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Audit-Proofing your Tax Returns
Sep 3, 2011
As I have told you, in 2010, the IRS made it mandatory that tax preparers electronically file all personal tax returns. They have reaped the savings in the form of reduced personnel costs that are no longer necessary to process returns that had been mailed to them during past years. Now, this reduction in labor costs means that they have a surplus of money available to spend elsewhere. They will unfortunately spend this extra money on the hiring of additional auditors. They have set a goal of at least 5 percent of all personal returns that were filed in 2009 to be audited. Those returns that have high expenses on Schedule A, such as high contributions or employee expenses, are “audit triggers” that could possibly cause the IRS to select the return for audit. A Schedule C for a sole proprietor with high income and low net profit is also a possible audit consideration. A Schedule C Loss is even more likely to be an “audit trigger”. Losses on Schedule E for rental property are also possible candidates for audits. This means that some of you have an increased risk of being audited. Beginning in May of 2011, the IRS has begun their auditing campaign on 2009 returns.
Tax avoidance is not a crime. As defined, it is the structuring of your affairs so as to pay the least amount of tax that you legally are obliged to pay. In other words, you can deduct every expense that you are legally entitled to deduct. However, tax evasion is a crime. Tax evasion is the paying of less tax than you legally should owe by deducting expenses that are higher than you actually have. To help you to protect yourself, I have decided to begin mailing clients an informational newsletter during the middle of the year, as well as at appointment time. This will help in tax planning opportunities. We are also available, for a reasonable fee, from May 1st thru December 31st each year for consultation appointments that are more specific to your business or tax planning needs.This brief letter also explains the basic rules for being prepared in the event of an audit by doing things correctly in the first place so that you will owe no additional tax in the event of an audit. Please read it and acquaint yourself with the rules for deducting expenses if you are not aware of them. In all instances, you must keep receipts, bank statements, and canceled checks as proof of all deductions claimed for a minimum of three years from the date of filing of the return.
In January we will mail a client organizer for the particular schedule you used on the 2010 tax return, such as Schedule A, C, or E. This organizer will help you by showing you the expense types and amounts you claimed in 2010 in one column, with a column for you to write in your 2011 amounts that you actually have receipts for and wish to claim. Please bring it to your tax appointment.
We recommend that you use it, so that you do not overlook expenses that you have receipts for and are entitled to claim.
Basic rules for Schedule A items that you can deduct:
1. Insurance premiums for medical, dental, vision, supplemental, Medicare or sick and accident insurance are deductible. Co-payments and deductible parts of medical bills you actually paid for out of pocket can be deducted. Also deductible are prescription medicine expenses, hospitals, doctors, clinics, dental, and eye care. But, you never can deduct pre-tax insurance.
2. State tax withheld from your pay and state income taxes paid or sales tax expenses, whichever is the greater amount but not both. You can also deduct property tax paid on your house or on other land you own. For our New Orleans clients, you may deduct personal property tax paid on automobiles, trucks or boats.
3. Mortgage interest paid on your primary and a secondary residence or land on which you intend to build a home is deductible. You may also deduct points or loan origination fees on the purchase of a new home, but you must amortize or deduct them over the life of the loan if it is a refinancing of the home. Investment interest to the extent of the investment income is deductible. Mortgage insurance premiums are also deductible.
4. Contributions paid by check to a church or other charitable organization are deductible, but never cash, unless a receipt is provided. You can deduct non cash clothing or other items donated to Goodwill or Salvation Army if you get a dated receipt and make a list of the items donated listing the approximate price you originally paid, and what you reasonably believe to be the fair market value.
5. Casualty losses are deductible only to the extent that they exceed 10% of your total income for the year plus $100.
6. Employee business expenses are deductible if necessary for the job. Any reimbursements from the employer are deducted from the allowable employee expense deduction. These expenses are many and quite varied depending on the job, and you should discuss the situation with me. Some typical expenses are vehicle expenses for the job, not going to or from work, but traveling for the employer during the day to pick things up or go to various locations. You can only deduct the business part of these expenses, and you need to keep a log of use. Business bridge tolls and parking, safety shoes or boots, special uniforms unsuitable for everyday wear, licenses, continuing education are some others. There are many more. We have a brochure available at your request that goes into detail regarding the vehicle expense.
7. Tax preparation, financial planning, safety deposit box fees are deductible as well as other miscellaneous deductions. Ask us!
8. Gambling losses are deductible, but only to the extent of the winnings. You should keep a log or some record of your trips, or obtain a win-loss letter from the casino if they track your gambling wagers.
Basic rules for Schedule C, a sole proprietorship business:
1. You should open up a separate business checking account for a business, if you do not already have one. You should deposit all revenue earned or collected, both checks and cash, in the account. You should keep deposit slips or records of income, such as invoices or register tapes. You should pay all business bills from the account. Do not pay any personal expenses from the account, but instead, write a check payable to yourself. Deposit this check into your personal checking account to pay your personal expenses. Save all receipts to correspond to the checks written and save the bank statements with cancelled checks for a minimum of three years from the date of filing of the tax return. Currently, this is for 2008, 2009, 2010, and 2011. You can discard the 2008 information on April 15, 2012. Mid size to large businesses should keep track of their income and expenses with Quickbooks or Peachtree accounting. If you do not have time to do this, we offer this service at a reasonable cost.
2. Meal or entertainment expenses are deductible on Schedule C, if the meal is for out of town overnight travel, or for a business purpose, such as a meal with a client or with a business associate discussing business. You must save the receipt and write on the back of the receipt the name of the client or associate and brief description. These expenses are limited to 50% of the total amount. We also have a brochure on deducting meal expense that is available for request.
3. Gifts to clients are limited to $25 per client. You also must keep the receipt and write on the back of it the name of client.
4. Vehicle expenses are deductible as actual (Gasoline, Repairs, Insurance, Maintenance, and Depreciation), or as an allowable federal prevailing rate. However, they must be prorated at only the business portion of use. You need to keep a mileage log, unless the vehicle is strictly a business vehicle used only within the business. Even then you will have to take beginning of the year odometer reading and end of the year reading. You must be able to prove the mileage claimed such as with repair receipts that list the odometer reading when the vehicle was placed in the shop, or with a dated picture at beginning and end of year. Once again, we have a brochure available at your request that goes into detail regarding vehicle expense.
5. Office in home expenses are deductible if you have a separate office in your home, and it is necessary for you to either see clients, or maintain records of your business including invoicing of clients or paying bills of the business. The rules are complex for this. We have a brochure available that thoroughly explains the handling of these expenses, if you wish to request one.
6. If you pay sub contractors more than $600 per year, a 1099 reporting form must be issued to them. We can prepare the 1099 for you if you ask us and provide us with the necessary information. If you have employees, you need to withhold taxes and send the tax to the IRS quarterly. Reports also must be filed each quarter. We can provide you with payroll services, and prepare the quarterly reports if you ask us to. You must be careful not to treat employees as sub contractors. We have a brochure, from the IRS, that describes the differences between employees and subcontractors. Please request it if you need it.
7. Any other expense that is an ordinary and necessary business expense for your business is deductible. However, you must save all receipts, bank statements, cancelled checks, and credit card statements as proof. We can also provide you with bookkeeping services if you are too busy to keep track of this information. Ask us about it if you are interested, but you still will be responsible for saving the actual receipts, cancelled checks, bank statements, credit card statements and proof of income for three years.
Basic rules for Schedule E, Rental Property:
1. You should open up a separate business account, just as with a business, to track the income and expenses of the rental property. You should not pay personal bills from this account. Deposit all monthly rent collected or paid to you by H.U.D.
2. Advertising, Cleaning, Commissions, Insurance, Repairs, Mortgage interest, Property tax, supplies, pest control, grounds keeping and utilities expenses are deductible.
3. Travel expenses are deductible, but you must keep a log showing the trips made from your house to the property and back if you are checking on the property, collecting the rent, or going to the bank for the property. You may also claim mileage to or from the hardware or building supply store to make repairs to the property. The mileage is at the prevailing federal allowable business rate. We also have a brochure that goes into much more detail for handling of rental property income and expense if you request one.
Category: Taxes
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