Legal Lines with Locke Meredith
David Gunn
Show # 80
Mr. Meredith: Hello, I’m Locke Meredith and I’d like to invite you to join me on the next Legal Lines with Tax Attorney David Gunn. David is going to talk to us about the various kinds of taxes that we pay on income, property, sales, etc. He is also going to talk to us about the IRS and what the IRS is looking for in tax returns these days and how the audits by the IRS are going up. So join us on the next Legal Lines with Tax Attorney David Gunn.
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Mr. Meredith: Welcome to Legal Lines. I’m Locke Meredith and I’m very pleased to have on the show today David Gunn. David is a board certified tax attorney here in Baton Rouge. David thanks for being on the show.
Mr. Gunn: Good to see you Locke.
Mr. Meredith: You are board certified in a number of disciplines, tell the folks about that.
Mr. Gunn: I am a board certified tax attorney also an estate planning specialist, I practiced for a number of years as a certified public accountant. I did a stint at LSU teaching a business class and now I practice in Baton Rouge.
Mr. Meredith: A lot of water under the bridge.
Mr. Gunn: That’s correct.
Mr. Meredith: Let’s talk to folks today basically about income, estate planning and taxes.
Mr. Gunn: Right.
Mr. Meredith: Explain to folks how taxes are taken from income. The different kinds of income and the different kinds of taxes.
Mr. Gunn: Well of course Locke the tax that everybody knows the most about and we have a lot of different kinds of taxes, but the income tax. Basically the Internal Revenue Code and the law says that you have to pay tax on all of your income.
Mr. Meredith: So any income that you earn is taxed?
Mr. Gunn: That’s correct unless it is specifically excluded by the law. There are a few exclusions, for instance, life insurance proceeds and gifts and things like that that you would receive. Generally, most everything that you receive is taxable including payments that you receive in cash.
Mr. Meredith: We are going to talk about that in a minute. Not only are you taxed on the income that you earn on the Federal level but you are also taxed on the income that you earn on the State level.
Mr. Gunn: That’s correct. Right now the situation with the Federal tax is that it runs from a zero percent tax up to thirty five percent. Your maximum rate on the Federal return is thirty five percent. The Louisiana return runs up to six percent. So someone with quite a bit of income will pay about a forty percent rate.
Mr. Meredith: Explain to the folks, we have what is called a marginal tax rate. Explain to the folks what that means.
Mr. Gunn: Well a marginal tax rate Locke, is the upper tax rate. We live in a graduated system. Somebody that maybe works part time or a student or something like that may not pay any tax on their income. It’s below the standard deduction and the dependency exemption.
Mr. Meredith: Currently that level is what?
Mr. Gunn: It starts at zero and for a married couple would be at about ten to twelve thousand would be the exempt. Single would be a little less than that because you only have one exemption. Then you run through brackets of ten percent, fifteen percent, twenty five percent, and on up to thirty five percent.
Mr. Meredith: When you hit a certain level of income, the income tax that you are going to pay on that goes up.
Mr. Gunn: That’s correct. It goes up.
Mr. Meredith: It’s the same thing on the state level.
Mr. Gunn: Exactly. State level again begins at zero; it runs through rates of two percent up to six percent.
Mr. Meredith: In addition to the income taxes we also pay at the State level property taxes.
Mr. Gunn: Correct.
Mr. Meredith: Explain that.
Mr. Gunn: It’s imposed on the valuation of your real estate or if you are in business, what is called your personal property. This would be things like your desk, or equipment in a plant, things like that. As you know there are a whole bunch of other taxes like sales, and rental tax which raise quite a bit of money for the State and local government.
Mr. Meredith: And I was going to say not only does the State tax sales and property but so does the local government.
Mr. Gunn: That’s correct. The parish and the city of Baton Rouge.
Mr. Meredith: So when you add them all up you could easily be paying fifty percent of your income in taxes if you are a high income person.
Mr. Gunn: Absolutely. On top of the income tax there is also a self employment tax, upon a self employed person, or if it is an employee they pay social security.
Mr. Meredith: The purpose of the social security or self employment tax is to fund reportedly, retirement and medical expenses when you attain a certain age. Is that correct?
Mr. Gunn: That is correct.
Mr. Meredith: Also in addition to the income tax, property tax, and the sales or transaction I call them, taxes, we have death taxes.
Mr. Gunn: Absolutely.
Mr. Meredith: Explain that.
Mr. Gunn: The death tax, fortunately Louisiana repealed its inheritance tax and we’ve been trying to help some folks in the legislature also get rid of the Louisiana gift tax. It is imposed at a maximum rate of about three percent. The Louisiana inheritance tax was repealed about three years ago. If you handle it properly when someone passes the Federal estate law is still there. It began within recent times with about a one million dollar exemption. It’s been phased up and right now we have a two million dollar exemption, meaning if one of us passes away the first two million dollars in our assets or property is exempt in the Federal Estate Tax. If you get above that exemption it is imposed at forty six percent brackets.
Mr. Meredith: That’s almost half.
Mr. Gunn: Yes, almost half. It used to be a lot worse. It used to be about fifty five percent. It is perceived to be a very unfair tax by me and people like myself because most people that have accumulated an estate.
Mr. Meredith: Already paid taxes.
Mr. Gunn: Exactly.
Mr. Meredith: You throw into that mix the fact that if you are operating a business in a certain form, corporation, the corporation itself is also taxed.
Mr. Gunn: Exactly. What’s called a “C” corporation is truly double taxation. Income is passed through to the shareholders and taxed at their tax rate.
Mr. Meredith: Now lets talk about the process of collection of taxes. How the Government does that. How does the Government collect taxes?
Mr. Gunn: Well this is a whole lot of what we do. There is a lot going on with the IRS right now. They are expanding a lot of money to increase the number of audits. They believe that is something that needs to happen. To improve the number of audits and secondly to increase the number of their collections of taxes that they know are owed and for whatever reason they just haven’t been able to collect.
Mr. Meredith: Now is that a good thing?
Mr. Gunn: I think it is. I think long term over the course of years it is a very good thing. If they collect the taxes at the rates that we have now from the people that owe it then their will be less pressure on the Congress and on the President to increase the rates higher than the thirty five and the six percent. Obviously for someone that has been cutting corners on their taxes, it is not a good thing.
Mr. Meredith: As I understand our tax system, it is a voluntary system. In the sense that everyone is required by law but voluntarily complies with it. They are trusted to file an income tax return and list the income that they receive. Explain that.
Mr. Gunn: It is what we call a self assessment system. Self assessment as contrasted with maybe, on April 15th you and I would go down to the IRS and they would prepare the return for us. Instead we self report our income and submit it on a return.
Mr. Meredith: Let’s continue this on the next segment and talk about how the IRS collects taxes. This is Locke Meredith with Legal Lines and David Gunn. We will be right back.
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Mr. Meredith: Welcome back to Legal Lines. I’m Locke Meredith and again I am very pleased to have on the show today David Gunn. He is a Tax Attorney here in Baton Rouge.
We were talking about how it is a self reporting system and that is what you are going to pay to the government in taxes. Let’s go ahead an explain the process.
Mr. Gunn: You file your own tax return; the government doesn’t file it for you. It is a self assessment system and that is where a little bit of the misconception comes in. We have people come into our office, obviously dealing with IRS audits and investigations frequently. A fairly typical comment that we have is, well the IRS possibly cant prove that. Outside of the criminal arena the taxpayer for all intensive purposes, generally has the burden of proof.
Mr. Meredith: Let’s explain what that means.
Mr. Gunn: Well it means that we file our own tax return and we are in control of almost all evidence that affects our income tax. The IRS will receive copies of W-2 forms and 1099’s and things like that. Through their investigation arm they can generally get a bunch of information. It is considered by the court system and by the law to be more readily available to the taxpayer, therefore, we have the burden of proving that something either is not income or that we are allowed a deduction or whatever.
Mr. Meredith: If I report a certain level of income on my tax return and the IRS says we want to meet with you or we are going to audit you, it is not the IRS’s burden of proof to show that my level of income is not right, it is my burden of proof to show the IRS what I reported on that form is accurate.
Mr. Gun: That is correct.
Mr. Meredith: It’s not coming from my mouth, it is coming from documentation.
Mr. Gunn: Well, that is correct. To an extent they will hear what you have to say about something and if you have credibility, you don’t have a history of misleading them, and then your testimony may carry some weight. Generally you are going to want to have documentary evidence of what your income and your deductions are.
Mr. Meredith: So what is the IRS looking at these days? You talked about spending a lot more money enforcing and collecting. What is it that they are focused on?
Mr. Gunn: They are increasing the number of audits. They are spending a lot of money collecting the taxes that are on the books. They are, the service perceives it has a big problem with people maybe not being straight with their income tax. They are sending people to jail. We had a client recently that was unfortunately sentenced to fifteen months in Federal prison for a false tax return. Another area that we have been seeing really for several years is that the IRS is very concerned that a lot of professionals are not filing their income tax returns. The idea is kind of like they are not even on the radar screen. The IRS is very concerned about this and they are spending a lot of money and devoting a lot of resources to finding those people and prosecuting them. We recently had a client, an Attorney in this area who didn’t file a tax return for a couple of years. The Government would like to see him spend twelve months in jail.
Mr. Meredith: Serious stuff.
Mr. Gunn: Yes, very serious.
Mr. Meredith: As I understand it there is a “dirty dozen” issues that they are looking at. Explain that.
Mr. Gunn: Yeah, this is something that they issue about once a year. It’s called the dirty dozen. It’s their list of what they perceive to be abusive activities or things that are going on which tends to hurt the system, meaning the income tax system. It’s twelve different things each year. This year the list included, if you can believe this, these little telephone refunds and it runs from about thirty dollars up to about sixty dollars. It’s really silly but apparently some people have been claiming much larger amounts. There have also been some tax preparers who have been allegedly engaged in fraud. There were two preparers in the Baton Rouge area that were arrested. The other thing is I guess other types of preparer fraud. The IRS believes that there are preparers out there that are charging people money to do their tax return and telling them for instance, if you claim a certain level of charitable contributions to your church, you wont get audited and you will in affect, get away with that. A real serious thing is what we call Identity theft on the internet. I really haven’t seen it but what I am hearing about and reading is that people will receive emails that says this is an email from the IRS, we believe you are entitled to a refund, give us your social security number and your credit card number and we will facilitate you getting this refund. What happens is that you end up with charges on your credit card.
Mr. Meredith: Now, define a fraudulent return. What is that?
Mr. Gunn: Technically a fraudulent return is where someone has intentionally understated their income or intentionally overstated the deductions. That is very serious. It is a criminal act. It can involve the person being incarcerated and also a lot of people are not aware but if you have done that and the IRS can prove it then on top of the taxes and normal penalties and interest that you owe. In addition there is a seventy five percent fraud penalty. So if your tax is ten thousand dollars on top of the other penalty and interest there would be a seventy five hundred dollar fraud penalty.
Mr. Meredith: So easily double.
Mr. Gunn: Yes. More than double basically.
Mr. Meredith: So lets talk about what someone does if they get a letter from the IRS and it says we need to talk to you. Take them through the process.
Mr. Gunn: Well obviously you need to pay attention to it. Unbelievably we hear people that just don’t respond to it. That’s not what you want to do. You want to contact the IRS examiner. If it is a complicated return or you have a CPA for instance, you should call them and have them make the appointment for you and maybe even go for you. For people that are being what we call straight on their tax return it’s really nothing to worry about. It should be an easy process. For people that have been cutting corners then it can be very traumatic.
Mr. Meredith: From what I understand, they can either be looking at one issue or they can be looking at the whole return.
Mr. Gunn: That’s correct.
Mr. Meredith: So it can be a very quick process and resolved quickly or it could be months or years.
Mr. Gunn: Right. The system is set up so that it would move forward quickly. People sometimes complain that this has taken three or four months and sometimes it is just the agent being very busy with the IRS.
Mr. Meredith: I know in your experience, you’ve found that the folks that you deal with to be very sophisticated, they know what they are talking about and they know what they are doing, the IRS folks.
Mr. Gunn: Yes. The IRS people are very good, especially in Baton Rouge. They are very competent and they really know what they are doing so the process should go very smoothly.
Mr. Meredith: Alright lets talk about the next leg of this and that’s estate planning on the next segment. This is Locke Meredith with Legal Lines and David Gunn. We will be right back.
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Mr. Meredith: Welcome back to Legal Lines. I’m Locke Meredith and again I am very pleased to have on the show today David Gunn. He is a Tax Attorney here in Baton Rouge.
We were talking about the process if you are audited and basically you go meet with the examiner. Let’s say they say look we think you owe more taxes. What are the options that the person has?
Mr. Gunn: First of all Locke there are two or three ways that an audit happens. One is just a correspondence audit. You get a letter and you communicate with them by mail. The other type is to meet with them and resolve it. If you are unhappy with the amount of tax that they believe that you owe then you might try to meet with them and their group manager and say look I think that you should reconsider this or take a look at additional evidence. After that process in concluded they send you a thirty day letter and say this is like a bill, here is what we think you owe. At that point you have what is called appeal rights. You can go administratively within the IRS to the appeals division and ask an officer that has had nothing to do with this audit to take a fresh look at it. A lot of people have real good luck with that. They’ll look at it and adjust it possibly in your favor. If you still aren’t happy with that then there is the court system. There are two options there Locke. You can go once you get what is called the ninety day letter which is a formal certified letter and you have ninety days to file a petition with the tax court to have them redetermine how much you owe without paying the tax. The other option is to pay the tax and then go to court in Baton Rouge, in Federal District Court, looking for a refund.
Mr. Meredith: Now why would you chose one over the other?
Mr. Gunn: Well most people go to tax court because they don’t want to pay the tax. The tax court is out of Washington, D.C. They write a circuit and you can usually have your case heard in New Orleans. Since the hurricane they have actually been having tax court matters here in Baton Rouge. If you don’t want to pay the tax, you go to tax court. If you would rather have it heard by one of the Federal District Judges you go ahead and pay the tax and if you get your money back then they repay you a little bit for that.
Mr. Meredith: David, I appreciate you being on the show. Thank you. This is Locke Meredith with Legal Lines and David Gunn. Thanks for being with us.
