10 tax blunders that can cost you
Plenty of Americans bungle their return every year and pay extra in penalties as a result. Here's how you avoid making those same mistakes.
By David Ellis, CNNMoney.com staff writer
March 29 2007: 1:09 PM EDT
NEW YORK (CNNMoney.com) -- It's virtually guaranteed to happen every year - the IRS gets a slew of tax returns loaded with errors.
These mistakes can range from the petty - failing to sign your tax return - to pretty substantial, like neglecting to report all the income you earned over the past year.
Whether intentional or not, these tax goofs can delay your refund or end up leaving you on the hook with a bigger-than-anticipated tax bill or additional penalties.
Read the rest here.
Thursday, March 29, 2007
Wednesday, March 28, 2007
How to avoid an audit
How to Avoid an Audit of Your 2006 Taxes
by John Rossheim
Monster Senior Contributing Writer
Taxes are high enough; you don’t want to also pay penalties and interest because an audit reveals you’ve broken the rules. And Internal Revenue Service audits aren’t a vanishing anomaly; they’re on the upswing.
“Seven years ago, we had a gentler, kinder IRS,” says Sanford Botkin, a lawyer and CPA. But now, the IRS “has gotten almost nasty” in its pursuit of tax payments that could help reduce the federal deficit, Botkin says. Audits of individual returns rose nearly 21 percent from fiscal year 2004 to 2005, to more than 1.2 million, according to the IRS.
Now that you’ve been forewarned, forearm yourself with these tips for reducing the chances that the IRS will send you an invitation you can’t refuse.
Choose Your Tax Advisors and Preparer Carefully
A highly qualified tax preparer will help you nip many common audit triggers in the bud. “You want an honest but aggressive accountant,” says Botkin, a former legal specialist with the IRS. That means interviewing preparers to determine if they will pursue all legitimate tax breaks without claiming questionable deductions that could raise red flags.
Watch Your Itemized Deductions
A tax return reporting a moderate $60,000 income while claiming a very large $15,000 mortgage interest deduction smells fishy. So the IRS uses computer algorithms to detect the smell of a tax return on which the key amounts relate to each other in statistically unlikely ways. That’s why it’s wise to include worksheets, disclosures, documentation or other explanations of large deductions and big changes from one tax year to the next with your return.
Small deductions that add up can also draw unwanted attention. “Look out for excessive miscellaneous itemized deductions like unreimbursed business expenses,” says Sandra Abalos, managing partner of accounting firm Abalos and Associates PC.
Learn About Tighter Rules for Charitable Gifts, Whether Cash or In-Kind
Keep giving, but be sure the recipients give you something back: Adequate documentation of the donation and its tax-deductible status. “Charitable contribution paper requirements are more intense this year,” says Kenn Tacchino, an adjunct professor of tax and financial planning at Widener University.
Bob Greisman, a partner with accounting firm BDO Seidman LLC in Chicago concurs. “Be careful not to take large charitable contribution deductions if you can’t back them up,” he says.
Keep a Lid on Your Tirades
If you really want to avoid an audit, don’t attach a statement to your return saying you’ve declared your half-acre home lot a sovereign nation not subject to US taxation.
Beware of Garbage In, Garbage Out
Neither a human preparer nor tax-preparation software like TurboTax or TaxCut can help you avoid an audit if you supply them with incorrect data. Because a highly qualified professional may be more likely to sense that your numbers are off, “the IRS is looking harder at returns prepared with consumer software,” Botkin says.
Play the Calendar
Some tax experts claim that you can cut your chances of an audit by strategically choosing when you file. The idea is to file on or within a few days before the tax deadline, usually April 15. From January to March, returns arrive at the IRS much more slowly, so the chance that any given return will be examined rises. But be sure your return is postmarked on time; late returns trigger audits.
Remember that Neatness, Accuracy and Completeness Count
Carelessness catches the auditors’ attention. “The number 1 audit trigger is that you didn’t include all forms or sign them,” Tacchino says.
Don’t let handwriting or an arithmetic error land you in the auditor’s hot seat. Hard-to-read returns will peeve the data-entry specialist, and math mistakes will be caught by the IRS computer and may raise a red flag.
Finally, accept that while you can significantly reduce your chances of audit, you might still receive that unwanted envelope requesting more information or summoning you to a sit-down with the feds.
A small fraction of returns -- probably less than 1 percent -- are randomly chosen for audit. “We’re seeing more of these now,” Abalos says. “In Phoenix, the IRS has trained a whole bunch of kids on audits, so we’re getting pure random training audits.”
Orginal article can be found here.
by John Rossheim
Monster Senior Contributing Writer
Taxes are high enough; you don’t want to also pay penalties and interest because an audit reveals you’ve broken the rules. And Internal Revenue Service audits aren’t a vanishing anomaly; they’re on the upswing.
“Seven years ago, we had a gentler, kinder IRS,” says Sanford Botkin, a lawyer and CPA. But now, the IRS “has gotten almost nasty” in its pursuit of tax payments that could help reduce the federal deficit, Botkin says. Audits of individual returns rose nearly 21 percent from fiscal year 2004 to 2005, to more than 1.2 million, according to the IRS.
Now that you’ve been forewarned, forearm yourself with these tips for reducing the chances that the IRS will send you an invitation you can’t refuse.
Choose Your Tax Advisors and Preparer Carefully
A highly qualified tax preparer will help you nip many common audit triggers in the bud. “You want an honest but aggressive accountant,” says Botkin, a former legal specialist with the IRS. That means interviewing preparers to determine if they will pursue all legitimate tax breaks without claiming questionable deductions that could raise red flags.
Watch Your Itemized Deductions
A tax return reporting a moderate $60,000 income while claiming a very large $15,000 mortgage interest deduction smells fishy. So the IRS uses computer algorithms to detect the smell of a tax return on which the key amounts relate to each other in statistically unlikely ways. That’s why it’s wise to include worksheets, disclosures, documentation or other explanations of large deductions and big changes from one tax year to the next with your return.
Small deductions that add up can also draw unwanted attention. “Look out for excessive miscellaneous itemized deductions like unreimbursed business expenses,” says Sandra Abalos, managing partner of accounting firm Abalos and Associates PC.
Learn About Tighter Rules for Charitable Gifts, Whether Cash or In-Kind
Keep giving, but be sure the recipients give you something back: Adequate documentation of the donation and its tax-deductible status. “Charitable contribution paper requirements are more intense this year,” says Kenn Tacchino, an adjunct professor of tax and financial planning at Widener University.
Bob Greisman, a partner with accounting firm BDO Seidman LLC in Chicago concurs. “Be careful not to take large charitable contribution deductions if you can’t back them up,” he says.
Keep a Lid on Your Tirades
If you really want to avoid an audit, don’t attach a statement to your return saying you’ve declared your half-acre home lot a sovereign nation not subject to US taxation.
Beware of Garbage In, Garbage Out
Neither a human preparer nor tax-preparation software like TurboTax or TaxCut can help you avoid an audit if you supply them with incorrect data. Because a highly qualified professional may be more likely to sense that your numbers are off, “the IRS is looking harder at returns prepared with consumer software,” Botkin says.
Play the Calendar
Some tax experts claim that you can cut your chances of an audit by strategically choosing when you file. The idea is to file on or within a few days before the tax deadline, usually April 15. From January to March, returns arrive at the IRS much more slowly, so the chance that any given return will be examined rises. But be sure your return is postmarked on time; late returns trigger audits.
Remember that Neatness, Accuracy and Completeness Count
Carelessness catches the auditors’ attention. “The number 1 audit trigger is that you didn’t include all forms or sign them,” Tacchino says.
Don’t let handwriting or an arithmetic error land you in the auditor’s hot seat. Hard-to-read returns will peeve the data-entry specialist, and math mistakes will be caught by the IRS computer and may raise a red flag.
Finally, accept that while you can significantly reduce your chances of audit, you might still receive that unwanted envelope requesting more information or summoning you to a sit-down with the feds.
A small fraction of returns -- probably less than 1 percent -- are randomly chosen for audit. “We’re seeing more of these now,” Abalos says. “In Phoenix, the IRS has trained a whole bunch of kids on audits, so we’re getting pure random training audits.”
Orginal article can be found here.
10 Reasons You Aren't Rich
The reason why you aren't a millionaire (or on your way to becoming one) is really quite simple. You probably assume it's because you aren't earning enough money, but the truth is that for most people, whether or not you become a millionaire has very little to do with the amount of money you make. It's the way that you treat money in your daily life.
Here are 10 possible reasons you aren't a millionaire:
1. You Care What Your Neighbors Think: If you're competing against them and their material possessions, you're wasting your hard-earned money on toys to impress them instead of building your wealth.
2. You Aren't Patient: Until the era of credit cards, it was difficult to spend more than you had. That is not the case today. If you have credit card debt because you couldn't wait until you had enough money to purchase something in cash, you are making others wealthy while keeping yourself in debt.
3. You Have Bad Habits: Whether it's smoking, drinking, gambling or some other bad habit, the habit is using up a lot of money that could go toward building wealth. Most people don't realize that the cost of their bad habits extends far beyond the immediate cost. Take smoking, for example: It costs a lot more than the pack of cigarettes purchased. It also negatively affects your wealth in the form of higher insurance rates and decreased value of your home.
Read the rest here.
Tuesday, March 27, 2007
IRS Cracks Down on Charity Cheats
"IRS Cracks Down on Charity Cheats"
NEW YORK (CNNMoney.com) -- As a group, Americans are pretty philanthropic, but we also love to overstate our generosity. Especially when it comes time to filling out our annual tax return.
But, starting this year, the IRS is making that a whole lot tougher to do. Last summer, the tax man announced a new set of requirements about how Americans report their cash and household item donations in an effort to crack down on taxpayer abuse.
Health Insurance Covering S Corporation Shareholders
Health Insurance Covering S Corporation Shareholders
Health Insurance Covering S Corporation Shareholders
NOTE: This headliner is current through the publication date. Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.
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Headliner Volume 163
May 15, 2006
In many solely owned businesses, the owner of the business will purchase health insurance in his or her own name versus the name of the business. The type of entity may greatly affect where this insurance premium expense may be deducted on the individual’s personal income tax return.
In Chief Counsel Advice (CCA) 200524001, it was held that a self-employed individual who is a sole proprietor and who purchases health insurance in his or her own name may treat that as health insurance purchased in the name of the sole proprietor business. As such, the insurance would qualify under the provisions of IRC §162(l). Assuming the self-employed individual meets the other provisions of IRC §162(l), the individual may claim a deduction for the insurance premiums in arriving at his or her adjusted gross income; also referred to as an above-the-line deduction.
In contrast, if the business is operating as an S corporation, there is a different tax consequence if the individual who is the sole shareholder and sole employee, purchases the health insurance in his or her own name.
For certain fringe benefits paid by the S corporation, including health insurance premiums, the Internal Revenue Code (IRC) holds that the S corporation will be treated as a partnership and any shareholder who owns more than 2% (a 2% shareholder) of the S corporation stock will be treated as a partner of such partnership (IRC §1372(a)). Revenue Ruling 91-26 holds that accident and health insurance premiums paid by a partnership on behalf of a partner are guaranteed payments under §707(c) of the Code if the premiums are paid for services rendered in the capacity of a partner and to the extent the premiums are determined without regard to partnership income. As guaranteed payments, the premiums are deductible by the partnership under §162 (subject to the capitalization rules of §263) and includible in the recipient-partner's gross income under §61.
As such, the health insurance premiums paid by the S corporation would not be deductible by the S corporation as a fringe benefit but would be deductible by the S corporation as compensation to the 2% shareholder. The health insurance premiums paid by the S corporation for the 2% shareholder should be included in the 2% shareholder’s W-2.
IRC §162(l)(5) holds that a 2% shareholder that is treated as a partner under IRC §1372 will be treated as a self-employed person and, assuming all of the other provisions of IRC §162(l) are met, may deduct the health insurance premiums paid by the S corporation as an above-the-line deduction. It should be remembered that there are some limitations under IRC §162(l)(2). The one that often affects a 2% shareholder deals with other coverage. An above-the-line deduction is not allowed for any calendar month for which the shareholder is eligible to participate in any subsidized health plan maintained by any other employer of the shareholder or of the spouse of the shareholder.
Assuming there are no other subsidized health plans, the problem arises if the sole shareholder/ employee purchases the health insurance in his or her own name instead of that of the S corporation. In that case, the S corporation has not established a plan to provide medical care coverage, there is no fringe benefit paid to the 2% shareholder and the provisions of IRC §1372 do not come into play. Since the provisions of §1372 do not come into play, the S corporation is not treated as a partnership and the shareholder is not treated as a partner. Since the shareholder is not treated as a partner, the shareholder is not treated as self-employed and is not eligible for the above-the-line deduction treatment under IRC §162(l). The shareholder is still able to deduct the health insurance as an itemized deduction which is subject to the 7.5% AGI limitation.
Some states do not allow a corporation to purchase a group health plan with only one participant. This prevents the S corporation from acquiring a health plan and it requires the shareholder to purchase the plan in his or her own name. That state law limitation does not override the requirements that the S corporation must provide fringe benefits to its employees in order to have the 2% shareholder qualify for the IRC §162(l) benefits.
In summary, contrary to the holding in CCA 200524001 dealing with a sole proprietorship, a shareholder/employee is not allowed to purchase health insurance in the shareholder’s own name and still obtain the above-the-line deduction benefits of IRC §162(l).
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Note: This page contains one or more references to the Internal Revenue Code (IRC), Treasury Regulations, court cases, or other official tax guidance. References to these legal authorities are included for the convenience of those who would like to read the technical reference material. To access the applicable IRC sections, Treasury Regulations, or other official tax guidance, visit the Tax Code, Regulations, and Official Guidance page. To access any Tax Court case opinions issued after September 24, 1995, visit the Opinions Search page of the United States Tax Court.
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