Your next audit may be an “audit lite” – The IRS is handling more reviews with form letters
Your next audit may be an “audit lite” – The IRS is handling more reviews with form letters
In-person audits with an IRS agent are becoming more uncommon. The IRS is instead handling their reviews through form letters called correspondence audits. Here is what you need to know.
In-person audits with an IRS agent are becoming more uncommon. The IRS is instead handling many routine reviews through form letters called correspondence audits.
These IRS letters are a kind of “audit lite” the agency uses to ask for clarification and justification of specific deductions on your tax return. Common issues that trigger a correspondence audit are large charitable deductions, withdrawals from retirement accounts and education savings plans, excess miscellaneous deductions, and small business expenses.
Don’t panic
Don’t panic if you get one of these “audit lite” form letters. The IRS often uses computer programs to compare individual return deductions with the averages for a person’s income level or profession. If you’ve received a letter, you may have simply fallen outside the averages. As long as you respond promptly, thoroughly and with good documentation, it won’t necessarily become a contentious issue.
The key is to keep proper, well-organized documentation under the assumption you may need it to support your deductions. If you do this right, the correspondence audit will end with a “no change” letter from the IRS, acknowledging you’ve addressed their concerns.
The downside
While correspondent audits usually target only a few areas on your tax return, there may be additional complications with this kind of audit. Here are some things to consider:
- It is an audit. Many taxpayers do not realize that this mail correspondence is an audit. When you get the “audit lite” letter, it’s important to ask for help. You need to address the audit promptly, but also professionally and accurately. How you respond is just as important as responding on time.
- No personal touch. Unlike an in-person audit, you won’t have someone there who personally understands your situation. This can be frustrating if you’re told you’re not providing enough information, you’re missing the correct information, or if you disagree with the agency’s findings.
- Back-and-forth hassle. If you want to challenge the IRS’s findings, it often takes multiple back-and-forth letters. Try to be patient. As long as you can defend your position with the correct information, you have a good chance of coming out on top.
Remember to ask for help if you receive one of these letters from the IRS.
Taxpayers to forfeit more than $1 billion in refunds – Are you one of them?
Taxpayers to forfeit more than $1 billion in refunds – Are you one of them?
The IRS disclosed there will be more than $1 billion in federal tax refunds forfeited this year if taxpayers don’t claim them by April 18.
The IRS disclosed there will be more than $1 billion in federal tax refunds forfeited this year if taxpayers don’t claim them by April 18.
Refunds have to be claimed within three years or they are forfeited to the government. The unclaimed $1 billion comes from about 1 million taxpayers who still haven’t filed returns for the 2013 tax year. Often the people who leave these refunds behind are young adults, college students, senior citizens and low-income taxpayers.
Why refunds go unclaimed
Forgetting withholdings. Even if you have very little income, your employer may have taken some money from your paycheck for federal tax withholdings. The only way to get it back is to file a tax return.
Not claiming refundable credits. Many tax credits are “refundable credits.” This means you can receive a refund even if you owe no income tax. Common examples available to students and parents are the earned income tax credit and the premium tax credit.
Missing information. Some people don’t file because they’ve lost the information they need. If the reason you can’t file is because you lost your data, you can request an online transcript from the IRS that will give you your wage, income and other tax information. You can also mail the IRS a Form 4506-T to get paper copies mailed to you. However, this will take between five and 10 business days, so don’t delay.
Fear of penalties. Sometimes taxpayers fail to file old returns because they think the IRS may penalize them. There is no penalty for filing a late return if you are owed a refund.
Get your money
The IRS is great at tracking down people who owe them money, but not so great at reaching out to people they owe. This irony should motivate you to get your money back. To be safe, send your 2013 return by certified mail early enough so that the IRS receives it by April 18. Any refunds that aren’t claimed within the three-year due date will be gone forever, swallowed up by the U.S. Treasury Department.
Remember, just because you are not required to file a tax return doesn’t mean you shouldn’t. There are more than a billion dollars in unclaimed refunds – make sure you get yours.
Tax Credits versus Tax Deductions – Which is worth more to you?
Tax Credits versus Tax Deductions – Which is worth more to you?
Deduct this or take a Tax credits? Which is worth more to you? Often the answer is not as simple as you think.
Every industry and profession has common terms that are used so often those of us in the business often forget that most people do not have the depth of understanding that a person working within the tax code might have. One of these areas is understanding the differences between the tax terms “deductions” and “credits”. Is one better than the other?
If it were simple
Dollar for dollar, a credit is worth more to you than a deduction. Why? A credit is a direct reduction in tax, while a deduction reduces the amount of income that gets taxed. Here is a simple chart showing the difference.
Assuming you have a $2,000 tax credit, how large a deduction would you need to be indifferent?
| Your marginal tax rate | Deduction required to equal $2,000 tax credit |
| 10% | 20,000 |
| 15% | 13,333 |
| 25% | 8,000 |
| 28% | 7,143 |
| 33% | 6,061 |
| 35% | 5,714 |
Note: This example does not account for the possibility that the deduction could move you into a lower tax rate nor does it consider other tax factors, including phaseouts.
So on the surface it appears that a credit is worth more than a deduction to you. But the real answer is….it all depends. Here are some things to consider:
How much is it? A large deduction could be worth more to you than a small credit. In combination with your marginal tax rate, you can calculate the equivalent credit that equals your deduction.
Your marginal tax rate. Remember, a similar deduction is worth more to someone in the 35% income tax range than it is to someone being taxed at 10%.
Are there phase-outs? Most credits and deductions phase out when your income is over certain amounts. Consider this when determining the true tax benefit. When a deduction reduces your income it could make other credits and deductions that were previously phased out now available to you.
Is the credit refundable? Some credits get a “bonus”. While you cannot deduct your income below zero, you can sometimes receive credits that create a refund even if you owe no tax. Credits that have this “bonus” feature are called “refundable” credits.
When it matters
Educational Expenses. If you pay tax-deductible tuition for undergraduate studies you must decide what tax alternative is best for you. Among the many alternatives that need to be evaluated are the American Opportunity Credit, the Lifetime Learning Credit, and the Tuition Deduction.
Understanding the Cost. Remember the value of a deduction to you needs to be filtered with your marginal tax rate to see the true tax benefit. Here is a simple formula.
| Deduction Amount | x | Your Tax Rate | = | Your Tax Benefit |
Thankfully, professional tax software allows for quick analysis of the choices. Please call if you have questions.
The Tax Impact as Your Children Grow Up – Prepare now for potential income tax hits
The Tax Impact as Your Children Grow Up – Prepare now for potential income tax hits
As your children age, you can easily be surprised by a larger tax bill. To help ease the possible burden, here are some possible tax hits to prepare for as your children age
A higher tax bill in your future
- At age 13: loss of your Dependent Care Credit. If your children are in daycare and you offset some of this cost with the Dependent Care Credit you will lose this benefit when they reach age 13. The impact: a credit against up to $6,000 in qualified daycare expenses. The good news here is that your children may no longer need the care as they get older.
- At age 17: loss of the Child Tax Credit. You may be claiming a child tax credit of up to $1,000 for each child under the age of 17. This credit phases out for income levels above $110,000 for married joint filers. Because it’s a credit that comes off the top of your tax bill, rather than a deduction that reduces taxable income, you’ll feel it even more when it’s gone.
- At age 19 (24 if a full-time student): loss of the Earned Income Tax Credit (EITC). The EITC pays a potential credit worth up to $6,318 for people with three or more qualifying children. Children stop being counted when they turn 19, or when they are 24 if they are full-time students.
- At age 19 (24 if a full-time student): loss of personal exemptions. You’re used to getting an extra personal exemption for every child under the age of 19, or under 24 if they are a full-time student. For the 2017 tax year, that’s potentially $4,050 in tax-free income for each child. When that goes away, plan for a higher tax burden.
What to do
Many of the child-related credits and deductions are meant to offset the cost of raising a child. Prepare now for the inevitable change in your tax situation that occurs when they go away. Here are some ideas:
- Know the age triggers. Note the tax years that these changes will occur. If a child is approaching one of these key years, adjust your spending to save a little more during the year to account for the change.
- Revise your withholdings. At the beginning of each key year, look at adjusting your withholdings on your paycheck to ease the potential tax burden.
- Conduct a tax forecast. Understand what the true impact of the change might be. You may find the tax hit less of a burden than you think. If you need help planning ahead, don’t hesitate to call.
Ten Commonly Overlooked Deductions Don’t forget these ideas to lower your taxes
Ten Commonly Overlooked Deductions
Don’t forget these ideas to lower your taxes
The tax code is about 75,000 pages long, so it’s not surprising there are many overlooked money-saving deductions hidden within it. Check out this list of commonly overlooked deductions. You might wind up with a bigger refund than you expected.
- State sales tax alternative
You can choose to deduct state and local sales taxes rather than state income taxes on a tax return using itemized deductions. This is especially useful for residents of states that don’t have state income taxes. It can also be used if you made enough purchases during the year that your state sales tax deduction is larger than your state income tax deduction. - Mortgage discount points
When you buy a home you can generally deduct the cost of mortgage “discount points” to lower your interest rate. A point is a fee equal to one percent of the mortgage amount and it lowers your mortgage’s interest rate. When you refinance a mortgage, you spread the cost of your points over the life of the mortgage. Many taxpayers forget that when they sell their home they can immediately deduct the remainder of the points not yet used as a deduction. - Job-hunting costs
Expenses for the purpose of finding a new job in your current occupation are generally tax deductible. You can usually deduct fees paid to recruiters or placement agencies. Deductions also include the costs of printing materials, postage, preparing resumes, and travel expenses. - Student loan interest
You can deduct up to $2,500 in interest paid on student loans from your tax return. This is true even if someone else helps you pay your loans. Parents who have co-signed student loans (creating legal obligation for the debt) often forget that they are also now eligible for the deduction on payments made by them. - Alimony legal fees
While most people who pay alimony know it is tax-deductible, fewer know you can also deduct money you spend on your alimony agreement, such as attorney fees. Make sure your lawyer breaks out the amount spent on the alimony agreement from the amount spent on the divorce, which is not deductible. - Casualty and theft losses
Amounts lost to theft or catastrophes (such as fires or earthquakes) can be deducted from your tax return. The timing of taking the loss and the amount of the qualified loss can get complicated, so ask for help if you think it applies to your situation. - Occupational education
If you are required by law or by your employer to take continuing education courses, or if you can show you need to take courses to maintain or update your skills in your current occupation, you can often deduct those costs. - Professional subscriptions
Expenses for trade magazines, professional journals or digital subscriptions relevant to your profession can be deducted as an itemized deduction. - Advisor fees
Fees for investment management or financial advice on income-producing investments can be deducted from itemized returns. This includes your tax preparation fee. - Small business tax breaks.
There are a number of special business incentives built into the tax code. This includes special depreciation rules to the now-permanent research credit. A deduction even exists for domestic production of qualified products.
As with any part of the tax code, certain qualifications must be met and limits apply. Please feel free to ask for help if you think any of these ideas apply to you.
Small Business Filing Deadline Approaching Fast Form W-2s and 1099-MISCs are Due Jan. 31
Small Business Filing Deadline Approaching Fast
Form W-2s and 1099-MISCs are Due Jan. 31
If you own your own business or have a side business in addition to your regular job, you may need to send out several IRS forms by Jan. 31 this year.
The deadline is for forms you issue to employees and others who were paid as part of your business activities throughout the year. These W-2 and 1099-MISC forms will have to be postmarked or sent electronically to both the IRS and the person you did business with on or before Jan. 31, otherwise you may face fines for each late form.
Most businesses understand that a W-2 is required for each of your employees. But did you know that you also may need to issue a 1099-MISC to each contractor or vendor you’ve done business with during the year?
General rule
The general rule is to issue a 1099-MISC to each individual contractor or vendor you paid at least $600 over the course of the calendar year. This form requirement doesn’t usually apply to your expenditures on hobbies or personal items, just business activities. In most cases you do not have to issue 1099-MISCs to corporations – just other individuals and partnerships. Here is an example.
Andrea has a side business as a model on nights and weekends in addition to her career as a medical device analyst. Over the course of 2016, she paid $600 to a hair and makeup stylist at Hair Art Inc., $800 to a freelance photographer for headshots and a promotional portfolio, and $2,000 in fees to Viva Talent LLC, a local modeling agency.
Andrea doesn’t need to issue a 1099-MISC to the stylist, because he works for a corporation, but she will have to send one to the photographer, who is an independent contractor. She needs to send one to the modeling agency as well, because it operates as a limited liability company (LLC) and files its taxes as a partnership rather than as a corporation.
Hint: Andrea can make her filing activities easier by issuing Form W9 to each vendor to get their tax information. These forms should be kept on file.
Other examples of business activities that may require you to issue a 1099-MISC include:
- Rents paid to a landlord for office space.
- Expenses paid to a contractor to turn a room in your house into a home office.
- Payments made to an attorney.
Fraud and fines
In the past, while most forms were filed by the end of January, you had until as late as March 31 to get the government their copies. The unified Jan. 31 deadline for these forms was changed as part of the IRS’s larger effort to crack down on refund fraud. Fraudsters have been filing bogus returns early in the year in an effort to snag a refund check before W-2s and 1099s arrive that contradict their returns.
Unfortunately, the fines on the self-employed and small business owners for missing the Jan. 31 deadline can be steep. Form W-2s and 1099s filed up to 30 days late are fined $50 each; $100 each for more than 30 days late; and $260 each for those filed after Aug. 1 or not filed at all.
The deadline is approaching fast, so don’t hesitate to call if you have any questions.
There’s Still Time to Fund Your IRA
There’s Still Time to Fund Your IRA
Looking for a last minute way to reduce last year’s taxable income? Consider funding a Traditional IRA or Roth IRA. Here is what you need to know
Remember that you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2016 tax year. The annual maximum contribution amount is $5,500 or $6,500 if you are age 50 or over.
However, if you or your spouse are an active participant in an employer’s qualified retirement plan, you may not be able to contribute the maximum amount. It depends on whether your modified adjusted gross income (MAGI) exceeds certain income thresholds. The limits for both Traditional and Roth IRAs are:
2016
Note: Married IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phaseout to contribute is $0 – $10,000.
How does the phase out work?
If your income is below the “full contribution” amount noted above, you can contribute up to the maximum annual contribution. If your income is above the “phase out complete” amount, you cannot make tax-advantaged contributions separate from your employer plan.
If your income falls between these ranges, this is how you calculate the reduced amount you can contribute:
- Subtract your income from the higher (phase out complete) amount to get your contribution income potential.
- Next calculate the phase-out range.
- Divide your contribution income potential by the phase-out range.
- Take the result times your maximum annual contribution amount.
Example: Roth IRA contribution limit for a single person, age 40 with MAGI of $122,000; $10,000 contribution income potential (132,000-122,000); divided by phase-out range of $15,000 ($132,000 – 117,000); 10,000/15,000= .666 x $5,500 = $3,663 2016 ROTH IRA contribution limit. Rounding rules apply.
If it’s too late for you to make a 2016 contribution, it’s not too late to plan for 2017. Here are the limits for 2017.
2017
A final thought
If your income is too high to take advantage of these IRAs you can always make non-deductible contributions to a retirement account. While the contributions are taxed, tax on the earnings is deferred until they are withdrawn.
Reminder. 4th Quarter Estimated Taxes are Now Due – Now is the time to make your estimated tax payment
Reminder. 4th Quarter Estimated Taxes are Now Due – Now is the time to make your estimated tax payment
Plan now to make your 4th quarter estimated tax payment
If you have not already done so, now is the time to review your tax situation and make an estimated quarterly tax payment using Form 1040-ES. The fourth quarter due date is now here.
Normal due date: Tuesday, January 17, 2017
Remember you are required to withhold at least 90% of your current tax obligation or 100%* of last year’s federal tax obligation. A quick look at last year’s tax return and a projection of this year’s obligation can help determine if a payment might be necessary. Here are some other things to consider:
Underpayment penalty. If you do not have proper tax withholdings during the year, you could be subject to an underpayment penalty. The penalty can occur if you do not have proper withholdings throughout the year. While a quick payment at the end of the year may not help avoid the underpayment penalty, it can help reduce the amount of the penalty.
W-2 withholdings have special treatment. A W-2 withholding payment can be made at any time during the year and be treated as if it was made throughout the year. If you do not have enough to pay the estimated quarterly payment now, you may wish to change your W-2 withholdings to address this problem in the future.
Self-employed. Remember to account for the need to pay your Social Security and Medicare taxes as well. Creating and funding a savings account for this purpose can help avoid the cash flow hit each quarter to pay your estimated taxes.
* If your income is over $150,000 ($75,000 if married filing separate), you must pay 110% of last year’s tax obligation to be safe from an underpayment penalty.
Tips to Organize Your Tax Records – Creating order out of chaos
Tips to Organize Your Tax Records – Creating order out of chaos
Looking for some ideas to make filing your taxes less cumbersome? Here are some tips
As important tax records start filling mailboxes, how can you make sure your tax preparation goes smoothly and efficiently this year? Here are some tips.
1. Keep it all in one place. It seems obvious, but how often have you found yourself going through piles of paper looking for that elusive 1099 tax form or charitable deduction receipt? If you only do one thing, this is it.
2. Time to sort. Now that everything is all together, best practice is to sort your information into the same buckets used in your tax return. At a minimum, sort the information into the basic categories below. If you have a lot of one category, sort that stack into the following sub-categories.
3. “Not sure” bucket. There may be things you receive that you are not certain about needing for tax filing purposes. These items should be gathered in one place for review.
4. Sum it up. Once the information has been categorized, create a summary of the information. This summary can be a printed copy of an organizer or it could be a simple recap you create.
5. Is something missing? Pull out last year’s tax return and create a list of things you needed last year. Use this as a checklist against this year’s information. While this process will not identify new items, it will help identify missing items that qualified in prior years.
6. Finalize required documentation. Certain deductions require substantiation and/or logs to qualify your expense. Common areas that require this are: business mileage, charitable mileage, medical mileage, moving mileage, non-cash charitable contributions, and certain business expenses. These logs should be maintained throughout the year, but now is a good time to make sure they are complete and ready to go for tax filing.
It is very easy to overlook something given the lengthy list of taxable income items, deductions and credits. By following these tips you can greatly reduce that risk.
The IRS Grilling – IRS applies more scrutiny to child-related tax credits
The IRS Grilling – IRS applies more scrutiny to child-related tax credits
Get ready to answer additional questions this year if you claim some tax credits related to children and college costs
Get ready to answer additional questions this year if you claim some tax credits related to children and college costs.
You may already be familiar with the additional questions and documentation required when you use the Earned Income Tax Credit (EIC). Starting this year, the IRS is applying the same level of scrutiny to three more credits:
- Child Tax Credit (CTC)
- Additional Child Tax Credit (ACTC)
- American Opportunity Tax Credit (AOTC)
Clarify child qualifications. For the CTC and ACTC credits, you may be asked how long your children lived with you over the past year, or whether they lived with an ex-spouse, relatives or other guardian. That is an issue particularly relevant to divorced parents, since only one parent is allowed to claim these credits.
More documents. If you are eligible for the AOTC, which is a credit to defray as much as $2,500 in higher education costs for you or your children, you will need to provide a tuition statement from the college or university. This is known as a Form 1098-T. You will also need receipts for related expenses, such as school textbooks.
Other common errors. You may also be asked to double check your forms to avoid submitting information that is incorrect, incomplete or inconsistent. Incorrect Social Security numbers and dates of birth for the dependents on your return are two common sources of error.
Cracking down on “improper payments.” Some of those common errors have helped to make the EIC and the other credits a major source of what the IRS calls “improper payments.” In fact, the agency estimates that of the $66 billion in EIC funds paid in 2015, nearly a quarter were collected by filers who didn’t actually qualify to receive them.
Don’t take it personally. In order to crack down on the problem, the IRS is requiring tax preparers to ask more questions. The agency’s new rules also have sharper teeth. Starting this year, tax preparers who don’t document their compliance with these new requirements could face fines of up to $510 per return.
So, please understand: if you get more questions than you are used to or are asked for additional documents, it’s not personal! It’s just what is now required.