Solo's Tax Blog

Wednesday, April 11, 2012

Tax Deadline, April 17th, Is Just A Few Days Away…….

The last day to file your tax return is just a few days away. Traditionally the last day to file your tax return is April 15^th. This year’s filing deadline has been extended because the traditional April 15 filing deadline falls on Sunday and the following Monday is a legal holiday in Washington, D.C.

If you do not have enough time to file your tax return by the deadline, you can request a 6 month extension. The extension does not extend your time to pay any federal or state income taxes owed by the April 17 filing deadline to avoid penalties and interest for late payments.

California provides an automatic six-month filing extension.

Here are seven important things you need to know about filing an extension:

1. File on time even if you can’t pay If your return is completed but you are unable to pay the full amount of tax due, do not request an extension. File your return on time and pay as much as you can. The IRS will send you a bill or notice for the balance due. To apply online for a payment agreement, go to the IRS website at http://www.irs.gov and click “Apply for an Online Payment Agreement (OPA)” at the left side of the home page under Online Services. If you are unable to make payments, call the IRS at 800-829-1040 to discuss your options.

2. Extra time to file An extension will give you extra time to get your paperwork to the IRS, but it does not extend the time you have to pay any tax due. You will owe interest on any amount not paid by the April 17 deadline, plus you may owe penalties.

3. Form to file Request an extension to file by submitting Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return, to the IRS by April 17, 2012, or make an extension-related electronic credit card payment. For more information about extension-related credit card payments, see Form 4868.

4. E-file extension You can e-file an extension request using tax preparation software with your own computer or by going to a tax preparer who has the software. The IRS will acknowledge receipt of the extension request if you file by computer.

5. Traditional Free File and Free File Fillable Forms You can use both Free File options to file an extension. Access the Free File page at http://www.irs.gov.

6. Electronic funds withdrawal If you ask for an extension via computer, you can also choose to pay any expected balance due by authorizing an electronic funds withdrawal from a checking or savings account. You will need the appropriate bank routing and account numbers. For information about these and other methods of payment, visit the IRS website at http://www.irs.gov or call 800-TAX-1040 (800-829-1040).

7. How to get forms Form 4868 is available for download from the IRS website or may be ordered by calling 800-TAX-FORM (800-829-3676).You can also obtain the form at your local IRS office. Telephone requests normally take 7 - 15 days to process and ship.

For more information about last-minute help with federal income taxes, go to www.irs.gov or call 1-800-829-1040. Last-minute assistance with state income tax returns is available at www.ftb.ca.gov or by calling 1-800-338-0505.

Friday, March 23, 2012

How to Choose a Tax Preparer

Tax return preparer fraud involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. Preparers may, for example, manipulate income figures to fraudulently obtain tax credits, such as the Earned Income Tax Credit.

In some situations, the client, or taxpayer, may not know of the false expenses, deductions, exemptions and/or credits shown on his or her tax return. When you sign your tax return, you are stating that under penalties of perjury you have examined your tax return and all the information that is reported is true, correct, and complete. When the IRS audits your tax returns and detects a fraudulent return, you the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

The IRS has enhanced compliance in the return-preparer community by investigating and referring criminal activity by return preparers to the Department of Justice for prosecution. The IRS can also assert appropriate civil penalties against unscrupulous return preparers.

While most preparers provide honest service to their clients, the IRS urges taxpayers to be careful when choosing a preparer –– as careful as they would be choosing a doctor or lawyer. Even if someone else prepares a tax return, the taxpayer is ultimately responsible for all the information on the return. For that reason, taxpayers should never sign a blank tax form. And they should review the return before signing it and ask questions on entries they don't understand.

Helpful Hints When Choosing a Return Preparer

· Be cautious of tax preparers who claim they can obtain larger refunds than other preparers.

· Avoid preparers who base their fee on a percentage of the refund.

· Use a reputable tax professional who signs the tax return and provides a copy.

· Consider whether the individual or firm will be around to answer questions about the preparation of the tax return months, or even years, after the return has been filed.

· Check the person’s credentials. Only attorneys, certified public accountants (CPAs) and enrolled agents (EAs) can represent taxpayers before the IRS in all matters, including audits, collection and appeals. Other return preparers may only represent taxpayers for audits of returns they actually prepared.

· Find out if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

· Ask friends and family whether they know anyone who has used the tax professional and whether they were satisfied with the service they received.

Reputable preparers will ask to see receipts and will ask multiple questions to determine whether expenses, deductions and other items qualify. By doing so, they are trying to help their clients avoid penalties, interest or additional taxes that could result from an IRS examination.

Tax evasion is a risky crime, a felony, punishable by five years imprisonment and a $250,000 fine.

Wednesday, March 14, 2012

Tax and Other Records: What do I need to keep?

All of us need to keep records that verify our tax return or other important life events for as long as they are needed. So what does this mean?

Federal Tax Return Documents and Receipts:

Generally you should keep your documents for three years from the later of the tax return filing due date OR actual filing date. Federal record keeping may be longer than three years if errors on your tax return for over 25% of the tax obligation require record retention of six years. If fraud or tax evasion is determined, the record holing period is indefinite.

State Tax Return Documents and Receipts:

The state of California can review your tax return after your federal tax return has been audited and officially closed. The state can audit your tax return up to four years from the later of the tax return filing due date OR actual filing date.

Records You Should Keep Forever:

Some items that should be kept indefinitely included, but are not limited to, copies of your 1040 tax return, major asset purchases and sales (i.e. home mortgage, home closing documents, investment/stock transaction documents, insurance documents, and birth/death/marriage certificates).

Valuable Item Records:

Keep records of any valuable items purchased. This includes jewelry and other collectables.

Non-tax Related Records:

You may need records for non-tax related purposes. Copies of divorce decrees, records of insurance and home sale closing paperwork are common examples of documents needed for other reasons.

Remember, when in doubt, it is always better to keep records them have to obtain them later when they are needed.

This information is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional advice and assumes no liability whatsoever in connection with its use. Because tax laws are constantly changing, and are subject to differing interpretations, we urge you to do additional research before acting on the information contained in this document.

Tuesday, March 6, 2012

Is Your Tax Return the Next IRS Audit?

Is Your Tax Return the Next IRS Audit?

Tax filing season is here! For those of you receiving a refund, you probably have already filed your tax return. High income earners and self-employed individuals with a balance due are probably waiting until last minute. Regardless if you have a refund or balance due, chances are that once your tax return is filed and accepted you forget about taxes until the same time next year.

So what happens to your tax return once it has been accepted by the IRS? Does this mean you are in the clear? Just because you received your refund or paid any additional taxes that were due, does not mean that you are free and clear of any further actions on behalf of the IRS. Over the course of the next few years, your tax return may be subject to more scrutiny and deeper analysis, with the IRS searching for more fraud flags that could still trigger a full and complete audit of your tax returns. The IRS has up to three years after you file your tax return to audit and asses additional taxes. If the IRS suspects that you may have committed fraud on your tax return, the audit period is indefinite.

10 Common Audit flags:

1. Not reporting income: The IRS receives copies of all 1099s and W-2s you receive, so make sure you report all income on your return. If you receive an incorrect 1099, talk to the issuer and make sure that a corrected form is filed with the IRS.

2. A large change in income: The IRS computers have all of your historic data, so when there's a big change from the previous year, it can trigger a red flag.

3. Being self-employed: Self-employed workers take note: The IRS doesn't trust you, because so many of you are trying to game the system by under-reporting income and overstating deductions. This class of taxpayer must be well-prepared to defend all deductions and credits. Just because your received cash or did not receive a Form 1099 for that side job you did for your friend, does not mean that it isn’t income. The IRS uses statistics such as www.bizstats.com for each trade to properly determine if you are reported the proper income and deductions for your trade.

4. Taking higher-than-average deductions: If deductions on your return are disproportionately large compared with your income, your return may get flagged. To defend yourself, make sure you have documentation.

5. Large charitable contributions: Many of you donate 10% of your income to your church. You must keep proper documentation such as copies of cleared checks or credit card receipts, if you donate cash you must show how it was obtained such as bank withdraw, and you must get written acknowledgement from the organization.

6. Small business losses: The IRS has plenty of experience with taxpayers who try to claim losses on a small business, when the activity is really a hobby. What's the difference? A business must be entered into and conducted with the reasonable expectation of making a profit. The IRS has a rule that states “the activity is carried on for profit if it makes a profit during at least three of the last five tax years.” This mean you should only have a loss for the first two years of the business. Special circumstances may apply.

7. Claiming dependents that are not a qualifying child or relative: Many taxpayers claim children on their tax return that are not qualified dependants. A qualifying child is the taxpayer’s child, stepchild, foster child, brother, sister, stepbrother, stepsister, or descendant of any of them. A qualifying relative is the taxpayer’s parent, grandparent, aunt or uncle. There are other requirements such as you must as well.

8. A home office deduction: Are you sitting in your kitchen, checking your work e-mail? Well, that's not a home office, according to the IRS. To qualify for this widely abused deduction, the room must be for work-only. If you really do maintain a home office, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance and other costs.

9. Large business meal and entertainment deductions: Wouldn't it be nice if every meal and trip could be easily classified as a tax deduction? Before you claim that big deductions for meals, travel and entertainment, remember they are big-time audit flags. Keep detailed records that document the amount, the place, the people attending, the business purpose and the nature of the discussion or meeting. Expenses must be ordinary and necessary to conduct your day to day business activity.

10. 100% business use of a vehicle: Claiming 100% business use of an automobile is not just a red flag, it's a red flag on steroids, because very few people use a car exclusively for business. No matter what percentage you're deducting, keep detailed mileage logs and precise calendar entries for the purpose of every road trip.

Bottom Line

Tell the truth; be honest when you are filling out your tax return. If you have a deduction that’s of the common audit flags and you have supporting documents to prove it, go ahead and take it. If your business has suffered a loss and you have documents to prove it, go ahead and report it. The only reason you should be worried about an audit is if you are cheating on your taxes.

Friday, November 5, 2010

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 info@sttstax.com

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.