The biggest fear of most Americans is a tax audit. If the IRS audits you, it is time to retain an experienced tax lawyer. Audits are undeniably scary things. That being said, not all audits are equal. The IRS, in fact, uses three different types of tax audits. The tax attorney is the person who can help you now.

Correspondence tax audits are the tool used most by them. In these audits, if it lets you know there is a problem and asks for more money or information. If they are asking for information that makes you nervous, go see a tax lawyer. If they are asking for money, determine whether you are comfortable paying it or want to fight it.

Office audits are a step up from correspondence audits. You are asked to come to an office with documents and/or information. It is highly recommended that you do not go without an experienced tax audit lawyer. If you do, the agent may try to get you to say incriminating statements or provide information for which they have no right to get. A good tax audit lawyer will put a stop to such tactics.

Field audits are the stuff of legend. In a field audit, they come to you. An agent will appear at your office or home and start rifling documents. This should scare the “you know what” out of you. In such a situation, you must get a tax audit lawyer. They will often sit down with the agent as the audit occurs. This is particularly effective since the lawyer can effectively push the agent in directions that are helpful to you while avoiding less comfortable areas.

When the IRS comes calling, it is extremely important to take the situation seriously. They aren’t auditing you unless the agency believes you are playing games with your taxes. The agent’s mindset will not be whether you have done something wrong. Instead, it will be how to find proof you’ve done it. This mindset often leads to further tax assessments and even jail time for tax evasion.

If they contact you regarding an audit, you could be looking at years of stress. Once you make the smart choice of retaining a tax audit lawyer, you need to pick the right one.

You want to select a tax audit lawyer who does nothing but fight for you. He or she should have at least seven years of experience doing this and probably more. Again, you don’t want an inexperienced lawyer to be learning while defending you. The definition of wisdom is learning from your mistakes. You want a lawyer who already has wisdom, not one who will gain it on your case.

On March 24, 2009, the Department of Labor (“DOL”) issued a statement making clear that employers, including Hawaii employers, can expect an increase in DOL audits.  The statement, issued through Secretary of Labor, Hilda Solis, can be found at the DOL’s website, http://www.dol.gov/opa/media/press/esa/esa20090324.htm.

Among other things, Ms. Solis stated that she is “committed to ensuring that every worker is paid at least the minimum wage, that those who work overtime are properly compensated, that child labor laws are strictly enforced and that every worker is provided a safe and healthful environment.”

In addition:

The department’s Wage and Hour Division has already begun the process of adding 150 new investigators to its field offices to refocus the agency on these enforcement responsibilities. In addition, under the American Recovery and Reinvestment Act, the agency will hire 100 investigators to ensure that contractors on stimulus projects are in compliance with the applicable laws. The addition of these 250 new field investigators, a staff increase of more than a third, will reinvigorate the work of this important agency, which has suffered a loss of experienced personnel over the last several years.

Finally, Ms. Solis stated that:  “I am dedicated to ensuring compliance with federal labor laws to both strengthen our economy and protect workers in this country.”

Given the expressed intent of DOL, it is critical that Hawaii employers take the necessary steps, now, to both reduce the risk of potential liability connected to a possible audit AND to prepare for audit itself. 

Thus, Hawaii employers should at a minimum take the following steps prior to and during the audit:

After the audit is completed, it is critical that the Company not repeat any errors in policies or procedures identified by DOL.  Accordingly, any necessary revisions should be made promptly with assistance of counsel.

Roman Amaguin, Esq.; romanamaguin@yahoo.com; www.amaguinlaw.com

Roman Amaguin, Esq. is a Hawaii lawyer specializing in employment law, labor law, and civil litigation.

For U.S. Persons with investment income, private placement life insurance provides for compliant, tax-free compounded earnings.A private placement insurance policy is variable in nature, which allows the insurance company to invest the majority of the premium(s) in a legally separate, segregated account to be managed by either an investment manager of the client’s choosing or the insurance company itself. There are no guarantees when it comes to the investment performance (as it varies, so does the death benefit but with a fixed minimum).The income tax benefits are:1. Assets inside a life insurance policy grow and compound income tax free.2. Death benefit paid income tax free.Domestically in the U.S., investors have traditionally used the tax benefits of variable life insurance policies to invest in mutual funds.  In contrast, international private placement life insurance policies allow users to invest in a wider range of investments including hedge funds, private equity, derivatives, and real estate investment trusts (there are functionally no restrictions on the types of investments that can be held and managed inside the policy).

Other benefits include the following:

1. Short-term capital gains (41% Federal/California income tax): exempt from income tax.

2. Bond interest (taxed at 41% ordinary income rates Federal/California):  exempt from income tax.

3. Policies in certain jurisdictions (e.g., Cayman Islands): exempt from creditor attachment.

4. IRS audit risks are minimized since assets held under a qualifying life insurance policy are neither subject to income tax, nor is there any required income tax reporting (under IRC §72(e)(5)).  In addition to the substantive tax and reporting benefits, for audit purposes there would be no presumed IRS tax avoidance, due to the fact that life insurance has been granted an “angel exception” (i.e., is an IRS approved transaction) (IRS Revenue Procedure 2004-65, 2004-66, 2004-67, 2004-68).

5. Policy lifetime withdrawals may be tax-free and not subject to tax reporting (as either a return of premium/basis or a loan). The Modified Endowment Contract (“MEC”) rules may or may not apply depending on policy design.