Archive for Steven Potts

You Are Under Audit – Survival Tips

If you get a letter from the IRS, do not take it personally. The government just wants to make sure your return is accurate. However, it does mean it is time to make sure you have all of your documentation and supporting records in order.

The IRS conducts audits in three ways:

1.  By Mail. You will be required to mail a form or additional information to the IRS.
2.  At an IRS facility. Typically, you will bring your receipts, records and other documents to substantiate what is on your tax return.
3.  At your home or business. An auditor visits your home or business to verify your return.

To get through an audit smoothly consider the following common-sense rules:

•  Consider hiring help! You can be represented by an attorney who has experience in IRS Audits and processes, a CPA or a federally authorized enrolled agent.

•  Know your rights. Before your audit, read “Your Rights as a Taxpayer” in my Tax Library.

•  Be Honest. Lying to the IRS can trigger heavy fines and even jail time.

•  Get organized. You will generally have more credibility if you can answer questions and produce what is asked of you. If you need time to get your act together, you or your representative may typically request a postponement.

•  Stick to the topic. Whether you are answering a question or responding to a request for records, only give the IRS what it requests.

•  Take notes. Keep track of the examiner’s questions and your answers.

•  Be courteous. Do not be hostile. If you think you are being treated unfairly, share your feelings with the examiner’s supervisor.

•  Consider an appeal. If you disagree with the auditor’s findings, you might first try talking to a supervisor. You can also send a protest letter to the IRS Office of Appeals within 30 days of receiving the report.

Written by | Posted in Federal • Individual

The Dreaded IRS Audit – Red Flags

Being selected for an IRS audit isn’t simply a matter of chance. Certain factors can make your tax return stand out from the rest.

Extra Help Online

To help you cut the risk of an audit, use a tax preparation service,

The IRS pays more attention to some returns than others, so it’s important to understand the factors that may elevate the likelihood that auditors take an interest in your situation.

If you’re audited, don’t be surprised if you have to make additional payments for invalid deductions or expenses. It’s easy to make mistakes, so be sure to keep all your documentation in case you get audited.

Here are eight potential red flags that could alert the IRS — and some survival tips if you come under scrutiny.

1. High incomes. According to a recent IRS report on its enforcement activity, your chance of being audited substantially increases once your income crosses $200,000.

2. Large itemized deductions. Deduct every penny you’re entitled to — but realize that if your itemized tax deductions are bigger than the IRS’ target range for people at your income level, your return may get a second look.

3. Home offices. You can only take a home office deduction if you meet all of the qualifications, including regularly and exclusively using part of your home as your principal place of business. For example, if your office doubles as the kids’ playroom, you’re generally unable to deduct it. For details, see IRS Publication 587.

4. Missing investment income. You know the IRS Form 1099 that financial services companies send you that summarizes your interest and dividends for the year? The IRS also gets that information. Make sure your return properly includes this information.

5. Incomplete returns. If your return is missing a few pieces, the IRS may wonder what else you forgot. Although you still must enter the correct information, a tax-preparation service that calculates figures you enter may help you avoid certain clerical errors that raise auditors’ eyebrows.

6. Business losses. In a tough economy, business losses are more common — but they’re still something the IRS likes to double-check. Make sure your expenses are legitimate and eligible to be deducted and that your business isn’t just a thinly disguised hobby.

7. Charitable deductions. You’ll need a canceled check or dated receipt for any cash contributions, and contributions of $250 or more require written acknowledgement from the charity. If you made a noncash contribution valued at more than $5,000, you’ll need an expert appraisal to back up your claim.

8. Medical expenses. For 2012, you can deduct these costs only to the extent they’re greater than 7.5% of your adjusted gross income, and it’s important to keep detailed records. Also remember you can’t deduct the cost of over-the-counter medicine, health club dues or most cosmetic surgeries. For 2013, the percent-of-AGI hurdle for those 64 and younger is climbing to 10%.

If you’re doubtful about the decisions you’re making when completing and filing your tax return, consider hiring a professional. Spending some money for expert guidance today could help you avoid paying increased taxes and penalties tomorrow.

Written by | Posted in TaxConnections

Thirteen Tax Deductions To Lower Your Tax Bill

 

For all the talk about tax changes at the end of 2012, many people are still left wondering what it means for them.

While many issues were resolved, a lot of taxpayers still aren’t sure how their tax returns and deductions are affected.

If you’re one of those people, brush up on these 13 deductions before tackling your tax return. They are worth reviewing, as they could lower your tax bill.

1. Traditional IRA contributions. You have until April 15, 2013, to contribute up to $5,000 to a traditional IRA for 2012 and, if you qualify, deduct it on your tax return. Here are some guidelines:

  • If you were 50 or older on the last day of 2012, you can contribute up to $6,000.
  • If you (and your spouse if you’re married) weren’t covered by an employer’s retirement plan in 2012, you can generally deduct your contribution in full.
  • If you were covered by an employer plan, you can only take a full deduction if your modified adjusted gross income was $58,000 or less  $92,000 or less for married couples filing jointly). Your deduction is reduced if your modified adjusted gross income was more than $58,000 but less than $68,000 ($92,000 and $112,000 for married couples filing jointly). Above those levels, you may still contribute, but you can’t take a deduction.
  • If your spouse was covered by a retirement plan at work but you weren’t, you’re eligible to take a full or partial deduction if your combined adjusted gross income was below $183,000. See IRS Publication 590 for more details.

2. Self-employed retirement plans. If you work for yourself, you can open a Simplified Employee Pension IRA by April 15, 2013, and deduct your contribution on your 2012 return. SEP IRAs may be an easy way to create your own retirement plan, and they can allow much higher contributions than traditional IRAs. Contributing to a SEP IRA does not exclude you from making an IRA contribution, but it may affect whether you can take a deduction for it. (A SEP IRA is considered an employer-sponsored plan).

3. Mortgage interest. You’re allowed to deduct interest paid on your primary mortgage, as well as home equity loans, home improvement loans and lines of credit. In general, you may deduct interest on up to $1 million of primary mortgage debt and up to $100,000 of home equity balances.

4. State and local taxes. The federal government generally allows taxpayers to deduct property and income taxes paid to state and local governments.

5. Sales tax. If you didn’t pay much state income tax — or live in a state that doesn’t tax income at all — you may be able to choose to deduct sales tax instead. And you typically don’t need receipts — simply calculate an assumed amount using an IRS table or online calculator.

6. Charitable gifts. Donations to charity may ease your tax burden, but only if you have the right documentation. Cash contributions — regardless of the amount — require a canceled check or dated receipt. Any contribution of $250 or more requires bank or payroll deduction records or a written acknowledgment from the charity. Noncash contributions valued at more than $5,000 generally require an appraisal.

7. Education costs. Up to $2,500 in interest on loans for qualified higher education expenses may be deductible if your adjusted gross income is less than $75,000 ($150,000 if you’re married and filing a joint return). A portion of your tuition and fees may be deductible if your adjusted gross income is $80,000 or less ($160,000 on a joint return). There are also two tax credits for college costs: the American Opportunity Credit and the Lifetime Learning Credit (See IRS Publication 970).

8. Medical and dental costs. The government sets a high hurdle for these expenses: You may be able to only deduct them if they exceed 7.5% of your adjusted gross income. Be aware that the Patient  Protection and Affordable  Care Act decreases this deduction for the 2013 tax year because those expenses generally will be deductible only if they exceed 10% of your adjusted gross income. The law does include a temporary waiver for seniors and their spouses if either has reached age 65 before the close of tax years 2013-2016.

9. Health insurance. Self-employed taxpayers get a break on one of their biggest financial headaches. In general, they may be able to deduct all of their health insurance premiums.

10. Health savings accounts. If your family was covered by a high-deductible health insurance plan in 2012, you may be able to contribute up to $6,250 to a health savings account ($3,100 if it only covered yourself). Contributions are deductible, and withdrawals for qualified medical expenses are tax-free. Similar to IRAs, you have until April 15, 2013, to contribute for the 2012 tax year.

11. Job-related moving expenses. If you moved to take a new job, you may be able to deduct your expenses if you pass these two IRS tests:

  • Your new job must be at least 50 miles farther from your old home than your old job. If you didn’t have a previous job, your new one must be at least 50 miles from your old home. If you’re in the military with permanent change of station orders, you do not have to meet these rules.
  • If you’re an employee, you must work full time for at least 39 weeks during the 12 months after you arrive in the general area of your new job. If you’re self-employed, you have to work full time for at least 39 weeks during the first 12 months and 78 weeks during the first 24 months.

12. Guard and Reserve travel expenses. If you traveled more than 100 miles to attend a drill and spent the night, you may be able to deduct lodging expenses, half the cost of your meals and 55.5 cents per mile for travel. You also can deduct tolls and parking fees.

13. Out-of-pocket teacher expenses. Teachers, aides, counselors and principals — kindergarten through 12th grade — should be able to deduct up to $250 for classroom supplies purchased in 2012.

Written by | Posted in Federal • Individual • Tax Policy • TaxConnections

Important Facts About Debt Forgiveness

If your lender cancelled or forgave your mortgage debt, you generally have to pay tax on that amount. But there are exceptions to this rule for some homeowners who had mortgage debt forgiven in 2012.

Here are 10 key facts from the IRS about mortgage debt forgiveness:

1. Cancelled debt normally results in taxable income. However, you may be able to exclude the cancelled debt from your income if the debt was a mortgage on your main home.

2. To qualify, you must have used the debt to buy, build or substantially improve your principal residence. The residence must also secure the mortgage.

3. The maximum qualified debt that you can exclude under this exception is $2 million. The limit is $1 million for a married person who files a separate tax return.

4. You may be able to exclude from income the amount of mortgage debt reduced through mortgage restructuring. You may also be able to exclude mortgage debt cancelled in a foreclosure.

5. You may also qualify for the exclusion on a refinanced mortgage. This applies only if you used proceeds from the refinancing to buy, build or substantially improve your main home. The exclusion is limited to the amount of the old mortgage principal just before the refinancing.

6. Proceeds of refinanced mortgage debt used for other purposes do not qualify for the exclusion. For example, debt used to pay off credit card debt does not qualify.

7. If you qualify, report the excluded debt on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness. Submit the completed form with your federal income tax return.

8. Other types of cancelled debt do not qualify for this special exclusion. This includes debt cancelled on second homes, rental and business property, credit cards or car loans. In some cases, other tax relief provisions may apply, such as debts discharged in certain bankruptcy proceedings. Form 982 provides more details about these provisions.

9. If your lender reduced or cancelled at least $600 of your mortgage debt, they normally send you a statement in January of the next year. Form 1099-C, Cancellation of Debt, shows the amount of cancelled debt and the fair market value of any foreclosed property.

10. Check your Form 1099-C for the cancelled debt amount shown in Box 2, and the value of your home shown in Box 7. Notify the lender immediately of any incorrect information so they can correct the form.

Written by | Posted in Federal • Individual

The Real Spending Problem

The New York Times Editorial Board has written an editorial condemning tax breaks, which is justified, in part. They point out:

Tax breaks work like spending. Giving a deduction for certain activities, like homeownership or retirement savings, is the same as writing a government check to subsidize those activities. Functionally, they mimic entitlements. Like Medicare, Medicaid and Social Security, they are available, year in and year out, in full, to all who qualify. Yet in budget talks, Republicans ignore tax entitlements, which flow mostly to high-income taxpayers, while pushing to cut Medicare, Medicaid and Social Security.

While they point out that the deduction for homeownership is the same as writing a government check they go on and only point out the special deductions/entitlements they feel are the ones the rich take advantage of:

CARRIED INTEREST.   This loophole lets private equity partners pay tax on most of their income at a top rate of 20 percent, versus a top rate of 39.6 percent for other high-income professionals. It drains the Treasury of $13.4 billion a decade, and should be closed, along with a shelter recently enacted in Puerto Rico that would help shield the income of individuals whose taxes would rise if the carried-interest tax break was eliminated.

NINE-FIGURE I.R.A.’S.   Remember Mitt Romney’s $100 million I.R.A? Private equity partners apparently build up vast tax-deferred accounts by claiming that the equity interests transferred to such accounts from, say, their firms’ buyout targets are not worth much. No one knows how much tax is avoided this way. What is known is that I.R.A.’s are meant to help build retirement nest eggs, not to help amass huge estates to pass on to heirs.

‘LIKE KIND’ EXCHANGES.   As reported in The Times by David Kocieniewski, this tax break was enacted some 90 years ago to help farmers sell land and horses without owing tax, as long as they used the proceeds to buy new farm assets. Today, it is used by wealthy individuals and big companies to avoid tax on the sale of art, vacation homes, rental properties, oil wells, commercial real estate and thoroughbred horses, among other transactions. Government estimates say this costs about $3 billion a year, but industry data suggest the amount could be far higher.

While these entitlements, which can be abused egregiously,  they are not the only ones. What Congress really needs to do is discard the entire tax code except for §61 which defines income as:

Except as otherwise provided in this subtitle, gross income means all income from whatever source derived …

Starting with that clean slate they should only allow exceptions for those exceptions which are willfully, intelligently and fully understood when put in place. No passing them so we can read the bill later.

These exceptions to income should be subject to hard and fast sunset provisions with the continuing of the exceptions only after detailed review and assessment that the purpose for which it was provided still is valid.

The tax code should not be used for social policy reasons. Examples are numerous but some of them are:

1.  Education Credits – to promote higher education for a certain group of citizens … discrimination to “fix” discrimination.

2.  Earned Income Credit – the largest area of fraudulent returns.

3.  Child tax credits … paying people who cannot afford to have children to have children.

4.  Mortgage Interest Deduction … started with the tax code of 1952 to help enable the returning veterans buy homes … something Congress deemed a good social goal.

5.  Child Care Credit … to allow single mothers the ability to work … a worthy cause I am sure but one that does little to discourage out of wedlock children, single parent homes, latch-key children, the cycle of children who are brought up thinking this sort of life style is appropriate.

Some will think I am harsh by the entitlements that I point out. I am not trying to say that none of them are valid I am just arguing that there should be no sacred cows. No matter which section of the tax code you try to eliminate someone’s ox is being gored. It is time to start over with the clean slate.

Written by | Posted in Tax Policy
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