Receiving a Notice from the IRS

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Almost everyone at some time in their life will receive a notice by mail from the IRS. This is how the IRS communicates with people. It isn’t necessarily a bad thing to get a notice. Sometimes, it can even be good news. However, most people when they see a letter from the “Internal Revenue Service” in their mailbox immediately panic. We always suggest that when you get a notice from the IRS or even a State agency, that you send us a copy (via fax, email or USPS) so we can explain what you received and how to properly handle it. So, today, I would like to mention a few of the types of IRS notices that people typically receive and what you should know about them.

1. Notice of missing information. The IRS compares what types of income has been reported to them to your Social Security number against what you have reported on your tax return. This usually takes a year or so for them to figure out. When they notice that something is missing such as a W-2 or 1099, they send a notice telling you so that you can compare it to your records and amend if necessary.
2. Notice of change to your tax return. This notice comes when you don’t respond to the notice above or if the IRS feels you have figured something wrong on your tax return. They have to tell you what they changed and why. This gives you an opportunity to compare their figures to yours and agree or disagree.
3. Notice that the IRS is working on your problem. When you write the IRS about any situation, it takes them time to go over it and respond. If it is taking an unusual amount of time for them to review it, they will send you a letter that essentially says they got your information and they are working on it.
4. Notice of an audit. This comes when the IRS wants you to provide proof of your income and expenses. It can be anything from a request for you to mail proof of certain deductions to a full-blown “come to the IRS with all your records” audit. You should ALWAYS contact your tax preparer if you get an audit letter.

These are just some of the most common letters. Most of the time a letter from the IRS isn’t anything to worry about. The most important thing to remember is if you get a letter, open it. There are usually time limits for responding. IRS notices are usually for clarification, and you always have the opportunity to agree or disagree.

Always remember to consult your tax professional when you get a notice. I always tell my clients, “Don’t panic until I tell you to.”

Have you received a letter from the IRS? Tell us about your experience?

 

 

Taxpayer Bill of Rights Part 1

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In June 2014, the IRS introduced the “Taxpayer Bill of Rights”. Taxpayers have always had rights but the tax code is large and confusing. This is an attempt on the part of the IRS to summarize the rights of taxpayers that are scattered throughout the tax code.   There are 10 provisions contained in the new Bill of Rights. We will take the next two blog posts to review these provisions.

1. The Right to be informed.

“Taxpayers have the right to know what they need to do to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures in all tax forms, instructions, publications, notices, and correspondence. They have the right to be informed of IRS decisions about their tax accounts and to receive clear explanations of the outcomes.”

What does it mean?

You have the right to clearly understand what the IRS is talking about in regards to your taxes. If the IRS makes changes to your tax returns, whether by letter or audit, you get to understand why they made the changes and how they determined the changes. You also have the right to understand what they want you to do to be compliant with tax laws or to fix an error.

2. The Right to quality service.

“Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS, to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.”

What does it mean? 

This provision has been the most frustrating for taxpayers. In the past IRS employees have been known to be intimidating and less than helpful. Even with this Bill of Rights in place, there are still very long wait times when you call or even visit the IRS. Still, if you feel you have been dealt with inappropriately, you do have the right to complain to the next level up.

3. The Right to pay no more than the correct amount of tax.

“Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties, and to have the IRS apply all tax payments properly.”

What does it mean? 

This provision can be tricky. There are so many different kinds of penalties and so many laws, that it is often difficult for a taxpayer to know if they are paying the correct amount or not. This is where your tax preparer can play a vital role to insure that you are paying only what is necessary and to get certain penalties and interest waived.

4. The Right to challenge the IRS’s position and be heard.

“Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions, to expect that the IRS will consider their timely objections and documentation promptly and fairly, and to receive a response if the IRS does not agree with their position.”

What does it mean? 

Challenging the IRS’s decisions has always been a right of taxpayers that most people don’t understand. IRS employees are just people doing a job. You have the right to challenge their judgment and stand up for yourself.

5. The Right to appeal an IRS’s decision in an independent forum.

“Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties, and have the right to receive a written response regarding the Office of Appeals’ decision. Taxpayers generally have the right to take their cases to court.”

What does it mean? 

There are many levels of appeals you can take advantage of if you feel the IRS’s decision is wrong. You should never be afraid to appeal your case. As a matter of fact, we have found that the appeals officers are much easier to deal with and we have had a lot of success working with them.

Next week we will review the final 5 provisions. Remember, You Have Rights as a taxpayer!

Don’t want to learn all the tax laws yourself? Let us do the work for you! Contact us at soulence.com

So Exactly What Counts as a Home Office?

This week we would like to take a look at a deduction that is confusing but valuable to tax payers.  We will be talking about what can be considered a home office.

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A home office is a room or area used exclusively for business.   So it can be a room that you keep a computer in and work on your bookkeeping; it can be a room that you store inventory or equipment and tools; or it can be a room where you actually create or manufacture a product.  It can include a shed or shop in your backyard, an unfinished basement that you keep products in, or a part of the garage that you keep tools and work vehicle in. Ordinarily the room or space must only be used for business. Now, like everything in the tax code, there is an exception.  If you have an office or shop somewhere other than your home, your home office must be a room used exclusively for business purposes.  But, if your home is your only place of business you can use a portion of a room.  You could even use your closet, if that is where you work!  To really help you understand what options you have, here are three examples of a legitimate home office space:

1. Natalie recently went through a divorce.  She has three small children, two of which are not in school yet.  She wanted to stay home with her children, so she started a daycare business.  She tends her own children along with four others from 6:30 am to 7:00 pm every weekday.  In her case a portion of her entire home is deductible.  We will explain more about how to take a portion of an entire house as a home office shortly.
2. Alan was laid off from his job of 15 years, so he decided to start a business selling cleaning products.  He operates his business primarily over the internet.  He owns a small home and has a wife and 2 children.  There isn’t an extra room to work out of so he uses a corner of the living room.  Because this is his only place of business the area in his living room is considered a home office.
3. Bobbie has a business of sewing costumes that she sells on EBay.  Her family is grown and gone out of the house so she turned her basement into a great big sewing room. She had a large family room that she turned into a product manufacturing room by tiling the floor, so it would be easier to keep the fabric scraps and thread under control, and putting her cutting table and sewing machines in it. She turned a spare bedroom into a storage room full of shelves to keep bolts of fabric and sewing supplies on.  She also has a corner that she uses to package the costumes for shipping.  Even though she sells them over the internet, she manufactures the costumes in the basement. This family room and bedroom in her home is definitely considered a home office.

We hope this helps you know whether or not your home office can be deducted this tax year. If you have any questions, check out www.avoidbeingaudited.com to learn more about this valuable deduction!

What will the IRS Audit You For in 2012?

Every year the IRS publishes the “Audit Technique Guides.”  This guide is used to train audit examiners in certain areas.  The guide contains, among other things, areas that the IRS will be focusing on in the coming year when they choose to audit individuals and businesses.  This guide is helpful for tax preparers and tax payers because it gives us a hint to the areas the IRS will be focusing on.

In this post, we are going to give you a list of some of the things featured in this year’s “Audit Technique Guides” that are important for you to know.  The IRS will be looking for:

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1. A lack of internal controls. This is how you are running your business.  Do you know what is going on with your business by being in charge of where the money goes or do you have employees who are in charge of paying bills, etc?  Weak internal controls makes is easier to lose track of income, and this is a great concern to the IRS.
2. The type of records maintained.  Do you have a valid way of keeping track of your income and expenses that would be acceptable in an audit?
3. The use of bartering.  Bartering has always been a red flag for an audit.  The value of products and services that are traded must have detailed records of their value and must be included in income.
4. Shifting or assigning income to a related entity.  Having multiple entities that are owned by other entities is a great tax and liability strategy.  It is an acceptable way of doing business as long as it is not used to try to evade taxes by deliberately shifting your income around.
5. The use of the Internet.  With more and more business being done over the internet, the IRS has become increasing worried about tracking taxable income.  So, they are looking more closely at companies that do the bulk of their sales and services over the internet.
6. The use of a fiscal year to defer income.  A fiscal year is a tax year other than January to December.  Many larger companies use a fiscal year so they can do their taxes at a time of year that is more convenient, such as when their business is slower.  As long as it is not used to alter tax liability, it is perfectly acceptable.
7. Travel.  Many people mix business with pleasure.  It is very important if you are planning a trip that you would like to combine with business,  to plan ahead and document everything you do for business.
8. Independent contractor vs. employee.  This is an area that the IRS has been increasingly more aggressive in.  There is certain criterion that qualifies a person as an employee rather than contract labor.  It is very important to follow the rules if you want to treat someone as contract labor.
9. Meals and entertainment.  This is an area that is common to almost every business and is very easy to misuse and under-use.  We have seen everything from people deducting every meal they eat to people afraid to deduct any valid meals and entertainment.  Business meals must be an ordinary practice for your type of business and business must be conducted during the meal. You can’t deduct a meal just because you didn’t have time to pack a lunch.    It is very important to follow the IRS guidelines and keep good records about why you feel it is a business expense.

These are a few of the major things the IRS is looking at.  For more detail on these areas check out our resources at www.avoidbeingaudited.com

Deducting Meals and Entertainment Without Getting Audited

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Some of the biggest business decisions and connections that business owners make are done over lunches or on the golf course. My business partner and I find that going to lunch is a great way to get out of the hustle and bustle of the office so we can clear our heads and discuss different things like management of office staff to specific tax issues there may be with different clients.  We often take potential clients out to eat to get to know them better and to see if they want to use us as their accountants.  This is great for us because one of the best ways we grow our business is through networking, and a good way to get into networks is to take people out on the golf course or out for a nice meal.

Using meals and entertainment to build business is very common to most business owners.  The important thing to remember is to keep accurate records, so as you are using different meals and entertainment to grow, expand, and maintain your business, you can also get tax deductions. The IRS has specific rules and specific things they want you to record in order to correctly document meals and entertainment so that they can be tax deductible. That is why keeping accurate records is so important.  The last thing you want is to be audited for a golf game.

To find out more about how to make your business meals and entertainment deductible, how to properly record these deductions and to learn more about other tax deductions you may qualify for, visit http://avoidbeingaudited.com.

Health Care Ruled Constitutional and Audits Increase

The end of the year is fast approaching.  We are sure you are busy preparing for holidays.  But here is some juicy tax gossip that we think you might want to think about in between all that holiday fun.

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We all know there has been a lot of political drama about the new Health Care Bill that will require everyone to obtain health insurance or be fined.  Well, the new health care law’s insurance coverage mandate was ruled constitutional by a district court. Meaning the court supports the section of the law that requires people to get health insurance by 2014 or pay the fine.  The issue will end up in Supreme Court as opponents of the legislation will continue to fight the law.  Also, several states have passed laws negating the mandate.

In other news, it seems the IRS is increasing the amount of correspondence audits or audits by letter.  But there is no need to panic if you receive a letter. Just make sure you contact us or your tax accountant, so you can help you figure out exactly what is going on with the letter.  Sometimes the IRS is just missing some information on your tax return.  But in reality, we have seen more and more people being audited this way.  Another great resource for you in avoiding or dealing with audits is an educational CD set called Tax Secrets Revealed.  This CD set will teach you everything you need to know to never worry about being audited again.  Go to avoidbeingaudited.com to learn more.

As always, if you have any questions about these issues , feel free to contact us.  Remember, tax season is coming up quickly, so make sure you are getting your finances in order.

Please have a Merry Christmas and

Very Happy and Safe Holidays!!

We’re Celebrating our Website Launch with Videos!

To celebrate the launch of our new website, we are going to spend the next two weeks posting video snippets from our newly released CD series Tax Secrets Revealed: A guide to saving thousands on taxes.  To learn more about these CDs you can go to http://avoidbeingaudited.com or click here.

This first video describes Amortization and how it can save you thousands of dollars on your taxes.  Don’t know what amortization is?  Watch this video!

Again, for more information about amortization and how you can save thousands of dollars on your taxes, go to avoidbeingaudited.com.

Five IRS Changes for 2010 Tax Year

We recently attended the National IRS Conference at the end of August.  The IRS is making a lot of changes, so here are five updates we learned about during the conference that are important for you to understand for this coming tax season.

1) Late Penalties for filing LLC returns and S Corp returns have increased.  During the 2009 tax year, late fees were $40 per month per owner.  The 2010 late fee penalty will rise to $195 per month per owner.  To give you an example, if your business has three owners including yourself and you file 3 months late, for 2009 you would have paid $240.  For 2010 you will pay $1170. This is a huge increase, so we highly recommend you get started early this next year and make sure you file your returns on time.

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2) New 1099 Forms. There will be a new 1099K form, which will be used to report payments you accept for goods or services rendered with a credit or debit card.  Merchant companies will be required to file a 1099K, which will show the IRS how much you collected through credit cards.

An additional change we will see with 1099s is that Brokers of Stock (like Les Schwab or Merrill Lynch) will now be required to report not only how much you sold a stock for but also how much you paid for the stock.  This will really help at tax time.  You may get a notice from your stockbroker asking you to provide information about the purchase of your stock.  If you do, please respond and cooperate with them or you may have problems at tax time this year.

3) IRA Changes. If you choose to convert your traditional IRA to a Roth IRA you will have the option to pay all the tax due with your 2010 return or split it between the 2010 and 2011 return.  Contact us if you would like to learn more about switching.

4) For the 2010 Tax Returns Only, there will be no limits on itemized deductions and exemptions because of high income.

5) The Adoption Credit has gone up.

None of these new changes are cause for alarm. The IRS makes changes every year.  Next week will have some more updates you should be aware of too, so check back with us next week.  But if you have any questions or concerns about how these things may affect your taxes please feel free to contact us.

Problems with that Homebuyer Tax Credit

Continuing with with our Homebuyer Credit topic, there is a little more news that you should be aware of.  You will remember that our first bit of news was that the filing deadline was extended to September 30th, 2010.  We have more news that is a bit more comical but serious still.  Apparently, the IRS is having trouble effectively regulating claim approvals for the homebuyer credit.  Multiple credits have been approved for the same residence.  For example, five homes were claimed by 256 filers.

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Other questionable claims include claims by prisoners that slipped through the cracks and were approved.  There were also many questionable amended returns in need of additional investigation but were never examined.  And some inspectors discovered that nearly 100 IRS employees filed questionable claims for the homebuyer credit.  Those employees are now under internal investigation.

Agency officials promise they’ll “plug the leaks” and do better at monitoring all claims for the credit.  But what does this mean for those who claimed the credit?  It means that the IRS is going to be looking more closely at the returns that claimed the homebuyer credit.  We don’t anticipate any trouble with our clients, but if you receive any kind of letter from the IRS about the credit, please don’t panic, but contact us so we can help you figure out exactly what the IRS wants from you.

There is still time to file for the tax credit, so if you are still wondering if you qualified for the tax credit, here are the guidelines for the tax credit as found on irs.gov.

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

• Applies only to homes used as a taxpayer’s principal residence.
• Reduces a taxpayer’s tax bill or increases his or her refund, dollar for dollar.
• Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.