Balanced Book Company Blog

IRS Mail Tax Audits

2011-04-05T12:38:00.000-07:00

IRS Mail Tax Audits

You're now almost four times as likely to conduct your tax audit by mail, as you are to sit down with the tax man.
Of the more than 1.6 million Americans who were slapped with audits last year, 78% dealt with correspondence audits, while only 22% were asked to come in for an in-person examination.
That is a 13% rise in audits-by-mail from 2009, and a 93% jump compared to 2003. In 2000, the chances of getting a correspondence audit were less than 2 to 1.
"When people think of audits, they think of being in an office and going to war with someone from the IRS," said Thomas Cooke, a professor of accounting and business law at Georgetown University. "Years ago you could almost guarantee you would have to go in and see someone to do it, but this isn't the case anymore."
Why the shift? Because correspondence audits are cheaper for the IRS. Plus, Cooke said many people take action as soon as they get the audit notice in the mail, in hopes that it won't escalate to a visit from Uncle Sam.
"People are scared to death when they get these letters, so they do everything they can to resolve the problem right away to make it not go further," he said.
While a face-to-face examination with an IRS agent can involve going through an entire return, correspondence audits usually ask taxpayers to provide information about very specific items on a tax return, like income, expenses or deductions.
"It's an effort to try to cut costs and focus their efforts, and there are pluses and minuses to it," said Ed Smith, a tax partner at BDO. "A plus would be if there are only one or two items the IRS is interested in, because they can focus their time and effort on those items and it's more efficient for both parties. On the other hand, depending on the complexity and detail needed to support something, it may be difficult for the taxpayer to respond to a correspondence audit and easier to go over things in person."
Even if the information the IRS is requesting is basic, the complicated jargon often makes it hard for people to understand that the letter they have opened is even an audit, national taxpayer advocate and IRS watchdog Nina Olson said in an interview with CNN Money.
Out of a sample of 754 taxpayers who claimed the Earned Income Tax Credit and were audited, more than a quarter of them had no idea they were even being audited, the Taxpayer Advocate Service's most recent survey found. Nearly 40% of the same respondents didn't know what information the IRS was asking them to provide.
And that's if they even received the audit in the first place. The IRS rarely checks to make sure letters have been sent to the correct addresses -- and about 10% of overall mail from the IRS is undeliverable, TAS has found.
In addition, 70% of people surveyed by TAS said they prefer not to communicate with the IRS through correspondence audit, and would rather communicate in-person or over the phone.
But the IRS argues that resolving tax-return issues by mail can really benefit both taxpayers and the IRS, saying that mail audits are mainly sent when there are fewer issues with a return and a full in-person audit isn't required.
"In comparison to other audits, correspondence examinations require fewer resources from either the IRS or taxpayers, are considerably less invasive for taxpayers, and effectively contribute to the tax administration objectives of fostering voluntary compliance and reducing the Tax Gap," the IRS stated in response to a recommendation from TAS to conduct fewer mail audits.
And the fact that the IRS is "vastly understaffed" and currently looking at possible budget cuts that would strip the agency of $600 million in funding is only likely to cause mail audits to continue to rise, said Olson.
"I would love to see the IRS go back to doing more field audits -- in most cases, it's less burdensome for taxpayers if they have someone they can talk to," she said. "But the IRS is moving in the opposite direction, and now with proposed budget cuts, there will be greater pressure to use more automation."

The new 2010 IRS Form 1040

2011-01-24T13:24:00.000-08:00

April 18 is the 2010 due Date.
Emancipation Day, a District of Columbia holiday, falls on April 15, deferring the tax filing deadline to April 18 and by filing Form 4868 on or before April 18 can extend your deadline to October 17.
No More Phase-Outs for Itemized Deductions and Exemptions
Phase-outs were completely repealed for 2010 as part of the Bush-era tax cuts, for example, write-offs for the most popular itemized deduction items (including mortgage interest, state and local income and property taxes, charitable donations, personal and dependent exemption deductions) You can now write off the full amount of your itemized deductions and exemptions on your 2010 Form 1040 without any worries and without having to fill out phase-out worksheets to penalize yourself. The recent tax cut extension legislation repealed the phase-outs for 2011 and 2012 as well.
Liberalized Adoption Credit
For 2010, the maximum adoption credit was increased to $13,170 (up from $12,150 in 2009). In addition, the credit was made 100% refundable for the 2010 tax year (previously, it was nonrefundable). That means you'll receive a check for any leftover adoption credit after your federal income tax bill has been reduced to zero. To claim the credit, fill out Form 8839 (Qualified Adoption Expenses), and enter the credit on line 71 of Form 1040.
One-Time Break for Self-Employed Individuals
Self-employed folks can generally deduct their health insurance premiums on page 1 of Form 1040 (use line 29 for 2010). The deduction reduces their federal income tax bills, which is nice. However, the self-employed have never been allowed to deduct those premiums when calculating their self-employment tax bills on Schedule SE. Good news: for 2010 only, you can deduct health insurance premiums on line 3 of Schedule SE. So those premiums will reduce both your income tax bill and your SE tax bill. Unfortunately, this break will not be available for 2011 and beyond unless Congress extends it.
Home buyer Credit Repayment Rules
As I explained in an earlier column, you may have to repay part or all of the credit claimed for a 2008 or 2009 home purchase with your 2010 Form 1040.
In most cases, however, only those who purchased homes in 2008 will be affected. They will generally have to repay 1/15 of the credit with the 2010 Form 1040. If this rule impacts you, fill out Form 5405 (First-Time Home buyer Credit and Repayment of the Credit), and enter the repayment amount as an addition to your tax bill on line 59 of Form 1040.
Real Estate Tax Deduction
For 2008 and 2009, unmarried individuals who did not itemize could write off up to $500 of state and local real property taxes by claiming an increased standard deduction. Married joint-filing couples could write off up to $1,000. This add-on standard deduction deal for real estate taxes expired at the end of 2009, and it was not reinstated for 2010.
Sales Taxes Deductions for on New Vehicle Purchases
The 2009 Stimulus Act created a temporary write-off for non-itemizers who paid state and local sales taxes on new vehicles purchased between 2/17/09 and 12/31/09. The write-off came in the form of an additional standard deduction allowance. Similarly, itemizers were allowed to claim an extra itemized deduction for such taxes. Both breaks lapsed at the end of 2009, and they were not reinstated for 2010.
Break for Unemployment Benefits Is Gone
In 2009, the first $2,400 of unemployment benefits was federal-income-tax-free. This break was not continued for 2010. Therefore, 100% of 2010 unemployment benefits generally must be reported as income on Form 1040 (use line 19).

Choosing A Tax Preparer

2011-01-13T08:47:00.000-08:00

IRS Tax Tip 2011-06, January 10, 2011
If you pay someone to prepare your tax return, the IRS urges you to choose that preparer wisely. Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare your return. Most return preparers are professional, honest and provide excellent service to their clients.
Here are a few points to keep in mind when choosing someone else to prepare your return:
1. Check the person’s qualifications. Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics. New regulations require all paid tax return preparers including attorneys, CPAs and enrolled agents to apply for a Preparer Tax Identification Number — even if they already have one — before preparing any federal tax returns in 2011.
2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Professional Responsibility for enrolled agents.
3. Find out about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.
4. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.
5. Provide all records and receipts needed to prepare your return. Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.
6. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
7. Review the entire return before signing it. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
8. Make sure the preparer signs the form and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.
You can report abusive tax preparers and suspected tax fraud to the IRS on Form 3949-A, Information Referral or by sending a letter to Internal Revenue Service, Fresno, CA 93888. Download Form 3949-A from http://www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

Tax Tips 2010 - 2011

2011-01-06T12:59:00.000-08:00

Tax Law Changes
The American Recovery and Reinvestment Act (ARRA) provided a temporary increase in the earned income tax credit (EITC) for taxpayers with three or more qualifying children and increased the beginning point of the phase-out range for the credit for all married couples filing a joint return for 2009 and 2010. The Tax Relief and Job Creation Act of 2010 extended these changes to 2011 and 2012.
The Education Jobs and Medicaid Assistance Act of 2010 repealed the Advance EITC. It is no longer available to workers. Individuals who received Advance EITC during any tax year must file a tax return to report the payments even if they owe no tax or are not otherwise required to file.
Tax Year 2010 Income Limits
Earned income and adjusted gross income (AGI) must each be less than:
• $43,352 ($48,362 married filing jointly) with three or more qualifying children
• $40,363 ($45,373 married filing jointly) with two qualifying children
• $35,535 ($40,545 married filing jointly) with one qualifying child
• $13,460 ($18,470 married filing jointly) with no qualifying children
Tax Year 2010 maximum credit:
• $5,666 with three or more qualifying children
• $5,036 with two qualifying children
• $3,050 with one qualifying child
• $457 with no qualifying children
Investment income must be $3,100 or less for the year.
The maximum Advance EITC workers could receive from their employers during 2010 was $1,830.
Preview of Tax Year 2011
Earned Income and adjusted gross income (AGI) must each be less than:
• $43,998 ($49,078 married filing jointly) with three or more qualifying children
• $40,964 ($46,044 married filing jointly) with two qualifying children
• $36,052 ($41,132 married filing jointly) with one qualifying child
• $13,660 ($18,740 married filing jointly) with no qualifying children
Tax Year 2011 maximum credit:
• $5,751 with three or more qualifying children
• $5,112 with two qualifying children
• $3,094 with one qualifying child
• $464 with no qualifying children
2011 Investment income must be $3,150 or less for the year

2010 Tax Changes You Need to Know

2010-12-14T07:30:00.000-08:00

Even with the availability of The Balanced Book Company, a professional tax preparation service, an estimated 40% of Americans do their own taxes. The typical do-it-yourself filer needs about 24 hours to complete the task, according to the IRS.
Commercially available software undoubtedly makes the job a lot easier, but no brand is guaranteed to be infallible. Thus, it's important for do-it-yourself filers to keep up as best they can with relevant changes to the tax code as a safeguard against errors in their tax prep software. Here are four of the most important changes to know about as you prepare your 2010 return.
1. Smaller Deductions for Business and Medical MileageYou can't write off the cost of a daily commute by car, but you can deduct other work-related mileage you're not reimbursed for. This year, for example, you'd get 50 cents a mile for driving from, say, Boston to New York City and back for a trade show. Charitable purposes are still deductible at 14 cents per mile, just like last year.
2. Better Limits on Deductions for Property Damage or Loss Due to TheftFor damaged or stolen property to be deductible, the loss amount must now only exceed $100. The "10% of AGI" rule still generally applies though.
AGI is the sum of all your income - such as wages, interest and alimony received - minus certain adjustments, such as IRA contributions, student loan interest you've paid and moving expenses.
3. Deduction for Taxes and Fees on New Motor Vehicle PurchasesIf you bought a new car, light truck, motor home or motorcycle between February 17 and December 31 of 2009? If so, in 2010 you can deduct state, local, and excise taxes related to the purchase. If your state has no sales tax, you can instead deduct other taxes or fees the purchase generated.
There are a couple limitations to know about. First, the deduction is only good on up to $49,500 of the purchase price. Second, it's phased out at certain levels of modified adjusted gross income (MAGI) - between $250,000 and $260,000 for joint filers and from $125,000 to $135,000 for other taxpayers. MAGI is your AGI plus certain deductions such as those for student loans, IRA contributions and higher education costs.
4. Bigger Deductions for Long-Term Care (LTC) Insurance PremiumsIRS rules allow LTC insurance policy owners to deduct more of their premiums in 2010 than in 2009. For example, those ages 51 to 60 can claim up to $1,230 in LTC insurance premiums this year, compared with $1,190 last year - about a 3% increase. Similar increases have been approved for other age groups as well: 40 and under, 41-50, 61-70 and 71 or over. At $330, the deduction is smallest for the 40-and-under age group. It rises progressively to a maximum of $4,110 for those ages 71 or over.
Other Tax Law ChangesOther potentially beneficial changes have been made; visit a list called "Tax Changes for Individuals" at the IRS.gov website.

Federal Tax Credits for Energy Efficiency

2010-07-07T16:17:00.000-07:00

Federal Tax Credits for Energy Efficiency
As of February 17th, 2009, customers buying new insulation may be eligible for a federal tax credit of 30 percent of home insulation costs, up to $1,500.

The economic stimulus bill, known as The American Recovery and Reinvestment Act (H.R. 1), was signed into law by President Obama on February 17th of 2009. The economic stimulus bill will provide significant energy tax credits for energy efficient home improvements made during 2009 and 2010. Eligible home improvements include those made to roofs, windows, doors, insulation, HVAC and non-solar water heaters.
Section 1121 of the Bill states that consumers who choose to make these improvements in the coming year can receive an energy tax credit for 30 percent of the cost, up to $1,500. Eligible building envelope component tax credits for home improvements, including insulation, do not apply to consumers who are building new homes.
For insulation to qualify, the primary purpose must be to insulate. For example, aluminum siding does not qualify as insulation. A manufacturer's certification is required and the insulation must be expected to last for at least 5 years, or carry a 2 year warranty.
Consumers should keep any receipts and Manufacturer's Certification Statements for tax purposes (IRS Form 5695). The insulation must be 'placed into service' during the taxable years of 2009 and 2010. Home improvements made during 2008 are not eligible for this tax credit.

AVOIDING AN AUDIT

2009-09-14T14:48:00.000-07:00

Suffering through an IRS audit is one of those things — like public speaking — that makes most of us sweat by just thinking about it. And unfortunately, the IRS is enforcing the nation's tax laws with renewed vigor, so you can expect a higher statistical chance of being audited in the future. How much higher remains to be seen, but I advise increased caution and attention to detail with your return.
The surest way to receive unwanted attention from the feds? Claiming what appear to be wildly excessive itemized deductions. That's always been the case. (Don't let that stop you from claiming all legitimate write-offs. If your deductions are well above the norm, just make sure you have solid documentation.) But the feds are now implementing several new measures designed to nail scofflaws who've been slipping through the tax collector's net with relative impunity. So if you've employed any of the practices described below, consider yourself warned.
Crackdown on Offshore Credit Cards
Here's a great tax-saving concept: You transfer cash into a bank account located in an offshore tax haven. You're told that you won't owe any taxes on the income or future earnings generated in the account. How do you get your hands on the money when you need it? Simple. Use your offshore bank credit card, issued as part and parcel of the deal, to hit the ATM and charge expenses. You'll then pay the resulting credit-card bills with your offshore cash stash. Sweet!
Surely, you will not be surprised to hear that this is an illegal tax-evasion scheme and that misguided participants can be caught, despite promoters' claims to the contrary. As part of the crack-down, the IRS filed several "John Doe" summonses to obtain records from 70 companies (including Disney, Hilton, and Air Canada) regarding credit-card transactions. Previously, the IRS filed seven other lawsuits to scoop up records from companies that process MasterCard transactions. Yet another lawsuit sought MasterCard International's records for accounts set up in Antigua and Barbuda, the Bahamas and the Cayman Islands. The IRS is also moving to gather information about MasterCard, Visa and American Express account holders in 77 other countries.
What the government is after, obviously, is the identity of anyone who may have signed up for offshore credit-card deals to evade taxes. The IRS believes more than a million U.S. citizens hold cards issued by foreign banks. While many folks no doubt have perfectly lawful reasons for doing so, a million seems like a suspiciously big number to the IRS — especially when a much smaller number of taxpayers admit to having foreign bank accounts. (Your Form 1040 requires you to tell the IRS if you have any foreign bank accounts.)
Other IRS Initiatives
Here's a quick summary of other major projects the IRS has on the front burner.
FIND UNREPORTED INCOME
The IRS has developed a new computer program to identify returns most likely to have underreported income. (How will it do so? Nobody knows. It's proprietary government information.) In the past, IRS computers focused more on fingering returns most likely to have overstated deductions.
Failing to report income can get you into a whole lot more trouble than puffing up your deductions a bit. Why? Because it's a very tough sell to claim you didn't realize that you have to report all your income to the IRS. In contrast, the rules for deductions are often so murky that even the most honest taxpayers can make mistakes.
Advice: Report all your income. No exceptions.
Match Schedule K-1s reporting "pass-through" income and deductions from partnerships and S corporations to returns filed by owners of these entities.The IRS believes income from partnerships and S corporations is often underreported, while deductions are often overstated. Until recently, no serious attempts at matching the more than 20 million K-1s issued annually had ever been undertaken. But this particular taxpayer holiday is now over. The new IRS matching effort means it's now critical to properly reflect Schedule K-1 tax information on owner returns.
Advice: If you own interests in partnerships and/or S corporations, consider hiring a competent professional to prepare your returns. If you insist on doing the work yourself, please be careful.
Shut down "Section 861" schemes.
Promoters of these bogus deals claim you can rely on Section 861 (which has to do with the foreign tax credit) to dodge taxes on any income that's not from foreign sources. Under this scheme, you're told to file amended returns to claim refunds of taxes previously paid.
Advice: Don't fall for these scams. You owe U.S. taxes on your U.S. income as well as any foreign-source income. Sorry about that!
Shut down abusive trust deals.
Promoters claim you can contribute business and income-generating assets to a trust, and thereby legally avoid paying federal income taxes.
Advice: Don't be a sucker. You generally owe taxes on income generated by assets you control, unless they're owned by a separate taxpaying entity, such as a corporation. Putting assets into a trust that you control won't change that. That's because the trust is considered a "grantor trust" owned by you, which means the trust's income is taxed to you.
The Last WordThere's a world of difference between taking advantage of legitimate tax-saving maneuvers (which I regularly cover here) and falling prey to a tax scam. Remember: You are required to pay only the amount of tax that you legally owe. Whittling that number down by any legitimate means is a worthy objective for anyone who wants to be considered financially astute. On the flip side, paying the taxes that you legally owe is a small price for the privilege of living in this great country.

INDIANA BUSINESS REQUIREMENTS

2009-08-12T09:08:00.001-07:00

Choosing a Structure and Forming Your Business
Below is a brief description of the various forms in which a business may organize under Indiana law. Caveat: Formally organizing a business carries both great advantages and legal consequences. Care should be taken when deciding which business form to utilize and while operating the venture. The Corporations Division is eager to help, but cannot offer legal advice. It is strongly suggested that an attorney be contacted for additional guidance.
Informal Associations:
The following informal business associations require no filing with the Indiana Secretary of State:
o Sole Proprietorship: One person who conducts business for profit. The sole owner assumes complete responsibility for all liabilities and debts of the business.
TAX: The income of the business is reported as part of the owner's personal income.
o General Partnership: Two or more individuals as co-owners of a for-profit business. Partnerships should operate under a written Partnership Agreement to avoid future problems. All partners are responsible for the liabilities and debts of the partnership.
TAX: Partnerships enjoy single taxation. Income is reported as part of each partner's personal income.
Formal Associations:
The following formal business associations require the filing of organizational documents with the Corporations Division of the Secretary of State:
o Corporation: A legal entity which is created by filing Articles of Incorporation. The Corporation itself assumes all liabilities and debts of the Corporation. A corporation is owned by shareholders. A shareholder enjoys protection from the corporation's debts and liabilities.
TAX: Income is taxed twice: 1) at the corporate level; and 2) at the employee level when a wage is paid or at the shareholder level when distributed as a dividend.
o S-Corporation: After filing Articles of Incorporation, a Corporation may seek to obtain S Corporation status for federal income tax purposes. The income of an S Corporation is taxed only once: at the employee or shareholder level. To qualify, the corporation may not have more than 75 shareholders and must meet other certain Internal Revenue Service criteria. The corporation must submit IRS Form #2553 to the IRS. An S-Corporation is considered a corporation in all other respects and is subject to no additional or special filing requirements with the Secretary of State.
o Limited Liability Company: An LLC is a formal association which combines the advantage of a corporation's limited liability and the flexibility and single taxation of a general partnership. An LLC has members rather than shareholders. A member enjoys protections from the liabilities and debts of the LLC. Although not required by law, an LLC should operate under an Operating Agreement which is like a Partnership Agreement.
TAX: If the LLC qualifies under IRS guidelines, it may be taxed only once, like a partnership, at the employee or member level, while not having the same restrictions as an S-Corporation.
o Nonprofit Corporation: A corporation whose purpose is to engage in activities which do not provide financial profit to the benefit of its members. Such corporations must obtain nonprofit or tax exempt status from the IRS and Indiana Department of Revenue to be free from certain tax burdens.
o Limited Partnership: A partnership with at least one General Partner and one Limited Partner. A limited partner's liability is limited to the amount invested, while the General Partner(s) assumes all the liabilities and debts of the partnership.
TAX: The income is taxed in the same manner as a General Partnership.
o Limited Liability Partnership: A General Partnership which elects to operate as an LLP. To operate as an LLP, a Registration must be filed with the Secretary of State. Unlike a General Partnership, the partners in an LLP enjoy protection from many of the partnership's debts and liabilities.
TAX: The income of an LLP is taxed in the same manner as a General Partnership.

Educational Credits

2009-06-27T07:44:00.000-07:00

Hope and Lifetime Learning Credits: For 2008, the amount of a Hope or Lifetime Learning Credit is phased out (gradually reduced) for those with a modified adjusted gross income (AGI) between $48,000 and $58,000 ($96,000 and $116,000 for joint returns). Those with a modified AGI of $58,000 or more ($116,000 for joint returns) cannot claim Hope or Lifetime Learning Credits.
Hope Credit: Beginning in 2008, the amount of the Hope credit (per eligible student) is the sum of:
1. 100% of the first $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for the eligible student, and
2. 50% of the next $1,200 ($2,400 for students in a Midwestern disaster area) of qualified education expenses paid for that student.
The maximum amount of Hope credit in 2008 is $1,800 per student ($3,600 for students in Midwestern disaster areas).
Tuition and Fees Tax Deduction: Congress extended this tax benefit until Dec. 31, 2009 as part of the $700 billion economic stimulus package.
Lifetime Learning Credit:
• For 2008, students in a Midwestern disaster are eligible for up to $4,000 - other students are eligible for up to $2,000
• The definition of qualified education expenses is expanded for Students in Midwestern disaster areas to include books, supplies, room and board, and additional expenses for special need students.

IRS WHISTLEBLOWERS

2009-06-25T14:49:00.000-07:00

An IRS district or service center director may approve a reward for information regarding underpayments of tax. The director decides whether the amount of the reward is adequate compensation in each particular case. IRS Publication 733 provides that the amount of reward will be determined as follows:

“For specific and responsible information that caused the investigation and resulted in recovery, the reward will be 10% of the first $75,000 recovered, 5% of the next $25,000 and 1% of any additional recovery. The total reward will not be more than $100,000.”

For more information http://www.taxwhistleblowers.org/

An Information Resource for Tax Whistleblowers
If you have information regarding underpayment of federal taxes, you could be entitled to a reward. Taxwhistleblowers.org is a free information resource that provides information to private citizens on the rewards available to those who report underpayments of tax to the United States government.

Important Development - New IRS Whistleblower Program
On December 20, 2006, the President signed into law new legislation that dramatically strengthens the IRS's whistleblower program. Under the new law, qualified whistleblowers will be entitled to awards of up to 30% of funds that are recovered by the IRS based on information provided by whistleblowers.
Form 211 Claims for Reward

The Form 211 program permits whistleblowers to request rewards from the IRS after reporting information about individuals or entities who have underpaid taxes. Notably, however, payment of any reward by the IRS under the Form 211 procedure is within the government’s discretion and cannot be compelled by the whistleblower.

Special Agreements

In addition to its Form 211 program, the IRS also has a lesser known program commonly referred to as its Special Agreement program, which permits whistleblowers to enter into contracts with the IRS before they provide detailed information about the subject taxpayer and their alleged tax violations. Special Agreements, however, are typically used only for cases involving large amounts of underpaid taxes.

Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

Bookkeeping ~ The Cash Flow Lifeline

2009-06-04T16:51:00.000-07:00

Operating a successful small business in today's fast-paced economic climate can be an exciting, complicated and expensive endeavor. On the surface, it seems simple, without proper bookkeeping, your flourishing company can take an abrupt dive towards bankruptcy.

This is why accounting is a key component in any small business's success. It should play a role in every financial decision you make ~ from purchasing vehicles, equipment and supplies to increasing production, stocking inventory and keeping track of payroll and expenses.

But if you, like most people, lack an extensive background in bookkeeping where do you begin? Balanced Book Company has the solution—giving you the tools and the information you need to keep your financial records in check, while aiding you in making the most of your company's cash flow.

We do your Bookkeeping, Prepare your Taxes and manage your Payroll at a Fraction of the Cost! We will train you in any and all facets of Intuit’s QuickBooks Bookkeeping software programs.

Balanced Book Company Provides the Pillars of Support!

Stimulus Payments and Tax Law Changes

2009-06-03T21:44:00.000-07:00

Taxpayers were instructed to retain a copy of the notice that included the stimulus payment for purposes of computing their 2008 tax returns. The estimated payments were computed based on information from the 2007 tax return. Double check the notice to be sure that the estimated stimulus payments were computed correctly. Any shortfalls can be recovered in 2009 when filing the 2008 return.

Family additions born in 2008 would not have been considered in the estimated stimulus payments. Do not overlook claiming the potential $300 refundable credit for each child.

Taxpayers filing 2007 returns after the extended October 15 due date are not entitled to receive a stimulus payment in 2008 until after they file their 2008 tax return.

Taxpayers who reside in federally declared disaster areas have an extended due date beyond October 15. For example, victims of Hurricane Ike have until January 5, 2009, to file their 2007 income tax return. There again, taxpayers will not receive a stimulus payment until after filing their 2007 return.

Congress passed the Mortgage Forgiveness Debt Relief Act of 2007 in December of that year to assist taxpayers avoiding foreclosure procedures and those afflicted as a result of the decline in the housing market. The law change excluded up to $2 million of cancellation of-debt income related to their mortgages on their principal residences, not including second or vacation homes.
The law only applies to acquisition indebtedness and refinanced debt that does not exceed the amount of acquisition refinanced debt.

Amendments to the Mortgage Forgiveness Debt Relief Act of 2007, passed in July of 2008, created a first time home buyer credit of up to $7,500 to eligible taxpayers. The credit is refundable and is repaid ratably in future years (up to 15 years for quailing taxpayers with full credit). Repayments do not begin until 2010 for homes purchased in 2008. This is an interest free loan for taxpayers facing the tight credit market that currently exists. In addition, some tax incentive credits for homes purchased in 2009 may not have to be repaid.

Please be advised that this website is a general information resource, and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

The Family Run Business

2009-05-31T08:08:00.000-07:00

The good, the Bad and the Ugly of succession Planning
Family run companies are in many respects the backbone of American Business. They are typically the most stable of small businesses, with a much lower failure rate than other small business models. Some of the largest and most successful companies in America are family owned and operated, yet 70 percent of family run businesses do not make it to the second generation; a full 90 percent never make it to the third generation. These statistics are not new, but are appalling just the same.

So why the high failure rate? Most experts chalk it up to poor succession planning, as if a plan would somehow make it all better. No plan will correct fundamental weakness in a business unless its managers recognize and address those weaknesses. Those weaknesses prevent many family owned businesses from realizing much of their real potential.

Please understand, this does not mean all family run businesses are fundamentally flawed. However, those that do have problems are often emotionally unwilling to acknowledge them or, having acknowledged them, are unwilling to make the hard decisions necessary to fix them. While family run companies have a far lower failure rate than the average of small businesses as a whole; this is still a pretty dismal record given the advantages such businesses typically have; loyalty, strong family support systems, management continuity, long training periods for the next wave of managers, love and affection, etc.
So here are some of the problems that often occur. If you’re the founder of a family run business typing the groom a son or daughter to succeed you, you don’t need to accept this list as your own; simply consider the possibility that some of these pitfalls may apply to your company. For example;

Your son simply may not be a very smart business person. He may have blindly copied your approach over the years, without developing the ability to devise and implement his own approach to problem solving, which is not a good shortcoming for the boss to have. All the love in the world won’t fix this one.

Your daughter may have a very different management style than the one you used to build the business and she may be successful only if she can adopt a style that works for her. Of course, if you don’t trust any style but your own, that won’t seem like a very good idea.

Your son-in law may recognize that your way of do8ng things successfully 30 years ago just won’t work today with more demanding customers, more aggressive competition, Internet options at very turn and the big box competitor just down the street. If he sees that clearly and you don’t, trouble lies ahead.

Your daughter-in-law may not have some of the skills needed for your type of business, yet be a very bright, alert, communicative person who commands respect. For example, a Phi Beta Kappa lawyer who steps into a company where she must be the sales manager is in trouble if her brilliance is mostly manifested at the PC keyboard or in research library. Worse, you many refuse to see those shortcomings, preventing them from being addressed openly. Still worse, you may see them only too clearly, and use them as an opportunity to prove time and time again that no one can do it thee way you did. This will invariable prove to be a self-fulfilling prophecy.

If anything sounds familiar here ~ perhaps your spouse has mentioned it a few hundred times ~ and you still can’t see it, it is possible your eyesight is not what it once was; don’t worry, it happens to the best of us. Here are some ideas to help improve your ability to pass the business along intact:

1. Treat your children like any other senior manager. Evaluate their performance formally and objectively (as you do with your other employees) and help them work out action plans to correct deficiencies before they become excuses to fail. A child who thinks this is unfair may need to be employed somewhere else for a few years to get a flavor of life on the outside

2. Make a detailed list of the skills needed to succeed in your business. This list should not only include the ones you used to start the company but the ones that help the company grow in the environment in which it now does business. You may need help from impartial but knowledgeable outsiders to complete this one but it’s worth it. Then, build your would be successor’s grooming program around that list.

3. Get formal training for your children in the areas they need strengthening. Seminars or workshops on topics such as managing and motivating people, business planning and managing money can build valuable skills for your company as well as enhance the personal growth of your children.

4. Rotate the assignments your children get in the company go five them a strong sense of the company from every direction, not just the functional area they are best in or most interested in. If one of them is interested in becoming the CEO one day, he or she must have a total company view to be successful. Each assignment should be at least a year, so they get past the possibility of just “riding it out” and actually get into the meat of the job.

5. Ask the honest opinion of others in assessing the performance and potential of your children. They may very will see things you can’t see despite your sincere attempts to be objective. Consider a 360º performance review process as a tool that might help your company team grow in addition to being a good way to get others ‘view of your children’s performance.

Your son or daughter could be a great future CEO for your business. He or she has tools available that you didn’t have when you started. He or she has the benefit of living in the culture of the business that you built. And he or she has time to prepare before taking on the responsibilities and challenges of the job. Take full advantage of all that potential and help maximize their potential. You’ll be helping to ensue the future success of your company and a stress-free retirement for you. That’s worth a little advance preparation, don’t you think?

Lawsuit Settlements may be Taxable

2009-05-31T05:20:00.000-07:00

Prior to August 20, 1996 lawsuit settlements were tax exempt, however, Congress revised the tax law §104 (a) (2) to exclude all Lawsuit Settlements may be Taxable
Prior to August 20, 1996 lawsuit settlements were tax exempt, however, Congress revised the tax law §104 (a) (2) to exclude all settlements that were not for physical injury or physical sickness.
If your tax return was filed excluding settlement, you could be liable for understatement of income tax penalty under §§6662(a) and (b) (2). IRS form 1099-MICS should be issued for settlements.

Please be advised that this website is a general information resource and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

Injured Spouse

2009-05-30T13:47:00.000-07:00

If you have unpaid taxes from prior years, the IRS can confiscate your refund for the current year as a payment on that liability. They figure they shouldn't be sending you a refund when you owe them money.
In addition, your refund may be applied to unpaid student loans, spousal and child support and if you're married filing jointly, the IRS is most likely to snatch that refund as well. If only one spouse owes the liability, the other spouse is entitled to his or her share of the refund. If the IRS has applied your share of a refund against a liability owed by your spouse, you are an injured spouse and you are entitled to relief. The injured spouse rule can also be applied to avoid the IRS from securing your refund in the first place.

This is what to do.
If the IRS has applied or you are concerned that the IRS may apply your refund against your spouse's liability, get the IRS Form 8379, Injured Spouse Claim and Allocation. The form will request identifying information and information needed to determine how much of the tax and refund will applied to each spouse. The IRS will also make the actual calculation that splits the refund between you and your spouse
If you are an injured spouse for a return that's already been filed, you can file an amended return with the IRS for prior years and previously filed tax returns. Attach Form 8379 to your return to prevent the IRS from seizing a refund on a return not yet filed.

Please be advised that this website is a general information resource and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

Surviving an Audit

2009-05-28T08:14:00.000-07:00

Who's afraid of the IRS? Almost everyone. The key to surviving a tax audit ~ and even coming out on top ~ is not to panic, but to prepare.

What to Do Before Your Audit
If you go it alone, before meeting the auditor, you should thoroughly review the tax returns being audited. Be ready to explain how you, or your tax return preparer, came up with the figures. If you can't, then contact your tax preparer or another tax pro.

Find all records that substantiate your tax return. As discussed, the IRS has a right to look at any records used to prepare your tax return. Organize your records for the auditor in a logical fashion. Your pre-audit organization of receipts, checks and other items will refresh your recollection for the audit meeting.

Neatness counts. Forget about dumping a pile of receipts before an auditor and telling him or her to go at it. Messy records mean more digging, and more digging, to the IRS, means more gold for them. Conversely, auditors frequently reward good record keepers by giving these folks the benefit of the doubt if any problems arise. Neatness builds your credibility with the auditor. Tidiness and order appeal to an accountant's mentality, and most auditors are accountants.

Pinpoint problems backing up income sources or expense deductions. You'll need to legally show your right to take tax deductions or other tax benefits claimed on your return. Research tax law, if necessary.

What to Bring to an Audit of Your Small Business
Audit success means documenting your expenses. Proof should be in writing, though auditors are allowed to accept oral explanations. A list of items the auditor wants to see usually accompanies your audit notice.
At a minimum, the IRS will expect you to produce the following documents:

• Bank Statements, canceled checks, and receipts. The auditor will want to see bank records from all of your accounts, both personal and business. As a rule, don't discard any business-related canceled checks, invoices, or sales slips. If you paid some expenses with cash, keep the paperwork (handwritten notes, notebooks, receipts, or petty cash vouchers) showing the payments.

• Electronic records. Most banks don't return canceled checks anymore, and many business expenses are charged on credit or debit cards. Bank and charge card (Visa, MasterCard, American Express) statements are now accepted by the IRS as proof of payment. They must show the name, the date, the amount, and the address of the payee.
Since charges and statements don't always show the business nature of the expense, you can't rely on them as your only records.

• Books and records. The auditor will ask to see your "books." The tax code doesn't require small businesses to keep a formal set of books; don't let an auditor tell you otherwise. If you keep records with only a checkbook and cash register tapes, so be it. If you maintain more formal records such as ledgers and journals, the auditor is entitled to see them. If your data is on a computer, the auditor will want to see a printout..
If you don't produce adequate records, the auditor is legally permitted to estimate your income and/or expenses and to impose a separate penalty for your failure to keep records.

• Appointment books, logs, and diaries. Businesses that offer services typically track activities and expenses using calendars, business diaries, appointment books and logs. An entry in a business diary helps justify an expense to an auditor as long as it appears to be reasonable.
Additionally, you must keep special records for certain equipment, called "listed property," that is often used for both business and personal purposes. (IRC § 280F.) Cell phones, computers kept at home but used for business, and vehicles used for both business and pleasure are designated as listed property.
Purely business equipment is not in this category. For example, mechanic's tools, a lathe, or a carpet loom are purely business tools, and no records of usage are required. But when assets are put to both business and personal use, the auditor can demand records of usage. For example, if you use a computer for business email and to play solitaire, keep track of the business portion. One way is to make notes in a note pad next to the computer.
If you haven't kept usage records of listed property, reconstruct them by memory or reference to projects that you worked on during the year.

• Auto records. As mentioned, a vehicle can be "listed property" if it's used for personal purposes as well as business. So business use of your personal auto requires detailed records showing the work portion. A log is the best way to keep track (and it's easy to keep a little notebook in the glove compartment), although it's not required by the tax code. Alternatively, you can keep all gas and repair receipts in an orderly fashion, with notations of trips showing how the car was used for business. A less accurate way to keep records is to add up the gas bills and divide by the number of miles per gallon that your car averages. Show the auditor your auto trip receipts and explain how they link up to sales trips by your business diary or calendar notations.

• Travel and entertainment records. By law, out-of-town business travel and entertainment expenses (T & E, in auditor lingo) require greater recordkeeping than most other expenses. You must have a written record of the specific business purpose of the travel or entertainment expense, as well as a receipt for it. (IRC § 267.)
A good way to document T & E expenses is with an appointment book or log, noting each time you incur a business expense, and the reason. Most folks aren't disciplined enough to write down every expense as it is incurred. It is okay to put together a log or diary after you have received an audit notice. But be up-front about it -- don't insult the auditor's intelligence by trying to pass off wet-inked paper as an old record. Remember, it's key to develop and maintain credibility with the auditor.

Example 1
Bianca, a self-employed designer, reconstructs a calendar book with a notation for June 18, 2000, as follows, "Round-trip cab fare to office of John Johnson, prospective client, $14 (no receipt). Lunch at Circle Restaurant: Discuss proposal to decorate new offices at 333 Pine Street, $32 (Visa charge) plus cash tip of $6 (no receipt)." Bianca can also give the auditor details, if asked. The auditor will probably be satisfied if it appears reasonable.

Example 2
Sam, the owner of a computer store went to an out-of-town computer retailers' convention. He spent $1,800 and claimed it as business travel expenses on his tax return. On audit, Sam produces charge card statements to prove the $1,800 was spent for hotels, meals, and convention registration. The auditor wants more and asks Sam to justify the business purpose of this trip. Sam produces an ad for the convention, an agenda of events, and notes he took at programs. If it looks legitimate, and Sam's explanation of why it was important for him to be there is convincing, the auditor should allow the deduction in full.
• Expenses for renting or buying property. To prove business rental expenses, bring in a copy of your lease. If you purchased the property or equipment, have the purchase contract. This establishes grounds for claiming these expenses as well as a beginning tax basis of the property, if you claim depreciation expenses.

Please be advised that this website is a general information resource and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

Whistleblower Rewards

2009-05-28T05:01:00.000-07:00

An IRS district or service center director may approve a reward for information regarding underpayments of tax. The director decides whether the amount of the reward is adequate compensation in each particular case. IRS Publication 733 provides that the amount of reward will be determined as follows:

“For specific and responsible information that caused the investigation and resulted in recovery, the reward will be 10% of the first $75,000 recovered, 5% of the next $25,000 and 1% of any additional recovery. The total reward will not be more than $100,000.”

For more information http://www.taxwhistleblowers.org/

An Information Resource for Tax Whistleblowers
If you have information regarding underpayment of federal taxes, you could be entitled to a reward. Taxwhistleblowers.org is a free information resource that provides information to private citizens on the rewards available to those who report underpayments of tax to the United States government.

Important Development - New IRS Whistleblower Program
On December 20, 2006, the President signed into law new legislation that dramatically strengthens the IRS's whistleblower program. Under the new law, qualified whistleblowers will be entitled to awards of up to 30% of funds that are recovered by the IRS based on information provided by whistleblowers.
Form 211 Claims for Reward

The Form 211 program permits whistleblowers to request rewards from the IRS after reporting information about individuals or entities who have underpaid taxes. Notably, however, payment of any reward by the IRS under the Form 211 procedure is within the government’s discretion and cannot be compelled by the whistleblower.

Special Agreements

In addition to its Form 211 program, the IRS also has a lesser known program commonly referred to as its Special Agreement program, which permits whistleblowers to enter into contracts with the IRS before they provide detailed information about the subject taxpayer and their alleged tax violations. Special Agreements, however, are typically used only for cases involving large amounts of underpaid taxes.

Please be advised that this website is a general information resource and it is not intended to provide legal advice in your particular case. You should consult with an attorney to obtain legal advice regarding your matter.

Federal Mileage Reimbursement

2009-05-21T14:17:00.000-07:00

Applicable Period Rates in Cents per mile and Source
July 1 – December 31, 2008 I IR-2008-82
Business 58.5
Charitable 14
Medical & Moving 27
_________________________________________
January 1 – June 30. 2008 IR-2007-192
Business 50.5
Charitable 14
Medical and Moving 19
_________________________________________
2007 IR-2007-168
Business 48.5
Charitable 14
Medical and Moving 20
_________________________________________
2006 IR-2008-82
Business 44.5
Charitable Contributions
General 14
Katrina Deductions 32
Katrina Reimbursement 44.5 IR-2005-138
Medical and Moving 18
________________________________________
September 1 - December 31, 2005
Business 48.5 IR-2008-8
Charitable Contributions
General 14
Katrina Deductions 34
Katrina Reimbursement 48.5 IR-2005-99
Medical and Moving 22 Pub L 109 73
_________________________________________
August 25 – 31 2005
Business 40.5 IR-2008-82
Charitable Contributions
General 14
Katrina Deductions 29
Katrina Reimbursement 40.5 IR-2004-139
Medical and Moving 15 Pub L 109 73
_________________________________________
January 1 – August 24, 2005
Business 40.5
Charitable 14 IR-2004-139
Medical and Moving 15
________________________________________
2004
Business 37.5
Charitable IR-2003-121
Medical and Moving 14
________________________________________
2003
Business 36.5
Charitable 14 Rev. Proc 2002-61
Medical and Moving 12
_____________________________________________
2002
Business 36.5
Charitable 14 Rev. Proc 2001-54
Medical and Moving 13