March 6, 2014
Authored By: Sheri Lewis, Staff Accountant, who has worked at Cook Martin Poulson since November 2011. She recently received her Master of Accounting Degree and is in the process of taking the CPA exams.
Although the IRS will audit less than an estimated of 1% of all the individual tax returns each year, the chance of being audited is a common fear of many clients. While no one can predict with certainty who will be audited, there are some common “red flags” that could increase your chance of audit. The IRS won’t come right out and provide a list of items they consider for audit, but there have been recent articles by tax professionals that outline some key areas that past data has shown to have been more heavily scrutinized by the IRS.
Some of the common “red flags” are as follows:
1. Having a large income or not reporting all of your income. The IRS receives copies of all your W2s and 1099 forms. If the amounts don’t match up, the IRS will want to know why. Additionally, the odds of audit increase as your income goes up. Those reporting $1 million or more of income have a greater likelihood at being looked at more carefully by the IRS.
2. Reporting an inordinately large amount of charitable contributions. The IRS has calculated the average amount of charitable contributions based on income level and compares these amounts with what you have reported. Also, any non-cash donations over $500 require an appraisal or documentation showing how the value was determined. The key is to have proper documentation substantiating your donations.
3. Operating a small business and filing a Schedule C to report your income and expenses. Several factors play into this area. Running a small business that is “cash” concentrated has a higher audit risk due to the greater chance of not reporting all of your income. Also, the higher the amount of income and expense, the greater the chance of audit. Big deductions for business meals, travel, and entertainment could raise the eyebrows of IRS agents.
4. Claiming 100% use of a vehicle for business and/or claiming an unusually large amount of auto expenses. It is rare for a small business owner to use a vehicle 100% of the time for business. In case of audit, be sure to keep detailed mileage logs including dates and business purposes. You can use the standard mileage rate or depreciate the vehicle and claim the costs associated with operating the vehicle. Once you choose a method, you have to keep using it.
5. Claiming a “hefty” home office deduction. In order to take the home office deduction (taking a percentage of housing costs) the space must be used “exclusively” and “on a regular basis” as the principal place for conducting business. The space can’t be used for activities that normally occur in your house such as watching TV, doing homework, or serving as a playroom or guest bedroom.
6. Not reporting a foreign bank account. If you have money in foreign accounts that in aggregate total more than $10,000 at any time during the previous tax year, you must report these accounts by filing Form 114.
7. Taking itemized deductions that are viewed by the IRS as above average. The IRS will compare your income to your deductions to see if the deductions suggest an improper balance.
8. Improper reporting of rental activity losses. In order for real estate professionals to claim rental losses, stringent parameters must be met. Also, if you actively participated in the renting property that you own, you can deduct up to $25,000 of loss against your income. But this also has certain requirements and begins to phase out when your AGI reaches $100,000.
While no one knows for sure what will trigger an audit, having proper documentation and discussing your financial transactions with your CPA can help make an audit a little more tolerable.
14 IRS Audit Red Flags by Joy Taylor, Updated Feb 2014, Kiplinger Tax Letter
Accounting Today Feb 13, 2014, Talk to Your Clients about Audits by Roger Russell
Fox Business published Feb 18, 2014, 6 Reasons Your Tax Return Might Get Audited by Kathryn Buschman Vasel
February 26, 2014
Simply put, estate planning is one way to leave instructions with regard to caring for all your assets in case you become incapacitated due to an illness, or if you unfortunately meet your demise. This includes a lot of legal instruments.
The legal nature and complexity of estate planning led majority of Americans to believe that estate planning is only for those who can afford it: the rich and the A-Listers. Below are other misconceptions you need to ward off before they prevent you from making one of biggest and most important decisions of your life.
“Relax, I’m Too Young”
How old are you? 20? 25? 30? You will never know when you’ll need a sound estate plan, and by then, it’s going to be late. While you may not want to foreshadow your imminent misfortune or death, it’s necessary to take some measures, even if they’re in small increments. As an advanced directive, a health care power of attorney and living will can be of great help in case you’re attached to a life support device and other end-of-life matters.
“If I Pass on Without a Will, the Government will Seize My Assets”
This myth is highly damaging. In case you die without any will or supporting legal instruments, each state will apply a special rule, which you may call “rule of intestacy.” This will identify who will get what. If this sounds a bit of a problem for you, now’s the right time to have a will drafted.
“Probate is Costly”
Probate is a legal instrument that serves as a first step in administering your estate in case the inevitable happens to you. Probates have a price that comes in the form of lawyer’s fees, filing fees, and other costs of miscellany. But sometimes, the price of the entire estate outweighs the price of a probate, so it’s always worth it to have it.
“I Need a Lawyer to Draft My Will”
This is not applicable to all situations. If you think your estate is sizable enough, you can draft your documents and have them signed by legal experts. It may cost little to nothing at all. But that doesn’t mean you don’t have to get a lawyer. There are some provisions that may complicate an issue and warrant an expert advice. If this is your problem, you can always consult us and have us go through your draft and make some suggestions.
Estate planning is not only about assets protection. It’s not only for the rich and the A-Listers. It’s for everyone. It’s for you who wants to make sure that all the things you worked hard for will be in good hands, and most of all, prevent chaos in your family. Browse our pages to see other services that may help you with this.
February 21, 2014
Authored by David Cash, CPA, MAcc. Dave has worked in the Logan and Salt Lake City offices of CMP. He spent 2 years in the Logan office and has been in the Salt Lake City office for over 5 years. Dave specializes in oil and gas taxation, pension administration and reporting, and individual and business tax planning and compliance.
As we turn the corner and are now into the rigors of our busy season it makes me ponder on the questions that seem to be raised most often by clients and also random people that I may run into on the streets on Sundays (my day off this time of year).
Question 1: I don’t want to go up to a higher tax bracket, how do I prevent that?
Answer 1: This is a four part answer, since most answers from CPAs are, “It depends”
1) Earn less money is the easy answer and the one that I may give if the situation strikes me as one where a little facetiousness may be appreciated.
2) The answer that I am more likely to give is to go through the tax organizer that we send out each January to help clients get their tax information organized. These organizers have information on what was on their return last year and also information on possible deduction items.
3) I also talk to clients about maximizing contributions to IRAs and retirement plans (in the future maybe myRAs, from the last State of the Union address); there are very limited deductions that can be legally taken where you still have the money and retirement plans are one of those.
4) I will also discuss the progressive tax system that we have in the United States. Just because a person goes from the 15% tax bracket to the 25% tax bracket doesn’t mean that all of the taxable income is now taxed at 25%. The rates are graduated and are kind of like buckets, you fill up the 10% bucket first, then the overflow of taxable income fills up the 15% bucket, then the overflow fills up the 25% bucket; therefore your tax bracket tells more about what the next dollar earned would be taxed at and less what rates your taxable income is actually being taxed at.
Question 2: Why do the tax brackets in 2013 go from 10%, 15%, 25%, 28%, 33%, 35%, and our new one 39.6%?
Answer 2: I am not sure, but I think the bigger question is why is the only jump that is higher than 5% from the 15% to the 25% tax brackets? Also, why only a 2% jump from 33% to 35%, is it because the 35% tax bracket in 2013 for a single filer is only $1,650 before it hits the 39.6% bracket? I am hoping to meet someone that files single status and is in the 35% tax bracket for the 2013 tax year. I think all of those people should get an award.
Question 3: Can I just call the IRS to ask a question?
Answer 3: The IRS recently issued a press release that they will be going to more automated self-service options as a result of “limited resources to support person-to-person services on the phone or at Taxpayer Assistance Centers.” Here is a link to the notice http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources. This may be an unpopular opinion, but the IRS personnel have a tough job to do. They keep getting more services to administer such as the cash for clunkers program (2009), first-time homebuyer credit (2008-2011), health insurance subsidy credits or additional tax (coming to a tax return near you for the 2014 tax year, next filing season); yet they seem to be required to administer those programs without the funding necessary to add those programs and maintain what they have traditionally done in the past. I haven’t even mentioned the increase in tax code, regulations, court cases that set precedence, and all of the items that CPAs as well as IRS personnel need to try to keep up with. With all of that being said, I do find it a little amusing that the IRS in the same press release state that they will be going to more “self-service” at “Taxpayer Assistance Centers.” If they are doing less taxpayer assistance at their centers then maybe the name should be changed to IRS offices.
Question 4: Are you worried about your job when the United States goes to a flat tax?
Answer 4: I feel very secure that I will have a job for the next 28 years until I retire and receive…social security. I just realized that I have approximately 28 more tax seasons, not counting the one that I am in. In fact, this is my busiest time of the year and I am writing a blog. I had better cut this off at 4 questions so that I can finish working on the stack of tax returns that are in my inbox. Perhaps the other 6 questions and answers will come this summer…
February 4, 2014
Authored by: Chad Lambert, staff accountant in the Logan CMP office.
The education credit known as the American Opportunity Credit (AOC) that was set to expire at the end of 2012 has been extended for five years until the end of 2017. The AOC is available for the first four years of post-secondary education to students who are enrolled, at least half time, in a program leading to a degree or certificate. Eligible taxpayers may receive a credit of up to $2,500 per student ($1,000 refundable and $1,500 non-refundable) for educational expenses paid to a qualified educational institution. This is based on a maximum of $4,000 of qualified expenses.
Although many taxpayers have benefitted from the American Opportunity Credit, not all of them include all of the expenses that can maximize the credit.
What expenses qualify?
• Books, supplies and equipment needed for a course of study
o The national average cost is $1,100 per year for books and supplies
o These need not be purchased from the educational institution to qualify
• Scholarships and grants received by the student need to be considered when determining the amount of expenses eligible for the credit.
The taxpayer that claims (as a dependent) the student for whom the expenses were paid is eligible to receive the credit. If the parent claims the student as a dependent, they will receive the credit. If the student is claiming him/herself, the student will receive the credit.
Important Note: If the student is claiming him/herself and the expenses are paid by the parent or someone other than the student, the student can still claim the credit as if they had paid the expenses themselves.
You cannot claim the credit if:
• Your filing status is married filing separately
• You are listed as a dependent on another person’s tax return
• Your income (MAGI) exceeds $90,000 ($180,000 if married filing jointly)
• You were a nonresident alien for any part of the tax year
• The student has committed a felony
John is a junior at Utah State University in the engineering program. During 2013 John paid the following expenses:
• $3,250 in tuition and fees to USU (shown on form 1098-T received from the university)
• $680 for textbooks purchased online
• $160 for materials and supplies required for engineering classes
• $3,400 for housing
John paid a total of $4,090 of qualifying expenses during 2013. This includes the amount paid for tuition and fees, textbooks (no matter where they were purchased) and required materials and supplies. The $3,400 spent on housing is not a qualified expense and cannot be used in figuring the credit. Since John’s expenses exceed the maximum of $4,000, John is eligible to receive the maximum credit of up to $2,500.
If John’s tax liability for 2013 were $1,400, the non-refundable portion of $1,500 would reduce the tax liability to $0 and the $1,000 refundable portion would be refunded to John. This makes the total benefit of the credit $2,400 for 2013.
January 29, 2014
Authored By: Tara Williams is a CPA in the Logan office of Cook Martin Poulson, P.C. Tara enjoys interacting with clients and working with them to create solutions to problems. Tara is a native of Layton and earned a bachelor’s degree in accounting from Utah State University and a master’s degree in accounting from Weber State University.
If the money you spend on your business exceeds your business income for the year, your business has incurred a loss. The good thing about having a loss is that you can use it to offset other income you may have. If your business continues to incur losses year after year, you should be aware of the hobby loss rules and how to prove to the IRS your business is not hobby.
You must report any income you earn from a hobby, and you can deduct expenses up to the level of that income. You cannot, however, write off losses from a hobby. In order for you to claim a loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years, you are presumed to be in business to make a profit. Deducting losses from a hobby or hobby like business is a red flag to IRS auditors. The IRS is looking closely at tax returns that report losses from small businesses that could possibly be a hobby. To ensure that your business looks and acts like a business instead of a hobby, you should ask yourself the following questions.
1. Does the time and effort put into the activity indicate an intention to make a profit?
2. Do you depend on income from the activity?
3. If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?
4. Have you changed methods of operation to improve profitability?
5. Do you have the knowledge needed to carry on the activity as a successful business?
6. Do you seek the advice of professionals to help you make a profit?
7. Have you made a profit in similar activities in the past?
8. Does the activity make a profit in some years?
9. Do you expect to make a profit in the future from the appreciation of assets used in the activity?
People who have lost money in their business for multiple years have been able to convince the IRS that they were in business. In one recent case, for example, the tax court ruled that a taxpayer’s music career, which had losses for seven straight years of $130,000 total and total income of only $13,000, was a business for tax purposes. With losses of that amount, how did the musician win his case?
• He was able to show the court that he had a business plan. He was in the business to make a profit and had recorded multiple CDs and original compositions.
• He showed that he had made changes to the business so that he could become profitable.
• He had substantial expertise to compose and produce music.
• He spent a substantial amount of time on his music and tried to overcome the changes in the musical industry to make a profit.
As long as your business consistently has net income, you don’t have to worry about the distinction between being a business or hobby. However, if you have been in business for several years without making a profit, you should go back to the drawing board and figure out how to change your business so that it can begin to produce profits. If you have any additional question on hobby losses, please contact any of our professionals at either our Logan or Salt Lake offices.Older Entries »