IN JUNE OF THIS YEAR THE IRS ADOPTED A PROPOSAL FROM THE TAXPAYER ADVOCATES OFFICE CALLED “THE TAXPAYER BILL OF RIGHTS”. I HAVE COPIED A LINK BELOW.
THE 10 “RIGHTS” ARE AS FOLLOWS:
1. THE RIGHT TO BE INFORMED.
2. THE RIGHT TO QUALITY SERVICE.
3. THE RIGHT TO PAY NO MORE THAN THE CORRECT AMOUNT OF TAX.
4. THE RIGHT TO CHALLENGE THE IRS’S POSITION AND BE HEARD.
5. THE RIGHT TO APPEAL AN IRS DECISION IN AN INDEPENDENT FORUM.
6. THE RIGHT TO FINALITY.
7. THE RIGHT TO PRIVACY.
8. THE RIGHT TO CONFIDENTIALITY.
9. THE RIGHT TO RETAIN REPRESENTATION.
10. THE RIGHT TO A FAIR AND JUST TAX SYSTEM.
I’M SURE THAT MOST (ALL?) OF YOU DID NOT KNOW THAT THE IRS HAD ADOPTED THESE “RIGHTS”. I WOULD ENCOURAGE YOU TO CLICK THE LINK ABOVE AND READ THE EXPLANATION OF THESE RIGHTS AND WATCH THE VIDEO. IT IS VERY INFORMATIVE.
OF THESE RIGHTS LISTED ABOVE, I WOULD ARGUE THAT THE MOST IMPORTANT IS NUMBER 9. IT IS IMPERATIVE THAT WHENEVER YOU DEAL WITH THE IRS YOU USE A QUALIFIED PROFESSIONAL WHOSE HAS DEALT WITH THE IRS ON THESE MATTERS.
I HAVE BEEN REPRESENTING CLIENTS BEFORE THE IRS FOR OVER 25 YEARS. BY FAR THE BIGGEST PROBLEM WE HAVE IS CLIENTS BRINGING IRS NOTICES TO US VERY LATE IN THE PROCESS.
FOR EXAMPLE, SOMEONE BROUGHT ME A NOTICE OF DEFICIENCY THEY HAD RECEIVED. A NOTICE OF DEFICIENCY IS ISSUED AFTER AN AUDIT HAS BEEN CONDUCTED. AFTER THIS NOTICE IS ISSUED, THE TAXPAYER HAS 90 DAYS TO FILE AN APPEAL WITH THE TAX COURT. THIS DEFICIENCY WAS OVER $7,000; THAT’S A LOT OF MONEY FOR MOST OF MY CLIENTS.
AND YET, BY THE TIME I SAW THE NOTICE THERE WERE ONLY 4 DAYS AVAILABLE TO FILE TO THE TAX COURT!
I BELIEVE THE TAXPAYER IS IN THE RIGHT. HOWEVER, BECAUSE THEY DID NOT USE THE RIGHTS AVAILABLE TO THEM, IT IS GOING TO BE MUCH HARDER TO RETRIEVE THE $7,000 I BELIEVE THEY ARE OWED.
WHEN CONFRONTED BY IRS ACTIONS, DO NOT DELAY IN A RESPONSE. AND PLEASE, DO NOT GO IT ALONE. CALL OUR OFFICE. WE HAVE LOTS OF EXPERIENCE DEALING WITH THE IRS.
I’m sure you are aware of the serious problem of identity theft in our country today. We hear stories of it every day. We are rightly concerned about the theft of our important data stored by vendors, banks and government agencies.
But many of you may not be aware of the problem from the perspective of filing your taxes.
Identity theft is the biggest complaint received by the FTC (Federal Trade Commission). In 2010 about 15% of complaints dealt with tax returns. Now that number is 43%.
At a recent educational event I attended, the presenter talked about this growing problem. Our presenter was a former official in the IRS and is now in private practice. He suggested that identity theft is the biggest fear of the IRS. He said that this problem is costing us billions of dollars.
It is vital that you protect your identity when filing your tax returns. If your identity is stolen and a fraudulent return is filed, you will probably wait at least 180 days before you see your refund money.
This problem was brought home to me last filing season. A client discovered that his daughter’s tax returned was rejected because it had already been fraudulently filed. The matter was eventually resolved (she did receive her refund) but only after many weeks of calls and letters.
What is causing this?
There are many factors but the two largest are 1) Electronic filing of tax returns, and 2) Refundable tax credits.
I was at the birth (1991 in Indiana) of the electronic filing movement. I immediately saw the increased productivity available with this new internet based means by which to file tax returns. However, many times blessings are accompanied by curses. The problems of Internet theft extend even to the IRS.
The second factor is the motivating factor. Quite frankly, if the government was not trying to give away so much of your money to so many people, there would be very little reward for fraudulent tax filing.
I remember just a few years ago when the government wanted to credit thousands of dollars for the purchase of a new home. In the first year of this program, NO documentation was required!!! No closing statement. No deed. No Nothing! Would it surprise you to learn that billions of dollars were wasted on giving thousands of dollars to people who actually did NOT buy homes? And, many were not even the real people filing the tax return?
All refundable credits-child credit, earned income credit, tuition credit-are incentives for people to steal. These credits may be politically/economically the right thing to do, but clearly, some other means of receiving these credits needs to be created to thwart the growing problem of fraudulent tax return filing.
Protect yourself. Protect your identity. If you do experience identity theft in the filing of your tax returns, call us. We can help retrieve your money.
The man pictured to the right, Jonathan Gruber, has been featured all over the internet and on some news organizations as one of the (highly paid) architects of the “Affordable Care Act”. He has revealed just how deceptive the process was in passing this monstrosity of a bill (which no one read except those who wrote it).
It would be nice if we could void legislation passed in this manner, just like we can void a fraudulent contract. Alas, laws cannot be voided even if fraud and lies were told to push the legislation through the Congress. The best we could hope for is that those who testified before Congress, under oath, would be held accountable for their perjury.
Even though this law, in my opinion, should be completely reversed, it is highly unlikely that will happen anytime soon. So, we are left with calculating the taxes/penalties that are assessed under this law.
This is the name of the tax you pay IF you have not purchased health insurance this year. Most of my clients will not pay this tax because they already have health insurance coverage through their employers. Some have health insurance as individuals because they are self-employed or their employers do not provide coverage.
For the few clients out there who DO NOT have coverage, they are going to pay this “shared responsibility” tax. What is that tax?
The GREATER of:
1. $95 for an individual or $285 per family OR,
2. 1% of your household income that is GREATER THAN your income tax filing threshold (approximately $10,000 per individual, $20,000 for a family).
For example, if you are married and make $50,000 (the median income in the United States) your tax will be $300 ($50,000-$20,000 X 1%).
Sounds simple-right? Wrong! There are about 16 exemptions from this tax which many of my clients may be eligible for.
So….this is the year you want to get professional help on your tax return. We will be prepared to help you navigate this complicated process. If you are falling into this “shared responsibility” trap, please call for an appointment so that we can help you with a possible exception to this new tax.
Perhaps the most frustrating experience I have as a tax professional is calculating the tax from an early distribution of an IRA or other pension account.
These situations usually occur when you are leaving an employer who sponsors a 401K or other pension plan. This situation almost always creates a balance due. Clients believe they are covered because taxes were withheld. But, the taxes withheld seem to NEVER be enough to cover the amount owed.
There are 3 taxes on these early distributions. First, there is a 10% penalty on the gross amount of the distribution. Second, there is a federal income tax at the highest marginal bracket you are now in because of the extra income you are now recognizing. Third, there are state and local income taxes that are owed (for which there never seems to be withholdings).
The taxes on these distributions are easily avoidable.
Here is where we can be helpful. Call us before you take the money. Do just a little bit of planning. There have been many situations where I have saved clients thousands of dollars in taxes from distributions that they really did not need. There was NO emergency.
And even if there is an emergency, a little bit of planning in the way you take the money-or the time that you take the money, can save several hundred, if not thousands of dollars in taxes.
Don’t give your hard earned pension money away to the IRS! Call us to find out how to take the money you have saved with the lowest possible tax liability.
November 8, 2014
Why is Warren Buffett smiling when he knows that tax rates are going to rise? He says “Tax the rich, we can take it”.
Perhaps he knows something that most people do not know.
Perhaps he knows that most of his wealth will IN FACT NOT be taxed. Why? Because the vast majority of his wealth is NOT SUBJECT to the income tax!
In “The Millionaire Next Door”—New York Times best seller in 1996—Thomas J. Stanley Ph.D. tells us that millionaires remain millionaires because only 2% of their wealth in any given year is subject to income taxes.
Mr. Buffett is worth $46 billion. But his taxable income is a very small fraction of that amount. And, the majority of his income consists of capital gains which occur only when HE decides to take those gains! Capital gains are taxed at a flat rate which is much lower than the high marginal rate of 39% that he and president Obama want imposed on the “rich” of this country.
The truth is that high marginal income tax rates are NOT a threat to the wealth of Warren Buffett, Bill Gates, or any of the other billionaires on the Forbes 400 list. High marginal income tax rates are a threat to the wealth accumulation of the average wage earner and tax payer.
The only way that I can accumulate wealth is by investing my available capital. My available capital is limited if the government takes more of my wages thereby limiting the capital I have available to invest! High marginal income tax rates are a BARRIER to the wealth accumulation of those who are not yet wealthy.
If you desire to be wealthy, not just a high wage earner, you need to do what Warren Buffett and Bill Gates did. Lower the income that is subject to the high marginal income tax system and invest in the types of assets that are either exempt from the income tax system or are deferred from the income tax system.
Did you realize that different types of income are subject to different types of tax?
Warren Buffett knows that. Maybe that is why he is smiling!
The Eldridge Group specializes in tax strategies that allow you to protect what you earn. If you are interested in keeping more of what you earn available for investment by reducing your tax burden, please do not hesitate to contact us at 765.827.1040.
The Tax Gap
I have been at a continuing education event today. One of the key speakers was an IRS agent representing our district. His main topic was, The Tax Gap.
The IRS believes that the tax gap is growing. In 2001, the last time they tested, they believed the gap was around $350 billion dollars. Now, based upon the most recent testing, the Internal Revenue Service believes the tax gap is $450 billion dollars, a nearly 30% increase in just 5 years.
What is the tax gap? It is the difference between what revenue was expected to be collected by our chief collection agency and what actually was collected.
In fiscal year 2012 our federal government collected $2.5 trillion dollars. But, that was nowhere near enough. We still incurred federal deficits over $1 trillion dollars.
Our federal government believes that, in part, that deficit can be covered by closing the tax gap.
The main portion of our speaker’s presentation was on how they will try to close the tax gap? Here are the seven ways he believes the IRS will close the tax gap. Following each suggestion, my comments are in italics.
1. Reduce opportunities for evasion. This means that the IRS will be insisting on even more reporting standards. The form 1099 now has as many versions as the alphabet. The IRS is setting up a reporting regimen that will allow them to know where every dollar you collect is coming from and where every dollar you spend is going.
2. Make a commitment to research the tax gap. This means that instead of every 5 years, they believe this issue must be studied every year. This means that more attention will be drawn to this subject and more power to correct the “problem” will be demanded by this agency.
3. Continue improvements in information technology. The IRS has made large investments in their network technology. This is allowing them to gain access and store vast amounts of financial information.
4. Improve compliance activities. Very simply…there will be many, many more audits of ALL taxpayers (both rich and poor), than there ever has been before.
5. Enhance taxpayer service. This means more agents “serving” the public. In fact, the Taxpayer Advocate’s Office, in last year’s annual report, said that the number 1 problem facing taxpayers is….too few IRS employees!!! Now, they did not say it that way. What they said was that the IRS does not have enough workers to accomplish all the missions given to it by the Congress.
6. Reform and simplify the tax law. Those are lofty goals, and will NEVER happen. Why? Because politicians want to meddle in your life! They want to tell you what to do. As long as there is an income tax, it WILL be complicated.
7. Coordinate with partners and stakeholders. Just to clarify, partners are CPA’s, EA’s and other tax professionals. The IRS is on a major effort to enlist the “help” of tax professionals to increase compliance levels. By compliance, they DON’T mean filing your returns on time. That rate is already 86%! They mean filing the return the way they want you to file it.
Well, I can tell you that incredible challenges lie ahead in the next few years. The IRS has tremendous power. It will be given MORE power.
You need to get prepared. You need to do things right.
What is Your Fair Share?
In our politically correct culture, the term “fair share” is now often used. It seems to mean different things at different times. However, it always seems to mean, “You should pay more” of your personal income to the government so they can distribute it to the people that really deserve it.
We reject that thinking.
We believe that your “fair share” is no more than the law demands.
Judge Learned Hand (pictured above) served on the United States Court of Appeals for the Second Circuit from 1924 to 1951. He is the most quoted judge in the history of our country. Perhaps his most famous quote is this:
“Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands” (Gregory v. Helvering 69 F. 2nd 809).
This truth has been affirmed time and time again by our courts since that ruling was given in 1935.
We believe in helping you comply with the law. To comply literally means “to fulfill, or accomplish”. The Eldridge Group will ensure that you fulfill the demands that the government makes upon you to report your business activity and pay the required taxes, whatever that amount may be. We believe in helping you to “arrange your affairs” so that you pay the lowest possible tax possible. Through proper planning and good compliance accounting, we can accomplish that goal.
There is a big difference between avoiding taxes and evading taxes. Even the IRS recognizes that difference.
“The distinction between avoidance and evasion is fine, yet definite. One who avoids tax does not conceal or misrepresent, but shapes and preplans events to reduce or eliminate tax liability, then reports the transactions. Evasion on the other hand, involves deceit, subterfuge, camouflage, concealment, some attempt to color or obscure events, or making things seem other than they are.” Internal Revenue Manual Section 913(1).
We believe and practice “avoidance” taxation. We use every tool possible to lower taxes. We believe that you and you alone know how to spend your money wisely.
We encourage you to schedule an appointment so that we can further explain what tools are available.
Travel & Entertainment Deductions
Some of the most powerful deductions available to any business owner are travel and entertainment expenditures. Those expenditures provide money back in your pocket and help “move the line” from personal to business expenses…IF they are handled properly.
Beware, travel expenses are among the most highly reviewed expenses by the IRS; whether in computer audit scenarios or live audit situations.
How do we ensure that our travel, lodging, meals and entertainment expenditures can be deducted?
1. Establish the business purpose. If the trip is personal, the IRS will rightly disallow the expenses as deductions. The business purpose must be clearly established.
2. Document the expenditures. Proper documentation is at the invoice level. The credit card entry is not enough. You must establish that the expenditure, even on a business trip, is business related. For example, if you take your family to Orlando for a conference and everyone visits Disney World while you are there, the Disney World expense will not be treated as a business expense by the IRS; that expenditure is personal. To properly document the business purpose, write the business purpose on the receipt. If you tore a hole in your shirt and you need a new one, write down why you are buying a shirt (normally a personal expense) and treating it as a business expense.
3. Be modest, not excessive in your expenditures. Do not rent a Ferrari when a Ford will do. The IRS will rightly disallow excessive, unnecessary expenditures. You do not have to eat at McDonald’s every meal. But, if you are going to Ruth Chris every night, you better have a good reason. Just be reasonable and document, document, document.
There are other issues, but these are the big ones. If you do these things, most of the time your expenses will be accepted.
Call me with any other questions. Thanks and God bless.
Ralph Eldridge, CPA
The Eldridge Group
Why Good Accounting IS Now More Important Than Ever
It has always been important to have good records in your business. But today, it is vital. There is NO excuse. You must have impeccable records to survive as a small business in this economy.
You must know what your bottom line is to the penny.
Margins are tight. Taxes are high. You cannot afford to waste money. You must know how you are performing as a business; and not just by looking at the balance in your checkbook.
Forecasting, budgeting, creating pro-forma financial statements and yes, regular financial statements are something the banks require regularly for financing your business project. They want documents every quarter, at least.
Too many business owners I meet just do not know; they are guessing, and many times guessing wrong.
Good records are the primary evidence cited by the IRS for business activity.
Many of you are starting a business. Is it a hobby? Or, is it a real business? If it is a real business, the IRS says you must have business records.
You need to be recognized as a real business because you want the wealth of deductions that are available to a business operation. If you are a hobby, your deductions are limited to the gross income you generate from that activity.
A client who owned a business was being audited. He also happened to be in the horse raising business. His main business was profitable, his horse operation was not.
As we neared the end of the business audit, I asked if the “hobby farm” issue was going to be raised by the auditor. The auditor said, no. Why? Because the records were so impeccable for the business he assumed they would also be in the same condition for the horse business.
The issue of a hobby business never came up, because of his good records.
This was a BIG victory for the client because, as you might imagine, his horse losses were substantial.
Without good records, the IRS will just deny the entire deduction.
Many people think that by writing a check, or swiping your card, you have substantiated the business purpose of that transaction. WRONG!
If you do not systematically record these transactions in an accounting format, and keep the underlying documentation, the business nature of the transaction will be denied. YOU WILL LOSE!
Again, I have been in audits with my clients who generated debit card or credit card transactions whose business purpose was questioned by the IRS. The client could not substantiate the business purpose because, 1) no books were being kept or 2) the underlying source document was not kept.
The IRS denied the deduction, and there was nothing I could do about it. I had no proof. I had no ammunition to fight with.
We help our clients keep good records and accounts. That is a part of our mission. If you are ever challenged by the IRS we want you to win! If you make a big investment in your dream business, we want you to succeed!
Success starts with good accounts and records.