluntary Disclosure Program or through any number of avenues that may be available to the client, we take a comprehensive approach toward minimizing the risk and cost associated with disclosure to the Service.

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Business and Real Estate Matters

As a benefit to our clients, we provide assistance in dealing with a variety of business and real estate matters including business sales and purchases, lease disputes, lease negotiations, corporate document drafting, corporate governance, entity formation, and other business and real estate issues. Mr. Brotman was a wide range of experience in dealing with these issues both as an attorney and as a business owner. We bring a practical approach to these types of issues and realize that ultimately legal decisions are business decisions. We believe strongly in the cost benefit rule and work to provide solutions that make sense from a business standpoint as well as from a legal and tax perspective.

 

 

As former corporate counsel for two major Southern California corporations, Mr. Brotman excels at quarterbacking and providing legal leadership for companies and businesses, who may not have the benefit of in house general counsel. His wide range of experience has been valuable at many levels and why our firm excels at working with small and mid-size businesses. We work on creating value for our clients with all the legal solutions that we implement with the chief objective in mind of making them become more profitable, minimizing their risk, or reducing the cost of legal services in the future. We realize that many business owners do not have a “legal expense” category on their profit and loss statement. That is why we serve as a guide post for them in all growth cycles and phases of their business.

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