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Direct Sellers and MLM’s! – the IRS is looking for you!

In an ongoing effort to find unreported or underreported revenues, the IRS has now created a video for Direct Sellers and MLM’s.

This video is to “help” you properly record and report your income each year.  It also helps you determine if you really have a business or a hobby.  (The tax laws treat each differently).

The video Direct Sellers is about an hour long but very information and instructive.  It will help you understand the value of getting and keeping your bookkeeping in order and help you understand what the IRS will be looking for in case of an audit.

By the way, the IRS has created an ATG (audit technique guide) for its agents for the Retail Industry.    They include Direct Sellers in the Retail Industry.   This guide walks agents through the audit process for the Retail industry.  If interested, you can view the guide, again quite instructive.

As usual, if you have any questions, please feel free to reach me at 240-356-5050.   To Your Financial Health!


Loan Modifications – Joy and Pain

Last year, Charles and Gloria were giddy with happiness.  Finally, after struggling for over a year with the loan modification process, they had been approved.

The modification would save them $700/month on their note, which equals $8,400/year.

Shortly thereafter, they received more good news!  Their property tax bill was being reduced $150/month or $1,800/year.  The county had re-assessed their home and the value of their home had dropped.

This was all good news… but a new problem was brewing.

Charles and Gloria now had an additional $850/month or $10,200 to work with.  What they didn’t have now was the tax write-off that went with the mortgage interest and the property taxes!

At our tax appointment, we discovered that they were in the 20% tax bracket.  As a result, their tax liability was $2,040 higher than usual because of the mortgage interest and property tax savings.   This was a major surprise to them.  They were still getting a refund but not as much as they had planned on.

Charles and Gloria were blessed that they did not end up owing taxes.  Many other families may not be so blessed.

So what should you do – Depending on your situation, here are 4 solutions

  1. Adjust your withholdings down to pay more taxes in during the year.
  2. Put more money into your 401k or 403b plan if you can
  3. Save 20%-25% of the new income to cover your taxes
  4. Some combination of all 3.

Hopefully you’ve found this helpful.

If you have any questions, please feel free to call me at 240-356-5050 or if you have any relevant comments on this blog, please feel to comment.

IRS Announces Tax Filing Delays!

Out of a limb

The Christmas Gift of Extended Tax Benefits may turn out to be a New Year’s Headache for both Tax filers and Tax Preparers.

The IRS announced on Thursday, December 23, 2010 that their systems will need to be reprogrammed and they would not be ready to accept tax filings for certain forms until at least mid-February, 2011.

Those affected include:

• Taxpayers who claim itemized deductions on Schedule A. Itemized deductions include mortgage interest, charitable deductions, medical and dental expenses, state and local taxes.

• Taxpayers who claim a deduction for tuition and fees. This is a so-called “above-the-line” deduction, which means taxpayers don’t have to itemize to claim it.

Parents and students who claim other education credits, including the American Opportunity Tax Credit and Lifetime Learning Credit, will not have to wait to file, the IRS said, assuming they don’t itemize.

• Taxpayers who claim the educator expense deduction. This deduction, which is also an above-the-line deduction, allows teachers to deduct up to $250 in out-of-pocket costs for classroom materials.

“The majority of taxpayers will be able to fill out their tax returns and file them as they normally do,” IRS Commissioner Doug Shulman said. “We will do everything we can to minimize the impact of recent tax law changes on other taxpayers. The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season.”

If you will have to itemize for 2010 or have tuitions and fees to be deducted, plan your finances now to anticipate the delay in possibly receiving a refund.

If you have any questions, please feel free to call me at 240-356-5050 or if you have any relevant comments on this blog, please feel to comment.

Early Christmas Gift from Congress – Tax Cuts Extended!

What's Hot

The President and Congress have given the country an early Christmas gift. They have passed an extension of the 2001-2003 Bush era tax cuts.

What this means is that your income tax bill won’t automatically increase, at least not for the next 2 years. Congress will have to revisit this issue again in 2012. They are hoping, however, that by then the economy will be much stronger as a result of the decisions made today.

Had this extension not been made, you could have seen your tax rate increase anywhere from 3% to as much as 5% depending upon your tax bracket. You also would have lost the teacher expenses deduction and had a return of the “Marriage” penalty in the tax rates.

Instead you keep these items for the next 2 years and also get a boost in your paycheck for 2011. Effective January 1, 2011, there will be a 2% reduction in the Social Security withholding tax. This reduction could mean as much as $2,136 back into your net paycheck during 2011. To offset the revenue lost on the Social Security change, Congress has removed the $400 Making Work Pay tax credit.

I believe that this tax extension is a good move regardless of any political reasoning behind. It will help the economy somewhat but until there is a move on either jobs creation or freeing up loans for small business, we still have a long road ahead.

Either way, enjoy your gift and if you have questions, please feel free to give me a call at 240-356-5050. Also, feel free to make relevent comments on this post.

To Your Financial Health.

How to Survive an Audit – More Info!

After my last post, I decided there was a little more information you might need regarding how an IRS audit might be triggered.

The IRS has 3 databases – The Individual Master File, the Individual Return Master File and the Automated Under Reporting System. By combining data from these three systems, the IRS is able to trigger audits specifically for you.

The Individual Master File (IMF) contains your personal information and all income information reported each year for you – your w2’s, interest income, 1099’s, etc. – are all captured in this one file.

The Individual Return Master File (IRMF) contains the information for your completed tax returns for each year you have filed. It even notes what returns you have not filed.

The Automated Under Reporting System (AUR) is created by combining the information in the IMF and the IRMF. The AUR compares the information reported on you with your tax return details for each year.

If there are any significant differences – for example, you didn’t report $1,000 in Unemployment Compensation – you may get a letter saying the IRS has amended your return. Worse, yet you may get a letter inviting you to visit them and bring your last 3 years returns and supporting documents.

Recently, one of my client had missed reporting a significant amount of interest income on her tax return. (She had not received the 1099-INT for the interest income). The AUR System caught the error and she was called in for an audit. This also triggered an audit of her small business as well. The examiner requested that she bring her 2008 and 2009 tax returns and supporting documents for review.

As a result, my client probably spent 8 hours getting ready for the audit and another 3 hours at the audit plus 4 hours of my time to help them review their returns and attend the audit with them. This caused her time, money and aggravation all because of a missed Interest income statement.

Your takeaway on this is to create a system for gathering all of your tax documents in 1 place each year and to be consistent with it. Also take time to compare the documents from your previous years tax return to the items you’ve received or should receive for the current year. This will help you make sure you haven’t missed anything as you go to have your tax return prepared.

Hopefully this gives you a better understanding of how some audits come about and how you can avoid being singled out specifically.

If you have any questions, please feel free to give me a call at 240-356-5050 and also feel free to make relevant comments to the blog.

To Your Financial Health

How to Survive an IRS Audit!

Imagine you go to your mailbox and surprise, surprise you find a letter from THE IRS! They are asking you to visit them for a few hours and oh, by the way, bring your last 3 years of tax returns and every receipt or document that supports the deductions that you made. Now you’re breaking into a cold sweat.

Recently, for one of my clients, this was not imaginery, it was for real.

No one knows who’ll be audited. Your chances of being audited are very low. However, if you are audited, be prepared to defend yourself. The keys to surviving an IRS audit are 1) having an excellent bookkeeping system, 2) being able to “follow the money” and 3) understanding your return.

Bookkeeping System

Whether individual, family or business owner, you need to have some sort of bookkeeping system in place. It can be a formal software package, a spreadsheet or a notebook. No matter what you use, you must have a system that allows you to prove and support any income or deductions that appear on your tax return. In my opinion, the ideal system allows you to track your income and expenses in detail on a month to month basis. This allows you to build consistency in your reporting and also to see income or expense trends.

Follow the Money

You must also have a retrieval system for all the supporting documents in your bookkeeping system. It is not enough to have a cancelled check. You must also have the invoice or receipt that provides the reason you made that payment. In case of an audit, you will be asked to provide the receipts, so set up a system that allows you to present the receipt to the examiner.

(Yes, I know receipts can fade and be unreadable. Consider scanning them into your computer and then backing up the files. Consider the program, “NeatReceipts” for this purpose.)

Understand Your Return

Finally, remember your return is your return, not the tax preparer’s. You will be the person audited and not the tax preparer. You must understand the numbers on your return and how and why they are there. Spend some time with your prepaper and have him/her review any item you have questions about and be sure you understand it. Don’t let anything go by that you can’t support. Remember you will be the one who has to pay!

Some specific areas that the IRS will look at are –

    Charitable contributions
    Non-Cash donations
    Cellphone Usage
    Excessive Medical Expenses
    Unreimbursed Employee Expenses
    Business Use of Automobile – Mileage or Actual Expenses
    Schedule C- Profit and Loss from Business
    Rental Income and Expenses

Unfortunately, these three keys – Excellent Bookkeeping System, Follow the Money and Understanding Your Return, won’t keep you from getting audited. However, they will make your chances of having to pay additional taxes much smaller.

If you have questions, please feel free to contact me at 240-356-5050 and also feel free to add your comments to this blog. (Now go find those receipts and get them filed!)

How to Save on Your 2010 Taxes – Year End Tax Tip #1

Here are 3 Ideas that you can use to save on your taxes this upcoming tax season.

    1. Consult your investment advisor regarding selling any stocks that have lost money this year. You can use the losses to reduce your tax liability.

    2. Purchase qualifying energy-star compliant doors, windows and appliances to take advantage of the Residential Energy Tax Credit and

    3. Make your contributions or non-cash donations to your favorite church or charity before January 1st, 2010 and remember to get your receipt.

I’ll be sharing more on these and other tax saving ideas over the next few weeks. If you have any questions or need assistance, please feel free to give me a call at 240-356-5050.

Business Owners – Let the IRS Help Pay for Private School!

Did you know that the tax laws could help you pay for Private School?

Well, not directly, but almost.

Last week, we talked about tax planning and how, if properly done, could save you, the business owner, thousands of dollars. We also talked about choosing the right business entity from which to operate.

As I promised, I’ll share with you how the IRS laws can help you pay a portion of your child’s college tuition or private school tution through a legal business deduction. You’ll be surprised how easy it is when done right.

One of the best known and least used tax planning techniques is to properly hire your family including children into your business. Children as young as 7 years old can work legally in your business. The key is that the job must be real, hours are tracked and salary is paid to the child through his/her own bank account.

How this helps is that up to $5,700 can be paid without the child owning any federal taxes and the next $8,375 is taxed at 10%. This would equal a salary of $14,075 with federal and social security taxes owed of only $1,915. You’d lose out on the $1,000 tax credit but the business deductions would be more than worth it.

The money earned could then be used to pay for private school tuition curtesy of the IRS code and your business. How’s that for “higher education”?

This tax technique can also extend to your spouse. Next week I’ll talk about how hiring your spouse can reduce your health insurance costs.

Through Tax Planning you can get ahead of the IRS and use the immense tax code to your advantage, but you must do your planning during the tax year and not when your returns are being prepared.

Remember, pass this blog post along to help your fellow business owners.

As usual, if I can help you keep more of what you make, give me a call at 301-773-7060.

To Your Financial Health!