Your IRS Taxpayer Bill of Rights

Stop, pay your taxes!

Stop, pay your taxes!

The Internal Revenue Service announced on June 10, 2014, the adoption of a Taxpayer Bill of Rights that will become a cornerstone document to provide the nation’s taxpayers with a better understanding of their rights. The Taxpayer Bill of Rights takes the multiple existing rights embedded in the tax code and groups them into 10 key categories, making them more visible and easier for taxpayers to understand. The rights will be sent to millions of taxpayers this year when they receive IRS notices on issues ranging from audits to collection. The rights will also be publicly visible in all IRS facilities as well as online at

The IRS released the Taxpayer Bill of Rights following extensive discussions with the Taxpayer Advocate Service, an independent office inside the IRS that represents the interests of U.S. taxpayers. I have given my opinion after each provision of the Taxpayer Bill of Rights on how I feel the IRS is doing with respect to each provision.

The Taxpayer Bill Of Rights are as follows:

  1. The Right to Be Informed. The IRS tries really hard to keep taxpayers informed but sometimes stops communicating for various reasons. Therefore, it is very important for you to follow up if you do not hear back from the IRS after 90 days of responding to a notice.
  2. The Right to Quality Service. The IRS is not delivering quality customer service. Whenever I call the IRS on behalf of a client, I am on hold for 30 to 60 minutes due to budget constraints and poor management. The IRS funding and employee headcount has decreased significantly since 2010, while its workload has increased due to health care reform and foreign account reporting rules.
  3. The Right to Pay No More than the Correct Amount of Tax. The IRS does a good job with this right and gives refunds when taxpayers file amended returns as well as billing taxpayers who fail to pay the correct amount of tax.
  4. The Right to Challenge the IRS’s Position and Be Heard. and
  5. The Right to Appeal an IRS Decision in an Independent Forum. Both these rights can be read together. The IRS does a good job giving taxpayers several ways to challenge or appeal its position either through the Taxpayer Advocate service, Appeals including fast track mediation, US Tax Court and the Court for Federal Claims.
  6. The Right to Finality. The IRS does not always provide a written report at the conclusion of a correspondence audit. Therefore, I always request a written report or statement from the IRS at the conclusion of an audit or when payments are applied from different years.
  7. The Right to Privacy. The IRS does a good job of protecting taxpayer privacy.
  8. The Right to Confidentiality. The IRS does a good job keeping your information confidential although it does share information with other federal agencies and state governments.
  9. The Right to Retain Representation. This is your most important right as a taxpayer. I personally know several clients that were not represented at the audit stage and paid more tax than clients I have represented at the audit stage with the same issues. I would never recommend a client go to an IRS audit by themselves.
  10. The Right to a Fair and Just Tax System. I think this right is the responsibility of Congress since they pass all the tax laws which are not always fair.

If you receive an IRS Notice or have any questions about your taxpayer rights feel free to contact Gregory J. Spadea online or at 610-521-0604. Gregory J. Spadea is a tax attorney, former IRS Agent and founding member of the Law Offices of Spadea & Associates, LLC located in Ridley Park, Pennsylvania.

What Should I Do if I Receive an IRS CP2000 Notice Stating I have Unreported Income

Sign on IRS Building in Washington, DC, United States

After you file your tax return the Internal Revenue Service (IRS) will match your return information with third parties who issued you W-2’s or 1099’s. If a discrepancy occurs the IRS will issue you a CP2000 notice assessing you additional tax on any unreported income. I always tell my tax clients to email or fax me any IRS correspondence they receive immediately, because the IRS typically gives you 30 days to respond.

However, if you ignore the notice, you receive a 90 day letter to petition the tax court. I always recommend petitioning that tax court to preserve your appeal rights. However in the event you fail to petition the tax court within the 90 days, you can still apply for audit reconsideration.

The first thing I do when a client calls me is to review the CP2000 notice and make sure it is accurate because the IRS sends lots of inaccurate notices to taxpayers. In addition I verify that is actually from the IRS and not from an identity thief. I typically will file an amended return if my client has additional expenses relating to the unreported income or has basis in securities sold that generated the CP2000 in the first place. If the IRS is disallowing a deduction I will send in the documentation to substantiate it. I always try to get the accuracy related penalty abated and am successful most of the time, especially if only one year is involved.

If you receive a notice from the IRS under-reporter unit do not panic. Just contact Gregory J. Spadea at 610-521-0604 from Spadea & Associates, LLC in Ridley Park.

What Business Expenses Are Deductible?

If you are a self-employed sole proprietor or operate an LLC or S-corporation any expense that your business incurs that is ordinary and necessary is deductible under Section 162 of the Internal Revenue Code. Therefore, please list the total spent on the expense categories listed below:

Accounting, legal and professional fees;


Car expense need total miles driven, business miles plus parking and tolls including business log with date, miles driven, business purpose and destination or
total miles driven, actual fuel invoices, auto insurance, repairs and total miles driven and business miles plus parking & tolls;

Fixed Assets – If you bought a vehicle, computer, equipment, office furniture or placed it in service during the tax year, even if you already owned it, bring in the purchase invoice so we can expense it under IRC Sec. 179;

W-3 – Salaries that your company paid to others. List officer and shareholder salary separately;

Employer share of employment taxes like FICA and FUTA;

Commissions or fees paid to other contractors, Get them to fill in W-9 if not incorporated so we can issue them a 1099;

If you already issued them a 1099, bring in the 1096 – showing total independent contractors paid.

Professional Liability Insurance, Workmans Compensation Insurance and Health insurance;

Office Supplies;

Materials or Purchase of inventory for resale;

Travel, Hotel, Airfare and Car Rental;

Meals (need date, place, person entertained and business purpose) Only need receipt if you pay more than $75.00 and have a day timer, If you do not have a day timer or digital calendar (such as Outlook or Google Calendar) then you need a receipt for everything;

Telephone include local, long distance, fax, land lines and mobile;

DSL, cable and internet charges;


Continuing education and business seminars and conferences;

Interest expense paid on business loans and provide year end balances;

Rent for office space or equipment;

Utilities like electricity, fuel oil, water or gas.

Prior year PA franchise (Capital Stock) tax from Page 2 of the PA RCT-101;

Prior Year Local Income Tax paid;

Total state sales tax paid if you included it in gross sales receipts.

Remember to never pay any personal expenses from your business bank account but instead transfer them to your personal account. Feel free to contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, if you have any questions or need your tax returns prepared.

IRS Audit Red Flags And How To Avoid Them

A waving red flag
I just read the January 17, Kiplinger Tax Letter which stated the 2013 individual audit rate was one out of every 104 1040 tax returns and they expect this amount to decrease as the IRS examination resources continue to shrink due to budget cuts. Millionaires seemed to get the most scrutiny, 1 out of every 9, and those with taxable incomes between $200,000 to $1,000,000 had an audit rate of 1 out of 37 and those with taxable incomes under $200,000 were audited 1 out of every 113.

I tried to create a list of obvious red flags that can increase your chances of being audited and possible solutions.

1. Claiming 100% business use of your car especially if there is no other car available for personal use which is an actual question on the return.

2. Deducting disproportionate or large amounts of business travel, meals and entertainment on schedule C of form 1040. I typically form an LLC for my sole proprietor clients and have them file 1120S corporate returns to reduce their chances of being audited.

3. Writing off a large hobby loss from horse or car racing or dog breeding on your schedule C which offsets your other income and decreases your taxes.

4. Deducting rental losses on schedule E of form 1040 by claiming to be a real estate professional where you must show you spend more than 50% of your working time and over 750 hours materially participating in real estate activities. However if you have more than one rental property you should make an election to have all your rental properties treated as one activity.

5. Running a cash business. The IRS is keenly aware of cash businesses such as taxis, restaurants, bars, lawn care, hair salons or car washes. The IRS even has guides for Revenue Agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income, which is why you should always hire a tax professional like Gregory J. Spadea to represent you if you are audited.

6. Failing to report foreign bank accounts. This is a huge area of focus with significant penalties possible especially since the IRS has had success getting foreign banks to disclose account owner information.

7. Taking higher than average deductions. The IRS may pull a return for review if the deductions are disproportionately high when compared with the reported income. This is why I always consider the category averages of filed returns with similar income when preparing returns for my clients.

8. Unsupported cash or property charitable contributions deducted on Schedule A of form 1040. I always recommend my clients get a letter from their church or charity if they give more than $250.00 during the tax year.

9. Improper matching of income reported by 1099-B, 1099-C, 1099-INT, 1099-DIV, 1099-K, W-2 or K-1 which is how most correspondence audits are triggered. I normally file an amended return to report the income and deduct the appropriate expenses.

10. Math mistakes on the return, although these can be avoided if you electronically file your return.

11. Claiming a dependency exemption also claimed by another taxpayer such as an ex-spouse, or the dependent themselves. If you do not have physical custody you should ensure the custodial parent signs Form 8332 to release the exemption to you.

12. Not filing your returns which may result in the IRS filing a Substitute for Return based on third party information and not allowing any deductions. I normally file the delinquent returns to take the appropriate deductions and apply for an installment agreement if necessary.

13. Engaging in cash transactions. The IRS gets many reports of cash transactions in excess of $10,000 on form 8300 from banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. Understand that the IRS looks at “step transactions” that occur with a short period to build upon transactions that are less than the $10,000 threshold.

14. Telling everyone how you put one over on the IRS. The IRS will look at your Facebook page and your other social media sites or pay whistle-blowers such as your ex-spouse, a disgruntled employee or a competitor, rewards of 15% to 30% of the additional tax collected, including fines, penalties and interest after they audit you.

15. Filing late after the extension period has expired, which also means late filing penalties.

16. Employee Job Expenses. The IRS generally starts with the assumption that if an employer doesn’t reimburse a specific expense made by the employee, that expense may not be a true job expense. So, if you are a W-2 employee, you must meet the following three guidelines: 1) total of all expenses exceeds two percent of your adjusted gross income; 2) the expenses are deemed “ordinary and necessary”; and 3) the expenses were not reimbursed.

17. Too many round numbers on a return, because the IRS thinks you just estimated or made up the amounts deducted.

18. Alimony deductions that don’t agree to alimony income of the recipient. In these cases the IRS requests the divorce decree or settlement agreement that specifies the amount of alimony.

The endless social engineering by Congress with tax deductions, credits, capital gains taxes and income tax rates makes it essential to have your tax return reviewed by your tax professional to determine whether such deductions are permitted and what tax strategies should be employed. Please call Gregory J. Spadea at 610-521-0604 of Spadea & Associates, LLC in Ridley Park, Pennsylvania if you get an audit letter or want help preparing your tax returns.

How to Avoid Cancellation of Debt Income in Foreclosure

Taxes, debts and other problems.
Many homeowners under threat of foreclosure attempt a short sale or a deed-in-lieu-of-foreclosure. Their goal is to escape liability for a potential deficiency between the selling price of the distressed property and the amount owed on the original loan. For federal income tax purposes, such a cancellation of debt (COD) is generally considered ordinary income when the lender forgives the mortgage debt. Many distressed homeowners face the risk of not only losing their homes but also owing thousands of dollars in income taxes on the forgiven mortgage debt.

Fortunately, Congress passed the Mortgage Forgiveness Debt Relief Act (MFDRA) of 2007, which relieves COD taxation on debt forgiven on principal residences. Secondary loans on a primary residence also are exempt if forgiven, but only if the money from these loans was used to purchase or improve the property. Advocates should be ready to demonstrate that their client’s property was, in fact, used as a primary residence to qualify for the MFDRA’s relief.

Even if homeowners do not qualify under the Mortgage Forgiveness Debt Relief Act, some common law and statutory exemptions may provide relief. First, indebtedness discharged as part of a bankruptcy is exempt from cancellation of debt (COD) income. Second, a purchase-price exception provides that when an original lender bargains with an original purchaser, a reduction in principal may be deemed an exception to COD income in cases of failing market conditions or reduced property values. If the lender issues you a 1099-C, then you will have to file IRS form 982 with your federal 1040 income tax return to avoid paying tax on the COD income.

If you face foreclosure or get a 1099-C for Forgiveness of Debt Income, please call Gregory J. Spadea at 610-521-0604 in Ridley Park, Pennsylvania.

How to Handle a Pennsylvania Sales Tax Audit

Man doing an audit
If your company gets an audit notice from the Commonwealth of Pennsylvania you need to take control of the situation. One of the first steps you should do in a Pennsylvania sales tax audit is to hire a professional that has experience in dealing with the Pennsylvania Department of Revenue. Spadea & Associates, LLC has successfully handled dozens of audits over the past 10 years. We can help you by scheduling the opening conference with the auditor at our offices. Spadea & Associates, LLC will represent your company and handle all communications with the auditor. This ensures that potentially sensitive information won’t be leaked accidentally to the auditor by any of your employees. By having the auditor review the records at our offices and not yours, protects your sensitive information and does not disrupt your workplace. We will also escort the auditor around your workplace when and if he wants to inspect it. We will prepare you for the interview to ensure the audit goes smoothly and does not turn into a fishing expedition. We will provide the auditor with only the specific information they need and not any additional records that may expose a vulnerability or expand the scope of the examination. Spadea & Associates, will ensure the auditor provides the statute or rule to back up their determination of taxation for any items that may be under question.

If you get an audit notice from Pennsylvania please contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604. We are located in Ridley Park, Pennsylvania.

When Do I Need To Take Required Minimum Distributions (RMD)

Sad businessman pushing hand truck with taxes.
If you are age 70-1/2 or older by the end of the year (December 31), the IRS requires you to take a required minimum distribution (RMD) from your tax-deferred retirement accounts such as traditional IRAs, SEP IRAs and 401(k) plans no later than New Year’s Eve. If you turned age 70-1/2 this year, you have the option to delay your first RMD until April 1 of the following year, but if you decide to do that, you will have to take two RMD’s in the same year which could increase your income taxes substantially.

If you inherit an IRA from your spouse you can wait until you reach 70-1/2 before taking required minimum distributions.

However, if you inherit an IRA from someone other than your spouse you must determine whether the account owner died before, on, or after his or her required beginning date (RBD):

• If the account owner died before the RBD, you may choose between two ways of calculating the RMDs—the life expectancy method or the five-year method.
• If the account owner died on or after the RBD, you must use the life-expectancy method.

The life-expectancy method requires that you withdraw certain minimum amounts annually according to calculations set forth by the IRS. You can always withdraw more than the required amount if you wish.

The five-year method requires that you receive all assets in the account no later than the end of the fifth year following the year of the account owner’s death. There are no minimum withdrawal requirements. You may withdraw assets at any time, as long you redeem the entire account by the end of the fifth year following the owner’s year of death. This option is only available if the IRA owner passed away before the RBD.

Your RMD is calculated using a “life expectancy” factor taken from IRS life expectancy tables. Non-spouse beneficiaries use the Single Life Expectancy Table, found in IRS Publication 590. If you are one of a group of beneficiaries, your RMD may be calculated using the life expectancy factor of the oldest beneficiary of the group.

If you withdraw less than the required minimum distribution, you will be subject to a federal penalty, which is an excise tax equal to 50% of the amount you should have withdrawn. This penalty is in addition to paying ordinary income tax on the amount you should have withdrawn.

Therefore you should keep a paper trail of all of your RMD distributions. Also keep a copy of any notice your brokerage firm sends you about the RMD for this year. This paper trail will be extremely helpful if you are audited or if you determine in the future that you did not withdraw enough money this year to satisfy the RMD requirement.

If you need any help calculating the RMD or have questions about how you can reduce your tax on the RMD, please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604, located in Ridley Park, Pennsylvania.

Internal Revenue Code Section 1031 Exchange Requirements and Benefits

Blue man carrying the words tax on his back
Internal Revenue Code Section 1031 enables property owners to defer capital gains on the sale of business use or investment property provided another business use or investment property is acquired in the same transaction. A 1031 exchange allows investors to accomplish many investment goals, such as acquiring property with greater income potential, relocation of an investment property and diversification.

Some of the requirements of a successful 1031 exchange are as follows:

• A qualified intermediary is required to facilitate the exchange. The qualified intermediary acquires, holds and conveys both properties, controls the sale proceeds and guides the exchanger through the exchange process.
• The exchanger must not have actual or constructive receipt of the sale proceeds, including deposit monies.
• Once the relinquished property is conveyed to a buyer, the exchanger has 45 days to identify replacement property and a total of 180 days to acquire it.
• To maximize the tax-deferral, replacement property of equal or greater value and equity must be acquired. In the event of a trade down in value or equity, the exchanger is taxed on the amount of the trade down.
• Title to the replacement property must be held in the same name as the relinquished property.

In addition to the investment objectives already mentioned, a 1031 exchange is a great estate planning tool. The fact that one may complete exchange after exchange and continue to rollover the gain allows the gain to be deferred indefinitely. Upon the death of the exchanger, the heirs inherit the property with a stepped-up tax basis thus eliminating all deferred gain.

While real estate exchanges account for a majority of 1031 exchanges, you can exchange any type of asset held for business use or investment, including tangible and intangible assets. A few examples include airplanes, construction equipment, rental car fleets, artwork, patents, race horses, distribution rights and livestock. When exchanging personal property, “like-kind” replacement property must be acquired which means something within the same asset class. When exchanging, in addition to deferring the capital gains, you also defer the depreciation recapture. For business owners who took bonus depreciation in recent years, this is especially beneficial and helps keep valuable capital invested in the business.

Business owners have long utilized 1031 exchanges to help grow their business. They can also help a business relocate to a better location or a more efficient facility or expand into several locations as well as replace equipment and vehicles. Additionally, exchanges can provide an exit strategy for retiring business owners by exchanging business related real property for other incoming producing real estate or even a future vacation home or primary residence.

If you are considering selling real property held for business use or investment purposes, be sure to contact Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604 to discuss how you might benefit from a 1031 tax-deferred exchange.

Discharging Federal Income Tax Debts in Bankruptcy

Bankruptcy sign
As a general rule, a debtor who files a bankruptcy petition is discharged from all personal liability for all debts incurred before the filing of the petition, which include those related to unpaid taxes. However there are five exceptions to this general rule that preclude federal income taxes from a discharge. Those five exceptions are:

1. A priority tax such as withheld payroll taxes or the IRS federal trust fund penalty.

2. A debt with respect to a fraudulent federal tax return.

3. More than three years must have elapsed since the tax return generating the tax liability was due, including extensions. Keep in mind various acts such as prior bankruptcies, collection due process (CDP) hearings and innocent spouse relief can extend this three-year time frame.

4. The actual tax return must have been filed more than two years earlier than the bankruptcy petition (generally applicable to late-filed returns). Note, however, that if IRS prepared “substitute for returns” (SFR) those SFR’s are not considered filed returns for this purpose, therefore a tax liability assessed from them would not be subject to discharge.

Therefore, it is always advisable for the debtor to file all delinquent returns and let the two year time frame pass before the bankruptcy petition is filed. Spadea & Associates, LLC can help prepare those delinquent federal and state tax returns to start that two year time frame.

5. At least 240 days must have elapsed since the date of an IRS assessment. This time frame is extended by an Offer in Compromise (OIC) and Collection Due Process Hearing (CDP).

Spadea & Associates, LLC can assist clients in determining if and when bankruptcy is a viable alternative for resolving federal tax liabilities by determining the composition of tax amounts owed and which tax liabilities might be dischargeable. Besides being aware of the tax resolution options of bankruptcy, we can recommend which administrative tax resolution methods the client should pursue first. These include innocent spouse relief, a request for abatement of penalties, an installment agreement or an offer in compromise (OIC). If those options are insufficient, bankruptcy may be the best way for clients either to secure a reasonable payment plan under Chapter 11 or Chapter 13 or to liquidate their assets to pay off all or a portion of their tax debt under Chapter 7. If you have any questions please call Gregory J. Spadea of Spadea & Associates, LLC at 610-521-0604 in Ridley Park, Pennsylvania

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