Second Quarter 2017 Newsletter

Early this year we had a DOE [California Department of Employment] payroll audit. This was a complete surprise and meaningless exercise taking three weeks to complete. We have been in business 40 years and never had either a client audit or our own business for this event. This resulted in bitter communications and demands from them until it was resolved for very little money for a 1099 employee who had not been on wages three years before when she worked independently out of her home [but was now working as a salaried employee on their audit]. They were looking for Illegals under the tables, tried to get payroll taxes on alimony payments, made a handyman an employee, then added huge penalties, on their absurd assumptions. Only the threat of appeals, causing a re-audit, resolved the audit. It was a total waste of time and resources for both the State and us. They wouldn’t tell us who sicced this meaningless audit on us.

The lesson above is that if you receive an audit notice from any Federal or State agency, immediately notify us, for your defense. In all audits the auditors make the worst assumptions and hope you will pay the overstated bill to get rid of the bad experience, especially with the State of California. All audits can be beaten down with a proper attitude and defense [and an appeal].

Now, for some mixed good news: The State of California passed a resolution, with a 2/3 majority vote, to increase DMV fees and fuel taxes for the repair of roads and the unfunded ‘Train To Nowhere’ rapid transit project. If my memory hasn’t failed, I remember the public voting to add sales taxes to motor fuels for this same purpose of fixing freeways and roads many years ago. It appears that the money has disappeared in the General Fund. A repeal is now being organized for the next election and we will have an opportunity to reject it. On the other hand, the residents of Temecula approved a local sales tax increase in the last election….

We have petitioned a case in the US Tax Court for a client. This appeal of a no-show business audit result is in the works. The case is being reviewed in Riverside. The last time I was there the case was settled when I bumped into the auditor while waiting for the elevator. This one is not that easy, but we will see how it goes. Two lessons are apparent at this point, keep good business records and don’t ever ignore audit appointments.

We just completed a 706 return which took months of compilation of data and research. Estate tax returns are not that common because the $5,400,000 gross estate exclusion is larger than most estates. These returns were filled to use the DSUE [deceased spouse unused exemption] to the advantage of the surviving spouse. This allows us to avoid future taxation of the unused exemption. Another reason for the prolonged preparation is because all estate tax returns and related gift tax returns are audited when received by the IRS. We have always had favorable audit letters and are waiting for the audit results.

The new Republican government is on track to change the US Tax Code. There will be significant changes and hopefully it will really be simplified and taxes not increased. The last major Tax Code revision was in 1984 when Alternate Minimum Tax was conceived. It should have been labeled correctly as Alternate Maximum Tax because it overrides and increases all other income taxes. I expect something to pass, but please remember that the horse created by a committee in Washington became a camel.

We are doing a lot of estate planning. Tax season has passed with much time now available to review your investments, savings, and trusts. We can help you with your living [revocable, grantor] trusts and estate 1041 trust returns. In all matters, because of my extensive experience in securities and present insurance licenses, it’s time for a free review of your estate. Please keep in mind that the stock market, like real estate, is at an all-time high and diversification is great to preserve capital and equity gains.

A practical estate planning note: For no charge, your bank or savings and loan will provide a ‘Payable on Death form’ for spousal signatures. This form allows a surviving spouse to access all bank and savings accounts for cash needs for funeral and other expenses without probate delays. Please keep this in mind if you have separate accounts anywhere. It is not required for pensions or IRAs.

Lastly, if you ever receive a letter from any government agency concerning taxes please call and send us a copy ASAP. We will also review your broker statements or pension documents without charge to discuss these matters with you.

We hope you continue to have a good year and we will see you again in the next tax season.

Phil Chute, EA
Phillip B Chute EA Financial Inc


(951) 302-4491

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