Reposted as an article by JENNIFER KING – from Lawyers.com

The deadline for filing your income tax return is rapidly approaching. Filers are often tempted to fudge the facts on their tax returns in an effort to get a bigger refund. But that tactic can backfire on you, resulting in an Internal Revenue Service Audit. Here are six of the more common ways of increasing your chances of an audit.

6. Suffer certain types of losses. If you claim a business loss or rental property loss, it may send up red flags. In recent years, many people have decided to go into business for themselves, and ended up with expenses that exceed their business income. Taxpayers often try to deduct hobby expenses as a business loss (“I really expect my cat circus to turn a profit!”), and if they don’t think your business stands a reasonable chance of succeeding, your loss may be denied. Real estate rental income, on the other hand, is usually considered passive income and losses may not deductible.

5. Claim that your car is used only for business. The IRS knows that few automobiles are used strictly for business—and it’s wary of taxpayers who claim 100% business use of their motor vehicle. If you’re making such a claim, you’d better have the documentation to back it up.

4. Take higher-than-average deductions or claim exceptionally large charitable contributions. It’s no surprise that the IRS compares your return to the average return of other taxpayers reporting similar income levels. If you’re paying less tax because you’re taking much bigger deductions, it sends up a warning flag and may trigger an IRS tax audit. (Before you file your tax return, some tax-prep software will tell you how your return compares to other returns in the same income bracket. It’s a useful guide to knowing how your return stacks up.)

3. Claim a home office deduction. For years, taxpayers have viewed the home office deduction—which allows you to deduct a portion of your rent, mortgage payment, real estate taxes and utilities—as an easy way to reduce their tax bill. But the IRS takes a firm position on what does and does not qualify as a home office. Before you deduct your home office, read the rules carefully to ensure that yours qualifies.

2. Don’t report all of your earned income. Remember those W-2s and 1099 forms you’ve been receiving? Well, you’re not the only one — the IRS gets a copy, too. If you forget to include some of that taxable income on your tax return, the IRS will notice. And don’t think you’re off the hook if a company forgets to send you a W-2 or 1099. The IRS expects you to report the income even if you’re missing the documentation.

1. Earn more than $200,000 a year. On average, the Internal Revenue Service audits 1.11% of all returns. But the audit rate increases as your income rises. For those who earn at least $200,000, the audit rate is 3.93% of all tax returns. And if you earn a cool million annually? You have about a one-in-eight chance of being audited.

Bonus: Make a math error. There are formal IRS audits, and then there are unofficial audits. The formal kind is what most people fear. But if you make a silly mistake on your return—such as a math error in your favor—the IRS will spot it. Last year, 4.7 million taxpayers got letters from the IRS notifying them that they’d made a mistake and owed more money. But that letter from the IRS doesn’t always bring bad news—another 4.6 million learned their corrected mistakes actually entitled them to a bigger refund.

If You’re Notified of an Audit

So what happens if the IRS tells you that you’re being audited? First, it’s important to remember that being selected for an audit doesn’t automatically mean you’re guilty of doing anything wrong. There may have been something in your tax return that got you flagged for an audit, or you may have been randomly selected.

“Most normal people dread an audit,” says Virginia-based tax lawyer Burton J. Haynes. “At best, it takes time and perhaps money for legal and accounting help. At worst, it can reveal understatements of income and overstatements of deductions, or even intentional fraud warranting prosecution and prison. Very few audits become criminal cases, but it does happen.”

Haynes says that the better your recordkeeping and the more accurate your tax return, the less concerned you should be if you’re notified of an audit. That said, it is a legitimate cause for worry for some taxpayers.

“For many it is merely an inconvenience, though for some a costly inconvenience,” Haynes says. “And for an unfortunate few, it is the beginning of a road that leads to criminal investigation, prosecution, incarceration, humiliation and ruin. Thus the lesson is to avoid giving the IRS a stick to beat you with, lest you wind up broke and with lumps on your head.”

Is Business Capital Expensing a Good or Bad Decision?

As a reminder, businesses may continue to accelerate the expensing of qualified capital purchases.

Bonus Depreciation

Business Expense
The Tax Relief Act of 2010 expands the additional first-year bonus depreciation to 100% of the cost of qualified property. To qualify the property must be purchased and placed in service after 9/8/2010 and before 1/1/2012. For property to qualify it must be “original use” property. This typically means new property, but that is not always the case. In 2012, this first year bonus depreciation falls back to 50%. Not interested in accelerating your depreciation expense? Then you may choose to opt out of this provision for each category (class) of property you place in service.
Section 179
The Small Business Jobs Act also extends the annual $500,000 amount of qualified assets that may be expensed (instead of depreciated) for 2011. This benefit can be maximized as long as total assets purchased by your firm do not exceed $2 million. Unlike bonus depreciation, qualified property under Section 179 also includes used property.

So is taking advantage of these provisions good for your business? Not always.Remember if you use these special asset “expensing” provisions, depreciation expense is given up in future years. This is especially important to plan for if your company is organized as a “flow through” entity like an S-Corporation as more income could be exposed to higher marginal tax brackets in a number of future years. How many future years? It depends on the recovery period of the asset, but the additional tax exposure could be from two to six years!

More importantly, if you think Congress will increase tax rates to help balance the budget, your future income may be exposed to a higher tax rate than your current income.

What should you do?

If you have some predictability in your business, it probably makes sense to forecast your projected pre-tax earnings with and without the accelerated depreciation to ensure you are making the right tax decision over the long-term.

Six simple ideas to teach you children to save their money

Teaching our children sound financial principles such as how to save and invest wisely will serve your children for the rest of their lives. Unfortunately, this topic is rarely covered in school and with the desire for instant gratification imbedded into our culture it is a wonder anyone saves money. Here are a few ideas to consider to help your children become smart savers.

1. Start as early as possible.
Encourage your child to develop good savings habits at an early age. Create your own “interest payment opportunities” by adding to their savings periodically for every dollar in their piggy bank.

2. Set goals. Help your child save for something meaningful to them. Embracing the concept of saving for the future versus giving into the need to buy it now can save your child from a lifetime of financial hardships.

3. Save a consistent amount. Consider giving your child an allowance. As part of this process talk about dividing the allowance into saving, spending, and charitable giving buckets. By putting a set amount into each bucket the “habit” of savings can be established.

4. Show your bills. When paying bills consider showing your children how much things cost. While you do not want your child to worry about money, you also want them to know that heat and electricity cost money. This can lead to a discussion about how you save enough money to pay for daily and monthly bills.

5. Have them pay for things. When you purchase a small item at the store, have your child pay for it. The act of giving money and receiving change not only builds practical math skills, it also helps them visualize the need to have money to buy the things you need.

6. Consider a bank account. Your child’s initial bank is probably in the form of a classic piggy bank. At some point have them go with you to a bank and open an account. Since savings rates are so low, an idea could be to augment the child’s saving deposit with “family interest”. For example, for every dollar your child deposits in a savings account, you could deposit ten cents in “family interest”.

The concepts of interest, savings accounts, stocks, bonds, and other means of growing your wealth were foreign to all of us at one time. By making this a normal part of discussion in your home, your children can start to see the benefits of savings and will hopefully find the world of finance and financial instruments less intimidating as they get older.

Middle Class Tax Relief and Job Creation Act of 2012

tax charleston

The payroll tax holiday gets an extension

In late February, Washington passed another Tax Relief and Job Creation bill that extends the 2% payroll tax break for all employees through 2012. This means W-2 employees will pay 4.2% versus the normal 6.2% and self-employed will pay 10.4% versus 12.4% for the balance of the year. Medicare payments remain unchanged.

Background

In late 2011, Congress extended the lower Social Security tax (OASDI portion of FICA) through February, 2012. The short two-month extension was all Congress could agree to because of disagreement on how to pay for the tax cut. When Congress came back from their holiday break, bills were introduced to extend this tax break through 2012. Also included in the bill were unemployment benefit payment extensions.

What does it mean?

Review your paystubs once again. Some companies were able to make the change, some were not. Simply make sure the FICA portion you pay equals 4.2% of the first $110,100 of your wages in 2012.

What does it cost? The cost of this portion of the bill is estimated to be $93.2 billion over 11 years. The tax-cut is being funded by transferring money from the “general fund”. Basically one part of the government loaning money to another part of the government.

More money to pay back. While some of the cost of the additional tax breaks and increased benefits are being paid for by selling our airwaves to private companies, the majority is being added to the debt.

I thought that Social Security was going broke? So why are they doing this now? Good question, and a highly debated topic. That’s one to ask your representative.

How much do I benefit? The Whitehouse/Congress assumes the average family will receive approximately $1,000 in additional take home pay.

What about my January/February Wages? Those who received more than the maximum allowed benefit for the reduced tax in January and February will not have to repay the excess benefit. Instead, wage withholding adjustments will need to be made over the balance of 2012.

WAScpa

6 Ways to Increase Your Chances of an IRS Tax Audit

Business Capital Expensing