Why should I care about IRS and their Audit Process now, at this time of year?
Historically, the IRS begins to hire their new employees at the beginning of their fiscal year which begins in the fall. I just can’t remember if it begins in September or ends in September. They will have completed their prospective new employee interviewing, offering positions to successful applicants and then start training those who have accepted their new assignments. Can you hear the Mission Impossible theme song playing here?
There have been stories that the IRS IS hiring rebutted other stories saying the IRS is NOT hiring. Has there been a hiring freeze? Are new agents and auditors in training as you read this? Whether of not they are hiring new employees, IRS training is ongoing year in and year out.
The whole point is, it doesn’t matter what percentage of the over 235 MILLION tax returns expected to be filed in 2011 are audited. If, I really mean WHEN, YOUR return is chosen, that is what is most important to you. It’s 100% for you!
My Experience
When I took my first job as an Income Tax Auditor with the IRS, I had NO, absolutely NO, experience in taxes other than from preparing my own personal tax return. I had someone else prepare my return after I purchased my first house. That was new for me and I didn’t want to miss anything that would help me. After that one year, I returned to preparing my own return. Today, I feel I know the tax laws, but if I didn’t have my professional tax software to help crunch the numbers, I wouldn’t do my own. I am very pleased that my clients feel the same way and trust me to do my best for them.
What experience did I bring to my new job as Tax Auditor? The IRS believed, based on my scores of an exam that was used in those years for Civil Service employment applicants, that I used good judgment in making decisions. That is the whole job of the tax auditor. They examine the facts, properly apply the tax laws and determine if the correct tax has been paid or not.
The IRS taught me how to read a tax return. The IRS taught me what the tax laws were. The IRS taught me that ALL income is taxable except that which is excludable by the tax laws. The IRS taught me that NOTHING is deductible unless specifically allowed by the tax laws. The IRS taught me how to research the tax court cases. I learned which cases were in the favor of the IRS and which cases were not in favor of the IRS. Guess which ones the IRS uses. But they have to know all of those cases because guess which ones I want to use now that I am on “the outside.”
Now is the Time…
So what? Why am I talking about this now? Because NOW is when IRS notices are being sent out. NOW is when new audits, NEW examinations will begin soon.
This is November 1st, 2012. The only reason I date this is to show you the time line you need to know. Any 2011 return not already filed is just plain late. And chances are, unless you made a mistake that will be revealed in processing your tax return you will not hear from the IRS quite yet. Processing your return is not examining your return. Processing your return is simply receiving your return and issuing your refund or invoicing you for any balance due. IRS is quick to issue refunds first because they don’t want to pay your interest for waiting too long to give you back our own money.
The statute of limitations is KEY. The IRS has only three years from the time you file your return (or April 15th if you file before the due date) to examine that return. That means the clock is ticking for them and for you, too. They don’t want to run out of time to assess any additional tax due. And if they don’t ASSESS (not collect) any additional tax due before April 15th, 2015 (2011 timely filed 4/15/12 plus 3 years) then heads will roll at the IRS. The IRS does have additional time to COLLECT taxes due, but that is a totally different discussion.
You Have Been Chosen…
What you need to understand is that when the IRS chooses YOUR tax return, they believe there is an error for them to discover. It’s like a treasure hunt for them. Your return has been selected for potential of error. They just don’t know if there is an error or not. And if there is an error they don’t know for sure where it is. But they have a pretty good idea where it might be. They are going to ask you to PROVE that you were right in claiming those deductions or credits. They are going to ask you to PROVE that you claimed the correct amount. They will want to see your receipts. Do you still have them? Did you ever have them?
Will every audit cost you money? Not necessarily. The job of the IRS Tax Auditor or Revenue Agent is to determine that the CORRECT amount of tax was paid. If you paid too much, the examination results in a refund due you. They get to write YOU a check. If you paid too little, the examination results in a balance due the IRS. You get to write the IRS a check. Third, the examination may result in no change. That would be best for you. ๐
Will every audit cause you inconvenience? Yes, guaranteed. Don’t you have better things to do than dredge up old tax records 12-30 months after you filed your tax return?
Will every audit cause you anxiety? Maybe Yes. Maybe No. Not necessarily so. That all depends on how well you kept your records, how closely your tax return relates to your tax records and how well you easily you can locate and provide those records (receipts) to the IRS to prove the items reported on your return. They should be the same. And you shouldn’t have to scramble to find them.
It’s all about PROOF. And YOU are the one who must PROVE that your put the right numbers on the tax return you gave the IRS. You do sign that return under penalty of perjury, you know.
I know I raised some questions here. I hope I also answered some questions. If you still have questions, please comment and add to the discussion.
To your lowest legal tax,
Nellie T Williams, EA
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Do you have a business? Or do you have a hobby?ย
What is the difference?
It is perfectly okay to like what you do. When you love what you do it is not really work.
A hobby, according to the Merriam-Webster Dictionary, is “a pursuit or interest engaged in for relaxation.” Think about what you do in your after-work hours? Do you have a favorite hobby?
A business, according to the Internal Revenue Service, is defined as “an activity engaged in for profit.” What is profit? Profit is the money you have left over after your business income pays for it’s business expenses. I like profit. Don’t you?
There are many ways to earn a living. And there are many ways to file your business income. The key is to report ALL your taxable income. What is taxable? ALL of your income is taxable, except that which is specifically excluded by the tax laws.
Whether you have income from a hobby or or income from a business, all of that income is taxable and must be reported on your tax return.
Did you know you could choose your business entity? When you begin a business you may start as a sole-proprietor and file Form 1040 Schedule C, Profit or Loss from Business. If you have a spouse and you both share and work in the business together, you may choose to “split” your Schedule C profits so both of you pay self-employment taxes on your respective halves of the business profits.
With the help of your tax advisor and your tax attorney, you can decide to form a business entity. Whether your are considering forming a Partnership or a Corporation or a Limited Liability Company, you will want to consult with a professional to benefit from their broader picture knowledge and experience. An attorney is needed to draft, file and publish your required legal documents. While there may be many do-it-yourself ways to take care of these details, they are just tools. And if you don’t have the knowledge and experience yourself, you don’t know what you don’t know. Invest wisely in yourself and your business.
A Partnership has two or more partners, at least one general partner who makes decisions for the partnership. A Partnership Agreement should be written to outline the respective partners’ duties. And when you are all friends starting out in this partnership business, I highly recommend you decide right then exactly how the partnership will treat a partner when the time comes when you part ways. Just like in a marriage between two people, there will be good days and not so good days in the lives of a business. We all want the high days, but begin with the end on mind to keep that future end a more pleasant one.
A Limited Liability Company, commonly called an LLC, is not a form of taxation, but is a method defined by the individual states in forming a business. Your LLC can choose to be treated as a corporation or a disregarded entity. What is an entity? What is a disregarded entity?
An individual is issued a Social Security Number. Originally intended to identify a person who would draw Social Security Benefits, it has evolved into our national identification number. One spouse of a married couple decides who will be the “primary” or first name and social security number on the 1040 tax return. If you do not choose to file your business income and expenses on your 1040 Schedule C, and if you have formed an LLC, then you are choosing to be treated as a “disregarded entity”. That means you are not filing as a Partnership or Corporation. You are not choosing your business to be a separate entity with a its own separate income tax return.
There are two kinds of corporations, one is the “C” Corp, or regular corporation, and the other is the “S”, or Small, Corporation. Not every corporation can be or wants to be an “S: Corp. But if you make that election, and special IRS paperwork is required, then you have made a decision on how your business will be taxed.
A “C” Corporation does pay tax. And the dividends that the C Corp pays to its shareholders are also taxed to the shareholder. This is called double taxation. And this is one of the reasons some people choose the “S” Corp. The “S” Corp, like the Partnership, does not pay tax. Both “S” Corp and Partnership calculate their net taxable profits and pass those profits (or losses) through to their shareholders or their partners on a Form K-1. That K-1 reporting is used in completing the shareholder’s or partner’s 1040 Individual Income Tax Return.
So how do you get paid? How do you take money out of your business to pay your personal expenses? It depends on which business structure, or entity, you have chosen.
You MUST take a wage from your corporation. You DO NOT take a wage from your partnership or from your schedule C, but you DO take a “draw”. When you take a wage you have income taxes withheld from your paycheck. When you take a draw, there is no withholding, but you do make estimated tax payments. Now that is a great topic for another blog, don’t you agree?
To your lowest tax,
Nellie T Williams, EA
“…I gotta be me, I’ve gotta be me
what else can I be but what I am.
I gotta be me.”
What else CAN you be? WHO else can you be but YOU?
Why is it so important to be yourself? Because people do business with people they know. People do business with people they like. People do business with people the trust. Know… Like.. Trust..
When you know yourself, it is much easier for other people to know who you are, to know what you stand for.
When you are in business, your objective is to make a profit. If profit is not your objective then you have a hobby and that is an entirely different subject with entirely different tax rules. When you are in business to make a profit, you need to have the right market to target. That market is your niche. Niche is a French word pronounced “neesh”. Americans, often pronounce this word as “nitch.” And that rhymes with RICH.
What is it that YOU do better than anything else? What do you do that sets you apart from others in your industry? What are you expert at or in? That is YOUR unique brilliance.
When I worked for the Police Department I was proud be helping “to serve and to protect.” I learned as a child that the policeman was my friend and that if I was ever in trouble, I should look for a policeman. In those years women were not part of the uniformed patrol. But I grew up to proudly wear that uniform for a few years..
Then I went to work for the Internal Revenue Service. Who wants to be freinds with the IRS man or woman? I would tell people that I worked for the largest accounting firm in the country. I learned how to hide what I did. Even today, the three letters “I R S” do not invoke a warm and fuzzy feeling for many people.
But my own experience is what makes me unique! It is that experience and specialized knowledge that allows me to do what I do so well. I help people pay their lowest legal tax. I help people understand the tax rules so they can play that annual high-stakes tax “game” to win. I help you Bullet Proof Your Taxes!
So, who is going to be unhappy with that? The IRS is happy. When you file a correct return and pay your proper tax to begin with, the IRS has when you file your return, the money they are entitled to. They save money by not having to spend any more time or attention on your tax return. But their happiness is not what motivates me.
YOU are happy because you are saving money by paying only your fair share and not a penny more. You are sleeping soundly at night. I have taken what could have been a nightmare and removed the giant fear of an IRS tax audit. I help you plan in advance so when (not if) that scary invitation from the Internal Revenue Service comes inviting you to “Come on down!”, you know you have everything you need. This former nightmare has become just an inconvenience.
Who would be unhappy with what I do? People who want to cheat on their tax returns often don’t like my truthful answers to their carefully crafted questions. People who don’t plan well enough to be able to pay their fair share and want to take deductions they can’t substantiate or prove don’t like me because I follow the rules I am have promised to follow.
But those people are not MY people. They are not my ideal market. They don’t want what I have to offer.
What do you have to offer? Who is your ideal market? If you need help answering these questions, I’d love to be the one to help you with that. Watch my website for that new opportunity to work with me in developing YOUR Unique Brilliance.
I gotta be me…. You gotta be you…. because You are the only YOU there is.
I’m all about saving you money.
To you lowest legal tax,
Nellie Williams, EA
Are you an employer? Are you and employee? I own my own business. I am both. I wear both hats.
Recently I spoke with a client who also is an employer. He has employees. And he has a problem with one of his employees.
I have learned so much over my varied career. I want to share with you what I’ve learned to help you have a better workplace. Now I don’t have all the answers. No one does. But see if you experienced any of what I experienced.
Are you an EMPLOYER in the eyes of the INTERNAL REVENUE SERVICE?
Do you have people that work for you in your business? Are you treating them like employees? What does that mean, Nellie? (“Whatcha talkin’ ’bout Willis?” from the TV Show Different Strokes)
When you are the employer and have employees in your business to help you get your work done, your product out, your sales made, whatever they do to help you, YOU are the boss. YOU have EMPLOYER responsibilities and EMPLOYER tax liabilities. Congratulations! You are in good company.
So many entrepreneurs go into business because they know how to do what they do. I was lucky to work for some high-powered organizations that showed me about what management really meant. Chain of Command! Employee Services Division, Personnel Department, and now called Human Resources.
Tick, Tock, Tick, Tock!
Have I ever told you about the time line that the INTERNAL REVENUE SERVICE is bound by? There are due dates. There are many of them.
Most of us are calendar-year taxpayers. That means our tax year ends December 31st. And when we file an individual income tax return, a Form 1040, that is due April 15th of the following year. At one time the 1040 was due March 15th, but so many people asked for extra time the due date was changed to April 15th. Even today, many people still ask for extensions. Not too long ago the extension gave us two additional months to file the return. And so many people asked for a second 4-month extension that the 2nd extension was eliminated and IRS now gives us one six-month extension. This means that if you REQUEST an extension of time, your April 15th due date has been extended to October 15th.
An extension of time only gives us time to file the paperwork. It does not give us any more time to pay our tax. The tax is still due by April 15th. If on April 15th you think you will owe tax with your tax return, you can make a payment with your extension and still get more time to finish your paperwork to file a correct and accurate tax return. If you wind up owing tax when you file that extended return, the extension will not be valid. Interest will be charged from April 15th until your taxes are paid in full. Penalties will also be assessed for late-filing and for late-paying your tax. This is not a pretty picture.
If you have a business and file a corporate return, whether it be a “C” Corporation or an “S” Corporation you may have a calendar-year entity or a fiscal year entity. Both “C” and “S” corporations have income and expenses. They have Income Statements and Balance Sheets. They have Schedules of Depreciation for assets like equipment and buildings. A “C” Corporation files an 1120 return, can have a tax liability on income greater than expenses, and the corporation would pay that tax. If you elect for that corporation to be treated as a small or “S” corporation, it files an 1120S return instead and the income greater than expenses, or profit, passes through to the shareholder (or shareholders) on form K1. The shareholder includes their share of the corporate profits on their 1040 tax return along with their other income. To keep it simple, if the corporation uses a calendar year, then that corporate return is due March 15th. And, like a personal 1040 return, can elect a 6-month extension that for the corporation ends September 15th.
Whether business or individual, you must request an extension. They are not automatic. And they are only good for filing the paperwork, the tax returns.. Any taxes due must be paid by the due date to avoid interest and penalties.
Have you ever heard the expression, “The shoemaker’s son goes barefoot.”? Lots of times I feel like the shoemaker’s son. My own tax returns are always on extension. Could I file them early and avoid the rush? Sure, but what would be the fun in that? I must really love the adrenaline rush. I am all about time management. But last week was truly “Just in Time! Management.” Did you ever stay up late studying for an exam? Did you ever pull an “all-nighter” where you didn’t get any sleep at all? I did. I did in college and I did last week, too. In some ways I am a lot like some of my own clients. I was busy finishing clients’ business returns and getting ready for an out-of-town business trip, and I found myself staying up all night to file my own business return before leaving for the airport for my business trip. tick, tock, tick, tock….
If you miss the extension deadline that return is just flat out delinquent. And I cannot be late and stay in business for you! So I missed a little sleep.
It is still September. But October is right around the corner! Like many of you, I, too, must finish my personal 1040 return before October 15th. Even though we have a deadline to meet, I encourage you to take the time you need to do a good job of getting your figures together. It is so much better and easier to file correctly to begin with. Remember, you are signing under penalty of perjury that you are filing a correct and accurate return.
If you do later find you need to amend a tax return, there’s a form for that. And the 1040X Amended Return has its due date too. Often you may file what you think is an accurate return only to get an additional form that you forgot about or didn’t even know you should have waited for. This often happens when you are the heir of someone who has passed away and you inherit something taxable. In that instance you will owe tax with that amended return. It is so much better to file that amendment than to wait for the IRS to tell you about your additional income and tax due. If you wait too long to file on your own, the IRS will start that ball rolling.
Maybe you find you left something off that is to your benefit, that would lower the tax you already paid, that would generate a refund for you. Here is where the timing is really important. You only have so much time to file that request for refund. Generally you must file the 1040X within three years of the date you filed that original return. This due date can be tricky, so be sure to consult your professional for advice on your 1040X.
Well, back to extended 1040s due October 15th. Since you and I will be getting our 2011 tax return information in order, may I suggest it is also a good time to start organizing our 2012 (this year we are in) data? Do you hear it? tick, tock, tick, tock …
To our lowest legal tax,
Nellie Williams, EA
Did you know that the IRS has made a special provision for teachers of Kindergarten though Grades 12? This special attention is not a bad thing. This is a good thing.
Oh, no. I owe!
I owe the IRS.ย What do I do now? Is there any hope for me?
Will I go to jail? Will I lose my house? Will they take my car? Will they take my retirement account? What can they do to me?
Your Income Tax Return is More than Just 1, 2, 3…
Your Income Tax Return is also A, B, C, D…
When you start your tax return, after the heading with your name, address, Social Security Number you will eventually get to the lines that allow you to voluntarily report your income.
Ours is called a voluntary system because you voluntarily report your different sources of income. In other countries the government has an agreement with employers to withhold their required taxes. Our voluntary system does not allow you to decide to file one year and not file another year. It is not that kind of voluntary.
AND if you decide not to voluntarily report your total income, ALL of your income, the Internal Revenue Service has it’s own ways of determining you have been less than totally truthful.
Page one of your 1040 Income Tax Return shows gross wages, interest and dividend income, net business profits and other sources of income. Your net business profits come from Schedule C – another form! Your interest and dividend income come from Schedule B – another form!
Page two of your 1040 Income Tax Return has a space, a line, for you to report your total itemized deductions. Finding your total itemized deductions takes work, but it can be worth it in saving you tax! There are several categories of itemized deductions. They are reported on Schedule A – ANOTHER FORM!
Unless you are filing a 1040 EZ, the simplest of income tax returns, you will have more than one page to your tax return, more forms before you are finished. And when your tax preparer asks you questions, it is not because they are nosy (maybe they are nosy) but they want to find every tax benefit for you. Yes, a good preparer will charge you for saving you money, but I hope you believe that paying that tax preparer to help you pay your lowest legal tax is a very good investment.
Schedule A, Itemized Deductions is not for everybody. The biggest deduction is usually interest paid on a home mortgage. If you do not own your own home you may not be itemizing. But the government has special gift for you. You do not have to do anything extra to take advantage of this tax saving gift. That gift is called the Standard Deduction. The amount varies depending on your filing status (see my blog on filing status