Overtime Option

New overtime option? Under a new bill proposed in the House, employers can offer to reward employees with extra time off in lieu of receiving pay at the usual time-and-a-half overtime rate. The choice would be voluntary. Any unused compensatory time at the end of a year would be converted to overtime pay.

www.SmallBizTax.net
Small Business Tax Strategies Vol. 12 No. 7 July 2017

Silence is Golden

Did the IRS just signal the end of Obamacare? Under the Affordable Care Act (ACA), supported by President Obama, the agency would reject tax returns if taxpayers indicated that they didn’t have qualified health insurance, unless they were exempted. If Line 61 of Form 1040 was left silent, the return was to be rejected. The reason: Nonexempt individuals without qualifying coverage would owe a penalty. Now the IRS says that it will process returns whether there’s an entry on Line 61 or not.

Small Business Tax Strategies Vol. 12 No. 4 April 2017

Strategies for Avoiding CP2000 Notices

Here’s what happens. The IRS Automated Underreporter Unit (AUR) matches income reported on individual tax returns with the income that is reported to the IRS from various third parties (e.g., employers, financial institutions, and banks) and recorded in its wage and income transcript file.

If there is a difference, the IRS “flags” the tax return for further review and may issue a CP2000 Notice. The notice tells the tax­payer that there are proposed tax changes because of a mismatch between the income shown on their return and the income reported to the IRS. It is worth noting that the IRS system does not work in real-time but rather runs in a batch mode.

There are two kinds of individual tax AUR notices:

  • A “hard” CP2000, which shows proposed changes and additional tax due
  • A “soft” CP2501, which asks for clarification regarding missing income items

Both require a response, although the CP2501 requests it far more politely.

The business versions of the CP2000/CP2501 are the CP2030/CP2531. IRS Publication 5181 is a great reference on CP2000/CP2030 Notices.

These notices are a fact of life because our taxpayers do not always present us with all their income documents when we are preparing their tax returns. In fact, in recent years, the IRS AUR has sent out over 4 million CP2000 Notices.’

Typical reasons run the gamut and include:

  • “I didn’t tell you about the inherited U.S. savings bonds I cashed in because my hairdresser told me they were tax-free:’
  • “I didn’t tell you about my Roth IRA distribution because it is tax-free:’ (Roth distributions are fully taxable if they are not shown on the tax return. The taxpayer must prove basis to prove they are not taxable. However, they could be subject to a penalty)
  • “I moved and didn’t get my 1099-R for my $50,000 early distribution:’
  • “I exercised my non-qualified stock options (Code V in Box 12 of the W-2) and paid normal income tax on the gain. TurboTax did not prompt me to enter the sale on Schedule D:’

As we say in the trade, you can’t make this stuff up!

A return flagged for unreported income can still be subject to examination at a later date. When a taxpayer gets a CP2000 Notice, they often think they are being “audited?’ It is important

to help the taxpayer understand exactly what the notice means and what his or her response options are.

Possible CP2000/CP2501 responses include:

  • No response, in which case the proposed tax will be assessed
  • Respond and agree
  • Respond and disagree
  • Respond and disagree, providing compelling documentation as well as background information in an attempt to reduce or eliminate the penalties associ­ated with any increased tax.

Taxpayers have 60 days from the date of notice to respond to the CP2000/CP2501. The notice actually says 30 days, but it pro­vides for 60 days if the taxpayer is out of the country. Since the IRS doesn’t know whether or not someone is out of the country, 60 days has become the standard.

I have gotten involved in responding to CP2000 Notices after the Notice of Deficiency was issued (I have faxed a response to the AUR Group on the 30th day of the 90-day

NOD and received a No Change on the 85th day). If no response is received after a late “hail Mary” fax, the taxpayer can still file a pro se petition to the Tax Court and continue to work on resolution while the case makes its way through docketing and appeals.

IRS Wage and Income Transcript Database Development

The IRS wage and income transcript data­base begins to populate after the tax year is over. For example, 2015 wage and income data were added to this database throughout calendar year 2016. In early 2017, the data­base will be complete, and the IRS will run its return-matching program against the database. The 12 months required for the database to be developed is the reason for the substantial delay between filing a return and getting a notice.

When the IRS runs its matching program, it flags returns showing a mismatch with Transcript Code 922, Unreported Income. This should occur in February and March 2017 for the 2015 tax year.

2015 PATH Act Changes

In an effort to reduce tax identity theft, the new deadline for filing W-2s and 1099-MISC with Box 7 NEC (non-employee compensa­tion) has been moved up to January 31. This will allow the IRS to verify that the income reported on 2016 returns “matches” the income reported to the IRS prior to sending out refunds with refundable credits.

It is not clear how this new W-2 program will affect the AUR matching program and its associated CP2000 Notices. Stay tuned.

Strategies for Preventing

CP2000 Notices

The way to prevent a CP2000 Notice is to report all income properly. Since our clients exercise some judgement on the tax docu­ments they present to us, we can’t depend on the information we receive from them to be complete. Here are a few strategies we can use to at least reduce the frequency of CP2000 Notices.

File an extension and verify income. Some of us work with troubled taxpayers (procrastinators) and have a Form 2848 or 8821 in place for each of our clients. We create a preliminary tax return prior to April 15 and ask our taxpayers to send in the preliminary balance with their extension.

In the August/September timeframe, we pull the IRS wage and income transcripts and verify that we have accounted for all the income reported to the IRS. Occasionally, I have seen new income documents hit the IRS transcripts as late as early October. Following this extension-and-verify-income procedure generally will reduce or eliminate CP2000 Notices.

Duplicate the IRS AUR procedure. A great strategy to check for an income-return mis­match is to duplicate the IRS AUR procedure. Late in the year, pull the wage and income transcripts from the previous year on each return we prepared and look for differences between reported income and the tax return.

This is a lot of work, but it can be simpli­fied with the wage and income summary, a one-page summary of all the income items. Typically, you will have a Form 8821 or 2848 on each client, so you can easily pull tran­scripts via IRS e-Services using commercially available software.

Catch the error before the IRS does. Take advantage of the IRS matching process and do your own search for the Code 922 Unreported Income in the IRS account transcripts in the February to March 2017 timeframe. The IRS has done the heavy lifting; you just look at the results.

When you do so, you can verify the mis­match between the filed return and the IRS wage and income transcript; if there is an error or omission, you can amend the return months before the AUR CP2000 Notice is mailed to your client. This saves the embarrassment of your client receiving an IRS notice (they hate that) and avoids having to pay some inter­est and the ever-possible 20 percent penalty (accuracy-related or substantial understate­ment of tax).

Monitoring these transcripts has an interesting benefit. The IRS is flagging income that was left off the return—but if the omitted income results in a refund, it appears to be current IRS policy to not send a CP2000 Notice. I have seen two of these in the past several years and have filed amended returns for refunds (a W-2 with high withholding was omitted from the return).

The policy of many tax professionals is to cover penalties and interest if they make an error; detecting and correcting these errors early saves the cost of penalties and reduces the potential interest.

Understanding the IRS

Matching Program Process

If the IRS Matching Program detects unre­ported income, a Code 922 is placed in the account transcript with the corresponding date. Typically, the transcript will appear as:

When the IRS sends a notice to the taxpayer, the date is changed to match the date on the CP2000 Notice. Typically, the transcript will be updated to:

With each ensuing IRS letter, the date of the 922 code on the transcript will be updated to the date on the most recent letter. If no response is received, the final letter will be a CP3219A Notice of

Deficiency (commonly known as the 90-day letter). If no response is received after the CP3219A is issued, the tax deter­mination is final, and the additional tax due is posted to the account transcript. If the taxpayer later wants to contest the assessed tax, they can submit an Audit Reconsideration request with supporting documentation to attempt to get the tax reduced to the correct amount.

In 2014, the AUR unit ran the matching program several times throughout the year. By observation, it appears that IRS budget cuts have reduced the number of matching runs. The IRS could increase the frequency of its computer-matching runs, since the majority of the data is available sooner.

If you are monitoring the account tran­scripts to check on AUR unreported income, it is prudent to pull the account transcripts every two weeks using commercially available software to continuously check on the status of each account. This strategy has the additional benefit of scanning for returns that have been flagged for examination (Code 420). The time between a return being flagged for exam and the actual exam letter has been observed to be as long as 18 months.

If a return is flagged for exam, you can review the return and, in some cases, offer an amended return to self-correct the issue that appeared to cause the exam flag. We have seen cases where the audit was short-circuited and the IRS accepted the changes on the amended return with no further correspondence.

In this time of budget constraints, we have also seen a timely filed 2012 return flagged for exam in late 2014 (Code 420), and seven months later saw a code 421 Exam Closed with no letters sent to the tax­payer and the Power of Attorney (POA). It appears that the audit would have to begin with less than 12 months remaining on the three-year audit statute—IRS policy is to have more than a year remaining on the statute before an exam is initiated. When an audit flag is detected on a prior year return, the current year return should be prepared with the expectation of an audit. All items should have documentation to back up every number on the current year return.

This all may sound like a lot of work, but it’s what we do. Enrolled agents are the go-to tax professionals when it comes to pulling and analyzing IRS transcripts to monitor and protect our clients.
EA Journal Vol. 35 No. 2 March/April 2017

Tax Tips for Farmers

Farms include ranches, ranges and orchards. Some raise livestock, poultry or fish. Others grow fruits or vegetables. Individuals report their farm income on Schedule F, Profit or Loss from Farming. If you own a farm, here are some tips to help at tax time:

 

Crop insurance.  Insurance payments from crop damage count as income. Generally, you should report these payments in the year you get them.

 

Sale of items purchased for resale.  If you sold livestock or items that you bought for resale, you must report the sale. Your profit or loss is the difference between your selling price and your basis in the item. Basis is usually the cost of the item. Your cost may also include other amounts you paid such as sales tax and freight.

 

Weather-related sales.  Bad weather such as a drought or flood may force you to sell more livestock than you normally would in a year. If so, you may be able to delay reporting a gain from the sale of the extra animals.

 

Farm expenses.  Farmers can deduct ordinary and necessary expenses they paid for their business. An ordinary expense is a common and accepted cost for that type of business. A necessary expense means a cost that is proper for that business.

 

Employee wages.  You can deduct reasonable wages you paid to your farm’s full and part-time workers. You must withhold Social Security, Medicare and income taxes from their wages.

 

Loan repayment. You can only deduct the interest you paid on a loan if the loan is used for your farming business. You can’t deduct interest you paid on a loan that you used for personal expenses.

 

Net operating losses.  If your expenses are more than income for the year, you may have a net operating loss. You can carry that loss over to other years and deduct it. You may get a refund of part or all of the income tax you paid in prior years. You may also be able to lower your tax in future years.

 

Farm income averaging.  You may be able to average some or all of the current year’s farm income by spreading it out over the past three years. This may cut your taxes if your farm income is high in the current year and low in one or more of the past three years.

 

Tax credit or refund.  You may be able to claim a tax credit or refund of excise taxes you paid on fuel used on your farm for farming purposes.

Top Eight Tax Tips about Deducting Charitable Contributions

When you give a gift to charity that helps the lives of others in need. It may also help you at tax time. You may be able to claim the gift as a deduction that may lower your tax. Here are eight tax tips you should know about deducting your gifts to charity:

 

Qualified Charities.  You must donate to a qualified charity if you want to deduct the gift. You can’t deduct gifts to individuals, political organizations or candidates. To check the status of a charity, use the IRS Select Check tool.

 

Itemized Deduction.  To deduct your contributions, you must file Form 1040 and itemize deductions.

 

Benefit in Return.  If you get something in return for your donation, your deduction is limited. You can only deduct the amount of your gift that is more than the value of what you got in return. Examples of benefits include merchandise, meals, tickets to an event or other goods and services.

 

Donated Property.  If you gave property instead of cash, the deduction is usually that item’s fair market value. Fair market value is generally the price you would get if you sold the property on the open market.

 

Clothing and Household Items.  Used clothing and household items must be in at least good condition to be deductible in most cases. Special rules apply to cars, boats and other types of property donations.

 

Form 8283.  You must file Form 8283, Noncash Charitable Contributions, if your deduction for all noncash gifts is more than $500 for the year.

 

Records to Keep.  You must keep records to prove the amount of the contributions you made during the year. The kind of records you must keep depends on the amount and type of your donation. For example, you must have a written record of any cash you donate, regardless of the amount, in order to claim a deduction. For more about what records to keep refer to Publication 526.

 

Donations of $250 or More.  To claim a deduction for donated cash or goods of $250 or more, you must have a written statement from the charity. It must show the amount of the donation and a description of any property given. It must also say whether the organization provided any goods or services in exchange for the gift.

Tips You Should Know about Employee Business Expenses

If you paid for work-related expenses out of your own pocket, you may be able to deduct those costs. In most cases, you claim allowable expenses on Schedule A, Itemized Deductions. Here are some tips that you should know about this deduction.

Ordinary and Necessary.  You can only deduct unreimbursed expenses that are ordinary and necessary to your work as an employee. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is appropriate and helpful to your business.

Expense Examples.  Some costs that you may be able to deduct include:

  • Required work clothes or uniforms that are not appropriate for everyday use.
  • Supplies and tools you use on the job.
  • Business use of your car.
  • Business meals and entertainment.
  • Business travel away from home.
  • Business use of your home.
  • Work-related education.

This list is not all-inclusive. Special rules apply if your employer reimbursed you for your expenses.

Forms to Use.  In most cases you report your expenses on Form 2106. After you figure your allowable expenses, you then list the total on Schedule A as a miscellaneous deduction. You can deduct the amount that is more than two percent of your adjusted gross income.

Educator Expenses.  If you are a K through 12 teacher or educator, you may be able to deduct up to $250 of certain expenses you paid for in 2014. These may include books, supplies, equipment, and other materials used in the classroom. You claim this deduction as an adjustment on your tax return, rather than as an itemized deduction. This deduction had expired at the end of 2013. A recent tax law extended it for one year, through Dec. 31, 2014.

Keep Records.  You must keep records to prove the expenses you deduct. For what records to keep, see Publication 17, Your Federal Income Tax.

 

Tax Tips about Reporting Foreign Income

Are you a U.S. citizen or resident who worked abroad last year? Did you receive income from a foreign source in 2014? If you answered ‘yes’ to either of those questions here are seven tax tips you should know about foreign income:

 

Report Worldwide Income.  By law, U.S. citizens and residents must report their worldwide income. This includes income from foreign trusts, and foreign bank and securities accounts.

 

File Required Tax Forms.  You may need to file Schedule B, Interest and Ordinary Dividends, with your U.S. tax return. You may also need to file Form 8938, Statement of Specified Foreign Financial Assets. In some cases, you may need to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts.

 

Review the Foreign Earned Income Exclusion.  If you live and work abroad, you may be able to claim the foreign earned income exclusion. If you qualify, you won’t pay tax on up to $99,200 of your wages and other foreign earned income in 2014.

 

Don’t Overlook Credits and Deductions.  You may be able to take a tax credit or a deduction for income taxes you paid to a foreign country. These benefits can reduce your taxes if both countries tax the same income.

 

Tax Filing Extension is Available.  If you live outside the U.S. and can’t file your tax return by April 15, you may qualify for an automatic two-month extension of time to file. That will give you until June 16, 2015, to file your U.S. tax return. This extension also applies to those serving in the military outside the U.S. You will need to attach a statement to your return explaining why you qualify for the extension.

Five Key Points about Children with Investment Income

Special tax rules may apply to some children who receive investment income. The rules may affect the amount of tax and how to report the income. Here are five key points to keep in mind if your child has investment income:

 

Investment Income.  Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.

 

Parent’s Tax Rate.  If your child’s total investment income is more than $2,000 then your tax rate may apply to part of that income instead of your child’s tax rate.

 

Parent’s Return.  You may be able to include your child’s investment income on your tax return if it was less than $10,000 for the year. If you make this choice, then your child will not have to file his or her own return.

 

Child’s Return.  If your child’s investment income was $10,000 or more in 2014 then the child must file their own return.

 

Net Investment Income Tax.  Your child may be subject to the Net Investment Income Tax if they must file Form 8615.

Top Six Tips about the Home Office Deduction

If you use your home for business, you may be able to deduct expenses for the business use of your home. If you qualify you can claim the deduction whether you rent or own your home. If you qualify for the deduction you may use either the simplified method or the regular method to claim your deduction. Here are six tips that you should know about the home office deduction.

Regular and Exclusive Use.  As a general rule, you must use a part of your home regularly and exclusively for business purposes. The part of your home used for business must also be:

-Your principal place of business, or

-A place where you meet clients or customers in the normal course of business, or

-A separate structure not attached to your home. Examples could include a garage or a studio.

Simplified Option.  If you use the simplified option, you multiply the allowable square footage of your office by a rate of $5. The maximum footage allowed is 300 square feet. This option will save you time because it simplifies how you figure and claim the deduction. It will also make it easier for you to keep records. This option does not change the criteria for who may claim a home office deduction.

Regular Method.  If you use the regular method, the home office deduction includes certain costs that you paid for your home. For example, if you rent your home, part of the rent you paid may qualify. If you own your home, part of the mortgage interest, taxes and utilities you paid may qualify. The amount you can deduct usually depends on the percentage of your home used for business.

Deduction Limit.  If your gross income from the business use of your home is less than your expenses, the deduction for some expenses may be limited.

Self-Employed.  If you are self-employed and choose the regular method, use Form 8829, Expenses for Business Use of Your Home, to figure the amount you can deduct. You can claim your deduction using either method on Schedule C, Profit or Loss From Business.

Employees.  If you are an employee, you must meet additional rules to claim the deduction. For example, your business use must also be for the convenience of your employer. If you qualify, you claim the deduction on Schedule A, Itemized Deductions.

AFS Taxsavers Staff Updates

Goodbye David Allen. David has taken on a new position with a different organization. (Yes, in the middle of tax season!) We want to ensure our clients that with this change, Taxsavers will be working hard to make this transition as smooth as possible.  We have all hands on deck to assist each client with their account.  If you have any questions or concerns about your account please contact Gary.  

Welcome aboard Marcia Birch to the AFS Taxsavers family! Marcia is a graduate of the University of Michigan- Dearborn.  She currently works in the finance department of Toshiba Business Solutions and has worked closely with her family’s business. Marcia is a great addition to Taxsavers as she is a hardworking, motivated individual with a wide knowledge base of QuickBooks.

Check out the AFS Taxsavers Facebook page for company updates!