Internal Revenue Service Takes Another Holiday!

November 20, 2013

What holiday you ask? I’m talking about the totally American holiday of Thanksgiving Day. Why is this so American? I did a little research for you. In representing a client in a tax case I must often research tax law. I learned a lot that I hadn’t know before in researching the history of Thanksgiving. How much of this did your already know? In 1621, the Pilgrims and some of the members of the Native American Wampanoag tribe came together to celebrate a successful harvest. They feasted for three days on fowl and deer and berries and most likely boiled pumpkin and plums. Mmmm. By 1777, all thirteen colonies celebrated a day of thanksgiving. In 1789, President George Washington declared a day of public thanksgiving and prayer. We were forming a new nation and establishing a new constitution and this was cause for the new national holiday and annual day of celebration. President Abraham Lincoln issued a proclamation in 1863 declaring the last Thursday in November to be a day of thanksgiving and praise. He wanted a way to bring our nation together after our Civil War. Climbing out of our Great Depression, in 1939 President Franklin D Roosevelt heard the merchants’ cry. The last November Thursday in 1939 fell on November 30th. And that only left 24 days to shop for Christmas. So FDR moved Thanksgiving to the second Thursday in the month. There was a lot of confusion and controversy around the new “Franksgiving”, but the shopping wasn’t really affected. (Deductible Gift giving was the subject of earlier blogs. Do you want me to address tax deductions of gifts again? Leave me a comment and let me know.) Congress passed a law on December 26, 1941 declaring Thanksgiving would be held every year on the fourth Thursday of November. This year that date is November 26th. We will have only 26 days until Christmas Eve. Most American’s will celebrate this family holiday. You are hard-pressed to take a tax deduction. But it can be done. Are you a restaurant or cafe or other eating establishment in the business of feeding people? Then you’ve got business income and business expenses. Keep track of those numbers. Most people will spend this day with their family. But are you throwing a business event on the holiday? If so, what business will you be discussing? Have your guests sign the guest book so you can prove who you were entertaining. And of course, keep your receipts. Maybe you will volunteer your time to help out at your local charity dining hall. You may not deduct the value of your time. But if you gave a turkey, or other items for the banquet, keep your receipts for what you spent AND get a letter of acknowledgement from the charity. Chances are you did some driving. If you made a special shopping trip for the charity, or if you drove to the dining hall to volunteer your time, keep track of those miles. Charitable miles are deductible at 14 cents per mile. You can choose not to track those miles. But if you don’t keep that mileage log, you don’t get to claim the deduction. One more thing. The day after Thanksgiving is called Black Friday. Why? Because that is traditionally the busiest holiday shopping day of the year. Many retailers’ profits move from the “red” to the “black” on Black Friday. I am grateful for all that I have. Everyday I thank God for my new day. I hope you have a blessed day of giving thanks.

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.

Nobody really likes to pay taxes. But who doesn’t like peanut butter?

By Nellie Williams on

November 7, 2013

- Deductions, IRS Audit, Tax Audit, Tax Audit Help, Tax Credit

November is National Peanut Butter Lover’s Month. I grew up on peanut butter and jelly sandwiches. I still have one of these comfort, stand-by sandwiches every once in a while. And I love peanut butter cookies! .. Can you deduct peanut butter? Not if it is just your own, or your children’s meal. And chances are you’re not going to offer a peanut butter sandwich to your business client. But you could decide to serve a fancied up sandwich at a business get-together. Think about a working lunch or a special afternoon tea type theme to your business meeting. .. If you run a sandwich shop, peanut butter can be an ingredient in one of your menu items. If you run a daycare center, you will certainly be serving this staple at lunch. Cookies can become a business gift. And maybe you want to have your clients over for an afternoon celebration. Of course, if your guest list includes someone with a peanut allergy, peanut butter will not be on the menu. But then this peanut butter could be the cause of a medical deduction. So there can be several ways peanut butter and taxes really are related. .. The IRS loves the words “ordinary and necessary”, “generally” and “usually”. To be deductible your meal or entertainment expense must be “directly related to” or “associated with” the active conduct of a trade or business. It can also be for the production or collection of income. It cannot be lavish or extravagant. It must be reasonable considering the facts and circumstances. .. Do you remember the five Ws of journalism? Who, what, when, where, why and then add how much you spent.. Who did you entertain? What did your discuss. When did you have this meal? Where did you go? What was the business purpose or what did you want to talk about at this restaurant? And how much did you spend? Your deduction can include the cost of the food, beverage and tip, but is limited to 50%. The cost of your own meal at a restaurant is not deductible. Meals with coworkers or business associates are not deductible unless you can show a clear business purpose. .. You must show that the main purpose for this meal or entertainment was for business; that you engaged in business during this meal or activity. You must also have more than a general expectation of receiving income or some other specific business benefit in the future. .. Instead of “directly related”, where you discuss business over a meal, your business discussion can be “associated with” the meal or entertainment. How much talking could possibly go on during a concert, at the theater or at a rousing sporting event or a backyard bar-b-que? If you are entertaining at your home, be sure to have a guest book for your records. Have each of your guests sign in. .. If the business discussion or transaction is substantial (and directly before or after the meal or entertainment) it can be deductible. There is no requirement that you spend more time on business than on the meal or entertainment. .. Employers have exceptions to the 50% deduction limit. If you provide meals to more than half of your employees on your business premises and for your convenience (not the convenience of the employee), those meals are a 100% deductible fringe benefit. Employer provided social or recreational expenses, like a company party or picnic, for the benefit of employees who are not highly compensated employees, are 100% deductible. .. I can’t emphasize enough your need to keep adequate records. This is for your tax audit protection.

Tax Deadlines – One More Down. How many more to you have to go this year?

By Nellie Williams on

October 25, 2013

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

We have just passed the October 15th extended deadline to file your income tax return. If you are an individual taxpayer, your next deadline might be the 4th Quarter Estimated Tax Payment which is due before January 15th for the calendar year ending December 31st. .. This can be confusing to a lot of my clients. If you think the January payment is for the current year, you are mistaken. It is for the PRIOR year. Since I work with these overlapping dates more often than you do, I have learned how to keep them straight. But if yours is the only tax return you are responsible for, these dates are often confusing. .. Who pays an estimated tax payment? Most wage earners get a paycheck. The money you take home is your “net check” after deductions are taken out. The basic deductions from most paychecks are for social security. medicare, federal and state income taxes. .. You may have income on which there is no withholding. What kinds of income might that be? Interest and dividend income, rental property profits, sales of assets, gambling winnings, spousal maintenance (otherwise known as alimony) just to name a few. .. Remember, as an American you are taxed on your worldwide income and every dollar is taxable unless it is specifically excluded. Some of the income that is not taxable includes child support, some inheritances and gifts you receive. There could be others, but I try to keep the length of these blogposts or articles to a pleasantly readable size. .. So, back to estimated tax payments. They are designed to help you pay the tax you estimate you may be liable for. The Internal Revenue Services wants you to pay this tax money evenly throughout the tax year. Taxes withheld from your paycheck are considered paid evenly through the year, even if they fluctuate from payday to payday. .. Small business owners generally do not take a paycheck. They figure their profits and make estimated tax payments to cover their income tax and their social security tax. Their tax for the year is figured when the tax return is completed. .. Estimated Tax Payments are made in four payments on Form 1040ES. The first quarter is composed of months January, February and March. The first quarter (Q1)1040ES is due April 15th. The second quarter (Q2) is for months April and May (only two months here). Q2 1040ES is due June 15th. The third quarter is back to three months, June, July and August. with the Q3 1040ES payment due September 15th. And the fourth quarter, Q4, is the FOUR months of September, October, November and December. The 1040ES for Q4 is due January 15th of the following year. You just tell me how much you paid and when. .. It is okay to make these estimated tax payments early. If you make the payments late, the late payment penalty is figured when preparing your 1040 tax return. If you did miss a payment this year, don’t panic. Just be prepared to add a few extra dollars (depending on the amount of your estimated tax payment) to your tax bill when your tax return is prepared.

The IRS is in the news again

By Nellie Williams on

September 26, 2013

- IRS Audit, IRS Problems, IRS Tax Problems

This is not our usual springtime 15th tax season. This is our fall, extension time tax season. In April, the Internal Revenue Service has been known to sprinkle the news with stories that scare taxpayers into compliance. The IRS knows that scare tactics can help people be more honest when filing their returns. Lately, the IRS has been in the news for their misdeeds. This is not the kind of publicity they choose for themselves. They are showing their human side. Every government office is staffed with individuals. These employees are human beings, just like you and me. Sometimes a single person may forget they are a civil servant. They forget their job is to serve the public. The fall victim to the emotional pull of power and greed. When I was an auditor in training I heard a story about a former co-worker. Former is the key word here. Usually, when management gets wind of a choice of action that is outside an employee’s job description, that employee gets noticed. A good manager will first counsel the employee. The manager will give that person a chance to clean up their act. They will give that person an opportunity to “fly right”. Sometimes, though, the misdeed is so wrong that the person is fired and maybe also arrested for committing a crime. This story was one I heard years ago. The story I heard was about taxpayers writing their checks for taxes due. Most people just wrote their checks payable to “I R S”. I wrote my checks to IRS, too. Then we were instructed to completely spell out the words “Internal Revenue Service”. Would you have thought that somebody was changing the letters “IRS” to “MRS” and adding a last name? That is exactly what happened. That employee was altering the taxpayers’ checks. (More than one!) That employee was stealing the taxpayers’ tax money and putting it in their own bank account. The crime was against both the taxpayers and against the government. Today we are asked to write our checks to the “United States Treasury”. Every year I must attend a certain amount of what is called continuing professional education, CPE, to maintain my credentials. Every year the tax laws change and I focus on knowing what I need to know in order to do my best job for you. My mind was never figuring out how to break the laws. But there are plenty of people who do just that. Lately the IRS has been caught with their hand “in the cookie jar” so to speak. They have delayed the applications of certain groups asking for legitimate tax-exempt status. They have wrongly targeted certain individuals for audit. These are examples of human beings who have let their access to power cloud their judgment. If you keep your eyes on doing the right thing, you’ll never have to be worried about any negative consequence. You’ll be able to sleep soundly every night.

Would you ever think of the Internal Revenue Service as a horse?

By Nellie Williams on

September 19, 2013

- IRS Audit, IRS Problems, Tax Audit

Well, these answers about our newest tax law change are direct from the horse’s mouth, the IRS. “The following questions and answers provide information to individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions or other similar formal relationships that are not marriages under state law. These individuals are not considered as married or spouses for federal tax purposes. For convenience, these individuals are referred to as “registered domestic partners” in these questions and answers. Answers to Some of the Frequently Asked Questions for Registered Domestic Partners and Individuals in Civil Unions” “Can registered domestic partners file federal tax returns using a married filing jointly or married filing separately status?

No. Registered domestic partners may not file a federal return using a married filing separately or jointly filing status. Registered domestic partners are not married under state law. Therefore, these taxpayers are not married for federal tax purposes.

“Can a taxpayer use the head-of-household filing status if the taxpayer’s only dependent is his or her registered domestic partner?

“No… A taxpayer’s registered domestic partner is not one of the specified related individuals …. that qualifies the taxpayer to file as head of household, even if the registered domestic partner is the taxpayer’s dependent.

“If registered domestic partners have a child, which parent may claim the child as a dependent?

“If a child is a qualifying child … of both parents who are registered domestic partners, either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.

“Can a registered domestic partner itemize deductions if his or her partner claims a standard deduction?

“Yes. A registered domestic partner may itemize or claim the standard deduction regardless of whether his or her partner itemizes or claims the standard deduction. Although the law prohibits a taxpayer from itemizing deductions if the taxpayer’s spouse claims the standard deduction …, this provision does not apply to registered domestic partners, because registered domestic partners are not spouses for federal tax purposes.”

There are more questions and some more answers to the questions that have surfaced around this issue. Next week I’ll talk about something different and come back to more of these questions and answers in a future blog.

Playing 20 Questions with the IRS

By Nellie Williams on

September 11, 2013

- IRS Audit, IRS Problems, IRS Tax Problems

Do you remember playing a game called 20 Questions? It’s a game for two or more players. One person thinks of something and the other players ask up to 20 questions trying to figure out what the first person was thinking. There is always something going on in the tax business, that sometimes I think we are all playing 20 questions with the IRS. Maybe it is the IRS trying to figure the public out. One of the most recent topics in the tax news today affects all of us in my business, but only a few of my clients. If this doesn’t affect you directly, you may know someone who is happy to hear this news. The IRS must follow the Federal Tax Code, the tax laws. In doing so, they draft rules and regulations, procedures and policies. Once in a while a taxpayer or group of taxpayers will take an issue to court and changes are made. This is about one of the most recent changes. Keep in mind that while most states follow the federal law, each state can decide for their own state if they will follow the federal law to the letter or if their state will make exceptions to any law. On their website, the Internal Revenue Service has published 19 questions and answers based on new Revenue Ruling 2013-17. Here are just a few of the questions taken directly from that announcement. In the upcoming weeks I’ll include the answers to some of them.

“1. When are individuals of the same sex lawfully married for federal tax purposes?

“2. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

“3. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

“4. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

“5. Can a same-sex spouse file using head of household filing status?

“6. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

“7. Can a same-sex spouse itemize deductions if his or her spouse claims a standard deduction?

“8. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

“9. If a sole proprietor employs his or her same-sex spouse in his or her business, can the sole proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages that the sole proprietor paid to the same-sex spouse as an employee in the business?

“10. Will the IRS issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17?”

IRS Notice – If you get one, what do you do now?

By Nellie Williams on

August 29, 2013

- Deductions, IRS Audit

This is the scoop straight from the IRS along with some comments from me. Each year the IRS sends millions of letters and notices to taxpayers. Many people may feel anxious when they receive one. The IRS believe many of these notices are easy to resolve. Basically they just want a little more information about something you put on your return. They might have a question about something you left off your return. Most recently, the IRS has been contacting small business owners to find out if they reported all their cash sales. There are also millions of other letters sent outside of this kind of “special” project.

Here’s what to do if you receive a letter or notice from the IRS:

Don’t panic. Take a deep breath. Follow the instructions in the letter. X
There are many reasons the IRS sends notices to taxpayers. The notice usually covers a specific issue about your account or tax return. It may request payment of taxes, notify you of a change to your account or ask for additional information. X
If you receive a notice about a correction to your tax return, you should review it carefully. You will need to compare the information in the notice to the entries on your tax return. X If you agree with the correction, you usually don’t need to reply unless a payment is due.If you don’t agree with the correction the IRS made, it’s important that you respond as requested. Respond to the IRS in writing to explain why you disagree. X Include any documents and information you wish the IRS to consider. Also include the bottom tear-off portion of the notice. Mail the information to the IRS address shown in the lower left corner of the notice. Allow at least 30 days for a response from the IRS. X
There is no need for you to call or visit an IRS office to answer most IRS notices. If you have questions, call the telephone number in the upper right corner of the notice. When you call, have a copy of your tax return and the notice available. X You will be referring to that notice on that phone call. What they don’t tell you is to be prepared to be on hold for a little while. They get a lot of phone calls. X
Keep copies of any correspondence with your tax records.

If you get an audit notice, consult with your tax advisor. Do not sign anything before you know what you are signing. Don’t agree to pay something you don’t owe.

Bank Statements

By Nellie Williams on

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.

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