Monthly Archives: October 2014

Shut up for 60 days!

by Alex Franch, Tax Specialist

IRSI see a lot of correspondence from the IRS.  Some of it is legitimate, some of it seems dubious to me, and some of it is good news ! Then there is LTR 4465C (the IRS letter that says it will make a determination in 45-60 days).

The IRS has parameters and norms that they compare your tax return too.  If this was College History 101 and you were the kid throwing off the bell curve, you might be flagged for examination.  These examinations might be a hassle but you can argue that they are legitimate.

Some examinations can be a bit dubious as in the case of a form that is not required to be filed anyway.  It happens more than you might think.

Sometimes you get some good news and discover that you made an additional tax payment.

My favorite letter however has got to be the ’60-day letter.’  The letter (technically LTR 4464C) basically tells you that they received your stuff, whatever that might be, and they will make a determination in 45-60 days.  On the face of it, it seems like you know where you stand but they basically just told you to shut your trap for 60 days with no other info regarding your case.

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Don’t Expect the IRS to Take Your Word on Charitable Deductions – Substantiate

by Cindy Toran, Tax Manager

What do we have to say about charitable deductions? Three words, SUBSTANTIATE, SUBSTANTIATE, SUBSTANTIATE!

“Honestly, I attend church every week (religiously) and give $20 cash when the offering plate is passed. So $20 times 52 weeks = $1040 charitable deduction.”  Really?  Not trying to cast any stones here; you have never missed a week of church while on vacation?DSCN1774-300x225

The IRS will disallow such a deduction.  For cash donations the taxpayer must have either:

  1. Bank records (e.g., cancelled check or account statement) OR
  2. Written acknowledgment from the charity documenting the contribution amounts and dates received.

Obviously, for relatively small individual donations using a check may be preferable.

But it gets even more complicated…..

How about single donations of $250 or more?  These must have written acknowledgment from the donee (organization receiving the gift). The gift must:

  1. Be received by either the date the tax return is filed or the extended due date, whichever is earlier. AND
  2. State whether any goods or services were provided in consideration for the contributions; and, if so, an estimate of their FMV.

What if I have payroll deduction contributions?

Substantiation would consist of and require a:

  1. Form W-2 or other employer document AND
  2. Pledge card or other document prepared by the charity.

What about all those household goods and used clothing (i.e., non-cash) items donated?

If <$250 value for each donation, you need a

  1. Receipt unless impractical to obtain (e.g., left at a drop box) AND
  2. Reasonably detailed description of item(s) donated, FMV, method of valuation, date and name of donee.

If the donated item is:

  • >$249, you also must have an acknowledgment from the organization.
  • $250-$500, acquisition cost, approximate date, and how acquired are additional requirements.
  • >$5K, a written appraisal is also required.

Autos, Boats & Planes

Autos, boats and planes are the same as other non-cash donations; and, if the value is at least $250, Form 1098-C from the organization must be obtained.

Volunteer Out-of-Pocket ExpensesAnne-Frank-Quote-circle-300x225

For volunteer out-of-pocket expenses receipts, cancelled checks or other written records are required.  If the amount is >$249 considered separately (e.g., $250 airline ticket), an acknowledgement also mandatory.
Nonetheless, after all this information you may want to note …

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Five Ways to Get Audited

by Alex Franch, Tax Specialist

In 2012, Americans filed 145 million individual income tax returns.  1.4 million of those returns will receive some level of examination from the IRS.  Here are a few ways to draw additional scrutiny from the IRS.

Making Too Much MoneyAudit-MicrosoftWord

Why, because that is where the money is.  If you make over $1M, your likelihood of being examined jumps to 10.8%.  Since any changes to your tax return are most likely to affect income being taxed at the highest marginal tax rate of 39.6%, there is a strong incentive to look a little closer.

Interestingly, those small business owners making over $200k are slightly less likely to be examined than those making between $100k & $200k.  My hypothesis is that the Alternative Minimum Tax wipes out a number of deductions that would make an examination moot and the payroll tax is already maxed out leading to diminishing returns for the additional efforts of the IRS.

Taking Large Charitable Deductions

I have done many returns for people who tithe, and while this may draw additional scrutiny, it has been my experience that many taxpayers who tithe tend to have a pretty decent record and the majority of the gifts go to one particular place of worship.

For everyone else, (1) make sure you have proper documentation, (2) make sure you have proper documentation, and (3) make sure you have proper documentation.

Claiming Day-Trading Losses on Schedule C

Do you remember Sesame Street: Which one of these is not like the others?  It is claiming day-trading losses on a Schedule C!

Normally capital losses are limited to ($3,000) per year but not if they qualify to be on a Schedule C.  The key here is that you have to qualify or otherwise be eligible to do so.  I guess this is too tempting for too many people that the IRS will give this additional scrutiny.

Dying

Estate Tax returns actually have an 11.6% examination rate, double if you go over the $5M Estate tax threshold.  I have a hypothesis about this based on my experience in dealing with the next of kin.  They had no idea what mom & dad had in their names and the resulting return leaves them exposed to additional scrutiny.  Example: “Dad had a timeshare in Florida?  Well I guess I forgot to mention it on the return.  Oops, my bad.”

Using the Wrong Status

Divorce can be stressful enough without having to juggle the correct filing status at the corner of Federal and State law.

IRS code dictates filing status regardless of who is claiming a dependent.  IRS code also dictates who is entitled to claim a dependent but this can be overruled by your local probate court.

Let’s say mom & dad both claim junior and/or Head of Household.  In comes the IRS to sort it out for you.  The worst part of these types of examinations is that the documentation you are seeking is not always cut & dry so it can be a frustrating ordeal.

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