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Monthly Archives: January 2015

Swimming With Sharks: Having Your Tax Return Flagged For Audit

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January 7  |  Uncategorized  |   admin

Here are some hot areas that may put your tax return in the IRS audit pool

Ever wonder why some tax returns are eyeballed by the Internal Revenue Service while most are ignored? The IRS audits only slightly more than 1% of all individual tax returns annually. The agency doesn’t have enough personnel and resources to examine each and every tax return filed during a year. And its resources are shrinking…the number of enforcement staff dropped nearly 6% last year, partly due to budget cuts. So the odds are pretty low that your return will be picked for review. And, of course, the only reason filers should worry about an audit is if they are fudging on their taxes.

However, the chances of being audited or otherwise hearing from the IRS increase depending upon various factors, including your income level, whether you omitted income, the types of deductions or losses you claimed, the business in which you’re engaged and whether you own foreign assets. Math errors may draw IRS inquiry, but they’ll rarely lead to a full-blown exam. Although there’s no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chances of drawing unwanted attention from the IRS.

1. Making too much money

Although the overall individual audit rate is about 1.03%, the odds increase dramatically for higher-income filers. 2012 IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 3.70%, or one out of every 27 returns. Report $1 million or more of income? There’s a one-in-eight chance your return will be audited. The audit rate drops significantly for filers making less than $200,000: Less than 1% (0.94%) of such returns was audited during 2012, and the vast majority of these exams were conducted by mail. We’re not saying you should try to make less money — everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you’ll be hearing from the IRS.

2. Failing to report all taxable income

The IRS gets copies of all 1099s and W-2s you receive, so make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 showing income that isn’t yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3. Taking large charitable deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag. That’s because IRS computers know what the average charitable donation is for folks at your income level. Also, if you don’t get an appraisal for donations of valuable property, or if you fail to file Form 8283 for donations over $500, the chances of audit increase. And if you’ve donated a conservation easement to a charity, chances are good that you’ll hear from the IRS. Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.

4. Claiming the home office deduction

Like Willie Sutton robbing banks (because that’s where the money is), the IRS is drawn to returns that claim home office write-offs because it has found great success knocking down the deduction and driving up the amount of tax collected for the government. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs that are properly allocated to the home office. That’s a great deal. For 2014 , you have a simplified option for claiming this deduction. The write-off can be based on a standard rate of $5 per square foot of space used for business, with a maximum deduction of $1,500. To take advantage of this tax benefit, you must use the space exclusively and regularly as your principal place of business. That makes it difficult to successfully claim a guest bedroom or children’s playroom as a home office, even if you also use the space to do your work. “Exclusive use” means that a specific area of the home is used only for trade or business, not also for the family to watch TV at night. Don’t be afraid to take the home office deduction if you’re entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.

5. Claiming rental losses

Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. But this $25,000 allowance phases out as adjusted gross income exceeds $100,000 and disappears entirely once your AGI reaches $150,000. A second exception applies to real estate professionals who spend more than 50% of their working hours and 750 or more hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation. But the IRS is scrutinizing rental real estate losses, especially those written off by taxpayers claiming to be real estate pros. The agency will check to see whether they worked the necessary hours, especially in cases of landlords whose day jobs are not in the real estate business.

6. Deducting business meals, travel and entertainment

Schedule C is a treasure trove of tax deductions for self-employeds. But it’s also a gold mine for IRS agents, who know from experience that self-employeds sometimes claim excessive deductions. History shows that most underreporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships and smaller ones.

Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too high for the business. Agents are on the lookout for personal meals or claims that don’t satisfy the strict substantiation rules. To qualify for meal or entertainment deductions, you must keep detailed records that document for each expense the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Also, you must keep receipts for expenditures over $75 or for any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

7. Claiming 100% business use of a vehicle

Another area ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use of an automobile is red meat for IRS agents. They know that it’s extremely rare for an individual to actually use a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will scrutinize your records. Make sure you keep detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, if you use the IRS’ standard mileage rate, you can’t also claim actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has seen such shenanigans and is on the lookout for more.

8. Writing off a loss for a hobby activity

Your chances of “winning” the audit lottery increase if you have wage income and file a Schedule C with large losses. And if the loss-generating activity sounds like a hobby — horse breeding, car racing and such — the IRS pays even more attention. Agents are specially trained to sniff out those who improperly deduct hobby losses. Large Schedule C losses are always audit bait, but reporting losses from activities in which it looks like you’re having a good time all but guarantees IRS scrutiny.

You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby. For you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you’re in business to make a profit, unless IRS establishes otherwise. If you’re audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So make sure you run your activity in a businesslike manner and can provide supporting documents for all expenses.

9. Running a cash business

Small business owners, especially those in cash-intensive businesses — think taxis, car washes, bars, hair salons, restaurants and the like — are a tempting target for IRS auditors. Experience shows that those who receive primarily cash are less likely to accurately report all of their taxable income. The IRS has a guide for agents to use when auditing cash-intensive businesses, telling how to interview owners and noting various indicators of unreported income.

10. Failing to report a foreign bank account

The IRS is intensely interested in people with offshore accounts, especially those in tax havens, and tax authorities have had success getting foreign banks to disclose account information. The IRS has also used voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean — in exchange for reduced penalties. The IRS has learned a lot from these programs and has collected a boatload of money (we’re talking billions of dollars).

Failure to report a foreign bank account can lead to severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them. This means filing Treasury Department Form 90-22.1 by June 30 to report foreign accounts that total over $10,000 at any time during the prior year. And those with lots more financial assets abroad may also have to attach IRS Form 8938 to their timely filed tax returns.

11. Engaging in currency transactions

The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious-activity reports from banks and disclosures of foreign accounts. A report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agrees, and it will make greater use of these forms in its audit process. So if you make large cash purchases or deposits, be prepared for IRS scrutiny. Also, be aware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 in cash one day and an additional $9,500 in cash two days later).

12. Taking higher-than-average deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. But if you have the proper documentation for your deduction, don’t be afraid to claim it. There’s no reason to ever pay the IRS more tax than you actually owe.

The bottom line is, if you get audited, hire a professional to represent you. Never, never, never, represent yourself before the IRS. It’s like swimming with sharks while wearing a swim suit made from fresh meat.

If you have any questions, comments or concerns please call us at (619) 497-1040

From Kiplinger.com

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Tax Prep Software versus CPA: What’s Right for You?

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January 7  |  Uncategorized  |   admin

Preparing your taxes for 2014 will be a daunting task. With every important job comes the question of whether or not individuals should prepare their taxes themselves or hire a professional. While the ever improving selection of tax preparation software certainly makes it easier and cheaper to do your own taxes, there are intangible costs of doing them yourself as opposed to hiring a Certified Public Accountants (CPAs).

The Advantages of Using Tax Software
Price

There is no way around the fact that you will pay less for a software package than you will to hire a CPA or another qualified tax professional. The price of tax preparation software ranges from the $25 to $120 range to websites that offer the service for free. On the other hand, the least expensive tax preparers will cost at least $150 and a CPA is likely to charge at least twice that amount. The upfront savings of using tax software over an accountant is one of the most attractive benefits of filing your own taxes. Beware of hidden costs: many software companies charge you an additional amount to prepare the state tax return and then add additional fees for e-filing your return. THERE IS NO FREE LUNCH!!!

Speed
Once you have all the necessary documents in front of you, it is possible to complete your own taxes in a few hours. In contrast, the best professionals can prepare the taxes with you during your appointment or, it may take longer depending on the complexity: from several days to a few weeks to complete the returns and file your forms.

Simplicity
Good tax preparation software walks you through the process very quickly and easily. For those who have only a W-2, (or few sources of income and deductions), then there is little need to sit down with an accountant to sort it all out.

The Benefits of Hiring a Professional Accountant
Better Software
CPA’s typically pay around $3,000 to $15,000 for their software, which is far more sophisticated than the tax preparation software sold to consumers. These more advanced programs have the ability to quickly scan your information and organize line items and forms correctly. By automating much of the data entry and organization, there’s less chance for human error to hurt your tax return.

Human Touch
A good tax professional can interpret your tax information and know the tax implications that may affect you. Like a good family doctor that knows your medical history, you can develop a relationship with an accountant so that he or she understands your family’s financial situation and future goals. Tax professionals are often able to make valuable tax savings suggestions that a software program just can’t anticipate. The value of this advice can easily exceed the additional cost of consulting with a professional. For example, a tax accountant can provide you advice on tax-friendly ways to save for your children’s education, or how to reduce taxes on your capital gains.

CPA’s Can Answer Your Questions Year Round
As a trusted professional, a good CPA will be able to answer important questions that arise not just during your annual consultation, but at other times during the year.

A CPA Saves You Time When Handling Complicated Issues
Taxpayers who find themselves at the center of complicated business and investment matters may even have the skill to sort through their taxes on their own, but is it worth their time? A professional tax preparer is so familiar with the system, he or she can quickly and easily accomplish tasks that might take even skilled taxpayers hours of research. For busy non-tax professionals, their time can generally be better spent earning money in their area of expertise. Even if your tax situation is straightforward, hiring a professional will save you the time and stress of doing your taxes.

The Bottom Line
Ultimately, there is no universally correct answer to the question of hiring a tax professional or doing your taxes yourself with software. There are tangible and intangible costs and benefits in making your choice. Your comfort and familiarity with IRS rules will be part of your decision, but the complexity of your finances should be the key deciding factor. Those with a single employer and few investments may save hundreds of dollars by preparing their own taxes, while those taxpayers with more sophisticated issues stock options, passive activities, business income or rental properties will find the expense of hiring a CPA to be worth their peace of mind and potential tax savings.

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Reasons You Should Hire A CPA

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January 6  |  Uncategorized  |   admin

Would it surprise you to learn that many small business owners trust their CPAs as much as their family members? It’s true. According to a survey by the American Institute of CPAs, CPAs are considered business’ most trusted advisors, and with good reason. CPAs, in order to keep their qualified status, are continually educated, tested and regulated by the State Boards of Accountancy. It is a profession that requires commitment, integrity, intelligence, and a strong sense of ethics.

To maintain the highest possible professional standards, CPA candidates are required to complete rigorous coursework at an accredited college or university and also pass the Uniform CPA Exam. This exam tests auditing, taxation, business and general accounting skills and was developed as a way of ensuring the utmost competence of CPAs entering the field. It is often considered the accounting equivalent of the bar exam for lawyers and the medical boards for doctors. Once the CPA license is received, CPAs are required to undergo many hours of continuing professional education every one to three years, the exact number of hours is regulated by the state in which the CPA is practicing, but usually fall around 40 hours annually.

Hiring a CPA can save you a lot of time and money. By turning to an expert, you do not have to worry about wasting time understanding complicated legal issues, or trying to analyze finances with limited experience. You and/or your business can become more financially organized and legally sound with the help of a CPA. At the same time, you can learn more about financial matters from your CPA and consequently gain knowledge and confidence in handling your business’ future financial issues and making critical financial decisions.

At tax time, you can’t afford even the smallest mistake on your returns. Instead of spending time and energy trying to navigating the seemingly endless stream of tax forms, consider hiring a CPA. They are specifically trained to complete multiple and complex state and federal tax returns, and know how to get the maximum number of tax deductions for you. They can also effectively organize your receipts and other documentation necessary for these returns.

Consider the following helpful CPA hiring tips before signing on the dotted line;

  • Get recommendations from a wide variety of trusted contacts to help you find the best fit for you.
  • Know your plans and objectives before meeting with your CPA. Collect enough information and necessary details so you can ask specific questions about your finances. Past tax returns, investment documents, business plans, and financial statements will make the process much smoother for you and your prospective CPA.
  • Make sure the CPA is licensed to practice in your state. Also, inquire about which professional organizations the CPA belongs to. CPAs are required to meet strict professional and technical standards.

Tax preparation, financial planning, auditing or advice on developing a working accounting system, can all be made easier with the help of a CPA. CPAs can help you set a course for your business or advise you on your investments, estate planning, and more. Finally, once you’ve hired your CPA, make sure to keep him or her current on what’s happening in your life and business. Marriage, divorce, children, inheritances, and other life situations all can impact your financial situation and tax liability.

Ten Reasons to Hire a Professional Tax Professional

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January 6  |  Uncategorized  |   admin

10. It takes the hassle out of doing it yourself.

9. You don’t have to keep up with the many tax law changes or understand complicated tax law.

8. Making mistakes can be very costly.

7. Your time is worth money – add up the hours you would spend doing it yourself and calculate what that’s worth. Also, tax programs have hidden fees that add up.

6. A tax program in a box cannot represent you in an audit. Nor can it answer questions about your deductions.

5. A tax professional can answer your questions to help you make smarter tax-saving decisions.

4. A tax professional can help you plan all year and for future years.

3. A tax professional can recommend ways to save on taxes

2. It gives you peace of mind knowing that a professional is taking care of it.

And the number-one reason you should hire a tax preparer is:

1. It can save you money – if your tax preparer finds even one significant deduction or tax credit you may have missed, it can easily exceed the average $300 fee it costs to have a professional prepare your return.

What You Should Know about AMT

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January 6  |  Uncategorized  |   admin

IRS Tax Tip 2014-10, February 10, 2014

Have you ever wondered if the Alternative Minimum Tax applies to you? You may have to pay this tax if your income is above a certain amount. The AMT attempts to ensure that some individuals who claim certain tax benefits pay a minimum amount of tax.

Here are some things from the IRS that you should know about AMT:

  1. You may have to pay the tax if your taxable income, plus certain adjustments, is more than the AMT exemption amount for your filing status. If your income is below this amount, you usually will not owe AMT.
  2. The 2013 AMT exemption amounts for each filing status are:
    • Single and Head of Household = $51,900
    • Married Filing Joint and Qualifying Widow(er) = $80,800
    • Married Filing Separate = $40,400
  3. The rules for AMT are more complex than the rules for regular income tax. The best way to make it easy on yourself is to use IRS e-file to prepare and file your tax return. E-file tax software will figure AMT for you if you owe it.
  4. If you file a paper return, use the AMT Assistant tool on IRS.gov to find out if you may need to pay the tax.
  5. If you owe AMT, you usually must file Form 6251, Alternative Minimum Tax – Individuals. Some taxpayers who owe AMT can file Form 1040A and use the AMT Worksheet in the instructions.
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Tax Tips for 2014 That You Need to Know

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January 6  |  Uncategorized  |   admin

The Patient Protection and Affordable Care Act health insurance mandate goes into effect

Starting in 2014, you must carry a minimum level of health insurance for yourself, your spouse, and your dependents, or possibly pay a fine.

If you have adequate health insurance through your employer, you purchase coverage yourself, or you are enrolled in a government program such as Medicaid, you don’t have to do anything different.

If you qualify for an exception; for example, if your income is too low for you to be required to file a return, you won’t have to pay the fine.

If you don’t have coverage or qualify for an exception, you could get hit with a tax penalty of up to 1% of your yearly income or $95 per person for 2014, whichever is higher. The penalties go up in 2015.

New 3.8% Medicare Investment Tax

The Affordable Care Act also mandated an additional 3.8% tax on investment income, including interest, dividends, capital gains, rental and royalty income.

This special tax is collected for Medicare, starting in 2013. You only pay it if your modified adjusted gross income is $200,000 or more ($250,000 if filing jointly, or $125,000 if married filing separately).

You pay the 3.8% tax in addition to tax you already pay on investment income. For example, if you pay 20% tax on a long-term capital gain, your total tax on the gain is 23.8% (20% + 3.8%).

New Medicare Health Insurance Tax on wages

The Affordable Care Act levies a special tax on the wages and other earned income of high-income taxpayers.

You must pay this tax if you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately).

Your employer generally withholds the Additional Medicare Tax from your pay. If you’re self-employed, you should plan for this tax when you calculate your estimated taxes.

This tax went into effect for 2013.

Simplified option for home office deduction

The IRS may have good news for you if you work at home as an employee or are self-employed and take a home office deduction.

Starting in 2013, you can use a simplified option for determining your deduction, based on $5 per square foot of home use for business (up to 300 square feet).

When you take the simplified deduction, you can still deduct mortgage interest and real estate taxes in full as itemized deductions. In addition, you don’t have to worry about calculating depreciation on your home, or recapturing depreciation later when you sell your home.

Energy credits

Thanks to an extension through 2015, you can still get an energy efficiency tax credit for qualifying energy-efficient products such as windows and doors, biomass stoves, and insulation.

The credit is 10% of the cost of your qualified energy efficiency improvements installed during the year, plus any residential energy property costs.

Your total credit for all years after 2005 cannot be more than $500.

Reminder: IRS e-file starts late this year

The IRS will begin processing individual income tax returns starting on January 31, 2015. The IRS is getting a late start accepting e-file returns this year because of the sequester.

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New Standard Mileage Rates Now Available; Business Rate to Rise in 2015

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January 6  |  Uncategorized  |   admin

IR-2014-114, Dec. 10, 2014

WASHINGTON — The Internal Revenue Service today issued the 2015 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2015, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

  • 57.5 cents per mile for business miles driven, up from 56 cents in 2014
  • 23 cents per mile driven for medical or moving purposes, down half a cent from 2014
  • 14 cents per mile driven in service of charitable organizations

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile, including depreciation, insurance, repairs, tires, maintenance, gas and oil. The rate for medical and moving purposes is based on the variable costs, such as gas and oil. The charitable rate is set by law.

Taxpayers always have the option of claiming deductions based on the actual costs of using a vehicle rather than the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after claiming accelerated depreciation, including the Section 179 expense deduction, on that vehicle. Likewise, the standard rate is not available to fleet owners (more than four vehicles used simultaneously). Details on these and other special rules are in Revenue Procedure 2010-51, the instructions to Form 1040 and various online IRS publications including Publication 17, Your Federal Income Tax.

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