Welcome to the tax year home stretch

2015This is NOT the 7th inning stretch that we are so familiar with in baseball. We are rounding third base and running home in the last month of the last quarter of this calendar year.

 

Will you be the winner in this tax game for 2014?  Will the IRS be the winner when they select tax returns for examination? Did you realize that the returns the IRS will be selecting in 2015 will not be the 2014 tax returns. Most of the tax returns they will be selecting tax in 2015 will be tax returns for the year 2013.

 

Do you know where your 2013 tax return is? Do you have a method for saving the records you used for that prior year’s return? Do you know how long to keep those records? The answer to these big questions is just one of the areas I cover in my Audit Proofing Coaching program available in January. First enjoy your holidays. Then we can get to work to protect you from a tax audit.

Your 2013 tax return is also the starting point for preparing your 2014 tax return.

What do you want to make sure you finish before December 31st?

Here are THREE TIPS direct from the Internal Revenue Service for Individual Retirement Accounts.

1.  Know the limits. You can contribute up to a maximum of $5,500 ($6,500 if you are age 50 or older) to a traditional or Roth IRA. If you file a joint return, you and your spouse can each contribute to an IRA even if only one of you has taxable compensation. In some cases, you may need to reduce your deduction for traditional IRA contributions. This rule applies if you or your spouse has a retirement plan at work and your income is above a certain level. You have until April 15, 2015, to make an IRA contribution for 2014.

“2.  Avoid excess contributions.  If you contribute more than the IRA limits for 2014, you are subject to a six percent tax (emphasis, mine) on the excess amount. The tax applies each year that the excess amounts remain in your account. You can avoid the tax if you withdraw the excess amounts from your account by the due date of your 2014 tax return, including extensions.

“3.  Take required distributions.  If you’re at least age 70½, you MUST take a required minimum distribution, or RMD, from your traditional IRA. You are not required to take a RMD from your Roth IRA. You normally must take your RMD by Dec. 31, 2014. That deadline is April 1, 2015, if you turned 70½ in 2014. If you have more than one traditional IRA, you figure the RMD separately for each IRA. However, you can withdraw the total amount from one or more of them. If you don’t take your RMD on time you face a 50 percent excise tax (emphasis, mine) on the RMD amount you failed to take out.

If you turned 70½ in 2014 and delay your first annual RMD until the year AFTER you turn 70½, you must take that first RMD by April FIRST, 2015  (not the fifteenth) PLUS you must take the 2015 annual RMD before December 31, 2015. Watch the timeline to avoid the penalties and make the most of your retirement savings.

The 12th Month of the Tax Year

clockIs the 12th month of the year like the 12th hour on the clock?

December is the holiday month. We just had Thanksgiving, coming up is Christmas and then New Year’s.  What must you do before the clock strikes midnight?

Individuals need to know about their numbers. Anyone who has a business needs to know about keeping track of their income and expenses. What is the key to tracking your income and expenses?  Do not let this word scare you, it is really just a simple activity. This word is one of only three words in the English language that have three double letters in a row. This word is bookkeeping. It just means keeping the books, keeping the numbers.

Your Statement of Income is keeping the numbers for your money in.  Your Statement of Expenses is keeping the numbers for your money out.  Businesses combines the income and expenses statements into one Profit and Loss Statement.

There is a very popular software program that many business owners use to help them – QuickBooks. The personal version is more of a checkbook tool called Quicken. Some of my clients use QuickBooks and many of my colleagues use QuickBooks Pro.

The danger with any software is that it is just a tool. Do you know how to best use this tool?   My friend, Joe DiChiara, a CPA in New York, says that QuickBooks is a pretty good tool. He believes it has more features than most of us need to use. My friend, Barbara Starley, a CPA in Arizona, is a QuickBooks Pro Advisor. She helps people untangle their bookkeeping software missteps.

For years, I used a professional accounting software to help my clients with their accounting needs. The software company was sold to another company whose professional cost priced me out of providing accounting services. That was when I began using Excel spreadsheets to track my income and expenses. The spreadsheet method might be just fine for you, but it does not create the balance sheet we need.

What does the balance sheet show? What does it balance? The balance sheet is like a teeter totter. On one side you list your assets, what you own, and their values. On the other side you list your liabilities, the money you owe, and your equities, the value you hold as an owner of your company.

Double entry means for every entry you have on the left side of your ledger, you have an equal entry on the right side of your ledger. When they are equal, or when they match, they balance. And that is what you want in a double entry set of books. Do not mistake double entry books with a double set of books. If you have two sets of books, you are looking for trouble.

Do you have to have certified financial statements? Only if your banker requires them for a loan. But you certainly wants to stay on top of your numbers.

Your Rights as a Taxpayer, Part Three

Young Woman On The Telephone And ComputerToday I will finish the second half of what we might call the IRS Taxpayer Bill of Rights. They call it the Declaration of Taxpayer Rights. If you want to see the IRS Mission Statement, go back to the earlier two articles on this topic.

I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions.  I have colleagues who help me and help you with the Collections side of the big tax machine.

Remember, every employee of the government is a person, an individual with a job to do. Are they just like you? Does one of you throw your weight around? Can you follow the Golden Rule and still protect yourself? Yes, I believe you can.

The Golden Rule is NOT “He who has the gold, rules.” The Golden Rule is NOT “Do unto others before they do unto you.” The Golden Rule is  “Treat others the way you would like to be treated.” You can always catch more flies with honey than you can with vinegar.

The very next right is all about the gold, IRS Collections.

5. Payment of Only the Correct Amount of Tax. You are responsible for paying only the correct amount of tax due under the law — no more, no less. If you cannot pay all of your tax when it is due, you may be able to make monthly installment payments.

6. Help With Unresolved Tax Problems. The Taxpayer Advocate Service can help you if you have tried unsuccessfully to resolve a problem with the IRS. Your local Taxpayer Advocate can offer you special help if you have a significant hardship as a result of a tax problem. For more information, call toll free 1-877-777-4778 (1-800-829-4059 for TTY/TDD) or write to he Taxpayer Advocate at the IRS office that last contacted you.

7. Appeals and Judicial Review. If you disagree with us about the amount of your tax liability or certain collection actions, you have the right to ask the Appeals Office to review your case. You may also ask a court to review your case.

8. Relief From Certain Penalties and Interest. The IRS will waive penalties when allowed by law if you can show you acted reasonably and in good faith or relied on the incorrect advice of an IRS employee. We will waive interest that is the result of certain errors or delays caused by an IRS employee.”

Often I quote Justice Learned Hand, judge of the US Court of Appeals, who said,

“Anyone may arrange his affairs so that his taxes shall be as low as

possible; he is not bound to choose that pattern which best pays the

treasury. There is not even a patriotic duty to increase one’s taxes.

Over and over again the Courts have said that there is nothing sinister

in so arranging affairs as to keep taxes as low as possible. Everyone

does it, rich and poor alike and all do right, for nobody owes any

public duty to pay more than the law demands.”

Your Rights as a Taxpayer, Part Two

ID-100266473Last week I began the conversation saying, “When you are being audited you might not realize that you do have rights as a taxpayer.”  And You DO!  We all do.

The mission of the Internal Revenue Service is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

I became The IRS Insider based on my personal experience as an income tax auditor. The IRS is a BIG organization. My perspective is limited to the Examination and Appeals Divisions.  I have colleagues who help me and help you with the Collections side of the big tax machine.

When you are in the audit “hot seat” you may not feel it is fair for you to be there, but the IRS just has unanswered questions based on the tax return you filed.

Below, is the IRS Declaration of Taxpayer Rights, I may comment on one or more of these rights, but will not paraphrase or condense them.  I have so much to say about your right to representation that this article is limited to only this one item, Taxpayer Right Number Four.

 “4. Representation. You may either represent yourself or, with proper written authorization, have someone else represent you in your place. Your representative must be a person allowed to practice before the IRS, such as an attorney, certified public accountant, or enrolled agent. If you are in an interview and ask to consult such a person, then we must stop and reschedule the interview in most cases.

“You can have someone accompany you at an interview. You may make sound recordings of any meetings with our examination, appeal, or collection personnel, provided you tell us in writing 10 days before the meeting.”

Based on my own experience, when a taxpayer wanted to record our interview, it made me even more cautious about what I was saying. That is not to say that I wasn’t careful to speak the truth or to act in a courteous manner without the recording. It meant that as IRS employees, we were less spontaneous. We were more guarded in what we said.

Every case that is worked by any IRS employee is subject to review by their division’s review staff. If the reviewer has questions about determinations made, the case can be “kicked back” to the auditor for explanation. If the review staff feels the case has not been developed fully, or worked properly, it will not be closed until the auditor addresses the concern of the reviewer.

As the auditor gains experience on the job, the better judgment they develop and the fewer cases are returned by the reviewer. But a random case will still be subject to review at any time in the examiner’s career.

When the taxpayer wants to record the interview, they must request this 10 days in advance of the appointment so that the auditor can arrange for their own recording device. The auditor will also have their supervisor, or another auditor, present during this recording. Will you have someone accompany you? Or will you feel outnumbered?

Do you want this interview to be the most formal or the most comfortable? I know, it is never comfortable in the audit “hot seat.”

Next post I’ll talk about the remaining four taxpayer rights.

You Have Rights as a Taxpayer

Transfer of money from hands in handsWhen you are being audited you might not realize that you do have rights as a taxpayer.

The mission of the Internal Revenue Service is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

With recent events in the news these past couple of years, we might think the IRS has lost sight of its mission. But when YOU are the taxpayer being audited you need to remember that you have taxpayer rights.

The mission of the auditor is not to assess more tax. The examiner’s job is to determine if you have paid the proper amount of tax. If it is decided that you do owe tax, they will ask you right then how you would like to pay your balance due. They will ask you if you can pay i full or if you need to make arrangements to pay.

It is the job of the IRS Collector, or Revenue Officer, to collect the tax that remains unpaid. You can pay your tax by check payable to the United States Treasury or pay by direct debit from your bank account. If you’d like to pay by credit card be ready to pay a convenience fee because the IRS does not pay the normal retailer’s merchant fee. I do not recommend you pay with cash. You want a receipt to prove how much you paid and when you paid it. Cash just offers a temptation for human theft at any of the levels in the employee chain.

You may find yourself in a position where you are unable to pay your tax. Depending on your financial situation, the Revenue Officer may be able to put your account in what they call currently not collectible status. They will review your uncollectible status at a future determined date to see if your ability to pay has changed.

The IRS has published their Declaration of Taxpayer Rights. It reads as follows:

“1. Protection of Your Rights. IRS employees will explain and protect your rights as a taxpayer throughout your contact with us.

“2. Privacy and Confidentiality. The IRS will not disclose to anyone the information you give us. You have the right to know why we are asking you for information, how we will use it, and what happens if you do not provide requested information.

“3. Professional and Courteous Service. If you believe that an IRS employee has not treated you in a professional, fair, and courteous manner, you should tell that employee’s supervisor. If the supervisor’s response is not satisfactory, you should write to the IRS director for your area or the center where you file your return.”

Everyone at every level has a supervisor. It is your right to request to talk with their supervisor.

These are just the first three of the IRS’ Declaration of Taxpayer Rights. Next week I’ll deal with just Taxpayer Right number four, Representation.

Advertising. Marketing. Promotion: Is it Tax Deductible?

ID-100144297Is there a difference between advertising, marketing and promotion? What is PR? What is deductible?

I checked several sources to find the definitions of advertising, marketing and promotion. When it comes to operating a successful business, it doesn’t matter that you have the world’s greatest mousetrap if the world doesn’t know about it.

The Universal Law of Income determines how much income you will have. You will be PAID in direct proportion to the VALUE you deliver according to the marketplace. What will your income be if the marketplace doesn’t know what product or service you provide? Do you believe you have a valuable product or service? Then you need to share it with the world.

ADVERTISING is the activity or profession of producing information for promoting the sale of commercial products or services. Advertisements are messages paid for by those who send them. They are intended to inform or influence people who receive them. Advertising is usually done through some type of media. That media could be print, television, radio, and social media.

MARKETING is the activity and processes for creating, communicating, delivering, and exchanging offerings that have value for customers and clients. It is the action or business of promoting and selling products or services. It includes market research, advertising, selling, storing, shipping and delivering products to people.

PROMOTION is devised to publicize or advertise a product or service. Promotional pieces include a brochure, free sample, poster, television or radio commercial, or personal appearance. A sales promotion shows the features of the product or service. Product promotions can also be classified as “sales” or “specials.” and may include a discounted price.

PR stands for Public Relations. PR is the deliberate, planned and sustained effort to establish and maintain mutual understanding between the company and the public. Often these efforts are called PR campaign.

The whole idea is to make people aware. Attract them and them induce to buy your product or service, in preference over others.

If what you are doing is ordinary, necessary and reasonable, and not lavish or extravagant, for your business, then the Internal Revenue Service should have no problem allowing your deduction for advertising, marketing, or promotion expenses..

Your challenge will be to decide how you label your expense. In what category do you want to claim your expenses?  Why are you incurring these expenses? What is the benefit to your business? Your responsibility to yourself is to keep your receipts so you can prove your expenses.

The IRS Examination Division is full of questions. The Tax Auditor or Revenue Agent will look to YOU for the answers to those questions. How much did you spend? When did you purchase it? How did you pay for it? If you used your credit card, your deduction is taken on the date you presented your credit card.

Advertising, marketing, promotion and public relations may come at a significant investment. While the benefits may be long-lasting, the costs are generally deducted in the year they are paid or incurred.

If you have questions, feel free to schedule a consultation. Send your email to nellie@ntwilliams.com.

End of Month – Employer’s Quarterly Reports are Due

bookkeeping irs auditThe last day of the month of October is the day that 3rd Quarter Employer’s Payroll Tax reports are due. The third quarter covers the payroll months of July, August and September.

If you are an employer, you are expected to deposit the taxes you withhold from your employees on a timely basis. If you owe less than $2,500 total for the quarter, you may make this payment with your Form 941 report. This report includes both Federal Income Taxes withheld AND the combination of social security and medicare taxes withheld (known as FICA) from the employees’ paychecks PLUS the employer’s matching FICA amount. If you owe less than $2,500, you could be a business with a small number of employees.

If you are a business that will owe more than $2,500 for the three months in the quarter, you must pay your “trust fund” taxes on a monthly basis. The taxes you withhold from your employees are called “trust fund” taxes because your employees are trusting you to pay the taxes withheld from their checks to the Internal Revenue service for their individual tax benefit.

If you do NOT withhold the proper amount of social security or medicare taxes from your employees’ checks, you could be responsible to pay what should have been withheld. If you do not pay what you are responsible for paying, you could (you probably will) be charged with penalties. Those penalties can be substantial and they can be BIG.

Do not run your business on your employee’s monies. That decision can put you out of business. If you are trusting one of your employees to make these deposits, make sure they are being made. Trusting an employee who is not trustworthy can also put you out of business.

If an employee seems so dedicated to their job that they do not take any time off this could be a warning sign to you. The employee who refuses vacation and sick leave could feel they must be there every minute of every day to make sure their deception, their theft from you, remains undetected.

Yes, we must trust our employees, but we must also be vigilant in conducting our businesses. The newspapers are full of stories of big-hearted people who are taken advantage of by people with self-centered ulterior motives.

Are YOU are the one to sign the reports, to sign the checks, to decide who gets paid this month and who must wait if there is not enough money to pay all of the bills? Do not decide to make the IRS wait for these taxes. The IRS could decide to give you (the decision maker) more time, jail time that is. That can put you out of business, too.

It is not always easy being the business owner. You are the one that can put “The Buck Stops Here” sign on your desk. I wish you only the best in your business. I wish you only the best when it comes to your tax situation. If you need help, consult your tax professional.

Records! Your Best IRS Audit Defense

ID-100234632I’m not talking vinyl music platters…I’m talking receipts. I’m talking about saving your business butt. I’m talking about saving your personal assets.

I was shocked when training with the Internal Revenue Service to find out that you (and me, too), the taxpayer, are considered GUILTY until you PROVE YOURSELF innocent. That was so against what I had grown up with in this great country of America, the land of Superman and Perry Mason.

Do you have what it takes to prove yourself innocent? How do you do that? Well, it’s very simple.  It can also be considered boring drudgery, but it is your best defense. It’s called record keeping.

Did you know that thermal paper receipts will fade over time. It is guaranteed! That printed strip of paper showing the date, the place of purchase, the item purchased and the amount you paid is so clear when you first get it. But when you look at it later it has begun to fade. And if you need it to show the IRS one or two years later, it could be completely blank.

So how do you protect yourself with this paper that you need so badly? Put it in a copy machine and make a photocopy. Or scan it into your computer. If you have a paper copy, you will want a file folder or envelope or box to organize your papers. If you use a scanner, you will want to set up a folder on your computer so you know how to go back and find what you need later.

Is this necessary for everyone? Yes. If you own a business or are self-employed you have a business tax return to file. And every person who owns a business must also file a personal tax return.

It is important to keep your business records separate from your personal records. It is important to keep the records for one year separate from the records for another year.

Did you know that the biggest gangster in Chicago during the Roaring Twenties, the 1920s, did not go to jail for moonshining, or drug running, or gambling or prostitution? Elliott Ness of Untouchables fame, was really an IRS Agent. This famous gangster, Al Capone. went to jail for tax evasion. He did not keep track of his income and expenses. Or did he? He just didn’t put all of the right numbers on his tax return.

Years ago, on the 10pm TV news they used to say, “It’s 10 o’clock. Do you know where your children are?” And today I submit to you, It’s the last quarter of this year. Do you know what your numbers are? Do you know where that receipt is?

I’ll be asking my clients for all their numbers come tax season. Get a jump on it. Catch up on what you could have done earlier this year. I’ll be asking you for your true numbers and I want you to be ready. They are your best audit defense.

Tips and Taxes

ID-10029711The word TAX can have several meanings. At Bullet Proof Your Taxes, the talk is all about income tax…I want you to pay only your lowest legal tax and not a penny more.

The definition I found online that fits is “a compulsory contribution to state revenue, levied by the government on workers’ income and business profits or added to the cost of some goods, services and transactions.”  Tax has also been defined as “a sum of money demanded by a government and a burdensome charge.

What is a TIP? This word also has several meanings. I regularly give tips, secret information and advice in my articles and on my radio show.  However, today I am talking about TIPS which is the acronym for To Insure Prompt Service.  A tip, and the amount of the tip, is given for a service performed or a service anticipated.

Tips are a matter of social custom which varies between countries and settings. In some settings a tip is discouraged and considered an insult.  While in other circumstances, like law enforcement situations, tips are illegal and could be considered a bribe. In most US locations a tip has become expected, but watch your bill because if you are part of a group at a restaurant, a service charge may been added and included in the total bill. You may not want to add any additional tip because the tip will be paid through that service charge. If you add just a single penny, one lone cent to your tip,  you are telling the server that you appreciate their exceptionally good service.

For you servers, tips are considered income and are subject to income tax. If your tips are paid by credit card to the establishment, your employer’s policy will determine whether you are paid them daily in cash or whether they are accumulated and included in your paycheck.

Your tips may be paid by your customer directly to you as cash or gift cards or casino tokens or other cash equivalents. If you receive $20 or more in a calendar month while working for any one employer you must report the total (not just the amount over $20) to your employer by the 10th day of the following month. The amount of those tips will then be reported on your W2. There is a special box on the W2 form just for allocated tip income for workers of large food or beverage establishments.

According to the IRS, at least 40% of tips to servers are not reported for taxation. The IRS has done special focus examinations on tip earners.  As a server, it is easy to pocket your cash tips and spend them on the way home for groceries, gasoline, etc.  You may not even realize you made more money than your paycheck reflects.

If you think those tips are “free” money to save up for something special, think again. The IRS pays special attention to tip income. It is up to you to keep track of your own total income. Remember, all income is taxable except that which we are told is not taxable.

What does “Confidential” mean to you?

ID-100214117According to the dictionary, “confidential” means something spoken, or written, or acted upon in strict privacy or secrecy. It implies having confidence or trust with secret or private affairs.

“Confidential” can intimate that a magazine article will be juicy and full of information you can’t get anywhere else.

In my business, it is quite the opposite. I acknowledge that you, my clients, tell me things that you share with no one else. I value your trust. I honor your trust in keeping true to my oath of confidentiality with your important tax information.

You ask me questions, I answer them to the best of my ability. Sometimes I must research the law to arrive at the right answer under the current law. Occasionally tax professionals will consult with one another about how they might handle a tax issue. But when we are discussing actual tax facts, names and other identifying information are never revealed.

I am blessed with clients who have been with me since my first year of being in business. I am proud to acknowledge that this year marks the 30th year of my tax practice. Some clients that are with me today have been happy with my service since their first day with me and some are with me until they file their final tax return.

Life happens and not every client can stay with me, some move away, some marry and the new couple may decide to go with the spouse’s preparer. There are some clients unhappy with the advice I render and they chose to find another advisor who might give them the answer they are looking for.

Many times a client will be happy enough to recommend family and friends to come to me. What they discuss among themselves is their choice, their business, but what each individual discusses with me is held in strictest confidence. If one family member should find a reason to change advisors, the rest of the family may be influenced to leave me as well.  I can never discuss the business of one with the others. Misunderstandings can never be explained by me to people not involved in the particular situation.

As your preparer, you will never hear me talking about you or your situation as part of any dinner conversation. I was at a restaurant one evening and overheard a man at another table talking with his tablemates. He sounded to me like a tax return preparer talking about another person known to the group, but not present at that dinner table. I wanted to go over and ask him if he knew what he was doing. I didn’t embarrass him or myself and quietly stayed at my own table.

As your tax return preparer I an bound by law to answer honestly any question the IRS has about the preparation of your return during the processing of that return. But when I represent you at the IRS in a tax audit, I answer their
questions truthfully, but with your best interest in mind.

When I hire staff to assist me in my tax office, I have them sign a Confidentiality Agreement acknowledging that client privacy and confidentiality are of the utmost importance. If they should violate this agreement they can be subject to a fine of up to $25,000.

At the end of any tax season you will never see boxes of outdated records sitting by the curb on trash-pickup day. Any piece of paper with confidential data that is no longer needed to be kept in my office is fed into the cross-cut shredder. No one would be able to put that piece of paper together again to find out what is between only you and me and the IRS.

When I was a young girl growing up, my mother never taught me how to gossip. I am so glad she shared her confidential standards with me. I hope you are comforted by my level of respect for you, your identity and your private information.

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