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How to Successfully Go through a Federal Tax Audit

December 29, 2011 By

IRS tax disputes are feared. Everyone tries hard to avoid situations that conflict with the law due to failure to pay taxes. It is always a good idea to clear a business’ accounts and file taxes without having problems to do with skipped taxes or other related issues.  No one ever wants to be placed under the scrutiny of an audit; it is very tiring having to go through all the rigorous processes that a tax audit entails. One spends so much time resolving audit issues and sometimes, heavy fines and penalties are levied. To avoid issues with the IRS, it is important to file tax returns correctly and promptly.

There are some tax returns that must be audited though. Tax audits have been on a steady decline and this could be attributed to the change in taxpayers’ behaviors as far as filing of tax returns is concerned. In the old system, a taxpayer had to bring all the records showing the taxes that had been paid. The auditor would then peruse through all the records in order to know how much had been paid and if there were any outstanding amounts. Today, things are totally different. A large company can no longer be subjected to such a process since it is time consuming and usually doesn’t come up with satisfactory answers. If one has to go through a federal tax audit, it is always good to comply and let the law take its course. Nonetheless, everyone agrees that it not the best experience; it is tiring and costly. Here are some things that one can do to make the process easier and faster:

  1. The IRS queries should be responded to in time. When one is asked to submit a document, it has to be done promptly. Delays can lead to fines and penalties. Most submissions have a deadline of up to 30 days thus, providing the taxpayer with adequate time to produce the document. If a person feels that he/she cannot meet this deadline, it is important to call the IRS and request for an extension, depending on the workload at hand.
  2. One should attach the necessary documents. The documents have to be in line with the demands for the audit. Transaction receipts are very important and one should have them ready for submission when required. Receipts make audit processes easy for both parties though there are people who prefer to use different types of proofs.

One has to organize well in order to face the audit panel. Having right documents in places makes one credible and reduces the need to “talk too much.” It pays off when one is coherent and confident before the audit panel.

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Commuter Tax Benefit Set to Reduce in 2012

December 28, 2011 By

The tax relief that is currently claimed by employees who commute to work using trolley, train, subway, buses, and ferry is expected to reduce come 2012. The current benefit of $230 a month was included in the 2009 stimulus package law and was set to expire on December 31, 2011. After this expiry date, the rates will go down to the pre-stimulus-package rate of $125 a month starting January 2012 unless Congress makes a last minute adjustment. However, the counterpart parking tax benefit that is given to those who drive themselves to their place of work has been adjusted upwards. The rate that stood equal to the commuter tax benefit at $230 a month is set to go up to $240 a month starting January 2012. Commuters and other stake holders are urgently agitating for the review of the commuter benefit to at least have it match the parking tax benefit.

Employers Update Employees with Expected Drop

Many employers have already communicated the expected reduction on the commuter benefit to the affected employees. The human resource departments communicate these changes to employees before making adjustments to their payroll systems to capture the changed rates. If the commuter tax benefit amount is to be adjusted upwards, it will have to be done before the new year as an adjustment within the year – even if applied retrospectively – would lead to a lot of inconveniences and paperwork for those involved with the payroll. The government therefore, avoids making such adjustments unless they are very necessary.

Impact of Change on Commuters

The drop from claiming a benefit cap of $230 a month in 2011 to claiming a maximum of $125 a month in 2012 is expected to significantly affect the commuters. For example, a commuter who earns income in the 40% tax bracket and who took the full $230 benefit in 2011 will lose out on tax savings amounting to $504 from making this 2012 adjustment on the commuter benefit. Different commuters will see their former tax benefits reduced in different amounts. Employers are now finding that employees who commute from far will lose a significant chunk of their former tax benefits.

Commuters and Stake Holders Championing for Adjustment

There are various campaigns that have been launched to advocate for an adjustment to be made to the commuter benefit before the new year begins. Those advocating for the change argue that it is unfair for the parking benefit to be increased as that of the commuter benefit is reduced. They are arguing that the government should be encouraging mass transport means as opposed to individual transport that leads to more pollution and traffic. The main campaign for an increase in the commuter benefit is being championed by the benefit providers including TransitCenter and WageWorks. This campaign is being run on commuterbenefitworkforus.com. The website enables commuters to communicate with their Congress representatives to urge them to campaign for an adjustment to be made on the commuter benefit.

Two Proposed Laws to Remedy

In respond to the campaign to adjust the commuter benefit, there have been two laws that have been proposed in Congress. One of these bills is the Commuter Benefits Equity Act of 2011 that seeks to keep the parking tax benefit equal to that of the commuter benefit. The other proposed law is the Commuter Relief Act that seeks to have both the parking and commuter tax benefit at $200 and to introduce a further tax benefit for those who cycle to work. However, many tax experts foresee that a permanent solution may not be passed and instead, an extension on the 2011 commuter benefit will be passed through the “Extender Tax Laws” that are being temporarily passed until December 2012.

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Make a Donation before the End of the Year

December 27, 2011 By

Year end is an important time for taxpayers to make adjustments in their incomes and assets so as to ensure that they maximize on tax savings. Since a tax year is from January 1st to December 31st of any given year, adjustments done at year end can nullify or reduce the impact of transactions done earlier in the year. One of the moves that can have a tax implication and that can be done at year end is donations. There are many reasons as to why to make a donation before year’s end.

Increase Deductions Threshold for Itemizing

You may consider making a donation to get your deductions to the itemization level. For you to itemize your tax deductions, the deductions will need to be above 2% of your Adjusted Gross Income (AGI). Therefore, to get your deduction to this threshold, you can make a donation of the difference. Using itemization as opposed to taking the standard deduction, can get you more savings on your taxes.

Donate Appreciated Assets

Another tax plan move that you can make before the year ends is to donate assets that have significantly appreciated in value and that you want to dispose. Assets that have appreciated will attract a high capital gain tax as the tax is calculated on the appreciation. On the other hand, if you make a donation, the donation deduction is taken at the current market price and thereby, giving you a hefty deduction.

Donate to Support a Cause

Besides donating as a means of tax planning, you may also make a donation to a charitable organization that supports a course that you are interested in. Since the economic recession of 2008, the donation levels have significantly plummeted. This reduction has happened understandably as many Americans have found themselves with less income or no income since the recession. Furthermore, those who have retained their incomes have also become more conservative with their donations as the financial future remains uncertain. On the other hand, the need for charity has also gone up over the same period. The period between 2008 and today has seen many people go into financial hardship and require financial assistance. Furthermore, there have been many weather related disasters within the same period that have called for many charities to assist with food and shelter related aid. This disparity between donations and charity needs has led to a huge gap. For this reason, there is a fresh call to taxpayers not to relent in the American culture of giving to charities for a good course. This is definitely a good reason to consider donating even before the year ends.

Ensure the Charity is Tax Exempt to Claim Deduction

Whether you are making a donation purely for supporting a good cause or as part of your tax planning, ensure that the charity organization you are making a donation to is IRS tax exempt and compliant under the IRS rules of Section 501(c)(3) organization. The IRS lists all organizations that are exempt on their website and you can counter check before making a donation. Donating to such organizations ensures that your donations are well accounted for and that they will accord you a tax deduction.

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6 IRS Tax Reliefs that Will Expire on December 31, 2011

December 26, 2011 By

There are various tax benefits that are earmarked to lapse in 2011. Therefore, unless Congress passes amendments to extend or make the tax breaks permanent, these reliefs will no longer be available to claim after December 31, 2011. Therefore, taxpayers can consider making purchases of these affected items so as to take advantage of the tax reliefs before they are no more. Six of these tax breaks set to lapse end of 2011 are discussed below:

1. The Adoption Credit

The Adoption Credit is a credit that provides a relief of up to $13,360 a year for people who adopt children. The credit is made available to those who adopt to assist them with the costs relating to adoption. The costs of adopting a child in the U.S. are very expensive and therefore, to encourage citizens to adopt children, Congress decided to pass the credit. However, starting 2012, this adoption credit will not be available for people who earn a certain amount of income. Therefore, those seeking to make an adoption and who earn above the new threshold may start the process before 2012 so as to redeem some of the costs from their taxes.

2. Mortgage Insurance Deduction

Mortgage insurance premiums are, until December 31, 2011, tax deductible for the first and second home of taxpayers who have Adjusted Gross Incomes (AGI) of $109,000 and below. However, from 2012, this deduction will be no more and homeowners will now shoulder the costs of mortgage premiums with no help from Uncle Sam. Therefore, taxpayers may consider paying off any insurance premiums before December 31st 2011 to take advantage of the deductions before the credit is retired.

3. Higher Education Deduction

As part of the Stimulus Package law, taxpayers were allowed a deduction of up to $4,000 for higher education costs for single taxpayers with an AGI of less than $65,000 a year and for those who file jointly, an income limit of $130,000 . The costs that were deductible included the enrollment costs, fees and tuition costs. The deduction was “above the line” meaning that it was available even for taxpayers who did not itemize their deductions. However, starting 2012, this tax deduction will no longer be available to claim. However, this deduction is allowed for the first three months of 2012.

4. Tax Credit for Home Energy-Efficiencies

The tax credit associated with energy improvements in the home will not be available in 2012. In 2011, home improvements such as installing power saving thermal-pane windows or having an energy conserving air conditioner or water heater earned you a credit of 10% of the costs subject to a cap of $500. The 2011 credit amount was actually reduced from the relief available in 2010. The credit is a one off benefit and those who claimed it in prior years cannot make another claim this year. You however, need to check the manufacturer’s information on the packaging to confirm that the purchase is certified for the tax credit.

5. Tax Deduction for State and Local Sales Taxes

In 2011, taxpayers who live in states that do not levy state income tax such as the State of Florida and taxpayers who are exempt from paying state income taxes for one reason or another were allowed to deduct sales taxes that they paid from their federal income taxes. However, starting 2012, these qualifying citizens will not have the relief available anymore. Therefore, these taxpayers who are considering making purchases that contain sales taxes should consider doing so before end of 2011 so as not to get cut off from the benefit.

6. Deductions on Educator Expenses

In 2011 and other prior years, educators such as teachers, professors, counselors and instructors were allowed to deduct the costs of teaching materials that they incurred off their pocket. These materials included stationery, books and computer equipment. The deduction was an above the line tax deduction with a cap of $250 an year. However, starting 2012, this tax relief will no longer be available to the educators. Therefore, the educators may consider purchasing some stock before the year-end so as to take a deduction on the cost before the relief expires.

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The IRS’s Holiday Gift Taxes

December 23, 2011 By

The holiday season is here again and gifts are exchanging hands with every handshake, but could that gift package include one from your employer? Yes. Many times, when that happens, there is a good chance the IRS is lurking close by, waiting to eat their share of the Christmas pie. This would be because they can place this gift given out by your employer as income, automatically making it taxable. When you get an end of the year bonus, it is common knowledge that this additional money is taxable income.

This sum is usually handled by the bonus being combined to your pay check and accounted for on your yearly W-2. A very kind employer could increases your bonus so that the tax would not hurt the total fee and your net extra cash is what you hoped to get.

An employer may also decide to hand you cash in an envelope as a good-will gift; many people might think of this as just a gift, but unfortunately, the IRS considers any small amount of cash as a wage. Hence, they are liable to taxation. Having said all this, it is worthy to note that there are still small gifts that are categorised under the “de minimis” fringe benefit rule of the IRS. “De minimis” meaning “of minimal value;” the IRS doesn’t consider this small tips and gratuities as wages or income, so they are not taxable by any standard.

To understand better, the idea is that gifts given to workers should be inexpensive; as a matter of fact, the IRS clearly states on their web page, under the header, “taxation of employee gifts,” that in a particular case, it ruled that items that are valued to be above $100 should and would not be considered as de minimis, not even when it is as a result of atypical conditions. But if the gift is valued at less than $100, it would be then allowed to be considered as a de minimis item.

In spite of the afore-mentioned technicality, the IRS still leaves open a few loopholes .They consider a certificate that entitles an employee to be awarded a special item of personal property that is small in value, as long as its not commonplace and it is administratively impractical to account for, this could be considered a de minimis benefit, conditional to the peculiarity of the situation.

This is why it’s easier for your employer to team up with a neighbourhood grocery store when giving out gifts. The gift certificates giving out of a turkey or ham to every staff member would be considered as a de mimimis by the IRS and would not be filed as a taxable income.

Having said that, food taxes are your responsibility; gift cards also don’t count under de minimis: they are liable to tax. In Publication 15-B, the IRS clearly points out that “cash and cash equivalent fringe benefits, no matter how little, are never excludable as a de minimis benefit except for occasional meal money or transport fair.” So if your employer is feeling charitable and he/she offers you a $150 gift card, you are expected to pay tax.

Public workers, including teachers in Alabama, are beginning to notice that they are limited in the type of holiday gifts they can receive. A recent report claims that the unprecedented amendments in the Alabama ethics law that took effect from January, introducing new restrictions on public officials, employees, and lobbyists, are currently, as the festive season approaches, stirring an average of 25 calls a day to the state ethics commission regarding holiday gifts. As it seems now, a lot of parents may be violating the state’s new law by handing out gifts to their children’s teachers. Nevertheless, giving out cookies or other consumables less than $15 is permissible, according to the Alabama States Ethic Commission, the official body charged with the responsibility of enforcing and clarifying the new law among other things.

Cash or any other valuable which the teacher can sell again is not allowed. Alabama officials plan to sit again to fine tune the new law, which in its current definition allows only for gifts under the definition of de minimis to be handed out.

It is obvious that the taxman never sleeps; he has his eyes open on whatever comes into your pockets and won’t hesitate to demand his own share of your Christmas gifts. After all, Uncle Sam must celebrate too!

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Festive Season Spells out Happier Times for the U.S. Economy

December 22, 2011 By

The good news emerging as the holiday season beckons is that the cost of living is now holding steady or simply, stabilizing. This is quite welcome, especially given the struggles everyone had to contend with during the recession and near economic meltdown periods just a few months ago. The taxman has come out with an announcement to the effect that interest rates will not be altered by any percentage for the quarter starting January 1 in the 2012 financial year.

Thankfully, the announcement from the tax agency is not the stand-alone indicator of improving economy; there is also the annual PNC Christmas Price Index. The index has revealed that prices seem to be remaining constant and stabilizing across the board. A good illustration of stabilizing prices is revealed in the purchase of items mentioned in the track “The Twelve Days of Christmas.”  This year, the price rose by a meager $800 or so, a figure that varies significantly with years gone by.

Most fiscal experts on both Wall Street and Main Street are of the opinion that emerging trends are not as a result of mere coincidence; they are a result of sound economic policies implemented by the Treasury as it sought to forestall and reverse the effects of the near economic catastrophe in the past few years. Typically, when one examines trends impartially, they are bound to notice clear similarities between the aforementioned Index and that of the Federal government.

To determine how much most items in the market cost, PNC utilized the knowhow of experts. This year, the firm employed the knowhow of Philadelphia dance companies, including the Philadanco, to give the price for services offered by the nine ladies dancing and the ten lords-a-leaping. The exact prices for majority of the birds were obtained from the National Aviary in Pittsburgh.

If one wanted to purchase the entire set, that is, between one partridge and twelve drummers drumming for every verse, they would have to fork out approximately $100,000. The most costly item on the list was undoubtedly the seven swans, which cost well over $6,000.The traditional pear trees, which are quite unpopular during the holidays, recorded quite low in sales. This was somehow expected. They may just fare better if a token tax was slapped on them.

As the cost of goods continued to rise, the cost of labor remained quite constant throughout the turbulent financial period.

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Wise Tax Moves to Make before the New Year

December 21, 2011 By

It is important for every company to embark on general housekeeping come the end of every year in order to start off the New Year with a clean slate. So, how exactly does a company go about this?

Prepare a draft return:

It is advisable that one does his/her own annual tax returns. Even though it is not mandatory for one to fill out all sections of the Form 1040, there are important sections which cannot just be brushed through. Observing keenness may lead one to discover for instance, that their investments have been recovered and that they may have qualified for an end of year distribution, a factor that could push them to a totally different tax bracket.

Double-checking possible breaks:

Personally filing a tax return will provide a taxpayer with insights into the likeliest tax deductions. One will discover if they have adequate expenses to itemize or if they’re able to make any deductible expenditures by the final day of the year.

College expenses:

As far as education is concerned, one can pay tuition for his/her upcoming semester tuition by December 31st and then record the expense as a 2011 expense; this may be in light of the fact that schools will remain closed until the following year.

There are a number of education tax breaks that may be useful; both for one’s education and tax purposes. For example, the Lifetime Learning facility can assist an individual in meeting the costs of his/her education for career advancement.

Assistance from home:

During winter, there are various energy-efficient improvements that one can make in order to considerably reduce tax and heating bills. A taxpayer may boost his/her itemized deductions for a year by paying January’s mortgage and property tax bills for the year by December 31st.

Spending FSA Cash:

If one happens to have some money left in his/her medical Flexible Spending Account (FSA) at the workplace, the IRS recommends for its use before year end so as to avoid forfeiture. Some firms give FSA owners a grace period of up to March 15th of the following year to spend the cash in the account.

Adjusting one’s Withholding:

Whenever one’s draft tax return shows that he/she is going to owe a little more than they initially thought they would, chances of interest and penalties being levied are high. One can forestall such an eventuality by adding extra withholding to the final pay slip of the year.

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What You Need to Do to Avoid Undeliverable Tax Refunds

December 20, 2011 By

This festive season, if you were giving $1,253, what would you use it for? That amount represents the average amount in tax refunds that were returned to the Internal Revenue Service, due to the fact that the U.S. Postal service couldn’t deliver the checks. Currently, the U.S. Government has decided to return the money, estimated to be about $153 million, to the 99,123 owners.

Surprisingly, more than 99,000 people filed for tax returns expecting to get refunds and they didn’t inquire when the checks failed to appear. It is interesting because this money amounts to the total amount of money these individuals overpaid in taxes to the IRS. This is hardly something new, as it has been occurring for a while now. Yearly, the IRS gets tens of thousands of mails sent back to them in refund checks. In some other cases, the checks are returned because the address that the tax payer submitted is incorrect.

It would be worthy to note that on most forms provided by the IRS, it is usually stated boldly for tax payers to double check their entries before submitting them. That means checking the accuracy of your Social Security number and your mailing address. Sometimes, some people try to cash your refund check while more righteous people try to mail it back to the rightful owner. It is very advisable to be careful with such delicate details.

Another nagging problem that could be the case is bad handwriting. Sometimes, the address entered is usually correct, but bad or illegible handwriting could make it difficult for the IRS employee to process your refund, hence, entering the wrong information into the database. A more reliable solution to this simple problem would be to file for your taxes online. That way, the forms are easier to read and if you e-file them, your files bypasses the IRS entry clerks.

Finally, some people unfortunately file a return and end up relocating from the address in which they filled on their form to new home; this is common among college students.

No matter the reason for unclaimed refunds, your money may be somewhere hanging in there, waiting for you to reach it and all the Internal Revenue Service needs from you to process your funds is a valid address.

If you think you fall in this category of undelivered funds, you can go to the IRS website and look for their online tracker, “Where is My Refund?” It would produce the status of your refund and a status of their repayment plan and in some instances how to put an end to your undeliverable funds issue. If you prefer to place a call, you can forward inquiries to the IRS’s automated tracking toll-free telephone number.

Next year, in together with using tax software and e-filing systems, you can try direct deposit. With the frown that appears on most faces from all the complexities of filing, a refund may be the best way to turn that frown upside down, but some avoidable errors can make that hope impossible.

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Do You Have Undelivered Refund Checks? What does the IRS Have to Say?

December 19, 2011 By

How does cash from Uncle Sam sound as a Christmas gift? In an update to taxpayers made this year, the Internal Revenue Service delivered an announcement to the effect that it is seeking to refund in excess of $150 million in tax refund checks that were not delivered to specific taxpayers. All in all, about 99,000 taxpayers will qualify for refund checks this year. Majority of these checks include those that could not be delivered as a result of errors in mailing addresses or other contingencies. The average sum of undelivered refund checks amounted to $1,500 in this financial year alone.

The main aim of these recommendations by the taxman was to forestall delivery problems in the future and to suggest the implementation of an e-filing protocol to adequately deal with the problem.

Taxpayers who are of the opinion that their refund check may have been returned to the taxman as undelivered should employ the use of the “Where’s My Refund?” portal on the official website of the IRS. This tool will give all the necessary details relating to the status of their refund and, in some instances, instructions on how to deal with the problems.

Those who decide to check on their refund through the phone will obtain instructions on ways to update their addresses. Taxpayers can access the Service through telephone by dialing the number 1-800-829-1954.

Although only a small number of checks mailed out by the tax agency are returned as without being delivered, individuals can put a stop to stolen, lost, or undelivered checks by opting for direct deposits at the time they are filing either electronic or paper tax returns. In 2010, well in excess of 78 million taxpayers selected to get their refund through direct deposit. Taxpayers can also choose to receive their cash straight into their bank account, allocate the refunds to a number of financial accounts, or even purchase a savings bond.

The taxman also recommends that people file their tax returns electronically because doing so reduces or totally eliminates the risk of lost paper filings. Furthermore, electronic filing reduces errors on tax returns and makes the refund process faster. Almost 8 out of every 10 taxpayers filed their returns electronically last year. This type of filing, coupled with direct deposits, is the best choice for taxpayers as it is fast, easy to follow, and safe.

Members of the public should be aware that the tax agency does not contact taxpayers using email to inform them of any refunds, and also does not request for fiscal or personal information through email. Email messages, purportedly from the IRS, are phishing scams.  The agency urges people obtaining such messages not to give away any personal information so sought, not to click on any links, or reply to the message so as to avoid giving way to viruses that can infect their computer databases.  The best method through which an individual can verify the status of any refund is by going directly to IRS official website, and using the portal mentioned above.

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