Monday, October 18, 2010

Questions from taxpayers

October 15th has passed and all extensions have been complete. Now I can get back to my tax blog. I apologies to those that I have kept waiting ;) As promised here are some questions that I have received from clients/friends that I though some of you folks might find interesting.

Question #1: I am a business owner/independent contractor, can I expense the use of my vehicle?

Answer #1:  To expense the use of your personal vehicle, the IRS requires that your vehicle use be ordinary and necessary to perform your day to day business operation and your evidence supporting the expense must be in writing.

You must have a mileage log that supports your business trips/miles driven and must describe the business purpose of the trip.

Microsoft Office has a great template that many of my clients use and taxpayers that I have represented in audit have used. 

Mileage Log Template

Taxpayers can either choose the Actual Expense Method or the Standard Mileage Rate Method.

Under the Actual Expense Method, actual car or truck expenses include: Depreciation, Lease payments, Registration fees, Licenses, Gas, Insurance, Repairs, Oil, Garage rent, Tires, Tolls, and Parking fees.  For example, if, based on records maintained by a taxpayer, total actual vehicle expenses for a given year are $2,500 and the vehicle is used 75 percent for business, the allowable deduction using the actual expense method is $1,875 ($2,500 x 75 percent).

Under the Standard Mileage Rate Method, vehicle expenses are based on amount of miles driven and calculated by the standard mileage rate that is determined by the IRS.  For 2010, the standard mileage rate is $.50 per mile.  For example, if, based on records maintained by a taxpayer, total business miles driven for a given year is 10,000 miles, the allowable deduction using the standard mileage rate method is $5,000 (10,000 miles x $.50 per miles).

Which ever method you choose, you must keep records to support your expenses.

IRS Publication 463, page 14-24 provide additional information to taxpayers.

Question #2: I keep hearing about Bush Tax Cuts that are set to expire, what are these tax cuts?

Answer #2: During 2001 and 2003 there were many tax cuts and credits that were enacted by the Bush administration, many  of these tax cuts and credits are set to expire at the end of 2010.

Here what this means for most taxpayers:

The standard percent rates -- the baseline percentage of your income that goes to the government -- will universally rise from 10% to 15% (for lowest-income earners), from 25% to 28%, from 28% to 31%, from 33% to 36%, and from 35% to 39.6% (for highest-income earners).  So what this means is if you are in the 10% tax bracket, in 2011 you will most likely be in the 15% and so on.  This is estimated to generate roughly about $157 billion in additional tax revenue.

Taxes on capital gains and dividends will increase.  No more reduced tax on long-term capital gains.

Child tax credit will go back down to $500 per child, currently $1,000 per child.

Below are some example based on Tax Foundation's 2011 Income Tax Calculator of what the effect of these expired tax cuts may be.

Family of four, combined income of $75,000, tax increase of $2,143 next year (2011).

Family of four earning $150,000, tax increase by $4,510.

Single filers earning $50,000, tax increase of $605.

Single filers earning $75,000, tax increase of $1,355.

Single parent with one child earning $25,000, tax increase of $955, decreasing his tax refund of $1,856 to just more than $900.

Low-income family of five earning $45,000 would see their taxes increase by $2,538.

Retired married couple with income of $60,000  ($10,000 in qualified dividends, $25,000 in Social Security benefits and $10,000 in 401k) tax increase by $2,676.

Question #3: What are high IRS Audit areas?

Answer #3: From my 5+ years of representation taxpayers in audit, I have noticed the areas that the IRS continues to focus over and over gain on are Car & Truck Expense, Meals & Entertainment Expenses, and Travel Expenses.

Why? Because these areas are common for taxpayers to hide personal expenses.  The IRS rules for any business expenses are "the expense must be ordinary and necessary to run your business."

The IRS may disallow these expenses in an audit if you do not meet the IRS record keeping requirements.  All of these expenses require proof of expense and a log describing the 5 W's (When, Where, Who, What, &Why)

IRS Publication 583 provide some useful information on starting a business and keeping records.

Please feel free to contact me with any of your questions/concerns

To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

Friday, October 1, 2010

15 Intersting Facts About the IRS

1. President Abraham Lincoln created the IRS during the Civil War to help pay for the military expenses.
Good Old Abe

2. The initial income tax was a mere 3% tax on individuals making over $800. Nowadays the top tax bracket consists of a 35% tax.

Rip Off! So that's why we are poor!

3. When it was first created, the IRS was known as the Bureau of Internal Revenue, it wasn’t until the 1950’s that the name was changed to the Internal Revenue Service.

4. Over 229 million income tax returns were filed with the IRS in 2006.

Wow that a lot!

5. In 2006, the IRS collected over $2.2 trillion, with $1.2 trillion coming from just income taxes.

6. Prior to the introduction of the Taxpayer Bill of Rights in 1998, the burden of proof was put entirely on taxpayers, meaning taxpayers had to prove themselves innocent.

Yes you now have some rights:

7. The IRS sends out an average 8 billion page of paper every tax season. If all the pieces of paper were laid out end-to-end, it would wrap around the earth 28 times.

8. In order for the IRS to print the necessary forms and documents on paper over 300,000 trees must be cut down every year.

What happened to going green? Save the trees

9. The federal government spends $200 billion per year on federal tax compliance, which is more money than it takes to produce every vehicle in the United States.

Yeah they audit like Crazy!

10. The IRS employs over 114,000 individuals, which is over double as many as the CIA and five times more than the FBI.

11. The United States tax systems is widely known for being confusing and difficult to understand. As such over 60% of seek professional help preparing their tax returns.

Yes that's why you should hire me ;)

12. The average family pays over 38% of their total income to the IRS, which is more than the average family spends on food, clothing, and shelter combined.

Food BAD, Taxes GOOD. I kidd

13. The federal government spends about $10 billion per year to pay the IRS’s 114,000 employees.

14. The IRS has a whistleblowers program designed to help catch tax evaders. In 2005 they paid over $27 million to informants which resulted in nearly $350 million in revenue.

Those jerks!

15. Tax Day, the date when tax returns must be filed with the IRS typically falls on April 15th. However, if the 15th falls on a weekend or holiday, Tax Day is moved to the next business day.