tax
Offshore voluntary disclosure deadline
Tuesday, August 9th, 2011 | consulting, tax | No Comments
The deadline in the IRS Offshore Voluntary Disclosure Initiative is August 31. For several years, the IRS has required taxpayers to disclose their accounts and income from foreign countries. The 2011 program offers taxpayers penalty reductions if they voluntarily disclose their offshore holdings and income rather than waiting for the IRS to find them.
The foreign financial account disclosure regulations carry onerous civil and criminal penalties for hiding offshore accounts and income. If you are concerned about your exposure to the IRS foreign financial account disclosure requirements, please contact us right away to discuss your options.
Beware of IRS emails
Wednesday, July 6th, 2011 | tax | No Comments
IRS says bogus email scams are resurfacing, including one involving payments allegedly rejected by the Electronic Federal Tax Payment System. The email has a link that may download malicious software.
IRS does not initiate communications with taxpayers by email. Check here for information on what to do if you receive a suspicious IRS-related communication. Or call us for help.
Standard mileage rates change
Friday, July 1st, 2011 | consulting, tax | No Comments
The IRS has adjusted the standard mileage rates beginning July 1, 2011, in response to higher gasoline prices. The new standard mileage rates will apply through the end of 2011.
Mileage Rate Changes
|
Purpose |
Rates 1/1 through 6/30/11 |
Rates 7/1 through 12/31/11 |
|
Business |
51 |
55.5 |
|
Medical/Moving |
19 |
23.5 |
|
Charitable |
14 |
14 |
You have the option of tracking actual vehicle costs or using the standard rates to calculate your vehicle expense deduction. You may deduct parking fees and tolls under either method. Remember to write down your odometer reading today and at year-end to help track total miles for each half of the year.
You do keep a mileage log, don’t you? The IRS has been finding easy money by increasing audits of business mileage because many taxpayers do not keep adequate records. You may keep your mileage log in any format that is convenient for you. IRS dictates that the log should contain the number of miles (beginning and ending odometer readings are best) for each business trip, the destination(s), and the business purpose of the trip. Anything less, and the deduction may be disallowed. If you spend the day on the road going to multiple work locations, a daily total is adequate along with a list of the locations you visited.
Another business mileage trip-up relates to commuting miles. If you do not report expenses for business use of your home, you had better report commuting mileage with your business mileage deduction. IRS says that mileage from home to the first work location of the day and from the last work location to home is non-deductible commuting mileage. If you do have a home office, then your home office is your first and last work location, and all mileage to other work locations throughout the day is deductible.
For more details about business, medical, moving, and charitable mileage deductions, feel free to call or email us. As with all things tax-related, special rules abound related to company expense reimbursement plans, personal use of company vehicles, depreciation, and other vehicle-related issues. We can help bring you peace of mind by setting up a reporting system that will pass muster with the IRS.
Bureaucratic snafu resolved
Friday, April 29th, 2011 | consulting, tax | No Comments
We helped one of our clients solve a problem today by resolving a bureaucratic snafu. The issue relates to one of the many areas where the federal and state governments communicate with each other. For owners of heavy trucks, the state requires county clerks to obtain verification that the federal heavy highway vehicle use tax has been paid before issuing a new registration annually. This has been a standard procedure for many years to ensure that heavy haulers pay for the extra wear and tear their big rigs inflict on the nation’s highways.
For several years, our client has been resigned to the apparent requirement and has dutifully paid the tax because otherwise, the company could not get tags for their truck. We found out about the situation as we worked on an unrelated matter. We learned that this particular type of truck is exempt under federal tax code because it is not designed to haul loads. But the county clerk’s staffers refused to issue the tags until our client provided proof that the tax had been paid.
We did some research, pulled the documentation together, and called the county clerk’s office. At first the clerk was not aware that an exception to the law existed. After we explained the exception and the fact that our client’s truck met the requirements for the tax exemption, she called her colleague at the state level. She confirmed that indeed there is an exception and the state has a procedure in place to handle it that the county clerk’s office was unaware of until today. She now has an affidavit for our client to sign to certify that their truck is exempt so they can get tags for their truck.
The representative from the county clerk’s office called us back to let us know that she would immediately inform the staff and make the affidavit available to our client and all others who apply for tags for an exempt vehicle. We solved a problem for our client that saves them a significant tax cost each year.
If you own a heavy truck subject to the heavy highway vehicle tax and you file IRS Form 2290, check the instructions for the exemption rules or call us, and we can help you determine if your vehicles are exempt. This is just one of the many ways we go beyond the usual tax-and-accounting CPA services to help our clients solve problems.
Filed an extension - now what?
Thursday, April 28th, 2011 | consulting, tax | No Comments
You pulled your records together and worked on your tax return, maybe using an “easy-to navigate” software program. But you were left with a nagging feeling that there may be something you missed, so you filed an extension.
Now what?
We’ve received calls from several people in this situation, asking us if we would take a look at their returns. This is a smart call if you have items on your return that are new for this year, or if an unusual event occurred in 2010. The mainstream tax software is designed to be easy for the average user, with questions that take you step-by-step through your return. In their effort at simplicity, sometimes the questions gloss over details in the code that might be important in your particular situation. Sometimes your answer directs the software to another module and list of questions, or to skip some questions. If you answer incorrectly at this stage, you may be messing up without knowing it.
In one recent case, a husband and wife used one of the name-brand tax programs to do their return, which included a business. Because of the way the software asked the questions, they inadvertently entered the same business information in two places on the return, doubling their income. Because of the software’s design, they did not become aware of the error until after they had e-filed the return.
The errors prompted a barrage of notices from the IRS and an audit of their return. They are now spending a lot of time, effort, and money to resolve these issues. The excuse, “it was the software’s fault,” has been tried all the way to Tax Court, and it has failed at every turn.
So if you are not confident that your self-prepared tax return is correct and that you have claimed all the deductions and credits to which you are legitimately entitled, you are smart to have filed an automatic extension. The next step is to gather your records and make an appointment with a tax expert like us. We can review your return and your financial situation to make sure your tax return is accurate and complete and your tax bill is as low as possible.
We’ll also advise you about the possible audit risk of your return. The IRS has been stepping up its examination of such items as employee business expenses, businesses reported on Schedule C of Form 1040, business mileage, and other areas. This means that good recordkeeping is more important than ever to prove that your deductions are legitimate.
Contact us today to quiet those nagging doubts about your return.
Tennessee tax deadline postponed
Thursday, April 14th, 2011 | tax | No Comments
The Tennessee Department of Revenue announced yesterday that the filing date for Franchise and Excise tax returns, gift tax returns, and Hall income tax returns has been extended to April 18, 2011, conforming with the federal deadline change.
If you make estimated franchise and excise tax payments though, you still must pay them by April 15.
You may read the announcement here.
Just so you know, we close our office for a week after the April tax filing deadline. This year, we will be wrapping up our tax season work on Friday despite the deadline changes, and we will be closed all week beginning April 18. If you need our assistance, please contact us today so we can finish helping you before we scatter.
Complexity of the tax code
Thursday, April 7th, 2011 | tax | No Comments
We just received a printed copy of the tax code, otherwise known as the Internal Revenue Code, or just the code. Sometimes we prefer to go to a book rather than navigate through searches and database links to find information that will help our clients.
The book is 2.5 inches thick, printed on paper I can practically read through in a font so small that my reading glasses are barely strong enough. The index alone is 296 pages. The last page of the book is page 4,052.
This book does not contain the regulations, procedures, rulings, or court decisions. Not to mention form instructions, publications, and announcements.
Is it any wonder that people mess up their tax returns and miss deductions? Or that even people who work for the IRS get the rules wrong sometimes?
I’m done venting - I’ll get back to your tax returns now…
IRS abates penalties
Monday, April 4th, 2011 | tax | No Comments
In a payroll tax case we have been working on for over a year, the IRS has agreed to abate penalties, saving the taxpayer over $200,000. This is a very unusual decision for the IRS, which considers non-payment of payroll taxes to be an unauthorized loan of government funds.
Employers are required to withhold income tax, Social Security tax, and Medicare tax from their workers’ wages and deposit these funds regularly. At the same time, employers pay their share of Social Security and Medicare taxes. Penalties mount rapidly if an employer falls behind on these deposits.
The circumstances of this taxpayer’s case were unique. Their office manager/bookkeeper had let the company get behind on their payroll tax deposits, but she had told the owners that everything was fine. She had gained unauthorized access to the company’s post office box so she could intercept the IRS notices before the owners saw them. Her ruse unraveled when she was absent one day. The owners received one of the notices in the mail and called us.
Our investigation revealed how serious the situation was, with a delinquent tax liability in the mid-six figures, plus penalties and interest. The owners amassed enough funds to get the back taxes paid. We organized the documentation, interviewed the owners, and fashioned a compelling narrative describing the course of events that led to the late deposits. Through a series of letters, conversations, and meetings, we were able to persuade the IRS to abate the penalties. If the decision had gone the other way, the burden of paying the penalties on top of the back taxes probably would have put the company out of business.
We consider this a big win against the odds for our client. Not all of our engagements with the tax authorities end this well, but this is one example in which our willingness to stand toe-to-toe with the IRS on behalf of the taxpayer turned a potentially catastrophic situation into a more manageable one. As a result, the owners can now turn their focus back to managing their company through the recession.
Do you have an IRS story you’d like to share? How can we advocate for you?
Minimize capital gains tax
Thursday, March 31st, 2011 | consulting, tax | No Comments
When you sell an asset for more than your investment in it, the IRS says you must pay tax on the difference, called capital gain. For some years, the tax rate on such gains has been lower than regular rates if the asset is held for a long term (currently, more than one year). Hence the nickname, capital gains tax. The asset may be stocks, bonds, mutual funds, other assets such as equipment and real estate, or an entire company.
On the tax return, short-term and long-term capital gains and losses are accumulated in a specific manner to arrive at net short-term and long-term capital gain or loss from which the tax is calculated.
With good planning, there are several methods that you might use to minimize capital gains, and thereby minimize the tax you must pay on them. Here are six tips (with nods to Alan Haft, CPA Insider):
- When selling stock, specify which shares to sell. By choosing, you can decide the amount of gain or loss on the sale. This method can be used in conjunction with other sales to exercise some control over the net capital gain or loss amount reported on the tax return.
- Make all gains long-term. In 2010, short term capital gains are taxed at your ordinary income tax rate, which can be as high as 35% depending upon your income level. Long-term capital gains are taxed at a maximum of 15%, with additional breaks for lower-income taxpayers. So by holding onto your assets at least one year before selling, you take advantage of the lower tax rate on long-term gains.
- Use capital losses to offset capital gains. Short-term and long-term capital losses reduce their respective gains dollar-for-dollar. If you have more capital losses than gains, the net loss can reduce other income. This loss utilization is limited to $3,000 per year, but the excess loss can be carried forward to future years.
- Replace losing investments. If a stock or fund investment is depressed, you may sell it to lock in a tax loss. If you still believe it’s a good investment, wait 30 days before buying into it again to avoid the “wash-sale” rule. If you buy an identical stock within a period 30 days before or after the sale, the wash-sale rule prevents you from claiming a loss on the sale.
- Replace winners. The wash-sale rule does not apply when you sell an investment to lock in a gain. You may sell it and then buy it back immediately. You might do this if you have a loss to offset the gain, reducing the tax bill on the sale. When you buy the stock back at the higher price, you will pay less tax on future gains because your basis (the cost of the investment) is higher.
- Check mutual fund’s tax efficiency. If you invest in mutual funds, check a fund’s tax-efficiency ratio before investing. This is the percentage of total return you keep after taxes.
Another mutual fund idiosyncrasy is capital gains distributions. Funds may realize capital gains when they sell their underlying investments. During the financial meltdown, we saw large taxable capital gain distributions on 1099s even as mutual funds were losing value. Fund managers were forced to sell appreciated investments in order to redeem shares as investors pulled out of the funds. The resulting capital gains were distributed to all investors, who faced potential tax liability even though they remained fully invested and received no cash from the funds.
Tax impact is not the only criterion behind investment decisions, but it can play a part. By consulting with your CPA or an investment advisor familiar with tax implications, you can balance all factors to make the best decisions. Minimizing capital gains tax can be complicated, but with good planning, it can help you keep your money in your pocket and out of Uncle Sam’s.
Bad tax preparer leads to audit trouble
Thursday, March 24th, 2011 | tax | No Comments
We recently met with a new client who had been invited to the IRS local office for an examination of two years of her tax returns. She called the tax preparer, who told her she would not need the preparer at the meeting (red flag number one). After the meeting, she called the preparer back for help, but the preparer was not available (red flag number two). She has not been able to reach the tax preparer since then (red flag number three).
At the IRS meeting, she was shocked to learn for the first time that several items on her tax return were incorrect, mostly improper deductions. She came to us, and we opened her eyes to many ways that her tax preparer had misled her. We will be able to help her minimize the damage, but she was very unhappy to learn that her tax preparer had botched her return, and that she would owe a big chunk of money as a result.
Here’s the catch-22: The tax laws are so complex, the average taxpayer cannot possibly keep up, but you bear the burden of the accuracy of your tax return. Whether or not you rely on a professional to prepare your return, you are personally responsible for everything on the return. You must have documentation to back it up. “That’s how the tax software did it” is no defense. So finding a reputable, credentialed professional who will talk honestly with you is a good investment. No one can guarantee that the IRS won’t have questions about your return, but the process goes much better if your return is properly and accurately prepared based on good records.
Until this year, there has been no federal-level program to ensure at least a minimum level of competency for tax return preparers. There still is no way to get feedback about a tax preparer’s competency or quality of work, other than word of mouth. There is no authority given to the IRS or any other agency that can be used to force bad preparers out of business, other than harassing their clients. Watch for those red flag warnings before trouble comes. A reputable CPA firm (us, for example) or enrolled agent is your best choice.