Tag: IRS

Posted on by Jan Roberg

Bad Calls

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Photo by Otto Greule Jr at Getty Images

Let me start with full disclosure:  I am a card carrying member of Cardinal Nation.    As I write this I am sitting on the sofa wearing my St. Louis Cardinal’s jersey hoping to type this out before the first pitch of the game.   So forgive me if it’s considered blasphemy but, the infield fly rule called against Atlanta during the 2012 Wild Card Play-Off was a bad call.  (http://www.nesn.com/2012/10/infield-fly-rule-prompts-criticism-of-umpires-call-for-instant-replay-in-mlb.html)  Hopefully we would have still beaten the Atlanta Braves anyway, but we’ll never know.

 

Another bad call occurred in week 3 of the 2012 NFL season featuring the Green Bay Packers and Seattle Seahawks—a Hail Mary pass was thrown and members of both teams caught the ball while the replacement officials gave conflicting rulings. (http://bleacherreport.com/articles/1346952-packers-vs-seahawks-the-replacement-officials-finally-broke-the-nfl)  That was a horrible call.

 

Sometimes tax preparers make a bad call when they do your taxes.  We’re not perfect either.  The other day I got a phone call from a woman who needed help.  The IRS was going to garnish her paycheck and she needed some help stopping it.  After I got the immediate problem taken care of, I asked her some questions about her tax return.  After getting enough details, I realized that the woman’s previous preparer had missed a pretty major deduction.  I recommended that she amend her return and have it done correctly, it would seriously help with her tax debt.  You see, when you make a bad call on your taxes, unlike some of the referee calls in sports, you have a three year period to make it right by amending your return.

 

The woman asked me what I’d charge to fix her taxes and she was a little shocked by the price.  She told me that her other preparer at “Brand X Tax Company” had only charged her half that much so she wouldn’t hire me.  Ahem.  I used to work for “Brand X”.  I know their billing practices and they charge by the form.  Had the preparer done all the forms that this woman needed to correctly file her tax return, the price would have been much closer to, if not more than, what I was charging.  But besides that, we’re talking about reducing her tax burden by a few thousand dollars.  Really I’m not all that expensive.  So now who’s making the bad call?

 

I remember a few years back, an elderly woman came into my office with an IRS letter.  It said that she owed about $10,000 and she didn’t know what to do about it.  As I looked at the letter and then at her return, I realized that she had a bunch of stock transactions that hadn’t been reported on her tax return.  Although the IRS said that she owed $10,000, when I checked things out, she really didn’t owe anything at all, she just needed to have her tax return done correctly.

 

When I told her the cost, she too was shocked, “But my other lady only charged me $20 to do my taxes,” she said.  “But your $20 tax return is going to cost you $10,000,” I replied.  She was smart, and now her taxes are done correctly.

 

Here’s the big hint—if you get a document that says “Important Tax Document”, you probably need to report something from that paper on your tax return.  If you give your preparer that piece of paper and she ignores it, that’s a red flag that something’s wrong.  Shame on her.  If you don’t give that paper to your preparer, then it’s shame on you.

 

Preparers can make mistakes.  (Even me, that’s why I have my staff review my returns just like I review theirs.  We’re all human.)  If you get an IRS letter, the first thing to do is to contact your tax preparer and give her a chance to fix it.  She might not have even made a mistake; sometimes it’s an IRS mistake.  They’re human too—(some of them.)  But if your preparer can’t or won’t help you when there’s a problem, it’s time to make the right call and move on.

Posted on by Jan Roberg

Turbo Tax Users: You Need to do a Three Year Review

Money and Magnifying Glass

Photo by Images_of_Money on Flickr.com

I’ve said it before: I think Turbo Tax is a great product. I also like 1040.com, the do it yourself software you can get on my website. Good products, good results. But, they’re not perfect—none of them are. And neither are tax preparers, after all they are human and make mistakes as well.

 

It’s August, generally quiet time in the tax business—but no, not this week. The other day my phone rang nine times—people getting IRS letters. “Hello, I got an IRS letter, what do I do?” I suspect that the IRS must have done a mass mailing the other day for my phone to ring so much. (My phone is usually slow in August.)

 

Some calls are easy and I can guide someone over the phone, “Oh, just send them a copy of XYZ form, that’s all they want.” Usually though, people need to come in and have me take a look. What I’m often finding this summer—is that people are getting IRS letters saying folks owe money, but when I review their returns, they should be getting a refund instead. And while I think that’s great fun (because I’m a tax geek and that’s the kind of stuff I live for) most people don’t like getting IRS letters saying they owe thousands of dollars at all. (Although they’re usually happy when I show they’ve got a refund coming.)

 

But here’s the catch—these people wouldn’t know they had money coming back if the IRS didn’t send them the nasty letter in the first place! What about all the people who left money on the table but won’t get an IRS notice?

 

What I’m finding is that the people with money coming back did their own taxes with Turbo Tax. Not that the Turbo Tax program made a mistake but it is usually just a misunderstanding of what should or should not be listed or possibly a typo. That’s why I’m recommending a three year tax review.

 

Why three years? If you made a mistake on your tax return, you have three years from the date of filing to file an amendment to get your money back. This is achieved by filing a Form 1040X.

 

For example, let’s say back on your 2009 tax return, you typed in that you paid $1,000 in mortgage interest when really you paid $10,000. The two numbers look pretty similar but there’s $9,000 worth of deduction there that you just missed out on. If you’re in the 25% tax bracket, that’s a $2,250 refund that you’d be entitled to. Your 2009 tax return was due on April 15, 2010. So, three years from that date is April 15, 2013. If you wanted to get that money back from the IRS, you’d need to file an amended return by then.

 

You don’t need to do this every year, just bring in three years worth of returns once every three years. Most places charge a fee, but it’s generally much lower than the cost of preparing your returns. (I know one large tax company used to advertise that they’d do it for free.)

 

If your returns are fine—then you’ve got peace of mind. If you’ve been doing something wrong—well then you’ve learned something. If you get money back—well then you know you did the right thing. It’s a winning situation all the way around.

Posted on by Jan Roberg

Let the IRS Help You Pay for Your Vacation

Saving with the IRS.

If you have trouble saving money, then withholding extra in your taxes might be the way to put money away for a vacation. (Or whatever else you want to save for!)

 

 

Okay I can hear you now, “How can you get the IRS to pay for your vacation?”  That’s not what the title said; it says “help pay” for your vacation.  If I had a way for the IRS folks to pay for my vacation, I’d be blogging this from London instead of my living room.  (Olympics are on, I’m an Olympics junkie.  I’m working in front of the TV set today.)

 

But how can the IRS help you pay for your vacation?  By helping you save for it!

 

Face it; some people are great at putting money away and saving up for whatever they need.  This blog post isn’t for them.  This is for the folks that have trouble saving up for the things they want—like a vacation.  If you’re not a good saver, then this plan might work for you.

 

First, you need to figure out how much money you need for your trip.  I was looking at a little trip to Disney World, with my husband, Mark.   I think we can do it for $3,000.  Mark gets paid twice a month—so over the course of the year, he’ll get 24 paychecks.

 

(Yes, I’m using his paycheck for this example.  I’m self employed.  If I’m thinking about buying something with my own money I use “How many tax returns to I have to prepare to go to Disney World?”  But I don’t have withholding—I have to pay estimated taxes so this program will not work for me.)

 

So to save up $3,000 first we’ll have to figure out how much of a refund we’ve got coming (or how much we’ll owe) if we don’t make any adjustments.  So how do you figure that out?  You use the IRS withholding calculator.  Here’s a link:  http://www.irs.gov/individuals/page/0,,id=14806,00.html

 

You’ll want to have a copy of your latest pay stub and your last tax return with you when you do it.  Just go to the site, answer the questions, and it will tell you what your expected refund (or what you’ll owe) will be.

 

I did this back in February and it looks like we can expect a refund of just about $1,000 next year.  We will need to save another $2,000 for our Disney vacation.  Since we did this in February, that gave us 10 months to save up.  Let’s do the math:

10 months times 2 paychecks per month = 20 paychecks

$2,000 divided by 20 paychecks = $100 per paycheck

 

So for us to have adequate savings for Disney World, Mark would need to withhold an additional $100 per paycheck to give us a $3,000 income tax refund.

 

If you want to change your withholding, you’ll need to go to your human resources department and complete a new W4 form.  If you know exactly how much extra money you want to save, just put that dollar amount on line 6 of your W4:  http://www.irs.gov/pub/irs-pdf/fw4.pdf

 

If you’re just interested in getting a bigger refund, but don’t know who much extra you want to save, you can change the number of allowances you’re claiming on line 5.  For example, if you’re currently claiming 3 exemptions and your refund is very small, change your withholding to 2 exemptions and your refund will be larger (assuming that everything else on your tax return stays the same.)

 

Realize that if you do this, you will have less money to spend from every paycheck.  What you’re doing is making a trade off.  Money later versus money now.

 

I’m going to be perfectly honest with you—most tax professionals would never, NEVER, recommend saving money by letting the IRS hold it for you.  Two reasons:  the first argument is that you can save the money yourself and earn interest on it in a savings account.  My answer to that is—the interest rate on my savings account right now is .2491%.   If I had the whole $3,000 in the bank for the whole year, I would earn $7.47.  I think actually being able to save $3,000 is worth that price.  This isn’t such a good argument these days.

 

The second issue is a little more serious:  If the IRS is holding your money—you cannot access it until you file your tax return next year.  If you have a financial emergency, there’s no way for you to get your hands on that cash.  It’s important that you understand that.  The whole point in having the IRS hold your money is so that you can’t spend it, it’s a good idea to have a little savings cushion—but this is a strategy for people who aren’t good at saving, so there’s a bit of a catch 22.

 

Like I said, this strategy isn’t for everyone—but there are lots of people who use it and they use it successfully if saving money is a problem for you.

Posted on by Jan Roberg

ATMs and the IRS: Why Your Business Shouldn’t Take Cash Out of the ATM

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Photo by Jenny Brown on Flickr.com

You should never take cash out of the ATM using your business bank account. Never.

If you never have and never will take ATM cash out of your business account, you’re done here. Go read a different post, I’m not worried about you. If you still think it’s okay to make a cash ATM withdrawal from your business account, keep reading. Imagine you’re routinely getting whacked upside the head with a rolled up newspaper about every two minutes until you learn this lesson.

Why not use the business account for the ATM?

1. It’s a blazing red flag to the IRS that you’re doing something naughty. Even if everything you do related to your ATM withdrawals is 100% legitimate, to the IRS it says, “I’ve been a scumbag! Make me pay more taxes!” It’s really not a message you want to convey.

2. It’s bad bookkeeping practice. You have income and expenses. You take money in and you spend it. You need to account for how you spend it. An ATM cash withdrawal doesn’t give you the paper trail you need for your expenses. Even if you’re good about keeping those receipts (and believe me, you’d be the exception) you’re still stuck with issue number 1 – blazing red flag to the IRS.

But I own the business and it’s my money, why can’t I just make a withdrawal? Good question. Let’s say you’re just a plain sole proprietor, nothing fancy. You’re absolutely right; that’s your money and you’re entitled to use it as you see fit. If you’re keeping a separate bank account for your business, then you should write a check from your business to you for your “draw”. That’s legit and it gives you a paper trail. Whenever you take money from your ATM, it is considered as going to you and you’ll be taxed as that being your profit.

Here’s an example: Fred takes $200 a month out of his business account to pay some contract laborers. He occasionally hires some kids from the local football team to help him with his moving company. He pays the boys in cash and has never paid any one boy more than $600 so he hasn’t had to issue a 1099 (1099s must be issued if you pay $600 or more.) Fred gets audited by the IRS. He’s claimed $2400 in expenses for contract labor. That’s the $200 a month cash he’s paid to the boys on the football team to help him with some moving projects. What the IRS sees is $2400 in ATM cash paid directly to Fred and they charge him $1200 in taxes and penalties for under-reported income. Fred will have a very difficult time fighting this. It’s possible that he can fight and win, but why be in that position in the first place?

Let’s move it up a notch, what if Fred has an LLC-a limited liability company? Let’s say Fred takes an ATM withdrawal from his business account so he can take his wife out to dinner. Once again, its Fred’s money and he has that right. But now Fred is treating his business account as a personal account. This messes up his “limited liability” status. If you don’t keep a strict line between your business account and your personal account, you risk losing your limited liability protection. This makes it even more important for Fred not to use his business ATM card for cash if he has an LLC.

How’s your head? Been smacked enough times? Bottom line: never make an ATM cash withdrawal from your business bank account. If you want to pay yourself, write yourself a check. If your business needs to use cash, set up a petty cash account and fund it by writing a check for petty cash. A clean paper trail will keep the IRS off your back and that means money in your pocket.

Posted on by Jan Roberg

IRS E-File Starts January 14th

The IRS will begin accepting e-filed individual income tax returns on January 14th.  Many people are anxious to file their returns, especially if they have big refunds coming to them.  But I’d like to issue a caution to those eager filers: don’t rush.  Here’s some common sense tips to help you hold out just a little.

1.  Do not try to file your tax return until you have all of your necessary paperwork–that means your W2s and 1099s.  It’s against the law for a professional preparer to file a return just using your check stub.  (Some companies will do a “loan” against your tax refund, that’s different, but you’ll pay a hefty fee for that.) 

2.  If you file your return without reporting all of your income, you will receive a letter from the IRS later.  It won’t be friendly either.  The headache of correcting a mistake like that is much worse than waiting a few weeks to have everything together and doing it right the first time.

3.  Your employer is required by law to send out your W2’s by January 31st.  You should have everything in your hands by February 5th.

4.  Even if you have all of your paperwork, some returns won’t be able to be filed until mid to late February because of delays.  When Congress changed the tax laws in December, it messed up the IRS’ ability to process some people’s returns.  If you itemize your deductions on a Schedule A frm, if you claim the teacher deduction, or if you claim the tuition and fees deduction; then you can’t file your return yet anyway.  (Other education credits weren’t affected.)

5.  If you’re doing direct deposit, there is no difference between whether you file on January 14th or filing on January 19th as far as how fast you get your refund.  It’s all related to the IRS cut off dates for issuing checks and direct deposits.  No difference.  It might make sense to hold off a day or two to make sure you’ve got everything you need.

For you FAFSA filers.  You want you tax return done as soon as possible so that you can include the information on your FAFSA application.  If you’re one of the many people whose return will be delayed because of itemizing, it’s okay to go ahead an prepare your return now and use the tax return information in your FAFSA and then file the actual return later once the IRS starts accepting them.

Posted on by Jan Roberg

How to Get an EIN Number for your Business for Free

Free EIN number

You can get an Employer Identification Number for your small business for free at the IRS website.

If your business needs an EIN (that’s an employer identification number), it takes about 5 minutes on the IRS website and you can get one for free.  I mention this because I found a company online that will do it for you for $75.  For an extra $75, they’ll put a rush on it.   So you can pay $150 for the rush job, or you can do it yourself for free in less time than it takes to fill out their online payment agreement.

The first step is to go to the IRS website. This link will take you right to the EIN page.

IRS EIN link

This page has links to a lot of information so it’s pretty useful.  It also has the link to go to the EIN application.  The online application has limited working hours, you’re not going to be able to file the application at 3 in the morning.  They’re basically open from 6 am until a little after midnight Monday through Friday with limited weekend service.

Before you actually apply for an EIN, think–do you really need one?  If you’re a corporation or a partnership, the answer is yes.  If you are an LLC, that means you are a limited liability company-that does not make you a corporation, so just because you are an LLC doesn’t mean you need to have an EIN.   Other reasons for needing an EIN include if you have employees, need to pay excise taxes, are a non-profit organization,  trust or estate.

You might not need an EIN per IRS standards, but it may be beneficial to your business anyway.  For example:  if you work as an independent contractor and do not want to give your social security number out or you are setting up a bank account in your business name.  Some vendors won’t give you business discount rates unless you have an EIN number, and I had one client who needed one because a vendor wouldn’t work with her at all because she didn’t have an EIN and she really needed the account.

Generally,iIf you are working as a contract laborer and filing your return as a sole proprietor, it’s most likely that you do not need to have an EIN number.

Applying for the actual EIN:  I recommend using the online application.  The application is presented in an interview style format.  It asks questions, you answer them and when you get to the end. voila’ you have an EIN number.  It sort of has a dummy proof mode too that let’s you tab back if you’ve answered a question incorrectly.  I recommend having access to a printer when you do it so that you can print out your new EIN when you’re done.  You don’t want to lose that number once you’ve got it.

Before you do the online application, you might want to check out the written application form so that you have all of your information handy before you apply:  http://www.irs.gov/pub/irs-pdf/fss4.pdf

To go straight to the online application, click this link:

https://sa2.www4.irs.gov/modiein/individual/system-unavailable.jsp

On little glicth, for some reason, if you  need an EIN because you receive home health care services, you can’t apply for your EIN online, you have to use another application method.  I suggest calling on the toll free number:  1 (800) 829-4933.  That’s the toll free number for the tax and business specialty hot line.    You will have to wait on hold for awhile, but it’s still faster than using the mail.

Posted on by Jan Roberg

Last Chance to Save Your Charity

The IRS has asked EAs and other tax professionals to post this widget on our websites. If you know about a charity that might be in danger of losing its not for profit status, please click on this link to get help. Many of these organizations can resolve their issues for no cost and it only takes a few minutes. The deadline is October 15th. Thanks.

Posted on by Jan Roberg

IRS Plans to Remove Debt Indicator for 2011

IRS Plans to Remove Debt Indicator for 2011

Have you ever gotten one of those Refund Anticipation Loans (also known as RALs) with your tax return? Those are the “fast money” refunds where you pay a fee and get your refund immediately, or perhaps in one or two days instead of waiting for two weeks. What the IRS has just announced could pretty much put and end to those types of loans.

In the past, the IRS has provided tax preparer firms and financial institutions with a “debt indicator” tool. Basically, when a tax return was prepared, if a person applied for the RAL, there would be a response about any government debt owed by the individual. Basically, if debt was owed, the RAL would be denied because the loan is secured by the anticipated refund.

According to the IRS, they no longer see a need for these Rapid Refund Loans since a person can receive his or her refund in 10 days.  There’s been a great deal of public pressure against RALs.  Consumer groups such as the National Consumer Law Center and the Consumer Federation of America have opposed RALs for years.  One reason is that RALS are usually targeted at low income households and the fees are often very high in relation to the loan provided.   The profit motive in RALS can sometimes lead to predatory and even fraudulent activity.  In 2008, the latest year that I could get figures for, 8.4 million RAL loans were made.  $738 million was spent on loan fees.  $68 million was spent on other related fees.

Individuals will still have access to their own personal information concerning debt via the “Where’s My Refund?” application on the IRS website.

For a look at the IRS press release dated August 5, 2010, click here:  http://www.irs.gov/newsroom/article/0,,id=226310,00.html

Posted on by Jan Roberg

Scam of the Month Club

Scam of the Month Club

One of the things I like about summer is that I have more time to catch up on my reading.   Not just my summer beach novels, but my business related journals as well.  During tax season, I basically read what I have to and get back to work.  In the summer, I have time to read about all the new laws and new tax proposals and have time to really absorb the information.

There’s a whole hierarchy to the newsletters I receive:  1.  Important and relevant–those that come from my professional organizations or the IRS itself.  I pay for the privilege of getting this information and so I read it immediately.  2.  Other legitimate tax information services–there’s a wealth of information out there.  I can’t read it all, but in the summer, I like to catch up.   And 3, the group that I consider to be the “scam of the month club.”   I’m guessing that doesn’t need much explanation there.

One of the necessary evils of my job is going through my spam folder.  Occasionally I receive legitimate business mail that gets diverted to spam, so I have to sort through it.   Of course, my spam folder is where I usually find my tax scam of the month.    Now to be honest, most of the spam is so obvious that I don’t even bother to open it, but sometimes it’s kind of fun to look at.

For example:  “Write-off your Rolex, We’ll Show You How!”   No, don’t even try it.  It’s not a legitimate business expense.

One that’s been popular this year,  “Never Pay Taxes Again, it’s  Unconstitutional!”  Actually, that argument is a little old.  The income tax was declared unconstitutional in 1895.  In 1909 Congress proposed to make it part of the Constitution and it was ratified as the Sixteenth Amendment in 1913.  The government has had a right to collect an income tax for almost 100 years.

One that caught my eye the other day was “Tax Deductible Cruise.”   That one was intriguing because, to be quite honest, there are some cruises, or portions thereof, that can legitimately be claimed as tax deductions.   But, there are a lot of things out there that aren’t.

For one thing, you cannot deduct the cost of a cruise (or any other type of travel for that matter) to attend one of those investment related seminars.  You can only deduct travel related to your trade or business.  Just because the promoter of a convention says it’s tax deductible, doesn’t mean it is, you have to go by tax law.

That said, there are times when you can legitimately combine your business trip with personal travel and claim a deduction.  For example, the IRS is holding one of it’s National Tax Forums in Orlando this summer.  The IRS Forums are a very legitimate deductible expense for me.  If I spent an extra day down there visiting my good friend, Mickey Mouse, my trip would still be deductible.  I couldn’t deduct the hotel cost for the extra day spent at Disney World, but the travel costs for the trip would still be written off.

There are even some times when you may even be able to deduct that cruise, or maybe part of it, for business.  The key of course is legitimacy and excellent records.  (That’s both, not either/or.)   Legitimacy meaning that you have a real business purpose relating to that cruise.  And by record keeping, I mean that you substantiate the amount of money you spent, the time you spent it, the place and business purpose of every expenditure.  And you do it while you’re on the cruise, or right after, not six months later in your accountants office while doing your taxes.  You can pretty much guarantee that deducting a cruise as a business expense is going to get a thorough review by the IRS.  Your best defense is to have flawless records.

If you’ve read about some tax idea on the internet and you’re wondering if it’s true or not, get a professional opinion.  You certainly don’t want to miss out on a valuable opportunity, but you don’t want to be duped either.  Many scams have some point of fact in them to start with.  (Like the unconstitutionality argument, it was true back in 1895.)  You know the old saying, if it sounds too good to be true, then it probably is.