Is the IRS Targeting Latino Businesses?
In
Recently we have seen five
different cases of IRS audits in
Haz Drywall’s annual gross
receipts were about $400,000. As a result of disallowing all labor, insurance,
and vehicle expenses, the IRS sought to impose tax on roughly 88% of gross
receipts for one year. That produced a tax bill of nearly $500,000 for a
three-year period. Clearly Haz could
not produce $400,000 of gross receipts without help.
In each of the five cases we
have seen, the IRS took essentially the same approach, although the stated
reasons varied. Because these five cases involved five different IRS Auditors
working under five different IRS Supervisors, arguing that this phenomenon is
due to one “rogue agent” seems implausible.
In two of these cases the IRS
Auditor stated that their Supervisor had informed them to disallow all labor
expenses if the Hispanic workers did not have valid SSNs or ITINs. Surprisingly
in one case, the Agent said that she (on her own) had contacted the IRS’s own
attorneys and had been informed that such blanket disallowances of labor cost
were not consistent with the law.
In one of the cases, the Auditor
stated in her Revenue Agent’s Report that “Taxpayer failed to establish
business purpose (invalid Social Security Numbers)” and disallowed all labor
costs for the entire year. The taxpayer had been in the construction framing
business for years. It is hard to conceive that he had no “business
purpose.”
The Internal Revenue Code
broadly defines income and allows reasonable deductions for business expenses.
If, for example, a business owner has limited records, it is sometimes
permissible for the courts to allow expenses based on the testimony of the
business owner, as happened in a well known case involving the entertainer
George M. Cohan. Despite this rule, in the recent Latino cases the IRS
gives no consideration to the fact that those workers must be paid regardless of
their status.
While some state laws have been
changed recently to deny deductions against state income taxes for compensation
paid to undocumented workers, federal tax law has no such provision. In many
years of tax practice, prior to the recent Latino cases, I have never seen an
IRS auditor totally disallow all contract labor costs.
Many fail to appreciate the
cause and effect of adjustments in an unchallenged Auditor’s Revenue Agent
Report. Far too often, an
inappropriate IRS Notice of Deficiency will be issued. If the taxpayer fails to
file a petition to the US Tax Court within 90 days, the tax bill will become
final, even if it is wrong.
The widespread failure to
understand and respond to IRS notices is compounded by the fact that many
Latinos speak English as a second language. It appears that the IRS (at least in
Even if labor expenses paid to
IKs with invalid SSNs or ITINs are deductible, there are other avenues open to
the IRS. One approach which is becoming more common in Northern Virginia is for
the IRS to issue a “No- Match” letter, Form CP-2100A, informing the business
that the IRS has determined that payees shown on an enclosed list of 1099
recipients may have provided incorrect SSNs, ITINs, or names. The last
newsletter (“Hernando’s Horrors”) discussed what the business must
do upon receiving such a “No- Match” letter.
If you have questions or have
these issues, you can contact Newland & Associates for assistance.
Copyright 2008
Published by the law firm of Newland & Associates, PLC
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