California adding "Elite TAX Enforcement Unit
With California's huge state deficit, it was a "no-brainer" that they would start going after additional tax money anywhere they thought they could find it. This new bill is now in the Cal state legislature ...
Instead of California just deciding to hire more auditors at the state tax dep't, this bill would authorize the "contracting" of independent tax attorneys to presumably seek out businesses and individuals who have a high probability of not reporting or underreporting taxable income. Since we're talking about bringing private law firms into the tax collection procedure as "bounty hunters", it's highly likely that these law firms will be paid, at least in part, based on a percentage of the amount of nonreported or underreported taxable income that they identify (the bill is notably non-specific as to how the private attorneys will actually be paid). This makes dance clubs a "ripe" target, as well as the dancers which club records show work(ed) there.
I'm extremely glad that I listened to my accountant and did not dance in California last year!
ARe: California adding "Elite TAX Enforcement
Any CPA who gets paid on percentages of tax refunds or dollar amounts found in audits will have their license stripped by AICPA and there are actually state laws that outlaw this as well.
That's not to say that Melonie is overstating the case but it is not a reason to be scared. If your accountant has done their job than things will be okay.
In the past few years the IRS (I assume state tax agencys too) have added several filters to audit questionable returns. What most people don't realize is that when these filters are retroactive and they immediately start with returns filed over the past 3 years (in some cases further). If you file a fraudulent return it may be caught immediately or it may take 3 years or more. The bigger the cheat the more likely they'll catch you - it's just a matter of time.
Re: California adding "Elite TAX Enforcement
Well, as is obvious if you checked out the text of the California bill, under this new program the tax attorneys will be working for the STATE! It will certainly be argued that AICPA standards and other laws governing the ethics of professional/client relationships do not necessarily apply (there was no mention of CPA's in the bill, for that matter - maybe your AICPA restrictions on percentage payments are the reason CPA's weren't included). There is certainly ample precedent for attorneys to be paid a percentage of the money resulting from their litigation - this is the basis for all personal injury lawsuits, product liability lawsuits etc. All the tax attorneys need do is research records of businesses and relevant individuals, prepare a brief with details of tax underpayments, and turn it over to the Franchise Tax Board for further action - who will in turn send a copy to the IRS.
I totally agree with you that the most dangerous aspect of any tax controversy is the retroactive aspect. In the case of California dancers, it is conceivable that the tax situation might be resolved in the club's favor a year from now, with California dancers being forced to file using "statutory employee" status as is called for under the currently ignored 2001 California law. As discussed elsewhere, the tax consequences of filing using "independent contractor" status versus "statutory employee" status are very significant because, among other things, it affects a dancer's ability to exclude the "house's share" of private dances, champagne room visits etc. as well as tipouts and stage fees, from her taxable income ("statutory employees" are limited to 2% of gross income for these sort of deductions). With 3 year retroactivity, it's not inconceivable that some of the better earning California dancers might receive tax bills next year approaching $100,000 for underpayment of taxes this year and last year as well as next year if the definition of just exactly what constitutes her taxable income changes and if taxes are now assessed on all of the money the dancer has paid to the club in the form of tipouts and stage fees during the previous three years!
Even at a conservative $50 a night total for stage fees and tipouts which an average dancer might pay, over 750 nights in three years you're talking about an extra $37,500 in money which could be considered additional unreported taxable income instead of a business expense. This might translate into $15,000 in new federal and state taxes on this previously unreported income, plus perhaps another $15,000 inadditional taxes due by increasing the tax bracket which applies to her previously reported income (with taxes already paid based on a much lower tax bracket), plus additional penalties for failure to pay appropriate amounts of estimated tax over those three years.