5 IRS Audit Red Flags

You may have done nothing wrong. But the prospect of an IRS audit makes everyone sweat.

Many things probably go through your mind as you’re preparing a tax return or looking at one that’s been completed for you. Did I declare all of my income? Are all of the deductions I claimed legitimate? Do I have the required background documentation in case I get audited?

Even if everything is in order, you may still be selected for additional scrutiny by the IRS. Some IRS audits are entirely random. You may be chosen as the result of computer screening or based on a statistical formula. Other triggers include:

  • Document matching (the information on your W-2s and/or 1099s doesn’t match what’s reported on the actual return), and,
  • Related examinations (if you have business partners or investors, for example, who were selected to be audited, you may also be subject because of your relationship).

5 Triggers

There’s no way to ensure that you’ll never be audited by the IRS. But some tax-related scenarios may make it more likely that you’ll get that official letter in the mail, like:
Your income is high. This is a good thing, right? Yes. But the more you make, the greater the likelihood of an audit. This is clear when you look at the most recent data available, as reported in the Internal Revenue Service Data Book 2014. 0.86 percent of all returns filed were “examined” in 2014, to use the IRS language. 0.53 percent of taxpayers who claimed an Adjusted Gross Income (AGI) of between $50,000-75,000 were looked at. That percentage jumped to 1.75 if you made between $200,000 and $500,000. If you made a million but less than $5 million, that percentage increased to 6.21. And 10 million or more? 16.22 percent of those taxpayers were tapped for examinations.

You’re self-employed. Claiming a loss if you work for yourself can increase your chances of being audited. According to the IRS materials referenced above, only 0.93 percent of taxpayers who had AGIs of $1.00-25,000 had post-filing sessions with the agencies. But of those who had an AGI of zero—or less than zero—5.26 percent were audited.  Why? The Schedule C. The IRS knows that some self-employed people either don’t report all of their income or exaggerate their deductions – or both. Some may also blur the distinction  between a business and a hobby, which the IRS can choose to scrutinize.

You’ve claimed excessive deductions. Two areas where this sometimes occurs are charitable deductions and medical expenses. You must have pristine records to claim either. So if you have a year when you’ve been especially generous or especially unhealthy, take special care to assemble and store all of your documentation, just in case.  There are other deductions that may raise an eyebrow at the IRS if their dollar amounts seem higher than they should. Do take any deductions that you’re entitled to, but know that the IRS might want to look at your return more closely.

You forgot to report some of your taxable income.
If you’ve received forms from institutions reporting on the income they supplied to you, the IRS was also notified. Go through your paper mail more carefully than usual in January and February; some will probably say something like Important Tax Information Enclosed. Start a folder for the forms that come in and keep it in a safe place.  If you’re using an accounting application, it will be easier to run reports and compare your data to the forms you’ve received. If you’re not, and you have multiple income streams, we’d be happy to help you explore all of the areas where you might have received money. (We can also look for deductions you might have missed and handle all of your tax preparation.)

You neglected to report (and pay) the penalty on early distributions from retirement accounts. There are situations where the IRS will grant an exception to a withdrawal from a  401(k) or IRA before age 59-1/2. If you don’t qualify for one, the 10 percent penalty is mandatory.

It’s much easier to do everything you can to avoid an audit than to have to go through the stress-inducing process. Let us know if you want our assistance when it’s time to start  preparing.

Tax Advantages of Donating Stock

iStock_000002942341_LargeMaking donations to non-profit organizations is a great way to do good works in the community your small business serves. It can also be a huge tax advantage to small businesses – especially if you take advantage of one not so widely known option to double up on your tax benefits.

Donating appreciated stocks allows you a “double play” of sorts when it comes to tax advantages. You get to claim the appreciated value of the stocks you donate while claiming the tax benefit of that appreciated value without paying the taxes on the gains.

How is This Possible?

Tax deductions on charitable donations are equal to the fair market value of the donation. This means that when stocks are donated, the deduction businesses (or individuals, as the case may be) are able to claim for their taxes is the full value of the stock at current prices.

Combine that with the fact that donors do not have to recognize capital gains on donated properties that are investments, and you have the perfect pair for giving that gives back.

Other Benefits of Offering Stock as Gifts

Aside from the tax benefits, businesses and individuals alike, can appreciate other reasons for donating stocks as their giving. One primary consideration is that it preserves the organizations available cash to fill other needs.

Curious about what donating stocks can mean for your tax picture? Make sure you contact us to get more information as well as the pros and cons of this kind of gifting decision.

Top Five Reasons the IRS will Sue You

Signing the Tax FormsNo one enjoys paying taxes, but the vast majority of individuals and businesses follow the rules, take their deductions, and write a check for what they own. Of course, there are those that try to find ways to avoid paying taxes, but too often, the IRS consider these loopholes tax fraud. Once you go down that road, you can expect to be audited and even sued by the IRS. Here are five of the top reasons the IRS will sue you.


If someone has told you that filing your tax return is voluntary due to the lack of a tax collection provision in the United States Constitution, don’t listen to them. While it is true that the constitution doesn’t give the federal government the right to collect income tax, the 16th amendment does.


While there are many legitimate reasons for and uses of tax shelters and trusts, if one is set up solely to hide income, this is seen as an abuse of the system. The IRS will not see a tax shelter but instead a tax dodge and consider this tax fraud.


If you establish an off-shore trust without a legitimate business reason, plan on hearing from the IRS. If you have an off-shore trust, you will need to be able to prove to the IRS that there is a concrete, business purpose for the trust; otherwise, they will assume you are using it to avoid your tax liability.


For those that have high incomes, the IRS consider these tax returns high risk as the individual filer has the ability to use corporations, partnerships, and trusts to move money or perform structured transactions. A structured transaction is one that has little to no monetary benefit with the actual purpose of reducing your tax liability.


While you are allowed to have an off-shore credit card, the IRS will take a close look as to exactly why you have one. They assume from the beginning that it is being used to evade taxes. If you have an off-shore credit card, you will be audited, so be prepared to have documentation as to why you have it.

What You Need to Know about Health Savings Accounts in 2016

121671842 (2) (1)There is very little that is certain in life, but one thing you can count on is tax changes when a new year begins. That’s true for Health Savings Accounts, (HSA), as well. The IRS put out new guidelines for 2016 that you’ll need to know as they will affect how you may want to proceed with HSA going forward.

For those employees that are enrolled in high-deductible health plans, Health Savings Accounts can be very enticing. HSA provide a way to set aside untaxed contributions that can be applied to cover medical expenses while, at the same time, reducing their tax liabilities to the IRS.

Another popular aspect of the HSA program is that unused funds can be rolled over year after year. This differs from Flexible Spending Accounts, (FSA), as FSA have a use it or lose it policy. Meaning if you don’t use all of the money contributed in the fiscal year, you will lose it. In addition, those that take advantage of Health Savings Accounts can earn interest on the unused contributions. This, in turn, actually reduces the cost of health care in the future.

With all the advantages in mind, there have been some changes for 2016. For individuals, the out-of-pocket limits may not exceed $6,550 which is a $100 increase from 2015, and for families the annual out-of-pocket limits has increased $200 to not exceed $13,100. In addition for families, the annual contribution limits increased $100 to $6,750.

While these amounts may not be earth shattering, they will have an affect on your Health Savings Account and should be taken inconsideration when making health care decisions in 2016.

Are You Claiming All of Your Tax-Deductible Business Expenses for 2015?

Haven’t completed your 2015 taxes yet? You’re cutting it close. Don’t short-change yourself on business expenses, though.

If you’ve been in business for several years, you have a pretty good idea of what expenses can be claimed on your income taxes. But even if you think you know or you’re filing a business return for the first time, you may be missing out on some legitimate deductions.

The IRS says that business expenses must be both ordinary (commonly used in your business) and necessary (“helpful and appropriate”). Some of the allowable business expenses are obvious, like office rent, advertising, and travel. But there are others that you may not know about. And even the obvious ones come with rules and exceptions.

Figure 1: If you use accounting software, you may have seen a listing similar to this in your Chart of Accounts.

Cost of Goods Sold. Whether you make products yourself or buy and resell them, the IRS requires that you make this calculation; it tells you what costs were involved in producing the items you sold. You’ll be able to deduct at least some of these costs (there’s an entire section on the Schedule C about this).

Warning: If you include an expense in the COGS, it can’t be deducted again as a business expense elsewhere in your return.

Depending on your business, you may have expenses related to, for example:

  • Factory overhead
  • Storage, and,
  • Raw materials used in the manufacture of your products.

Note: “Cost of Goods Sold” is a complex concept. If you sold products for the first time in 2015, you should have valued your inventory at the beginning and end of the year.

Let us help you sort this out.

Insurance. Policies that are directly related to your business, trade, or profession can usually be deducted.

Taxes. Some federal, state, and local taxes may have a direct tie-in to your business and might be deductible.

Business Use of Home (the “home office deduction”). If you use a room or space in your house for your business, you may be able to deduct expenses like utilities, mortgage interest, and insurance on your Schedule C (again, these expenses can’t be reported elsewhere). The IRS created a simplified method of reporting this deduction a few years ago, but it’s still complicated. In fact, there’s an entire IRS publication devoted to it. We can work with you on assembling the necessary information and reporting it.

Personal and business expenses. It goes without saying that you can’t claim personal expenses as business deductions. But what if you purchase something that’s used for both? The IRS says that you’ll need to determine what percentage of the expenditure went to personal use (not deductible) and to business (deductible). Again, a bit of a complex issue. We can advise you on this.

Employee compensation. Yes, these expenses may be deductible – if they are, says the IRS, “reasonable…and for services performed.” There are numerous factors involved in making this determination.

Capital vs. deductible expenses. This is an area where you really have to understand the IRS’s official distinction between these two types of expenses. Take motor vehicles, for example. If you buy a car to use in your business, you’ll usually report that as a capital expense and claim annual deductions for depreciation.

But there are dollar limits on how much depreciation you can claim every year if you buy a passenger car and use it for business purposes. Do you know what those are? And do you know whether repairs to that vehicle are deductible? What about reconditioning and overhauling it?

How do you report those expenses?

Figure 2: Business expenses look so simple as they’re listed on the Schedule C. But the IRS has many rules about precisely what can be claimed.

If you just look at what’s printed on the Schedule C, you might think it’s not that difficult to determine which of your business expenses can be legitimately claimed is that difficult. But it is.

Business deductions are subject to many rules – rules that sometimes come with their own exceptions.

Your business expenses may be simple and few, requiring little study of IRS instructions on your part. But the slightest bit of complexity can lead to an inaccurate return. We’re very familiar with IRS regulations where business expenses are concerned, and we’d be happy to help you be absolutely compliant.

Do You Need to File Form 1099s?

There are a number of situations where you’ll have to create and/or file Form 1099s. However, how do you know if you are affected?

If you’ve been sending Form 1099s for years, you’re probably already working on them or have completed them. If you receive them regularly, they should be on their way to you soon (if they haven’t already arrived), waiting to be used in the preparation of your income taxes.

But if you’ve never sent one, it’s worth a look at your financials to see if you should. There are countless scenarios that would make that action necessary.

On the Receiving End

There are several types of 1099s. If you are not involved in a business or trade, you don’t have to worry about sending them. For example, you might get one or more if you:

  • Received interest income from a deposit account, like a CD. Financial institutions are required to dispatch 1099-INT forms to taxpayers who made money during the calendar year in this way.
  • Were granted debt forgiveness for a loan. Debt forgiveness represents income, so you should get a Form 1099-C.
  • Made money on a real estate transaction. A Form 1099-S will be sent to you.
  • Are a merchant who receives payments via credit cards or PayPal, or who sells on eBay, for example. The Form 1099-K has only been in use for a few years. If you receive one and don’t understand why, or you think you should have gotten one and didn’t, contact us.

Figure 1: The 1099-MISC will look familiar if your business pays money to independent contractors or other individuals who are not official employees.

The Form 1099-MISC

As a small business, the 1099 that you will be most likely to complete and send out is the 1099- MISC (Miscellaneous Income). This form covers a lot of ground. It must be provided to anyone that you have paid at least $600 to during the tax year. This includes:

  • Payments to independent contractors, freelancers, or individuals who provide services to you but are not employees of your company (like an attorney)
  • Rent (office space, machine rental, etc.)
  • Other income, including prizes and awards

These are some of the most common types of payments that must be reported on Form 1099-MISC, but there are others. And there are many exceptions. If you have never filled out a 1099 or you have any doubts about whether you need to (and how to do so), please contact us.

It’s critical that your Form 1099-MISCs are completed with 100 percent accuracy. Besides the fact that the IRS requires it, the amounts that you report will have impact on the tax returns of the recipients. For example, most taxpayers who receive a 1099-MISC that contains an amount in Box 7 (non-employee compensation) are subject to the self-employment tax, which is why that number needs to be correct.

A Word About Tax Planning

By the time you’re reading this, any tax law changes for the 2015 tax year will have been
finalized. Many were in the works, in areas like the Affordable Care Act, deductions and exemptions and IRAs. In addition, tax credits that were due to expire may have been extended.

If you’re preparing your taxes on your own, you will see these changes reflected in IRS forms and instructions. So, it should not be a problem to take advantage of any that affect you. If you make tax planning a year-round effort, you’ll be able to make business decisions about income and expenses based not only on these potential modifications, but also on your financial situation as a whole – 365 days a year.

This means more than just hurriedly making charitable donations in December. It involves careful attention to your finances starting January 1, and it means knowing what reports to run, what projections to make and how to analyze all of that information.

We’d be happy to help you with this. Tax planning is an area where we have a great deal of expertise. We know not only what data needs to be pulled from your accounting files, but also how to interpret it. Consider working with us on this, and making 2016 the year that you finally feel confident and informed about your company’s tax obligation! Give us a call today to get started.

The IRS’s Treatment of Bitcoin Payments

unspecifiedIf you’ve paid attention to the news the last few years, then you have probably heard of Bitcoins. In fact, you may even have considered accepting them as payment for services or product sales. Before you do, you’ll want to make sure you have an understanding of how the IRS treats Bitcoin payments.

First, it’s important to be aware of the fact that the IRS does not consider Bitcoins, which are virtual currency, as a legitimate state-backed currency. Instead, they see Bitcoins as property.

How does this affect you as a taxpayer? This means that the tax rules that apply to property transactions will also apply to payments received in Bitcoins. When a person or business acquires property, they are required to record the fair market value of the property. This will become the owner’s basis for the property.

Once the property is sold or exchanged, if the fair market value of the property has increased, then the owner will have a taxable gain. On the other hand, if it has decreased in value, the owner will have a loss.

This means that if a business owner sells a product today and receives Bitcoins worth $100, but then converts them to dollars next week and the value has increased to $120, they will have a gain of $20 that will be taxed as capital gains.

This becomes even more complicated when multiple Bitcoin transactions take place. Each transaction needs to be tracked separately, and each will have its own gain or loss depending on the current valuation of Bitcoins when they are converted to dollars. The amount of paperwork and record-keeping becomes significant.

There are a couple of workarounds for this. First, each transaction can be converted to dollars immediately. Secondly, there are now Bitcoin merchant service providers that will deal with all of the back-end record-keeping that is necessary. This allows businesses to accept Bitcoins without ever actually dealing with them.

The IRS ruling to treat Bitcoins as property turned the Bitcoin world and those who want to accept them on their heads, but technology and even the IRS will eventually catch up to the new reality of virtual currencies. It just may take awhile.

For more information on tax implications associated with Bitcoins, please contact us today!

Section 179 – Why it Still Matters

Mn6nmnI4Fr8BLn3VrZsov7640U05qcDz_z7rriVqIik,1VwuMWh1cGtNcRx_IEJMbY_xikY7pdOZOwxFyr7s5zwSection 179 allows a business to deduct the total cost for qualified leased, financed or purchased equipment in the year it was purchased instead of depreciating the cost over the life of the equipment. Typically, however, Congress waits until after the first of the year to renew this section, which can hurt small business owners and manufacturers as well as farmers, dentists and medical providers.

Very often, Congress doesn’t get around to renewing tax breaks, such as Section 179, until well after the end of the year. Then they make it retroactive. This creates a variety of issues for businesses who attempt to plan purchases with tax breaks in mind. Often, small businesses will miss out on the tax altogether.

While tax breaks such as Section 179 are typically renewed each year, it isn’t a given. That means businesses as well as farmers and even those in the medical profession won’t know if they are allowed to deduct $25,000 or $500,000. The final approved amount depends on whether or not the larger deductions are renewed. If not, the limit reverts to the original $25,000.

This can make a buying decisions difficult. For example if a farmer needs to buy a new combine, the farmer is looking at an investment of up to half a million dollars. If Section 179 isn’t renewed at the higher levels, this investment may need to be reconsidered. The same goes for medical or manufacturing equipment.

Still, for a small business, even the limit of $25,000 can make a tremendous difference. Being that off-the-shelf software also qualifies for this deduction, a small business could update its software to enhance efficiency, therefore increasing its bottom line.

Tax planning is a critical component of running a successful company. In order for small businesses to plan for the next year while they still have the time to implement smart decisions, it’s imperative that Congress acts in an efficient and timely manner. Small businesses are the backbone of this county and do drive the economy, and Congress shouldn’t forget that.

For more information, please don’t hesitate to contact the office today!

How to File an Appeal with the IRS

The thought of having to communicate with the Internal Revenue Service about something you believe is an agency error is intimidating to most people. However, you are allowed to start a dialogue with the IRS if you feel that its findings are incorrect. The tax code is massive and often difficult to decipher, and everyone gets at least a little nervous when they consider engaging the governing agency.

Yet, there are numerous reasons why you might dispute something that the IRS has communicated to you. You might think, for example, that the law was not interpreted correctly, so a decision may not have been the right one. Or you don’t believe that a collections effort should have been initiated against you, or you feel that your offer in compromise should have been accepted.

There are three things you need to do first:

  • Double-and triple-check any IRS publications that you consulted to make sure you read them correctly, as well as to be sure that you’re very clear on what your position is and why.
  • Decide whether you are going to go it alone or whether you would like a CPA or attorney to represent you.
  • Prepare to file a written protest to request an Appeals conference.

Note: You may be able to bypass this formal document if you qualify for something like the Small Case Request. Check with us to see which procedure will be appropriate in your case.

Even if you choose to let us guide you through this complex process, you can start gathering information for the written protest. The IRS expects it to contain a great deal of detail, including:

  • Your contact information,
  • A clear statement indicating that you intend to appeal to the Office of Appeals because of changes that the agency suggested,
  • The letter that the IRS sent you that outlined the changes it believed needed to be made,
  • The pertinent tax period(s) or year(s),
  • A list of the items with which you take exception,
  • Your rationale for disagreeing, including supporting facts,
  • Your signature, of course, and
  • A statement and signature from any professional who helped you prepare the protest document.

Talk to us if you’re protesting a lien, levy, seizure, denial or termination of an installment agreement. These disagreements require a different procedure.

Be Proactive

You may assume that the IRS is always right and therefore may be uncomfortable second-guessing the changes the agency made to your tax return. However, you have a perfect right to protest – as long as you’re certain of the rationale for your dispute. The best way to avoid having to go through this process, of course, is to be exceptionally careful about your tax return in the first place. This requires planning throughout the year and a thorough understanding of all of the information you supply to the IRS.

If your return contains more than some simple income and deductions, we’d be happy to work with you from start to finish. Call us today to get started!

Tax Benefits of Health Savings Accounts

WgOKidSSefJKiRfanIJdVyMhshOmV0aA0M2QtUKUxlM,s_nOYYHmrF0ug-QUn1fzmP-LnE03g4AYeWh4o6KlBX8While most people are familiar with tax benefits for other types of investments, often times, they are less familiar when it comes to the tax benefits of health savings accounts.

There are three such benefits that you should know about and utilize. Perhaps the largest tax benefit is that the money that goes into the account is tax-deductible. Also, if the money is invested through a company payroll deduction, all contributions are made pre-tax.

The second tax benefit comes on the interest side. Health savings accounts, do earn interest, and this interest is tax free. This allows an individual to use the account for long-term appreciation as the money does grows tax free. In that regard, it is very much like a Roth IRA with the added benefit of a current tax deduction.

The third tax benefit is that the owner of the account has the option of taking tax free withdrawals for medical expenses. These expenses must qualify, but they do include almost all services provided by licensed health providers as well as substance abuse treatment and prescriptions.

Currently, in 2015, an individual can contribute up to $3,350 and a family can contribute up to $6,650. For those over the age of 55, an extra $1,000 contribution per year is allowed.

Finally, it is important to note that health savings accounts do not have a limit on carry-overs or a requirement on when the funds must be used. This is what enables them to be used for long-term savings to offset increased health-care costs or additional costs after retirement.

While health savings accounts haven’t always been on the forefront of investment options, with health insurance policy’s current rising deductibles and out-of-pocket expenses, more individuals are qualifying for the accounts, and with the tax benefits, it’s wise to give them a look.

For more information regarding tax benefits of health savings accounts, please contact us!