December 2

Understanding Tax Estimation

No one enjoys paying taxes at tax time, and the thought of paying taxes in advance is even worse. But, the real truth is that savvy business managers and investors are required to make allowances for taxes from the very beginning of the year. While the typical worker who is a company employee will have money withheld from their earnings throughout the year, then receiving a W-2 form at the end of the year stating how much money they have contributed toward their tax obligations, business operators and investors will allow for taxes first. Individuals or married couples who work regular jobs and operate side businesses have a tax concern as well. Married couples may actually want to file separately, or at least separate from the business. Taxpayers with investments who receive dividends each quarter will also often pay additional estimated taxes as the year progresses. And of course, most small business taxes are filed every three months. Everyone should give their tax burden some forethought, and especially those who are self-employed and have a considerable income.

Deciding on an Estimated Contribution

All taxpayers and small businesses need to estimate first how much money they expect to receive in annual income and then calculate their small business estimated taxes. Married couples may need to evaluate their filing status as well, as there could be benefits to filing either jointly or separately. This will depend on the individual situation. Some self-employed people who run businesses actually pay themselves just as any other worker and make their personal tax contributions in the traditional tax deduction format. Other self-employed individuals will opt to keep what they earn and pay taxes quarterly, while others may pay in small business estimated taxes during the year to their IRS account and then file annually. And of course, there are still those who wait until the end of the year and file traditionally, taking the hit for the extra tax obligations at the end of the year. The problem for these individuals is that they may be required to pay an underpayment penalty for failing to meet their obligations throughout the year, which can be avoided by making estimated tax payments during the year. This is actually a requirement for those who expect their tax debt to be in excess of $1000 for the year.

Percentages and Amounts to Avoid a Penalty

A good general rule for many taxpayers is estimating tax requirements in $1000 increments using a 90% rule regarding tax obligations. Those who expect their tax deductions to be within 90% of their total annual tax debt will often choose to pay extra at the end of the year, and those who pay each quarter could opt to pay an additional amount with their regular tax payments. Individuals with significant wealth will have the means to pay the entire tax bill annually, but this would also mean they could still pay estimated amounts in advance to avoid any subsequent penalty. It is not uncommon for a business of significant size to calculate their annual taxes going forward at the beginning of the year as a necessary business expense and then look for strategies to reduce the tax burden during the year. Annual tax returns can apply to businesses as well as individual workers, and they will assuredly be paid when small business taxes are not questioned when appropriately filed.

Any taxpayer who works a regular job and operates a side business always has the option of requesting additional tax deductions be withheld from their regular earnings. Most employers have no problem with this choice, as they are not required to match deductions as in Social Security tax obligations. This works well for those who will have a small tax obligation from their personal business operation and have a significant income from regular employment. And it is an easy method of ensuring there are adequate resources already in place when the final tax burden is calculated. This clearly depends on the individual situation. However, it is always best to be “better safe than sorry” when dealing with the Internal Revenue Service. The IRS may want to present a more amiable attitude towards taxpayers, but make no mistake about the fact that agents are very serious about collecting the government’s share, whether it be fair or not. It is always best to be prepared beforehand, and sometimes required by law.

August 14

Every individual should be on the lookout for financial scams of any type, as they are clearly prevalent in contemporary society. Unscrupulous actors like to develop schemes that sound valid in presentation, but are actually just fronts for theft and other forms of deception intended to steal assets from an unsuspecting victim who does not recognize and understand their tactics.

The actors have no problem even imitating government agencies such as the Internal Revenue Service if they can con anyone into believing their deception and gain access to money. The goal is to steal anything that can be stolen, ranging from financial assets to personal identification information that can be used to fraud other individuals or businesses. This kind of illegal activity is more common than most people realize, and it is always a good decision to take some time to learn how to spot these criminals. Here are a few reminders regarding IRS tax scams.

Phone Contact Policy

Many of us have received a phone call where the person claims to be from the IRS or the Department of Justice and you need to immediately pay up or they will be at your door to make an arrest. The IRS rarely contacts a taxpayer by telephone. It can happen, but not by standard policy. Instead, the IRS will send a contact letter first, also known as a “notice letter,” and it will typically inform the taxpayer of issues with their tax account or tax return.

In addition, the IRS never sends emails or text messages. When the IRS does call, it is typically a courtesy call of sorts, and they will never demand immediate delinquent payments. In fact, IRS agents CANNOT take payment over the phone. Any payment to the IRS must be mailed to the address provided by the Service. IRS notifications are formal and all taxpayers have rights to challenge issues with their account and to appeal decisions made by the IRS or to the US Tax Court. In fact, the IRS has a “Taxpayer Bill of Rights” ( known as Publication 1) that can be downloaded here. The service often includes this publication when mailing taxpayers notices on changes to your account, request for audit, demands for payment, and intent to levy or lien the taxpayer.

“Phishing” Scams

Another problem is receiving an email contact from a fake IRS agent or tax preparer. This is also referred to as a “phishing” scam. The sender requests specific sensitive information such as your social security number, bank account number, credit card information and so on. The sender’s intent is to use this information for illegal purposes. Even opening the email or clicking on any hyperlinked website in the email could trigger a malware program that will scour your computer for any exposed identification information, including passwords to financial accounts in some instances.

These scams can actually be more problematic than fake preparer claims or demands for immediate payments. The damage that can be done to the victim and their financial status can be extensive, including credit rating damage, embezzlement of personal assets, and ongoing identity theft as the culprit acts continually in assuming the victim’s identity. This can actually happen in a variety of ways, and it is always a good personal practice to mark spam in your email accounts and dump the notices daily because of potential malware concerns.

Scams Happen Throughout the Year

Tax scams are not necessarily season-specific, although the typical taxpayer associates taxes with the first part of the year. Many business operators pay taxes quarterly and are in regular contact with the IRS. Be aware of this activity at any point in time, and never provide any information without documented validation from the contacting party. The best response is to hang up on the caller and contact the local police department immediately, including if the caller claims to be a tax advocacy group requesting pertinent personal information such as a Social Security number. In addition, the IRS aims to inform taxpayers about these scams and contains many resources on its website.

Never Respond to a “Ghost” Preparer Contact

Some telephone contacts regarding IRS claims are conducted by fake tax preparers. They may sound nice at first, but the ultimate goal is often to secure personal information that can be used for various nefarious activities. The pattern for the ghost preparer is to not sign the return, making it appear the taxpayer has prepared the document personally, and then charge an upfront fee for the preparation the preparer refuses to sign. All certified tax preparers are issued official identification numbers, also known as a TPIN, and all prepared returns must be signed by the preparer and their TPIN number included on the form EVEN IF YOU DO NOT PAY FOR THE SERVICE.

Fake tax preparers often:

  • Charge a fee with no receipt
  • Enter false information to increase a tax return value
  • Divert direct deposits to a personal account

This could result in the taxpayer being responsible for a false tax filing as well as being swindled out of any valid tax return, leaving the “ghost” preparer with the assets and no valid form of identification associated with the case. Hang up anytime a tax preparer calls unsolicited and then call the authorities immediately, including filing an IRS ghost tax preparer report Form 14157. The government takes these claims very seriously, and they welcome your help in stopping this practice.

Contact the IRS Following Suspicious Activity

It is always good to understand and follow the requested protocol when being targeted for a tax scam. The Internal Revenue Service suggests:

  • Hang up immediately after recording the caller ID number
  • Report any information to the Tax Inspector General at the IRS
  • Report the incident additionally to the Federal Trade Commission

Contacted individuals should also remember to review their tax account at IRS.gov and call the agency at 800-829-1040 when any discrepancy is found. Always remember that the IRS has a specific protocol when tax collections could be an issue, and it is a legal process that allows all taxpayers an opportunity to appeal any delinquent tax notification or assessment. The government understands that mistakes are made from time to time, and they actually want the record straight as much as the taxpayer.

And always remember to share your experience on social media platforms to help prevent this activity from being extended to other victims. For more tips on dealing with tax scams, visit this IRS tip page and always be on the lookout for tax scams. Also, remember to NEVER email your personal identification information. Email is not secure and should never contain social security numbers, bank account numbers, credit card numbers, driver’s license numbers and so on.

August 14

Taxpayers using a vehicle for business-related travel need to understand how they may claim vehicle travel expenses. They can either claim a deduction based on allowable business mileage during the year (Standard Mileage) or claim the business use percentage of actual vehicle expense during the year (Actual Expenses). The Internal Revenue Service makes your first-year deduction decision by only allowing you to use the standard mileage method. However, you may want to switch methods in the second and subsequent years.

Claiming Standard Mileage Expense

While some business tax deductions can be detailed and complicated, using the standard mileage deduction is rather easy. The Internal Revenue Service publishes the standard mileage rate each year. This rate is then applied to your business miles for the year to compute your mileage deduction.

The IRS standard mileage rate for 2019 is as follows:

  • 58 cents per mile for standard use
  • 20 cents per mile for use for medical or qualifying moving purposes
  • 14 cents per mile when used in a charitable cause

It is important to note that the standard mileage rate includes fuel, maintenance, repairs, insurance, and licenses so you cannot deduct these expenses in addition to using the standard mileage rate. You can still deduct tolls and parking.

Deducting Actual Expenses

Many taxpayers may want to use the actual expense method instead of the standard mileage method. Under the actual expense method, you first divide your total annual business miles by the vehicle’s total annual miles to determine your business use percentage. You then multiply your actual expense during the year by the business use percentage to determine your deductible expense. Actual expenses include:

  • Either lease payments or depreciation if you purchased the vehicle
  • Fuel
  • Vehicle repairs and servicing
  • Tire purchases
  • Insurance premiums
  • Taxes and licenses

Documentation Requirements

The IRS requires you to document your business miles and to produce a mileage log and actual expense receipts during an audit. The mileage log rule applies whether you use the standard mileage method or claim actual expense. If you fail to keep a log, the IRS will deny your vehicle-related expense. Your log should include the starting address and the address traveled to, the miles and the business purpose. You should also keep oil change records to document your vehicle’s odometer reading.

Always remember that complying with tax law is important.  Tax agencies can deny a deduction if they find that the taxpayer overstated a deduction or failed to produce requested records to document a deduction. You also need to timely file and pay all taxes.

The preceding is solely intended for informational purposes and is not intended as legal advice.  It is important for business owners to consult with an experienced tax attorney or Certified Public Accountant.  Contact our office if you would like to further discuss your taxes.

February 21

Even the most honest of taxpayers can be left trembling at the thought of an IRS audit. Let’s face it–it’s right up there with public speaking. To survive an audit, you’ve got to arm yourself with information. You should understand what the audit process is all about, why your return was audited, what your rights and responsibilities are, and how you can appeal the findings.

An audit is not an accusation of wrongdoing

An IRS audit is an impartial review of your tax return to determine its accuracy–it’s not an accusation of wrongdoing. However, you must demonstrate to the IRS that you reported all of your income and were entitled to any credits, deductions, and exemptions in question.

The IRS generally must complete an audit within three years of the time the tax return is filed, unless tax fraud or a substantial under reporting of income is involved.

Certain returns run a greater risk of audit

Several factors can lead the IRS to single out your return for an audit. For instance, taxpayers who are self-employed, receive much of their income in tips, or run cash-intensive businesses historically have faced a greater likelihood of audits. The IRS may also pay more attention to professionals such as doctors, lawyers, and accountants (who often run their own businesses and do their own bookkeeping). In addition, if your itemized deductions in several major categories–e.g., medical and dental expenses, taxes, charitable contributions, and miscellaneous deductions–are greater than the statistical average, you’ll generally have an increased chance of being audited.

Other things that may lead to an audit could include:

  • A return that is missing required schedules or forms
  • A return signed by a preparer associated with problems in the past
  • A return reporting income of at least $200,000 (in general, higher income may lead to an increased chance of audit)

There are three types of audits

If you are to be audited, the IRS will inform you by telephone or letter. If contacted by telephone, the IRS will also send a letter confirming the audit. E-mail notification is not used by the IRS.

There are three types of audits:

  1. A Correspondence Audit: This is typically for minor issues and requires only that you mail certain information to the IRS. For example, maybe you forgot to attach a Schedule C to your income tax return. The matter will be closed if the IRS is satisfied with your paperwork.
  2. An Office Audit: Here, you’d typically bring your tax-related records to an IRS office for examination. For example, if you claimed an unusually high deduction for medical expenses, the IRS may want to see your medical bills and canceled checks, among other things.
  3. A Field Audit: Here, the auditor generally visits your home or business to verify the accuracy of your tax return. It may be possible for the auditor to visit the office of your representative, instead.

Know your rights regarding the audit

You have several rights when you’re involved in an audit. These include:

  • The right to professional and courteous treatment
  • The right to an explanation of the audit process
  • The right to representation
  • The right to know why the IRS is asking for information, how the information will be used, and what will happen if the information is not provided
  • The right to appeal decisions

Consider the following when you are audited:

  • Request a postponement (whenever you need it) to gather your records and put them in order
  • Be sure to read IRS Publication 1 (Taxpayers’ Bill of Rights) before your audit
  • Before your initial interview with the IRS agent, meet with your representative to discuss strategies and expected results
  • Bring to the audit only the documents that are requested in the IRS notice
  • Be thoroughly prepared–if your records clearly substantiate the items claimed on your return, the agent won’t waste time conducting a more in-depth audit
  • Be professional and courteous (and expect the same treatment in return)
  • Do not volunteer information to the IRS agent; if you have a representative, he or she should respond to the agent’s questions
  • Don’t lie
  • Keep detailed records of any materials that you submit to the agent and of any questions asked by the agent
  • Ask to speak to the auditor’s supervisor if you think that the agent is treating you unfairly
  • When you get the examination report, call the auditor if you don’t understand or agree with it
  • If you don’t agree with the audit results, request a conference with a manager, and know your appeal rights

You can appeal if you disagree with the audit result

You can either agree or disagree with the auditor’s findings. If you agree, you’ll complete some paperwork and pay what’s owed. If you disagree with the auditor, the issues in question can be reviewed informally with the auditor’s supervisor. Or, you can appeal to the IRS Appeals Office, which is independent of the local office that conducted the audit. You can appeal the auditor’s findings by sending a protest letter to the IRS within 30 days of receiving the audit report. If you do not reach an agreement with the appeals officer (or you do not wish to use the appeals office), you may be able to take your case to the U.S. Tax Court, U.S. Court of Federal Claims, or U.S. District Court where you live.

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