IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 3

Posted on January 18, 2012 by Kursti Nakagawa

Are you self employed? Do you file a Schedule C? If so, you have a higher likelihood of getting audited. Individuals and small business often make small mistakes that flags their tax return for an audit. Taxes are no place to falsify information but small mistakes and common practices such as rounding numbers can give an IRS agent enough reason to audit your entire return. Of course, doing your taxes the right way from the start is always the best advice. In part three of our three part series on Tax Tips to Avoiding a Costly IRS Audit, here is a list of additional “Red Flags” that can trigger an audit of a tax return. In this segment we focus upon those that are self employed or who own a small business.

Small Business/Self Employed Tax Return Red Flags

Schedule C – Overly Abused: Because there is so much abuse in the Schedule C it may be prudent for taxpayers to incorporate or form an LLC. The mere reporting of businesses operations on Schedule C rather than a separate corporate tax return increases a taxpayer’s chances of being audited 50 times.

Schedule C – Taxpayers who are employed by others (i.e. who receive a W-2 at year end) and who also claim a loss from a Schedule C business operation are likely to find their tax returns audited by the IRS.

Schedule C – Cash businesses: Small business owners, who have cash businesses: taxi drivers, car washes, bars, nail salons, hairdressers, small restaurants are easy targets for IRS auditors.

Schedule C – Large Meal and Entertainment Expenses: Big deductions for meals, travel and entertainment are always a audit red flag. Make sure your business conforms to strict substantiation rules for the expenses: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling. Essentially if your meals, entertainment and travel expenses are more than 10 percent of your business’s gross income there needs to be a good reason.

Schedule C – Reporting business losses for more than 2 years consecutively: The IRS has a rule that you cannot deduct losses from a hobby on your tax return. You must be in business with the intent of making a profit. If the IRS deems that your “business” is actually a hobby, they will disallow the deductions.

Schedule C – Loss-generating activity sounds like a hobby:…dog breeding, horse racing, antique seller, classic car reseller. Tax laws don’t allow you to deduct hobby losses on Schedule C; however, you do have to report any income earned from your hobbies.

Schedule C – Claiming 100% business use for an automobile: Make sure you have very detailed mileage logs and precise calendar entries for the purpose of every road trip. if you use the IRS’ standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs depreciation.

These and other tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. If you need to file your 2011 or prior year tax returns, or if you have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 2

Posted on January 15, 2012 by Kursti Nakagawa

The Federal Budget Deficit is a large concern and the IRS has become more vigilant with tax enforcement. The IRS is already paying more attention to returns that might have been passed over for an audit in years past. With more audits occurring, more and more people are concerned about making small mistakes that might flag their tax return for an audit. Taxes are no place to falsify information but small mistakes and common practices such as rounding numbers can give an IRS agent enough reason to audit your entire return. Doing your taxes the right way from the start is always the best advice. In part two of our three part series on Tax Tips to Avoiding a Costly IRS Audit, here is a list of additional “Red Flags” that can trigger an audit of a tax return.

What might bring your return to the attention of the Internal Revenue Service?

Income – Suspiciously Low: The IRS knows how much somebody in your field earns on average. If you are making less than others in the same profession that raises an audit/red flag. Also, if you have relatively low income but live in a high income area the IRS may review your return.

Income – Unusually High: Though fewer than one-percent of taxpayers are audited each year, those making over $100,000 are 500% more likely to be audited.

Income – Failure to Report: If you file a return but fail to report ALL the income you received, you’ve run up an audit/red flag. All of your wages, interest, dividends, capital gains and miscellaneous income must be reported to the IRS. The IRS receives copies of ALL W-2 and 1099s and computers match these records

Income- Large Swings:. The IRS believes that your income should be consistent from one year to the next. If there are large changes in income, that cannot be backed up by your 1099s or W-2s, this is a audit/red flag.

Itemized Deductions – Too High: Any deductions outside of the “average” will release a audit/red flag. So, watch out if you have a lot of itemization such as (Medical or Dental Expenses)(Taxes:, Real Estate or Personal Property) (Interest: Home Mortgage, Points or PMI-Insurance Premiums) (Gifts: Cash, Check or Fair Market Value of Donated Goods) (Sizable Casualty or Theft Losses) (Unreimbursed Employee Expenses)

Itemized Deductions – Charitable Non-Cash – Over $500: If you don’t get an appraisal for donations of valuable personal property or if you fail to file Form 8283 for donations over $500 an audit/red flag appears. Taxpayers are entitled to claim a deduction for the fair market value of the property donated NOT the original cost. For the current Fair Market Value, there are two free tools at your disposal: ItsDeductible, from Intuit, and DeductionPro, from H&R Block

Itemized Deductions – Overly Generous Charitable Contributions: Charity is wonderful, but too much charity could be audit/red flag. If the average person in your income bracket donates about $500 to charity and you claim you donated $5,000 you better have detailed and accurate receipts.

Itemized Deductions – Employee Job Expenses: .The IRS starts with the assumption that if an employer doesn’t reimburse a specific expenditure made by the employee that expenditure is probably not a true job expense. Consequently, the mere existence of a Job Expense will cause an IRS red flag. So, if you are a W-2 employee you must meet the following guidelines: total of all expenses exceeds two percent of your adjusted gross income; the expenses are deemed “ordinary and necessary”; and the expenses were not reimbursed.

These tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. We have more we want to share with you about IRS Audits so look for our third and final installment of Audit Red Flags in the coming days.

If you need to file your 2011 or earlier tax returns, or have an IRS or State Tax problem, our experienced tax professionals can help. For more information about our tax services, visit us today at www.professionaltaxresolution.com. You may also Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

IRS Back Tax Tips – Help with Late Tax Bills – Pay Your Tax Debt

Posted on January 13, 2012 by Kursti Nakagawa

Did you receive an IRS notice that you owe back taxes? While owing money can be a big worry, ignoring the problem will only make things worse. There are options to pay your tax debt, even if you can’t do it all at once.

If you need help with tax resolution because you owe back taxes, you can take advantage of different methods of payment or request that the payments be broken up into installments. Here are some tips:

A late tax bill from the IRS is expected to be paid promptly, including the taxes owed, penalties, and interest. You may want to get a loan so you can pay it in full to avoid making installment payments if you do not already have the money ready. A bank loan could have a lower interest rate than what you would have to pay in additional interest and penalties.

Tax bills can be paid via credit card. Your credit card could also have a lower interest rate than what you would have to pay in additional interest and penalties.

Tax bills may also be paid through checks, money orders, cash, cashier’s checks, or electronic fund transfers.

If you are unable to pay in full, you may be eligible to request an installment agreement between you and the IRS. The agreement would break up the amount due into monthly installments. Make sure that your required returns are all filed and your estimated tax payments are current.

You can request installment payments whether your tax bill is over or under $25,000. You should be informed within roughly 30 days if the IRS approves or denies your request, or if they need more information.

If you receive a late tax bill, our experienced professionals can help you resolve your back tax issues. For more information about our tax debt resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at (877) 889-6527 or by email at info@protaxres.com to receive a free, no obligation consultation.

IRS Audit Red Flags – What the IRS is looking for – Tax Tips Part 1

Posted on January 10, 2012 by Kursti Nakagawa

Most people have a great fear of getting audited. Audits can be long, expensive and can require a lot of supporting documentation and professional guidance. There are actually three types of Audits that an individual or business can experience, a field, office, or correspondence audit. Each comes with a different set of requirements to find a tax resolution.

Of course the fear of having a tax return audited is justified if you are misleading the government, but for most taxpayers it is simply a worry they hold in the back of their minds each year. Are you curious about what your chances to get “Flagged” for an audit review might be? With this in mind, we begin a three part blog series on common “Red Flags” that can trigger your tax return for an audit.

Tax Return Red (Audit) Flags – Part 1

Most tax returns are processed by IRS computers that are programmed to watch for anything unusual. Here are some red flags that may cause the IRS to take a closer look at your tax return:

Abusive tax shelters: Offshore Transactions involve activities in “tax havens” that offer financial secrecy. The IRS is intensely interested in people with offshore accounts, Failure to report a foreign bank account has strict penalties and the IRS has made this issue a top priority.

Foreign trusts (Disguise income because they are flow-through entities)
Foreign (Offshore) Partnerships, LLCs and LLPs
Offshore-Private Annuities or Offshore-Private Banks
Personal Investment Companies – Captive Insurance Companies – Related Party loans

Amending Returns: Did you forget to include a deductible expense which would give you a small refund? If that amount is truly minimal it could be better to just let it pass. Why? Amended returns get more attention from the IRS than initial ones – you may be inviting trouble.

Compiling your tax return incorrectly: Your return must be in the Proper Order. First, is the return itself. Then, attach the schedules in alphabetical order, forms in numerical order and plain paper statements. Do not forget to enclose W-2 and your 1099s. (or you could just e-file)

Disagreements between State and Federal returns: Oh how we love technology – here is another example of how computers are making the IRS an efficient agency. Be sure that ALL of your state and federal tax information match – because computers will catch any errors.

DIF Score: The IRS assigns a numeric value to tax returns known as a DIF score. The IRS used a computer-scoring system known as Discriminate Information Function (DIF). The DIF is based on deductions, credits and exemptions for the average taxpayer in each of the income brackets If deductions on your return are not comparable to your income bracket an audit/red flag is released. Here are some CCH Itemized Deduction Averages for 2008

IncomeRange	Medical Expenses	Taxes Paid	Home Mtg Interest	Charitable Contribution
$15 – $30,000	$7,000	$3,100	$9,200	$2,000
$30 – $50,000	$6,100	$3,800	$9,000	$2,100
$50-$100,000	$7,000	$6,000	$10,600	$2,600
$100-$200,000	$9,200	$10,800	$13,700	$3,700

Home office: This is because historically people who claim a home office don’t meet all the requirements for properly taking the deductions: 1) the space must be used EXCLUSIVELY and 2) on a REGULAR basis used as your principal place of business.

Mistakes, Math errors and Messy returns: This is one reason to file electronically. Computer software will calculate your return and create neat and clean copies to e-file. Mistakes can include writing your social security number for yourself, your spouse of your claimed dependents.

Pay or Contest: If you receive a small balance due from the IRS it may be better to pay it and forget it in. If you disagree it gives the IRS the opportunity to look more closely at your return so you could be liable for even a greater amount.

Round numbers: It’s unlikely that your investment returns were exactly $1,000 or that your mortgage interest deduction was $8,000. Too many round numbers on a return marks a return for an audit/red flag.

Underpayment: The IRS may audit you if you don’t pay enough taxes and don’t offer an explanation as to why you aren’t paying. If you can’t pay the taxes include Form 9465 “Installment Agreement Request”

Never boast you “outwitted” the Internal Revenue Service: Informers can earn a reward of 15%-20% of the additional tax collected, including fines, penalties and interest. So keep your “tax strategies” to yourself.

These tax tips are just examples of the type of the proactive, year-round tax guidance we provide to our clients. We have more we want to share with you about IRS Audits so look for our next installment of Audit Red Flags in the coming days.

Tax Tips for 2011 – 6 Last Minute Tax Saving Tips

Posted on December 27, 2011 by Kursti Nakagawa

This time of year, clients call for last minute tax guidance that will help them maximize their returns. While we advise our clients on a year round basis – not just at tax time – here are a few last minute tips you might find helpful.

Here are a few things you can do in the next couple of days that may save you some 2011 tax dollars:

1) Make a charitable contribution.
If the last minute contribution is for more than $250, it must be documented by a contemporaneous acknowledgement from the donor organization.

2) Make a contribution to an IRA, 401(k) or other retirement account.
Most retirement plans actually give you up until April 15, 2012 to make a contribution as long as you designate that the contribution should apply to the 2011 Tax Year.

3) Fund a Health Savings Account or a Medical Savings Account.
The money put into these accounts is tax deductible up to certain limits and is not taxed when it is taken out as long as it is used for medical expenses. Any funds put into either of these account types before December 31 can be counted as a tax deduction for 2011 even though will not used for medical expenses until 2012. At the end of each year, money in these savings accounts that has not been used to cover medical expenses during the current year can be rolled over for use during the next calendar year.

4) Pay your 2011 State Income Tax.
Although the deadline for paying your 2011 State Income Taxes is April 15, 2012, the State Income Tax Deduction can be claimed a whole year earlier if the payment is made before December 31.

5) Consider selling investments that are down if you have sold investments that have shown gains in 2011.
Although the entire amount of capital gains is taxed during the year they are realized, the maximum yearly deduction for capital losses is $3000. However, any capital gains realized during a calendar year can be offset by capital losses posted during the same year. This tax law essentially allows you to increase the allowable capital loss deduction by the entire amount of any gains realized during the same year.

6) If you own a small business, consider making equipment purchases.
A special tax code makes it an advantage to purchase business tools and equipment before the end of 2011. Although the cost of a capital expenditure usually must be depreciated over the predicted life of the equipment, a special tax code allows you to deduct the full amount of a purchase, up to certain limits, in the calendar year it is made. (https://boxmining.com/) This amount is $500,000 for 2011 but will drop to $139,000 in 2012 and then to $25,000 per year.

If you need tax advice, contact us at (877) 889-6527 or by email at info@protaxres.com for a free, no obligation consultation with a CPA today. If you already owe a tax debt or are simply trying to avoid incurring tax debt in the future, our experienced professionals can help. Click the links for more information about our tax planning and preparation and tax debt resolution services.