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socrateaser
socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33777
Experience:  Retired (mostly)
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I have a Ph.D. in finance and started helping local people

Customer Question

Will pay $100 with bonus for good, swift answer to AMISH tax problem!

I have a Ph.D. in finance and started helping local people with their taxes as a public service. I live in a community with hundreds of Amish families. Here is a tad of background. Three men sought me out because all owe the IRS $3000 to $3500 for insufficient payment of 2009 federal taxes. They are distraught. All are self employed only (SCH C of SCH F) and have no W-2 income. Each has at least six qualifying children for EIC and Additional Child tax credit; all have filed and been approved for 4029s years ago for exemption (SS 310) from paying Social Security, Medicare tax, and Self-Employment tax. They will also NEVER accept Social Security, Medicaid, or Medicare, as culturally they believe in being self-sufficient. Some years they get full EIC and Additional CHILD Tax credit; some years it is later disallowed, and the IRS requests money back---after the local preparer files a 1040X saying these credits were disallowed---for NO REASON THAT MAKES ANY SENSE TO ME! Some years the preparer only lists two dependents when each man has at least seven to ten! Some years they do NOT pay any Self Employment tax (which should be accurate), and some years they pay 50%--AGAIN, FOR NO REASON THAT MAKES ANY SENSE. All are simple men who work six, twelve-hour days every week; all are going under financially. NONE understands tax code, the tax return form at all, the request for extra money--or anything. ALL ARE TERRIFIED! Their returns are filled in by hand and mailed in by the same ill-PREPARED tax preparer. As far as I can see, the problem is caused by that preparer! Their returns were not done on a computer and not filed electronically (since that violates their culture), so the tax preparer just started over every year and forgot their classifications as 4029 exempt (I surmise). All men are married--and all of their wives have no income. In addition to the egregious mis-filing of their returns, I noticed readily that their SCH Cs and SCH Fs were not complete. As is typical of the Amish culture, much business is conducted by cash. None of the men claimed anything for contract labor since they didn't know that if they paid part-time laborers by cash they could deduct this even though they have PAID CASH receipts. They did not of course give these laborers 1099s, nor even understand what they are or that they could. Their tax preparer never asked them about this either. My question is four parts (for which I will pay $75 and a good bonus--or more if you desire and can verify the accuracy of your responses). I only need enumerated answers with simple answers--YES--allowed, or NO, or whatever. Nothing lengthy is required. I just need to know I can verify what I believe is both accurate and legal. Please only respond if you are certain. 1. a. With filed and approved 4029s for Exemption from Social Security taxes, Medicare taxes, and Self-Employment taxes, these men are entitled to a full EXEMPTION from these taxes, including Self-Employment tax. Correct? b. Then, I may assume that the 50% assessment for SE tax some years was simply a mistake? 2. Even with the 4029 exemption and only with SCH C or SCH F earned income as business profit, these men are still entitled to the EIC and Additional Child tax credit if they have the qualifying children, right? 3. I can invoke the Cohan Ruling of 1930 and use estimated figures or use cash receipts or a ledger for overlooked items on the Schedule C for contract labor and other salient and deductible expenses, correct? 4. a. I believe this cultural problem the AMISH have with taxes needs explanation. Would it be better, in your opinion, for me to write a letter explaining this and attach it with their 1040X amended returns or should they do this in their own handwriting (with a tad of coaching)? Or should it NOT be explained...I think that would be ill-advised, but... b. Since these errors and inconsistencies were of NO FAULT of their own, is it possible to go back farther than three years and do 1040Xs for these men? YES OR NO? I know the ruling says this is possible to correct errors but not to secure refunds past three years. Would this qualify for as a special circumstance? Thank you so much, sincerely. Cheryl
Submitted: 3 years ago.
Category: Tax
Expert:  socrateaser replied 3 years ago.
1. a. With filed and approved 4029s for Exemption from Social Security taxes, Medicare taxes, and Self-Employment taxes, these men are entitled to a full EXEMPTION from these taxes, including Self-Employment tax. Correct?

A: Correct -- but see my answer to #2 and #4(b), below.

b. Then, I may assume that the 50% assessment for SE tax some years was simply a mistake?

A: Correct -- but see my answer to #2, and #4(b) below.

2. Even with the 4029 exemption and only with SCH C or SCH F earned income as business profit, these men are still entitled to the EIC and Additional Child tax credit if they have the qualifying children, right?

A: This is an interesting question, that I cannot answer definitively without conducting a lot of research. The reason for this is that if the credit is issued under provisions of the Social Security Act, rather than under the IRS code, then the credit could be viewed as an implied revocation of the Form 4029 waiver, because the taxpayer may have received a Social Security benefit, rather than a credit from the Treasury. These tax credits can exceed the amount of tax paid, which means that the government is paying from a source other than the taxpayer's withholdings. Given that the additional credit may not be coming from the taxpayer, it could be coming from a Social Security source, which means that the 4029 exemption is either invalid or a misrepresentation.

3. I can invoke the Cohan Ruling of 1930 and use estimated figures or use cash receipts or a ledger for overlooked items on the Schedule C for contract labor and other salient and deductible expenses, correct?

A: The Cohan Rule can be used to substantiate deductions, except for those found in IRC 274(d).

4. a. I believe this cultural problem the AMISH have with taxes needs explanation. Would it be better, in your opinion, for me to write a letter explaining this and attach it with their 1040X amended returns or should they do this in their own handwriting (with a tad of coaching)?

A: I don't think it matters, and I don't think any explanation is required. All that's required is the 1040X and the corrected numbers. Then let the IRS send out an audit letter and then you can start explaining, if necessary. Remember, you're dealing with a first level auditor, who probably can't chew gum and walk at the same time. Give that person too much info (and especially a philosophical argument), and you will seem like a tax protester.

b. Since these errors and inconsistencies were of NO FAULT of their own, is it possible to go back farther than three years and do 1040Xs for these men? YES OR NO?

A: No. Only one form 4029 is required, because the exemption continues until revoked. If the tax preparer was filing a form each year, this could potentially have triggered an inconsistency, for example, if the forms stated different starting dates for the exemption.

I know the ruling says this is possible to correct errors but not to secure refunds past three years. Would this qualify for as a special circumstance?

A: I don't think you can make a claim for a refund on the expenses, beyond the three year statute of limitations in IRC 6511(a). There are a couple of self-employment tax exceptions in 6511, but they don't have any application to your described circumstances.

Hope this helps.

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socrateaser, Lawyer
Category: Tax
Satisfied Customers: 33777
Experience: Retired (mostly)
socrateaser and 4 other Tax Specialists are ready to help you
Customer: replied 3 years ago.
Thanks so much. Excellent and thorough answers to very complex issue. I am going wiht the full exemption then and believe that these men are due the full EIC and Additional Child tax credit. Any idea why in 2009 all three had 50% only exemptions for SE tax? Makes no sense to me.

How do I give you the bonus for the full $100?

Thanks again--outstanding! I especially liked the part about the initial-level auditors. I know what you mean. I surived a FULL FIELD AUDIT and they GOT nothing from me but 1000 pages of substantive data. They had never even heard of the Cohan Ruling. It was a cake walk! GRIN!

Cheryl
Expert:  socrateaser replied 3 years ago.
You can just add a bonus, if you wish.

Note: re Cohan...deductions that are clearly susceptible to misrepresentation will be challenged (meals, entertainment, travel, mileage, etc.). So, be careful how far you stretch this rule.

Happy 4th.
Customer: replied 3 years ago.
Did you get paid? I had decided to close my acount and then found you. I think the transmissions may have gotten crossed in cyberspace. Please let me know. I will check again now.

Cheryl
Expert:  socrateaser replied 3 years ago.
Yes, I was paid -- and I appreciate your contribution. Let me know if I can be of any further service.

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