Every business is allowed to take “ordinary and necessary” business expenses.  But is the activity a hobby or a business?

Under the “hobby loss rule,” a taxpayer can only take business deductions if the activity is engaged in for profit and carried on for a trade or business.  An activity is presumed to be carried on for profit if it makes a profit in at least three of the last five tax years, including the current year.  For breeding, showing, or training race horses, a profit must be achieved in two of the last seven years for the presumption arises.

If the presumption does not arise, a list of non-exclusive factors must be examined to determine if the activity is a hobby or a business.   Failure to properly classify the activity may result in denied deductions and cause the IRS to impose underpayment penalties or accuracy related penalties. Because the IRS may not audit your return for years, penalties and interest associated with the hobby loss rule can be significant.

The IRS will not impose penalties if a tax lawyer gave the taxpayer a written opinion stating that the activity was a business.  However, the IRS will only accept a properly written opinion meeting certian criteria before it will waive penalties, so ensure the lawyer or other professional has the experience in providing written tax opinion.

For more information, visit Robinson & Henry’s tax practice webpage at http://www.wlhenry.com/practice_area_taxation.php  or contact us at  (303) 688-0944 .

Thousands of taxpayers across the country receive a notice of intent to levy from the IRS each year.  Many of those taxpayers, however, do not know what that notice means or what they should do. A notice of levy is the IRS’s way of telling the taxpayer that they are going to garnish the taxpayer’s wages or levy the taxpayer’s bank accounts. 

If the IRS chooses to levy a bank account, it can levy all money in the bank account up to the amount of tax that the IRS says that it is owed.  All of the taxpayer’s outstanding checks will bounce if the money in the bank account is not sufficient to cover the IRS levy and the outstanding checks.  When an IRS levy occurs, taxpayers often do not have sufficient funds to pay their mortgage or rent payments (not to mention the bank fees!).

If you get a notice of levy, it is extremely important that you do not ignore it.  A notice of intent to levy means that the IRS has started the collection process and will not stop until the debt is satisfied. An IRS tax lawyer should immediately work on preventing a levy from occurring or reducing any damage that has occurred while he or she negotiates with the IRS on your behalf.    

For more information, please visit the tax section of Robinson & Henry, P.C., at http://www.wlhenry.com/practice_area_taxation.php or contact us at   (303… .

As an employer, you act as a fiduciary withholding money from your employee’s paychecks and depositing the money with the IRS.  It’s not your money, so the IRS takes employment tax problems very seriously.  The IRS can assess a special penalty and hold you personally responsible for not depositing employment taxes. You can avoid the penalty if you can demonstrate reasonable cause not caused by willful neglect. 

Because of the seriousness of employment taxes problems, all employers should take immediate action if they fall behind on depositing employment withholdings.   Do not ignore the IRS!