No longer do you need to move your assets offshore in order to protect your yourself from an ex-spouse, creditor or a potential litigant. Nevada gets the top rating according to Forbes.com for being the most debtor-friendly state and for having the most trusts of all 50 states.

HOW THEY RANKED—Forbes.com ranked the 12 states that allow domestic asset protection trusts on how much protection they offer the people who owe money to others:
» Nevada A+
» Alaska A
» Delaware A-
» South Dakota A-
» Rhode Island B
» Tennessee B
» New Hampshire B-
» Utah C
» Wyoming C
» Missouri C-
» Oklahoma C-
» Colorado D

To see the full article on Forbes. com click here.

U.S. Chamber Launches Advertising Campaign: ‘Jobs, Not Lawsuits’

LOS ANGELES, CA—A new national survey finds that California’s lawsuit climate is among the worst in the country and on par with states including Alabama, Louisiana, and West Virginia. Among local jurisdictions, Los Angeles’ courts were mentioned as the second worst in the nation for legal fairness after Chicago, Illinois. San Francisco’s courts were named as the sixth worst.

The findings from Lawsuit Climate 2010: Ranking the States were released today by the U.S. Chamber Institute for Legal Reform (ILR). The survey, conducted by Harris Interactive by telephone and online from October 2009 to January 2010, ranks the worst five states for legal fairness as: California (46th), Alabama (47th), Mississippi (48th), Louisiana (49th), and West Virginia (50th). Two-thirds, or 67%, of the 1,482 corporate lawyers contacted for the survey say a state’s lawsuit environment is likely to impact important business decisions at their company, such as where to locate or expand their business—up 10% from just three years ago.

“California needs more jobs, not more lawsuits,” said Lisa A. Rickard, president of the U.S. Chamber Institute for Legal Reform. “With one of the highest unemployment rates in the country, California’s legal climate is discouraging new businesses and new jobs at a time when the state needs them most.”

This year’s survey is the eighth such ranking of the 50 state lawsuit climates since 2002.  Respondents—general counsels and senior attorneys or executives in companies with annual revenues of at least $100 million—give California especially low rankings for its treatment of class action lawsuits, tort or personal injury lawsuits, damages, and contract litigation.

Some facts about California’s legal system account for its low ranking.  For example:

• More than four class action lawsuits are filed every day that California superior courts are in session.  California judges (especially in Los Angeles and San Francisco) are willing to certify class actions that are not certifiable in other states.
• In recent years, out-of-state law firms have opened offices in California to file asbestos claims that would have been barred in their home states.

Rickard said that the state’s legal climate affects all businesses, but small businesses can be particularly hard hit. “Most small businesses operate on small profit margins.  In an economic downturn, a single lawsuit against a small business may mean the difference between survival and closing its doors,” said Rickard.

ILR also announced a new national advertising campaign called “Jobs Not Lawsuits,” which will include movie trailers to be shown on more than 250 movie screens in California this spring.  It will be the first time that movie trailers have been used for issue advertising in California.

The two-minute trailers feature the stories of California small businesses that were the subject of costly lawsuits that had a material impact on their companies. In one story, an after-school youth basketball facility in Sacramento called Basketball Town was forced to close after the company’s finances were drained by legal bills from fighting a lawsuit.

“Los Angeles is the movie capital of the world and the silver screen is the perfect place to tell these true stories of businesses that have been victimized by a dysfunctional legal system,” Rickard said. “We want people to see the real life consequences of these lawsuits.”

ILR seeks to promote civil justice reform through legislative, political, judicial, and educational activities at the national, state, and local levels.

The U.S. Chamber of Commerce is the world’s largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations.

An irrevocable trust is lawsuit proof because you do not technically own the assets of the trust, even if you may control the assets through underlying entities. In a trust, the “irrevocability” goes to the fact that those you name as beneficiaries must remain as beneficiaries. You cannot change that.  Therefore you have given away that particular asset that you have placed in the trust.  If you are no longer the owner, then your lawsuit adversary can not touch it.  On the other hand, if you had the ability to change the beneficiaries of the trust, the Court would simply tell you to change the trust’s beneficiary to that of your lawsuit adversary. (That is one of the reasons why revocable or “living trusts” are not lawsuit proof.)

Entrepreneurs and business owners crave lawsuit protection and understand its wisdom, but are also reluctant to give up control.   These same entrepreneurs (that’s you) also want some security that they may have use of those assets while they are still living. This is why nearly all estate planning attorneys and certainly all asset protection law attorneys will couple the irrevocable trust with an underlying business entity, such as a family limited partnership, LLC or corporation.  Choosing which entity is best will depend on the type of asset the entity is holding, your circumstances and your myriad of objectives.  The purpose of coupling the underlying business entity with the lawsuit protection trust is to allow the original owner to have as much direct control as they desire over the assets until their death.  The person that makes the decisions on how to invest the assets, when to sell the assets and so forth, is the person who runs and manages the underlying business entities.

As Rockefeller, who used such planning stated, his key to success was “to own nothing and control everything”. As an entrepreneur, this should be your same goal.  Such planning will provide you with increased privacy, enhanced estate and succession planning and lawsuit protection over your current wealth, your retirement security, and those assets you wish to pass down to your children and grandchildren.

With proper planning, all of your objectives can be met: you can gain true lawsuit protection, without depending on individuals outside your personal estate planning, while at the same time maintaining control over the assets.

One of the expert speakers at Laughlin’s 3-Day seminars is Sandy Botkin. Sandy is both an attorney and a CPA and thus brings a unique perspective on business and taxes to his audiences. He is a friend to small businesses all over the country, providing easy to understand access to topics that owners need to be up-to-speed on. Sandy takes important, but typically dull tax information and makes it understandable and interesting. So, as we come to the close of the 2009 tax season, here are some of Sandy’s insights on taxes, scams and how to stay out of hot water. – AY

Tax Scams - By Sandy Botkin, CPA , Attorney

“The money is the same, whether you earn it or scam it.” – Bobby Heenan
“Who said crime doesn’t pay? Look at how much Madoff made.” – Anonymous

There are an ever increasing number of scams being investigated by the IRS. Some of these scams are so devious and clever that even the smartest of folks can be fooled. Every year IRS publishes a list of the “dirty dozen” tax scams. Following are some of the latest:

1. Phishing scams: Folks are receiving letters or emails with the IRS / Treasury department logo informing them that they may be owed a refund. In order to obtain this refund, they have to prove that they are the right person by confirming certain personal information such as social security number, mother’s maiden name, address etc. To date, IRS has identified as many as 1500 different phishing scams.

Sandy’s Elaboration: IRS will NEVER call you or write you asking for this type of personal information. You should never provide it to anyone by phone, letter or email. If you get an email requesting this type of information allegedly from the IRS, forward the email to phishing@irs.gov.

2. Economic Stimulus Scams: Some scam artists are trying to trick individuals into revealing personal financial information that can be used to access their financial accounts by making promises relating to the economic stimulus payment, often called a “rebate.” To obtain the payment, eligible individuals in most cases will not have to do anything more than file a federal tax return. But some criminals posing as IRS representatives are trying to trick taxpayers into revealing their personal financial information by falsely telling them they must provide information to get a payment. Sometimes, these criminals might ask for bank account information for the IRS to directly deposit the rebates, which then results in the thieves cleaning out the bank account.

Sandy’s Elaboration: IRS will NEVER ask for this type of information regarding your social security number or bank account information.

3. Frivolous arguments: There are a host of frivolous arguments being made by promoters of scams that purport to reduce or even eliminate most tax liability. Some of the many fallacious arguments are:

• “Taxes are unconstitutional or not properly codified by Congress”
• Folks are promised a non-existent “mariner’s tax deduction”
• “Tax filing is voluntary and thus, you don’t have to pay anything”
• “Taxes are only required for federal employees”
• “Wages, tips and other service income is not taxable”,

You can get a complete list of these fraudulent arguments by going to: http://www.irs.gov/taxpros/article/0,,id=159932,00.html This is found in IRS notice 2007-61.

Sandy’s Elaboration: None of these frivolous arguments have won in court. In fact, the judges are so tired of hearing them that they are asserting the government’s legal fees against those that make these arguments in court.

4. Fuel Credit Scam: Sometimes there is some truth behind the scam. Farmers are allowed a fuel tax credit for off-highway business purposes. Unfortunately, some individuals are claiming the tax credit for nontaxable uses of fuel when their occupation or income level makes the claim unreasonable. Fraud involving the fuel tax credit was recently added to the list of frivolous tax claims, potentially subjecting those who improperly claim the credit to a $5,000 penalty.

5. Hiding income offshore: To my knowledge, this scam has been around for years but is being aggressively investigated by the IRS. Promoters are promising that by placing assets offshore in foreign banks or tax havens, taxpayers would avoid all taxes and, at the least, not have their income discoverable by the IRS on these accounts. Interestingly, some Swiss banks helped promote this scam to the detriment of those involved. As an offshoot of this, some promoters set up foreign credit cards and promised that all income earned is paid to the credit card. This way, they promote that there will be no tax and that the IRS will never find out.

Sandy’s Elaboration: US citizens are taxed on their world-wide income. Setting up foreign bank accounts will NOT shield them from taxation. Furthermore, on the federal tax return there is a question specifically asking about foreign accounts. Now a taxpayer may have foreign accounts for many reasons; however, if a taxpayer doesn’t disclose these accounts, they are subject tocriminal fraud penalties. Moreover, IRS is aggressively investigating these accounts and has cut deals with most foreign jurisdictions.

6. Abusive retirement scams: The IRS continues to uncover abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers are using to avoid the limitations on contributions to Roth IRAs. Taxpayers should be wary of advisers who encourage them to shift appreciated assets into Roth IRAs or companies owned by their Roth IRAs at less than fair market value. In one variation of the scheme, a promoter has the taxpayer move a highly appreciated asset into a Roth IRA at cost value, which is below annual contribution limits even though the fair market value far exceeds the amount allowed.

Sandy’s Elaboration: Contributions to retirement plans must be made in cash and NOT with appreciated assets. Also, there are limitations to yearly contributions, which must not be exceeded.

7. Claiming zero wages: Some taxpayers try to file phony wage or income related information such as Form 4852 which is a substituted W-2 or amended form 1099 (for income, dividends and royalties) in order to improperly reduce their taxes to zero. This type of behavior is being tracked by the IRS and is aggressively being prosecuted. Don’t get fooled into thinking that this scam will work.

8. Filing a false claim for refund: Usually taxpayers file form 843 to abate previously assessed taxes giving some fictitious argument. Even worse, many individuals who have tried this haven’t even previously filed a federal tax return.

9. Return preparer tax fraud: Perhaps this has been an ongoing problem for years which is why I have seen a dramatic increase in enforcement by the IRS against fraudulent tax preparers. Thirty years ago, it was rare if more than two or three tax preparers per week were barred from preparing taxes or representing taxpayers. Today, I have seen as many as thirty tax preparers per week barred from preparing taxes. The range of what these accountants are doing is quite varied. Some fraudulently pumped up their credentials claiming that they were CPAs or lawyers, which wasn’t the case. Some improperly gave the fuel tax credit noted above. Many preparers inflated taxpayer’s deductions in order to generate a lower tax liability. As an example, there was one accountant who claimed thousands more in charitable deductions than his client donated.

Sandy’s Elaboration: IRS investigates these fraudulent accountants and subsequently audits all of their clients. You should certainly look for an aggressive accountant but also one who is honest!

10. Disguised corporate ownership: Some folks are forming entities in some states in order to hide the owners who are conducting a wide array of illegal activities such as hiding income, money laundering, etc. IRS is working with state authorities to investigate these activities.

Sandy’s Elaboration: No entity can guarantee complete shielding from the IRS. If IRS wants to investigate an entity, they can get the names of the owners, officers and any other pertinent information. There are some states, such as Nevada, that promise increased privacy. Even corporations in these states can easily be investigated by the IRS. Don’t be fooled into thinking that any entity can be used to hide income from the IRS.

11. Misuse of trusts: Many promoters have promised taxpayers that certain trusts can be set up to minimize taxes by deducting a wide array of personal expenses or avoiding estate taxes. While there is a kernel of truth to this, especially regarding estate taxes, these trusts must be set up correctly. Moreover, they usually do not allow for deduction of personal expenses. It is vital to seek a good, qualified tax attorney to verify that these trusts do accomplish what was promised and are set up correctly. Finally, putting property in trust where you can control the assets or receive distributions can result in you, the grantor, being taxed on all of the trust income!

12. Abuse of charitable contributions and organizations: Many promoters promise to maintain control over donated property while taking a deduction. Examples of phony charitable deductions involve taxpayers who claim tuition payments as charitable contributions. They also claim that if you own property over a year, you can donate property and get a deduction for the fair market value of the item. Promoters have set up scams where they sell paintings, antiques etc. to taxpayers promising that after a year they will get these taxpayers an appraised value of many times the initial cost. When the item is donated a year later, the taxpayer uses the inflated appraised value to receive a higher charitable deduction. These overvaluation scams are fairly rampant.

13. Slavery tax credit: Although this isn’t on this year’s dirty dozen tax scams per se, IRS has noticed that this is a fairly widespread “frivolous argument.” Promoters promise African Americans a special tax credit as reparation for slavery and oppressive treatment. This is absolutely false and no one should be fooled by this. Each year, IRS publishes a new list of their “dirty dozen” tax scams. You should be aware of these widespread scams. They can cost you large penalties and may even subject you to criminal penalties if  you follow their advice. Avoiding these scams and running from people who promote them will make your life less taxing!

Sandy Botkin CPA, Attorney is a former trainer of IRS attorneys. He is president of the Tax Reduction Institute and lectures all over North America on tax planning. He has two bestselling books, “Lower Your Taxes: Big Time” and “Real Estate Tax Secrets of the Rich.” You can get these books in most book stores or by going to his web site at www.taxreductioninstititute.com

As business owners, you know that March 15th is right around the corner. Lots of us had a bumpy 2009 and may not be too worried about tax liabilities. That is the good news. The less than good news is the fact that the IRS has announced a step up in the percentage of audits that they will be conducting this year.  There are a number of factors that can put you at higher risk of being audited. None of which is more of a red flag than being a small business owner. According to Investopedia,  just being a small business puts you at the top of the target list. Do any of these apply to you?

Partnership/Trust/Tax Shelter Risk
If you own shares in a limited partnership, control a trust or partake in any other tax shelter investments, you are more apt to be audited. While there may be no way to avoid such an audit, individuals that have a stake in such an entity should be aware that they have a target on their backs. They should also take even greater care to document deductions, donations and income.

Small Business Ownership
Small business owners are an easy target – particularly those with cash businesses. Bars, restaurants, car washes and hair salons are exceptionally big targets, not only because they deal in so much cash, but also because there is so much temptation to under-report income and tips earned.

Home Office Deductions
Be careful with home office deductions. Excessive or unwarranted deductions can raise red flags. In addition, large deductions in proportion to your income can raise the ire of the IRS as well. For example, if you earned $50,000 as an accountant (operating from home), home-office related deductions totaling $30,000 will raise more than a few eyebrows. Trying to write off the value of a new bedroom set as office equipment could also draw unwanted attention.*

At Laughlin Associates, we work with thousands of business owners each year to help keep them on the right side of audit troubles.  Still, we hear horror stories all the time from people who didn’t take their business documentation seriously.  It is not enough to just use a credit card statement as your substantiation. You must document who, what, why, and how much. This can easily be accomplished if you know what to do and use some simple tools.  For more on this you can go to our resource page. Even as the President of The United States expounds on the virtues of owning a business and how small business owners create the vast majority of jobs in this country, the Tax Man is planning a visit to many of those business owners’ doors. The government must collect every nickel it can to try to stem the hemorrhaging caused by the recent bailout spending and other entitlement programs. We small business owners will be targets, sure, but we will also continue to find new and creative ways to make our businesses profitable.  We will invent, manufacture, sell, consult and barter our way through whatever hurdles are placed before us. We have always been that way. We always will be.  Just make sure that you dot your “I’s” and cross your “T’s” along the way.You can read the full Investopedia article here.