Top IRS Audit "Red Flags"

While audits of individual tax returns are relatively uncommon, the rate has been increasing recently. According to recent statistics, 1.11% of individual returns were audited last year, the highest rate since 1997. If you've ever wondered what kinds of things might get you audited, check out this list of "red flags" from Kiplinger.

Summary of the December 2010 Tax Act

The newly passed and signed 2010 Tax Act, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, includes several provisions that will affect taxpayers. Here is the information you need to know now about this legislation, formally named the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.

Major Provisions
The new law

• postpones the sunset of the 2001 and 2003 tax cuts;
• reduces the estate tax;
• extends unemployment benefits;
• includes an alternative minimum tax (AMT) patch;
• continues through 2012 the lower capital gains tax rate introduced by the Jobs and Growth Tax Relief Reconciliation Act of 2003; and
• extends for two years the repeal of the itemized deduction phase-out and the personal exemption phase-out.

Provisions That May Affect You
Estate Tax
The Act temporarily reinstates the estate tax, with an estate tax rate of 35% and an estate tax exemption of $5 million (adjusted for inflation after 2011).

Payroll Tax
For 2011, the Act reduces the rate for the Social Security portion of payroll taxes to 10.4% by reducing the employee rate from 6.2% to 4.2%. The employer’s portion remains 6.2%.

Family
The Act extends several expired or expiring provisions affecting families, including the following:

• • The increased standard deduction for married taxpayers filing jointly, which is scheduled to expire after 2010, continues for two years.
• • The $1,000 child tax credit amount continues for two years instead of reverting to $500.
• • The increased starting and ending points for the earned income credit continues for two years.
• • The $3,000 amount for the child and dependent care credit, which was scheduled to revert to $2,400 after 2010, continues for two years.
• • The American Opportunity Tax Credit continues for two years.

The Act also makes adjustments to the gift exclusion and generation-skipping transfer (GST) tax that will affect family giving:

• The federal gift tax exemption is increased to $5 million for 2011 and 2012, up from $1 million in 2010.
• The GST tax exemptions are set at $5 million for 2011 and 2012. The exemption limit is scheduled to drop to $1 million beginning in 2013.

Business
The Act extends the 100% bonus depreciation for business property acquired after September 8, 2010, before January 1, 2012, and placed in service before January 1, 2012 (or before January 1, 2013, in the case of certain property). It also sets the expensing limitation under IRC §179 at $125,000 and the phase-out threshold amount at $500,000 for 2012. The Act then reduces these amounts to $25,000 and $200,000 for tax years beginning after 2012.

The temporary 100% exclusion of gain from the sale of certain small business stock under IRC §1202, enacted by the Small Business Jobs Act of 2010, is extended through 2011.

AMT
The Act includes an AMT patch for 2010 and 2011.

Needless to say, the 2010 Tax Act is still very new. It is only just being analyzed by professional advisers. The law is potentially subject to modifications by technical correction acts. In addition, provisions of the law may be interpreted by the Treasury Department issuing regulations and by the IRS issuing forms and instructions.

Returns Won't Be Accepted Before Mid-February

Due to the spate of last-minute changes to the tax rules, the IRS has said they need until mid-February to reprogram their computers before they can accept some returns. Returns for anyone who itemizes deductions or claims certain other deductions cannot be filed until that time. So, if you have to wait longer for your refund, thank a congressman!

IRS Issues 2011 Mileage Rate Update

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

• 51 cents per mile for business miles driven
  
• 19 cents per mile driven for medical or moving purposes
  
• 14 cents per mile driven in service of charitable organizations
  

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Details from the IRS

Summary of the Small Business Jobs Bill of 2010

There's still a lot of work to be done before we have the certainty we need for tax planning in 2011 and beyond, but the Congress got a start with the Small Business Jobs Bill of 2010. ADP/CCH have a nice summary of the provisions on their site.

A quick synopsis:

• Section 179 expense limits are restored to their higher levels
• Bonus depreciation is back
• Sole proprietors now save SE tax on their health premiums
• Some sales of small business stock become tax-exempt

Here's a Tax Simplification Proposal to Watch

Tax simplification is on the minds of legislators these days. It might not be the best thing for a CPA's business, but I'd love to see the tax code become more understandable. Here's one proposal that's being considered.

• Only three tax brackets: 15% for the first $75,000 of taxable income for couples, 25% on the next $65,000, and 35% over $140k. Cut those brackets in half for singles.
  
• Bigger standard deductions: $30,000 for married, $15,000 for singles. That means far fewer people will itemize deductions.
  
• Alternative minimum tax is eliminated, as are phaseouts of itemized deductions and personal exemptions on higher income taxpayers.
  
• 35% of your dividends and capital gains would be excluded. That would put those items at a maximum 22.75% tax rate, versus the current 15% rate that's already set to expire at year end.
  
• Municipal bonds would be less favored. You'd get a credit for 25% of the interest on new bonds, instead of the full exemption they enjoy now.
  
• Some tax breaks would be eliminated. These include flex plans, miscellaneous itemized deductions, moving expenses, the foreign income exclusion, and some tax-free benefits like group term life insurance, employer-provided meals and employee awards.
  

Some S Corporations To Incur Additional Taxes

Owners of small S corporations will begin paying some self-employment tax on the corporate earnings under a Senate bill expected to pass shortly. Personal service corporations who have three or fewer employees will face the 15% SE tax in addition to regular income tax, as will any S corporations who are partners in a service business.

S Corporations have long been a popular tool for saving self-employment tax. They can still serve this purpose in larger settings or in non-service businesses. Set up correctly, the owner is paid a "reasonable wage" that is subject to payroll taxes. Any remaining profits can be distributed to the owner, who pays only regular income tax on those profits.

The problem? Too many hogs screwed up the whole deal for the rest of us. The IRS notes 35,000 one-employee S corporations with income of more than $100,000 who showed no wages. Another 40,000 S firms with income of $50k-$100k also paid no wages, and therefore, no payroll taxes. The IRS has long argued about what is "reasonable compensation," but no one can argue that zero is reasonable.

As is often the case in tax law, pigs get fed, but hogs get slaughtered. The hogs who thought they could abuse the SE tax provisions are on their way to the slaughterhouse.

This blog has moved

This blog is now located at http://futcher-henry.blogspot.com/.
You will be automatically redirected in 30 seconds, or you may click here.

For feed subscribers, please update your feed subscriptions to
http://futcher-henry.blogspot.com/feeds/posts/default.

Auto Deductions Need Documentation

Auto deductions are one of the most frequent business deductions, but is the amount you claim really deductible? Not if there's no documentation, say the laws and recent court cases.


Once recent case involved a man who could absolutely establish that his travel was for business purposes, and not reimbursed. However, he didn't have a log that showed when and to where his trips occurred. The IRS and the tax court denied him any deduction.

Keeping a log can be a tough habit to get into, but without one, your auto expenses may be completely disallowed. That change could be an expensive one for some of you, especially if you do a lot of travel. Something as simple as a small calendar book with the names of the cities you travel to on that day can save your bacon on this deduction.

Stimulus Summary

The recently passed economic stimulus bill contained several tax code changes designed to increase our personal and business spending. These include a deduction for sales tax on auto purchases, even for non-itemizers, increased depreciation for business asset purchases, and a credit for first-time home buyers.

A nice summary of these provisions can be found here.

IRS Mileage Rate for 2009 Will Be 55¢

The IRS announced that the standard mileage rate usable for business mileage reimbursements will move to 55¢ effective January 1. This rate falls in between the early 2008 rate of 50.5¢ and the late 2008 rate of 58.5¢. What's nice is that the stupid half cent is finally gone!

Medical and moving mileage will go to 24¢ per mile, with charitable miles at the good old standard rate of 14¢.

Employers who reimburse their employees should be sure to update their reimbursement systems immediately after year end. If the old rate of 58.5¢ is used instead, the difference of 3.5¢ is technically taxable income to the employee, and payroll taxes would be due on the difference. No big deal if you're a sole proprietor, but for larger companies, a miss on that could be a problem.

McCain & Obama's Plans For Your Tax Bill

As we head toward the climax of the 2008 presidential election, we'd like to bring you the highlights of some tax-related proposals of each of the candidates. We're not here to promote either candidate. While there are many other considerations in selecting your candidate, few will hit you as directly in the pocketbook as the income tax.

The Washington Post shows a nice summary of the effect the candidates changes would have on your family's income. You can see quickly that Obama favors reducing the overall tax burden slightly, but leans toward increasing the taxes for high-incomers to fund further reductions for those in the lower income levels. McCain's plan would reduce overall taxes further, and would provide some relief for all income levels, with more reductions to the high-incomers who pay more of the taxes.

If you'd like some detail on the proposals, visit the Tax Policy Center. Some of the highlights:

Issue	McCain	Obama
Capital gains/dividend tax rate (currently 15% max)	15%	20%
Max Corporate tax rate (currently 35%)	25%	35%
Estate tax exemption	$5 Million	$3.5 Million
Estate tax rate	15%	45%
Other	Require 60% approval for tax hikes	Impose additional 2-4% Social Security tax on those making over $200k-250k
	Increase dependent exemption by 70%	Increase education, earned income and child care credits for low incomers

IRS Increases Mileage Rate for 2nd Half of 2008

In case you haven't noticed, fuel prices are up. Oh...you already knew that?

Well, fortunately, the IRS has gotten wind of this trend as well. As of July 1, 2008, they have increased the standard mileage rate by 8¢, to 58.5¢ per mile. This mileage rate is used by employees or the self-employed to calculate deductions for the usage of their personal vehicles.

Also increasing is the medical and moving expense mileage rate, up 8 cents to 27 cents per mile. As always, the charitable mileage rate remains at 14 cents. Isn't that special...

New Rules Tighten Proof of Contributions

Guidelines issued by the IRS increased the level of documentation required for many contributions to charitable organizations. All monetary contributions must now be supported with either bank records or a written receipt from the organization that gives information about the date and amount of the donation.

Until this change, documentation from the charity was only required for individual contributions over $250. Now that bank records or receipts are required, some smaller cash contributions that we previously deducted are likely not going to qualify. For instance, dropping cash in the collection plate at church, contributing to the Salvation Army's kettle, and pitching in a buck or two at your Rotary meeting will be nondeductible without a receipt from the organization.

Sometimes it seems like the IRS has it in for charities. I'm not sure what that motivation would be, so I'll presume I'm wrong. I just don't see the damage in allowing some minimal threshold for deductible cash contributions with no receipts, if the circumstances seem reasonable.

IRS to Delay Refund Processing for Some Filers

Because Congress failed to fix the alternative minimum tax (AMT) until the last moment, the IRS announced that it will have to delay processing for some returns potentially affected by the AMT changes. Instead of delaying all returns, as was originally thought to be the case, the IRS will only delay processing of returns that use the affected forms.

The forms that will trigger an e-file rejection until the IRS systems have been updated are the following:

• Form 8863, Education Credits.
• Form 5695, Residential Energy Credits.
• Form 1040A’s Schedule 2, Child and Dependent Care Expenses for Form 1040A Filers.
• Form 8396, Mortgage Interest Credit.
• Form 8859, District of Columbia First-Time Homebuyer Credit.

This seems to be pretty good news, as these forms are not incredibly common among returns filed by our office. The Education Credit form is probably the one that would affect the most filers, but the IRS still expects to be ready to accept these returns by February 11. The number of returns filed by our office before February 11 last year? Three.

2008 Mileage Rates Released

The IRS announced that the mileage rate for business use of a vehicle will increase to 50.5¢ per mile for 2008. This is just a two cent increase from 2007.

For moving and medical expenses, you can use a mileage rate of 19¢ in 2008. This is actually a one penny drop from 2007. Apparently there are special, cheaper gas stations you can use when moving or heading to the hospital.

And since the rate is set by statute, the charitable mileage rate of 14¢ remains another year.

Business or Hobby?

Is raising pigs for your kids' 4-H project a business? How about selling kitchen supplies just so you can buy at wholesale prices? In many cases, the IRS has found activities like these to be hobbies, not businesses. The IRS has issued fact sheet FS-2007-18 to explain the rules for determining if an activity qualifies as a business and what limitations apply if it's a hobby.

Basically, if you don't have a realistic chance of making money, the IRS will want to call your activity a hobby. The big downside of this treatment is that your expenses have to go on your Schedule A, in the section that's reduced by 2% of your gross income from all sources. The expenses also can't be more than the gross income from the activity. Don't worry too much about how to report it; just know that it's a lose-lose situation if your activity is deemed a hobby.

Oh, and even if you don't get any benefit from your deductions because of the rules above, you still get to pay tax on the revenue from the activity. Isn't that generous?

Things you can do to help your activity seem more like a business include having a business plan that realistically shows you could make money on the deal, handling things in a businesslike manner (business cards, advertising, etc.), and, well, making money! If you have a profit three out of five years, the IRS will leave you alone. Of course, you can be in a legitimate business and lose every year; the burden of proof is yours, though.

Tax Preparers Gone Wild

Nothing against our friends in the transportation industry, but if your school bus driver is preparing your tax return, you might have a problem. Such was the case for over 300 individuals in Missouri

A daytime bus driver and nighttime tax preparer, Yolanda White, has been accused of filing scores of bogus tax returns for people. Apparently, the IRS audited 30 of her clients, and they all contained fraudulent deductions. Guess who else the IRS will be auditing? That's right, the other three hundred clients of hers.

So when it comes to taxes, remember that the same person who gets you bussed can also get you busted.

Do You Owe Tax on eBay Sales?

The friendly folks at the Internal Revenue Service want to make sure you know that if you sell things on eBay, you might owe them money. They issued a summary that gives some guidelines on whether you're in the 'business' of auction sales.

Basically, if you're just selling things occasionally, in the online equivalent of a garage sale, you're clear. But if your activity is repetitive, or you buy items with the intention of reselling them for a profit, you could well be in business, whether you know it or not. In addition to regular income tax, the Service could want an extra 15% self-employment tax.

They just wanted to make sure you know! ;)

New Rules for 2007

As we begin the new year, you'll want to keep in mind some of these new or updated tax law provisions that take effect January 1:

Individuals

• Charitable contributions have to be documented in order to count. Cancelled checks or receipts can fill that requirement. No more deductions for cash in the offering plate or Salvation Army kettle, though.
• Private Mortgage Insurance (PMI) is now deductible if you get your mortgage in 2007 or beyond.
• You can contribute an extra $500 to your 401(k) plan with a new maximum amount of $15,500.

Businesses

• Maximum amount of equipment purchases you can immediately expense instead of depreciate increases to $112,000.
• Standard mileage rate is up to $0.485 per mile.
• For contractors and manufacturers, the pruduction activities deduction increases from 3% to 6% of your income.