e- NEWSLETTER

April/May 2004

Taxation Law

IRS Warns Against Common Tax Abuse Schemes

Cameron R. Monti

                In a March 2004 press release, the Internal Revenue Service (IRS) urged taxpayers to avoid participating in some of the more common tax scams/schemes. The IRS and other federal agencies are aggressively prosecuting promoters and participant taxpayers for fraud and tax evasion, which can result in imprisonment, fines, and/or repayment of taxes owed with interest and penalties.

            Some of the more commons tax schemes include, for example: Misuses of Trusts; "Claim of Right” Doctrine; Employment Tax Evasion; Return Preparer Fraud; and Improper Home-Based Business.

            Misuse of Trusts. This scheme involves promoters urging taxpayers to transfer assets into trusts, promising tax benefits that are improper. The IRS warns that before a taxpayer enters into any trust arrangements, particularly those that seem too good to be true, they should seek out the advice of a trusted tax professional.

            Claim of Right Doctrine. In this scheme, taxpayers file returns and attempt to take a deduction equal to the entire amount of their wages. Promoters encourage taxpayers to characterize the deduction as a necessary expense for income or compensation for personal services rendered. The deduction is based on a misinterpretation and misapplication of the Internal Revenue Code.

            Employment Tax Evasion. Another tax scheme involves promoters instructing employers not to withhold federal income tax or other employment taxes from wages paid to their employees. Such scheme is based on an incorrect interpretation of Section 861 of the Internal Revenue Code as seen disputed in recent court cases.

            Return Preparer Fraud. The IRS warns of abusive tax return preparers who often charge inflated fees for the return preparation services, falsely advertise inflated refunds, and divert a portion of their taxpayer’s refund for their own benefit. The IRS warns to be very careful when taxpayers choose who to pay to prepare their tax returns. More often than not, taxpayers are ultimately responsible for all the information submitted in their return.

            Improper Home-Based Business. Promoters suggest that taxpayers can deduct most, if not all, of their personal expenses as business expenses by setting up illegitimate home-based businesses. The Internal Revenue Code is clear in stating that there must be a clear business purposes and profit motive in order to generate and claim allowable expenses.

            Do not be misled. There are legitimate and legal tax planning practices involving the creation of trusts, taking business deductions, and other tax saving strategies that the IRS views as entirely proper. Therefore, if you are thinking about participating in a tax saving plan, it is a general good idea to follow the old adage, “If it sounds too good to be true, it probably is.” If you question the legality of a tax strategy, it is highly recommended that you seek trustworthy and professional tax advice. For further information or questions about this article, please contact Cameron Monti at cmonti@lavellelaw.com

Financial Planning

Identity-Theft: Why Should I Worry?

Kerry M. Lavelle

                Identify theft is one of the fastest growing crimes in the country, and the liability risk of employers is increasing along with it. Generally, we fail to safeguard vital codes, employee identification numbers, facts, and employee related information. As consumers, we blithely hand over credit cards to clerks and waiters who take them out of our sight, or we fill out on-line forms without considering who is receiving them, or whether they really need the information they are requesting.

                Identity theft is growing at a phenomenal rate.

                In the past year the FTC reported that 9.9 million Americans were victims of identify theft, and according to some studies, improperly handled employee records were the greatest contributor to identify theft in the workplace.

                What can we do for employees?:

                        1. Collect only the information necessary from applicants, employees, and customers;

                        2. Use numbers other than social security numbers as employee identification numbers;

                        3. Rigorously enforce the confidentiality of employees personal information, including their social security numbers and i.d. numbers;

                        4. Do background checks on all prospective employee's backgrounds before hiring them;

                        5. Destroy employee records when they are no longer needed. Use paper shredders as necessary;

                        6. Do not put the social security numbers on badges, time cards, work schedules, etc. Social security numbers should never be used

                        as computer password or log in;

                        7. Encourage employees to keep all personal information they bring with them to work in locked desk drawers, cabinets, etc. Further, employees should not place personal    

                         outgoing  mail containing checks, social security numbers, or other financial account information in mail trays in the workplace; and

                        8. Adopt a written policy on identity theft and incorporate it in your employee handbook.

                What about individuals and consumer theft? First, document the crime, and contact all credit reporting agencies such as Equifax, Experian, and TransUnion, (although the FTC states that reporting to one also alerts the others) to place a fraud alert on your account. Try to file a police report. Generally, police departments are reluctant to file on identity theft, it is because oftentimes purchases were made 100 miles away from the local police department. The FTC advises persistence, including contacting your County Sheriff's Department or State Police, if your local police will not help.

                Keep excellent records of all of your correspondence. We advise victims to keep detailed logs tracking money spent such as postage, long distance phone calls, notarizations and accountants, and legal fees, as well. If your case involves mail fraud, contact the U.S. Postal Service. Other agencies that may be notified for a particular offense, may be the Department of Motor Vehicles, the Social Security Administration, the FBI, and the FTC. The FTC offers an affidavit of identity theft, which should be notarized and sent to creditors and agencies.

                Look out for "phishing". Phishing is an e-mail scam using known logos from entities such as E-Bay, PayPal, and America Online, to "phish" for personal information. The victim receives a legitimate looking e-mail proclaiming problems with the account information. The e-mail requests that the potential victim "click on the link, and provide additional personal and financial information to clear up a few questions."

                What can individuals do? As they say on the X Files, "trust no one."

                1. Be suspicious of transactions you did not initiate;

                2. Ask yourself if you really need to provide your social security number, and never carry your social security card with you;

                3. Do not carry credit cards and a checkbook unless you plan to use them;

                4. Opt in for credit agencies periodic credit watches. They are not free, but they might buy you peace of mind;

                5 . Take the contents out of your wallet, and photocopy everything, front and back, and keep the copies in a secure place;

                6. When you get a new credit card, sign it immediately. Retrieve mail from your post offices immediately as possible;

                7. When ordering checks, omit your drivers license number, social security number, telephone number, and if possible, only use the initials of your first and middle name;

                8. Shred all documents that contain any personal information before throwing them away. "Dumpster diving" is not just about finding antique furniture; and

                9. Lastly, keep all records of on-line purchases, including dates and order numbers. Look for "secured socket layers" protection when purchasing on-line.

                In the end, as consumers we can minimize our risks but not eliminate them.

                    When was the last time you reviewed your credit report? Contact me at klavelle@lavelle.com if you have any questions about your credit report.

Estate Planning

New Funding Methods For The Family Trust

Lauren E. Schaaf

     This article comes pursuant to a private letter ruling and is instructive for estate planners. The gist of this new ruling is that taxpayers have the ability to use a single pool of assets to fund a family trust, regardless of which spouse dies first. This is beneficial because a couple’s assets do not necessarily have to be divided up between different trusts to take full advantage of the unified credit amount.

Basically, this decision is unremarkable if the husband dies first. The ruling is favorable when a husband places assets into his revocable trust, making a portion of those assets subject to his wife's general testamentary power of appointment if she predeceases him. This results as a gift from husband to the wife at the time of her death if she predeceases. If the wife exercised the power of appointment by placing the assets into a family trust for the benefit of the husband, the assets will not be included in his estate. The result is that if the wife dies first, the assets that originated with the husband pass through the general power given to the wife through her estate and into a family trust, or bypass trust, for the benefit of the husband. Therefore, the husband's assets are being used to fund a bypass for himself.

    This decision is beneficial for estate planning clients who have a hard time fulfilling their $1.5 million unified credit amount. Husband and wife do not have to each have separate assets accumulating a total of $3 million. Husband and wife can use a single pool of assets maybe only accumulating to $1.5 million and pass those assets to other’s family trust, depending on who dies first. Do you know your estate’s total worth including investments and retirement accounts? Is it over $1.5 million but less than $3 million? Are you still married and therefore able to split your assets into two different monetary pools to take full advantage of the unified tax credit? If you don’t know the answers to these questions, or in need of estate planning services please contact me at Lschaaf@lavellelaw.com

A Reminder On Social Security Retirement Ages

            Many people still believe - mistakenly - that they are eligible for full retirement benefits under Social Security upon attaining age 65. "Full retirement age" is the age at which you may receive an unreduced retirement benefit from Social Security. Only people born in 1937 or earlier reach full retirement at age 65. The retirement age has been rising due to reforms enacted in 1983. The chart illustrates the gradual increase in full retirement age. It is important to note that a person can start receiving a reduced benefit at age 62, irrespective of the year that they were born.

Real Estate Law

How To Save Your Home From Foreclosure

Theodore M. McGinn

        One of the greatest repercussions due to a loss of a job or a medical tragedy is the inability to stay current with your mortgage payments. Shortly after falling behind your mortgage payments you will undoubtedly receive threatening letters from the attorney representing the mortgage lender threatening to take your home. Contrary to what they may indicate in their letter, there are several steps you can take to save your home from foreclosure.

            The first option to consider is whether or not you can reinstate your mortgage loan. Reinstatement is essentially catching up on your mortgage loan payments. Under Illinois law, a lender is obligated to reinstate your loan if you are able to make, in one single payment a total amount of the arrearage, including all missed mortgage payments, accrued interest, and any incurred court costs within 90 days from the date you were served with a summons for foreclosure 735 ILCS 5/15-1602. If you can make such payment, the lender has to reinstate your loan.

            The second option to consider is redemption. Redemption is the satisfaction in full of the total outstanding balance owed to the lender including accrued interest and court costs incurred in their foreclosure suit. A lender is obligated to allow the homeowner to redeem the property as long as such full payment is made within seven months of the date that the homeowner is served the summons for foreclosure 735 ILCS 5/15-1603. There are typically two ways with which to redeem your property. The most common method is to refinance. Under that scenario, you will enter into another mortgage loan and use the proceeds to pay off the balance owed to the foreclosing lender.

            Another way to redeem would be to sell your property out right. Naturally, you would want to make sure that the property is sold for enough in order to satisfy the outstanding amount to the foreclosing lender. In addition, you may wish to discount the sale price of the property in order to effectuate a timely sale and preserve any equity that you can recover from the sale.

            Many times a homeowner is unable to redeem or reinstate the property. A homeowner may be unable to obtain the necessary funds to reinstate. Furthermore, a homeowner’s credit may be so poorly damaged as a result of the defaults on their mortgage loan so as not to qualify for a refinancing loan. One last alternative would be a Chapter 13 bankruptcy petition. With Chapter 13, a homeowner is able to extend the period time in order to reinstate their loan. Using Chapter 13 bankruptcy protection, Under the reinstatement option set forth above, a homeowner only has ninety days with which to obtain the funds necessary with which to reinstate. Using Chapter 13 bankruptcy protection, however, a homeowner can extend the time to refinance up to three years, and even longer in certain circumstances. One requirement in a Chapter 13 Bankruptcy is that you must be able to make the regular monthly mortgage payments in addition to the extra monthly payments for reinstating the loan. Whenever a homeowner becomes in default of their mortgage loan, all is not lost. However, they should contact an attorney and evaluate their options. The last thing such individual should do is allow their long built equity slip away to the lender. Because only a limited amount of time is available, you must act fast.   If you have any question, please contact me at tmcginn@lavellelaw.com
 

Taxation Law

Who Must File A Tax Return

Timothy M. Hughes

            There are some instances when you may not be required to file a federal income tax return. But keep this in mind more than 70 percent of those who file a return are due a refund, so it may be to your advantage to file even if you are not required to.

            The law does require you to filed a tax return if your income is above a certain level. Check the instructions for Form 1040, 1040A or 1040EZ (under "filing requirements") for specific details that may affect your need to be file a tax return with the IRS this year.

            Here are some general guidelines for anyone under age 65. Remember , these guidelines may change based on your particular situation. In general, once you have the following gross income amounts, the law requires you to file a federal tax return with the IRS:

                                                                                                                    Single $7,800.00
                                                                                                                    Head of Household $10,050.00
                                                                                                                    Married Filing Jointly $15,600.00
                                                                                                                    Married Filing Separately $3,050.00

            Generally, a person who is self-employed must file a tax return if his or her net earnings from self-employment for the year exceed $400.00

            Even individuals who don't earn enough to be required to file a tax return may be eligible for an earned income credit up to $2,547 for a taxpayer with one qualifying child and $4,204 for a taxpayer with two or more qualifying children. Some individuals who do not have a qualifying child may be eligible for a credit of up to $382. However, you must file a return to receive the Earned Income Tax Credit. You must also file a return if you received any advance payments of this credit while you worked during this year.

            Filing a return also helps in maintaining a record of compliance. Which record of compliance is easier proven by a filed return than by not filing. This may become important if there is every a problem with compliance in the future.

            Have you filed a return for every year since you started to work ?  If you have any question concerning this article, please contact me at thughes@lavellelaw.com

Corporate Law

You Can't Just Leave It All Behind -

How To Properly Dissolve Your Company

Matthew J. Sheahin

             Some small businesses fail. This is a fact of life. However, if you are a shareholder or director of a small corporation and decide that you need to close up shop, you must still follow proper procedures in order to protect yourself, as an individual, from becoming personally liable for your company's debt. In Illinois, actions against a dissolved company survive dissolution for five years. In most cases, you will be protected by the general rule that separates corporate liabilities from personal liabilities. An officer, director, or shareholder is generally not personally responsible for a corporate debt. However, if you fail to notify the creditors of your company regarding the dissolution you may become personally liable.

            Section 12.75 of the Business Corporation Act outline the type of notice that must be provided to your creditors upon the dissolution of your company. Please note that the rule makes no distinction between a voluntary dissolution and an involuntary dissolution.

            12.75    (a) A dissolved corporation may bar any known claim against it, its directors, officers, employees or agents, or its shareholders or their transferees, by following the procedures set forth in subsections (b) and (c) of this Section. A claimant that does not deliver its claim by the deadline established pursuant to subsection (b) or that does not file suit by the deadline established pursuant to subsection (c) shall have no further rights against the dissolved corporation, its directors, officers, employees or agents, or its shareholders or their transferees.
                        (b) Within 60 days from the effective date of dissolution, the dissolved corporation shall send a notification to the claimant setting forth the following information:
                                        (1) The corporation has been dissolved and the effective date thereof.
                                        (2) The mailing address to which the claimant must send its claim and the essential information to be submitted with the claim.
                                        (3) The deadline, not less than 120 days from the effective date of dissolution, by which the dissolved corporation must receive the claim.
                                        (4) A statement that the claim will be barred if not received by the deadline.
                        (c) If, after complying with the procedure in subsection (b), the dissolved corporation rejects the claim in whole or in part, the dissolved corporation shall notify the claimant of such rejection and shall also notify the claimant that the claim shall be barred unless the claimant files suit to enforce the claim within a deadline not less than 90 days from the date of the rejection notice.
                        (d) For purposes of this Section, "claim" does not include any contingent liability or a claim arising after the effective date of dissolution or a claim arising from the failure of the corporation to pay any tax, penalty, or interest related to any tax or penalty.
                        (e) This Section shall not apply to claims arising out of violations of the criminal law. If you fail to send out proper notice to known creditors then section 8.65of the BCA kicks in and transfers corporate liabilities to you personally.

            Section 8.65(a)(2) of the Business Corporation Act outlines the liability of directors in certain cases as follows:
            (2) If a dissolved corporation shall proceed to bar any known claims against it under Section 12.75, the directors of such corporation who fail to take reasonable steps to cause the notice required by Section 12.75 of this Act to be given to any known creditor of such corporation shall be jointly and severally liable to such creditor for all loss and damage occasioned thereby.

            This failure to send out notice can make you personally liable for any corporate debt, even if the corporation did not have the assets to satisfy the corporate debt. The law in this regard is not concerned with the assets of the corporation, but instead makes you personally liable for the entire debt. It is imperative the small business owners take the proper steps to formally dissolve a corporation in order to avoid assuming personal liability for corporate debts. -Additionally, if your corporation is involuntarily dissolved by the Secretary of State, you still must send out proper notice. As you can tell, it is wise to consult with your attorney before winding down any business.

 

This newsletter is a publication of Lavelle Legal Services, Ltd. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.