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IRS Office of Appeals to Pilot Internet Virtual Conference Option

On July 24, 2017, the IRS Office of Appeals announced that it will soon pilot a new Internet virtual conference option for taxpayers and their representatives. This new option will offer an additional choice for holding taxpayer conferences and will come as close as possible to a “face-to-face” meeting.

Internet Virtual Conference Option: Existing Options

Each year, the IRS Office of Appeals hears appeals of more than 100,000 taxpayers. The main purpose of such an appeal is to resolve tax issues without going to court. By avoiding the court, the taxpayers are able to dispute the original IRS finding in a convenient and fast way; they can even introduce additional evidence without the formal procedures required in court. The IRS Office of Appeals is also a very cheap forum for disputing IRS decisions compared to federal court. Finally, it is one of the ten rights guaranteed to taxpayers under the Taxpayer Bill of Rights

Currently, the taxpayers who utilize the appeals process can participate in a meeting with an Appeals Officer in three ways: in person, by phone or through a special video conference technology. Each of these options has its own problems. A face-to-face meeting with an Appeals Officer may require substantial traveling for the taxpayer. A telephone conference resolves this problem, but it loses the personal interaction that so many taxpayers prefer.

While the current video conference option partially resolves both problems, its biggest drawback is limited availability – only a few IRS Offices have the necessary technology.

Internet Virtual Conference Option Aims to Offer Another Option to Supplement the Existing Ones

The new Internet Virtual Conference Option aims to resolve the current problems with the existing options. The idea is to provide a secure, web-based screen-sharing platform to connect with taxpayers face-to-face from anywhere they have internet access – this is very similar to Video Skype Conferences offered by Sherayzen Law Office.

In essence the pilot Internet Virtual Conference Option will allow for greater access of the IRS by the taxpayers. In the future, it is likely that this option will become the preferred one by the IRS and the taxpayers.

Internet Virtual Conference Option Pilot Will Start on August 1, 2017

The IRS Office of Appeals plans to commence the pilot Internet Virtual Conference Option on August 1, 2017. After the pilot program is completed, the IRS will analyze the results and determine the taxpayers’ satisfaction with the technology. Sherayzen Law Office predicts that, once the technology is finalized, the IRS Internet Virtual Conference Option will become a permanent feature in the near future.

IRS Audit and the Constructive Dividends Trap

Do you own or work for a closely-held corporation? Do you make frequent payments between your small C corporation and your shareholders? Then you should be especially careful about the constructive dividend rules. Under these rules, the IRS can deem certain payments made to or on behalf of its shareholders as dividends, even though they have not been officially declared as dividends. In such cases, both the corporation and the shareholder may face steep additional tax liabilities, as well as significant penalties and interest on the resulting liabilities.

This article will explain the basics of constructive dividends. It is not intended to constitute tax or legal advice.

Corporate taxation can involve many complex tax and legal issues, so it may be advisable to seek an experienced attorney in these matters. Failure to do proper tax planning can result in significant adverse tax consequences. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

Constructive Dividends

In general, a constructive dividend can be any type of economic benefit made to the shareholders by a corporation without an expectation of repayment that represents an undeclared dividend. If the economic benefits were primarily of a personal nature rather than business–related interests to the corporation, they will likely be treated as constructive dividends. Constructive dividends, as with declared dividends, can thus be distributions of cash and/or property as well as other types of payments that provide an economic benefit to the shareholder(s).

Because of the greater potential for self-dealing in closely-held and family-owned small corporations, the IRS is especially vigilant when it comes to possible constructive dividend situations in such entities. Shareholder-owners will often run afoul of tax laws if they attempt to have the corporation make payments for their personal, non-corporate related expenses, of if they try to distribute corporate profits to themselves by having the corporation report illegitimate expenses, rather than by paying a dividend.

Types of Constructive Dividends

There are numerous types of payments or economic benefits to shareholders that can be re-characterized as constructive dividends. If you are a shareholder in a closely-held corporation you should be aware of the possibilities.

One common constructive dividend is unreasonable compensation paid by a corporation to a shareholder-employee. Frequently, members of family-owned corporations will try to shift income by having their corporations pay excessive salaries (compared to the work actually performed) to family members who pay at lower tax rates, thereby reducing corporate net income at the same time. Because of the potential for tax abuse, shareholder-owners of small corporations will need to be able to show that the salaries paid were legitimate. Some factors to consider, among others, will be the nature and complexity of the work performed by the employee, the employee’s qualifications for the job, a comparison of salary paid by the corporation to prevailing salaries for similar jobs, as well as the ratio of dividends paid to salary by the corporation.

Bargain sales or rentals of property by the corporation to its shareholder(s) will also likely be deemed to be constructive dividends, depending upon the circumstances. For example, if a shareholder purchases property at a bargain rate below its true fair market value, a constructive dividend will arise on the amount of difference between what the property was purchased for and its actual value. Thus, if you are making such transactions, you should have a legitimate appraisal of the property and treat the sale at arm’s length in order to decrease the potential for a constructive dividend to be declared.

A constructive dividend can also arise when a corporation makes payments on behalf of its shareholder-employees personal expenses, or if the shareholder-employees use corporate property for personal use. An example of the latter situation may occur when shareholders use a company car or plane for non-corporate reasons without adequate payment to the corporation for personal use.

Constructive dividends may also be deemed by the IRS to be paid when a corporation makes payments to shareholders that are not bona fide loans. The determination of whether a payment was in fact a bona fide loan is a very complex tax issue that involves numerous factors, such as whether interest was actually paid by the shareholder to the corporation, and whether a loan agreement existed.

Proper Tax Planning is Required To Reduce the Probability of Constructive Dividend Classification During IRS Audit

While representing clients in IRS audits, I see that the widespread use of constructive dividends by the IRS. While this is a fairly common audit issue, it is appalling to see that this problem may have been prevented through timely tax planning by the taxpayers or their accountants.

This is why it is important to resolve this issue before the IRS audit begins, even if it means amending already filed tax returns. However, this is a job for an experienced tax attorney; I would strongly advise against doing the tax planning for such complex issues by yourself.

Contact Sherayzen Law Office for Help With Tax Planning

This is why you should contact Sherayzen Law Office before the IRS finds you. Attorney Eugene Sherayzen constantly deals with the IRS, and knows what to look for and where potential problems may arise, and we can use this knowledge to help you.