Do you cringe at the mere thought of an IRS audit? Consider taking a few precautions to give your tax return better odds in the audit lottery.

Due in large part to budget and personnel cuts, the IRS is auditing fewer and fewer taxpayers every year. On the other hand, since the primary goal of a tax audit is to make money for the federal government, auditors do their best to select taxpayers who they think are likely to owe the largest amounts in unpaid taxes. That means that if you lose the “audit lottery,” it’s probably because the IRS believes it can wring a whole lot of money out of you.

That said, no one is immune to an audit. Fortunately, there are some specific steps you can take to make your return less interesting to auditors.

1. Report all your income

It might be tempting to leave out a little income here and there when you’re filling out your tax return, but resist that urge. Even a small amount of income may be reported to the IRS by the person or company that paid you. If the IRS identifies a payment to you that you didn’t report as income, then agency’s interest in auditing you will go way up.

2. Keep your ratio of deductions to income low

One thing that’s guaranteed to pique an IRS auditor’s interest is a high ratio of deductions to income. Auditors reason that if you’ve claimed such an enormous amount of deductions relative to your income, then there will likely be many tax breaks they can invalidate in an audit — thereby creating a fat tax bill for you. Taxpayers typically deduct well less than half of their income, so if you cross that threshold, then you may draw an auditor’s attention.

If you actually can deduct more than half of your income, then you’ll have to decide whether you’re prepared to run the risk of an audit by claiming the full amount. No matter how high or low your deduction-to-income ratio is, make sure you have thorough documentation to back up every tax break you claim.

3. Use a professional tax-preparer

Working with a tax preparer. Professional tax-preparers, especially CPAs and Enrolled Agents, keep up to date on tax law and can be sure your return meets the latest requirements. And experienced tax-preparers are typically aware of what’s likely to catch an auditor’s eye; if you ask, they can take extra precautions to put together a tax return for you that seems less audit-worthy.

If you don’t feel you need a tax preparer, or if you can’t afford one, then at least use a quality tax software package to prepare your return. Tax preparation software dramatically reduces the odds that your return will contain errors.

4. Send in your return by mail, not electronically

In order to review the year’s tax returns for possible discrepancies, the IRS has to put them all into its computer system. If you file electronically, this happens automatically as soon as the IRS receives the file. However, if you file by mail, someone has to take the paper return and physically enter it into the database. And because the IRS is chronically short on personnel, many of those returns by mail never make it into the computer. Instead, they go to a warehouse for a few years and are eventually destroyed once the statute of limitations expires for that particular tax year. So if you send your return by mail, you have a good chance of never having the return entered in the audit lottery in the first place.

Note that you can still use tax software to prepare your return; you just need to print and mail it rather than e-file.

5. Be specific

The IRS is highly suspicious of perfectly round numbers on your tax return — like when someone claims exactly $5,000 in medical expenses. Don’t try to round expenses or deductions (even if you’re rounding down) except, of course, to the nearest dollar. And if you’re claiming business expenses, don’t put more than 10% or so in the “miscellaneous” category; try to pick a more precise expense category as often as possible.

6. Don’t be a sole proprietor

Business owners who are sole proprietors are far more likely to be audited than owners of other types of businesses (e.g., partnerships and corporations). This is especially true if your business is bringing in a relatively high annual income. According to Deduct It! Lower Your Small Business Taxes by Stephen Fishman, sole proprietors in the $100,000-$200,000 income range were audited at a rate of 2.4% in 2014 — significantly higher than all other forms of small businesses, even corporations in the $5 million-$10 million income range. Once your sole proprietorship starts bringing in more than $100,000 in annual revenue, seriously consider either incorporating or forming an LLC (this is a good idea from a legal and liability standpoint as well).

7. Don’t claim the Earned Income Tax Credit (EITC)

As a general rule, the higher your income, the more likely you are to be audited — except when it comes to the EITC. The IRS has seen such a high incidence of fraud related to this credit that it takes a very close look at anyone who claims it, even though taxpayers who claim the EITC typically have low income. Of course, the reason so many people fraudulently claim the EITC is because it’s such a darn good deal, so you’re better off taking the credit even if it might increase your chances of an audit. Just make sure your return is squeaky-clean, as it will probably be subject to extra scrutiny.

If you are eligible to claim this credit, then it’s even more important to seek professional help with your return. Tax preparers are required to go through a lengthy process to validate any claim for the EITC, including filling out a special worksheet to prove that they checked various aspects of your eligibility. So if you use a professional tax-preparer, the IRS is more likely to believe that you’re really eligible for the credit in the amount you claimed. Fortunately, there are programs such as VITA (Volunteer Income Tax Assistance) that will prepare your return for free if you fall under certain income requirements, which will generally be the case for EITC filers. At least that way you’ll get to have your taxes done for you on the IRS’ dime.

You can read the original article here https://www.fool.com/taxes/2017/03/04/7-ways-to-reduce-your-odds-of-a-tax-audit.aspx

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How to Make Your Accountant Love You—And Get Bigger Tax Returns to Boot

Think you’re stressed about tax season? Imagine how your accounting professional feels. Not only is this an accountant’s busiest time of the year, but he or she never knows exactly what to expect from each client.

As entrepreneurs know, time is money. If you can help your accountant save time you’ll get better results—and likely pay less in tax preparation fees as well.

Get It Right From the Start

Going back and forth with your accountant wastes their time and yours. Do your best to submit accurate information from the beginning. Also, if you’re going to do your own bookkeeping (and you’re not a trained bookkeeper), make sure you at least hire someone to help you set up your system properly.

“Bookkeeping is the cornerstone of tax preparation. Many people do not give it the high regard the process demands,” says Donna Merrill, founder of Frisco, Texas-based Business Untangled, Inc. “If the bookkeeping is off-kilter or otherwise incomplete, there is no way to get a proper tax return.”

Merrill loves QuickBooks; however, she says it does not do a good job of guiding users to set up their chart of accounts properly. “This causes no end of problematic bookkeeping to follow,” she warns.

If QuickBooks isn’t your thing, enter your financial information into an organized spreadsheet, suggests Andrew Poulos, principal of Poulos Accounting & Consulting, Inc. in Atlanta. “The better the record keeping and documentation, the less expensive the tax preparation fee will be,” he says.

Sticking to paper invoices, statements, and records? “Have all the envelopes opened, papers removed and unfolded,” suggests Merrill. It’s a small courtesy, and it can save time.

Fudging it is not a strategy. “Some clients believe that by supplying partial facts and ambiguous data to their accountant, they’ll be able to squeak by on deducting that particular business expense,” observes Thomas J. Williams, a virtual tax accountant who operates Your Small Biz Accountant, LLC.
Don’t Overlook Details

Deducting a home office? Gather the information your accountant needs. “Have the following information: value of home, square footage of home, and square footage of the area you’ve designated as the office,” says Folasade Ayegbusi, owner of Suncrest Financials and Accountingwithfolasade.com. “This will prevent the accountant from having to search your county property records and to avoid estimates,” she says.

If your numbers don’t make sense to you, they may not make sense to your accountant either. “Make sure the financial statements you provide are accurate, final, and that the opening balances match the numbers you provided the year before. Often, changes are made to the accounting records after they were submitted to the accountant, and a lot of time and energy is spent determining these changes,” says Ken LaCroix, president, Orange County, California-based Signature Analytics. “That is time better spent for tax planning and strategy.”

Don’t Procrastinate Too Long

Waiting until the last minute to get everything together can be costly. “Don’t get to January or February and tell your accountant what you did; you should have called them during the year and told them what you were thinking of doing,” suggest Jeffrey Beebe, a CPA in Boise, Idaho. “Often there are choices which can help you avoid taxes.” Although that advice may not help you this tax year, it’s worth heeding for next year, which will come more quickly than you realize.

A specific example is retirement savings. “We consistently work with clients who come to us trying to reduce their taxes, but it’s too late,” warns Kirsten Curry, Seattle attorney and founder of Leading Retirement Solutions.

“When it comes to reducing a company’s taxable revenue and a business owner’s taxable income, the regulations generally require that a company-sponsored retirement plan—like a 401(k), defined benefit, or profit share plan—must be in place by the last day of the company’s fiscal year. The contributions to the plan can be made after the close of the company’s fiscal year, but the retirement plan must be in place on or before the last day,” she says.

Planning ahead with your accountant can help you avoid a major tax bill (and potentially a tax lien) if you can’t pay what you owe. A tax lien on your business has a major negative impact on your business credit scores and can hold you back from business loans and financing you might need down the road. (You can check your personal and business credit scores for free on Nav.com.)

Get on the Same Page

Just like you need a doctor or dentist you feel comfortable with, you need to make sure your accounting professional is on the same page as you. “Be clear about how much risk you are willing to take,” says Crystal Stranger, EA, president of 1st Tax. “[Sometimes] tax law is not black and white when it comes to business deductions; there are many types of deductions that could be questionable down the line, but have not been technically disallowed by statute or judicial precedent,” she says.

If you want someone who will push the envelope, you need to be clear about that. And if you want to pay a little more tax to further reduce your chances of an audit, your accountant needs to know. “The important thing is to find the tax advisor who you are comfortable working with, and is comfortable with the level you are at,” she adds.

Finally, as much as you may hate dealing with taxes, remember your accountant is not the enemy. He or she is trying to help you get your taxes filed as accurately as possible, while saving you as much money as possible. Help your accountant help you and you’ll both be happier.

Original article: https://www.allbusiness.com/how-to-make-your-accountant-love-you-110659-1.html

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According to an analysis by the nonpartisan Tax Policy Center, the health-care bill introduced by House Republicans last week would give the top 1 percent of earners a cut worth about 2 percent of their after-tax incomes. That shakes out to an average of $37,240 per year. The Tax Policy center defines the top 1 percent of Americans as those making more than $772,000.

The top 0.1 percent of earners, those making $3.9 million or more, would fare even better. They would see their taxes cut by 2.6 percent, or an average $207,390.

The middle 20 percent of earners, who make between $52,600 and $89,400, would see a tax cut of just 0.5 percent — or about $300 a year. The lowest earners, or those in the bottom 20 percent, would receive an average reduction of $150, or 0.9 percent.

“The bottom line is that while everyone gets a tax cut, they are more favorable to the rich than those at the bottom,” said Roberton Williams of the Tax Policy Center.

Original article: https://www.cnbc.com/2017/03/14/top-01-of-earners-would-get-a-207000-tax-cut-under-gop-plan-to-repeal-obamacare.html

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Many workers have access to a flexible spending account at work, but you might not know just how big a tax break your FSA can be. If you have an FSA, you can save toward your anticipated medical expenses and save on both income and payroll taxes as well. However, there are some tricks involved with using flexible spending accounts correctly, so it pays to know the benefits and potential pitfalls of FSAs.

What is a flexible spending account?

A flexible spending account gives you the ability to take money out of your paycheck and put it into a special account to pay medical expenses you incur in the future. You can either pay your medical expenses directly from the FSA, or you can use other funds to pay your medical bills and then reimburse yourself by taking withdrawals from the flexible spending account.

The tax break that FSAs offer is more extensive than what most other benefits do. The money that goes into an FSA isn’t subject to income tax withholding, and you also don’t have to pay payroll taxes for Social Security or Medicare on whatever goes into the flexible spending account. By contrast, popular tax breaks like 401(k) contributions don’t produce that much tax savings, as you still have to pay payroll taxes for Social Security and Medicare even though the contributions do typically get excluded from your income for income tax purposes.

Image source: Getty Images.

How can I use my FSA money?

You can use flexible spending accounts to pay for a wide variety of medical expenses. Among them are payments for medical services, whether they’re inpatient services like a hospital stay or outpatient services like doctor visits. Whatever co-pay, deductible, or coinsurance amount you have to cover out-of-pocket is eligible for FSA treatment.

In addition, prescription medications qualify for FSA payments, as does medical equipment like diagnostic testing devices, crutches, or bandages. However, over-the-counter medications for which you don’t have a prescription are generally not eligible, so you can no longer simply buy aspirin or cold medicine with your FSA money.

One thing that trips up some people is that you can’t use FSA money to pay health insurance premiums. Coverage has to come from other funds.

Whose medical expenses can get paid out of my FSA?

FSAs are primarily for your own medical expenses, but the rules also allow you to pay for certain family members. If you’re married, then your spouse’s expenses can be paid from your FSA. Any dependents that you claim on your tax return are also eligible for favorable treatment.

How much can I contribute to an FSA?

There are contribution limits for FSAs. In 2017, the maximum you can contribute to an FSA is $2,600, up from $2,550 in 2016. Some employers make additional contributions to employee FSAs out of their own funds, but any employer contributions aren’t counted toward the maximum employee contribution.

Will I lose my FSA money?

The biggest restriction on FSAs is that they’re designed to get spent down every year. In the past, any money you didn’t spend was forfeited. That’s still the case for some flexible spending accounts.

However, the IRS has made FSAs a little more flexible. Employers can choose one of two options to make things easier for employees. One option allows employees to incur medical expenses in the first two and a half months of the following year and take money out of their prior-year FSA balance. The other option allows employees to carry forward up to $500 in FSA money from the previous year and apply it to current-year expenses.

One thing to keep in mind is that employers aren’t allowed to offer both options, and some employers offer neither one. Be sure to check with your HR department to see what provisions your FSA has in this regard.

If you’re fortunate enough to have a flexible spending accounts at work, make sure you take advantage of it. As one of the best ways of producing tax savings, FSAs are worth looking at more closely.

Original article https://www.fool.com/taxes/2017/03/10/health-fsa-taxes-in-2017-what-you-need-to-know.aspx

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Continuity, Availability & Advice

Big box accounting chain stores like H&R Block, Liberty Tax and Jackson Hewitt ramp up their staff each year with seasonal personnel.

The problem is there is little chance you’ll ever see the same accountant year-after-year.

It’s a numbers game to see how many returns can be filed before tax season ends and taxpayers are usually better known by their Tax ID than their tax profile.

Continuity is very important in tax preparation because the history of your tax profile is essential in preparing a complete and accurate return in your favor. If your tax preparer doesn’t know you, errors can easily occur and you won’t get the tax benefits that you deserve.

If during the year you have any tax related questions, your tax preparer may no longer be working there to give you the advice you desire and you’ll have to start over with a new tax specialist.

Less seasoned tax preparers do not have the breadth of experience and strategies to help reduce your tax obligations.

A Personal Approach Does Not Have To Cost More

At Rick Schiffmiller EA. Corp., once a taxpayer becomes a client, they become a member of our extended family and we are available to them anytime inquiries are need.

We know more than the average accountant about tax laws. When you become our client, not only do you get expert tax preparation but also invaluable tax planning advice and proven strategies that can have a lasting impact on your bottom line.

Our approach streamlines your tax filing. We meet at your office or ours. We prepare your tax return and suggest tax strategies based on your personal tax profile and goals to reduce your tax obligations. We send the return back for your review and upon approval we e-file it for you.

We offer free tax analysis ($500 Value). Call us today to speak with an accountant (561) 922-3718.

Please do your due diligence before hiring an accountant.

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