Posted on June 12, 2012May 31, 2016 by Jan Roberg

Is Your CPA Qualified to Do Your Taxes?

Photo by Paul Miller at Flickr.com

Is your CPA qualified to do your taxes? Now that seems like a pretty dumb question right? Obviously CPAs do taxes and they’re smart so they can, right? So the answer should be yes. But to be honest, the real answer is: not always. And that’s been a pretty hot topic lately among tax professionals.

Here’s the story—The IRS has cracked down on tax preparers. They’ve started a new program where all preparers (even CPAs) must have something called a PTIN (Preparer Tax Identification Number) that goes on every tax return so they can be identified. They’ve also started a program that all tax preparers need to pass a test in order to get paid to prepare income taxes. People who pass the test are called Registered Tax Return Preparers (RTRPs). In addition to passing the test, RTRPs are required to take 15 hours of Continuing Professional Education credits every year.

Some people who do taxes do not have to take the RTRP test. Enrolled Agents (that’s what I am) don’t have to take the RTRP test because we already passed a series of tests that is more complex than the RTRP test. We’re licensed by the Department of Treasury, and we are required to take 24 income tax continuing education credits per year. Our licenses come up for renewal every three years, and we basically have our personal tax returns reviewed by the IRS before they grant us a new license. Because of our training, we can do things that RTRPs aren’t allowed to do. If you hire an EA, you know that person has had quite a bit of tax training and should be up to date on all the tax laws.

CPAs are another group that does not have to take the RTRP test. Once again, they’ve already passed the CPA exam—which is an even nastier test than the EA exam. (I often get into the EA versus CPA debate but I will concede that their test is harder than the EA exam.) CPA stands for Certified Public Accountant but one of my CPA friends says it stands for “the test is so awful I Couldn’t Pass it Again.” It is a bear of a test. CPAs are licensed by their respective states. They are also required to take continuing education credits to keep up their licenses—but here’s the problem—CPAs aren’t required to take any income tax education to maintain their licenses and do tax returns. None.

Many CPAs who prepare taxes take tax classes for their CPE credits—at least an update class. Update classes are important because the government changes the tax laws so frequently. There are hundreds of tax law changes every year—sometimes it seems like we get daily reports of new laws from Congress. Anyone who doesn’t at least take an update class every year shouldn’t be doing tax returns.

And that’s where the problem with CPAs doing tax returns lies—the ones who don’t keep up with the tax law. For every year that a CPA doesn’t update his tax education—there are more and more mistakes that happen. Sometimes it’s a little thing like a $30 telephone tax credit, maybe it’s a little bigger like missing a $400 making work pay credit. It was quite awhile ago now that the IRS changed the definition of a qualifying child for EIC purposes—you get that wrong on your tax return and you could be in big trouble. It was back in 2005 that the IRS changed the “uniform definition of a child” and I’m still seeing returns being prepared under the old rules. 2005!

I had a little “conversation” with someone who had incorrectly prepared my client’s tax return. (I was representing the fellow in an audit, but I hadn’t done the return.) “Well Missy, I’ve been doing taxes for over 20 years now and I think I know what I’m doing.” That was the problem—he didn’t know what he was doing, that’s why the client was being audited. The tax rules today are not the tax rules of 20 years ago. Heck! They’re not even the same rules as last year! (By the way, don’t call me Missy either.)

So how do you know if you’ve got yourself a CPA who knows taxes or not? Unless the IRS decides to monitor CPA training or licensing, the only way to protect yourself from a CPA who doesn’t really know taxes is to ask questions, the big one being—did you take a tax update class this year? Any CPA who takes tax season seriously did. Any CPA who didn’t take a tax update class doesn’t—and you should walk away.

There are competent, qualified CPAs out there who do a great job of preparing tax returns. Right now, there’s no way to tell who they are unless you take the time to ask questions. Until the IRS decides to officially identify the CPAs who are qualified to do taxes, asking questions is your only defense.

Posted on June 8, 2012May 31, 2016 by Jan Roberg

Jury Duty Pay is Taxable

Photo by 401K on Flickr.com

Well that’s basically it. If you were trying to Google jury duty pay to find out if it’s taxable or not—here’s your answer. It is.

Usually when I make a blog post about something, it takes me a few sentences to get to the point. And this topic was so simple that I almost didn’t bother to write about it except that I just got back from the bank depositing my jury duty paycheck: $98.40! That’s for one entire week of jury duty. The going rate around here is $10 a day, $18 if you actually get put on a trial. They also reimburse you for mileage. Yeeehah!

As we commiserated around the jury room about our grand financial boondoggle, our jury foreman told us that the money wasn’t taxable, except he was wrong. You do have to pay tax on your jury duty income.

When you’re filling out your tax return, your jury duty income goes on line 21—other income. Most of the “do it yourself” computerized tax programs ask you if you had jury duty income and guide you through inputting it onto your return. It’s really not a big deal.

But what happens if you don’t put it down? Most people only get about $20 or $30 from their jury duty service. Will the IRS really go after you for missing that little amount of money? The thing is—yes, they will.

Now you have to remember that it’s not like some IRS agent is waiting to nab some poor innocent person who just happened to accidentally leave $30 off of his tax return. Believe it or not, they’re not vindictive like that. (Most of them aren’t anyway.) What really happens is that the big IRS computer does something called “document matching.” If your county courthouse issues you a 1099 for $30 and it’s not listed on your 1040, the IRS computer goes, “Whoopsies—this guys’ missing something,” and you’re going to get a nasty letter. (Okay, I’ve never really heard a computer say, “Whoopsies,” but you get my drift.)

So while a human would probably take a look and say, “Oh, I bet it’s just jury duty or something like that—it’s only $30, no big deal,” and skip right over it, the computer won’t. The computer will generate a letter saying that you didn’t report all of your income and that you need to pay additional tax. And that means paperwork, and IRS agents opening your file and looking. Now that probably isn’t a problem since you’ve got nothing to hide—except you’ve just neglected to report income in one area—what else aren’t you telling the IRS?

See how a simple little mistake can open a can of worms that shouldn’t even be a can of worms? So remember to report you jury duty income on your tax return. Don’t worry about the tax, you didn’t make that much on your jury duty pay to begin with. The tax won’t be that much.

Posted on June 5, 2012May 31, 2016 by Jan Roberg

Your Weird Business Idea: And Why it Might Not be So Crazy

Photo by by hoyasmeg on Flickr.com

Sometimes it’s a little eye opening to hear how someone else describes your job. I got that little “aha moment” the other day when my daughter explained my business as, “My Mom does taxes for people with weird businesses.” Now that’s not entirely true–I have lots of clients with perfectly “normal” jobs, but it’s also fair to say that I have a higher percentage of clients with “non-traditional” businesses than some of my peers.
My foray into weird businesses started years ago, back when I was the “newbie” at the big tax company. Basically, the way things worked there was that the senior preparers got their choice of the new clients and I got tossed the dregs–anybody they thought was an oddball that they didn’t want to deal with became my client. And they were pretty picky–artists, actors, exotic dancers, magicians–they were mine. When the circus came to town and one of the clowns called up asking if he could get his taxes done while they were in St. Louis– his call got put straight through to me. He shouldn’t have even been my client (all he had was a W2) but the receptionist heard “circus” and “clown” and obviously the call had to go to Jan. I did the return anyway. How could I resist doing a tax return for a real live clown from the circus? Too cool!

And that’s the thing–these business returns that nobody else wanted to work on–I loved. I got to meet really interesting people and solve some interesting problems. Quite frankly, if you can make your bird disappear in front of a live audience, then I’m inclined to write off the birdseed as a business expense. And while the IRS generally frowns upon claiming “make-up” as a business expense deduction, if you’re purchasing eye lash glue by the gallon and using it to glue your costume in place so that you don’t violate local decency ordinances–well then I think it is an ordinary and necessary cost of doing business.

It doesn’t matter whether you’re a lawyer, you own a flower shop, or you do standup comedy–at the end of the day you want to make enough money to put food on the table and a roof over your head. Business is business and you want to make a profit or you starve.

One of the biggest problems people with non-traditional businesses face is the perception that they’re going to starve if they go forward with that business idea. Let’s face it; if everybody tells you your idea is bad–it kind of puts doubts into your head, doesn’t it? And doubt can kill a business.

What if American Idol was around back in the 60s? Picture Bob Dylan singing his heart out and Simon Cowell saying, “Well Bob, you seem like a nice enough young man and you play the guitar fairly well, but this is a singing competition and you’re just not cut out to be the next American Idol.” (Go ahead, take a minute and insert your own favorite rock icon in there and how they get rejected, it’s kind of fun.) The point is, Bob Dylan didn’t quit and he went on to make an indelible mark on American music. (Okay, if you’re too young to know who Bob Dylan is–check out this link: http://en.wikipedia.org/wiki/Bob_Dylan

So what about you? What’s your idea? Is it crazy? I would have thought Facebook was a crazy idea. How much money did Mark Zuckerberg get out of that IPO? Billions! Are you old enough to remember pet rocks? Pet rocks are the gold standard of dumb, yet profitable, ideas. Someone took plain old rocks, stuck them in a box and sold them as pets. Everybody was buying them, it was nuts! It was a totally stupid idea and I’m sure that guy laughed all the way to the bank. http://en.wikipedia.org/wiki/Pet_rocks

One of the advantages of having a non-traditional business is that you have to be twice as organized to come across as being half as legitimate. This is an asset. An attorney walks into a bank, says he’s an attorney, and everybody thinks, “Oh, this guy knows something.” While an attorney should know a lot about the law–some of them don’t know diddly squat about business. You walk into a bank, say you’re a professional geese herder and you sure as heck better have your ducks in a row (couldn’t resist the pun) if you’re going to get financing from them. (Yes, I know a professional geese herder–real business. Awesomely cool.) No one will take the geese herder seriously if she doesn’t know her stuff. Sometimes that uphill battle gives you the extra edge you need.

The bottom line is–if your business idea is a little strange, it doesn’t mean it’s not good. It could even be great. But you’ve got to do your homework. Know what it is you’re selling, who’s going to buy it, and how you’re going to get the product to the customer. A lot of new businesses get tripped up in the idea that they are “unique” and they don’t fit the basic mold. Here’s a tip for you–everybody is unique; everybody. Here’s my other tip–if you can’t answer the questions, what do I sell, who do I sell to, and how do I get the product to the customer? Then your business isn’t ready yet.

But if you know what you sell, who you sell it to, and how you get the product to your customer–then you’re in business!

Posted on June 1, 2012May 31, 2016 by Jan Roberg

Sole Proprietor: You Gotta Have a Home Office

Photo by f.x.l. at flickr.com.

Right now, I’m sitting in my comfy chair in the corner by the window of my home office and drinking a freshly brewed cup of coffee from my favorite mug. The dog has done her security patrol of the perimeter, deemed me to be safe from the local deer and bunny rabbits, and has settled in for her morning nap. I’m having one of those, “This is why I’m doing this,” kind of moments and it’s nice.

As a tax person who specializes in small businesses, I get asked a lot of questions about different business practices–Should I set up an LLC? I always answer, “That depends.” Should I lease a car or buy it? That depends. Should I set up as a sub-chapter S corporation? That depends. You get the picture. But when people ask me about a home office I always say, “Yes! Every small business owner who files a schedule C should have a home office.” My answer has nothing to do with the comfy chair and coffee either. As usual with me–it’s all about the money.

A home office is good for your tax return. First, you get to use a portion of your living expenses (that you would already be paying anyway) to offset your self employment income. Remember–your self employment income is taxed at 13.2% more than your regular income tax so even something like your mortgage interest-which is already deductible, is a better deduction when it goes against your self employment income. Kaching!

a home office is foThe other reason you want r your mileage. Yes, you read that right–you want the home office deduction to claim mileage. Here’s the deal–let’s say you’re a contractor, you drive to jobs all over town. You probably put close to 20,000 miles on your truck a year for business. You claim that on your tax return and get audited. (Side note: claiming exactly 20,000 business miles on your tax return will get you audited it’s a red flag.) Anyway, you go through the audit process and the IRS disallows all 20,000 miles because you’re commuting to those job sites from your home and commuting miles are not tax deductible. That’s over $3800 worth of tax money that you just lost right there. Add the fines and penalties and you’re well over 5 grand in tax debt.

But if you had a home office–all of that mileage becomes deductible because ou’re traveling from your office to a job site.

But what if I don’t really have a home office? Seriously, you need to set something up. It doesn’t have to be a whole room–it can be a corner of a room (like my comfy chair spot although most people have a desk or table.) You can’t just say you have a home office on your tax return and not really have one. (You’ve heard of fraud, right?) Be be realistic. If you have a small business–you’ve got something–files, or a computer, or make up, or something–and it needs to be put someplace. You need a spot to make phone calls from, pay the business bills, do your adminsitrative work–that’s your home office.

Aren’t I more likely to get audited if I claim a home office? To be honest, I keep hearing that, but my experience says no. The only time I’ve seen home office expenses audited was when they really were wrong and it was part of a broader audit. (Oh yeah, and when I redid those numbers correctly the taxpayer got a bigger home office deduction.) Be honest about it and you’ve got nothing to worry about.

But what if I have a real office in a business building that I go to every day? Can I still have a home office? Yes you can. You make your home office your administrative office. Like I said, pay bills, balance the business check book. I never meet clients in my home office, they always come to my “business office” location. My business office doesn’t prevent me from having an “administrative” office at home.

If you’d like more information about claiming a home office, try this link: http://robergtaxsolutions.com/2010/09/can-you-claim-a-home-office-deduction/ It has more information about the rules and what the IRS is looking for. But seriously, if you’re a sole proprietor, you need a home office.

Posted on May 29, 2012May 31, 2016 by Jan Roberg

Protecting Your Identity

Photo by David Goehring on Flickr.com

With your name, birth date, and social security number, I can ruin you. Now I wouldn’t– I have laws to follow and a code of ethics too, but basically those are all the tools an identity thief needs to ruin your life.

Scary isn’t it? And how easy is it to get that information? Got a Facebook page? There’s your name. Did you post your birthday on it for all your friends? That’s two. The social security number is harder to get—or at least it should be.

Do you have a driver’s license that uses your social security number as the ID number? Do you keep your social security card in your purse? Both of those practices are extremely dangerous.

Why am I obsessing over identity theft in my tax blog? It’s a really hot issue in taxes this year. Fake tax returns reflecting huge refunds have risen exponentially, and the IRS is having a hard time fighting the phenomena. I’ve written about children’s identities being stolen for tax returns before, but the issue of adult identities being stolen is what has really caused problems this past season.

Here’s the thing: A fraudulent tax return gets filed in your name with a large refund. You go to file your taxes, maybe you even owe, but you can’t file because your identity has already been claimed. Next thing you know, you’re under criminal investigation for tax fraud. Ugly, isn’t it? You don’t want this to be you.

What can you do? Prevention is the best. Guard your social security number like your life depended upon it. It does. Take your birthday down from your Facebook page. My apologies to everyone who’s sent me requests to sign up for the birthday club—sorry, I just won’t do it.

If you do get hit, be sure to report it right away. Even if the police will do nothing about your case, you’ll have the fact of reporting it on file. If you’ve been the victim of identity theft for tax purposes, you’ll need to fill out the IRS Identity Theft Affidavit, Form 14039. Here’s a link to get it: http://www.irs.gov/pub/irs-pdf/f14039.pdf.

Even if you haven’t been affected by tax identity theft, if your purse has been stolen and your social security number is at risk, you should contact the IRS before a problem comes up. You can call this number for assistance: 1 800-908-4490. That’s the IRS Identity Protection specialized Unit. They can take steps in
advance to protect your account.

I worked on an identity theft case years ago, before it was a common problem. It was a nightmare—because not only had the man’s identity been stolen, but the IRS was charging him with fines, penalties, and tax fraud for getting a huge tax refund for claiming some children that weren’t his. It all started with an IRS letter asking him if Billy and Susie were his children. He responded back saying , “No,” he didn’t have any children at all. He wasn’t thinking about identity theft, he was thinking that maybe an old girlfriend was trying to pin paternity on him for some kids that weren’t his. He had no idea that it was the beginning of a tax problem that took over a year to solve.

He hadn’t filed a tax return for that year due to lack of work, so he was a good candidate for identity theft. Once the IRS determined that the return as fraudulent, they weren’t looking for someone else—they went to my client who happened to have the name and social security number on the tax return. Like I said, it was a nightmare.

So be careful. Protect yourself and your social security number. You’ll be glad you did.

Posted on May 25, 2012May 31, 2016 by Jan Roberg

What if I Win the Lottery?

Photo by John Russell at Flickr.com.

I recently received a question from a reader about winning the lottery. His question was, “If I win the lottery, will I have to pay the Alternative Minimum Tax?” My answer to that question was, “probably not” because under most circumstance it wouldn’t appy–but the idea of winning the lottery is so fun, I thought I’d do a whole post about it.

First, a couple of things you should know. If you plan on claiming a lump sum on the prize, you’ll get about half of what the advertised pot is. So if the prize is a million dollars, and you take the lump sum, you’ll only get $500,000– that’s not including taxes.

There’s a deadline to being able to claim a lump sum–here in Missouri it’s 60 days, otherwise you’re automatically getting the annuity payments that are spread out over 25 to 30 depending upon which lottery you win.

I’ve actually gotten to help with two different lottery winners, one had a $100,000 win and the other had $1,000,000. Both took their money in lump sum payouts.

Neither was one of my own clients, I was just called in for a consultation, but they were still really fun to work on.

Let’s say you win the Missouri Lotto and will take home a lump sum of one million dollars. Before you get the cash, the Lotto commission will withhold 25% for your federal taxes and another 4% for your Missouri taxes. Your take home check will actually be $710,000.

The first thing you need to know is that the actual Missouri tax rate is 6%, so you’re going to want to make an estimated tax payment of another $20,000 before you go spending your money. Now you’re down to $690,000.

Now on your federal return, you’re bumped up to the 35% tax bracket. You’ll get a deduction for the $60,000 you paid to the state and you’ll get credit for the $250,000 they withheld for federal taxes, but you’ll still owe another $55,000 to the feds when all is said and done. So now your million dollar windfall is now only worth $635,000. (I’ll still take it, thank you very much.)

Now you’ve got some options here. Personally, I’d want to take my money, pay my taxes, and have it be mine to do with as I want. Maybe I give money to the relatives, maybe not. My decision. But I have a friend who knows that if he wins, it gets split 10 ways among family members. He’s got a choice to make.

He can claim his ticket, pay the taxes, and then gift each of his other family members $63,500. He wouldn’t actually owe gift tax on that money, but he would be required to file gift tax paperwork which would cost him something there.

Or, he could present the ticket as a group winner–with each of the family members being able to claim $100,000 in winnings. And, each member could also chose the annuity option if they desired (which would double the payout.) Because he knows this is what he’s going to do–it makes a lot of sense–the $100,000 win keeps him in the 25% tax bracket which saves the group $55,000 right off the top. It also keeps him from preparing gift tax returns too (which is just kind of annoying.)

So what about the annuity payout option? That would be $2 million dollars paid out over 25 years. (Remember, if you take the lump sum it’s half of the total so your million dollar lump sum example was a $2 million dollar win.) This works out to a cool $80,000 a year.

The Lotto agency would still withhold 25% federal taxes and 4% state taxes leaving you with a take home check of $56,800 a year for 25 years. You’d still want to pay Missouri an extra $1100 to cover your taxes, but your federal withholding should be sufficient. Using this option, after 25 years you would have received $1,392,500 free and clear. Sweet.

No matter whether you take the cash now or later, make sure you prepare for the taxes that go with it before you spend all your money and you’ll come out a winner. Good luck!

Posted on May 22, 2012January 14, 2017 by Jan Roberg

EIC and Your Family Tree: What Counts as a Qualifying Child?

Qualifying child is an IRS term for claiming a dependent.

Family consists of the people we love, but the IRS definition of family is very strict based upon relationship. When filling out your tax forms, remember you need to use the IRS definition of family to claim dependents.

Some people honestly don’t know who does and who does not count as a qualifying child for EIC and they mess it up. But one of the most common types of EIC fraud is someone claiming a child that does not belong on his income tax return. If you make an honest mistake, the IRS agent is probably going to assume you’re committing fraud anyway. So I’m here to keep you out of trouble.

I come from one of those families where we use phrases like, “first cousin once removed.” When I was a child I remember going to a wedding reception and playing all evening with my “cousin”, only to be told later that she wasn’t a cousin, she was my “father’s half-brother’s step daughter.” (Yeah, do the calculation, in any normal family your uncle’s kid is a cousin, right?)

I married into a family that is “we’re all one big happy”. We don’t have steps, or in-laws, or halfs, we’re all brother, sister, mom, cousin, etc. I think most people are somewhere in between. But what we’re dealing with today is the IRS version of family and the IRS version of family goes like this:

Let’s start with you. You are the center of the universe and all family members revolve around you. What we’re trying to figure out here is what counts as a Qualifying Child for you—this eliminates all parents and grandparents and members of their generation.

You may count your brothers and sisters. You must be older than your brother or sister to claim them (unless they are physically or mentally disabled.) You can also include step brothers and
sisters, and half brothers and sisters, and adopted brothers and sisters.

A step sibling means that your parent married somebody else who had kids. There is no blood relation, but there is a marriage license. If your parent did not marry the other person, even though you all live together and think of yourself as one family unit, there is no IRS relationship.

A half sibling means that one of your parents had a child with someone other than your birth mother or father. Let’s say your mom had you and then left your dad for someone else and had a child—that child is your half sibling—you two share half of a gene pool. The counts with the IRS.

Adopted siblings are just that—they’re adopted. There will be court records showing that they were adopted and part of your family. Adopted children are always treated like natural born children for IRS purposes.

These people are all on your even level of the family tree. Imagine you’re standing there with your arms straight out with your brothers and sisters side by side—this is your generation.

Down below your generation is your son, daughter, step child, foster child or a descendent of any of them, for example grandchildren or great grandchildren. Additionally, any descendents of your generation—those are your nieces and nephews (or great nieces and nephews.) So let’s say your half brother adopts a child and he dies and you’re raising that child—that counts as your qualifying child for EIC purposes because he is your nephew.

A foster child is a child who has been placed by an authorized placement agency in your home or by a judgment or decree or court order. No matter what, a foster child has some legal paperwork involved. If your neighbor runs off and leaves her kid behind and you wind up raising her, she doesn’t count as a foster child until the courts come in and say she’s a foster child. This is one of the most common mistakes people make—claiming children they’re taking care of as foster children without the court documents to back it up. Without that legal piece of paper, the child is not a foster child.

Cousins are never qualifying children for EIC purposes.

Posted on May 15, 2012January 14, 2017 by Jan Roberg

Small Business: Proving You Have Income Without a 1099-MISC

Good records will prove your income to the IRS.

For some small businesses a simple wire bound receipt book is all you need to substantiate your income.

Now some people may be wondering, “Why would I want to prove I have more income than I have to?” But for many small business owners, that’s exactly the problem—you have income, you want to report it to the IRS, and you’re having a hard time proving it. This post is for you.

The number two reason for reporting your non-1099 income (number one of course being basic honesty) is qualifying for the Earned Income Tax Credit. 2011 sort of hit small business owners who normally qualify for EIC with a one-two punch. We had the new 1099 reporting requirements that upped the ante for so many businesses, and we had the new EIC tax preparer due diligence rules with one of the questions being “Do you have forms 1099-MISC to support the income?” With the next question being, “If not, is it reasonable that the business type would not receive Form 1099-MISC?” Here’s a clue: if you answered NO to the first one, you have to answer YES to the second.

So what types of businesses wouldn’t normally receive a 1099? Bunches of them! Face it, if you’re reading this—I’m guessing that your business doesn’t receive 1099s. Generally, it’s reasonable to expect that anybody who works for other people, as opposed to other businesses, would not receive a 1099. House cleaners, dog walkers, handymen, lawn mowing services, daycare providers, interior decorators, and even income tax preparers are all types of business that could easily never see a 1099. (Yeah, me too! Although I’m now getting 1099k forms because I take credit cards, I don’t get 1099-MISC for preparing personal tax returns. Maybe I’ll see some 1099-MISC forms from some of my business clients this year, but I never used to get them in the past.)

So, how does a small time personal service provider prove his or her income to the IRS? There are a couple of things you can do. I’m going to start with my favorite: the business bank account. This is what I do and several of my clients do it too. (Okay, because I’m their accountant and this is what I tell them to do.) Get an Employer Identification Number (EIN) for your business and set up a separate bank account for your business in your business name. Only business income goes in, only business expenses go out. You may have to put some of your own money in for a start up, and once you’re making money you’ll take out a draw, but you’ll label those as such. Other than those two items, your business checking account is pretty much your profit and loss statement as well. Now for a bigger company that would be over simplifying things, but for us little folks–I’m spot on. See this post for more information about getting an EIN number: Free EIN

Why does this make good proof? Because you’ve got a monthly record of your income and expenses. I also have deposit slips to back it up: Mary Jones paid me $200, Fred Smith paid $250. It’s a good solid audit trail. Here’s another post about bookkeeping and your business bank account: Banking and Bookkeeping

But what if you don’t have a separate account? Maybe your business is just too small to bother with the expense of an extra account. What if you’ve just got something really simple like watching the little neighbor kid for a couple of hours after school every day. There’s no contract, no business cards, no advertising. You get $100 a week from your neighbor friend. She pays you in cash—it never sees the inside of a bank because that’s your grocery money. It’s not much but it supplements your child support. How do you prove that kind of income?

The easiest way to prove your income if you provided child care is to have the person you provided it for claim your services on their tax return. You make them a daycare receipt, just like the ones regular day cares do showing the name of the child, how much they paid you and your EIN number. (You can use your social security number but I never recommend that. You can get an EIN number for free. Protect yourself.) This is doubly good because the IRS will get confirmation of your income from an outside source. You prove income, your customer gets a tax deduction, it’s a win/win situation.

But what if your business isn’t day care? What if you did something like mow lawns around the neighborhood and shoveled snow in the winter? Nobody’s going to be claiming you on their tax return, what can you do? In your case, I like receipt books. You can find different kinds at Office Max or any office supply store. I like the ones with a carbon copy—one for you, one for your customer.

Now if you have just one customer and you’re always going to the same place—you can just use the little one that just has a couple of lines and the amount on it. You might write, “Mowing, Mr. Jones, $30, 5/15/2012” on it. You know what you did, who you did it for, how much you got paid, and when. If you have multiple customers you’ll want the larger receipt books that include the address and phone number of the customer. If you do different types of jobs for different people, you might need the bigger ones so you can write down the type of work that you did for them as well.

You don’t have to have a 1099-MISC to prove your income to the IRS. You just need to have a system in place to document your income and you’ll be fine.

Posted on May 9, 2012May 31, 2016 by Jan Roberg

Stolen Children

Imagine being a parent, raising a family, taking your kids to school, making their breakfast, tucking them into bed at night and basically doing all of the everyday kinds of things that parents do for their children. Then you go to file your tax return and you are notified by the IRS that someone else has already claimed your children on their taxes. How can this happen?

UPDATE: Effective January 1, 2016 The IRS will now require Identity Theft protection PINs for dependent children who have been victims of identity theft. Thank you!

I had always thought that cases like this were caused by divorced parents behaving badly, and to be quite honest many times that’s exactly what it is. But after I did a post about what you should do if someone else claims your child, I started receiving numerous posts, e-mails and phone calls about how for some people, this happens to them year after year after year.

One form of recourse the IRS has is to ban a person from claiming the Earned Income Tax Credit for three to eleven years if the person fraudulently claimed a child on a tax return. You would think that would solve the problem–except, as I’ve since discovered, it does nothing to stop true fraud. Although the original guilty party may not be able to file an EIC claim at all–it doesn’t prevent him or her from selling the child’s social security number on the black market to be used for fraudulent tax returns.

So who’s harmed by this fraud? Well obviously, the parents of the children who’s identities are stolen, and the children themselves. But also you! According to the IRS, there is approximately $12 to $14 billion dollars of EIC Tax fraud every year. $14 billion that’s coming out of your taxpaying pocket.

We’re talking about some serious fraud here.

In a normal case, the wrong parent claims a child, IRS notices go out, the issue is settled and the offending parent pays back the taxes while the rightful parent claim gets paid his or her refund. While the system isn’t perfect, in theory it’s all good.

With a stolen child identity case, it’s genuine fraud. The criminal steals the ID, creates a fake tax return–often under a fake identity, uses the child’s very real social security number to receive refundable tax credits, and then disappears off the radar before the IRS can catch him (or her.) The IRS has to pay the real parent his tax refund–because it’s the rightful claim, but the money that went to the criminal is lost forever.

As an adult, if your identity is stolen and used in a phony tax scam, you can receive a PIN number to protect you for future tax filing. Currently, there is no such protection for children. And child IDs are extremely valuable to fraudsters–with a single child being worth thousands of dollars in federal refundable tax credits.

What can you do? Please sign my petition to the Obama Administration to create a child identity theft protection PIN number for victims of child identity theft. Basically I’m asking that anyone who has successfully defended a rightful claim for having their children on their tax return for two years in a row to be awarded a PIN number to be used in association with their child’s social security number in order to prevent fraudulent returns from being filed.

You can access the petition by clicking on this link: White House petition (Update, I removed the link and petition 10/10/2015, we got what we wanted.)

Why defend for two years instead of only once? Divorced families often have conflicts over claiming a child and it’s fairly common to have an issue once in awhile. Issuing a PIN after just one claim could wind up muddying the system worse than before. If a family has defended the claim twice in a row– that’s a clearer indication of fraud and the need for protection is much more defined.

What happens if custody changes and the rightful parent is not the one with the PIN number? If the parent with the PIN number doesn’t turn over the PIN along with the child’s custody, the new custodial parent will wind up paper filing their tax return and going through the same process of claiming their child as what happens currently. The purpose of the PIN is to stop fraud, not completely end parental rights. Please sign the petition today, and help stop child identity theft.

See also: My Ex Claimed My Kid, Now What Do I Do? http://robergtaxsolutions.com/2011/01/my-ex-claimed-my-kid-now-what-do-i-do/

Posted on April 24, 2012May 31, 2016 by Jan Roberg

Filing Back Taxes

Jan Roberg can help you file back taxes.

If the IRS has been filing your tax returns for you, it's a good idea to hire a professional to fix them.

Did you get one of those notices by the IRS that says you owe money for 2005, 06, and 07 but you never even filed a return in the first place? You’d be surprised, you’re definitely not alone. Lots of those notices have gone out lately. If you’ve got several years of back taxes that need to be filed, I recommend hiring a professional to do it for you. (Okay, namely I think you should hire me, but then again this is my website.)
But seriously, there’s a reason you didn’t file your taxes in the first place; maybe they were too complicated, maybe you were going through a divorce or suffering from a death in the family, or maybe you were just being lazy. Whatever the reason, the problem has gotten to the point where the IRS is threatening you– so you need to get yourself a buffer zone. Someone to put a little distance between you and the IRS, it keeps it a little less personal. Plus a professional will know all those funky little tax law changes: 2007 was the telephone tax credit, 2008 had that $300 recovery rebate credit you missed because you didn’t file, and stuff like that. You don’t want to lose out on those things.
If you hire a tax professional that’s worth her salt, the first thing she’s going to do is to contact the IRS and get all of the information they have on you. That will include your wage and income transcripts, your account transcripts, and any return transcripts they may have. Even though you didn’t file tax returns, the IRS filed one for you, that’s how they came up with what they’re assessing you for. It’s a waste of time trying to negotiate with the IRS if you don’t know what information they’re using. Remember, when the IRS files for you, it’s always the worst possible tax status and you get no deductions.
The next step is to prepare all of your income tax returns. Not just for 2005, 06, and 07—in order to be in compliance (that’s the term the IRS uses for someone who’s in good graces with the IRS) you must have all of your tax returns filed and up to date. You can’t set up a payment agreement to get yourself out of an IRS levy if you haven’t filed all of your returns.
If you’ve been a good doobie and responded to the first IRS notice immediately, they’ll give you 30 days to file and then you can usually get another 30 day extension before you have to deal with any consequences. If you’ve blown off the IRS a couple of times already, they will not be so willing to wait for you. The problem is that you might not know that you’ve blown them off, especially if you’ve moved and they have the wrong address for you. Don’t assume you’ve got 30 or 60 days unless the IRS tells you they’re giving you that much time.
Each tax return must be mailed in a separate envelope. People mess that up all the time. Older returns go to one address, current returns go to another. And the addresses vary depending upon where you live. (Another reason it’s a good idea to get professional help.) Even if you’re sending two or three returns to the same address, you still need to put them in separate envelopes. (Think of a little kid going through a box of cereal looking for the prize. Once the prize is found, he sort of forgets about the cereal. It’s the same with tax returns and envelopes. Once an IRS agent opens the envelope and finds a tax return—everything else is forgotten, that other return does not exist, only the first one he finds is real.)
Once you figure out what your real tax liability is (remember there will be penalties for late fling, late payment, plus interest), then you can negotiate a payment agreement or perhaps an offer-in-compromise if you qualify. It all depends upon how much you owe and what you’re able to pay. A simple payment agreement can be negotiated in about 10-15 minutes, while an offer-in-compromise can take 6 months or even longer.
On the “fun” scale, filing back taxes is right up there with root canals and colonoscopies. Nobody wants to do it, but you reach a certain point and you just have to. And, not unlike a colonoscopy or root canal, you want someone you trust doing the work. If you’re in the “back tax” situation, the sooner you just get it done, the better off you are. On the bright side, you’ll feel better when it’s all over.