Andrew Samaniego | Tax Resolution Blog | CA

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The Cohan Rule: How This 100-Year-Old Case Still Saves Taxpayers Today

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Do you know what grinds my gears more than a mandatory sprint? Bookkeeping. Just yesterday, after panting through my annual Physical Readiness test (which I absolutely loathe), it struck me how similar my feelings are towards keeping meticulous financial records. But like running, it’s a necessary evil, especially if you’re a business owner gearing up for tax season.

However, let’s face it—sometimes life throws a wrench in our plans. Documents get lost, receipts fade away, or, heaven forbid, a disaster wipes out all our meticulous records. What then? Do we just roll over and let the IRS have its way with us? Not quite, thanks to a century-old lifesaver known as the Cohan Rule.

What is the Cohan Rule?

Cast your mind back to 1920s America. George M. Cohan, a legendary Broadway figure (you might know him from the song, “Give My Regards to Broadway”), found himself in hot water with the IRS. Despite his success, Cohan was no fan of detailed record-keeping. When audited, he lacked the documentation to support his claimed business expenses.

But instead of folding, Cohan fought back, and his case went all the way to the United States Court of Appeals. In a landmark decision, the court ruled in favor of Cohan, essentially stating that when a taxpayer can convincingly show that qualified expenses occurred, the IRS should estimate the allowed deduction rather than deny it outright just because specific records are missing.

Why Does the Cohan Rule Matter to You?

If you’ve skipped filing your taxes for the past few years and are now in a scramble to get your affairs in order, the Cohan Rule could be your unsung hero. Here’s why:

  1. Flexibility in Deductions: The Cohan Rule allows for tax deductions based on reasonable estimates if you can demonstrate that you genuinely incurred the expenses. This means that even if your record-keeping was less than perfect, you might still salvage significant deductions.
  2. Reducing Tax Liability: By enabling you to estimate and deduct legitimate business expenses, the Cohan Rule can substantially decrease your tax liability. This is crucial if you’re piecing together back tax returns and find yourself short on documentation.
  3. Empowering Negotiations: Knowing about the Cohan Rule arms you with valuable information that can be leveraged in discussions with the IRS. It shows that you’re informed and proactive, qualities that can influence the outcome of tax disputes.

How to Use the Cohan Rule Wisely

While the Cohan Rule is a powerful tool, it’s not a free-for-all. Here’s how to use it effectively:

  • Be Reasonable: Your estimates must be plausible. Wild guesses won’t fly with the IRS.
  • Show Evidence of Effort: Demonstrate that you’ve made a genuine attempt to track and document expenses, even if the records are incomplete.
  • Consult a Professional: Navigating the complexities of IRS rules can be daunting. A tax professional can help you make the most of the Cohan Rule and ensure your estimates are defensible.

Conclusion

Just like how I’d rather run laps than do bookkeeping, sometimes we must tackle the less pleasant aspects of life head-on. If you’re dealing with back taxes and missing records, remember the Cohan Rule. It might just be the lifeline you need to turn a potential financial disaster into a manageable situation.

Need more insights or help applying the Cohan Rule to your tax situation? Dive deeper into tax strategies and solutions on my blog or reach out for personalized advice. Don’t let the fear of imperfect records keep you from taking control of your tax destiny.

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com

How to Use State Tax Debt as a Bargaining Chip with the IRS

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What a whirlwind of events this weekend! From the highs of launching my YouTube channel and visiting the Temecula vineyards, to the unsettling news of an attempt on Former President Trump’s life—a figure whose speeches I admired during my time at the US Naval Academy. It’s times like these that remind us to stay resilient and focused, no matter the chaos.

Amidst all, let’s shift gears back to something we can control: navigating the treacherous waters of tax negotiation. Particularly, how you can use your state tax debt as a cunning leverage point in negotiations with the IRS.

The Art of Leverage

In the world of taxes, knowing how to maneuver can make or break your financial health. One less known but effective strategy is using your state tax liabilities as a bargaining chip with the IRS. Here’s why this works and how you can apply it:

Understanding the IRS vs. State Tax Boards

The IRS and state tax authorities, like the California Franchise Tax Board, often seem like they’re cut from the same cloth. However, they operate under different rules and have different levels of flexibility when it comes to debt settlement. States, especially California, are notoriously rigid in their negotiations. They often do not budge much on the amount owed.

Step 1: Assess Your Total Tax Liability

Firstly, get a clear picture of what you owe both to the IRS and your state tax board. This will be your starting point in understanding the scope of your negotiations. Remember, knowledge is power—particularly when it involves figures the IRS might be interested in.

Step 2: Approach the IRS

When you negotiate with the IRS, point out your significant state tax liabilities. Here’s the kicker: since the state is less likely to negotiate down the debt, you can argue that a significant portion of any resources or payments you can muster will need to go towards settling your state tax debts.

Why This Appeals to the IRS

The IRS is keen on collecting as much as possible but understands they are in line with other creditors, including state tax authorities. If they see that the state will take a substantial part of your payment capacity, they might be more willing to negotiate favorable terms on the federal tax debt to ensure they receive something rather than nothing.

Step 3: Propose a Payment Plan

Armed with the knowledge that you have substantial state debts, propose a payment plan to the IRS that considers your total debt load. This plan should aim to balance payments realistically between state and federal liabilities. Demonstrate good faith by proposing a structured payment schedule that prioritizes both debts.

Step 4: Documentation and Professional Help

Back up your negotiation with thorough documentation. Show clear calculations of your income, existing debt obligations, and potential payments. In such complex negotiations, it is prudent to seek the guidance of a tax professional who can strategically present your case to the IRS.

Wrapping Up

While the realm of taxes often feels daunting, strategic approaches like using your state tax liabilities as leverage in IRS negotiations can provide surprising relief. Just as we keep our spirits up and resilience ready in the face of national events, so too should we tackle our financial obligations with strategic foresight.

Remember, navigating these tricky waters doesn’t mean you’re alone. Consult a tax professional who can provide you with the arsenal you need to make the most of every negotiation with the IRS.

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com

Substitute Returns: Why They Can’t Be Discharged and What It Means for You

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Happy Monday, folks! As we gear up for a new week full of potential and growth (both personally and professionally), I’m excited to share a bit of my own news—I’m starting a YouTube channel! That’s right, I’ll be diving into the world of video to bring tax solutions right to your screen, helping turn those tax problems into tax triumphs.

Now, onto a less thrilling but critically important topic: Substitute for Returns (SFRs) by the IRS. Understanding this could save you a lot of headaches down the road.

What is a Substitute for Return (SFR)?

Let’s set the scene: you’ve missed filing your taxes for one reason or another. Instead of letting it slide, the IRS steps in and files a Substitute for Return. This might sound like a helpful service, but don’t be fooled—this is the IRS’s way of ensuring they get what they believe you owe, and it often doesn’t work out in your favor.

An SFR typically only includes the basic information the IRS has about your income from sources like your W-2s and 1099s. What does it miss? Pretty much everything that could benefit you. Deductions, credits, exemptions—you name it, it’s likely not included. The result? A higher tax bill than you might actually owe.

Why Can’t SFRs Be Discharged?

Here’s where it gets even stickier. A tax debt from an SFR is particularly tough because, under the law, these cannot be discharged in bankruptcy under most circumstances. Why? Because the tax return was not filed by you, the taxpayer, and bankruptcy law requires that you file a tax return for the debt to be dischargeable.

This means if the IRS has filed an SFR on your behalf, you’re stuck with this debt unless you take action. It’s a ball and chain on your financial freedom, potentially preventing you from clearing your slate even in dire circumstances.

What Can You Do About It?

  1. File Your Actual Return: If you’ve had an SFR filed, it’s not the end of the world, but you need to act quickly. You can still file your actual tax return to replace the SFR. This is crucial because your own return will likely include all the deductions and credits you’re entitled to, potentially reducing your tax liability significantly.
  2. Consult a Tax Professional: Navigating SFRs and their implications can be complex. Professionals like myself, Enrolled Agents who specialize in tax resolution, can help you understand your options, file your overdue returns, and even negotiate with the IRS to get penalties reduced.
  3. Stay Compliant Going Forward: Once you’ve addressed the SFR, ensure you stay on top of your tax filings in the future. Keeping current with your tax obligations prevents the IRS from stepping in and taking matters into their own hands again.

Wrapping Up

As we launch into new endeavors, like my upcoming YouTube channel, it’s important to remember that dealing with something like an SFR head-on is always better than letting it fester. The IRS doesn’t create these substitute returns for your benefit—they do it for theirs. By taking control of your tax situation, you ensure that you’re not paying more than you need to and protect your financial future.

Stay tuned for more insights on my new YouTube channel, and remember: every tax problem has a solution. You just need the right tools and knowledge to find it. Cheers to a productive week ahead, and let’s tackle those tax issues together!

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com

Love the Government’s Numbers? Here’s Why You Might Want to Reconsider

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Hello, everyone! Last night, we rediscovered one of California’s iconic experiences—the drive-in theater in San Diego.

With the beautiful night sky above us and nestled in the comfort of our car, it was the perfect way to enjoy a movie with our little one, Kainalu, without the fuss of a traditional cinema.

Speaking of doing things differently, it got me thinking about a less enjoyable aspect of life where going with the ‘default’ might not be in your best interest—dealing with the IRS, especially when it comes to their version of your tax returns.

When the IRS Does Your Homework

Imagine this: You’ve skipped filing your taxes for a few years. Maybe life got busy, or perhaps the paperwork seemed overwhelming. Whatever the reason, if you don’t file, the IRS can file a tax return on your behalf.

This is known as a Substitute for Return (SFR). Sounds helpful, right? Well, not so fast. Let’s dive into why accepting the IRS’s numbers might not be the best move.

**1. One-Size-Fits-All Approach: Just like a drive-in movie isn’t the perfect fit for every moviegoer, an SFR isn’t tailored to your unique financial situation. The IRS fills out these returns based only on the information it has, which usually means without any deductions, credits, or exemptions you might be entitled to. This can lead to a significantly higher tax bill.

**2. Missing Out on Deductions and Credits: When the IRS creates an SFR, they don’t know about your charitable donations, your deductible mortgage interest, or that you have three kids who could qualify you for substantial tax credits. Every detail omitted can mean more dollars out of your pocket.

**3. Tax Liabilities and Penalties: Not only does an SFR often result in higher tax due, but it also starts the clock on penalties and interest. These can accrue at an alarming rate, turning what might have been a manageable bill into a financial nightmare.

**4. Less Control Over Your Financial Life: Relying on the government to report your earnings and calculate your taxes means giving up control of your financial narrative. It’s like letting someone else pick the movie you’re going to watch at the drive-in—you might end up watching a horror flick when you really wanted a comedy.

Taking Back the Reins

So, what can you do if you find yourself facing an SFR? First, don’t panic. Second, it’s time to take action:

  • File Your Past Returns: Even if the IRS has already filed an SFR, you can still file your own return to replace it, and this is almost always in your best interest.
  • Claim What’s Yours: Make sure to include all your deductions and credits. It might not just reduce your tax liability; it could lead to a refund.
  • Seek Professional Help: Navigating back taxes and replacing an SFR can be complex. Working with a tax professional like an Enrolled Agent can help ensure you’re making the right moves.

Conclusion

Just like choosing a drive-in over a traditional movie theater gave us control over our family movie night, taking charge of your tax situation gives you control over your financial future. Remember, when it comes to the IRS, the default option is rarely the best choice. If you haven’t filed your taxes in a while, it’s time to switch from the backseat to the driver’s seat.

If you need help or guidance with filing past returns or dealing with an SFR, visit my website for more information or to contact me directly. Let’s get your tax situation back on track under the stars of clarity and confidence, not under the cloud of IRS defaults.

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com

Non-Filers, Meet the IRS: How Wage & Earning Reports Can Work for You

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I hope you all had a spectacular Fourth of July, we enjoyed the fireworks over Lake Murray here in beautiful San Diego. As we settle back into the daily grind, let’s talk about a crucial issue that many overlook—what happens when you haven’t filed your taxes for several years.

Imagine this: you’ve missed filing your taxes. Not just for one year, but for several. This isn’t just a small oversight; it can feel like a massive weight hanging over you. Today, we’re going to address one of the most powerful tools at your disposal if you’re a non-filer: the IRS Wage and Earning Reports.

Why You Might Not Have a Tax Problem, But a Filing Problem

During my consultations, I often meet people who are terrified they’re in deep trouble with the IRS. But here’s a little secret: many of you might not actually have a tax problem; you might just have a filing problem. Yes, it sounds less daunting when you put it that way, doesn’t it?

The Magic of Wage and Earning Reports

For many of my clients, especially those who have worked standard W-2 jobs and have simply fallen behind on their paperwork, the solution might be simpler than you think. The IRS keeps a record of all your reported earnings through what’s called Wage and Earning Reports. These documents compile all the information from forms like W-2s, 1099s, and other tax documents that employers and clients file to report what they’ve paid you.

How These Reports Can Help You

  1. Identify What You’ve Earned: These reports provide a clear picture of your earnings over the years. This is invaluable if you’ve lost your own copies or never kept records in the first place.
  2. Facilitate Filing Back Taxes: With accurate income information, you can retroactively file your tax returns. This isn’t just about compliance; it’s about potentially unlocking refunds you didn’t know you had coming.
  3. Assess Potential Liabilities: If it turns out you do owe money, having all the correct information can help you or your tax professional create an accurate return and minimize what you owe. Sometimes, it’s much less than expected.
  4. Set the Stage for Negotiations: If you’re facing penalties and interest, being armed with correct and comprehensive data allows tax professionals like myself to negotiate effectively with the IRS. We can often reduce these penalties or set up manageable payment plans.

Taking Action

So, what’s your next step if you’re a non-filer who’s feeling overwhelmed? First, don’t panic. Second, consider retrieving your Wage and Earning Reports from the IRS. We offer this service as the first step in solving your Tax Resolution Case.

Need Help?

Navigating back taxes and dealing with the IRS can be daunting, but you don’t have to do it alone. If you’re unsure where to start or what to do next, I’m here to help.

Stay tuned for more content, possibly even some YouTube videos where I’ll dive deeper into these and other tax issues. Let’s turn that filing problem into a solution today!

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com

Correcting Substitute Returns: Declare Your Financial Independence Today!

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Happy Fourth of July, everyone!

As we celebrate America’s independence with burgers, music, and fireworks by Lake Murray in San Diego, it’s hard not to think about the very reasons we kicked off this grand celebration back in 1776—taxation without representation.

Fast forward to today, and taxes are still a hot topic, especially if you’ve been neglecting them. Did you know that if you don’t file your tax returns, the IRS doesn’t just wait around? They take matters into their own hands by filing what’s known as a Substitute for Return (SFR) on your behalf. And trust me, it’s not as beneficial as it might sound.

The Problem with Substitute Returns

Imagine letting someone else decide what you’re going to eat at a barbecue without knowing what you like or what you’re allergic to. That’s roughly what happens with an SFR. The IRS prepares these based on the information they have, which is usually limited to your income. They don’t consider your eligible deductions, credits, or expenses, which means you could end up owing much more than if you had filed yourself.

Why You Need to Take Action

Just as our forefathers didn’t stand by to let taxes define their fate, you shouldn’t let the IRS dictate yours with a Substitute Return. Correcting an SFR is your financial declaration of independence. It allows you to replace the IRS’s version of your tax situation with one that accurately reflects your finances, often reducing the amount owed significantly, and sometimes even turning that balance into a refund.

How to Correct a Substitute Return

Step 1: Gather Your Documents Collect all relevant financial documentation from the year(s) in question—W-2s, 1099s, receipts, mortgage statements, etc. These are your ammo against the IRS’s assumptions.

Step 2: File Your Accurate Return Prepare the correct tax return for the years the IRS filed an SFR. This can either be done by using tax software that allows you to file back taxes or by working with a tax professional who can ensure that every potential deduction and credit is accounted for.

Step 3: Submit and Negotiate Once your accurate returns are prepared, submit them to the IRS. This will replace the SFRs, but the process doesn’t end there. If there are penalties and interest from the late filing, you may also need to negotiate with the IRS to reduce those penalties or set up a payment plan for any remaining debt.

Step 4: Stay Compliant Just as the U.S. continued to shape its own destiny after gaining independence, you must maintain your financial freedom by staying compliant with your tax filings moving forward.

Need Help Taking the Helm?

Navigating the murky waters of Substitute Returns can be complex and intimidating. If you’re unsure where to start or worried about going head-to-head with the IRS alone, I’m here to help. Check out my website where you can download a free e-book packed with guidance on how to handle Substitute Returns and reclaim control over your tax situation. Visit CrushIRSAnxiety.com and take the first step towards your financial independence.

This Fourth of July, while we celebrate our nation’s liberty, let’s also commit to securing our financial liberty. Don’t let Substitute Returns set the course of your fiscal future. Correct them, claim your rights, and ensure your tax situation is something that truly represents you. Here’s to a future where you hold the reins to your financial independence!

Happy Independence Day and here is a picture of my favorite firework show!

Andrew Samaniego, EA, CTRC, MSCTA

Andrew Samaniego Tax Planning & Resolution

(619) 268-1084  |  AndrewSamaniego.com