by Donya Curry | Feb 18, 2019 | Business, Individuals, Non Profits
Every year millions of tax returns are audited by the IRS. The average taxpayer main concern behind paying taxes is somehow causing the IRS to audit their tax returns. It’s true that certain things can automatically trigger an audit. An audit doesn’t actually mean your return is wrong. There are items on a return that present higher opportunities for committing fraud or mistakes.
The burden of proof for taking credits and deductions falls on your shoulders. You might have to prove that you are taking a position on your return in line with current tax code.
The audits are done primarily by mail today. There is a small chance of having an auditor show up in person. No matter how your audit is done you need to respond as soon as possible to ensure they don’t give you a default position. Letter normally state you have a certain amount of days from receiving the letter to respond if you disagree. If you don’t respond they automatically assume you agree with their findings in the letter. If you respond there are one of three things that happens.
The IRS auditors decides the information provided is correct and your return stays the same.
The IRS auditor proposes a change to your tax return, and you can agree to it and/or pay the appropriate taxes, interest or a penalty.
The IRS proposes a change you don’t agree. You have a chance to appeal and enter into an agreement with the IRS.
In the cases of serious tax fraud even though it’s an extremely rare outcome. The IRS can pursue forfeiture of property, jail time, and restitution.
Audit Flags
1. Reporting the wrong taxable income
The IRS actually receives your W-2,1099, and K-1’s before the taxpayers. This goes for both full-time employees and self-employed contractors.
You should check to see if your W-2 or 1099 you receive from any company matches your own records. If you think it is incorrect, immediately inform the company, and request that they file a corrected W-2 or 1099 with the IRS. If a company fails to update their information you would have to file a complaint with the IRS to go through this process of updating those records.
2. Charity donations
If you’re giving away large amounts of money to a charity when your income is low. Be prepared for some scrutiny from your tax pro and the IRS. If you are audited and can’t substantiate your donations. You and the tax pro will have fines and penalties to pay. Any large donation should be appraised, and you should file the Form 8283 for any donation over $500. Make sure you keep all of your charity receipts and follow the IRS’s tips for charitable donations.
3. Business Vehicles
Cars/ SUVs are still the main transportation for alot of business owners. Having a vehicles under your business doesn’t exclude you keeping track of personal miles. Running personal errands to pick up friends and go shopping should not be included. You should always keep a record of your mileage using qualified record keeping guidelines.
4. Home office
This deduction is on a lot of peoples deduction list. Who wouldn’t want to be able to take electricity, internet, and other expenses you use at home and get a benefit. There is a specific definition of what qualifies as a home office, so claiming it could easily trigger an audit. Ensure the room is where you do the majority of your work, and that is not used for any other purpose, especially personal use. This type of deduction can trigger an in-person audit where the IRS want to actually see the room you are claiming for a business deduction.
5. Tax Errors
Simple tax mistakes like small mathematical mistakes are the top reason for alot of audits. The IRS will normally fix these and send you a correction. This can also result in you actually receiving a larger refund as well.
6. Round numbers
On indication of making up income and expenses is have a series of even or round numbers. This is a common practice for people who don’t keep records and try to prepare a return from memory. Audits don’t always happen immediately. They normally come a few years later. You should have documentation to support your deductions and credits. When preparing you return use the actual numbers that match your receipts and other records.
7. Business Losses
The main requirement for being considered to have a business by the IRS is actually doing something to earn a profit. If your business just constantly loses money year after year it will cause some red flags. If you report a loss three out of the last five years. The IRS might consider your business a hobby or fraudulent depending on your specific circumstances. If you have a business ensure your run it like one with receipts and backup.
by Donya Curry | Nov 11, 2018 | Business, Individuals
Foreign Reporting
Requirements
By law, U.S. citizens and residents must report their
worldwide income. This includes income from foreign trusts and foreign bank and
securities accounts.
You must file required tax forms. You may need to file
Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may
also need to file Form 8938, Statement
of Specified Foreign Financial Assets. Certain domestic corporations,
partnerships, and trusts that are considered formed or availed of for the
purpose of holding, directly or indirectly, specified foreign financial assets
(specified domestic entities) must file Form 8938 if the total value of those
assets exceeds $50,000 on the last day of the tax year or $75,000 at any time
during the tax year.
There is a foreign earned income exclusion. If you qualify,
you won’t pay tax on up to $100,800 of your wages and other foreign earned
income.
Unmarried taxpayers. If you are not married, you satisfy the
reporting threshold only if the total value of your specified foreign financial
assets is more than $50,000 on the last day of the tax year or more than
$75,000 at any time during the tax year.
Married taxpayers filing a joint income tax return. If you
are married and you and your spouse file a joint income tax return, you satisfy
the reporting threshold only if the total value of your specified foreign
financial assets is more than $100,000 on the last day of the tax year or more
than $150,000 at any time during the tax year.
Specified foreign financial assets include the following
assets.
1. Financial accounts maintained by a foreign financial
institution.
2. The following
foreign financial assets if they are held for investment and not held in an
account maintained by a financial institution:
a. Stock or securities issued by
someone that is not a U.S. person (including stock or securities issued by a
person organized under the laws of a U.S. possession),
b. Any interest in a foreign
entity, and c. Any financial instrument or contract that has an issuer or
counterparty that is not a U.S. person (including a financial contract issued
by, or with a counterparty that is, a person organized under the laws of a U.S.
possession).
Exceptions: If you do not have to file an income tax return
for the tax year, you do not have to file Form 8938, even if the value of your
specified foreign financial assets is more than the appropriate reporting
threshold.
Duplicative reporting. You do not have to report any asset
on Form 8938 if you report it on one or more of the following forms that you
timely file with the IRS for the same tax year.
Form 3520, Annual Return To Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts.
Form 5471, Information Return of U.S. Persons With Respect
To Certain Foreign Corporations.
Form 8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing Fund.
Form 8865, Return of U.S. Persons With Respect to Certain
Foreign Partnerships. Instead, you must identify on Form 8938 the form(s) on
which you report the specified foreign financial asset and how many of these
forms you file.
In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts.
Visit IRS.gov for more information. The FBAR is not filed with a federal tax
return. When the IRS grants a filing extension for a taxpayer’s income tax
return, it does not extend the time to file an FBAR. It should be filed at https://bsaefiling.fincen.treas.gov/main.html.
- the US person had a financial interest in or signature authority over at least one financial account located outside of the United States; and
- the aggregate value of all foreign financial accounts exceeded $10,000 at anytime during the calendar year reported.
The new annual due date for filing Reports of Foreign Bank
and Financial Accounts (FBAR) for foreign financial accounts is April 15. Schedule
an appointment today so IATC Inc can help you.
by Donya Curry | Jan 15, 2018 | Individuals
One out of every four US citizens are currently paying back their student loans. At the end of the year you might receive a Form 1098-E, Student Loan Interest Statement. Generally, an institution lender that received interest payments of $600 or more on one or more qualified student loans must send Form 1098-E to all borrowers by January 31. Don’t forget to take this easy deduction to minimize your tax burden.
The amount of your student loan interest deduction is gradually
reduced if your income is between $65,000 and $80,000 ($135,000 and $165,000 if
you are married and file a joint return). You can’t claim a student loan
interest deduction if your income is $80,000 or more ($165,000 or more if you
file a joint return). The maximum deduction you can get regardless of how much
you pay is $2,500 as of 2018.
by Donya Curry | Aug 5, 2016 | Business, Individuals, Non Profits
If you watch the news you will probably feel like there are major unexpected disasters happening every week. Unfortunately, you would still be underestimating the number of serious disasters in this country. FEMA actually tracks this data, and so far in 2016 there have been at least 69 declared disasters this year.
If you are not going to consult with a professional please review the IRS Pub 547 as it covers disasters, casualties, and thefts in-depth. A federally declared disaster is a disaster that occurred in an area declared by the President to be eligible for federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. It includes a major disaster or emergency declaration under the Act. It is true that you may deduct casualty and theft losses relating to your home, household items, and vehicles on your federal income tax return. There are always important distinctions and rules to follow. One issue that clients struggle with is not being able to deduct casualty and theft losses covered by insurance. You have to actually own the property to deduct the loss. You can be the person paying for the property, but if you are not the property owner the IRS will disallow all deductions.
What’s the difference between these losses? A casualty loss comes from the damage, destruction, or loss of your property from any sudden, unexpected, or unusual event such as a flood, hurricane, tornado, fire, earthquake, or volcanic eruption. A casualty does not include normal wear and tear or progressive deterioration. This definition is a determining factor for clients on if you can qualify for casualty losses.
A theft is the taking and removal of money or property with the intent to deprive the owner of it. The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent. You might be thinking now you can deduct some stolen items like a cellphone, laptop, or jewelry. I wouldn’t get my hopes up high just yet. The amount of your theft loss is normally your adjusted basis of the property, because the fair market value of your property after the theft is considered to be zero.
Time to Deduct
Casualty losses are deductible in the year the casualty occurred. Casualty losses from a federally declared disaster that occurred in an area warranting public or individual assistance have the option to treat the casualty loss as having occurred in the previous year immediately preceding the tax year in which the disaster happened, or you can deduct the loss on your return for the preceding tax year.
Theft losses are normally deductible in the year you discover your property was stolen unless you have a chance of recovery through a claim for reimbursement. No deduction is available until the taxable year in which you can determine with reasonable certainty whether or not you will receive a reimbursement.
Casualty Property Type
Personal-use property or property that is not completely destroyed. Casualty losses are the smaller of:
- The adjusted basis of your property, or
- The decrease in fair market value of your property as a result of the casualty
Business or income-producing property that are completely destroyed losses is the adjusted basis.
Insurance or Other Reimbursements
You must reduce the loss first, whether it is a casualty or a theft loss by the salvage value and by any insurance or other reimbursements you receive or expect to receive. The adjusted basis of your property is the cost including any improvements or depreciation.
How to Claim Your Loss
Individuals have to claim their casualty and theft losses as an itemized deduction on Schedule A. You should have subtracted any salvage value, and any insurance or other reimbursement of Personal use property already. You must now subtract $100 from each casualty or theft event that occurred during the year and add them all up. 10% of your adjusted gross income is subtracted from the total to calculate your allowable casualty and theft losses for the year. Casualty and theft losses should be reported on Form 4684.
If your loss deduction is more than your income, you may have a net operating loss (NOL). The NOL is for individuals as well as business to have an NOL from a casualty the treatment is identical. Any unused portion of a casualty loss deduction can be carried back for three years, and then carried forward for 20 years until it’s used up. In a tax year you don’t have any income you can take advantage of the deduction in the future.
by Donya Curry | Jun 17, 2016 | Business, Individuals, Non Profits
It is summer already and half of the year has already passed by. Life changes like getting married or a new job can be exciting events. This is the perfect time to see your accountant for a quick tax checkup. I normally recommend clients send in their most recent paystub. I use the stubs to check if the amount of taxes being withheld is accurate. I use this time to remind clients of the recommended strategies for tax minimization given to them previously.
The summer is provides a little more free time than during the busy season. If the strategies suggested are no longer viable we can formulate a plan tailored to your liking. A checkup is a great way to avoid any unexpected surprises at the tax desk. It still gives you time to prepare for changes you might have not been aware of. If you’re a do it yourself small business problems with your books are easier to find with less transactions. The details of events are easier to be remembered now rather than a year later.
I know it can be stressful when the tax bill is larger than originally planned. Having that knowledge know can empower you to make necessary changes for your business. You can enjoy your vacation knowing your accounting is in order. If you need bookkeeping services or an individual tax review you should Contact Us today at International Accountants and Tax Consultants.
by Donya Curry | May 5, 2016 | Individuals
Summer is a great time for family vacations and amusement parks. If you are one of the lucky 20 million young adults’ ages 16-24 years old working is also on the schedule. The Bureau of Labor and Statistics estimates annually 20.3 million young adults become employed between the months of April and July. School may be out but you will still be learning about life as a working adult. Earning your own money brings its own kind of personal freedom. A summer job is the perfect introduction to money management. One topic normally skipped over is the actual taxes taken from you.
When you receive your first paycheck stub you should notice your gross pay and a few deductions before you get your actual net pay. Gross Pay is the total amount of income earned before any deductions are taken out. The first thought going through your mind might be how do I keep all of my hard earned money? Your first lesson as a working adult is you don’t get to keep all of your hard earned money. All businesses are tax collectors for the government. The first day you became an employee you were signed up for the government’s special pay as you go tax package.
There are normally four separate taxes being deducted from your gross earnings. Federal income tax withholding is the first tax to be deducted from your paycheck. This tax is a percentage on the gross amount of money you are earning. The tax percentage for 2015 was 10% on earnings from $1-$9,225. To make it easier for you the IRS actually lists a tax table every year that tells you the amount of income tax you should have paid based on your gross income. This tax is how the government pays for public services.
The second and third deduction you should see is the FICA deduction. FICA stands for the federal insurance contribution act. This tax is actually comprised of two individual taxes that are required by law to be deducted from your earnings. Social Security tax of 6.2% is the second followed by the Medicare tax of 1.45%. The taxes collected under FICA are used to pay for retirement, survivors benefits, and qualified disabled individuals. Medicare is used to pay for medical insurance.
The fourth tax is the state income tax deduction. Depending on your home state you might even have additional locality taxes. States like Alaska, Texas, Florida, Tennessee, Wyoming, Washington, Nevada, South Dakota, and New Hampshire do not have income taxes. When file a tax returns the federal income tax and state income tax over payments are what you would have refunded back. The next time you look at your paycheck the deductions should all make sense.
Sources:
http://www.bls.gov/news.release/youth.nr0.htm
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