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Posted on by Jan Roberg

How to Report Tax Fraud

photo by S.E.B.

As an enrolled agent, I have something called client privilege. Basically it means that I can’t tell the IRS what I’ve discussed with a client and I don’t have to share any written information that is not already on the tax return. While it’s illegal for me to file a false tax return, I’m not allowed to tattle either.

But people seem to want me to. I often get calls from people telling me they know someone is cheating on their taxes and they want me to report them. First and foremost, I am not the IRS. If you truly believe that someone is cheating on their taxes and you really want to report it, you have to report it directly to the IRS.

I think the main reason that people call me is they’ve called the IRS first and “nothing happened.” That’s quite possible, and here’s why.  For one thing, if you really are reporting tax fraud, you need to fill out form 3949 and mail it to: Internal Revenue Service, Fresno, CA 93888.

Here’s a link to get the form on the IRS website.
http://www.irs.gov/pub/irs-pdf/f3949a.pdf

A phone call won’t do the trick. The IRS wants its paperwork. It has to be the right paperwork and it has to go to the right place.

Second, when completing the form, only answer the questions asked–see the second page of the form for a more detailed explanation of what they’re looking for. Don’t send the IRS anything not specifically asked for. If the IRS is going to build a successful case, they will have to do the work themselves. They have access to an amazing amount of information plus they have the power of subpoena. If they want your evidence, they will ask you for it (but don’t hold your breath.)

Unless you are a crucial witness to the case, you will hear nothing about the audit from the IRS. They won’t even tell you if they perform one. You cannot call them to learn about the audit because the IRS will not be able to tell you anything, it would be a violation of privacy laws. Once you’ve mailed in that form– you’re done.  There will never be a phone call thanking you for your assistance.  You won’t see the police come and cart the person away.  If you’re seeking revenge, you’ll never know if you got it or not.

Here’s another tip: look closely at your motives for reporting the fraud. Are you genuinely trying to report a real tax crime or are you mad at your ex-husband for not paying the child support while buying his new girlfriend a diamond ring? The IRS really does not want to be involved in personal domestic squabbles.

If you are reporting a former spouse, look long and hard at what you’re doing. It’s quite possible that an audit could come back at you. Let’s say you’ve only been divorced for a few months and the IRS performs an audit. If they find that your ex-husband was under-reporting income, they are likely to investigate prior years. If they find that he owes taxes for years that you were married to him, you could be held liable for paying those taxes. Stop and think before you act.

One final thing, if your complaint is that someone claimed your children on his or her return and shouldn’t have, don’t file a 3949 form. Just prepare your return correctly, listing your children as dependents, and mail it in. The IRS will take it from there.

Posted on by Jan Roberg

Westport Halloween Parade

 Hi.  Thanks for visiting us at the Westport Plaza Halloween Parade.  Please click on the link below to find the picture of your child.  The number on your Treasure Map should coincide with your child’s picture, but I did get a little off so you’ll probably need to add about 5 to get to the right picture.  You’ll see the numbers as you scroll the mouse over the photos.  (You probably don’t even need the numbers, you’ll see your child anyway.)

[Halloween Parade]

Thank you so much for letting us celebrate this event with your family.  We probably had as much fun as the kids did.

Pirate Bill and Picture taker Jan 

And in case you haven’t already clicked ahead to find your pictures, here’s our brazenly commercial plug:  We hope that you’ll consider Roberg Tax Solutions in the future if you need tax assistance.  If you’re a do it yourself type, do check back at this site for tips and tricks for preparing your own return.  Or, if you’d like, you can sign up for our email newsletter.  It comes out once a month.  (Of course, we never sell or give out your email address and once you unsubscribe–we don’t bug you again!)  You can check out some of our previous newsletters by checking out the archive:

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Posted on by Jan Roberg

Business Expenses for Unusual Occupations

Charlee Chartrand as Superman from the Post Dispatch article, see link for full story.

 What do you do for a living?  Are you in advertising, construction, real estate?  When you tell people what your job is do they seem to have a grasp of what that means?  Some people’s jobs aren’t so easily defined, like Superman for example. 

Actually, his name is Charlee Chartrand and he dresses as Superman for his job.  This is not your every day occupation.  Now I don’t know Mr. Chartrand and I don’t do his taxes, if I did, my confidentiality rules wouldn’t allow me to talk about him.  I read about him in Sunday’s Post Dispatch.  I did contact him and ask for his permission to use him as an example though.

The main part of Mr. Chartrand’s job is that he dresses as Superman, hangs around at Cardinals games and collects tips for posing in pictures with  fans and tourists.  He’s also been performing at birthday parties.   If you think there’s no money in this, think again, he can earn as much as $400 in tips in a day.    And that’s why he’s going to need to figure out his deductions before he files his tax return.

So what can Superman deduct?  Let’s hit the obvious thing first:  the costume–all of it.  Cleaning, repairing, replacing, clearly this is one clothing expense that will count as a business expense.  I would also include his undergarmets.  You can’t dress as Superman and wear any old boxer shorts.

The hair:  most of the time hair cuts and styling products, etc are not considered legitimate expenses for business, even if you are a professional actor or television personality.  In Superman’s case here, I would claim his hair expenses.  He has to dye his hair black to be Superman, and he uses four different products to get just the right effect–including the “S” shaped curl on his forehead.  I think that goes far beyond what would be normal for Mr. Chartrand during his off duty hours.  

I can’t tell from the photo if Superman is wearing make-up or not.   He doesn’t look like it, but if he was, I’d allow it.  (He might need to darken his eyebrows to match his hair.)    A note about make-up:  generally, make up is frowned upon by the IRS as a business expense.  A clown wearing clown make-up would qualify for a deduction, but most women in any business would not.  I once helped a dancer with her return and as we went through her expenses she claimed “a gallon of eyelash glue.”  Now, I thought that was an excessive amount even for a professional dancer.  “Not for eyelashes,” she said, “It’s to keep my costume on!”  Evidently, during a dress rehearsal she had had a “wardrobe malfunction”.  In order to keep herself looking decent, she glued her costume on to make sure she stayed covered.  That clearly fit the category of “necessary” and I put it in.  (Even the meanest IRS agent couldn’t argue that one.)

Let’s get back to Superman,  He can probably claim either a home office deduction or rent for his work space.  And, since he travels from his home office to his gigs, he can deduct his mileage as well.  These are expenses that are pretty normal for many small businesses.  It’s important to remember that even unusual businesses have normal types of expenses.  Another normal type of expense for Superman might be advertising, if he has flyers or cards that he distributes to get new business.

Here’s another expense that I would use for Superman that might seem out of the ordinary:  comic books—Mr Chartrand uses comic books to compare against his costume and maintain the authenticity of his look.  I’d count it as a valid business expense. 

Also, Mr. Chartrand has a goal of moving to Los Angeles.  Making a permanent move to Los Angeles would count as a moving expense, as opposed to a business expense.  But, if Mr. Chartrand makes a trip to Los Angeles, to test the market so to speak, he could probably write off most of that stay as a business deduction.  This would give him a chance to test out the market and give himself an out to come home if he found Los Angeles wasn’t the place for him. 

When claiming business deductions, the key phrase the IRS uses is “ordinary and necessary”.  

To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

When you’ve got a one-of-a- kind type of career, it’s not always easy to figure out what ordinary means.  Hopefully, Superman’s example can give you some ideas about what’s ordinary and necessary for your business.

To read more about Charlee Chartrand, aka Superman, this link will take you to the St. Louis Post-Dispatch article about him:

Superman Story

Posted on by Jan Roberg

Roth IRA Conversions-In Plain English

A real deer in headlights, not my husband.

I was having dinner with my husband and was telling him that we needed to think about doing a Roth IRA conversion this year.  The more detail I went into, the further his eyes glazed over.  Finally, he waved his hand over his head and said, “You do the calculations and let me know if we should or not.”    He gets that way when I go into “tax speak.”   He’s not stupid either, he understands money, he has an MBA, but taxes tend to give him that deer in the headlights look.  I’m guessing he’s not alone.  Here’s my attempt at making it easy.

A regular IRA is money that you get a tax deduction for when you put the money in, but you pay taxes on it when you take the money out.  If you take the money out before you’re 59 1/2, you also pay a 10% penalty on top of the tax you pay for taking it out.

A Roth IRA doesn’t give you any tax deduction when you put the money in, but when you take it out there is no tax on the withdrawl.  The penalty, if you take it out early, is only on the earnings, not the main amount of money.  It’s usually very small.

The whole issue of Roth vs regular is Pay Now or Pay Later.  Normally I’m a “pay later” kind of person, but I like the benefits of the Roth so much that they often outweigh the disadvantage of Pay Now. 

So what’s a Roth conversion?  That’s when you have money that you put into a regular IRA and move it into a Roth IRA.  When you do that, you will have to pay tax on the IRA money, but you won’t have to pay the penalty. 

Why would anyone want to do that?  It’s back to pay now versus pay later.  It looks like tax rates will go up in the future.  Roth IRA money would be tax-free income during retirement and we all like tax free income!

Why is it a big deal now?  Normally, you can only convert to a Roth IRA if your income is less than $100,000 — that’s including the money being moved into a Roth IRA because that also counts as income.  For this year only, 2010, there is no income limit.  Anybody can play.

So what’s the catch?  If you do a conversion, you have to pay the tax.  You have two choices:  1.  You pay all of the tax on the conversion with your 2010 tax return, or 2.  You split the tax you pay into two equal installments with your 2011 and 2012 taxes. 

Once again, normally I’m a pay later person, but right now Congress hasn’t extended the Bush tax cuts yet.  Until we hear otherwise, tax rates are scheduled to go up for 2011.  I’d make my decision based upon paying it all in 2010.  If things change, then you’ve got options, otherwise, go for pay now.

Do I have to convert all of the money in my IRA to a Roth?  No.  Only as much as you want/can afford to. 

Do you think I should do it?  That depends.  The younger you are, the more inclined I am to say yes.   If you’ve ever put money into an IRA that you didn’t get a deduction for, I’m more inclined to say yes.    How are you going to pay the additional tax?  If you’re going to take it out of the IRA money you withdraw, then I’m definitely leaning against that.  If’ you’ve got it in savings, or have withheld extra and are just giving up a big refund, then you’re good.

Bottom line is:  as much as I like Roth IRAs and this is a once in a lifetime opportunity, it also involves paying more taxes.  If you have the cash and can afford to do it, I say go for it.  If you’re cash strapped already, it’s not such a good choice.

Posted on by Jan Roberg

Is a Flu Shot Good for Your Business?

I got my flu shot yesterday and I’m writing it off as a business expense.  I wasn’t going to get one.  I’m reasonably healthy (knock on wood) and I’m not in any of the target groups susceptible to the flu, so I wasn’t going to bother.  What I didn’t know, was that without a flu shot I could be a carrier and infect other people with the flu.  In my business I meet with hundreds of people during the height of flu season.  I don’t want to be responsible for getting any of my clients or their family members sick.

But writing it off as a business expense?  That might seem like a leap, but it’s really not.  Every year when I’m preparing other people’s taxes, I write off all types of vaccinations for health care providers because it’s an ordinary and necessary part of their jobs.  I write off hepatitis vaccinations for people in the food industry because it’s an ordinary and necessary cost of working with food.

The key phrase here is “ordinary and necessary.”  It’s a term the IRS uses a lot in their small business publications.   I honestly believe that protecting my clients from a potential life threatening illness is an ordinary and necessary part of my business.  If you work with people, especially if you deal with senior citizens or children,  protecting them is indeed ordinary and necessary.   Therefore, in my professional opinion, a flu shot is a legitimate business expense.

One final thing, much to my surprise — it didn’t hurt!

Posted on by Jan Roberg

Can You Claim a Home Office Deduction?

 For many people who own their own business, claiming a home office is a great tax deduction.  Some people who work for employers can also claim a home office, but they must also meet the requirement that it’s for the benefit of the employer. What about you?  Should a home office deduction be on your tax return this year?

 The first criteria for a home office is “regular and exclusive”.  This basically means that you have a defined space that is only used for business.  It doesn’t mean you have to have four walls, your defined space can be a section of another room.  For example, let’s say you have a desk in your bedroom that you do your office work out of.  You make your business calls there, the computer is there, it’s your business headquarters.  Your bedroom can’t be your home office, but that corner of your bedroom certainly is.  Many people think that since they don’t have a dedicated room to call an office that the home office deduction isn’t available to them.  That’s not true.  Let’s say that this guy’s bedroom is 12×14 feet.  His office space is basically his desk, his chair and a file cabinet that takes up about 5×8 feet.  His home office space is 40 square feet.  Granted, that’s not much of an office, but it’s still going to help reduce his taxes and that’s the whole point isn’t it?.

 Let’s go back to the “exclusive” use idea again.  Let’s say you’re using your kitchen table for you office.  (To be honest, it’s my favorite place to work.)  The problem is, because its the kitchen table, it doesn’t qualify as exclusive use.  Come five o’clock (at least at my house) I clean the table off and get ready for dinner.  I actually have another spot in the house that I do claim as my home office, and I really do work up there.  It doesn’t mean I never work at the kitchen table, it just means that I don’t claim the kitchen as my home office. 

 The concept of office space as a function of business is changing.  How many people do you know would say their office is at Starbucks?  The cab of their truck?  Wherever their Blackberry is?  (The IRS doesn’t yet allow Starbucks receipts to be claimed as office rent expense, but I wish they did.)  For many people, these places really are their offices, but they still need a place where they can regularly store paperwork and/or product and receive mail. Starbucks may seam like your main office, but I would argue that you could also claim a home office deduction if you made space for it. 

 Now if you actually meet clients in your home, the home office deduction is almost a gimme.  Also, if your home has a separate structure where you do business, that’s pretty much guaranteed. Qualified daycare providers have special rules for claiming the home office deduction, but they definitely are able to claim a portion of the home expenses against their business income. 

 So what home office claims are going to get denied?  Well, one example that didn’t work was a woman who had a party plan business.  Every week she was hosting parties in her home for 10-20 couples selling her product.  She had claimed her whole house as a home office business deduction because the guests had full run of her house during the weekly parties.  Right about now you may be wondering, “what the heck was she selling anyway?”  Pretty mundane stuff actually.  If you’re selling a home party product like Avon, or Pampered Chef, you can claim a home office deduction for the storage of your product.  You can also claim office space for your administrative duties.  I would even go so far as to say you could claim an area of your home if you used it exclusively for your home parties on a regular basis like this woman did.  But, claiming your whole house (including your kid’s bedrooms, your bedroom, your kitchen, your personal bathroom) …that’s not going to fly. 

 Many people are afraid that a home office deduction guarantees an audit.  That’s not the case.  But, there are trip points that will make the IRS look closer at your return like claiming the whole house in the example above. Be sure to have a professional prepare, or at least review, your return when you claim a home office.  The money you spend up front will be well worth it in the time and taxes saved.

Posted on by Jan Roberg

Employee or Contract Labor

With the economy being in turmoil, a lot of people are turning to contract labor jobs. That’s where the company doesn’t hire you as a regular employee, even though you work for it. You won’t receive a W2 at tax time, but you will receive a form 1099MISC and you will be expected to pay tax on that.

Contract labor is good for employers who are a little gun shy over hiring. It’s also good for employees who may need to work to put food on the table, but don’t want to commit to a job that they wouldn’t ordinarily take.

If you’re thinking about accepting a contract labor type job, here’s a few things you should know. First, when you receive a form 1099MISC, the IRS treats that as self employment income. That means, at tax time you’re going to have to file a Schedule C along with your 1040 long form. You will be required to pay your own Social Security and Medicare taxes, in addition to paying what your employer would normally have withheld.

Let’s use an example: Heather and Melanie are both high school seniors looking for summer jobs. Heather gets a job at McDonald’s making $10 an hour. Melanie gets a contract labor position also making $10 an hour. They both work 20 hours a week. Since this is the only income the girls will make all year, we’re not even going to look at regular income tax (they won’t owe any) we’re just going to look at their take home pay and self employment taxes.

Since Heather works as an employee, McDonad’s is required to withhold her Social Security and Medicare taxes (FICA). Heather makes $200 a week, but she’ll only take home $184.70 because McDonald’s will hold back $15.30 to pay her FICA. What most people don’t realize is that in addition to the money McDonald’s holds out of Heather’s paycheck, McDonald’s also pays an additional $15.30 towards Heather’s FICA. At the end of 12 weeks, Heather will have $2,216.40 that she was paid by McDonald’s. She will owe no income tax at the end of the year.

Now let’s look at Melanie. As a contract laborer, Melanie has no FICA withheld from her pay. For one week, she gets a check for $200. At the end of 12 weeks, she’ll have been paid $2,400. The difference here is that Melanie will have a tax bill of $339 that she’ll owe at tax time. After paying her taxes, Melanie will only have cleared $2,061.

[Geek alert: if you checked my math, you’d say. “but 2400 times 15.3% is $367” -and yes, you’re right. The first $433.13 of self employment income isn’t taxed so the actual equation is income x .9235 x .153.]

In our example here, it’s better to be hired as an employee because the company pays half of your payroll taxes. But that doesn’t mean that you should not take that contract labor job. For one thing, you may be able to write off some of your job expenses, which would reduce your self-employment taxes. Or, you might negotiate a higher hourly wage rate. An increase of 7.65% would basically cover the additional tax paid by the employer. Knowledge is power. Knowing how you’ll be taxed and how much you’ll be taxed let’s you make smart decisions.

Posted on by Jan Roberg

Urgent News for Nonprofit Organizations

Urgent News for Non-Profit OrganizationsThe IRS will be revoking not for profit status on several nonprofit organizations that have failed to file information returns for the past three years.  As of July 2010, it appears that more than 355,000 nonprofits were facing revocation.  If you are involved with a nonprofit organization, you need to make sure that your organization is safe.

What happened?  For decades, once an organization received a determination from the IRS that it was tax exempt, that status was final, unless specifically revoked by the IRS.  Although many nonprofits do file information returns every year, small organizations with receipts of less than $25,000 were exempt.  This changed with the Pension Protection Act of 2006.  The PPA had a lot of provisions about taxes, but the relevant one here was that it required almost all exempt organizations to file information returns with the IRS every year starting in 2008.  If an organization didn’t file for three years, then the IRS is required to revoke the tax exempt status.

If your organization loses its tax exempt status, then it will be required to pay income taxes.  If it’s a charity, it will no longer be able to accept tax-deductible contributions.  Revocation is serious business.

The deadline for filing was May 17th, which has already passed.  Fortunately, the IRS is offering one time relief for filers of form 990N (the e-Postcard) for nonprofits with receipts of less than $25,000.  And also for filers of 990EZ for organizations with receipts of less than $1,000,000 but more than $25,000.   The new deadline is Octobr 15, 2010.

What can you do?  First, check to see if your organization is on the IRS revocation list.  Click on the link to the IRS website, scroll down to find your state and open the file.  The organizations are listed alphabetically.  http://www.irs.gov/charities/article/0,,id=225889,00.html

If you’re on the list, then you’ll need to determine what type of filer you are and then you can go from there.  Do not let your organization be a victim of “Oops, I didn’t know.”  Call me, I can help.

Posted on by Jan Roberg

Saving for College

Saving For College

New parents always want to start saving for their child’s college education. People often ask me what’s the best way to do that?   To be honest, for different circumstances I give different answers, but these are some of my standard recommendations.

First, before you put any money into a college savings plan, make sure that you have enough money in your emergency savings fund. You should have enough money in savings to cover at least three months worth of expenses (I prefer to see six.)  If you lose your job or have some other financial emergency, putting food on the table and a roof over your child’s head ranks over having money for college. People fight with me over that, they say, “No, I want to have money I won’t spend.” Bingo, that’s why it’s called savings. Think of your savings account as your college fund, it’s just step one.

Once you’ve got that established, I like to see money in a Roth IRA. Once again, this isn’t a college fund, but it makes sense financially. First, a Roth IRA can be used to pay for college expenses penalty free.   Also, because you get no tax break for contributing to a Roth, you pay no income tax on the money when taking it out.   And it grows tax free, so a Roth is a good vehicle for college savings.  Secondly, suppose your child decides not to attend college or manages to get a free ride at a University? Well, then you’ve just got more retirement money sitting around for you. (Sweet.) Third, let’s say you’re not financially able to pay for all of Junior’s tuition and you need to apply for financial aid. Money in a child’s 529 plan is considered to be fully available to pay for college. Money in an IRA is not. Your financial aid package will be better if your funds are in a Roth.

One more point in favor of paying towards retirement before paying for college. When push comes to shove, if there is no money for college, a motivated kid can get a loan for school. But if you’re 70 years old and your only income is your Social Security check, do you honestly think a bank will give you $100,000 to help you with your retirement expenses? It’s not going to happen.  It’s kind of like the airplance emergency demonstration, you need to put on your own oxygen mask first,  before you help someone else.

So let’s say you have all your bases covered, you’ve got savings and you’ve got retirement money, then what? Now we can start with the 529 plans. Although there are no federal tax benefits for 529 plan contributions, they do grow tax free. Also, many states exempt a portion of your income from tax when you contribute to their state plan. For example, in Missouri, you can contribute $8,000 a year tax free to a 529 plan. If you’re married, both spouses can contribute– giving you a $16,000 tax deduction. Here’s a link to their website:

http://www.treasurer.mo.gov/Most.asp

The most important thing about saving for college is to start.  You won’t believe how fast your kids grow up until they’re already grown.  By then it’s too late.  Good luck.