IRS Secret Agent

Quote of the week:

"The purse of the people is the real seat of sensibility. Let it be drawn upon largely, and they will then listen to truths which could not excite them through any other organ."

-Thomas Jefferson

IRS Secret Agent

Quote of the Week:

"Any tax is a discouragement and therefore a regulation as far as it goes."

-Oliver Wendell Holmes

Is Your Social Security Secure?

So you are retired and it's time to relax and live life at a more relaxed pace. This is the life you have been waiting on. You can finally live life with no worries. You have a retirement nest egg and of course you have your Social Security Income. But wait...you also have some lingering tax issues you did not get cleared up before you retired. Most might fear that the IRS can gather up your nest egg and leave you with an empty "coop." This is true but there IS another concern...the IRS can also levy your Social Security Check. Let me say that again...

The IRS can levy your Social Security Check!

The IRS can levy up to 15% of your Social Security Income in order to retrieve the money you owe the IRS for past due taxes. I know what you are thinking...I don't make enough in my social security check now...how am I going to pay my bills if they take even more money out of it? There are solutions that can be reached so if you want to know what your options are before this happens to you please contact a professional tax resolution company.

IRS Secret Agent

Quote of the Week:

"The Congress will push me to raise taxes, and I'll say no, and they'll push and I'll say no, and they'll push again. And all I can say to them is read my lips: No New Taxes."

-George Herbert Walker Bush

Tax Challenges for Business Income - Part I

Understated business income...the IRS says this is becoming more and more prevalent especially in small businesses. Are more and more small business owners trying to cheat the IRS out of tax dollars? The IRS thinks it is more likely to be the lack of knowledge on the part of small business owners of just how to calculate and document gross business income. Here are some helpful tips from the IRS to help out those who struggle with this on their tax returns.

First of all, what is business income? Business income is any and all income associated with a business. If there is any connection between the income and a business it is business income. You can answer that question with another one...if the business did not exist would the income have been received? If you can answer that with "yes," then put it in the business income column. As a business owner you are legally required to report ALL income that is derived from your business.

There are numerous ways to receive business income. Typically, the income is from simple forms of payment such as cash, checks or credit cards. However, trades, bartering, exchanging of services, exchanging of property are additional ways of paying for the goods and services provided by a company. All of these are considered taxable as sources of income. This leads us into Cost Of Goods Sold (COGS) where businesses will sell products in order to trade for services needed. This is where a lot of things are not as "black and white" on the business income spreadsheet. Next week we will continue with this topic and get into how to actually calculate gross business income though these types of sources.

Tax Resolution Integrity

So you find yourself being the subject of the IRS collections process. You have a tax liability with the IRS. You have unfiled returns for past tax years. Maybe you even owe money to the state for same reason. How are YOU going to get it resolved?

The answer is fairly simple. Most taxpayers cannot get their tax liabilities resolved on their own. Mostly because of a lack of knowledge of how the IRS works or because they simply don't have the time to spend hours, days and weeks on the phone negotiating the tax debt they have accrued. If it is simply tax returns from years past the taxpayer can usually file these as long as they understand the guidelines of what can be deducted or included on the tax return for that particular year, have access to all of their financial information, and can access the correct years tax return forms. Simple right? Tax returns are the easy one. If it is a tax debt owed of substantial amounts the IRS would love for all taxpayers to handle this on their own without any representation whatsoever...this is the easiest way for them to get all of their money.

OK, so you need a tax advisor who can handle filing past due returns and negotiate your past due tax liability. How do you find one? Even more important...how do you find the right one? Here are some important tips to consider:

• Make sure they are a member in good standing with the Better Business Bureau. Also look to see how many complaints they have had each year. Some companies may have a satisfactory rating but have a high number of customer complaints.
• Make sure they are licensed for both preparation of tax returns and tax resolution.
• Make sure they are licensed to operate in the state for which you have tax issues...there are several who do not or cannot operate in all 50 states due to improper business practices.
• Make sure you are dealing with a company who is financially strong...in today's economy there are a lot of "fly-by-night" companies who simply do not have the financial structure to make it through tough times and you may find out the company you sent money to yesterday is out of business today. Make sure they have been in business for at least four years...most new businesses fail financially in the first three years so if you have a business in year four you probably have a strong company financially.
• Make sure they do not have any pending litigation from civil lawsuits from unsatisfied clients.
• How long does the average resolution take? Anything outside of 180 days is unsatisfactory.
• Do they simply submit all clients under one program (Offer in Compromise) or do they have multiple options for resolution.
• Do they have a good reputation on the industry? This can be done online through a google search. Keep in mind most companies (good and bad) have varying reports. Not all customers who get tax resolution get the resolution they wanted so there will always be complaints with just about every company but look at the reasons and more specifically the number of complaints. Ask the company you are talking with to furnish customer testimonies on services rendered.
• Are they a member of the Net Promoter Score Program which is designed to identify companies who have excellent customer service. (Here's a hint: review the program guidelines and see what the company's score actually is.)

I hope this helps you in your search but keep in mind...this is something in my opinion the average taxpayer cannot handle themselves. Make sure you get the right help with your tax situation and hire a professional tax resolution company.

IRS Secret Agent

Quote of the Week:

"Friends and neighbors complain that taxes are indeed very heavy, and if those laid on by the government were the only ones we had to pay we might the more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly."

-Benjamin Franklin

Can the IRS Require More Taxes From Your Check?

In a conversation I had with a customer this week, we discussed why he owed so much money each year to the IRS. He is an employee from which taxes are taken directly, and at the end of the year he receives a W-2 detailing the amount of earnings and taxes paid. If he pays his taxes out of each paycheck, how does he owe more at the end of the year? Well, he did not have the correct amount of taxes witheld from his paycheck. Therefore, at the end of the year he had not paid what he owed to the IRS.

He asked me if the IRS can make him change this. The answer to this question is...YES! The IRS may direct your employer to withold additional taxes from your paycheck to cover the appropriate amount needed which is done through a "Lock-in Letter." At this point the amount of witholdings on your W-4 Form become null and void and your employer MUST increase the tax rate on your paycheck. You will also be sent a copy of the letter and given a period of time before the changes are effective. If there are specific circumstances for the decreased witholdings or proof that they are accurate, you can submit a new W-4 Form with documentation directly to the IRS to try and reverse the changes made. However, once a Lock-in Letter has been issued only the IRS can make those changes, so your employer cannot do anything until a change confirmation has been received from the IRS. So keep your witholdings correct, your returns filed and your taxes paid and you won't have to worry about any IRS interventions on your next paycheck.

IRS Secret Agent

Quote of the Week:

"The only thing that hurts more than paying an income tax is not having to pay an income tax."

-Lord Thomas Robert Dewar

E-file Frenzy

Do you remember the good ole days where you would have a friend or family member who thought they knew tax returns show you how to fill out your returns. You would then, armed with a ton of energy and ambition ready to tackle your own returns, wait until 11:50 pm on April 15th and drive to the post office in order to hand your package to the post office by midnight so it would get postmarked correctly and the ENORMOUS dreadful event would then be over for another year. If someone would have told me fifteen years ago that one day I would file my taxes on my computer and never leave the house I believe I would have felt deprived of the annual trip to the post office. How else would I get to know the postmaster at my local office if I did not see them in mid April every year?

In fact we are as a nation headed in that very direction and in 2008 almost 60% of this country filed their returns via e-file. We crossed the halfway mark in 2005 (just six short years after the beginning of the program) but hit the highest point of 57.8% in 2008. This number is projected to be over 60% in 2009. Do we really trust these programs? Do we really like to be online that much? Have we become too lazy for the "old school" train of thought? Maybe we need to reconnect with our local postmaster again this coming year. As for me, any tax returns I prepare will be with a pen and a calculator and delivered promptly at midnight to the post office on April 15th.

IRS Secret Agent

Quote of the Week:

"What at first was plunder assumed the softer name of revenue."

-Thomas Paine

Help Yourself by Filing Past Due Tax Returns

So you have tax returns from previous years that are unfiled. The IRS has not contacted you, so why should you file them? Maye the IRS forgot about you... they didn't forget! So here are some reasons to go back and file those late tax returns:

• If you have a child moving into higher education and you are in need of federal financial assistance...a review a filed tax returns is a requirement in order to receive that assistance.
• Lending institutions may require tax returns for you to qualify for a loan.
• Social Security income, medicare and disability benefits are all figured on the basis of a tax payer's lifetime earnings which is based from information obtained from the tax returns filed.
• Just like Social Security, Medicare and Disability income listed above, Unemployment income is also based on tax returns filed.

If you do not file your returns you can incur failure to file penalties, forfeit tax refunds, lose your Earned Income Tax Credit, and open yourself up to criminal charges for failure to file.

The bottom line is: make sure you file your returns. Even if you DO NOT have the money to pay what you owe the IRS you still need to file the returns. For more information, please consult a tax professional.

IRS Secret Agent

Quote of the Week:

Question: " I understand that Congress is considering a so-called 'flat' tax system. How would this work?"

Answer: "If Congress were to pass a 'flat' tax, you'd simply pay a fixed percentage of your income, and you wouldn't have to fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant talking broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax."

-Dave Barry

Fishing for Birdies and Paying Tax

So it's the weekend and you are ready for your favorite leisure activities to replace the hectic work week chores. You can't decide should I play golf, go fishing, work in the garden, or maybe stay inside and organize my favorite stamp collection. While you are deciding what activities are going to fill your weekend you may want to consider how much tax you may be required to pay on them.

What am I talking about? There are activities that some taxpayers pursue (typically more than a leisurely level) that can be considered a business. Golfing, fishing, gardening, sewing, woodworking, coin collecting, stamp collecting, and scrap-booking are just a few of the activities that the IRS could potentially tax as a business if there is a profit created from the participation in these activities. A hobby is an activity that is not pursued for profit. A business is an activity generally carried on with the reasonable expectation of earning a profit.

So how do you know if you need to consider these kinds of activities as a business income instead of a hobby? Here are some simple guidelines to answer that very question:

• Does the time and effort put in to such an activity indicate an intention to make a profit?
• Do you depend on income from the activity?
• Have you changed methods of operation to improve profitability?
• Do you have the knowledge to carry out the activity as a successful business?
• Did you make a profit through similar activities in past years?
• Does the activity make a profit in some years?
• Do you anticipate making a profit in the future due to the appreciation of assets used for the activity?

Generally, the activity in considered a business if it has produced a profit in three of the last five years including the most recent year. Deductions for both business and hobby income are allowed but you must first determine whether your income is from a business or a hobby in order to follow the correct procedures for taking these deductions.

The IRS is not out to spoil your fun, but if these activities produce a profit every year or so you may want to determine whether or not you are required to pay taxes on that money. Don't find yourself behind the "eight-ball" with the IRS who may tell you you owe them taxes on your unreported income. This can become a mess and hard to provide proper documentation leaving you with an unexpected tax liability.

IRS Secret Agent

Quote of the Week:

"I like to pay taxes. With them I buy civilization."

-Oliver Wendell Holmes

Closing Costs? Take the Deduction!

So you recently closed on a mortgage finance transaction and you are wondering how you can benefit from paying all those closing costs. You can take a tax deduction on the "points" you paid to obtain your mortgage loan. There are several factors which come into play in regards to how you need to deduct them and if they can be deducted in full or over time. Make sure you understand these guidelines so you take advantage of this unique deduction. You can deduct the entire amount of the points in the year you paid them if the following conditions are met.

• If your home loan is on your primary residence.
• You use the loan to buy or build the home you will be living in.
• If paying points to a mortgage company or bank is a standard practice in your area.
• The points you paid are not excessive for your area.
• Points were not paid as a lump sum for other services typically listed separate on the Settlement Statement (i.e. Appraisal Fees, Titlework, Attorney Fees, Credit Report Fees, Inspection Fees or Property taxes)
• The points were computed as a percentage of the total amount of the loan.
• The amount is clearly shown on the settlement statement.
• The points were paid before or at the closing by the borrower or seller but none of the amount owed was borrowed.

Points that do not meet these standards are not wasted money. Most are very necessary to the process of obtaining a mortgage loan from any financial institution. However, if the y do not fit the above requirements - all is not lost. You can deduct them over the life of the loan. Simply total the points and divide them by the number of payments required within the term of the loan and then deduct the points on your annual tax returns (on a Schedule A with your 1040 return) by how many payments were made in that year.

So don't worry you were charged too much...it just gives you a larger deduction. This should make everyone feel better. Well maybe not but anytime we can write off expenses on a tax return is helpful.

Are you Moving?

Congratulations on your new job...you even get to move to a new city...you could qualify for a tax deduction from your moving expenses. If you have recently moved to a new city for a new job or because your current company has moved it's operations you may qualify for a tax break on your moving expenses. The main factors are how far you moved and how much time you spend on the job. If it is a short-time or part time job or if the move is relatively local you may not qualify.

Your new job must meet the "mileage test" which states that the new job must be 50 miles further away from your home than the old job was. For example, if you drive 3 miles to work on your current job, your new job location must be 53 miles away from your home.

You must also meet the "time test" which states that you must maintain Full Time Employment for at least 39 weeks during the 12 months immediately after the move takes place and 78 weeks of the 24 months immediately following the move. How do you determine that if returns are due before this can be verified??? You can still deduct the expenses even if you have not met the "Time Test" qualifications before your return is due if you realistically expect to meet those guideline requirements. If you are a military personnel and your move occurs because of a permanent change of station you do not have to meet these requirements.

How much can you deduct? You can deduct the expense of moving your household goods and personal items as well as the expense of traveling to your new home which includes lodging. However, no part of the purchase transaction can be deducted as a moving expense. Make sure you take advantage of these deductions in order to save you money on your returns. Also make sure you maintain documentation of all moving expenses with a copy of your tax returns. This will keep you in line later if the IRS decides to audit any of your returns.

IRS Secret Agent

Quote of the Week:

"Only the little people pay taxes."

-Leona Helmsley

Beware of Tax Scams!

So you got an e-mail notifying you that you owe taxes to the IRS and you can send the money in to get it resolved. Before you send any money you may want to check the source. The IRS has been one of several government agencies and corporations whose names and websites have been copied by impostors claiming to be IRS employees and asking for your money. Be aware that the IRS does not contact taxpayers through e-mail in regards to tax debt. DO NOT open links in unsolicited messages claiming to be from the IRS.

E-mail isn't the only way for "scammers" to access your personal information. Phone calls are also a good way to obtain information. DO NOT give away any personal information to anyone over the phone claiming to be from the IRS unless you have verified the callers identity. You can do this by calling the IRS at 800-829-1040 to avoid becoming a victim of fraud. Thieves can use your personal information to access accounts, run up credit card balances, apply for personal loans or credit accounts. They can also produce false information and identification enabling them to intercept refund payments and present the IRS with false information leaving you to deal with tax issues you didn't create.

Some of these con artists make a living creating fraudulent tax returns knowing that you (as the taxpayer) are ultimately responsible for all the information on your tax return. Make sure you are using a credible company to file your returns and make sure you review ALL returns for accuracy to make sure they are correct. To avoid these scams takes awareness, a little common sense and making sure you are filing and paying taxes on time as required by the IRS. The last rule of thumb here will help the most.

Don't Leave Money On The Table!

Have you recently donated money or items to a local charity in order to help someone less fortunate than yourself? Don't leave money on the table when you can take a tax deduction for such activity. Just make sure you have the required documentation in order to back up the deduction on your return. The IRS has become more strict on this since January of 2007 due to the Pension Protection Act of 2006 so make sure you understand the guidelines and follow the rules. This will save you a lot of time and money by taking deductions the right way.

In order to deduct a donation to a charity you must have a bank record or a written communication from the charity showing the name of the charity, the amount given and the date of the contribution. Acceptable bank records can be cancelled checks or bank statements containing the name of the charity, the amount given and the date of the contribution. Bank registers, diaries and personal notes made around the time of the contribution are no longer acceptable. Here are some additional tips to keep in mind when filing for a deduction on your tax returns:

• Contributions must be made to a qualified organization.
  
• Used clothing and household items must be donated in good used condition.


• Vehicle donations are subject to special rules.


• To deduct charitable items which have a value more than $250, you must have a written acknowledgement from the qualified organization.


• To deduct charitable items which have a value more than $500, you must complete a form 8283, Non-cash Charitable Deductions, and attach the form to your return.

If you need further information or help a good resource is IRS publication 526. As always, make sure you take advantage of the tax credits you are entitled to but make sure you follow the proper procedures. If you don't you can leave yourself open to filing an improper return and fall subject to penalties and interest. If this happens you can always obtain the services of a professional tax resolution company to rectify the situation. However, if you follow the rules on the initial return this will help you to avoid an unpleasant situation all together.