May Newsletter   

  Important Dates

May 15: Payroll Tax Payments

May 20: Sales Tax Payments

May 28: Memorial Day

June 15: Payroll Tax Payments

 June 17: Father’s Day

 June 20: Sales Tax Payments

 Is your return asking for an audit?  Red Flags to Avoid

An IRS audit. It’s what taxpayers most dread as they prepare their returns & what 1.3 million of them faced last year—up 5% from the year before.

As the White House & Congress look for more way to shrink the federal deficit, your chances of being audited are likely to grow, especially if your income tops $100,000.

Although there are no foolproof methods to avoid an audit—& many returns are chosen randomly—there are certain red flags that draw the  attention of IRS computers & auditors.

Here are mistakes that could cause your return to stand out & suggestions on how to avoid an audit…

1) Omitting or underreporting income. Employers & financial institutions sometimes report income incorrectly to taxpayers & the IRS on W-2 forms & 1099 forms. Safest: If you receive an incorrect W-2 or 1099, don't just substitute a different figure on your tax return. Get the mistake corrected at the source, & ask for a new W-2 or 1099.

2) Failing to fill out an Alternative minimum Tax (AMT) schedule.  This year, more than 3.5 million individuals are expected to owe this tricky tax, which kicks in when deductions push the regular tax below a certain minimum amount. Taxpayers who live in “high tax” states, such as New York & New Jersey, are particularly vulnerable, because state & local income tax & sales tax are not deductible for AMT purposes. Safest: Use the IRS 2006 AMT assistant, an online calculator at www.irs.gov (put “AMT Assistant” in the search window), to determine whether the AMT applies to you.

3) Messing up the math or leaving blanks. IRS computers easily detect math errors & omissions. Safest: Print out your calculation so that you can double check them. Review all lines, as well as blanks, to make sure that you didn’t leave out required information or put it in the wrong place. That includes the signature lines—remember both spouses must sign a joint return. Better yet: File electronically. It cuts down on math errors—E-filed returns have an accuracy rate of more than 99%, compared with 80% for paper returns, because the program checks the math.

4) Claiming too many deductions &/or       credits. The IRS is on the lookout for excessive deductions & credits. Safest: In general, don’t claim deductions that far exceed what tax preparers say is reasonable for your income bracket, of if you do, attach an explanation. Attach copies of bills for unusually high medical expenses. Have proper documentation for donations to charity. For used clothing & household items, take pictures of the items to show that they were in good used condition or better. Guidelines. There are no “standard” deduction amounts. Based on IRS statistics for 2004, taxpayers with adjusted gross incomes (AGIs) of $50,000 to $100,000 itemized an average of $2663 in charitable contributions & $6125 in medical costs. Those with AGIs of %100,000 to $200,000 itemized an average of $4130 for charity & $9811 for medical costs.

5)  Claiming losses on hobbies. Deductions for a fun activity, such as coin collecting, may be rejected if the activity results in losses that don’t make commercial sense year after year. Safest: Don’t claim deductions for hobby expenses unless you are prepared to show that you are engaged in the activity for profit.

S Corporations—Audit Triggers

First, the IRS is intensely auditing “ a statistical sampling” of S Corps to gather data on what it should look for in auditing other S Corps. Nationwide, this audit blitz now includes 5,000 unlucky S Corps. If you are selected, expect a fight on almost every line of our return.

Second, the IRS is attacking S Corp compensation practices. In particular, auditors’ eyebrows are being raised of salaries paid by an S Corp to its principal owner or owners look suspiciously low. This “troublesome area,” as SB/SE Commissioner Brown calls it, involves a technique in which the S Corp owner/employee draws a low salary to avoid employment taxes that ordinarily would be due on additional wages but would escape tax if passed through as dividends. Brown labeled this practice as “abusive” & warned that “IRS examiners are aware of the practice.” Not only are IRS examiners disallowing this technique but they reportedly are also assessing a 20% accuracy-related penalties. A review of W-2 income & total distributions received by the S Corp owner-employee during the year may be in order for many business.

 IRS New Developments

TIGTA (The Treasury Inspector General for Tax Administration) audit finds IRS not properly safeguarding taxpayer data [Audit Report No. 2007-20-048]:

IRS is not adequately protecting taxpayer data on laptop computers & other portable electronic media devices, the TIGTA said in a recently released audit. IRS employees have reported the loss or theft of at least 490 computers between Jan 2, 2003 and June 13, 2006. While no organization is impervious to theft or loss of computers & many incidents cannot be prevented, TIGTA noted that employees can reduce the risk by taking precautions. Since 111 incidents occurred within the IRS facilities, TIGTA surmised that employees were likely not storing their laptop computers in lockable cabinets while away from their office. TIGTA found limited definitive information on the lost or stolen computers (such as the number of taxpayers affected), but it believes it is very likely that a large number of the lost or stolen computers contained unencrypted taxpayer data. The audit is available at http://www.treas.gov/tigta