Watch Your Mailbox for Important Tax Forms! Part Two:

January 23, 2014

- IRS Audit, IRS Audit Help, IRS Audit Process, IRS Problems, IRS Tax Problems, Tax Audit, Uncategorized

For those that can file the simplest of tax forms, you may have your W2 and are ready to file. Last week I talked about W2, W2-G, 1099-G, 1099-Misc and K1 forms. Today I talk about more of the common forms you need to complete your proper tax form. 1099-R is used to report distributions paid to you from your pension plan, your retirement plan or our Individual Retirement Account or IRA. If you have a distribution that is not taxable, it must still be taken into account in filing your proper tax return. 1099-INT is sent to you when you earn $10 or more interest on a bank account or certificate of deposit. You should get one of these forms for each account that generated $10 or more of interest. If you have more than one account at a single branch, they may report each account separately on a single, or consolidated, statement. Some banks show each account and provide the total earnings for all accounts. Whether or not you withdrew the interest, or had it in your hot little hands, this is taxable income that must be reported. If you earned less than $10 you are still required to report the interest earned, you just won’t get the Form 1099-INT to remind you. In this case, you’ll need to check your account statement that includes December 31st. 1099-DIV reports to you earnings of $10 or more in dividends paid on stocks, bonds and mutual funds. Like 1099-INT, you are responsible to report all earnings even if you had less that $10 and do not get this form. 1099-DIV also includes capital gains paid on these investments. These capital gains are for activity within you account, not for the sales of stocks from your account. Both ordinary dividend and capital gain dividend numbers are important in calculating your proper tax. Your tax professional will see that you don’t overpay your tax. 1099-B reports your sale of stocks, bonds or mutual funds. You receive Form 1099-B from your broker or mutual fund company. This form can be one page or multiple pages depending on the size of your account. For each sale this report will tell you the name of the stock or fund account, how many shares were sold, the date of the sale and the sales price. Some brokers issue a preliminary report to meet heir February 15th deadline to issue this Form 1099-B, but they will tell you to expect a corrected or final statement later in the tax season. Provide EVERY page of this report to your tax advisor. 1099-C reports Cancellation of Debt income which must be reported on your tax return. This income may or may not be taxable to you. It can be issued because you were unable to pay a debt, perhaps credit card or mortgage debt. Be sure to share this information with your trusted tax advisor. The US Tax Code states all income is reportable except that which is specifically exempt from tax. Protect yourself from IRS audit by reporting all of your income.

Watch Your Mailbox for Important Tax Forms! Part One:

By Nellie Williams on

January 15, 2014

- IRS Audit Help, IRS Audit Process, IRS penalties, IRS Problems, IRS Tax Problems

January 31 is the deadline for many of your “Important Tax Information” reports to be mailed to you. You may even have received some of them early. They truly are important for you. They are a goldmine for identity thieves, so get them out of your mailbox and into a safer place right away. .. The reason we are getting them in the first place is that they are also important to the IRS. The IRS gets copies of these forms as well and if you happen to forget to include income on your return…don’t worry because the IRS will certainly be contacting you. .. W-2 is the key form for employees. You need to report the wages you earned from each employer you worked for during the year. This form also reports the income taxes withheld from your earnings and other important information. .. 1099-MISC is the key form for independent contractors or business owners. Much like the W-2 for employees, this is the form that businesses report total yearly payments of $600 or more to workers who are not considered employees. If you think you are an employee and get a 1099-Misc instead of a W-2, I’d like to consult with you. If your business has taken the steps to become a corporation or partnership, you may receive a W-2 or a K-1. .. Form K-1 is used by various entities to report earnings and other tax return related information. S-Corporations, Partnerships, Trusts and Estates use this form to “pass through” income and expenses to owners, partners and heirs. Your tax return cannot be completed until this K-1 is reviewed. If the business has filed an extension of time to file the business return, you may not get this form until close to, or even after, the April filing deadline for individual returns. If this is the case for you, you will need to file an extension for your individual tax return. .. W-2G is used to report Gambling Winnings. There are different reporting requirements depending on the type of game you won. Just because you were the WINNER does not mean are ahead “of the game.” and had a profit. It means you had a WIN. To avoid an IRS inquiry, report ALL gambling winnings, whether or not you received a W2G. Be sure to keep a log of your Gambling Activity. See my blog on Gambling Winnings and Losses for more information. .. 1099-G is issued by states when you receive a tax refund of state or local taxes. This refund may or may not be fully taxable to you. Consult with your tax advisor. A separate form of this same number will also report unemployment benefits paid to you. Unemployment benefits received are income taxable and must be reported on your tax return. .. Next week we’ll cover more of the 1099 series of forms you need to watch for. .. The US Tax Code states all income is reportable except that which is specifically exempt from tax. Protect yourself from IRS audit by reporting all of your income.

What is Your Beginning of the Year Odometer Reading?

By Nellie Williams on

January 4, 2014

- IRS Audit, IRS Audit Help, IRS penalties, IRS Problems, IRS Tax Problems

What are you going to do different this year than you did last year? If you use your car for business I hope you remembered to write down, yes on paper, your odometer reading. If you didn’t do this before you got behind the wheel on the first day of the year, it’s not too late to start this process today. What good is this Beginning of the Year Odometer Reading? This is just one step on the “Prove It!” scoreboard if you are ever in a contest with the Internal Revenue Service. This contest is also known as an IRS TAX AUDIT! This audit can be started by the IRS, but they work hand in hand with the states and this audit can also be started by your state’s Department of Revenue. By working together, these agencies are sharing the workload AND they are sharing the results with each other. Most state tax returns begin with the results of your federal return for that same year. If the IRS makes an adjustment on your federal tax return, you can be darn sure they will tell their counterpart at your state’s tax office. And if your state makes an adjustment, corrects a mistake, disallows (throws out) a deduction, adds income you failed to include (ignored or didn’t even remember you received), you can be sure they will tell “the feds.” Record-keeping is your safety net and YOU must keep the documentation you need to prove the position you take on your tax returns. Because in an audit, you are considered guilty until you prove yourself innocent. CAUTION: Do not throw away old tax returns just because we turned another page on the calendar. ALWAYS keep your copy of the tax returns you filed FOREVER! Why that long? Why not just three or five or seven years? You never know when you need to look back at an earlier year’s return. In 2013, I was amending a 2009 tax return. It had a tax benefit that was to be carried BACK two years to 2007. Since I was the preparer on both years, I had the preparer copy of both years’ returns. But if you were my new client, would you have that 2007 return for me? Another client is inheriting an IRA from her mother. Is all of that IRA taxable to her? Did her mother ever deduct her IRA contributions? Did Mom keep her copies of those earlier year returns that have now become so important to her daughter? Do yourself and your family a favor and KEEP your tax returns forever. So, back to your New Year’s auto log. It’s never a bad habit to keep a little diary for your car, whether you want to deduct your mileage or not. If you want to sell it later, this odometer reading record helps to prove the condition of your vehicle and could get you a better sales price. Keep a record of your vehicle maintenance. When was the oil changed? When were the tires rotated? When were old tires replaced with new ones. Keep track of things like that. If you want to deduct the business use of your vehicle, the IRS does require a log of your total miles AND a log of the miles you drove for business. If you don’t want to be bothered by keeping this timely (at-the-time driven) log. you don’t have to. But if you do not keep the log, you do not get to claim the deduction. It’s as simple as that.

Military Tax Benefits

By Nellie Williams on

November 13, 2013

- IRS Audit, IRS Audit Help, IRS Tax Problems, Military

Attention Military Members: Internal Revenue Service gives special tax treatment to our Military! … I am grateful for the sacrifices of our military veterans. This week we remembered them on Veterans’ Day. … My father and my uncles all served in World War II. My schoolmates served in the Vietnam War. Many of my clients have served or are still serving in our military today. You and your families sacrifice so much to protect us. Thank you so much for your service. I am happy to help remind you of these tax benefits available to you. … Americans are taxed on their worldwide income and you are taxed on most of your income, too. But there are some specific incomes that are excludable, or not taxable. … Military pay you earn while serving in a designated combat zone is not taxable. When you are outside the United States you are allowed an extra two months if you choose to file an extension of time to file your return. If you are serving in a combat zone you have even more time. There is a complicated formula used to figure the exact number of extra days you can use. The same caution applies to everyone filing an extension: taxes not paid by April 15th will incur interest and may also incur penalties. So get those taxes paid early to avoid those extras. … If your spouse is unable to sign the tax return because they are serving in a combat zone. you are allowed to sign the return for your spouse. Most of my client spouses have power of attorney, often referred to as POA. If you do not have a POA, and you sign for your combat-zone serving spouse, attach a letter with the return explaining this. … The basic allowances for housing and subsistence are not taxable. If you own your home and pay real estate taxes, those taxes paid are still deductible even though you get the tax-free housing allowance. … Most people who have a job-related moving expense have to meet certain time and distance requirements. These requirements do not apply to military moves. Your new location does not have to be more than 50 miles from your last assignment. You do not have to stay employed in the new location for at least 39 weeks in the 52 weeks following your move. … If you receive disability pay for a combat-related injury, that disability income is not taxable to you. … If you are on full-time active duty, you generally may not deduct your uniform expenses. But if you are serving as a reservist, you DO get to deduct any uniform expense that is more than the uniform expense reimbursement you receive. … Just like any mileage to a second job on one day, reservists may also be allowed to deduct the cost of their transportation to meetings they attend on the same day after working their regular job.

Back to School Already?!

By Nellie Williams on

August 8, 2013

- Deductions, IRS Audit, IRS Audit Help, IRS Audit Process

It’s still summer according to the weather reports. But here in Arizona, it is back to school. School starts in August and gets out in May—we don’t have snow days. The newscasters were cautioning drivers today to watch out for children. Parents were advised to accompany their children walking to school these first few days. Do your children walk to school? Do they take the bus? Are they old enough that they drive themselves? Do you home-school them? Are YOU the student? What does school have to do with taxes? There is more than one place on your tax return for education-related expenses. It can get complicated. I believe that our learning never really ends. As a tax professional I am required to attend a certain number of hours of continuing education in tax law and in ethics every year. I also enroll in other courses for personal development. All these classes are deductible as business expenses. Any classes I chose to take that are hobby-related or are just fun are not deductible for me. But if you are in the food business, the cooking class I might want to take for fun could be a deduction for you. Sending your children to school is generally not deductible. It is considered a normal cost of living. We normally cannot deduct our personal meals, or clothing, and we cannot deduct the expenses we incur to send our children to school. But if you pay to send a little one in pre-school, that may qualify for a child care credit. If your child is under the age of 13, after-school care may also qualify for a child care credit. Usually school for grades K-12 do not provide you any tax benefit. Depending on your state’s tax laws, you may qualify for a state credit if you help support extra-curricular activities. College tuition and fees paid to enroll yourself, your spouse or your dependent child may also qualify for a tax credit. If you buy your required books from the college bookstore you may include them in your tax credit expenses, Books purchased from the student selling books from last semester and room and board expenses are not deductible and do not qualify for tax credit. When I went to college I worked all summer to pay for the coming year’s tuition. Going to school in my own state helped reduce my costs. Going to school at the junior college level was also less expensive the first two years. I never had a student loan. But most of my clients do. Student loan interest can be deductible. But there are limits on how much of your expenses can be used for tax purposes. What is the difference between a deduction and a credit? Deductions are subtracted from your total income and then your tax is calculated. Tax credits do not reduce your income, they reduce your tax. An easy example would be if you were in the 15% tax bracket and had a $1000 deduction, you could save $150 in tax. A tax credit of $1000 would save you $1000 of tax. Most of the time you cannot decide to take a credit instead of a deduction. Congress makes those decisions for us when they create the tax laws. And it’s those laws I want you to understand so you are always paying your lowest legal tax.

Tax Return Identity – Part Two

By Nellie Williams on

July 31, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process

Last month I told you about my travel adventure with Stephen E, AKA Steve E. “AKA” is police lingo short for “also known as”. You don’t want any mix-up with your identity, or with the identity of your dependents, when it comes to your income tax return! Today it seems a newborn baby gets their social security number before they leave the hospital. What about a baby born at home? The important point is that any parent wanting to claim that new little bundle of joy must include the child’s social security number on the tax return. When I add that baby to the return I also track the date of birth so we can claim every tax credit available. And different taxes apply to different taxpayers depending on their ages. When you file your tax return you enter your name, address and social security number, or SSN. When you file a joint return with your spouse, you put both names and social security numbers. One person’s name and SSN are listed first. The other person’s name and SSN are listed second. The name and number listed first is called the PRIMARY taxpayer. The other person is called the SECONDARY taxpayer. This does NOT mean that one is better than the other. Remember this when you first marry: You can CHOOSE whose name and number goes first. The primary taxpayer is not always the male of the couple. But once you decide that HER name is going first, don’t change that order next year or any other year. That will just buy you trouble from the Internal Revenue Service. They might be expecting a tax return from HER next year and not be able to find any record. Then you get your letter asking to explain everything. Other important numbers required for your tax return could include the daycare provider’s SSN. If that daycare provider is operating as a business they may have an EIN, Employer Identification Number. With electronic filing of the income tax returns, name and number mismatch (when things don’t match up) can cause what is known as a reject. Something must be corrected before we can file that return. If someone has stolen your identity or the identity of your dependent, that can cause very inconvenient delays of your refund. One year a return was rejected because the dependent’s name and SSN did not match. The IRS had just begun matching tax return identities with Social Security records. I called my taxpayer, let’s call him Mr Smith. I learned that for years I had been filing the return for Mr and Mrs Smith and their daughter, Ms Smith. But the daughter was MRS Smith’s daughter. And Ms Smith was really Ms Jones. The adoption was never legally finalized, the SSN records had never been changed and the tax return was rejected. We then mailed the return in with the explanation. Mr Smith’s nerve-wracking situation could have been avoided if he had just understood the importance of telling me the whole truth for his tax return. Identity theft can also bring about other legal problems. If you find yourself in that position, please contact me so I can talk with you about what action you might want to take next.

What does July 31st mean to your business?

By Nellie Williams on

July 25, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process

Do you have employees? Did you pay them during April, May or June? If yes, then you have payroll reports due for the 2nd quarter of this calendar year. sssss What if you didn’t pay any employees during April, May or June? If you have been filing these quarterly reports and did not tell the Internal Revenue Service that you stopped having employees, you have to file these reports for the second quarter, too. You will just report zero wages and zero withholdings. sssss There is nothing simple about the IRS. There is a little wrinkle here for some employers. If you have been given permission to file an annual 944 instead of the quarterly 941, you may just have quarterly state reports to file. sssss But for most of us, you now know July 31st is the due date for Q2 (second quarter) payroll reports. Not just the reports, but the payments due with them, also. sssss It is easier for some people to work with numbers. I am a number cruncher. I prepare reports for my own company and I prepare reports for several business clients. All my payroll clients have to do is tell me the details. sssss The details are not difficult. they give me a list of employees with their names, addresses and social security numbers. MAJOR TIP: Never write anyone any paycheck until you have this information AND you have their completed form I-9. sssss For every paydate, I need the following information. 1) the name of the employee, 2) the amount of the check, 3) the amounts withheld and for what. sssss The amount you wrote the check for is called the “net” check. “Net” take-home pay is AFTER deductions. The amount of the paycheck BEFORE deductions is called “gross” paycheck. I need to know how much you withheld for each of the taxes your employee may be subject to. sssss Taxes must be withheld from each employee’s paycheck. These taxes start with the employee’s one-half of social security and medicare taxes. Based on the employees gross check they may also have federal income taxes withheld. And if you pay workers who live in a state that has stare income tax, you may also be withholding state income taxes. sssss You may have other employee benefits that the employee pays for out of his check. An example of this could be the tools a mechanic buys for his job that he pays for out of his paycheck. This deduction does not change what he makes, but it does change what he takes home. sssss When it comes to social security and medicare taxes, the employee is only responsible to pay half. YOU, the employer, pay the other half of these two taxes. If you fail to withhold these taxes from your employee’s pay, you are responsible to pay the WHOLE amount. You can wind up paying both halves when you don’t withhold from the employee. sssss You, the employer, are also responsible for paying federal unemployment taxes. You may send a payment every quarter, but this report is not due until the end of the year. Your state, however, may have a report and payment due each quarter. sssss What’s next? File your reports and pay the taxes due for Q2 before July 31st to avoid penalties and interest for late filing and/or late payment.

What does your identity have to do with your income tax return?

By Nellie Williams on

July 18, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process, IRS Problems, IRS Tax Problems

What’s in a name? What’s the big deal about your identity? So what happened to make me want to talk about this subject? xxxx Recently, I was traveling on business and invited my husband to join me. Since my trip was for business, my expenses were deductible. My husband’s trip was not for business, it was for his pleasure; therefore, his expenses were not deductible. Some of you may have a spouse that also works in your business. If so, your spouse’s expenses may or may not be deductible. xxxx Our travel involved flying from Phoenix to Chicago and then back from Chicago to Phoenix. Phoenix Sky Harbor boasts to be one of the friendliest airports. Chicago’s O’Hare is also a great airport, but let me tell you about our adventure with our Transportation Security Administration, TSA. xxxx I understand the agents at TSA have an important job to do. And the people we met in both cities were certainly nice. We had our boarding passes and our luggage was checked. We were ready to have our carry-on luggage screened and our bodies x-rayed. At O’Hare, for the first time ever, we were detained. Steve’s ID and boarding pass were confiscated! TSA wanted more information. I could go on ahead but I said, “No. We will stay together.” xxxx When I ordered our airline tickets, I got one ticket for me and one ticket for Steve. I married Stephen E and purchased his ticket under that name. But do you know what? When he produced his photo ID (and it does look like him, no question) the name on his Arizona Driver’s License is not “Stephen E”, but “Steve E”. Could you ever imagine this would be a problem? It had never been a problem before. I didn’t know the documents wouldn’t match. I had never asked to see his driver’s license. I had never “carded” him before 😉 xxxx Steve said he had been in a hurry when he got that license. He introduced himself as “Steve” so it was just natural for him to write his name as “Steve”, that’s what he calls himself. Sometimes that’s what I call him, too. You might imagine all the names I was calling him that day. Okay, not really. xxxx The TSA Agent who was holding Steve’s ID and boarding pass, escorted us back to the airline ticket counter. I felt like a criminal being detained, but we had done nothing wrong. Did the ticket agent feel this Steve E and Stephen E were one and the same? Thank goodness we had allowed additional time! After a small delay, and a smile from the TSA Agent, she took us back to the front of the security check in line. We went on our way and had a few minutes to spare before boarding our flight home. xxxx This incident made me think about my role as a tax return preparer. I am careful to make sure everything matches up for my client. Sometimes we find out that is not always the case. Sometimes it is the Internal Revenue Service or our state Department of Revenue that lets us know things don’t match up. xxxx When preparing your return, take the time to make sure your name is spelled correctly, that your Social Security Number is entered correctly, double check that your address is current. This is where IRS will send any important correspondence and you don’t want that sent to anyone but you!

Independence Day

By Nellie Williams on

July 4, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process

Ever since I was a little girl, Fourth of July has been of on my favorite holidays. In my little town we had a great celebration. The children decorated their bicycles to ride with the floats in the parade through town. The town’s fire truck sounded it’s horn and gave short blasts of the siren. We ate hot dogs and ice cream. And, of course, we always looked forward to the fireworks!

Do you know what the fireworks represent? Think about the words of the Star Spangled Banner: “The rockets red glare, the bombs bursting in air…”

What was this American Revolution all about? You guessed it. TAXES! The original “tea party” in Boston, Massachusetts was the beginning of this long-brewing war. The people settling the American colonies were unhappy paying taxes to the King of England. They did not want taxation without representation.

This article is not about any political posturing. It is totally about income taxes. I am not just an Audit Specialist. I am also an Income Specialist. I always hope you have to pay a LOT of tax because I want you to have made a LOT of money. At the same time, I want you to pay your lowest legal tax and not a penny more.

An individual pays tax on their individual income. A business owner has several choices. If you choose to file your business taxes as a sole proprietor, you will report your business income and expenses using Schedule C on your 1040 personal income tax return.

If you choose to be a Limited Liability Company, LLC, you will file your Articles of Organization. Now you may choose to be taxed as a corporation or as a “disregarded entity.” This is just a fancy way of saying Schedule C.

If you choose to be taxed as a corporation, you file Articles of Incorporation. You may also qualify to elect “S” Corporation status. This “S” status is not available to everyone corporation. The “S” corporation does not pay tax on its profits. Those profits pass through to the shareholders. The “S” corporation profit is included in the individual shareholders’ taxable income.

The “S” corporation must be sure to pay a fair wage to the owner or shareholder who works in the business. They cannot pass through their entire profit as dividend to avoid employment tax issues.

A regular or “C” Corporation will pay tax on their net business income. The net income is the result of subtracting business expenses from total, or gross, income. When the “C: Corporation declares a dividend and pays that dividend to the stockholder, that stockholder also pays tax on the dividend income. This is why the “C:” corporation is subject to what is called double taxation.

The freedom of choice is one of our great rights we have as Americans. We are fortunate to be able to choose the type of entity that best suits our business. Enjoy your red, white, and blue holiday. Keep your business “in the black”. And stick with me to learn the rules of this tax game so you can play to win. Beat, not cheat, the IRS. Keep more of what’s yours from becoming theirs, spelled the-IRS.

Death and Taxes – Two Certainties in Life

By Nellie Williams on

June 27, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process

According to Benjamin Franklin, the only things certain in life are Death and Taxes.

I just spent most of my Saturday reaching out to people who I thought needed to know that a good friend of ours had passed away. This lady had more influence than any single one of us realized. Let’s call her Jill.

Why am I sharing this with you? Why am I playing with the many pieces to the puzzle of her life? Well, because Jill left no will and I am trying to make some sense of what is left. How does that involve me? I helped her buy her apartment and the neighbors and manager reached out to me as someone who might be the one to start trying to tie up loose ends.

I want YOU to understand the importance of drafting your will or even creating a revocable living trust. I have helped many people work with the legal community in preparing these critical documents. Because we had had conversations in the past, we think we know what Jill’s wishes were. But did she change her mind since we talked long ago?

Where did she keep her important documents? Will I find them all in one place? Do I have a responsibility as co-owner of her apartment? Am I biting off more than I want to chew by letting people know of her death? Have I forgotten anyone? I have no map to follow. But I do have a law firm I can call for advice.

Will I have a liability that I am not aware of? I learned at the Internal Revenue Service, that ignorance is no excuse. Just because I don’t know the answer doesn’t mean I can risk blundering into committing some grave mistake.

Jill is not just a friend. She is also a former tax client. Jill filed her last tax return many years ago. She has not had sufficient income to require her to file since that last return. But will that be the case for you? Some clients DO have income that keeps them filing a tax return up until the date of their death.

Other clients have created a revocable living trust. As long as they are living, they can change their mind. They can revoke one or more provisions of that trust. While they are alive, they report all that income on their personal return.

The day after the trust owner’s death, the trust becomes IRREVOCABLE. No more changes can be made and the trust then must file it’s own tax return. Have you ever heard of Elvis Presley or Michael Jackson? They both are making more money after their death than anyone ever imagined. As long as there is income, there is tax to pay.

After you die, your spirit will not really care what happens to the stuff you leave behind. But the people you leave behind may feel this stuff is important. Help them know what you would want them to do.

Step One: Make out your will or trust, or have someone assist you. This is your last love letter to family and friends.
Step Two: Tell someone where you have put your important papers.
Step Three: Enjoy your life. This is NOT a dress rehearsal.

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