The Sales Tax Audit Series- For California And Beyond

Over the next several weeks we will post five blogs that should interest any taxpayer who is in fear of a sales and use tax audit – especially an audit that results in a “huge, unexpected liability.” These five blogs will help prepare you for all aspects of a sales tax audit by a government agency (before, during and after) and, more importantly, will help to put you on a path to owe little or nothing (you might even get a refund) – particularly if you follow the second of the five blogs, where we’ll talk about shoring up your systems before an auditor even shows up.

The advice that we will provide in these five blogs will apply to a sales and use tax audit for any state, but we will focus many specifics on our home state: the Golden State of California. California’s sales and use tax department is called the CDTFA – California Tax and Fee Administration. (The CDTFA was established in January 2018 as the successor to the State Board of Equalization or SBE.) The CDTFA is an enormous governmental agency – the size and sophistication of the CDTFA almost single-handedly dwarfs many of the U.S. states’ entire governments. The CDTFA administers 37 tax and fee programs; employs thousands of auditors and generates more than $90 billion for California and its counties, cities, and special tax districts. The CDTFA’s audits result in over $600 million of unreported tax each year. So, what can we do to help you to not be one of those taxpayers that contribute to the $600 million in audit deficiencies? It’s simple – read this blog and the next four.
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Bankruptcy Schedules: Schedule F

Continuing our series on bankruptcy schedules, Schedule F is used to list all of your general unsecured debts. General unsecured debts are those that are not secured by collateral and are not entitled to priority payment under the Bankruptcy Code. These debts are typically credit card debts, medical bills, and other similar debts. You may recall that, in our last blog – focused on Schedule E – we noticed that Schedules E and F have been combined into one schedules – cleverly labeled “Schedule E/F”. However, we also noted that, for purposes of discussion, we were breaking out the detail of Schedule E versus Schedule F.

Step 1: Gather Information About Your General Unsecured Debts

Before you can start filling out Schedule F, you’ll need to gather information about all of your general unsecured debts. This may include credit card debts, medical bills, and other debts that are not secured by collateral. Lesser known unsecured debts include deficiencies on repossessed vehicles and personal guarantees on business loans. Student loans are also unsecured debts, but they are treated separately under the Bankruptcy Code and are not generally not dischargeable under §523(a)(8) of the Bankruptcy Code. An exception is provided if excepting student loans from discharge would impose an “undue hardship” – an extremely high burden that has historically only been satisfied when a debtor is unlikely to be able to work for a living in the future.

Make sure to gather all relevant documentation, including the most recent billing statements and any other documents related to your general unsecured debts. If you believe that you may have an “undue hardship” as a result of student loans, talk to your attorney about the possibility of seeking a hardship discharge. In some cases, student loan companies may be willing to negotiate these debts based on demonstrated hardship situations.

Step 2: List Your General Unsecured Debts

Once you have all of the necessary information, you or your attorney can start listing your general unsecured debts on Schedule F. For each general unsecured debt, you’ll need to provide the following information:

-Creditor’s name and address: This is the name and address of the creditor who holds the general unsecured debt.
-Date incurred: This is the date that the general unsecured debt was incurred.
-Amount of claim: This is the amount that you owe on the general unsecured debt as of the date that you filed for bankruptcy.
-Be sure to list each general unsecured debt separately, even if you have multiple debts with the same creditor.

Step 3: Complete the Form

Once you’ve listed all of your general unsecured debts on Schedule F, you or your attorney must complete the rest of the form. This includes providing your name, case number, and other basic information, as well as signing the form to certify that the information you’ve provided is true and accurate.

Step 4: Review and File

After you’ve completed Schedule F, review it carefully to make sure everything is accurate and complete. Keep in mind that a trustee will be reviewing these forms and may ask you questions about them at the meeting of creditors. Once you’re satisfied with the form, you or your attorney will file it with the bankruptcy court, along with the rest of your bankruptcy paperwork.

As with other schedules, completing Schedule F is an important part of the bankruptcy process. By following these steps and seeking the guidance of a bankruptcy attorney if needed, you can ensure that your general unsecured debts are accurately listed, and that your bankruptcy case proceeds smoothly.


Copy of Schedule F Form
Download Schedule F Form

Have a question? Contact Greg Mitchell, Freeman Law, Texas.

Standard Mileage Deduction Rates Should Be Consistent For All Taxpayers

The IRS released a Strategic Operating Plan (SOP) outlining how it intends to use the nearly $80 billion in additional funding received as part of the Inflation Reduction Act of 2022 (IRA) to improve the taxpayer experience, modernize its information technology (IT) systems, and strengthen tax compliance programs in a fair and equitable manner.

This is a game changer to transform how the U.S. government administers the tax laws in a more helpful and efficient manner while focusing on providing the service taxpayers deserve.

However, of the nearly $80 billion in supplemental IRA funding, only $3.2 billion was allocated for Taxpayer Services and $4.8 billion was allocated for the IRS Business Systems Modernization (BSM) projects. Combined, that’s just ten percent of the total. By contrast, 90 percent was allocated for Enforcement ($45.6 billion) and Operations Support ($25.3 billion). The additional long-term funding provided by the IRA, while appreciated and welcomed, is disproportionately allocated for enforcement activities, and I believe Congress should reallocate IRS funding to achieve a better balance with taxpayer service needs and IT modernization.

As discussed in the Estimated Allocation of Funds section of the SOP, the additional resources the IRS has deployed to meet current taxpayer service needs will deplete the entire $3.2 billion IRA allocation for Taxpayer Services in less than four years if additional annual appropriations or supplemental funding is not provided. The SOP also expresses concern about the adequacy of BSM funding to modernize the agency’s antiquated IT systems.
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Mississippi Reverses Its Stance On Taxing SaaS

As businesses both utilize and develop technology product including electronically downloaded software and cloud computing or Software-as-a-service (“SaaS”), the taxability of these products continues to be varied and can be confusing.

The SaaS model continues to be a very popular method of delivering software to users. If you are a frequent reader of our blogs, you know that many states tax the SaaS revenue stream and many do not. In this article, we take a look at how the rules in Mississippi have recently become more defined in this space and the state has changed its taxability of SaaS.

The taxability of SaaS in MS largely depends on the nature of the specific software being provided to customers. The state of Mississippi, currently taxes the SaaS revenue stream. One caveat is that the SaaS product needs to be hosted on a server owned by the customer located in Mississippi.

Effective July 1, 2023, as outlined in SB 2449, Mississippi will exempt the SaaS revenue stream from sales tax. Furthermore, it will exempt remotely accessed SaaS (computer software located on a server outside of the state and accessed only via the internet) from sales and use tax. That means that SaaS subscription revenue received from Mississippi customers will not be subject to sales tax, even if the seller has met the nexus thresholds in the state.
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Federal News Network

According to the Federal News Network, The IRS is facing substantial cuts to funds meant to rebuild its workforce and modernize its legacy IT systems over the next decade, as part of a deal to raise the debt ceiling and avoid a first-ever government default.

The White House and congressional Republicans reached a final agreement Sunday night to limit federal spending over the next two fiscal years, in exchange for raising the debt limit through January 2025.

Congress still needs to pass the spending plan by June 5 to avoid a federal default. That’s about how long the Treasury Department estimates it still has enough revenue on hand to make scheduled payments, without having to borrow additional funds.

The spending deal struck by the Biden administration and House Speaker Kevin McCarthy (R-Calif.) would keep non-defense discretionary spending roughly flat in fiscal 2024, and would cap growth in non-defense spending to 1% in FY 2025.
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Chapter 61 Foreign Information Penalties: Taxpayers and Tax Administration Need Finality (Part 2)

Due process requires that matters be resolved according to established rules and principles and that taxpayers be treated fairly. The international information return (IIR) penalty regime under IRC Chapter 61, Subchapter A, Part III, Subpart A does not adhere to this fundamental mandate. Now is the time for Congress to fix this broken system by providing a clear path for implementation of these penalties. This fix, which would provide much-needed clarity and finality, will require legislation.

The need for this legislation has been brought to a head by the U.S. Tax Court’s recent decision in Farhy v. Commissioner, which holds that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b). In part one of this series, I provide a discussion of this decision and a recommendation that would protect the rights of both taxpayers and the government.

Since assuming the role of National Taxpayer Advocate, I have recommended that the IRS cease systemic assessment of these penalties, and I have requested that Congress enact legislation providing the IRS the ability to utilize deficiency procedures for IIR penalties. Among other things, deficiency procedures allow for judicial review in the Tax Court prior to the assessment and payment of the asserted penalties.

Compared to other courts, the Tax Court is more accessible for taxpayers and is by far the least expensive and easiest to navigate for low-income taxpayers. Amending the IRC to implement deficiency procedures would solve the problem highlighted by the Tax Court in Farhy. Nevertheless, there remains a separate and important issue regarding Chapter 61 IIR penalties that also needs a legislative fix.

Chapter 61 International Information Return Penalties Require Finality
Taxpayers are entitled to finality and a fair and just tax system. Protection of these rights is a bedrock aspect of quality tax administration.

The failure to provide a clear statute of limitations for some Chapter 61 penalties represents a defect in the IRC. Unlike most other penalty provisions in the code, there is no explicit statute of limitations impacting some Chapter 61 penalties. Nothing in the code specifically prohibits the IRS from imposing penalties going all the way back to the enactment of some code sections. That being said, the Court noted in Farhy, “28 U.S.C. § 2461(a) expressly provides that ‘[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil act.’” 28 U.S.C. § 2462 provides that a suit to enforce penalties must be commenced within five years.
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Bankruptcy Schedules: Schedule D

Continuing on with our series on Bankruptcy Schedules, today we’ll look at Schedule D, which is used to list all of the secured debts that you owe as of the date that you filed for bankruptcy. Secured debts are those that are secured by collateral, such as a car loan or a mortgage. By completing Schedule D, you will provide the court and your creditors with a detailed list of all the debts you owe that are secured by collateral. As a general matter, secured debts will not be discharged in a bankruptcy case. Therefore, if you intend to keep the property that serves as the collateral for a loan, then you’ll need to plan to continue to make payments on that debt after bankruptcy.

Step 1: Gather Information About Your Secured Debts

Before you can start filling out Schedule D, you’ll need to gather information about all of your secured debts. This may include car loans, mortgages, and other loans that are secured by collateral. Make sure to gather all relevant documentation, including loan agreements, billing statements, and any other documents related to your secured debts.

Step 2: List Your Secured Debts

Once you have all of the necessary information, you can start listing your secured debts on Schedule D. For each secured debt, you’ll need to provide the following information:
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Chapter 61 Foreign Information Penalties: Part One: Taxpayers And Tax Administration Need A Legislation Fix

Since 2020, I have repeatedly recommended a legislative change under which Congress would make foreign information return penalties and assessable penalties subject to deficiency procedures for the benefit of both the IRS and taxpayers. This change would provide taxpayers with a more efficient, less costly, and more equitable regime governing the initial imposition of these penalties, as well as the mechanisms by which they can be challenged by taxpayers.

This blog specifically addresses information reporting penalties in Chapter 61, Subchapter A, Part III, Subpart A (hereafter referred to as Chapter 61 for brevity’s sake).

Taxpayers who receive foreign gifts or control certain foreign corporations and partnerships and fail to file required information returns are subject to penalties under IRC §§ 6038 and 6039 (which are in Chapter 61 of the IRC). IRC § 6038 is one of several code sections that require similar filings and provide for similar penalties for taxpayers with various types of foreign corporations, partnerships, assets, and accounts. These Chapter 61 penalties are peculiar in that each section specifically imposes the penalties but provides no authority to assess and collect the penalties. I raised this concern in my 2020 Annual Report to Congress and recommended that the IRS take steps to protect the government fisc and also taxpayer rights by maximizing taxpayers’ access to administrative and judicial review.

Farhy v. Commissioner
The ability of the IRS to assess a Chapter 61 penalty was recently challenged before the U.S. Tax Court in Farhy v. Commissioner and, in a precedential decision, the court held that the IRS lacks statutory authority to assess and collect penalties under IRC § 6038(b).
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Bankruptcy Schedules: Schedule C

This will continue our series on bankruptcy schedules. In a prior blog post, we looked at Schedule A/B. Today, our focus will be on Schedule C related to the claiming of exemptions.

In a bankruptcy case, Schedule C is an important form that allows debtors to claim exemptions for certain property. Exemptions are legal provisions that allow debtors to protect certain assets from being seized and sold by the bankruptcy trustee to pay off creditors. In this blog post, we’ll go over the basics of completing Schedule C in a bankruptcy case.

Step 1: Understand Your State’s Exemptions

Before you can start filling out Schedule C, you need to understand the exemptions that are available to you in your state. Each state has its own set of exemptions, and some states allow debtors to choose between state and federal exemptions. Make sure to consult with a bankruptcy attorney to understand your state’s exemptions and which ones may be applicable to your case.

Step 2: Identify Property to Claim as Exempt

Once you’ve identified the exemptions available to you, the next step is to identify the property that you want to claim as exempt. This can include things like your home, car, personal property, and other assets that are protected by state or federal exemptions. This includes things like protected accounts like IRAs and 401(k), along with a variety of other items that varies by state.
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Plan Now To Take Advantage Of New And Existing Tax Benefits, Prepare For Reporting Changes

WASHINGTON — The Internal Revenue Service urged business taxpayers to begin planning now to take advantage of tax-saving opportunities and get ready for reporting changes that take effect in 2023.

During National Small Business Week, April 30 to May 6, the IRS is joining the Small Business Administration and others in both the public and private sector to celebrate the hard work, ingenuity and dedication of America’s small businesses and their contributions to the economy.

With next year’s filing deadline nearly a year away, entrepreneurs still have time to identify possible tax benefits, take action to qualify for them and then claim them when they file in 2024. They also have time to plan for reporting changes and even claim overlooked tax benefits from the recent past.

Cutting Energy Costs For Small Businesses
The Inflation Reduction Act (IRA), enacted last summer, includes provisions that can save small business owners money on energy costs. For example:
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STAY AWARE: Hiring Trends In Corporate Tax Departments Now And For The Future

About five years ago, when we surveyed thousands of executives on corporate tax departments trends, I recall one tax executive’s comment vividly… “ The Corporate Tax Department of the Future Will Be Very Different From The Tax Department Of Today.” This comment was emailed to me by a prescient corporate tax executive five years ago. This tax executive provided an insightful understanding of trends that were about to take place. The focus of this post is to discuss trends we now see that are happening behind the scenes in the tax community.

With thirty years’ experience being retained by corporate tax clients to find tax executives, I am highly qualified to discuss hiring trends well in advance of the market understanding the trends currently unfolding around them. The last prediction posted in my blogs a couple of years ago was easy in that I stated once tax professionals start working remotely, they would not want to go back to the office. In this post, I will bring to your attention where we see rising activity in hiring trends and the cost to corporations who do not understand the importance of the technology experts they employ.

Recently, I communicated to a senior management tax executive of a private equity firm my advice on the most important person they should have in-house on their acquisition team. Over the years, they have learned the importance of a strong in-house tax team who can assess the challenges they will face while conducting mergers and acquisitions. While in the past the focus has been on highly strategic tax planning, these teams are becoming ever more careful of the challenges they face in the integration of the software of two separate entities. In some cases, hundreds of millions of dollars of software purchases would not work to integrate two separate systems. This is a software trap many companies are walking into these days. It is messy and it is very expensive.
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A Picture, A Painting, And A Prince: The Supreme Court Addresses The ‘Fair Use’ Doctrine

On May 18, 2023, the U.S. Supreme Court issued its 43-page majority opinion in the case of Andy Warhol Foundation for the Visual Arts, Inc. v. Goldsmith, No. 21-869, 598 U.S. __ (May 18, 2023) (slip opinion linked here).

Facts. The facts of the case center around artistic creations of Andy Warhol and Lynn Goldsmith.

In the 1980s, Goldsmith, a photographer extraordinaire, captured images of many rock-n-roll stars, including Prince. In 1984, Goldsmith licensed to Vanity Fair magazine one of her photos of Prince for “one time” use as an “artist reference.” Vanity Fair wanted to use the photo for the creation of illustrations to be included in an article about Prince. Vanity Fair engaged renowned artist, Andy Warhol, to prepare the illustrations. Goldsmith was credited for the source and was paid $400. But, Warhol went on to create additional works using Goldsmith’s photo or the illustrations he created from it. In 2016, the Andy Warhol Foundation for the Visual Arts, Inc. (AWF) licensed one of those works to magazine publisher, Condé Nast, for illustrating another story about Prince. AWF received $10,000 for the license. Goldsmith received nothing.

Shown below are the three creative works in issue in the case:

Goldsmith, 598 U.S. __ (May 18, 2023) at pg. 4 (slip opinion)

Goldsmith informed AWF that the use of the photo in the Condé Nast magazine infringed her copyright in the photo she provided to Vanity Fair in 1984. In response, AWF sued her, claiming that AWF’s use was “fair use” and thus, pursuant to 17 U.S.C. § 107, was not an infringement on Goldsmith’s copyright. Goldsmith counterclaimed for infringement.
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