May 2013 TAX ALERTS. House Ways and Means Committee Sets Sights on Small Business Tax Reform. Contact us at

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1 May 2013 TAX ALERTS House Ways and Means Committee Sets Sights on Small Business Tax Reform Many small business benefits incorporated into the tax laws are complicated and, arguably, in need of a reform. House Ways and Means Committee Chair Dave Camp, R-Mich., recently released a draft proposal containing numerous tax reform measures specifically designed to simplify taxation of small businesses and partnerships. According to a report by the National Federal of Independent Business, cited by Camp, small business owners spend approximately $18 to $19 billion every year in tax compliance costs. Camp's proposal addresses this and other issues by recommending lower tax rates, permanent Internal Revenue Code (IRC) Section 179 expensing, expansion of the cash accounting method, unification of tax filing rules for S corps and partnerships, and more. Camp's dedication to tax reform, if not his specific proposals, carries credibility on both sides of the aisle on Capitol Hill. If the momentum toward tax reform continues to grow, Camp's current efforts will likely shape at least a portion of its overall framework. Proposed reforms IRC Section (IRC Section) 179 expensing The American Taxpayer Relief Act of 2012 (ATRA) extended the $500,000 expensing limit and $2 million dollar limit through the end of Camp's proposal would make permanent IRC Section 179 expensing for certain depreciable business property for businesses, but would lower the limits allowed for costs of qualifying property placed in service after A business would be allowed to deduct the costs of up to $250,000 in qualifying property placed in service during a tax year after 2013 (down from $500,000 in 2013). The allowance would be subject to a dollar limit threshold of $800,000 under the proposal (down from $2 million in 2013). The proposal would also provide for an annual adjustment of the limits for inflation. Cash method of accounting Camp's proposal would expand availability of the cash method of accounting for certain business entities that do not currently have the option to use the simpler cash method under which items of income accrue when received and expenses are counted when actually paid. Uniform capitalization rules Camp's proposal would expand the number of business taxpayers exempt from the IRC Section 263A uniform capitalization rules (UNICAP) that require businesses to capitalize certain direct and indirect ~ 1

2 House Ways and Means Committee Sets Sights on Small business Tax Reform (continued) costs for items such as materials, labor, or production that are allocable to real or tangible personal property that the taxpayer produced for certain trade, business, or resale purposes. Current law provides an exception for small businesses that have average annual gross receipts of less than $10 million and acquire property for resale. Camp's draft proposal would expand the exception to also cover small business producers of real or tangible property. Start-up expenses Camp's proposal would simplify the current treatment of the $5,000 deduction for start-up expenses by consolidating the provisions of IRC Sections 248 and 709, which govern organizational expenditures for corporations and partnerships, under the start-up expense deduction provisions of IRC Section 195. The draft proposal would also increase the current IRC Section 195 deduction limit from $5,000 to $10,000, subject to a phaseout limit of $60,000 (up from $50,000). Business tax return deadlines Camp's proposal would shift due dates for Form 1065, U.S. Return of Partnership Income, Form 1120S, U.S. Income Tax Return for an S Corporation, and, with respect to C Corporations, Form 1120, U.S. Corporation Income Tax Return. The deadlines would change from April 15 (Form 1065) and March 15 (Forms 1120 and 1120S) to March 15 (Form 1065), April 15 (Form 1120), and April 1 (Form 1120S). The proposal would also provide an option to file six-month extensions for all three forms. Pass-through reform Pass-through entities, such as S Corps and partnerships, are stymied by the tax laws' complexity, according to Camp. Because an estimated 65 percent of new jobs over the past 17 years were created by small businesses formed as unincorporated pass-through entities, Camp's proposal set forth several recommendations for drastic reform of the current pass-through regime, such as enacting a shorter recognition period for a newly elected S Corp's built-in gains under IRC Section 1374 and increasing the threshold at which an S corporation's net passive income becomes subject to the highest corporate tax rate. Alternatively, Camp has also proposed a drastic rewrite of current Subchapters K and S, which govern taxation of partnerships and S Corps. The tax laws would contain one unified set of rules under a new Subchapter K for taxation of partnerships and pass-through corporations. The new Subchapter K would expand eligibility of most pass-through corporations to elect S Corp treatment, loosen current restrictions on who may be an S Corp shareholder, impose a withholding requirement on a passthrough with respect to certain amounts of each pass-through owner's distributive share, and more. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , or (213)

3 Chances of Being Audited by the Internal Revenue Service The Internal Revenue Service (IRS) has issued its annual data book ( which provides statistical data on its fiscal year (FY) 2012 activities. The data book provides valuable information about how many tax returns the IRS examines (audits) and on what categories of returns the IRS is focusing resources, as well as data on other enforcement activities such as collections. What are the chances of being audited? Of the 143,399,737 individual tax returns filed in calendar year 2011, 1,481,966 were audited. This works out to roughly 1.0%, down slightly from 1.1% the previous year. Of the total number of individual income tax returns audited in FY 2012, 487,408 (32.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 483,574 (30.9%) of all audited returns for FY Only 24.3% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That is slightly down from the 25% figure for the previous year. The 75.7% balance of the audits were correspondence audits, slightly up from 75% for the previous year. Following are selected audit rates for individuals not claiming the EITC: For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 3.6% of returns were audited in FY 2012, down from 4.3% in FY For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.4% of returns were audited in FY 2012, a decrease from 3.8% in FY Of the returns showing farm (Schedule F) income,.5% were audited in FY 2012 versus.6% in FY For returns showing total positive income of $200,000 to $1 million, 2.8% of returns not showing business activity were audited, and 3.7% of returns showing business activity were audited. The audit rates for such returns were 3.2% and 3.6%, respectively, for the previous year. For FY 2012, the audit rate for returns with total positive income of $1 million or more was 12.1%, slightly down from the 12.5% rate for FY Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 0.85% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (down from 1% for FY 2011), and 1.96% for those with $200,000 to $500,000 of AGI (down from 2.66% for FY 2011). Exam coverage increased to 8.9% for those with at least $1 million but less than $5 million of AGI (down from 11.8% for FY 2011). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more. 3

4 Chances of Being Audited by the IRS (continued) Select audit rates for business returns were as follows: For all corporate returns other than Form 1120S, 1.5%, same as the year before. For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.7%; $1 $5 million, 2.1%; and $5 10 million, 2.6%. For FY 2011, the percentages were, respectively, 1.6%, 1.9%, and 2.6%. For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.8%, up slightly from 17.6% for FY The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 10.5% for those with total assets of $10 $50 million (down from 13.4% for FY 2011); 22.7% for those with $250 $500 million (up from 17.4% for FY 2011); 45.4% for those with $5 20 billion (down from 50.5% for FY 2011); and 93% for those with $20 billion or more (down from 95.6% for FY 2011). For partnership and S corporation returns, the audit rate was 0.5%, as compared to 0.4% for the year before. IRS's activity on other fronts Number of returns filed The number of partnership returns filed (Form 1065) increased by 1.5%, and the number of S corporation returns (Form 1120S) grew by.8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 2.2%. The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.8%, reflecting the second consecutive increase (likely due to improvement in economic activity) after the 2% drop exhibited in FY 2010 and the 6.7% drop shown in FY The number of estate tax returns filed in FY 2012 increased by 145.5%, following last year's 62.1% plunge (which was attributable to the temporary repeal of the tax for deaths in calendar year 2010) before being reinstated retroactively with a $5 million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010). Math errors on individual returns The IRS sent out roughly 2.7 million math error notices relating to the 2011 return. Of the total math error notices, 23.9% were for tax calculation/other taxes (which include errors related to self-employment tax, alternative minimum tax, and household employment tax), 15.3% related to exemption number/amount, 13.4% related to the EITC, 10.6% related to the standard/itemized deduction(s), 5.3% related to the child tax credit, and 5.2% related to the first-time homebuyer credit. Penalties In FY 2012, the IRS assessed 28.5 million civil penalties against individual taxpayers, slightly down from million assessed in the previous year. Of the FY 2012 assessments, the top three penalties in percentage terms were 60.2% for failure to pay, 24.8% for underpayment of estimated tax, and 11.5% for delinquency. On the business side, there was a total of 995,533 civil penalty assessments (down from 1,080,027 for the year before), and the top three penalties in percentage terms were 51.4% for delinquency, 25.8% for failure to pay, and 20% for estimated tax. 4

5 Chances of Being Audited by the IRS (continued) Offers-in-compromise In FY 2012, 64,000 offers-in-compromise were received by the IRS (versus 59,000 for FY 2011), and 24,000 were accepted (up from 20,000 for the year before). Criminal cases The IRS initiated 5,125 criminal investigations in FY There were 3,701 referrals for prosecution and 2,634 convictions. Of those sentenced, 81.5% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2011, the IRS initiated 4,720 criminal investigations. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , or (213) Business Personal Property Taxes are Due This article is reproduced with permission from Spidell Publishing, Inc Most counties have mailed their business personal property tax statements to business owners and, while the due dates vary, the deadline to avoid penalties is May 7, The penalty for late filing is 10% of the final tax. Note: Unlike real property, business personal property is not subject to the restrictions of Proposition 13. Most counties use Form BOE-571-L, Business Property Statement, to determine the tax assessment. If a business is required to file the form in a county and fails to do so, the county assessor will estimate a value and add a 10% penalty to that estimated assessed value. Therefore, failure to return Form BOE-571-L can result in an over-assessment. Electronic filing Many counties provide online filing for most businesses. In most of these counties, once a taxpayer chooses the e-file option, the taxpayer will no longer receive a paper copy of Form BOE-571-L unless one is specifically requested. For a list of the counties participating in the e-file program, go to For your county assessor s contact information, go to 5

6 Business Personal Property Taxes are Due (continued) Assets, values, and rates Every business taxpayer who owns taxable personal property (other than a manufactured home) having an aggregate cost of $100,000 or more for any assessment year must file a signed property statement with the county assessor; others are required to file only upon request of the county assessor, unless the property qualifies for direct assessment. All machinery, office furniture, computers, equipment, and supplies are subject to tax. Business inventories, licensed vehicles, and any intangible assets are exempt from assessment. Assessment begins with the cost of the asset, including sales tax, freight, and installation, but not including any trade-in. The assessor applies an index factor to the asset s cost and then applies a depreciation factor to the result and this becomes the assessed value. The assessor s depreciation schedule is different from the tax depreciation schedule, as it is based on expected economic life. The tax rate is usually a little more than 1% of the assessed value. Generally, using a rate of 1.2% will give a conservative estimate. For example, if the cost of a business asset is $15,000 and the assessed value is $12,000, your property taxes on the business asset will be about $144 ($12, %). Form and manner Unlike real property, business personal property is reappraised annually. Business owners must file a business property statement each year detailing costs of all supplies, equipment, and fixtures at each location. Caution: Remember that property listed on Form BOE-571-L should also be listed on the depreciation schedules on the tax return. At least once every four years, county assessors are required to audit the books and records of any trade or business whose business personal property and trade fixtures have a full value of $400,000 or more. If the taxpayer does not own the real property where the business is conducted, the tax bill should arrive about the middle of July. Payment is due by the end of August. If the taxpayer owns the real property, the assessed value of the business assets will be added to the value of the real property and the tax will be paid in the December and April tax payments. ~ For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , or (213)

7 Internal Revenue Service (IRS) Releases the Dirty Dozen Tax Scams for 2013 On March 26, 2013, the IRS issued its annual Dirty Dozen list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud. The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns. "This tax season, the IRS has stepped up its efforts to protect taxpayers from a wide range of schemes, including moving aggressively to combat identity theft and refund fraud," said IRS Acting Commissioner Steven T. Miller. "The Dirty Dozen list shows that scams come in many forms during filing season. Don't let a scam artist steal from you or talk you into doing something you will regret later." Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shut down scams and prosecute the criminals behind them. The following are the Dirty Dozen tax scams for 2013: Identity Theft Tax fraud through the use of identity theft tops this year s Dirty Dozen list. Identity theft occurs when someone uses your personal information such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer s identity to fraudulently file a tax return and claim a refund. Combating identity theft and refund fraud is a top priority for the IRS, and we are taking special steps to assist victims. For the 2013 tax season, the IRS has put in place a number of additional steps to prevent identity theft and detect refund fraud before it occurs. We have dramatically enhanced our systems, and we are committed to continuing to improve our prevention, detection and assistance efforts. The IRS has a comprehensive and aggressive identity theft strategy employing a three-pronged effort focusing on fraud prevention, early detection, and victim assistance. We are continually reviewing our processes and policies to ensure that we are doing everything possible to minimize identity theft incidents, to help those victimized by it, and to investigate those who are committing the crimes. The IRS continues to increase its efforts against refund fraud, which includes identity theft. During 2012, the IRS prevented the issuance of $20 billion of fraudulent refunds, including those related to identity theft, compared with $14 billion in This January, the IRS also conducted a coordinated and highly successful identity theft enforcement sweep. The coast-to-coast effort against identity theft suspects led to 734 enforcement actions in January, including 298 indictments, information, complaints, and arrests. The effort comes on top of 7

8 IRS Releases the Dirty Dozen Tax Scams for 2013 (continued) a growing identity theft effort that led to 2,400 other enforcement actions against identity thieves during fiscal year The Criminal Investigation Unit has devoted more than 500,000 staff hours to fighting this issue. We know identity theft is a frustrating and complex process for victims. The IRS has 3,000 people working on identity theft-related cases more than double the number in late 2011; and we have trained 35,000 employees who work with taxpayers to help with identity theft situations. The IRS has a special section on IRS.gov dedicated to identity theft issues, including YouTube videos, tips for taxpayers and an assistance guide. For victims, the information includes how to contact the IRS Identity Protection Specialized Unit. For other taxpayers, there are tips on how taxpayers can protect themselves against identity theft. Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax accounts. Taxpayers can call the IRS Identity Protection Specialized Unit at More information can be found on the special identity protection page. Phishing Phishing is a scam typically carried out with the help of unsolicited or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft. If you receive an unsolicited that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov. It is important to keep in mind the IRS does not initiate contact with taxpayers by to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information that can help you protect yourself from scams. Return Preparer Fraud About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft. It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs). The IRS also has created a new web page to assist taxpayers. For tips about choosing a preparer, red flags, details on preparer qualifications and information on how and when to make a complaint, visit Remember: Taxpayers are legally responsible for what is on their tax returns even if it is prepared by someone else. Make sure the preparer you hire is up to the task. 8

9 IRS Releases the Dirty Dozen Tax Scams for 2013 (continued) IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form and fill it out or order by mail at 800-TAX FORM ( ). The form includes a return address. Hiding Income Offshore Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities, using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee leasing schemes, private annuities or insurance plans for the same purpose. The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases. While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting and disclosure requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution. Since 2009, 38,000 individuals have come forward voluntarily to disclose their foreign financial accounts, taking advantage of special opportunities to comply with the U.S. tax system and to resolve their tax obligations. And, with new foreign account reporting requirements being phased in over the next few years, hiding income offshore will become increasingly more difficult. At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS continues to work on a wide range of international tax issues and follows ongoing efforts with the DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced. The IRS has collected $5.5 billion so far from people who participated in offshore voluntary disclosure programs since Free Money from the IRS & Tax Scams Involving Social Security Flyers and advertisements for free money from the IRS, suggesting that the taxpayer can file a tax return with little or no documentation, have been appearing in community churches around the country. These schemes promise refunds to people who have little or no income and normally don t have a tax filing requirement and are also often spread by word of mouth as unsuspecting and wellintentioned people tell their friends and relatives. Scammers prey on low-income individuals and the elderly and members of church congregations with bogus promises of free money. They build false hopes and charge people good money for bad advice, including encouraging taxpayers to make fictitious claims for refunds or rebates based on false statements of entitlement to tax credits. For example, some promoters claim they can obtain 9

10 IRS Releases the Dirty Dozen Tax Scams for 2013 (continued) for their victims, often senior citizens, a tax refund or nonexistent stimulus payment based on the American Opportunity Tax Credit, even if the victim was not enrolled in, or paying for, college. Con artists also falsely claim that refunds are available even if the victim went to school decades ago. In the end, the victims discover their claims are rejected. Meanwhile, the promoters are long gone. The IRS warns all taxpayers to remain vigilant. There are also a number of tax scams involving Social Security. For example, scammers have been known to lure the unsuspecting with promises of nonexistent Social Security refunds or rebates. In another situation, a taxpayer may really be due a credit or refund but uses inflated information to complete the return. Beware: Intentional mistakes of this kind can result in a $5,000 penalty. Impersonation of Charitable Organizations Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters. Following major disasters, it is common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or to solicit money or financial information. They may even directly contact disaster victims and claim to be working for, or on behalf of, the IRS to help the victims file casualty loss claims and get tax refunds. They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims identities or financial resources. Bogus websites may solicit funds for disaster victims. As in the case of a recent disaster, Hurricane Sandy, the IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips: To help disaster victims, donate to recognized charities. Be wary of charities with names that are similar to familiar or nationally known organizations. Some phony charities use names or websites that sound or look like those of respected, legitimate organizations. IRS.gov has a search feature, Exempt Organizations Select Check, which allows people to find legitimate, qualified charities for which donations may be tax-deductible. Do not give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money. Do not give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift. Call the IRS toll-free disaster assistance telephone number ( ) if you are a disaster victim with specific questions about tax relief or disaster-related tax issues. 10

11 IRS Releases the Dirty Dozen Tax Scams for 2013 (continued) False/Inflated Income and Expenses Including income that was never earned, either as wages or as self-employment income, in order to maximize refundable credits, is another popular scam. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties and, in some cases, even prosecution. Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit, but other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000. False Form 1099 Refund Claims In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return. Do not fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution. Frivolous Arguments Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law. Falsely Claiming Zero Wages Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a corrected Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS. Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty. Disguised Corporate Ownership Third parties are improperly used to request employer identification numbers and form corporations that obscure the true ownership of the business. 11

12 IRS Releases the Dirty Dozen Tax Scams for 2013 (continued) These entities can be used to underreport income, claim fictitious deductions, avoid filing tax returns, participate in listed transactions and facilitate money laundering and financial crimes. The IRS is working with state authorities to identify these entities and bring the owners into compliance with the law. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are legitimate uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses, and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS. IRS personnel have seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement. For more information about this article, please contact us at taxalerts@windes.com or any of our tax professionals at (562) , (949) , or (213)

13 Windes & McClaughry is a recognized leader in the field of accounting, assurance, tax, and business consulting services. Our goal is to exceed your expectations by providing timely, high-quality, and personalized service that is directed at improving your bottom-line results. Quality and value-added solutions from your accounting firm are essential steps toward success in today s marketplace. You can depend on Windes & McClaughry to deliver exceptional client service in each engagement. For over eighty-five years, we have gone beyond traditional services to provide proactive solutions and the highest level of capabilities and experience. Windes & McClaughry s team approach allows you to benefit from a wealth of technical expertise and extensive resources. We service a broad range of clients, from high-net-worth individuals and nonprofit organizations to privately held businesses and publicly traded companies. We act as business advisors, working with you to set strategies, maximize efficiencies, minimize taxes, and take your business to the next level. Headquarters 111 West Ocean Boulevard Twenty-Second Floor Long Beach, CA Tel: (562) Orange County Office Von Karman Avenue Suite 1060 Irvine, CA Tel: (949) Los Angeles Office 601 South Figueroa Street Suite 4950 Los Angeles, CA Tel: (213) Visit us online at: , Windes & McClaughry Accountancy Corporation 13