Navigating the California Employee vs Independent Contractor Maze

2021-10-18 by Eva Rosenberg

Subtitle: Playing 10 Questions with California’s Employment Development Department about How to Onboard Former Freelancers

 

Since the California Legislature passed Assembly Bill 5 (AB5) in September of 2019, the rules regard who is and who is not an employee in this state have gotten ever more stringent – and confusing.

Why confusing? Because there was a very loud roar from several industries whose workers’ statuses were so severely compromised by this Bill.

I remember being at the 2019 CSEA State Tax Agency Liaison Meeting (STALM) in Sacramento after the bill was signed and one of the big concerns was truckers. Many of them work for the same company all year round (one “employer”) but own their own rigs and have always filed their tax returns using a Schedule C. Suddenly, if they had to be employees, there goes their federal deduction for the depreciation on the very expensive rig (costs approach $100,000 for some), the interest or lease fees, the fuel costs and all the other, legitimate out-of-pocket expenses they have in order to do their “jobs.”

They were not the only industry with legitimate issues. Nearly a year after AB5 was passed, Governor Newsome signed AB2257 on September 4, 2020. This gave us  an entire list of industries and employees that are now exempt from the rules of AB5.

But we weren’t done yet. The entire industry of gig transportation workers (the original target for AB5) did more than just protest. They floated a 2020 ballot proposition to exempt gig workers from AB5. Proposition 22 passed in the November election. So now, the main workers for whom AB5 was written are exempt from AB5 by law. Granted, Prop 22 came with some conditions requiring Lyft, Uber, etc. to provide employee-style benefits and certain work-hour restrictions.

Still confused?

That brings to mind the exit line from the parody television series, Soap. “”These questions—and many others—will be answered in the next episode of…Soap.”

more->

Well, I have some bad news for you. I will not be clearing up the entire situation. But…I did have some important questions that really needed to be clarified by our California Employment Development Department (EDD). They were kind enough to bring an entire team of their key staff to this year’s CSEA STALM virtual meeting.  Some of my questions were covered during the meeting. Others were answered afterwards by one the EDD’s team of Taxpayer Advocates.

OK, let’s play 10 Questions with the dedicated team at California’s Employment Development Department:

 

Q1.  All businesses that pay workers must use the ABC test that will probably define their long-term freelancers as employees. Does California have any law or amnesty provision similar to the IRS’ Voluntary Classification Settlement Program (VCSP)? (Note: In very simple terms, the IRS program works with companies that had consistently been issuing a Form 1099 to all affected freelancers. They can pay 10% of one year’s payroll taxes and avoid being audited for all the earlier open years.)

  1. California does not have a program like this. It would require the state legislature to pass laws to make this possible. Perhaps CSEA should lobby our legislature for an amnesty program for AB5.


 

Q2. Since there is no VCSP-like program, what are the consequences (or protections) for those employers who sign up with the EDD for the first time to comply with the new laws?

  1. A. There are no specific protections. But newly registered employers are not apt to face automatic audits for all the earlier years when they are not in compliance. In other words, the EDD will not get a specific alert that this new employer has been in business for 20 years and has just now registered as an employer. When filling in the DE1 registration form, the employer should simply enter the current year in box D as the first payroll date.


Q3. But wait! The statute of limitations to assess payroll taxes is open for all years in which the employer had employees but didn’t file payroll tax returns. Doesn’t that still leave the employers vulnerable for all the years when they did not treat their workers as employees?
  1. A. Yes, it does. But EDD doesn’t have the time or staff to simply audit everyone. So they will only audit a business if there is a valid reason. Some valid reasons include:


  • Workers filing unemployment or disability claims without ever having been on payroll
  • Someone submits an Audit Lead Referral (same form as worker classification request – Form DE230)
  • Public informants in general
  • On Site inspections
  • Forms 1099 NEC or MISC
  • Random industry surveys


There are multi-agency strike force teams that go out and do inspections  of certain kinds of businesses. For instance, restaurants are notorious for not reporting employees and/or paying in cash.

If EDD does perform an audit and the business has not put the proper workers on payroll, then that may result in the audit going back for several years.

Q4. In the event of an EDD audit, how many years is EDD most likely going to examine?

  1. A. Typically EDD starts with the assumption of 3 years. If payroll tax returns have not been filed, and this was due to negligence or intentional disregard, they may go back further than that.


On the other hand, if a company has been filing payroll tax returns all along but excluded some of their workers (by issuing 1099s to them), the EDD may only look back for 3 years – unless there is evidence of fraud or intent to evade taxes.

Q5. Naturally, if the audit determines that they should have been paying their workers as employees, there are likely to be penalties. What can employers expect?

  1. There are a variety of different options open to the EDD. But, in some cases, penalties are mandatory. For instance, if the employer never registered with EDD and didn’t file payroll tax returns, there is a mandatory penalty of 15% of the assessed taxes (Unemployment Code Section 1126). If an employer was registered, but misclassified some of their employees, the 15% penalty is not mandatory and is applied if the examiner determines that the failure was due to negligence or intentional disregard.


The worst penalties tend to be generated for willful non-compliance involving 
fraud and intent to evade. Those could amount to 50%. If they failed to provide information returns in the past, then there is the potential for another 50% penalty. In other words, penalties can end up being 100% of the taxes owed. 

A common example is the restaurant industry, mentioned above. They may be hiding workers and demonstrate a clear intent to evade taxes. These are the kinds of cases where fraud penalties can be applied.

For a list of all the penalty codes – here’s a chart – https://www.edd.ca.gov/pdf_pub_ctr/de231ep.pdf

Q6. Speaking of audits of newly registered employers, are there extra records or precautions they must take to avoid problems going forward (beyond normal recordkeeping and defining employee functions)?

  1. A. These employers should make sure they have the 1099 records for the past years.
    They should be prepared to provide them in the event of an audit. If these employers are audited, encourage them to cooperate with the examiners. Penalties start to build when they try to hide the truths.  


Q7. This discussion about hiding employees, paying them under the table and so on, brought up a common problem in our state. Illegal aliens as employees. Setting aside all the other legal problems with this kind of hire, let’s look at what employers can do if they do want to put illegal aliens on their payroll. The EDD has a way to handle this, right? What can an employer do to ensure the withholding is credited to the correct worker?
  1. According to the EDD’s Tax Processing and Accounting Division regarding the proper completion of the Quarterly Contribution Return and Report of Wages(Continuation) (DE 9C) – when an employee does not have an SSN or ITIN. Employers enter the employee’s name and put all zero’s in the SSN field on the DE 9C.  Do this for each quarter, showing the name the same way, and the EDD will have a record of the data on each employee, by name.
    If the employee later provides either the SSN or ITIN at a future date, the employer should submit a Form DE 9ADJ correcting the previously reported information.


Q8. That brings up the question of illegal aliens applying for EDD benefits. Is that even possible?
  1. Yes, it is. If the employer has been filing payroll tax returns that include these workers, they are eligible for disability benefits if they become ill or unable to work. However, they are not eligible to collect unemployment benefits.


 

Q9. What should employers do when a worker (often a friend or family member) begs to be treated as an independent contractor instead of as an employee? Is the employer still liable for penalties when they were not the ones to initiate this employment status.

  1. Absolutely! Advise your clients to protect themselves first – to not succumb to these requests. The employer will be totally exposed for the payroll taxes, penalties and workers compensation – and any potential lawsuits when the employee reports the employer for not being in compliance with the law.


Q10. There is so much to know. Where can employers get all the information they need to know about how to start doing payroll for the first time – or how to do a better job?
  1. EDD agrees that employers need to be educated. They offer employment status tax seminars online. They are taught regularly – and people can ask questions. This page gives employers choices of several topics. https://seminars.edd.ca.gov/payroll_tax_seminars


 

Frankly, I was pleasantly surprised about the information regarding illegal aliens. Perhaps the IRS has a similar program? Who knows? The question has been posed to them. When they come back with an answer, I will update this report.

In the meantime, if you are and employer, and are still confused – work with an experienced Enrolled Agent or CPA to make sure you get it right.

 

 


 

Resources

Unemployment Code Section 1126  https://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?lawCode=GOV§ionNum=1126

EDD AB 5 – Employment Status
https://edd.ca.gov/Payroll_Taxes/ab-5.htm

CA Labor and Workforce Development Agency

https://www.labor.ca.gov/employmentstatus/

 EDD -  DE 40 tax audit guidelines
https://www.edd.ca.gov/pdf_pub_ctr/de40.pdf

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TaxMama’s® TaxQuips Ready or Not – Time is Up!

2021-10-14 by Eva Rosenberg

It’s TaxQuips time from TaxMama.com.
Today TaxMama® wants talk to you about the final income filing deadline for this year’s tax returns.

 

 

 

     

 

 

Dear Family,

Every year we get to this point in time. Getting down to the wire.

In private social media forums, tax professionals are posting notes and screams of frustration, dealing with clients showing up at the last minute with surprise income, off-handedly mentioning – Oh, I sold that property last year, or mention of an LLC they opened that they forgot to bring up earlier. Or still not providing the missing documents or expense summaries the tax pros have been requesting for months. And then there are those charming folks who think it’s fun to walk into their tax pro’s office two days before the final filing deadline, all ready to sit down and get the tax return prepared on the spot.  (I have a friend who thinks that’s cute – he’s not a client, though.)

Let’s face a few realities, my friends.

This has been a tremendously stressful year – on so many levels. Aside from the COVID dangers, Congress has been passing laws in 2020 and 2021 that they expect taxpayers, tax professionals and the IRS to understand and implement – some of the laws being retroactive for the last year or two. In addition to tax compliance and enforcement, Congress has tasked the IRS with issuing several series of payments to taxpayers – and the IRS is trying so hard to make the information easier for taxpayers to find that they simply don’t have time to answer all the questions people have.

And with everyone working from home, the IRS is totally behind on opening paper mail, including payments people have made – so the IRS computers are spewing out past due notices to people who have already paid their taxes.

This year is a total mess.  But that doesn’t mean you’re off the hook about meeting this October 15th filing deadline. (Unless you live in a disaster area. Then you still have more time.)

My message to you?

If you haven’t already filed your tax return, finish up and do it IMMEDIATELY!
Today. File it electronically and keep an eye out for rejections, so you or your tax pro can fix the problem quickly.

But, you don’t have all the information?

Too darn bad! You have had over 9 months to gather the data. If you don’t already have it all – make your best estimate of the missing income or expenses. Include a disclosure statement, Form 8275, to explain why you have estimated amounts – and that you will amend your tax return as soon as you get the correct data.

Why should you file a tax return with estimates, instead of waiting until you get all the numbers?

  • Your extension will run out on October 15th. The non-filing penalty is 5% per month for up to 5 months. That’s 25%. Does that start in October or April? I believe it starts in October.
    • But the late payment penalty of ½% per month started in April, if you didn’t pay all the taxes you expected to owe for last year at the time you filed the extension. (So you’re already up to 7 months of late payment penalties plus interest.)


  • In order to claim certain tax breaks and credits, you must file the tax return on time. They don’t work on late returns.
  • Folks who miss this filing deadline often get stymied about what to do in the following year – and it starts a pattern of non-filing for the next few years until they get things sorted out. This ends up becoming very, very expensive.


Oh yeah, There’s More Due tomorrow

Yup. In addition to the final filing deadline for the prior year, you have the 3rd quarter estimated tax payment due for the current year.  

Paying this is especially important if you find yourself owing more than you can pay for last year and/or earlier years. To get the IRS to agree to an Offer in Compromise or Installment Agreement, or any other breaks for past due balances, you must be current on this year’s withholding or estimated taxes. So, catch up – and pay online only, to ensure that your payment is credited to your taxpayer account – be sure to put the correct year on the payment – https://www.irs.gov/payments .  Do not send paper checks – they are taking too long to post to taxpayer’s accounts.

This is also a good time to schedule a meeting to review your tax situation for the past year. Your tax pro is going to want a break, desperately. So schedule your meeting for next month.

We know there will be more legislation coming from Congress this year. And we already know it’s going change a great many issues in your tax life – probably retroactive to the beginning of this year – after it’s (nearly) too late to change what you’ve done. So expect next year to be a challenge as well.

I will keep you updated once they actually pass the legislation – hopefully before the end of December!

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

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TaxMama’s® TaxQuips IRS Unemployment Refunds Alert

2021-08-31 by Eva Rosenberg

It’s TaxQuips time from TaxMama.com®.
Today TaxMama® wants talk to you about the unemployment refund checks the IRS has started to send out.
Yours may be on the way!

 

 

 

 

 

Dear Family,

In today’s TaxQuip, I want to reach taxpayers who prepare your own tax returns. Please share this with anyone else who is affected.

Let’s do a little recap on the current situation:

Long after millions of taxpayers filed their tax returns (American Rescue Act in March 2021), Congress decided to help out shocked taxpayers who learned that the unemployment benefits they received during this pandemic are taxable. Congress decreed that the first $10,200 of all unemployment benefits would not be taxable.

The IRS said they would issue the refunds automatically and asked us all not to file amended returns until after they issued the refunds, as I reported earlier.

So, now the refunds are arriving. Now that tax pros have seen how the IRS made their computations, they noted that many of their clients do need to file amended returns. Why?

Frankly, for the IRS to perform a complete computation on each tax return would be so prohibitive that the refunds would be delayed for months. Instead, they took a short-cut. They multiplied the amount of the unemployment exclusion (up to $10,200 or double that for couples filing jointly in community property states) times the taxpayer’s tax bracket.

This computation works really well for people who have jobs that provide health insurance coverage, little or no other income, and don’t have children. For instance, let’s look at a single person’s income of about $42,000, including unemployment income. They would be in the 22% tax bracket. Now, subtract $10,200 and their tax bracket drops to only 12%. This person gets an extra $1,000 of refund. This person isn’t going to want to amend!

But what about people who have children – or more complex tax returns?

Dropping their income by $10,200 will reduce their adjusted gross income (AGI) and might increase their refundable credits (child tax credit, earned income credit and American Opportunity credit).  The lower AGI may also increase their right to other deductions or tax credits:

  • Suspended real estate losses (up to $25,000) might become deductible
  • Non-deductible IRA contributions might now qualify for a deduction
  • Student loan interest and tuition and fees deductions are limited by AGI – they might become deductible.
  • Taxable advance premium tax credits (insurance from the marketplace) might well turn into refundable credits.
    • Yes, we know that Congress waived the taxes for 2020 – but reducing the adjusted gross income might turn those (forgiven) balances due into refunds – this could be a substantial windfall.


Then, look at people who collect Social Security benefits.

Normally those benefits are tax-free. However, when they have other income, like wages, self-employed business income or investment income – or unemployment – up to 85% of those Social Security (SS) benefits can become taxable. Dropping the AGI can bring the income low enough so none of the SS benefits are taxable.

For instance, let’s say a couple is receiving $18,000 of SS benefits each, $2,000 of tax-free interest income, a pension of $20,000 and $10,200 of unemployment benefits (assuming they didn’t get more than that…)

Using live software, we determine that $11,270 of the SS benefits are taxable, resulting in taxes due to the IRS of  $1,407. (Details in our files)

When we remove the unemployment from the equation, the taxable income is zero.

The IRS would have sent them $1,020. By filing an amended return, they can get an additional refund of $387.

Depending on the state they live in, they might get additional refunds from the state – although most states don’t tax Social Security income in the first place.

Good News for people with Professionals

Tax professionals will take care of their clients, either now or when you come in for next year’s tax appointment. So, feel free to wait until then – and see what else the IRS does about issuing refunds to those people who paid the penalties because their income was too high for the Premium Tax Credit.

The folks at VITA (Volunteer Income Tax Assistance) have told me that they will be reviewing the 2020 tax returns for all of their clients – and that VITA does have the authority to prepare the amendments for them. At no charge. That means that the teams at TCE (Tax Counseling for the Elderly – often run by AARP), will probably do this as well. You might also be able to get help from the Low Income Tax Clinics, often run by colleges and universities, if you have a problem getting the IRS to accept your amended returns.

In Short

Although the numbers presented may not look enormous, for some households, this can mean thousands of dollars’ worth of refunds. Others – maybe only hundreds. It’s well worth your time to recompute your revised tax liability once you get that IRS refund check. And remember, the IRS will be paying interest on the additional refunds – a lot more than your bank pays.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments please drop into the TaxQuips Forum.

 

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TaxMama’s® TaxQuips Where are your Refunds?

2021-08-04 by Eva Rosenberg

 

It’s TaxQuips time from TaxMama.com®.
Today TaxMama® wants talk to you about the biggest question out there – Where is my #$#DE Refund?

 

 

 

 

 

 

 

 

 

Dear Family,

Are you still waiting for your IRS refund? Has it been 3, 4, 6 months since you filed your tax return, and you’re still singing, “where oh where has my poor refund gone. Where oh where can it be?”

Well, the good news is – you’re not alone.

Why is that the good news? Because you’re probably thinking that you’ve done something wrong, and they are holding up YOUR refunds as a result. No, it’s not you.  It’s the entire process that is facing a complex series of problems. If we have time, I will tell you what’s going on.

In the meantime, what should you do?

Let’s start with what NOT to do:

  • Do NOT call the IRS – you’re going to waste a lot of time sitting on hold – and probably get disconnected before you even get to someone. And finally, finally, when you reach someone, they are going to say, “Uh…I don’t know.”
  • Do NOT call your tax professional. Their job ended when they either electronically filed your tax returns, or gave you the printed version so you could mail them in. NOT included in the fee is helping your sort out IRS problems – that’s your job.
  • Don’t call the Taxpayer Advocate Service (TAS). Unfortunately, this is not a unique situation. Millions of people are in the same position – TAS cannot help you.


OK, so what CAN you do?

The IRS has recently expanded their online tools for your use. For several years, they have been planning to increase the do-it-yourself capability of the IRS websites and apps. Naturally, security has been a major consideration. As a result of the pandemic, they have moved the timetable forward and increased you capabilities. So…

  • Start with the IRS Where’s My Refund tool
    https://www.irs.gov/refunds
    Oh…you’ve already done that, and it says something useful, like “Still processing?” What’s next, then?
  • Go to the enhanced IRS My Account tool
    https://www.irs.gov/payments/view-your-tax-account
    • Among other things, you will have access to your IRS accounts via the Get Transcript tool. IF there is any progress on your refund, the information will be there.
    • If you don’t really understand how to read or access your transcripts, this system will let you link up to your tax professional’s power of attorney and approve it on the spot.
    • You will be paying your tax professional for researching your transcripts and account records and translating that information for you. Do not expect them to include this as part of your tax preparation service – unless you have already subscribed to their services for this purpose.



  • If there is still no definitive information, then what?
    • Take a deep breath.
    • Relax
    • Wait!




There is nothing to be gained by stressing, calling, and haranguing the IRS or your tax professional. It won’t speed anything up. Things will get processed in their own good time.

Refund News

  • I have recently heard that someone received their refunds from their March 2020 tax return – so they are remarkably far behind – especially when tax returns were filed on paper.
  • The IRS announced that they have started to process the refunds for the non-taxable unemployment compensation of $10,200. Naturally, they started issuing the refunds on the simplest tax returns first – folks who didn’t have tax credits or itemized deductions that needed to be considered. They will work their way through the rest of the tax returns, little by little.


Meanwhile, if you are affected by the refundable unemployment taxes and/or the refundable Premium Tax Credit penalties – do not amend your returns. WAIT for the IRS to finish processing your refunds internally – THEN amend to catch the related adjustments that they missed. Yes, there will be reason to amend at that time – but don’t amend in advance. It will only mess up all the computations – and it will take about two years to sort out. Avoid that by simply being patient.

So what’s holding up all these refunds? Aside from experienced IRS staff retiring in droves during the pandemic? Aside from the IRS still struggling with distancing, remote employees, etc.?

Fraud is holding up your refunds.  Although the tax criminals are few in number, they are generating so many tax returns with fraudulent refundable credits and fraudulent head of household statuses that increase the amount of fraudulent refundable credits, that the IRS (Criminal Investigation Division) has to review tax returns that include the Earned Income Credit, Child Tax Credits, American Opportunity Credits and Head of Household status.

If you are upset by this – and you have friends or neighbors who are bragging about ripping off the system – blame them for your delays. And if you know of a tax preparer (not a professional) who is running a phony refund mill – they are intensely responsible for your delays. When you get angry enough, feel free to report them to the IRS to discourage future fraud, theft and delays of your refunds. This IRS page will give you all the information you need.
https://www.irs.gov/individuals/how-do-you-report-suspected-tax-fraud-activity

Meanwhile, best advice for the long term?
Do not file tax returns on paper.
Do not make payments via paper check.
Make best use of the IRS’ electronic and online tools.
And make sure that you wait to file tax forms until you have received ALL your W-2s, 1099s, etc.

And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

To make comments please drop into the TaxQuips Forum.

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TaxMama’s® TaxQuips IRS Improvements Summer of 2021

2021-06-21 by Eva Rosenberg

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Or watch it on YouTube tomorrow

It’s TaxQuips time from TaxMama.com® – today TaxMama® wants to tell you about resources that are opening up for you on the IRS website.

 

 

 

Dear Family,

The IRS was busy last week, issuing announcements people have been waiting for about the advance payment of the Child Tax Credit this summer. The IRS will pay half the total credit amount in advance monthly payments. You  will claim the other half when you file your 2021 income tax return.

Eligible families who already filed or plan to file 2019 or 2020 income tax returns should not use the non-filer tool. You will get the funds distributed automatically, starting July 15th

more->

Non-Filer Sign-Up Tool – https://www.irs.gov/credits-deductions/child-tax-credit-non-filer-sign-up-tool . This tool has two purposes:

  • Use this tool to report your qualifying children born before 2021 if you:
  • Are not required to file a 2020 tax return, didn’t file one and don’t plan to; and
  • Have a main home in the United States for more than half of the year.
  • Also, if you did not get the full amounts of the first and second Economic Impact Payment, you may use this tool if you:
  • Are not required to file a 2020 tax return, didn’t file and don’t plan to, and
  • Want to claim the 2020 Recovery Rebate Credit and get your third Economic Impact Payment.


In addition, we expect to see another Opt-In tool for people whose children were born in 2021, or who got custody of children in 2021,

Not everyone will want to get these payments in advance – for a variety of reasons. Taxpayers have expressed a desire to opt out. The IRS will be adding the new tools to this page.  
https://www.irs.gov/credits-deductions/advance-child-tax-credit-payments-in-2021

In other news, the IRS held a very informative Digital Day webinar on July 17th.  (The IRS will be posting the video here, in a couple of months.) Meanwhile, if you missed it, you will want to read this handout.  FINAL_HANDOUT_Online_Services_Digital_Day_508_June2021

Some highlights:

  • For Taxpayers – you will have an expanded online account:
    • You will be able to access many more IRS tools, transcripts, records and payment plans.
    • You will also be able to see all the payments you have submitted to the IRS – and any scheduled payments.
    • You will also be able to see and approve powers of attorney that you have given to tax professionals. It will accept an electronic signature.


  • For Tax Professionals – you will also have an expanded online account:
    • Most importantly, when it comes to powers of attorney (POA) (Form 2848) and information authorization forms (Form 8821), you will be able to fill in the client’s (and your) information directly into the system – and sign electronically.
      • When your client logs into their account and approves it, you will have instant access to their account. (Instead of the current `10-12 week wait to get into the CAF unit).
      • You can add multiple representatives to the POA, but only the first two will get copies of notices sent to the taxpayer.

      This will work for people who have access to their own cell phone accounts and have credit accounts. The IRS is making some changes to make this more accessible for seniors and others who don’t necessarily have active credit accounts. But this will still not be useful for many of the people who need our help the most – non-filers – people who haven’t filed a tax return for a year or more. They won’t have any information about last year’s adjusted gross income.

      Regardless, these are additional systems – they don’t replace the old ways to reach the IRS. The IRS designed them to be accessible to the largest possible number of taxpayers in compliance. More improvements will be added in the coming year.

      And remember, you can find answers to all kinds of questions about taxes and business issues, and EA Education, free. Where? Where else? At http://iTaxMama.com/AskQuestion

      To make comments please drop into the TaxQuips Forum.

       

      Download the MP3 (0:00min, 5MB) or listen now...

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