Home Office Deduction in California 2021

Do you qualify for a home office tax deduction?

So many people work from home nowadays. Even before the pandemic, some of the biggest and best employers were trending towards more flexible work schedules and remote work options. Here we are almost one year into the Covid-19 pandemic and it seems that working from home is more the norm rather than the exception. Those of us who always dreamed of being able to work from home often imagined how ideal it would be to not have to commute into the office, not have to give face-time to management, not have to shave or get fully dressed. Now that most of us have gotten a taste of it, we can’t wait for things to return to normal, especially if we share our workspace with little “distance-learners.”

If there is one thing this pandemic has taught us, it is that we have to always look for the silver lining; that’s what keeps us motivated and optimistic when times are tough. Wouldn’t it be nice if there were some kind of tax benefit associated with working from home? Well, for some taxpayers, there might be, and it’s called the home office deduction.

First of all, don’t even think about claiming this expense unless you are self-employed. If you are self-employed, you would report the home office tax deduction on your Schedule C. The requirements are fairly strict, so not everyone who does work out of their home will qualify, and if you get too aggressive with this deduction, then you might get audited. You can claim a separate structure such as a barn or garage, an entire room in your home, or even a portion of a room, but whatever area you claim must be your principal place of business and it must pass the “exclusive & regular use” test. You must use this area exclusively for conducting your business, and you must conduct business there on a regular basis. Obviously, the more difficult element is exclusivity. If you use the claimed area for any other purpose besides for your business, then it does not qualify.

If you do in fact qualify for the home office deduction, the calculation is fairly simple: you would measure the square footage of the work area and divide it by the total area of the house to arrive at a percentage. Then the percentage is used to determine what fraction of your overall bills (rent, utilities, maintenance, etc.) can be claimed. There is also a simplified method whereby you are allowed $5.00 per square foot, (capped at $1,500 maximum deduction) without regard to actual expenses.

What about the increased costs associated with working at home such as faster internet, higher utility bills, and office equipment… can any of that be written off? Again, if you work as a 1099 independent contractor, you can deduct those expenses, but if you work as a W-2 employee, the answer is no. If you are an employee and you are required to work from your home office, the best option for you is to seek reimbursement from your employer.

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Changes to IRS Offer in Compromise Tax Settlement Procedures

Does the IRS offer settlements? If you owe a tax debt that you cannot afford to pay, you may want to consider negotiating your tax debt through a tax settlement. The procedure is known as an offer in compromise. The Internal Revenue Service (IRS) began charging taxpayers who want to attempt to reduce their tax liabilities through a tax settlement an offer in compromise application fee in November 2003.

Beginning April 27, 2020, the application fee for IRS offer in compromises will be $205.00. This is an increase from $186.00. According to a memorandum from Director of Collection Policy Nikki Johnson, the Department of Treasury reviewed the offer in compromise program costs and issued final regulations to increase the amount of the application fee imposed under section 300.3 of the Treasury Regulations for processing an offer in compromise.

There will be a grace period through May 27, 2020 for taxpayers that have submitted an offer in compromise with the prior fee of $186. The IRS will require any shortfall be paid prior to continuing the offer investigation. While the increase in the IRS offer in compromise application fee is only $19.00, the IRS will continue to waive the application fee for low-income taxpayers and those taxpayers that base their offer to settle based on doubt as to liability.

Additionally, if you live in California, the IRS has changed the unit that will be assigned to investigate your request for an offer in compromise. I believe there is a group of IRS agents in Brookhaven, New York that is now very happy that they won’t have to fight with our attorneys anymore. We hope this helps you understand how to get a settlement with the IRS.

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The New Large-Font IRS Form 1040-SR

What is IRS form 1040-SR? The IRS rolled out a new tax form this filing season called the 1040-SR. It’s basically a simplified, large-font 1040 form similar to the 1040-EZ. I know the IRS means well, but was this really necessary? Who can use form 1040-SR? There are a number of restrictions on who is permitted to actually use this form; and of those that are, it is questionable just how many will want to. If you itemize your deductions, you may not use this form. If you earn over $100k, presumably you should be able to afford to hire a tax professional to file your taxes, and you may not use this form. If you have investment income or income from a business, you may not use the new 1040 form. And if you are under 65 years old, regardless of how bad your eyesight is, you may not use this form. Side note: I know many people under 65 who would benefit from a tax form 1040-SR, one of them being the referee at my son’s basketball game the other day.

Furthermore, the large font only helps if you’re actually filling out the form by hand with a pen. These days a vast majority of taxpayers file electronically and even pay someone else to do it. I suppose if there are any traditionalists left who fill out tax forms by hand, they probably fall in that 65+ group. But even that group may derive only a small benefit from the new form if they use any of the lettered schedules because none of the tax schedules and attachments have been updated with larger fonts. The IRS even admitted that the group of taxpayers who will benefit the most from Form 1040-SR makes up less than 10% of all tax filers.

It’s always easier (and more fun) to poke holes in IRS programs and the way they administer the tax code than it is to identify what they’re doing right. It just seems like they’re often more concerned with the minutia and less relevant details. It’s the same brand of thinking that results in the auditing of small business owners, sometimes year after year, while major corporations often avoid taxes altogether. Age 65 is not that old anymore. Seniors are resourceful; they wear glasses, they use computers, and they pay younger eyes to do what they no longer can. My thinking about taxes won’t change when I’m 65; I guarantee I’ll care way more about the size of my tax obligation than I will about the size of the font on my 1040.

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IRS Gives Private Debt Collection Firms More Power

The IRS is constantly coming up with new convenient payment options for taxpayers with back tax debts. As we know, the IRS is always so very concerned about the taxpayer, and they like to be as generous and accommodating as possible. Payment option language takes up some of the most prominent positions in collection notices. And clicking that “Pay” tab on the IRS website reveals no less than seven different payment options. Of course, when my clients tell me that they don’t know how they’re going to pay their tax bill, its usually not because they can’t decide between writing a check or paying in cash. As usual, the IRS is missing the point and still thinking inside the box, and their latest attempt to beef up collections from people who can’t pay is very concerning to me. The IRS is now allowing private debt collection firms that have contracted with the federal government to accept payments from taxpayers (see IRS News Release IR-2019-165, October 8, 2019).

The IRS has tried using private debt collection agencies (PCAs) off and on, unsuccessfully, but never before have they been authorized to accept payments. There are concerns that these programs often cost more than the revenue collected. There are concerns from the National Taxpayer Advocate and others within the industry about security of information and violation of taxpayer rights by employees who do not have the same ethical standards as the IRS (Did I just suggest that the IRS has standards?). And probably the most glaring problem I see is a potential diluting of the message that the IRS and others (myself included) have been preaching for years: you don’t send federal tax payments to anyone other than the IRS/Department of Treasury.

It’s no secret that some people have a hard time distinguishing between communications from the IRS and communications from scammers. I think it muddies the waters a bit now that it is permissible to give credit card info to Pioneer Credit Recovery, for example, besides the IRS. No longer is there a bright line rule about sharing sensitive information. For the record, there are only four potential PCAs that have contracts with the IRS: Pioneer, CBE, Performant, and ConServe. But if it is difficult for some to distinguish between the IRS and criminal IRS impersonators, then it’s only that much harder to distinguish between authorized third-party collection agencies and their unauthorized criminal counterparts. Even the IRS seems to acknowledge the added risk to taxpayers since a good portion of their news release appears under the subheading “Be aware of scammers.”

The IRS promises that PCA employees will not make threatening calls and that they will abide by the Taxpayer Bill of Rights and the Fair Debt Collection Practices Act, but how much oversight and control do they really have over these private firms and their employees? I don’t know the answer to that question, but I know how well-trained and well-behaved actual IRS employees are who work under the same roof as their supervisors, so I can only imagine.

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The IRS LT11 Collection Notice

A follow-up to the last article (Aug 2019) about the IRS CP504 notice to compare it to IRS LT11 notice.

In this article I am going to dissect that notice’s evil cousin: the LT series letter. The one I happen to be looking at for reference today is a LT11 notice. Again, the notice code can be found in the upper right corner of the first page along with the notice date, social security number (often times partially masked these days), case reference number, and IRS phone number.

There are many similarities between the CP and the LT letters. Both come with a payment coupon at the bottom of page one. Both contain information about the denial or revocation of a US passport, information about penalties and interest, and information about “what you need to do immediately.” The LT11 has a more descriptive section on Federal Tax Liens, but for the most part it actually has less information than the CP504. I think the rationale is that they have already spelled things out in previous letters and its just not necessary to repeat everything.

The first thing a taxpayer will probably notice on the IRS LT11 notice is what appears in the boldest, biggest font on the front page: “Intent to seize your property or rights to property / Amount due immediately: $_______.” The heading, which actually appears above this phrase, is “notice of intent to levy and notice of your right to a hearing.” The right to a hearing is key because without it the IRS can’t move forward with levies. Some of the types of property that become subject to levy are listed on the first page of the LT11 notice: wages and other income, bank accounts, business or personal assets (including your car and home), Alaska Permanent Fund dividend and state tax refund, Social Security benefits.

Another major difference between LT11 and CP504 is where the letter comes from. The office address is in the upper left corner of the notice, and the LT letters will come from ACS or “ACS Support.” ACS stands for “Automated Collection System.” ACS is difficult to define because it is an IRS operation/function, it is a physical place (or places) with support sites in Atlanta, Cincinnati, Fresno, Kansas City, and Philadelphia, and it is a case status. According to the Internal Revenue Manual:

Automated Collection System Support (ACSS) is a Compliance Operation, supporting ACS Call-Sites, resolving correspondence from taxpayers, their representatives, and/or third party contacts. These include Taxpayer Delinquent Accounts (TDA) with a balance due and/or Taxpayer Delinquency Investigations (TDI) with delinquent returns.

IRM (02-20-2018)

As for the “what you should do immediately” section of the letter, the options are (1) pay what is owed; (2) make arrangements to pay/resolve what is owed; or (3) request a Collection Due Process hearing. If you do not believe you are responsible for the tax, it might be worth while to file a CDP hearing request. If you know that you owe, but can’t pay, then you’ll want to explore other resolution alternatives such as an installment agreement or offer in compromise. Everything from this point on in your case is extremely time sensitive. Even if you’ve been able to fly under the radar for several months, once you’re in collections, things start to move more quickly. A tax attorney can help you decide which is best for your individual circumstances, help you to meet important deadlines, and get you back on track with the IRS.

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Deciphering the IRS CP504 Notice

The CP504 notice is one of the most misunderstood IRS notices. To the average inexperienced taxpayer, the heading can be completely terrifying: “Notice of intent to seize (levy) your property or rights to property.” The next line, appearing in a larger, bold font states “Amount due immediately: $XX,XXX.” Just for good measure, the word “immediately” appears three more times on the first page of the notice. If that weren’t enough, the CP504 often arrives via certified mail, so it cannot be easily ignored.

If you have a healthy heart and you get past the first page without experiencing any serious cardiac symptoms, you’ll notice there are a total of 5 pages of light reading (precise length will vary and will likely increase over time as the IRS discovers creative new ways to torment us). To summarize, you’ll find multiple options for paying in full, including a nifty payment voucher to make paying the IRS as convenient as possible. You’ll see information about how to appeal the actions specified in this letter, as well as information about penalties charged, interest rates, and what will happen if you don’t respond to the notice. The newest addition to the IRS CP504 notice is a paragraph describing the passport revocation provisions of the Fixing America’s Surface Transportation (FAST) Act. This is the legislation that calls for revocation (or denial) of passports where a taxpayer is considered “seriously delinquent” (meaning they owe more than $52k and have not made arrangements with the IRS to pay).

So, what makes this notice so difficult to understand? Let’s go back to the first page. For most red-blooded humans, after they sign for the letter and get it open, there is an immediate emotional reaction to the first couple lines (“Notice of intent to levy” and “Amount due immediately”) that somehow prevents them from reading beyond those horrifying words to see what it all really means. Is this a catch-all “intent to levy” notice? Is the IRS moments away from emptying your bank account or issuing a wage garnishment? Maybe not, actually. The CP504 notice informs you of the government’s intent to levy a very specific asset type: your state tax refund. This is actually explained fully on page three: “In most other situations, before we levy on your property or rights to property [defined as income, bank accounts, personal assets], we’ll send you a notice that gives you the opportunity to request a Collection Due Process hearing, unless you have already received one.”

Now this is where the attorney in me wants to chose my words carefully and my lawyer instincts go on red alert. Please do not misinterpret what I have said in this article. I am not saying that the CP504 certified mail notice is “no big deal.” I am not saying it is not urgent. I am definitely not saying you can ignore it. What I am saying, though, is that in most cases you’ll get another warning (another letter) before the IRS engages in active collections. As you can see, the IRS does not want you to feel too comfortable, so they avoid using completely definitive phrasing in this letter. The fact is there are always exceptions, and sometimes they make mistakes, and sometimes you’ll get a CP504 when you’ve already previously received the more urgent levy warning letter that includes an explanation of your due process rights.

So, while the CP504 certified mail notice is probably not the last notice you’ll receive from the IRS, it’s also not the first. When someone calls because they received a CP504, that tells me there is a little bit of history; it tells me that prior notices have been sent and the tax issues have not been resolved. The silver lining is that I also know we still have time to jump in and fix things. But the window is small, and it closes quickly. If your tax issues are not resolved at this critical stage, your account will undoubtedly end up in the IRS Collections Department, which will present a whole different set of challenges.

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IRS Not Fully Up to Speed Following Shutdown

Even though the government shutdown has ended and IRS employees have returned to work, it could be a while before we can say that things are “back to normal.” We are seeing continued delays in both Exams and Collections cases as IRS personnel catch up on their backlog. If you’ve ever returned to work after an unusually long break, you understand how the first several days back are spent putting out fires and giving attention to the most urgent tasks first. If you had been working with a revenue officer prior to the shutdown, and you have not heard from him/her yet, then it is probably because they have put a higher priority on some other cases besides your own. Don’t be offended; we really have no way of knowing what is happening with assignments and caseload on their end. Instead, it would be wise to take inventory and re-evaluate where you are on your end of things.

Every revenue officer I have worked with has given the taxpayer a specific set of tasks or requests, usually having to do with filing missing tax returns and/or providing financial information. This lull in activity from revenue officers is the perfect time to get everything in order. Maybe your due date has long passed and you haven’t heard from your revenue officer in a couple of months. Now is the best time to prepare your case because you can do so without the pressure applied by an overbearing revenue officer. Once the fires have been put out and they pick up your file, you can bet there will be short deadlines and the ever-present threat of levies and other active collection measures. Ideally, the IRS will attempt to reestablish contact with taxpayers first, and possibly set new deadlines. I’ve been doing this long enough to know that there will be some revenue officers who will not do the right thing; they will come back at you with all guns blazing, and their first post-shutdown contact with you will be a levy notice.

It is human nature to procrastinate when faced with a task that we don’t enjoy. And it is human nature to defensively wait for the IRS to come back into contact and put our tax matters aside while things are quiet. But for all we know, this is the calm before the storm. Now is the time to file missing returns, change your withholdings, make an estimated tax payment, gather bank statements, or whatever it is you know you have to do. If you owe back taxes and haven’t heard from the IRS in a couple of months, try to fight off the notion that maybe it will just go away; this kind of thing does not magically go away.

Contact us today with any and all questions you may have. MW Attorneys is happy to offer advice and guidance when it comes to dealing with the IRS.

New IRS Commissioner, Charles Rettig

Earlier this month the Senate confirmed Charles P. Rettig as the 49th Commissioner of the IRS. Rettig was managing principal of the Beverly Hills law firm, Hochman, Salkin, Rettig, Toscher & Perez, a firm specializing in high profile tax controversy cases. The biggest challenges he’ll face as commissioner are the same ones that have existed for years, namely improving the effectiveness of an agency that doesn’t get the funding it really wants or needs, improving public perception & confidence, and now implementing a whole host of new tax laws. Rettig has spent basically his entire career with the same law firm and his peers definitely think highly of him.

With each new commissioner, the question that always comes to mind for me is, will he be sympathetic to the common taxpayer? I am definitely encouraged by the fact that he has real hands-on experience representing taxpayers seeking tax relief and going up against the agency that he now runs. Also, he’s a California attorney, so he is intimately familiar with the unique struggles of local people like our own clients. I’m sure many of his clients are from the Los Angeles area, but there’s no reason to think he has not also assisted taxpayers in Northern California towns like Sacramento, Modesto, or Fresno. The commissioner is usually someone with vast amounts of experience in administration, but limited knowledge of taxes. However, Rettig is well versed in all aspects of tax controversy, including (according to the practice areas listed on his firm’s website) audits, appeals, offshore accounts, penalty abatement – surely almost anything related to IRS collections. We don’t know if Rettig will be that champion of taxpayer rights that we always hope for; he actually seems middle-of-the-road politically. But he at least knows the point of view of the taxpayer and knows from experience what it means to go face-to-face with the IRS. In my book, that’s a fantastic start.

Any comments or questions? Please, contact us today. We’d love to hear from you!

IRS Credit Report: Certain Tax Liens Removed

Wondering how to remove tax liens from your credit report? Tax experts generally agree that the tax lien is one of the least useful of IRS collection tools for the amount of damage it can cause. It used to be that the IRS filed liens in just about every case where a taxpayer allowed his tax account to go unpaid. Over the years the IRS has pulled back somewhat on tax liens to soften their bite. Through the Fresh Start program the IRS has increased the minimum dollar amount that it uses as a marker for when liens are to be filed. This avoids those situations where a taxpayer owes a couple thousand dollars that he pays off quickly and then has to wait months before his credit score bounces back. The IRS also provides a means whereby a taxpayer can get liens released under specified conditions (or avoided in the first place) by entering into a direct debit installment agreement.
Now we are getting good news about tax liens from the credit reporting agencies who also play an important role, although from their perspective it is less about helping struggling taxpayers and more about ensuring that the information reported to them is accurate. What does this have to do with removing IRS tax liens from your credit report? Beginning July 1, 2017, the three credit reporting agencies will begin to exclude tax liens from credit reports unless they have certain minimum information. Furthermore, they have agreed to actually remove tax liens that don’t meet the criteria. The minimum information required is: (1) name, (2) address, and (3) social security number or date of birth. Just how big of a deal this is remains to be seen.
When I first saw this story, I immediately thought (based on the headlines alone) that this was going to be a major change for taxpayers with credit scores improving nationwide for everyone plagued by tax debts. I actually first heard about this on NPR, but I only caught part of the story. So I went to my computer thinking I would find all the major news outlets reporting on this huge story. But they didn’t…and I think I know why. I think the credit reporting agencies have agreed to the IRS tax lien removal from the credit report and exclude amounts to very little. As for the IRS, there has been a push to exclude complete social security numbers on routine notices, but they still put that minimum identifying information on almost everything. Certainly they wouldn’t leave those things off a Notice of Federal Tax Lien! According to the original source of this announcement, the Consumer Data Industry Association, about half of all tax liens may not meet the new criteria, but I wonder if those are mostly state tax liens.
The biggest complaints about credit reports is that they contain incorrect information and that certain credit “smudges” are too difficult to clear up. This change addresses those concerns, but I don’t think it represents a big win for Americans with delinquent federal tax accounts.
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Business Email Spoofing

Google defines “spoof” as a “humorous imitation of something,” or a “trick played on someone as a joke.” But there is nothing funny about the type of spoofing I am about to describe. The tax industry is gathering forces to warn the public about a dangerous tax scheme that involves something called “business email spoofing.” I feel compelled to do my part in spreading the word about this one. As part of this scheme, cybercriminals send an email that appears to come from a high-level executive at the target company to somebody in HR or payroll, asking them for sensitive employee information (most often social security numbers or documents containing social security numbers). This particular scam first appeared last year and we are now seeing a second wave. Enough victims have reported these emails so that the IRS now has examples of the exact phrasing used in some of these spoof emails. It is worth your time to review these phrases, and certainly double check any similar requests coming from the head of your company.

Only a few days after their warning to the business world last month, the IRS released a follow-up alert stating that the spoofing scheme had spread to “other sectors, including school districts, tribal organizations and nonprofits.” The second wave appearing this tax season appears to be more dangerous and more pervasive than what was witnessed last year. First of all, the emails started surfacing earlier in the season this time around. The scheme has spread to new sectors of society; pretty much any organization that collects social security numbers is at risk. And the emails have gotten more bold this time around. Originally the criminals would ask for social security numbers under the guise of high-level management, which would potentially provide a means for illegally obtaining tax refunds (an indirect way of getting paid). Now they are boldly taking a more direct route to the cash by simply asking for a wire transfer. I am sure that most of the time these emails are recognized as spam/phishing, but with just the right wording and in just the right set of circumstances, the cybercriminals are successful.

We have seen variations of this scheme before. Tax scammers posing as representatives of the IRS typically called or emailed individuals asking for financial and identifying information as well as direct payments. But why contact taxpayers one by one when you can hit the jackpot exploiting the vulnerabilities of entire businesses and organizations? That has to be their rationale. I imagine crime rings where the more effective individual scammers are “promoted” to a position where they handle the corporate accounts where both the risks and the potential profits are much greater, but I really have no idea about the structure or sophistication of these criminal organizations. For all I know it could be one or two thugs sitting in their mom’s garage somewhere halfway around the world. It is very frustrating that this kind of thing can go on, but I’ll leave that to the FBI and Criminal Investigation. What goes on in the mind of the victim is also interesting, but I don’t know enough about human behavior to understand why people keep falling for this. We are increasingly comfortable making financial transactions online. Does that familiarity cause us to let our guard down? If it is mostly a matter of people being uninformed, I hope this article helps to spread the word.

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