This act has wide ranging impacts to the income tax system for both businesses and individuals. Most of the changes take effect in 2018, however there are a few that are retroactive to 2017.
When we prepare your taxes, we will give you insight into how the new tax law will impact your taxes in 2018. There are many moving pieces of the tax law that changed so it would impossible to make general statements on how it would affect everyone. For most people and businesses, the changes should be positive.
Wondering if you are missing a deduction on your 2016 tax return? Well worry no more, through the rest of December we are offering a free review of your 2016 tax return. Call for an appointment either in person or virtually.
A newer IRS scam is coming to a mailbox near year. Scammers are sending out CP2000 letters that are demanding payment for tax return errors. It is not uncommon to get these letters if something was missed on the tax return. Below is as short write-up on the issue. If you have gotten a letter you can speak with us about it to determine if it is legitimate.
IRS Alerts Practitioner Groups of Fraudulent CP 2000 and ACA Letters
In a November 16 IRS National Public Liaison (NPL) meeting, IRS alerted tax practitioner groups of another variation of the fraudulent CP 2000, Notice of Proposed Adjustment for underpayment/Overpayment, scam where fraudsters are sending these notices to taxpayers asking them if they agree with IRS’s findings and to send them a check. The letters also inform the taxpayers that if they disagree with the IRS’s findings, that they should still send the fraudsters a check. In addition, fraudsters are sending taxpayers fake notices relating to unpaid taxes in relation to the Affordable Care Act, while also giving these taxpayers an indication that they may report them to immigration services. Again, the fraudsters ask the taxpayers if they agree with the IRS’s findings and to send the fraudsters a check, and if they disagree, to also mail the fraudsters a check.
I have recently become an Tax Services Endorsed Local Provider for Dave Ramsey’s company Ramsey Solutions. He is primarily known for his call in radio shows on personal finance and the 7 Baby Steps for getting your financial life under control. He runs 9 week personal financial classes called Financial Peace University throughout the United States.
Here is a link to his website https://www.daveramsey.com
People are concerned that when they pass away or are mentally incapacitated that their family will not be able to track down all their financial information. It is normally recommended that you keep all your information in a notebook or similar spot. This is hard to keep up to date and with so much of our life being transferred online it is difficult print it out and then get it into a notebook.
A shortcut which will capture a majority of your financial information is your yearly tax return. If you keep all the documents such as the 1099s and W2s with the tax return, your family will quickly be able to track down your assets. If you have a bill for your safety deposit box, throw that in there also so they at least know what bank has the box.
A fallback is to pull these records from the IRS transcripts. They will need to request an IRS specific Power of Attorney, provide the IRS with a Letters Testamentary from the court if they are deceased or a Durable Power of Attorney is they are alive.
First I’ll say there nothing wrong with doing your own income tax returns using any of the tax return programs or the good old pen and paper method. I’ve seen many taxpayer prepared returns that were spot on. I’ve also seen the horror stories on these types of returns, but lets focus on the benefits of a professional preparer, specifically an Enrolled Agent or a CPA.
- Greater investment in tax education. To become an Enrolled Agent you need to study and pass a series of 3 exams that run 3-1/2 hours each. Then we are required to have at a minimum of 72 hours of documented continuing education over a period of 3 years. Most EA’s greatly exceed this minimum by reading professional tax magazines, on-line training, professional meetings and tax seminars.
- Access to reference databases and professional organizations. Professional preparers have access to proprietary knowledge databases, manuals and quick reference material that is more detailed than standard off the shelf tax reference books. We have access to other experienced tax professionals within our professional societies and other tax experts for consultation on difficult situations.
- Sophisticated tax software. For example Intuit that makes Turbotax also produces professional versions that allow much greater flexibility in producing the return. This is not question and answer based software, but dataset input and analysis software. Most of this software will run several thousand dollars a year for licensing.
- Experience with hundreds or thousands of tax returns and scenarios. Like any task or job experience results in a better final product. We know what questions to ask to find deductions and keep our clients out of trouble with the IRS. There are several gray areas in tax administration and we know how to navigate those areas.
- It saves you time. We’ve already done the research and are ready to go at tax time. In the time it would take you to read up on the tax changes I will already have your return completed. You benefit from our economy of scale.
- There are unknown unknowns out there. Not every tax issue is addressed or correctly addressed on the internet. You might not understand exactly what Turbotax is asking and misinterpret what is meant. I’ve seen this situation cost taxpayers thousands of dollars.
- We optimize your tax refund. Often there are several ways to account for college spending, but which way is the best way? When your children start making their own money is it better to include them on your return or have them file their own? Should you file married jointly or separately? Should you be a sole proprietor or a corporation? These are the tax issues we work through each day to come up with the best results for our clients.
If you feel competent to complete your own return and many people are, then go for it. If you have some doubts then at least have a professional review your return. We provide tax return review and tax consultation for several clients that go the DYI route. If you are interested in any of our services just give us a call.
If you owe the IRS money you have 6 basic options. Here is a quick rundown:
- Pay them in full. If you have the money this is normally the best option as it stops the accumulation of penalties and interest.
- Pay them in installments. If you are short on money this is a good option as it will normally stop the IRS’ bank levies and let you get your finances in order. If you look at all your creditors the IRS has the most power to attach your bank account and assets. They are not all powerful but the laws back them up.
- Can’t pay anything, go into Currently Not Collectible (CNC). You will have to prove that you don’t have the funds to pay them at all. This is common after a job loss and you simply don’t have enough income or savings left after meeting your minimal living expenses. This doesn’t make the bill go away or stop the penalties and interest but it gets the IRS off your back for some time.
- Bankruptcy. I’m not an attorney, but this can be an option if the debt is overwhelming. However IRS debt is difficult to eliminate. Some tax debts are not bankrupt-able and normally the debt needs to be 3 years old. If you haven’t filed a tax return the clock hasn’t started to run on that debt.
- Run out the Statue of Limitations. Normally the statue of limitations is 10 years, but there are exemptions. Again you need to have filed your tax return for the clock to start. If you don’t have the money and will never have the money this can be a good option.
- Offer in Compromise. This is the one you hear on all the TV and radio commercials. It’s all based on what money you have, your current income, expected income and how much time is left on the statue of limitations. Yes the IRS cuts deals all the time, but don’t expect to get rid of a $10,000 debt when you are making $70,000 and the IRS has 7 years to collect that debt. It’s actually pretty common sense, the IRS wants the money and to move one, but they don’t want to leave money on the table either.
With all these options the devil is in the details. If you are in collections with the IRS give us a call we can take a look at your situation and see how we can help. Normally when you get a professional involved the IRS will stand down until a plan can be worked out.
What we see in the tax business are small businesses that are running a profitable business but their bookkeeping processes don’t hold up under an IRS audit. When you have difficulties proving your income and expenses to the IRS you then have to in essence recreate the business’ books properly. This is expensive for the owner(s) as this type of bookkeeping comes at a premium cost. Audits are normally done years after the tax return is filed and it is difficult to remember all the details of your business transactions, which could result in unallowed deductions or additions to business income.
Here are a couple of common stumbling areas for small business bookkeeping that we see over and over:
- Combining personal and business accounts. There is nothing illegal about doing this, but it greatly complicates an audit and brings your personal accounts into the audit process. If you sell a personal car on Craigslist and that income goes into your personal account which is included in the audit, then you have to prove that the sale of your personal car was not business income. In an audit the IRS will go through every single deposit and you have to show that it was not business income. Personal expenses paid out of your business account can be identified as an owner’s draw, however an excessive amount of personal expenses will cause the auditor to question if some of the business expenses are in fact personal in nature and not deductible. For LLCs and Corporations this starts to breakdown the legal distinction between the person and the company.
- Not keeping invoices or receipts. Several businesses use their credit card statements that show where the purchase was made as their method of proof of a business expense. This is not a fool proof plan. In a Washington State audit if you have made a purchase over the internet the credit card statement will not show if you paid sales tax. In an audit if you can’t prove via an invoice that you paid the sales tax, then you will be required to pay use tax (the same rate as sales tax). Since I run a tax business a purchase from Staples would logically be a business expense and accepted in an audit, however a purchase from Lowes would be questioned and I’d likely need to show an receipt proving that what I purchased was needed for the business. The best plan it to scan in all your receipts and write any notes about the purchase on the receipt or invoice.
- Not using a professional bookkeeper. Bookkeeping seems pretty easy to do, until it isn’t. A professional bookkeeper is a cost effective method of keeping your business records straight. At the very least have a professional set up your books and show you how to make the entries correctly. Going back to fix the books is incredibly frustrating and time consuming for a business owner. I know since I’ve had to do it myself. A professional will also bring other accounting/tax knowledge to your team besides just the books themselves.
We don’t do bookkeeping as part of our tax services but we can refer you to reputable companies that do bookkeeping. Good luck with your business!