Tax Accounting Blog
News and Views in the Tax Preparation, Accounting, and Financial Investment World
What are your chances of a tax audit by the IRS?
When you think tax audit, panic and anxiety may set in. There are two kinds. The first is a correspondence audit, which is the mildest form, in which the IRS asks for information to be mailed in. A more complicated one requires that you meet in person with an IRS representative either at their office or your own. This type of audit may cover multiple years and/or sections of your tax return. Kevin Thompson, CPA says “for aggressive taxpayers, it’s a great time to be alive.” Your chances of a tax audit are at a low level right now. There has been a six-year decline in audits with only 1,000,000 taxpayers selected. The number of people being audited dropped 16% between 2015 and 2016. In the last 12 years, fewer people were audited and the population of U.S. taxpayers has expanded by approx. 30 million people. The cause of the decline The IRS has experienced budget and funding cuts in recent years and that has resulted in a decrease in IRS employees and enforcement agents. Because a citizen’s chances of a tax audit are lower the government has received less in revenue. IRS commissioner John Koskinen reported that about 2 billion in revenue has been lost as a result. Thompson says...
Basic Tax Rules – A Struggle for the Average Joe and Jane
Most taxpayers will admit that they have a hard time understanding basic tax rules. Who can blame them? It’s complicated. Still, only 32 percent hired a tax professional while 35 percent used some type of commercial tax software. The remainder depended on family members, significant others, free IRS software (available to certain income groups) or companies like H & R Block. Kevin Thompson, CPA says “this is like showing up at a gunfight with a water pistol. Taxpayers are increasingly outmatched by an underfunded IRS and their inability to hire and pay for competent professional services.” 8 questions were given to a group of average Americans regarding IRS rules. Out of the group, only 25% of the questions about basic tax rules were answered correctly. Half of them had no clue what tax bracket they were in and 58% thought a tax extension meant they could delay paying their income tax by the due date. Thompson says “I guess they know now that they can extend filing but not payment. I say I “GUESS” because we discover every year yet another client unaware of the onerous penalty system imposed by the IRS and their voracious appetite for those penalties.” 71% were correct in...
What you Need to Know About Tax Return Disclosure That Does Not Trigger Audits
Tax return preparers and advisers often use the word “disclosure” but many taxpayers do not understand what it means. Kevin E. Thompson, CPA says “I understand most taxpayers misunderstanding disclosure. I’m not sure most preparers know what it means. And some taxpayers may also think of it in a negative way or are suspicious about disclosing information that could invade their privacy.” It can also be perceived as more work or a risky venture. No one wants to risk an audit if they can help it and will try to avoid doing anything that would trigger an audit. The fact is: Disclosure can help prevent risk in many cases. Thompson says “we are looking to avoid two types of risk. First and foremost, appropriate disclosure of certain transactions can avoid an examination. Second, it can reduce the incidence of penalties.” What is disclosure? Disclosure is an “explanation” of income or expense. How much should be disclosed depends on what your legal requirements are and what you do. Sometimes the IRS requires one especially if a point is in question on an item you are claiming. There are multiple instances in which it is beneficial even though it may not be required. It may get you out...
There May be Another Medicare Hold Harmless in 2017 so Beware
Most tax advisors learned last year that the Social Security law would prohibit the net amount of a Social Security check from decreasing because of increases in Medicare premiums. It’s called the “Hold Harmless” provision and is not usually an issue because a COLA is usually in place. That means Social Security benefits are greater than the increase in Medicare premiums. However, in 2016, there wasn’t a COLA and Medicare premiums increased because of expenditures. There will be a COLA in 2017 but it will only be a tiny 0.2%. Medicare trustees announced in June that a 22% increase in Part B premiums may be mandatory. This will affect the wealthy but others may also be affected and face a stiff increase in their Medicare Part B premiums. They will need to fall into certain categories in order to be protected. Kevin E. Thompson, CPA says “I have seen three (3) taxpayers thus far that have seen significant increases driven by their income levels.” In 2017, premiums will be based on 2015 Medicare expenditures. (a 2-year “look back”) 75% will be paid from the general fund. (where Medicare taxes is generally collected.) 25% is paid using premiums that are charged to beneficiaries....
Reduced funding for the IRS has Resulted in Lower collections from High Income Nonfilers
The IRS has been ignoring high-income taxpayers who owe billions of dollars and its watchdog group is pressing them to go after them. Approximately 1.9 nonfilers for 2012-2013, who have expired extensions, still owe an estimated $7.4 billion according to the Treasury Inspector General for Tax Administration Audit. (TIGTA) However, they are not faulting the IRS, as much as Congress, who have cut the agency’s budget. Reduced funding has subjected compliant taxpayers to mediocre service and has made it harder for the IRS to pursue delinquent taxpayers. Nonfilers account for at least $26 billion of the $458 billion estimated tax gap. In the course of a year, the IRS will typically send delinquency notifications to approximately 7 million nonfilers. But the TIGTA has found that programming errors, bad management decisions, and lack of resources have contributed Treasury losses. In 2012 and 2013 the IRS collected $433 million and $290 million compared to $4.3 billion and $3.6 billion for 2010 and 2011. Nonfilers are tracked by third party reporting such as 1099 Misc, (self-employment) and 1099-B (stocks) forms. They also look at taxpayers who have filed in the past but failed to...
Bitcoin User Data Being Sought by IRS
The IRS is looking for user data from Bitcoin customers causing tensions in regards to compliance and privacy. The agency has requested that Coinbase turn over records on users who have completed transactions between 2013 – 2015. Kevin E. Thompson CPA says “I began looking at the Bitcoin phenomenon maybe 5 - 7 years ago. My long-time business associate said I should check this out and the Burger King on Pico and 20th started accepting Bitcoin. So, I did. I am not normally a risk-averse person but this stuff had risk written all over it. The rest of this article validates why I stayed away.” Thompson says “but that doesn’t mean everyone stayed away.” Coinbase currently has nearly 5 million users. Their main concern is that they will be required to turn over their customer’s financial records. The IRS has previously targeted banks but didn’t require them to turn over data on most of its account holders. What they are asking Coinbase to do is much broader. The company is concerned that innocent as well as fraudulent customers will have their privacy violated. For instance, if you have bought books, considered to be politically incorrect, the government will have a record of it. The...
Beware of the Quickbooks Software Phishing Fraud
“Fishing is fun,” says Kevin E. Thompson CPA “But PHISHING is dangerous. ”Phishing is when a scammer sends an email that makes you think it’s from a reputable company. They can replicate a company’s branding to trick you into giving them important information. If you think you’ve received a phishing email do not click on any of its links. Instead, go to your browser’s address bar and type the company’s main domain. Scammers often use well-known banks and other financial institutions to phish. One company that has recently been targeted is Quickbooks. You may receive an email with a subject line that reads “Quickbooks Support: Change Request.” It asks you to confirm that you’ve made a change to your business name with Intuit, the company that owns Quickbooks. This is also called “click bait” When you click on a link in the email, scammers can download harmful malware to your device. They can then collect your passwords or financial information and steal your identity. A good rule of thumb is to never click on links in the emails of financial institutions, even if you think it’s real. Ways to identify phishing emails Check the reply email. If it does not come from the main domain...
Replacing Computer Equipment
Co-written by Kevin E. Thompson CPA and Ted Mayeshiba, MBA, Fellow, Institute of Industrial & Systems Engineers. How do you define “business interruption”? News reports that talk about earthquakes, hurricanes and tornados come to mind. However, the most disruptive for the single person or small business is as simple as an electrical outage maybe due to high winds or an isolated burst pipe. Since most of your business is on computers, how far do you get with no electricity? How far do you get with a computer failure? How willing are your clients to wait for service? Let’s help you determine your greatest risk potential. (https://www.sba.gov/blogs/seven-ways-start-your-business-continuity-plan) Risk of Failure Laptop Desktop Virtual Terminal Server Firewall Low <2 years <3 years <7 years <3 years <4 years Moderate 2-3 years 3-5 years 7-10 years 3-4 years 4-6 years High 4+ years 5+ years 10+ years 4+ years 6+ years Ease of Replacement Moderate Moderate Easy Hard Moderate As a physical asset, hardware replacement must usually be planned for in advance so that you’re not scrambling to replace it after it fails. This proactive replacement is often referred to...
How the Donald Trump Tax Change Proposals Could Affect You
“My tax cut is the biggest since Ronald Reagan. I’ve very proud of it. It will create tremedeous (sic) numbers of new jobs” ~ Donald J. Trump (Well, he can’t spell) Here is a summary of Donald Trump’s tax change proposals. Tax Rates There will only be three brackets rather than the existing six - 12%, 25%, and 33%. Corporate taxes will be fixed at 15% and there will be a 10% repatriation tax on foreign subsidiary accumulated earnings. Deductions There will be new deductions for health insurance premiums, childcare costs, and dependent care savings accounts. Itemized deductions will be limited to mortgage interest and charitable gifts. All deductions will be limited to a cap of $100,000 for individuals and $200,000 for those filing jointly. Proposed Repeals Trump has promised to repeal the Affordable Care Act (ACA), Alternative Minimum Tax (AMT), Gift & Estate tax, stepped up basis on gains over $100, and most business tax incentives. Kevin Thompson, CPA says “I cannot imagine the complexities surrounding the repeal of the ACA. Although I don’t like the idea that health insurance has become a tax issue, I also do not like the idea of uninsured Americans.” Thompson goes on to...
IRS Takes Aggressive Stance on LLC Self-Employment Tax Income
If you have an LLC do you know how much your member’s shares are when it comes to self-employment tax? It’s a complicated matter because the IRS code and regulations do not provide any guidance on how to treat an LLC member in that regard. However, the agency has just provided a form that details how aggressive it will be in going after self-employment taxes from certain LLC members and it’s something to be aware of. Kevin Thompson, CPA says “this is another example of a complex set of laws biting taxpayers when they try and do the right thing.” Before anything else, it’s important to understand why this is an issue, who is subject to SE tax, and why the authority doesn’t exist. Self-employment income is taxed at 15.3%. 12.4% goes to old-age survivors and disability insurance tax. The remaining 2.9% is designated toward hospital insurance tax. Another 0.9% has been tacked on to a taxpayer’s self-employment if their income is over $250,000 married - filing jointly, and $200,000 if single. In total, the self-employment tax burden, under the current law, can be as high as 16.2%, before considering the deduction for one-half of the self-employment tax that doesn’t include the 0.9%...