Supreme Court Hands One to the IRS (and many more…)

Posted on March 31, 2011 by

Per this analysis from Taxes -the Tax Magazine, the Supreme Court has decided in favor of the IRS in a suit brought by the Mayo Foundation. The details of the suit are not important unless you are a resident physician who would like to be classified as a student instead of an employee.
However, what is important is how the Court decided the case, ie, the standard to which they (and all the other courts that follow the Supreme Court) will hold IRS regulations.
And it’s not good news for us. IRS regulations are the rules that the IRS comes up with to enforce tax laws. The tax laws that Congress passes can be maddeningly vague or just poorly-written. When a new tax law is changed or created, tax professionals and the IRS try to figure out exactly how and to who it applies.
To help us out, the IRS will draft regulations pertaining to a law. However, I must point out, they are not the law – just one way to interpret the law.  And taxpayers challenge the IRS rules, suggesting that Congress may have intended something other than what the IRS says.
Well, that will be much harder to prove since the Mayo decision. The Supreme Court, ultimate court of the land, chose to give much more weight to IRS regulations. Courts will now defer to the IRS regulations unless Congress has revisited the issue and unless they are clearly contrary to the law or capricious in nature. I think this shifts the burden onto the taxpayer to prove this higher standard. The judicial repercussions are still unfolding. We’ll see what happens…

Posted in Tax News | Leave a comment

Blog Carnivals 2011-03-30

Posted on March 30, 2011 by

Thanks so much to Money Beagle for listing my post about Audit Risks at the Carnival of Personal Finance and Don’t Mess With Taxes Tax Blog Carnival for listing my small business taxes book review. It’s great to see what others are discussing this week.

Posted in Tax News | Leave a comment

Tax Savvy for Small Business Book Review

Posted on March 25, 2011 by

Tax Savvy for Small Business BookTax Savvy for Small Business is a clear and handy guide to many aspects of small business taxation. If you own a business, I recommend you leaf through it and then sit down and read the sections relevant to your business. It is not a guide to doing your own business taxes; instead this book tells you about everything else you need to decide before your tax return is prepared.

Let’s face it, most financial decisions in your business have tax consequences, If you can have those consequences in your mind when making day-today choices on spending, hiring, business structure, office space, etc, then you will be way ahead of the game come tax time. Your accountant will be happier and you will get much more out of the the time and money you spend there.

If you’re just starting out or if your accountant never sat down and explained how and what to deduct, then read the “Basics” section first. Learn the ins-and-outs of deductions and depreciation. Buying things is essential for most businesses to run and whether you lease or buy, and when and where you take the deduction makes a difference to your bottom line. I cannot over-emphasize the importance of keeping good records; if you do not know what you spent, you cannot deduct it!

The next most important thing to business taxes is the structure of your business. While most of us start out as a sole proprietor or a partnership, there are good reasons to move up the evolutionary ladder and get a bit more formal. Each form of business — sole prop, C corporations, S Corporations, partnerships, LLC, and personal service corporations — are examined along with the good and bad news about each one.

One reason that small businesses are called the “poor man’s tax shelter” is fringe benefits. The benefits available to you will depend on the business structure that you choose, but they can be financially significant. Read up on them in this book and see if they make it worthwhile to set up a nice tax-advantaged retirement plan, dependent care plan or other snazzy tax deduction. Your favorite tax professional can help you with the nuts and bolts of these types of plans.

Now business is not all deductions and conventions in Waikiki – sometimes you have to deal with the IRS. There are great tips in this book on how to handle these types of situations. I would never say meet the bogeyman by yourself – but reading this section will make you a more informed participant so you can help your tax pro do the best job for you.

There are several other sections and chapters I haven’t even mentioned but I think that you can see for yourself that this is an excellent book for any business owner, especially as it has been updated in late 2010.

Posted in Business Taxes and Accounting, IRS Audits | Tagged | Leave a comment

Audit Risk Highest on $10Million+ Income

Posted on March 21, 2011 by

Recently released data from the IRS shows that 19% of  income tax returns showing an Adjusted Gross Income (AGI) of $10,000,000 or more were examined in 2010 even though they were just .01% of all returns submitted that year. That’s a pretty good odds for being audited, unfortunately. Though you might consider yourself fortunate enough to be in that tax bracket!

If your AGI was just a step below, from $5,000,000 to $10,000,000 — you’re a bit better off, audit-wise.  Just 12% of those returns were examined by the IRS while they were the same percentage (.01) of the total tax returns. Great reason to shift some income into next year to stay below the dreaded $10 million level. Ah, to have such problems…

Examination rates continue to plummet as for mere millionaire earners, it is a comparatively meager 3% – 6%, depending on how far over the fence your pot o’ gold extends this particular year.

While middle class and upper middle-class are very fuzzy terms, I can tell you that taxpayers with an AGI from $50,000  – $200,000 face very similar examination rates,  around 3/4 of a percentage point on average. This group includes about 55% of  all tax returns submitted.

Audit rates actually go up on tax returns showing an AGI from $1 to $25,000. That is 40% of tax returns and just about 1% of them got looked at by the IRS. The last category as reported by the IRS is “No Adjusted Gross Income,” which includes a negative AGI, presumably from a net loss. These suspicious returns,  just 2% of those submitted, had an audit rate of more than 3%.

What have we learned?

  • The IRS trusts the middle class most
  • It’s better to make $8,000,000 than $11,000,000, and
  • Try not to show a negative income on your return

 

Posted in IRS Audits, Tax News | Tagged , | Leave a comment

Time is Running Out to Collect 2007 Tax Refunds

Posted on March 10, 2011 by

The IRS kindly reminded us that an estimated billion dollars in unclaimed refunds will expire April 18, 2011. The deadline for receiving a refund on your tax return is 3 years from the date due. The return for tax year 2007 was due April 15, 2008 and no claims for a refund will be accepted after April 18, 2011. (Though the tax return is still legally due!)

“The IRS estimates that half of these potential 2007 refunds are $640 or more from taxes withheld or estimated payments made during 2007.”

Many taxpayers who have not filed past returns no longer have all the records needed. The first step is to get a transcript of what information the IRS has on file for that tax year. Try the online procedure as long as you don’t need the transcript mailed to a different address than what the IRS has on file. You must file a paper Form 4506-T instead. Then get started on your 2007 tax return.

Posted in Overdue Tax Returns | Tagged , , , | Leave a comment

Late Filing Your S-Corp Election Part 1

Posted on March 9, 2011 by

Did you just realize that no one filed the one piece of paper that changed your C-corporation or LLC into an S-corporation?

The election to S-corp should have been filed the year before it applies or within 2 months and 15 days into the year it applies So, if you are an existing calendar year business, file Form 2553 by March 15, or better yet, the year before. If you are a new business, it needs to be filed within two months and 15 days of the first tax year. For example, if you started your business July 1, file by September 15. But that’s probably all past history. You missed those deadlines, so now what?

Well, there is actually a rare second chance to get the S-corporation election right. How you file does depend on certain conditions and you do need to have a good reason why the S-corp election wasn’t filed or filed correctly. In this first article about late filing S-Corp elections, I’ll cover IRS Revenue Procedure 2007-62 and who can use this very simplified method for obtaining relief.

Continue reading →

Posted in S-Corp Taxes | Tagged , , , | 2 Comments

Hello world! from Wendy Litten, EA

Posted on January 31, 2011 by

Welcome to my new blog, exploring issues in tax problem-solving. The odds of running afoul of the IRS or a state tax authority seem to be growing every year. I hope to share information that anyone can use in these situations. Thanks for visiting!

Posted in Tax News | 1 Comment