“Passed during the 80th Legislative Session in 2007, HB 11 dramatically increased the Comptroller’s ability to identify, audit and, when appropriate, prosecute retailers who are collecting sales tax but not remitting the proper amount to the state.

HB 11 amended the Alcoholic Beverage Code and the Tax Code to require distributors and wholesalers who make sales of ale, beer, wine, cigarettes, cigars and tobacco products to Texas retailers to report those sales monthly to the Comptroller’s office. Those distributors and wholesalers are also required now to report that data electronically, unless inability to do so is shown.

HB 11 data, which has now been collected since January 2008, allows the Comptroller to compare the purchases that retailers have made of these products with the sales that retailers are required to report. Because both sets of data are largely received electronically, discrepancies can be more easily and rapidly identified. Rapid identification is essential so that the Comptroller auditors can begin their work to mitigate and recoup the revenue loss to the state. The Comptroller’s office identified almost $90 million due to the state in fiscal year 2009 and more than $102 million due to the state in fiscal year 2010. To date in fiscal year 2011, more than $59 million has been identified.

In some cases, audit documentation may suggest that the taxpayer had criminal intent to evade taxes. If so, the case will be reviewed and evaluated by the Criminal Investigations Division for the possible filing of criminal charges.”

Small convenience store retailers of alcohol and tobacco products have been flooding my office in recent months with sales tax audit determinations which clearly show the effectiveness of an audit based upon HB 11 reporting.   The Comptroller has been consistent in proposing a 50% penalty in addition to the 10% penalty permitted by law.  In some cases, the Comptroller will agree to drop the 50% penalty in exchange for a settlement, but only if the taxpayer has timely petitioned for an audit redetermination.

If a store has closed and the auditor cannot conduct an in-store “shelf test” or if the taxpayer cannot or will not produce actual daily sales documentation sufficient for the auditor to determine a markup on alcohol or tobacco products, the auditor is instructed to use certain percentages for alcohol and tobacco markups.  In addition, the auditor is instructed to use a certain percentage to obtain a “product mix” of alcohol and tobacco products as compared to taxable non-alcohol and tobacco products.  A very small percentage is allowed for spoilage and theft.  Once these factors are applied, a sales tax estimate is calculated and compared against the sales tax reported by the taxpayer.

In the case of all audits presented by potential clients, the taxable sales estimate, which has been derived by formula and  upon which the sales tax deficiency is calculated, is significantly higher than the taxable sales amounts reported by the taxpayer.

The best way to defeat an sales tax audit based upon Texas  HB 11 data is to keep good records and accurately report taxable sales.  However, if record keeping or reporting proves to be a problem, the audit may be attacked administratively or at hearing in several different ways.

If you are a retailer facing a significant sales tax increase as proposed by a sales tax audit, call my office before the audit begins, or as soon as you receive the audit determination letter.  Do not make any admissions to the auditor  or agree to anything after the audit determination letter has been issued.  If a request for an administrative redetermination or a hearing is not timely made, the results to the taxpayer are usually disastrous!

One needs an attorney experienced in sales tax audits and hearings to level the playing field.  Call for a consultation now!

When is a worker an employee or an independent contractor for federal income tax purposes?   Disputes over employee or independent contractor classification frequently arise and the outcome is usually very important to one and very expensive for the other.   Mistakes are sometimes made, but more often, employers will incorrectly classify an employee as an independent contractor for several reasons.  The most common reason  is to avoid the payment of the employer’s portion of employment  taxes (usually about 7.5% of gross).   The second reason is to avoid the preparation and filing of quarterly 941 employment tax returns. Another reason is to avoid making employment tax deposits.  Sometimes, employers may not understand the legal and tax difference between an employee or independent contractor and classify the worker in whatever way the worker suggests.

A worker who should be classified as an employee may want to be treated as an independent contractor so that  payroll taxes and federal income taxes are not withheld from his or her earnings.  More common is the situation where a worker who is classified as an independent contractor wants to be treated as an employee so that more of his or her earnings are reported to the Social Security Administration.  The more income reported as earned, the higher the monthly retirement benefit.   In certain trades and businesses, such as construction, landscaping, housekeeping, janitorial, farming, ranching, fishing, repair and maintenance-where workers traditionally earn piecemeal or by the job and are often unskilled and less educated –the worker simply has no choice as to whether they are classified as an employee or as an independent contractor.

The IRS provides Form SS-8 -Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding– for use by an employer when the employer is not sure how to classify a worker.    Upon submission of the SS-8, the IRS will make an advance determination of how the worker should be classified, which gives the employer a safe harbor if the worker ever complains or if the wrong classification is made.

In addition, the IRS provides Form 8819– Uncollected Social Security and Medicare Tax on Wages- to a worker who believes that his or her employment classification is incorrect.   Form 8819 is the big, loud and often very expensive whistle, that when submitted with Form SS-8, alerts the IRS to a possible improper classification and permits the employer’s portion of social security and medicare taxes to be credited in advance to the worker’s social security record.

If the IRS ultimately agrees that the whistle blowing worker has been misclassified, the actions of the employer will be carefully scrutinized.  An employer who improperly classifies an employee as an independent contractor may be subjected to an audit.  The books and records of the employer will be examined and workers may be questioned.  In addition to an after the fact assessment of the employer’s portion of employment taxes, the employer who misclassifies a worker or workers may be subjected to ordinary civil failure to deposit, failure to file and failure to pay when due (delinquency) penalties, the more serious civil fraud penalty and the most serious of all, a federal crime.   None of these outcomes are good for business, even in the best of times.

If you are an employer that is unsure of how to classify a worker, that has discovered certain workers have been misclassified, or that has intentionally misclassified workers, seek legal assistance immediately.  If you are a worker who believes that he or she has been misclassified and wants some recourse, don’t wait to blow the whistle.

The area of worker classification can be very confusing.  Mistakes are common.  Misclassification of worker status to keep costs low or for exploitative purposes frequently happen.   The law firm of Peter G. Milne, P.C. is here to help.  Don’t wait until its too late.  Contact us right now.

A common example of using the tax code for public policy reasons is the provision of the tax code that permits a taxpayer to reduce his or her taxes by allowing the interest paid on a mortgage note to be deducted from the  taxpayer’s taxable income.  The theory is that by allowing the mortgage interest deduction, Congress’ will, through the tax code, influence people to buy homes, rather than rent, which is a public policy goal.   This particular tax break is only one of many that are found throughout the tax code: a tax break to encourage green energy production; a excise tax on a pack of cigarettes to encourage a smoker to quit; an excise tax on a gallon of gas to encourage the motoring public to drive less.  Congress does not have the power to pass laws which mandate the behavior of citizens and directly address these issues.   Rather, Congress uses the tax code as a blunt tool of persuasion to achieve social, economic and yes, political goals.

Most federal laws, whether major or routine,  contain some provision that affects the tax code.  It is no wonder that the tax code is voluminous, complex and often contradictory.  It has been written piecemeal, over a long period of time, without a unifying vision and often times for reasons having more to do with pubic policy, rather than the raising of revenue.

It’s time for Congress to be honest with itself and accept the fact that its power is limited.  It’s time for Congress to simplify the tax code and get back to the business of providing for the common Defense and general Welfare of the United States.

KETK interviews managing partner Peter G. Milne on March 23rd, 2010 regarding the new healthcare policy.

Read the full article Here.

Video courtesy of KETK NBC Tyler.

A Revenue Officer is empowered by the United States to take whatever legal means is necessary to collect taxes.  These individuals are based in the community and may come to the home or business of a taxpayer to examine books and records or to collect.  A Revenue Officer may issue summons for records,  may record federal tax liens upon real property, or may issue bank or wage levies to seize assets or income.  The Revenue Officer is the IRS’s “bad dog”, and the unarmed and unprepared taxpayer is often just another bone on which the Revenue Officer chews,  until the poor taxpayer, rightly or wrongly, simply gives up and gives in. 

Given the current level of federal debt and poor economic outlook, it is highly unlikely that the United States Treasury is going to have much compassion for those who have not or cannot pay thier taxes.  Rather than hiring more persons who could  assist the embattled  taxpayer, such as those employed by the Taxpayer Advocate, Uncle Sam is clearly looking out for it’s own bottom line.

The Healy Milne & Associates Team

An even more creepy unintended consequence is the possibility that some wealthy, terminally ill person or those ungrateful kids who hate step-Mommy and who will stand benefit from Daddy’s early demise may choose to “pull the plug” in 2010 or pray that Daddy “goes to Heaven” sooner rather than later. We all know that a family who prays together stays together. “Take That!” Who says a Democratic controlled Congress doesn’t stand for “family values”?

Regards,

The PGM Team