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.

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 Itemized Deductions and Volunteer Work at Schools

Posted on October 7, 2011 by Kursti Nakagawa

Interesting questions come up everyday at our tax firm. On the mind of many parents particularly those with part time or full time self-employment, relates to how their volunteer work for their child’s school might affect them from a tax standpoint. Now that is October, children have settled into their classrooms and many schools have begun requesting parent volunteers. This practice is becoming more and more common because schools face such large spending constraints. School volunteers might be needed for sports programs, tutoring, maintenance, bulletins, books fairs, drama productions, bands, academic tournaments or even bake sales.

It doesn’t always occur to the parent, but there may be some tax benefits that follow as a result. The question we are asked about most often is the value of volunteered time. The IRS does not allow any charitable deduction for this and the principle is simple; charitable deductions are a donation of taxable income. Because the donated time didn’t create income, no deduction from income occurred.

That said, almost every voluntary effort incurs some cost for the individual volunteer. These out-of-pocket expenses related to volunteering for tax-exempt organizations are indeed tax deductions. A qualified CPA will know that these deductions are reported on Schedule A and are thus only available to taxpayers who itemize deductions.

Clearly in order to deduct costs incurred during volunteer work, the charitable organization must not reimburse the expenditures. In addition, the expenses must have a direct connection to volunteered services and have arisen due strictly to the volunteering. Taxpayers cannot deduct any expenses for personal or general living costs, such as meals eaten while conducting a volunteer service. However, something like buying pizza for the speech team during travel for a school event is in fact tax-deductible.

Likewise, supplies for school projects are tax-deductible along with items given as prizes or awards. Keeping copies of receipts to support any expenses related to volunteer activities is something we always recommend. In addition, we also document the nature of the school event for the deduction on the tax return itself.

One deduction opportunity many parents do not realize is that driving for charitable activities may also incur a tax deduction. It is important to keep a record of the date, travel purpose, and numbers of miles as these are requirements of the IRS. Each year there are standard IRS mileage rates established for using a personal vehicle to perform a charitable function which is then calculated on the return. A word of caution however, mileage driven to and from ballgames or performances doesn’t count as charitable; actual work as a volunteer is required.

Also not every school related purchase will qualify as a deduction. Merchandise sold at school activities are not tax deductable so buying candy, popcorn, apparel with the school logo, and similar items will not qualify as a donation.

These tips are examples of the types of the proactive, year-round tax guidance we provide to our clients. At Professional Tax Resolution we often amend prior year returns and file back taxes for new clients, many of whom qualify for more deductions than they realize.

If you have an IRS or State Tax problem, our experienced tax professionals can help you resolve the tax issue that caused it. For more information about our tax debt resolution services, visit us today at www.professionaltaxresolution.com. Contact us by phone at (949)-596-4143 or by email at info@protaxres.com to receive a free, no obligation consultation.

IRS to Fingerprint Tax Preparers and Require PTIN to be Renewed Yearly.

Posted on September 28, 2011 by Kursti Nakagawa

We have many clients who come to us with huge tax debts that have resulted from errors or miscalculations on prior year returns. Sometimes these tax filing errors flag an audit or create what might start off as a small tax liability but after years of penalties and interest becomes a much bigger problem. Of course, we wish no one had to experience this in the first place but unfortunately until now there has been some leniency in the educational and documentation requirements for some tax preparers.

Luckily Uncle Sam also wants to be sure that whomever you trust to prepare your taxes also understands the increasingly complex tax code. While CPA’s like those at our firm have extensive licensure oversight, continuing education and years of experience, not all general tax preparers do. To overcome this, the IRS has just announced they are taking steps to begin fingerprinting all tax preparers and are stepping up educational requirements.

In addition to acting as proper Identification, the fingerprints will also be run through the FBI database. This will help identify any unscrupulous characters. Perhaps even more importantly is the new obligation for tax preparers to renew their Preparer Tax Identification Numbers (PTIN) every year in accordance with Notice 2011-80 and undergo a 15-hour continuing education requirement. All of this is set to take effect next year.

Up until now, the IRS had been issuing provisional PTIN for preparers who are not attorneys, CPA’s, accountants or enrolled agents. That former flexibility allowed others to prepare tax returns before taking competency tests and undergoing suitability requirements. This was partially because the testing and continuing education programs had not been implemented yet, but as of next year, this will finally be the case.

Before you hire anyone, we recommend checking their licensure and checking with the Better Business Bureau. Read reviews and understand the details of any services for which you are hiring.

At Professional Tax Resolution Inc. our CPA’s and EA’s are proud of our reputation. We welcome you to look up our license and review our A rating with the BBB. We have links to a variety of unbiased review sites including Yelp, The BBB, and Merchant Circle readily available on our home page.

Call us today for a free, no obligation consultation. No matter how worried you are, no tax issue is too complex! (949) 596-4143 or toll free (877)-889-6527

IRS Math Error Adjustments -The Debate and Your Rights

Posted on September 5, 2011 by Kursti Nakagawa

A report from the Treasury Inspector General for Tax Administration published earlier this month gives an unfavorable evaluation of the timeliness and accuracy of IRS responses to taxpayer complaints about math adjustments. The IRS has the authority to adjust taxpayer returns for over 400 math error conditions. These conditions, which can be adjusted by the IRS without performing an audit, include arithmetic errors, missing documentation and missing or incorrect social security numbers, among other things. A taxpayer can accept or reject a math error adjustment once they have received an official IRS Notice informing them that one exists.

The complaint highlighted in the recent TIGTA report is that taxpayers who dispute math adjustments often experience delays in receiving a response form the IRS. Such delays either result in the taxpayer not receiving benefits to which they are entitled or a loss of revenue to the federal government, depending on how the appeal is decided. Since both of these results are negative to one of the parties involved, TIGTA has made recommendations to the IRS to remedy the situation. In response to the TIGTA suggestions, the IRS has agreed to make their responses to taxpayer math error disputes more thorough and accurate. They did not, however, agree to the other TIGTA requests which were to monitor the timeliness of their responses and to prioritize the responses related to earned income.

The most important thing to take away from this is that if you revieve an official notice from the IRS regarding a math error adjustment, you should not ignore it. The professional help of a qualified Certified Public Accountant to evaluate your options in dermining your responce to this notification is often well worth the investment.

Click the “Learn More Link” or Call (949) 596-4143 to have one of our CPA’s provide a Free IRS or State Tax Notice Review and Consultation.

An Audit Reconsideration Success Story – A $26,000 Mistake Corrected Results in Zero Tax Liability

Posted on June 3, 2011 by Kursti Nakagawa

Professional Tax Resolution has successfully helped many clients find tax relief. Here is the story of a client who came to us in March of 2011.

Mr. and Mrs. M lived, worked and paid taxes in the United States from 2008-2010. In early 2010 both Mr. and Mrs. M moved out of the country and despite leaving a forwarding address, never received a notice from the IRS asking for supplemental documentation related to a 2008 tax return. Unfortunately more than a year passed before the taxpayers became aware of the problem and once they were informed, the IRS had moved on from their initial request for supplemental information and had both audited their return and disallowed more than $26,000 in deductions taken on their 2008 taxes. The result of the audit was a notice of deficiency for a sizable tax liability.

Now aware of their problem, Mr. and Mrs. M came to us asking how we could help. By examining the tax code, we determined that the original deductions were legitimate and we developed a tax settlement action plan. Professional tax resolution was able to request an audit re-consideration with the IRS directly. The IRS granted our request and re-opened the audit. During the re-examination period, Professional Tax Resolution Inc. was able to defend Mr. and Mrs. M successfully by providing all of the necessary documentation and evidence of the legitimate deductions in question.

In April 2011, just a few weeks after Mr. and Mrs. M hired Professional Tax Resolution; the client received final notice from the IRS that all adjustments and balances owed were reversed. No petition to the US tax court was required and a final “No Change” letter was issued closing the case.

Not only was their audit re-considered but by providing the correct paperwork and documentation, their entire liability has been eliminated. Professional tax resolution has another satisfied client and achieved an amazing 100% reduction in tax debt liability.