by Jim Magary | Mar 31, 2016 | Tax Help
Employment Tax Recordkeeping
You should Keep all records of employment taxes for at least four years after filing the 4th quarter for the year.
These should be available for IRS review. Records should include:
• Your employer identification number.
• Amounts and dates of all wage, annuity, and pension payments.
• Amounts of tips reported.
• The fair market value of in-kind wages paid.
• Names, addresses, social security numbers, and occupations of employees and recipients.
• Any employee copies of Form W-2 that were returned to you as undeliverable.
• Dates of employment.
• Periods for which employees and recipients were paid while absent due to sickness or injury and the amount and weekly rate of payments you or third-party payers made to them.
• Copies of employees’ and recipients’ income tax withholding allowance certificates (Forms W-4, W-4P, W-4S, and W-4V).
• Dates and amounts of tax deposits you made.
• Copies of returns filed.
• Records of allocated tips.
• Records of fringe benefits provided, including substantiation.
by Jim Magary | Mar 31, 2016 | Tax Help
What is Taxable and Nontaxable Income?
You can receive income in the form of money, property, or services.
This section discusses many kinds of income that are taxable or nontaxable.
It includes discussions on employee wages and fringe benefits, and income from bartering, partnerships, S corporations, and royalties.
The information on this page should not be construed as all-inclusive.
Other steps may be appropriate for your specific type of business.
Generally, an amount included in your income is taxable unless it is specifically exempted by law. Income that is taxable must be reported on your return and is subject to tax.
Income that is nontaxable may have to be shown on your tax return but is not taxable.
Constructively-received income. You are generally taxed on income that is available to you, regardless of whether it is actually in your possession.
A valid check that you received or that was made available to you before the end of the tax year is considered income constructively received in that year, even if you do not cash the check or deposit it to your account until the next year.
For example, if the postal service tries to deliver a check to you on the last day of the tax year but you are not at home to receive it, you must include the amount in your income for that tax year.
If the check was mailed so that it could not possibly reach you until after the end of the tax year, and you could not otherwise get the funds before the end of the year, you include the amount in your income for the next year.
Assignment of income.
Income received by an agent for you is income you constructively received in the year the agent received it.
If you agree by contract that a third party is to receive income for you, you must include the amount in your income when the party receives it.
Example. You and your employer agree that part of your salary is to be paid directly to your former spouse. You must include that amount in your income when your former spouse receives it.
Prepaid income.
Prepaid income, such as compensation for future services, is generally included in your income in the year you receive it.
However, if you use an accrual method of accounting, you can defer prepaid income you receive for services to be performed before the end of the next tax year.
In this case, you include the payment in your income as you earn it by performing the services.
Employee Compensation
Generally, you must include in gross income everything you receive in payment for personal services. In addition to wages, salaries, commissions, fees, and tips, this includes other forms of compensation such as fringe benefits and stock options.
You should receive a Form W-2, Wage and Tax Statement, from your employer showing the pay you received for your services.
Childcare providers.
If you provide child care, either in the child’s home or in your home or other place of business, the pay you receive must be included in your income.
If you are not an employee, you are probably self-employed and must include payments for your services on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business.
You generally are not an employee unless you are subject to the will and control of the person who employs you as to what you are to do and how you are to do it.
Babysitting.
If you babysit for relatives or neighborhood children, whether on a regular basis or only periodically, the rules for childcare providers apply to you.
Fringe Benefits
Fringe benefits you receive in connection with the performance of your services are included in your income as compensation unless you pay fair market value for them or they are specifically excluded by law.
Abstaining from the performance of services (for example, under a covenant not to compete) is treated as the performance of services for purposes of these rules.
Recipient of fringe benefit.
You are the recipient of a fringe benefit if you perform the services for which the fringe benefit is provided.
You are considered to be the recipient even if it is given to another person, such as a member of your family.
An example is a car your employer gives to your spouse for services you perform. The car is considered to have been provided to you and not your spouse.
You do not have to be an employee of the provider to be a recipient of a fringe benefit.
If you are a partner, director, or independent contractor, you can also be the recipient of a fringe benefit.
Business and Investment Income
Rents from personal property.
If you rent out personal property, such as equipment or vehicles, how you report your income and expenses is generally determined by:
• Whether or not the rental activity is a business, and
• Whether or not the rental activity is conducted for profit.
Generally, if your primary purpose is income or profit and you are involved in the rental activity with continuity and regularity, your rental activity is a business.
Partnership Income
A partnership generally is not a taxable entity.
The income, gains, losses, deductions, and credits of a partnership are passed through to the partners based on each partner’s distributive share of these items.
Partner’s distributive share.
Your distributive share of partnership income, gains, losses, deductions, or credits generally is based on the partnership agreement.
You must report your distributive share of these items on your return whether or not they actually are distributed to you. However, your distributive share of the partnership losses is limited to the adjusted basis of your partnership interest at the end of the partnership year in which the losses took place.
Partnership return.
Although a partnership generally pays no tax, it must file an information return on Form 1065, U.S. Return of Partnership Income.
This shows the result of the partnership’s operations for its tax year and the items that must be passed through to the partners.
S Corporation Income
In general, an S corporation does not pay tax on its income. Instead, the income, losses, deductions, and credits of the corporation are passed through to the shareholders based on each shareholder’s pro rata share.
You must report your share of these items on your return. Generally, the items passed through to you will increase or decrease the basis of your S corporation stock as appropriate.
S corporation return.
An S corporation must file a return on Form 1120S, U.S. Income Tax Return for an S Corporation.
This shows the results of the corporation’s operations for its tax year and the items of income, losses, deductions, or credits that affect the shareholders’ individual income tax returns. For additional information, see the Instructions for Form 1120S.
Royalties
Royalties from copyrights, patents, and oil, gas and mineral properties are taxable as ordinary income.
You generally report royalties in Part I of Schedule E (Form 1040), Supplemental Income and Loss.
However, if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ.
Virtual Currencies
The sale or other exchange of virtual currencies, or the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment, generally has tax consequences that could result in tax liability.
This guidance applies to individuals and businesses that use virtual currencies.
Bartering
Bartering is an exchange of property or services.
You must include in your income, at the time received, the fair market value of property or services you receive in bartering.
by Jim Magary | Mar 31, 2016 | Tax Help
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 important points to keep in mind if your child has investment income:
1. Investment Income.
Investment income generally includes interest, dividends and capital gains. It also includes other unearned income, such as from a trust.
2. Parent’s Tax Rate.
If your child’s total investment income is more than $2,100 then your tax rate may apply to part of that income instead of your child’s tax rate. See the instructions for Form 8615, Tax for Certain Children Who Have Unearned Income.
3. Parent’s Return.
You may be able to include your child’s investment income on your tax return if it was less than $10,500 for the year. If you make this choice, then your child will not have to file his or her own return. See Form 8814, Parents’ Election to Report Child’s Interest and Dividends, for more.
4. Child’s Return.
If your child’s investment income was $10,500 or more in 2015 then the child must file their own return. File Form 8615 with the child’s federal tax return.
5. Net Investment Income Tax.
Your child may be subject to the Net Investment Income Tax if they must file Form 8615. Use Form 8960, Net Investment Income Tax, to figure this tax.
by Jim Magary | Mar 31, 2016 | Tax Help
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With or without tax with or without tax records reconstruction is possible.
If the Internal Revenue Service has set up a tax audit against you and has disallowed expenses because you had no receipts or no records the Cohan rule may be applicable.
If you have just received a letter and you’re going in for an IRS audit call us and talk to us about the best way to have a tax audit defense.
If you have already been audited you could ask for an IRS audit reconsideration.
What is a Audit Reconsideration’s
You got a notice from the IRS saying your tax return was audited (or the IRS created a return for you) and you owe taxes, and you disagree with the tax the IRS says that you owe.
In any of the four situations below, you can request an Audit Reconsideration – a process that reopens your audit with the IRS.
• You have new information about the audit
• You disagree with the tax the IRS says you owe
• You never appeared for the audit conference or sent the IRS any information
• You moved and never got the audit notice in the first place
You can’t request reconsideration if:
• You’ve already paid the full amount you owe. In that case, you must file a formal claim for refund with an Amended Return.
• You previously agreed to pay the amount you owe by signing an agreement such as a Form 906, Closing Agreement; an offer in compromise agreement; or an agreement on Form 870-AD with the Office of Appeals.
• The United States Tax Court, or another court, has issued a final determination that you owe the tax.
More about lost records and receipts below.
The Cohan Rule
Cohan rule is a rule applicable in tax law.
According to this rule, a taxpayer may approximate travel and entertainment expenses when no records exist, provided the taxpayer has taken all possible steps to provide documentation.
The standard was set in the case Cohan v. Commissioner, 39 F.2d 540 (2 d. Cir. 1930) in which the court held that the tax court may make a reasonable estimate of the allowable deduction, “bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making.”
The Cohan rule has been superseded since by section 274(d) of the Internal Revenue Code, which now governs the deductibility of entertainment and travel expenses.
Since 1962, travel and entertainment expenses have been only partly deductible and must be carefully documented. Here is where the experience of former IRS agents can help.
Some types of examples of using the Cohan rule:
Can be recreated if the basis for it is reasonable.
showing your calendar can be a reasonable basis for where you were and the types of travel expenses that may be allowed.
Can be valuable support for the reconstructed support.You can make statements under penalties of perjury.
Others can provide written supporting documentation as to where you weren’t things you did, meeting times and places.
So, who was George Cohan?
Cohan was a 1920’s vaudevillian who is probably most known to modern audiences as the man who wrote songs
“I’m a Yankee Doodle Dandy, Grand Old Flag and Give my Regards to Broadway”
Known in the decade before World War I as “the man who owned Broadway”, he is considered the father of American musical comedy.
His life and music were depicted in the Academy Award-winning film Yankee Doodle Dandy (1942) and the 1968 musical George M!.
A statue of Cohan in Times Square in New York City commemorates his contributions to American musical theatre.
however Cohan is better known for being the plaintiff in one of the most famous and enduring tax cases in ever American in history.
Cohan was audited and unable to produce receipts that showed the actual amount he spent for certain business expenses.
The IRS laid down the hammer and said” if you can’t prove how much you spent, you don’t get the deduction.”Kinda sounds like them.
The Cohan Rule as it has come to be known, stands for the theory that taxpayers may or can use estimates when they can show that there is some sort of factual foundation on which to base a reasonable approximation of the expense when taxpayers can prove that they had made a deductible expenditure but just cannot prove how much that expenditure might have been. A good majority of taxpayers are not good record keepers.
It changed the way IRS audits are handled when records or receipts are missing.
The Judge in the matter, got to lave the name, Judge Learned Hand
Circuit Court Judge Learned Hand said in an opinion that has been part of our common law for more than three-quarters of a century:
In the production of his plays Cohan was obliged to be free-handed in entertaining actors, employees, and, as he naively adds dramatic critics. He had also to travel much, at times with his attorney.
These expenses amounted to substantial sums, but he kept no account and probably could not have done so. At the trial before the Board he estimated that he had spent eleven thousand dollars in this fashion during the first six months of 1921, twenty-two thousand dollars, between July first, 1921 and June thirtieth, 1922, and as much for his following fiscal year, fifty-five thousand dollars in all.
The Board refused to allow him any part of this, on the ground that it was impossible to tell how much he had in fact spent, in the absence of any items or details. The question is how far this refusal is justified, in view of the finding that he had spent much and that the sums were allowable expenses. Absolute certainty in such matters is usually impossible and is not necessary; the Board should make as close an approximation as it can, bearing heavily if it chooses upon the taxpayer whose inexactitude is of his own making. But to allow nothing at all appears to us inconsistent with saying that something was spent.
True, we do not know how many trips Cohan made, nor how large his entertainments were; yet there was obviously some basis for computation, if necessary by drawing upon the Board’s personal estimates of the minimum of such expenses.
The amount may be trivial and unsatisfactory, but there was basis for some allowance, and it was wrong to refuse any, even though it were the traveling expenses of a single trip. It is not fatal that the result will inevitably be speculative; many important decisions must be such.
We think that the Board was in error as to this and must reconsider the evidence.
And the rest is tax history.
IRS Tax Audit Help + No Receipts, Lost Receipts + No Problem
by Jim Magary | Mar 30, 2016 | Tax Help
Affordable IRS Tax Audit Help, Tax Audit Defense – Former IRS Agents 1-866-700-1040
We have 205 years of direct tax experience, 65 years of working for the IRS in the local, district and regional offices. We worked as Agents, Instructors and in IRS Management.
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Be worry free, call us today. 1-866-700-1040
We are one of the nations most experienced IRS Tax audit defense help firms.
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Facts about IRS Tax Audits:
The IRS audits a total of 1,391,581 tax returns a year.
The IRS field agents complete more than 310,000 audits by office or business visits a year.
The IRS completes over 1,081,152 correspondence audits a year.
IRS has installed new software tracking systems with the development of the CADE 2 computer to spot and recognize tax audits more proficiently
IRS collected over $10 billion dollars a year from IRS tax audits.
IRS employs over 13,000 IRS auditors.
$5.2 billion dollars are collected through the IRS document matching program.
For truly professional IRS Tax Audit help contact former IRS Agents and Managers.
IRS Policy Statement P-4-21. It states
“The primary objective in selecting returns for examination is to promote the highest degree of voluntary compliance on the part of taxpayers.”
The IRS Tax Audit Examination Plan
The plan that is used by the IRS is based on long-range coverage planning, and objectives on the resources requested in the Congressional Budget.
From this, there is an established plan where staff years are allocated to all area IRS offices using resource allocation and a prescribed methodology.
Each Area Manager of the IRS is responsible for preparing an area response following instructions from the National Headquarters.
Staffing for the IRS Tax Audit
Staffing is based on the examination priorities that differs from office to office and region to region, front loaded programs set up before hand, historic examination rates adjusted to yield sure ended results and audits that match experience of the personnel.
Each region is excepted to produce tax audits and money from tax audits. IRS is funded thru results.
Why the IRS Audits Tax Returns
a. Front Loaded Programs
Front Loaded programs are those tax audits that IRS DC headquarters has determined are very important and a considerable amount of time must be spent on these programs and activities.
Each area has discussions within management as to what the programs should be for each region, district, and office.
Some of the programs are:
- Special enforcement programs – An example of this may be compliance of all flee market vendors, a program I was involved with
High Income non-filers – The IRS would get their information from a match program of w-2’s and 1099’s and match up social security numbers against filed returns
Abusive Tax Avoidance – This could be in the area of offshore activities
Offshore credit card program
National Research programs – Those set forth by management after doing a trends project
FBAR filing – IRS is currently targeting those with overseas bank accounts
Non- filers – IRS is presently forming a task force to seek non-filers though aggressive means.
b. The IRS makes sure there is balanced coverage.
The National Office makes sure there is a balanced approach for audit return delivery and tax compliance. Resources and inventory and the size of personnel all go into this formula.
The focus is blended into these areas:
Individual returns less than $100,000.
Individual returns greater than $100,000 but less than $200,000.
Individual returns greater than $ 200,000.
Small Business Corporations.
Small Business Flow-Through Entities – S Corporations, Fiduciaries and Partnerships.
c. Classification Plan
The IRS will prepare a plan, which is classified. A National DIF score indicator is placed on all Federal Income tax returns that are filed. Each tax return has certain factors that contribute to its score such as Gross Income, Adjusted Gross Income and line item expense.
There are several classified secrets that go into the DIF score.
Each tax return is processed through the IRS computer line item by line item.
A DIF score label is placed on every tax return with its DIF number. A tax examiner or Revenue Agent manually eyeballs each and every tax return with a high DIF score. The examiner then determine which return has the highest probability of tax audit success.
d. DIF Cutoff Score
The IRS will calculate the Area DIF cutoff score for each activity code, giving consideration to the selection rate.
This is the lowest DIF score necessary to secure the number of returns required for audit.
For example, if the return plan shows 225 returns for an activity code and the selection rate is 70%, the IRS will need to order 321 returns (225/70%).
The DIF Cut off Score is 500. The number of returns with DIF scores greater than 550 is 280, which is less than the number of returns required, so the lowest DIF score on an ordered return will be in the range of 500 to 550 and the DIF cutoff score is 500.
This is the IRS example as found in the IRS IRM section 4.
e. Where your case is worked
Examination inventory is assigned to IRS offices based on ZIP codes, using the Look up Tables at Martinsburg Computing Center.
f. High Assault Risk Areas
Certain ZIP code areas are identified as High Assault Risk Areas. There are special instructions the IRS has regarding these audits. These returns will be audited.
Survey of Examination Cases. The IRS can look over your case and close it with an eyeball look.
While cases should be selected and started in accordance with all guidelines, in a limited number of circumstances, there may be returns that appear in the “judgment of the examiner and manager” to warrant survey without taxpayer contact. That is to not even contact the taxpayer.
Cases delivered to the IRS area manager will generally fall into one of three categories: mandatory work, strategic (priority program) work, and non-strategic work.
Mandatory work includes nationally coordinated research projects such as NRP and employee audits (excludes “new” IRS employee audits)
Strategic work is identified annually in the Exam Program Letter which can be found at http://sbse.web.irs.gov/Exam/.
The procedures to survey strategic work and referrals from other business units, “new” employee audits and cases with previous taxpayer contact require an explanation for the rationale for the survey.
Cases that are not mandatory work, strategic work, a referral from another business unit, and are not part of an employee examination or research study may be surveyed based upon the professional judgment of the examiner with concurrence of the immediate supervisor.
Here are some factors to consider when determining whether to survey strategic work:
Taxpayer is in bankruptcy
Taxpayer has suffered an extreme hardship or illness
Taxpayer is deceased, or
Examiner has additional information that was not available during classification
This is in the complete judgment of the IRS tax auditor
From year to year the IRS changes their programs to keep everyone honest. However, after years of experience, a trained eye can know what tax returns will be pulled for audit.
Why use former IRS agents for IRS tax audit help
Being former IRS agents we know all the protocols, all the theories, all the settlement formulas and all the tax procedures the IRS will use for a IRS tax audit.
While most tax professionals learn their IRS Audit skill during on-the-job training, former IRS agents and managers actually know the insider programs and insider secrets to successful tax audits.
The team of tax professionals we have at fresh start tax not only were former IRS agents and managers but were former instructors with the Internal Revenue Service not only taught a local office but also taught in the district and regional IRS offices as well.
We are one of the most experienced tax firms when it comes to IRS tax audit help.
If you must a hire a professional tax firm it is wise to hire tax attorneys, certified public accountant or former IRS agents and managers who can provide you the very best IRS tax audit help.
There are many excellent tax firms to help you through this problem make sure you check on their experience and their Better Business Bureau rating.
IRS Tax Audit Help Phone Number = Audit Defense
