Bank Statements

August 15, 2013

- Deductions, IRS Audit, IRS Problems, Tax Audit

Did you know the Internal Revenue Service can ask to see your bank statements? It is important for you to understand why. … Having a business is a little like having a child. Both the child and the business are a part of you, but they are also separate from you. … Are you a business owner? No matter how small a business, if you are in business, your business needs its own bank account. … You will deposit every penny, EVERY penny your business earns into that business bank account. You may want to have both a business checking account and a business savings account. When you have more money than you need to cover expenses, you can transfer that beautiful excess into your savings account. … When you deposit your business proceeds into your bank account, it should be easy to match those deposits to your sales records. In the accounting world, that is known as “tying” the deposits to the sales records. … When you transfer money from one account to the other, it is important to make a note to remind you that this is not new money being deposited. It is a TRANSFER from checking to savings or vice-versa. … In the beginning of your business you may “seed” your account with your personal money. This is not business income. This is your investment in your own business. You may have other people invest in your business. If you give them shares of your business stock in return for their money, they are now a stockholder in your business. You want to be sure to record (make a note of) that transaction. … There may come a time when you need to borrow money. When you take out a business loan to help fund your operations, the money you owe becomes a liability on your balance sheet. This blog post is not about accounting, it is about your bank statements. The loan you receive is not income from the sale of your products or services. The loan is not taxable income. You want to make sure you are protecting yourself by making adequate notes about what money is going into your bank accounts. … When the IRS examines a business tax return, they often ask to see the bank statements. They want to know how much money is going into your bank accounts. They will examine your income records and match them to your bank activity. If you cannot prove that extra $10,000 was a loan from Aunt Mary, then that $10,000 could become taxable income in the eyes of the IRS Agent. And if you are in the 15% tax bracket, a $10,000 adjustment to your return could cost you $1500! You don’t owe tax on the loan. Documentation is your protection. … Remember, as an American, you are taxed on your WORLDWIDE income. Wages, business profits, interest income and dividends from stocks and bonds are just some of the types of taxable income. Transfers between accounts, loans, and gifts are generally not taxable. … I just want you to have the information you need to protect yourself when it comes to your taxes.

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!

Death and Taxes – Part Two – Do I have to pay taxes after I die

By Nellie Williams on

July 11, 2013

- IRS Audit, IRS Audit Process, IRS Tax Problems

Do I have to pay taxes after I die? I thought taxes would end when I did!

While we are earning money, we get a W2 or a 1099 and we pay INCOME TAX.

When we have investments that pay us interest income or dividend income or we sell an investment for a profit and have a capital gain we pay INCOME TAX. When we are retired and receiving retirement benefits we may pay INCOME TAX.

And you are saying…we might have to pay taxes even after we die?

If you leave too much money behind when you leave this earth, you may be subject to ESTATE TAX.

“But I have a will. Doesn’t that make a difference?” A will is a legal document that determines how your assets are distributed after your death. Do you remember the board game Monopoly? “Go to Jail. Go directly to Jail. Do not pass Go. Do not collect $200.” Well, with a will you “Go to Probate. Go Directly to Probate… “

What is probate?

According to Wikipedia, a probate court decides the validity of a will and grants its approval to the executor The executor is the person charged with having the legal power to dispose of your assets in the manner specified in the will.

The court wants to make sure your wishes are followed. And probate takes time – sometimes a lot of time and it can take money for legal fees. Creditors need to be notified and given time to present their claims. Legal notices will be published.

As many as 55% of Americans die without a will. Making no decision is still a decision. Families are supposed to love one another, but things can get ugly very quickly when MONEY is involved.

According to Morning Star.com, “If you don’t [have a will], the state will decide how your assets are distributed, and even who will be the guardian of your minor children. And once you have a will, it’s important to make sure it’s clear and up to date.”

Why do I want to think about a trust? What can a trust offer me that a will cannot?

Elvis Presley died with a valid will in place in 1988. His estate was valued at over $10 million. The probate process fees and taxes cost over $7 million! His family would have received much more if he had had a trust instead of just a will.

A trust is private, you avoid probate. While a will can be contested in court, it is much harder to challenge a trust.

Taxes do not always have to be paid at a death. But like anything else in life, it is better to have knowledge in advance so if you have a choice, you can make an informed decision.

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.

Can Summer Camp or Day Care Really Save Me Tax Dollars?

By Nellie Williams on

June 19, 2013

- IRS Audit, IRS Problems, Tax Audit, Tax Credit

Yes! You may qualify for the Child and Dependent Care tax CREDIT. How do you qualify? Your dependent must be age 12 or younger, when the care is given. No credit is allowed in the year your child turns 13. An older dependent or spouse may qualify if they are mentally or physically unable to care tor themselves. Your dependent must have lived with you for more than half the year. There are special exceptions for dependents who are born or who die during the year. You will list their names and social security numbers on the tax credit form plus how much you paid for each individual person’s care. This care must be given in order for you to go to work or look for work. You must have income from wages or other taxable compensation. If you are married and filing a joint return, this work requirement applies to both of you. What if you are a stay-at-home parent and don’t have a job? If you go to school full time, you may be considered as having earned income for this credit. This credit is not available to spouses choosing the “married but filing separately” tax filing status. This payment has to be made to someone other than your spouse, You cannot take a credit if you pay the parent of your qualifying person for the care. Payments you make to someone you claim as a dependent on your tax return do not qualify for the credit. If you do pay for your own child, who is not a dependent on your tax return, they must be age 19 or older that year. You will list each care-giver’s name, address, social security number or employer ID number PLUS the total amount you paid that care giver. The Internal Revenue Service tax law will dictate how much credit is allowed on the amount of expense you incurred. Some care-givers are people who run their businesses “on the side.” If they do not provide you with their social security or employer identification number, you do not get to claim the credit. They are cheating the tax system. And you are paying their tax. (Just sayin’.) Is theirs the only care you can get for your child? Is theirs the only care you can afford for your child? You are able to give someone up to $13,000 per year for this year. That gift amount can change every year. That gift is not taxable to them and is not deductible by you. Generally a gift is given with no expectation of anything in return. Day care given in exchange for money or something else of value is not a gift. The income the care giver receives is their taxable income, whether they have a hobby or a business. Money you pay for your babies in day care may qualify for the credit. Money you pay for older children’s after school care may qualify. What about summer school? The tuition is not deductible. But the cost for care after summer school class may qualify for the tax credit. What about summer camp? Day camp may qualify but a camp where the child stays overnight does not qualify. And what about if the dependent who needs care is an adult? There is also adult day care. Your expenses for all of these different types of dependent care may qualify for the Child and Dependent Care tax Credit. The tax laws are always changing and get more and more complicated. There will always be more that needs to be said. I hope this blog has helped you understand some of the CREDIT that your family may qualify for. If you have questions about your day care situation, post your question in the comment section of this blog or consult your tax advisor. I’ll talk about Education Tax Credits and Education Expenses in another blog.

When Can I Deduct My Food?

By Nellie Williams on

June 13, 2013

- IRS Audit, IRS Audit Help, IRS Audit Process

Nothing is deductible. Unless Congress says it is, of course. It is our elected Senators and Representatives, our Congress, that make the tax laws. It is the Internal Revenue Service that is charged with enforcing the tax laws. All income is taxable. The IRS expects you to report all of your income. When you take a deduction, you are subtracting that deduction from you income and you pay less tax. I want you to pay your lowest legal tax, not a penny more. And to do that well, I think you need to know the rules of this tax game. Generally, the cost of food is not deductible. We all have to eat. Food is a personal expense. But food can sometimes be a business expense. And business or job-related expenses can be deductible. You just need to structure the circumstances. Most of the time my husband does the cooking. He loves to cook. He is a good cook. I can cook too. But when I cook now, I make reservations. 🙂 Not long ago we went to dinner at a popular restaurant. The food is always good but this night it was very noisy. I was thinking how hard it would be to have a business conversation in such a noisy place. When you want to deduct the cost of your meals, you need to do certain things. First, there must be a business purpose for this meal. How do you conduct business over a meal? There are several different ways you might have a deductible meal. Is this a business meeting in your place of business? Are you the business owner feeding your employees at a meeting? That meal could be 100% deductible. Are you the business owner entertaining customers at a get-together? Are you a business person entertaining a client at a restaurant. Are you taking a customer or a client to a social event? Those meal expenses could be 50% deductible. Why only 50%? Because the cost of your own meal is not deductible. The cost of your guest’s meal is. But you are not looking at who ordered what, just the whole bill, including tax and tip. How do you make these expenses deductible? DOCUMENTATION is the key! Recordkeeping is what protects your deduction. The expense must be directly related to conducting business. Your objective must be to generate income. After all, this is INCOME tax we are talking about. The business can be conducted immediately before, during or immediately after the meal. The meal cannot be lavish or extraordinary if you want the government to pay for it. Isn’t that what we’re asking when we reduce the income we pay tax on by taking an allowable deduction? Meals with co-workers or associates are generally not deductible. The IRS says you don’t need an actual receipt for meals under $75, but I still encourage my clients to keep all of the receipts you can for any tax deductible expenses. You do still need records to substantiate your deductions. Your records do still need to show for each separate expense: the date, the name of the place, the business purpose (who you entertained), and the amount spent. This amount can include the cost of the meal including tax and tip. I ask my clients if the remember the 5 “w”s of journalism? Write down WHO your entertained, WHAT was the purpose of your meal or event, WHEN (the date) you did this, WHERE you went, WHY this is going to help your business and finally, How Much did you spend? If you do not keep adequate records, you can lose you deduction. So you decide. Is your deduction worth the extra time to protect it, to save it?

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