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7 posts from April 2013

04/24/2013

Overall Audit Odds Increasing for Individuals

It’s hard to not feel guilty if your tax return is audited by the IRS, even if you have done everything right.
 Be on notice: the random selection IRS audit process is raising the odds against individual taxpayers.

Warning sign graphicNumbers show the odds that your individual tax return will be audited have increased every year
for the last ten years, except for 2012. 

The most recent tax statistics show for individual taxpayers making less than $200,000 a year, the chances of being audited in 2001 were .58 out of 100--and have now grown to 1.02 out of 100 individual tax returns filed for 2011 income taxes.

The publicly released IRS Fiscal Year 2012 Enforcement and Service Report reveals the audit probabilities dropped a bit last year (for 2012 tax returns) to .94 out of 100 returns as many taxpayers voiced concerns about the increasing rates of audits.

The audit enforcement reports have to do with tax returns for multiple tax years compared against numbers for the most current tax year filings.   So, experts say, even with the slight dip in 2012, results show an upward trend continues.

Overall, nearly 14 million taxpayers have been audited in the last ten years.  The chances of being audited are much higher for taxpayers who earn more income:

                    Income less than $200,000 = .94 out of 100 returns

            Income $200,000 to $999,999 = 3.7 out of 100 returns

                Income $1 million and above = 12.14 out of 100 returns

The data also shows the percent of audits on business returns continues to rise.  In 2012, .71% of small businesses, 1.12% of small corporations (assets under $10 million), and 17.78% of large corporations ($10 million+) were audited.  Each of these audit percents are up from the previous year.

Receiving an inquiry from the IRS doesn’t mean you are accused of a violation. Yet, you will bear the cost for proving your reported income and deductions are right should you need to involve a professional to handle your response.

If you can’t afford representation, a taxpayer advocate service is available.  The form to request such help is, no joke, Form 911.

The most common form of audit notice is an IRS Correspondence received in the mail.  You are asked to submit answers in writing or may be asked to visit with an agent.  Another type of audit, a Field Audit, may include an auditor conducting an on-site visit to a business where the auditor(s) will comb through records.

Here's more numbers to ponder from the IRS Fiscal Year 2012 Enforcement and Service Results Report. 

Total IRS Audits 2012 Individual Tax Returns:

Individual                     1,481,966

Small Business                  70,265

Small Corporation           21,164

Large Corporation           10,752

Total IRS Enforcement Revenue Collected Including all Tax, Interest and Penalties collected:

Fiscal Year 2011:   $55.2 Billion

Fiscal Year 2012:  $50.2 Billion

Total collected from audits since FY2002:  $ 538 Billion

Should you be audited or have a question, contact us at McRuer CPAs.  When dealing with the IRS, it’s better to be safe, than sorry.

04/18/2013

IRS Audits Target Small Business Owners

The release of preliminary findings of a study of small business tax compliance by the National Taxpayer Advocate Service (TAS) may confirm the IRS targets small business owners for audits.

Magnifying glass 3TAS is an organization within the IRS that operates independently to help taxpayers resolve problems with tax issues and the IRS.   Now preliminary findings of a TAS study on taxpayer compliance seems to confirm what many small business owners suspect; small business owners, especially sole proprietors, are under more scrutiny and are more likely to be audited.

The TAS study is trying to determine taxpayer compliance for specific small business “communities” with similar operations and offerings.  TAS seeks to confirm what affects compliance and whether tax cheating is driven more by IRS rules or individual will.

Its findings are relying on secret IRS DIF data, so many tax experts conclude the study confirms the IRS is targeting small businesses and reveals which small businesses are more likely to be audited.

Small business tax returns are subjected to a computer program to mathematically quantify the higher chances of cheating or misrepresentation.  Each return is assigned a score, with the higher scores more likely to be audited.  The score is called the Discriminant Inventory Function or DIF, but the math formula used to figure this score remains a secret.

Though it cannot be confirmed, tax preparation experts know that there are red flags that increase the odds that a small business will be audited:

  • Operating as a sole proprietorship
  • Claiming expenses that are unusually high based on business income averages
  • Claiming charitable deductions as a large percent of income
  • Failure to report all income that has been independently reported to the IRS

The study is expected to take another two years to complete, but early findings claim small businesses with low compliance levels are typically clustered in geographic communities and may be more likely to associate with each other through local organizations.  They typically believe tax laws and the IRS are unfair. 

TAS’s preliminary analysis shows “smaller businesses with local customers and those in professional or technical businesses were more often in the high-compliance group…Taxpayers in construction-related and real estate-related industries appeared to be less compliant.” 

The IRS may be using that information to determine which tax returns it will select for audit. The report suggests tax returns filed by sole proprietors that are paid cash rather than wages are targeted more often for IRS questions or audits seeking to collect more money.

The study says most compliant business owners used a professional tax preparation service, which may indicate self-prepared tax returns for small business owners are more likely to be audited. 

The results also state that the low-compliance groups are more likely to say government is too big and wastes tax dollars. 

TAS says its goal is to improve voluntary tax compliance.  The findings of its study are being released at the same time the IRS is stepping up its effort to increase collections.

For more information you may wish to read the most recent TAS Annual Report to Congress detailing what it calls the “most serious problems” encountered by taxpayers.

Should you be audited or have a question, contact us at McRuer CPAs.  When dealing with the IRS, it’s better to be safe, than sorry.

04/14/2013

No More Free Lunch? : The Debate on Employee Benefits & Free Food

Could you be taxed for the free donuts and coffee your employer provides you at work?  There’s new debate about whether such freebies can be considered employee benefits, and thereby, be taxable as income to you.

This controversy adds yet another dimension to arguments over who will be targeted and in what way in the ongoing search for more tax revenues to lift ailing budgets.

Chef in hat 1Reports confirm the IRS is investigating the practices of large corporation complexes in the Silicon Valley where free meals are provided to employees round the clock.  Most tech companies with huge campuses provide employees free meal services claiming workers in rural and often highly secure environments don’t have enough time to take an off-campus food break.  

Some companies categorize the 24x7 meals and appetizers prepared by chefs and elaborate trendy "snacks" as a vital part of enhancing collaboration, motivation and dedication.

Investigators say tax rules “categorize meals regularly provided by an employer as a taxable perk, similar to personal use of a company car.” Meals may remain untaxed if they are served for reasons such as workers being in remote locations, but tax experts aren’t certain that tech company campuses qualify as “remote”.  They say it’s an issue of fairness to ensure that workers at large corporations with higher than average salaries are paying their fair share of taxes.

How far could these tax laws reach?  Some say hundreds of millions of dollars in taxes could be involved.  For example, at $8 to $10 a meal, times two per day, some employees may be responsible for taxes on benefits that reach $4,000 to $5,000 annually.

Arguments are being made that if some employers are allowed to offer tax-free perks, it puts other employers and employees at an unfair disadvantage; and if left unchecked, could become a standard.

Technically, any unpaid back taxes for free benefits would be owed by individual employees, but in practice the IRS typically cites the employer for failing to withhold taxes.  Tax attorneys say large companies usually settle with the IRS for the fair-market value of the freebies by including the dollar amount in paycheck stubs and then the companies give workers a raise to cover whatever the larger tax bill would be.

On the other  side of the debate, small business advocates fear widespread enforcement of such tax rules would mean the end to things like free coffee and donuts, and success celebrations at their offices.

But, good news, under current tax laws coffee and donuts and occasional office parties are excluded from taxation.  Employees who work for restaurants and hospitals may also receive meals on site without those meals being considered taxable benefits.  

The tax rules for employee fringe benefits are extensive.  Taxpayer advocates say employer-provided meals are one of many kinds of benefits that are under scrutiny as law makers and regulators intensify their search for ways to collect more tax revenues using current tax codes.

Contact us at McRuer CPAs for more information.

Last Minute Tax Saving Tips

Time running out graphic

With just a day remaining until the 2012 income tax filing deadline, there are still a few tax-cutting moves you may be able to make on or before April 15th.

Contribute to a traditional or Roth IRA. You may contribute up to $5,000, or, if you are 50 or older, up to $6,000.  Income limits apply.

Remember that traditional IRA contributions are often tax-deductible, but withdrawals are taxable.  Roth account contributions aren't deductible, but qualified withdrawals are tax-free and have other benefits for retirees.  For example, the Roth withdrawals don't raise Medicare premiums or taxes on Social Security benefits, nor do they help trigger the new 3.8% Medicare tax on other investment income.

Contribute to a SEP IRA or other tax-favored pension plan. Taxpayers with filing extensions can make deductible payments to these plans through October 15th. 

Contribute to a Health Savings Account. Taxpayers who already set up an HSA by the end of 2012 have through April 15th to make deductible payments if the accounts are linked to an approved high-deductible health plan.  They may contribute up to $6,250 per family or $3,100 for individuals.

If you have any questions, contact us at McRuer CPAs.

04/09/2013

When You Can't Afford to Pay Your Taxes Now

A variety of solutions are available if you can’t file your federal income tax return and/or pay the taxes you owe by the April 15th deadline.

You Owe Tax Sign on Back

If you are having difficulty, you are not alone.  It's expected that for the 2012 tax preparation season, more taxpayers than ever before will be requesting more time to file and more time to pay. 

If paying the amount you owe is the issue, you should still file your tax return.  This week's IRS Newswire report reminds taxpayers:

"Tax-filing extensions are available to taxpayers who need more time to finish their returns. Remember, this is an extension of time to file; not an extension of time to pay. However, taxpayers who are having trouble paying what they owe may qualify for payment plans and other relief.  Either way, taxpayers will avoid stiff penalties if they file either a regular income tax return or a request for a tax-filing extension by this year’s April 15 deadline. Taxpayers should file, even if they can’t pay the full amount due."

Here is a list of payment options approved by the IRS as well as links to find out more information.

Options to Pay Now:

  • Debit or Credit Card
  • Electronic Funds Transfer
  • Check or Money Order

If You Can’t Pay Now:

If You Don’t Pay:

  • Refund is used to offset tax bill
  • Federal tax lien can be filed against your property
  • Salary & accounts can be seized
  • You can be served a summons
  • You face penalties & fines
  • If fraud is proven, you face fines & imprisonment

Find out more about the cost of failng to file or failing to pay in our previous blog:  "The Cost of Filing Late & Paying Late".

If you have any questions, please don't hesitate to call us at McRuer CPAs to review your options with one of our tax preparation team members.

04/08/2013

The Cost of Filing Late & Paying Late

With debate underway about the reasons why so many taxpayers are filing later than usual this year, the bottom line remains the same:  file on time and pay on time, or it will cost you.

The numbers show more taxpayers are requesting extensions to file their completed income tax returns and millions more are for the first time seeking alternative ways to pay what they owe by the deadline.  The stagnant economy, new tax laws, the expiration of many tax relief programs, and increases in living expenses are all being blamed for limited resources and unexpected tax obligations.

Taxpayer advocates have helped pressure the IRS to expand the filing and payment options available for taxpayers as the tax code and guidance continues to grow more complicated each year.  The IRS has already offered some relief from penalties this tax season if a taxpayer can show that their delays were caused by this season’s late issuance of more than 31 tax forms.


1040 manAn IRS report says, “The number of electronic filing and payment options increases every year, which helps reduce your burden and also improves the timeliness and accuracy of tax returns.” 

However, when it comes to filing your income tax return and paying the taxes you owe, don’t expect any favors.

You face penalties for failing to file and filing late; and, if you also owe taxes, you face penalties for failing to pay and paying late.

Here are the general rules, but make certain you consult with your professional tax preparer or find more information from the IRS about how the rules and penalties may specifically apply to you.

If you file late:  The penalty for filing late is typically 5 percent of the unpaid taxes owed for each month that a return is late.  It cannot exceed 25 percent of what you owe.  If you file your return more than 60 days after the due date or extended due date, the penalty is $135 or, if you owe less than $135, you would be penalized 100 percent of your unpaid tax.

If you don’t pay the taxes owed on time:  Late tax payments made after the due date generally result in a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month the taxes are not paid.  It cannot exceed 25 percent of what you owe.

If, by the deadline, you file for an extension and pay at least 90 percent of your tax liability:  You will not face a failure-to-pay penalty if the remaining balance is paid by the extended due date.

You may not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

For millions of taxpayers who are facing serious financial struggles, the IRS offers choices based on individual circumstances such as installment agreements, temporary delays due to a hardship and an Offer in Compromise.

Be mindful that there are ways to get back on track if you have fallen behind on filing and/or paying your taxes.  The best practice is, if you can’t meet the deadline, communicate your issues and begin the process to resolve the matter.

Each time you delay or fail to pay, it will cost you even more.  If you have any questions, please contact us at McRuer CPAs.

04/01/2013

More Tax Deadline Pressures Make News

An article in the Sunday edition of the Kansas City Star offers a look at a half dozen reasons why taxpayers in Missouri and Kansas are filing their individual income tax returns later than usual or requesting an extension.  

Deadline graphic alertMany professional tax preparation service providers agree that this tax season is unprecedented in the number of last-minute tax filers.  Some affirm procrastination can be partly to blame, but they also say many taxpayers are filing later because of delays in the availability of the updated tax forms they needed to file for tax credits--all while many tax cut programs phased out and new tax laws were implemented.

Among 31 delayed new tax forms were several that had to do with tax credits for both businesses and individuals.  This made it difficult to prepare a return and figure the total tax owed.

The Kansas City Star article begins:  

"The mad dash for April 15 is especially crowded with procrastinating taxpayers this year. More Americans than usual have waited until the last two weeks to send their tax returns to the Internal Revenue Service. The latest IRS data showed there were about 4.5 million more taxpayers still waiting to file as of March 22 than was the case on that day last year. Plus, the IRS expects about 2 million more returns this year than last. Even catching up some ground with late-night number crunching during April’s home stretch probably will still leave several million filers staring at the deadline. “Everybody’s got to file eventually,” said Mark Steber, chief tax officer for Jackson Hewitt Tax Service Inc. “This year’s like no year we’ve ever seen.” You can blame the tax season’s delayed start for this year’s filer-packed finish. Congress rewrote so many tax laws at the last minute — to avoid the fiscal cliff — that the IRS was forced to start accepting tax returns two weeks later than normal. Heck, Kansas City even can blame the snow for the large number of taxpayers who still need to file..."

For more information, click here for the link to the entire article online.

Meanwhile, read on our blog about the McRuer CPAs cost relief offer to qualifying taxpayers who need to file an extension.  There are also several other blogs about this on-going issue.   If you have any questions, please don't hesitate to call us right away at 816.741.7882.

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