IRS Screws Up, But Taxpayer Wins

They should make a reality show on the daily drama in a tax office. I volunteer to use my office as I think some of the garbage the IRS comes up with is a joke and I enjoy a good laugh.

Few of my regular clients get audited and for good reason. My team works hard at filing an accurate tax return the first time. We can get aggressive, but only if we have a nail to hang our hat on. No wingers. When audits do occur, they are usually short with a small or no change. The same cannot be said about audits that come from outside the firm.

A regular client received his audit notice recently and we went to work. Preparing a tax return and preparing for an audit are two different animals. Preparing a return requires numbers to be placed in the correct spot with consideration toward tax savings. An audit is the process of verifying those numbers. The audit in question stood the test when reviewed internally. The IRS disagreed.

The auditor, new to the job, disallowed all business miles. The taxpayer's mileage log was in perfect order. The IRS demanded that additional documentation not listed in the tax code for the deduction to be allowed. I told the auditor he was full of... (Sorry, this is a family blog.) After months of discussion and no progress, I filed suit in Tax Court. The auditor called when he received notice of the suit. I told him to get ready to look like an idiot in front of the judge, a real tax professional. The audit was dropped, no change.

All those resources wasted. And to think: Why does Congress want to cut the IRS's budget for 2012? If Revenue used their money more wisely they could cut their budget in half without sacrificing a thing. But then again, I don't run the IRS.

First-Time Homebuyer Credit Running Short

If you have plans to buy your first home, you better hurry. The first-time homebuyer credit expires November 30, 2009. There is no plan to extend the credit at this time.

The $8,000 credit is refundable, meaning, if your taxes are under $8,000, the excess will be paid to you. You can amend your 2008 tax return to claim the credit immediately.

The old credit for 2008, capped at $7,500 was no more than an interest-free loan. Those credits must be paid back in 15 equal installments starting with the 2010 tax return.

For 2009, the credit expanded to $8,000 and doesn't get paid back. The home must remain your primary residence for three years or the credit is forfeited.

You must close on the home prior to filing an amended return for the credit. Use form 5405. The IRS is slow sending checks for this credit due to the volume received and for fraud prevention. The credit has turned into a fraud problem for IRS, so they are reviewing all claims for the credit.

Follow-up note: After I wrote this post I read that there is an effort in Congress to extend the credit. Stay tuned; I'll fill you in if it is extended.

Times Up

If you haven't filed your taxes you may suffer a late filing fee. If you have a refund, no problem; if you owe, penalties and interest will apply.

Note on how to make a tax accountant happy: Get you stuff in early.

A couple people in my office waited so long (and brought in boxes) so I couldn't finish on time. Sorry. Get it in sooner or you risk financial loss.

Tax Deadline October 15th

The deadline to file your taxes is October 15th, assuming you filed an extension. After that... [friendly accountant drags index finger across his throat].

Audit Myths

Several tax blogs I've recently reviewed, including advice in the comments section, exercise the fear factor. This is concerning because fear of an audit is a poor guide for tax planning.

The best way to increase your chance of an audit is to have an income over $100,000. Refusing to reduce your taxes legally is stupid. I am not too harsh in this statement. If you qualify for a deduction, take it; if the income is excludable, don't claim it. Keep documentation to prove your position.

Any tax professional that encourages you to overpay your taxes as a strategy to prevent an audit is incompetent. Overpaying your taxes will not prevent an audit; it may let the IRS know you're a patsy willing to overpay even more. Follow the tax code to the letter and document your position.

There are more myths than tax code. The following is a list of audit FACTS:

• An audit is NOT an accusation. An audit is a request to verify your documentation.
• A third of audits end with little change or a refund.
• The IRS doesn't care if you are aggressive; they care if you cheat. By aggressive, I mean, you use the tax code to your advantage. By cheat, I mean, you write-off expenses that never happened or fail to claim all income.
• IRS auditors don't bite, not often at least. (You should laugh right about here.)
• It is natural to be nervous about an audit. Your tax professional can help you every step of the way. The auditor will need to speak with you at least once. Tell the truth. Review said truth with tax pro in advance. The remainder of the audit should be handled by the tax pro. If you have a business, the auditor will want to see the business. The remainder of the audit should happen at your accountant's office.
• You are not screwed if you lost a receipt. Depending on the amount and how many are missing, the IRS will probably use a reasonable number. My reasonable number is different than theirs, which leads us to,
• If the auditor disallows something you have the right to appeal. In 98% of appeals in my office, the amount owed the IRS is reduced, sometimes to $0.

When a tax pro says they had two or three audits in the last year and they were hell, look for a tax pro with more audit experience. I handle over 50 audits per year personally; all but one or two come in off the street.

Auditors put on their pants one leg at a time, same as you and me. Their job is to add up numbers and produce a report. The auditor's supervisor is the first level of appeals. A formal appeal is required if a satisfactory outcome isn't reached.

Audits and appeals take time. Find an experienced and trusted tax pro to guide you through the rough waters of a tax audit. Then, it just might be smooth sailing.

I Ain't Got No Money

Behind my desk sits a file with completed documents. The client refuses to pick-up or file the forms with the IRS because she is short the amount due. Of course, you realize, she is only digging the hole deeper.

Friendly advice from your local accountant: Always file on time, even if you can't pay. Why? Because there are several IRS penalties in this world: penalties for not paying on time and penalties for not filing. The last penalty is a self-inflicted wound. File on time and set-up a payment plan, thereby forgoing the late filing penalty.

This is the easy way to reduce your tax burden. It is bad enough you have to pay taxes, why volunteer to pay extra.

Links

Because I am on vacation I provided some interesting links below. I'll be back Monday.


http://online.wsj.com/article/SB125020653689430645.html

http://online.wsj.com/article/SB10001424052970204313604574328273572673730.html?mod=rss

A Wise Choice

Choosing a tax preparer is more than shopping price. There are varying levels of competence among tax preparers and it's possible to hang a shingle without any qualifications.

Tracking a tax preparer is difficult, even the IRS has little oversight (accountingToday Vol. 23, No. 12). Since your tax preparer is handling your annual reconciliation (tax return), it is in your interest to find the best.

Can you trust the IRS to weed out bad preparers? No. The IRS tracks paid preparers on 22 different systems and many preparers use different identifying numbers. The IRS admits it cannot follow-up on all preparer complaints. The IRS doesn't even know how many paid preparers exist.

Let me give two examples that highlight the problems finding a competent tax pro.

A few years back I completed an audit where the IRS auditor threatened me with preparer penalties. Her expression was amusing when I showed her two IRS letters providing advice on the complicated tax situation. What happened is that the IRS reversed its position. If this happens, you will owe the tax and interest, but no penalty. Preparer penalties are not in the cards since we trusted the IRS's advice. In reality, it was a rouge agent on an ego trip. She has since left the area.

Next, a new client arrives from a tax preparer that changed his information prior to e-filing. The preparer added credits the taxpayer wasn't entitled to, changed the taxpayer's address, and direct deposited the refund to his own account. We provided the IRS with all the details and they have done nothing. The preparer wasn't shut down. The taxpayer is headed for tax court to get his refund. He is out over $10,000 and pushing higher. The preparer in question had a good prep fee: $60. Any tax pro that charges $60 is pulling a scam, unlicensed, or unqualified. Remember the difference between price and cost. If you save $100 in prep fees and overpay your taxes by $500, is it really a good deal? And if you get lucky and find a crooked preparer, God have mercy on you, you'll need it.

Since the IRS is unable to help you choose a qualified preparer, what can you do? The two real examples above show how the IRS fails to protect you, the taxpayer. The IRS promises more oversight, but I doubt it will be anything more than token.

To increase your chances in finding a real tax pro requires a small amount of research. First, your tax pro should be an enrolled agent (EA), CPA, or attorney. Second, they should have several years of experience.

EA's are the only tax pros. CPAs are accounting pros that might focus on taxation; attorneys, legal pros. Once you find an EA, check to see how long they have been in the field. If they are starting their business, but have worked in a tax office for years, that is real experience.

Finally, ask around. Successful people have a good working relationship with their tax pro.

It is never too early to start looking. Now is the perfect time to cement a relationship with a tax pro. They have time now and are less likely to spend time acquiring new clients when they are working fifteen hours a day. It could be the best time you spend all year with a high return on investment.

I Don't Pay Tax on That

A dirty bug-a-boo showed up again today. I thought it was dead, buried for all time, but somebody at the tavern must be spouting tax law after their seventh Bud.

Client calls this morning and wants to verify he didn't need to pay tax if the amount is under $600. After pounding my head into the corner five or six times, I return to the phone and explain that all earned income is reportable. If you do a small side job for $350, you still need to report it.

He didn't believe me. Actually, he thought I was stupid and nearly said so.

How do I convince said client on actual tax law? The light bulb flashes on. I rephrase my advice. "Okay, you got me. You don't have to pay tax on income under $600. That is why I charge so little for my services; haven't paid taxes since Reagan was in the White House."

It took a while for the light to go on over his head.

The $600 rule is for filing Form 1099. If you receive $600 or more from a vendor during the year, they will inform the IRS on Form 1099. Just because you don't get a 1099, doesn't mean it is tax free. And if you get caught, the penalties and interest are usury.

IRS, tax humor

The IRS is more than frustrating. Today, Jeff and I had a phone conference with Revenue. The call had two of their attorneys, our client's attorney, Jeff, and me.

We spent a half hour debating what would be the best time to schedule another phone conference. Zero issues were covered or even mentioned. Let me be clear: The IRS needed a conference call, attorneys and all, to set another phone conference. Got it.

I know how to balance the federal budget. Just stop all the stupidity. We could all get a nice tax cut and balance the budget if this kind of waste was ended.

Don't count on it. It has been this way as long as I've been in the field and I started in the mid-80's.

Considering IRS foolishness, I had a productive day (outside the conference call). I can see a sliver on glass poking through my desk top.

Go figure.