If the most popular question asked of a CPA is "can I deduct that?" the second most popular question is "will that cause an audit?". 99% of the time the answer is "maybe".
Often taxpayers will confuse an audit with a tax notice. The IRS uses tax notices to reconcile discrepancies between income reported to them from third parties compared to income reported on the taxpayer's tax return. Typically these notices can be cleared up with some correspondence and in some cases a telephone call.
Tax audits are much more involved. Typically a taxpayer will need to prove certain amounts reported can be substantiated by way of bank statements, receipts and other documentation.
While no one can predict with any certainty that a tax return will be selected for audit there are things that increase your likelihood.
Here is a list of items that increase your chances of being examined:
- Sole proprietorships that report large revenues and a small net profit or a loss. Schedule C entities are an IRS favorite. Probably because their experience tells them that there is either unreported income and/or overstated deductions.
- Big differences between you and other taxpayers. The IRS measures your return against the average amounts reported by other taxpayers. If you report larger than normal deductions it may increase your chances of being examined.
- Noncompliance. The easiest way to attract attention is to ignore the IRS. This is especially true if they are receiving information from third parties that show you have taxable income.
These are just a few things to consider. If you want to learn more about audit red flags contact me at tax@ajbtax.com.
Wednesday, January 25, 2012
Thursday, January 5, 2012
Important Dates for 2012 Filing Season
The 2012 tax filing season is almost underway and there are several important dates for taxpayers to keep in mind.
The filing deadline for individual taxpayers without extension is April 17, 2012. This is true for both federal and Massachusetts tax returns. The same deadline applies for making 2011 IRA contributions.
If an extension is filed, the extended due date is October 15th, 2012. If a business owner files an extension, certain retirement plans have until the extended due date to make a retirement contribution. This is an excellent planning opportunity for business owners who have increased cash flows in the summer and early fall and want top maximize retirement savings.
The deadline for estimated tax payments for 2012 are as follows:
Quarter 1: April 17, 2012
Quarter 2: June 15, 2012
Quarter 3: September 17, 2012
Quarter 4: January 15, 2013
The filing deadline for individual taxpayers without extension is April 17, 2012. This is true for both federal and Massachusetts tax returns. The same deadline applies for making 2011 IRA contributions.
If an extension is filed, the extended due date is October 15th, 2012. If a business owner files an extension, certain retirement plans have until the extended due date to make a retirement contribution. This is an excellent planning opportunity for business owners who have increased cash flows in the summer and early fall and want top maximize retirement savings.
The deadline for estimated tax payments for 2012 are as follows:
Quarter 1: April 17, 2012
Quarter 2: June 15, 2012
Quarter 3: September 17, 2012
Quarter 4: January 15, 2013
Tuesday, December 27, 2011
Temporary Payroll Tax Cut
The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extends the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through Feb. 29, 2012.
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
What does all of that mean? Pay close attention for an extension of the payroll tax cut for the rest of 2012. If an extension is not passed, there doesn't appear to be any incentive to accelerate earnings beyond $18,350 in the first two months.
Under the terms negotiated by Congress, the law also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).
This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions. The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. With the possibility of a full-year extension of the payroll tax cut being discussed for 2012, the IRS will closely monitor the situation in case future legislation changes the recapture provision.
What does all of that mean? Pay close attention for an extension of the payroll tax cut for the rest of 2012. If an extension is not passed, there doesn't appear to be any incentive to accelerate earnings beyond $18,350 in the first two months.
Monday, December 22, 2008
Tax Audits and Examinations
Ronald Reagan was once quoted "The most terrifying words in the English language are: I'm from the government and I'm here to help." The second most terrifying words are "You're being audited."
So how do you deal with this type of situation and how do you avoid an audit entirely?
While no one can guarantee you will never be audited, there are things you can do to minimize the risk.
File Timely, Complete Returns - Whether you are an individual or business owner, filing all the required tax returns is an important first step to avoid questions being raised. If you have employees payroll tax returns should also be filed and don't forget about 1099's for subcontractors.
Match Income/Expenses Reported to You - If you receive a Form 1099, W-2, 1098, etc. ensure you are reporting those amounts on your return(s). The IRS generally matches the information reported on those types of forms to the information reported on your return(s). Of course, all your income and expenses should be reported accurately. If there are errors reported on any tax forms you received you should contact the issuer and make a note on your tax return(s).
What happens if you are being audited?
The best advice is to hire a professional. Audits can be a stressful event. It is best to have a qualified representative who has dealt with similar issues in the past.
If you are not certain that you are doing all you can to minimize the risk of an audit or want to ensure you are doing the appropriate record keeping, please contact your tax professional or e-mail me at tax@ajbtax.com.
So how do you deal with this type of situation and how do you avoid an audit entirely?
While no one can guarantee you will never be audited, there are things you can do to minimize the risk.
File Timely, Complete Returns - Whether you are an individual or business owner, filing all the required tax returns is an important first step to avoid questions being raised. If you have employees payroll tax returns should also be filed and don't forget about 1099's for subcontractors.
Match Income/Expenses Reported to You - If you receive a Form 1099, W-2, 1098, etc. ensure you are reporting those amounts on your return(s). The IRS generally matches the information reported on those types of forms to the information reported on your return(s). Of course, all your income and expenses should be reported accurately. If there are errors reported on any tax forms you received you should contact the issuer and make a note on your tax return(s).
What happens if you are being audited?
The best advice is to hire a professional. Audits can be a stressful event. It is best to have a qualified representative who has dealt with similar issues in the past.
If you are not certain that you are doing all you can to minimize the risk of an audit or want to ensure you are doing the appropriate record keeping, please contact your tax professional or e-mail me at tax@ajbtax.com.
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