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Three types of IRS audits – not all are scary!

Field Audit—a field audit is done at the taxpayer’s place of business.  The taxpayer, however, can request a change in venue for the audit.  Frequently, the request is to have the audit done at the taxpayer’s CPA’s office.  The request is usually granted.  By having the audit offsite, there is less disruption to the business.  However, the IRS still reserves the right to visit the taxpayer’s place of business.

Office Audit—an office audit is conducted at the local IRS office.  This type of audit typically involves one or two items on the return that may be in question.  You will need to bring all of your books and records to the IRS office.

Correspondence Audit—as the name implies, the correspondence audit is done through the mail.  These tend to be, although not always, routine matters that can be handled through the mail.  This might seem like the preferred audit to many.  It’s not to me.  By definition, with a correspondence audit, you won’t be meeting with an auditor face-to-face.  Sometimes this can work against the taxpayer and their representative. Whichever audit you get, remember to subscribe to the Boy Scouts motto, “Be Prepared.”

 

Source

The eternal question: What are a taxpayer’s Chances of an IRS Audit?

Individual return audit rates

To start, individuals get more audits than business and specialty taxpayers. In 2017, the IRS reported a 1 in 184 (0.542 percent) chance of being audited for all taxpayers. For taxpayers filing individual returns, the likelihood of audit is 1 in 161 (0.623 percent).

Out of the 150 million taxpayers who filed in 2017, here are the IRS statistics on who experienced an audit:

Form 1040 taxpayer types, in descending likelihood of audit Returns audited
International taxpayers 1 in 19
Taxpayers with gross income before deductions of over $1 million 1 in 23
Sole proprietors with gross income before deductions between $100,000 and $200,000 1 in 48
Sole proprietors with gross income before deductions between $200,000 and $1 million 1 in 64
Taxpayers with self-employment income under $25,000 who claim the EITC 1 in 72
OVERALL INDIVIDUAL AUDIT RATE 1 in 161
Farmers 1 in 228
Wage earners who make under $200,000 and don’t claim the EITC (65% of taxpayers fit this category) 1 in 364

The IRS is focusing its audit resources on areas where it knows taxpayers are traditionally noncompliant: small businesses, international taxpayers, high-wealth taxpayers, and possible Earned Income Tax Credit fraud schemes. Traditional wage earners who have traceable income reported on Forms W-2 face much less scrutiny.

Business and specialty tax return audit rates

Out of the millions of returns filed by businesses, employers, and specialty taxpayers (estate, gift, trust returns), here are the IRS statistics on who experienced an IRS audit:

Business/specialty taxpayer types, in descending likelihood of audit Returns audited
Large corporations (Form 1120, assets greater than $5 billion) 1 in 3
Estate tax returns 1 in 12
Large corporations (Form 1120, assets between $10 million and $5 billion) 1 in 23
Excise tax returns 1 in 72
Gift tax returns 1 in 130
Small corporations (Forms 1120, not 1120-S) 1 in 146
OVERALL CORP/PARTNERSHIP AUDIT RATE 1 in 224
Partnership returns (Form 1065) 1 in 260
Estate and trust income tax returns (Forms 1041) 1 in 971
Employment tax returns (Forms 940 and 941) 1 in 568
S corporation returns (Forms 1120-S) 1 in 358

Click here for full article from Accounting Today

What Makes Iowa Income Tax Unique?

Federal Tax gets a lot of nightly news hype. Iowa gets left in the dust.

Until now.

Iowa gets the spotlight today –

Here’s what makes Iowa income tax for 2018 (current filing season) unique!

  1. Do I meet Iowa income tax filing requirements? #1 question our office receives.
  2. Iowa Tax Rates range anywhere from 0 to 10%
  3. What are the standard deductions for each filing status? They are not as high as one thinks they are.
  4. Iowa is one of few states with a pension exclusion.
  5. Iowa is on a short list of states that exempts military pension retirement income from taxable income.
  6. Iowa also doesn’t tax ANY social security monies.
  7. Iowa’s income tax code promotes 529 college savings plans contributions by making the first $3050 contribution per beneficiary an immediate reduction to Iowa taxable income.
  8. Iowa also has a Tuition and Textbook Credit for k-12
  9. Iowa has a due date of April 20, 2019 for the individual income tax return

What Can I Do to Make Tax Season Smooth Sailing?

  1. For those utilizing drop off or portal upload methods, visit your secured portal!
    1. Click on the required documents drop down menu at the top.
    2. Save relevant forms as PDF’s
    3. Complete the forms
    4. Load the forms to your secured portal

^This can be done at any time prior to your assigned drop off/portal upload week! ANYTIME!

  1. Use the secured portal for the entire tax process and save 5% on your tax preparation fees!
  2. Take a valid stab at your completing your tax organizer (found in your secured portal).

    a. This helps ensure you provide all your documents at ONE TIME for tax preparation which decreases the chances of errors on the tax returns. Piece mealing anything doesn’t produce greatest results

  3. Put your 1:1 sit down tax appointment OR your drop off/portal upload assigned date on your calendar.
    1. If you don’t have all your documents prior to your 1:1 tax appointment or by the end of your assigned drop off or portal week, please let us know. We’re more than willing to accommodate a change in schedule to ensure we get all your documents at one time
  4. Politely abide by our Cancellation Policy and No Kids Policy. See required forms in secured portal for No Kid Policy
    1. We value your time and our time therefore we have no time for distractions; hence our No Kids Policy.
    2. We know you don’t have time nor do we to be sick; hence our No Kids Policy.
    3. WE have a working relationship with PlayDates in Coralville – great evening care for your kids while you come to your tax appointment or spend evening time uploading tax documents to the secured portal.
  5. Ways to counter balance our tax preparation fee increase:

    a. send us your friends and family – We work with only the best and are thankful you are part of the bmp, CPA family. Save 10% when you send us a paying referral.

    b. Use the secured portal and save 5% on tax preparation fees.

 

 

What does tax season look like in our office?

What does January – May look like in our office?

Not quite this bad! On most days.

Our full team of five plus the elephant in the room showed up to work on January 2, 2019 ready to put forth their best efforts to produce a high value, quick paced, and accurate tax season.

Brooke is most like the animals running around the place – trying to accomplish several big and bold goals simultaneously. She’s like the lamb fur – catches all the heat of the good, bad, and the ugly. The dog represents Brooke’s quickness to bark orders, spur of the moment marketing plans, management plans, client management tips and to do lists to herself and others in the office. She’s like the dragon when it comes to tax strategy for clients – full of fire to melt down the tax code to the gray area that fits the client’s greatest benefit. On the flip side, she listens to her team and clients like a quiet little mouse. The more she understands the more she can help.

Tyler is best represented by the girl making and throwing paper airplanes made of pages of the expired IRS code. He’s a note taker focused on client tax strategy, analyzing changes in tax code, pulling apart software nuisances, and making internal process and procedures more efficient. He also knows how to poke fun at himself, the team, and the governments.

Julia our office manager is best represented by the young boy trying to manage a snowman in hot room filled with people. She’s the one scheduling in person tax appointments, assigning drop and portal upload weeks, answering phone calls, compiling and mailing tax organizers, uploading organizers to the secured portal, communicating directly with clients, IT teams, and training new staff. Julia’s work ethic is something from the older generation – she works hard and smart. She’s moving buttons on a snowman in several directions at the same time in hopes it doesn’t melt before the goal is accomplished at 100%.

Darcie is our new seasonal office assistant. She’s in her first week of training with Julia. She’s polite, courteous, hardworking, self-driven, and pays attention to detail with an emphasis on confidentiality. She’s much like the woman in the front row reading the new employee policy and procedures binder created by Julia. Although I’m sure over time she’ll be the one in the front row trying to scarf down a whole meal in a matter of seconds because there’s not much time to reload during tax season.

Tammy is the librarian in the back – nice and neatly organized with a calm cool relatable to people demeanor. Each book represents a budget fund to her. And she’s a believer in the Fun Fund book! She can find a solution to any problem within any book of life. She may appear to be quiet but really her mind is spinning with actions for you to implement to improve your money ways. She takes no trash (hence the trash bin located conveniently to right) and she’s always willing to read up on new ways to help. She struggles, like Brooke, to keep plants living which is why she probably placed the plant on the top shelf. It’s going to die anyway so why bother with it? She’s great at prioritizing!

And we can’t forget the Elephant in the room! The IRS, Social Security Administration, Department of Labor, Iowa Department of Revenue, and the financial institutions. They watch from the window and when necessary they roar. Heads up – the federal agency haven’t been roaring much while on a partial government shutdown, but they will once they can get back to work.

So will we…

 

Government Shut down History!

Here’s a closer look at the four longest government shutdowns, not including the current one, why they happened and the fallout from each.

President Bill Clinton vs. Gingrich

Duration: 21 days, began Dec. 5, 1995, ended Jan. 6, 1996

What happened: This titanic political battle between Democratic President Bill Clinton and Republican House Speaker Newt Gingrich holds the record for the longest shutdown.

It was the second standoff between the two, both over taxes, and came just a month after a five-day shutdown from Nov. 13-19. 2015.

Gingrich and other congressional Republicans wanted to reduce spending. Clinton refused to make the cuts they wanted. Gingrich then refused to raise the debt limit. The shutdown ended when the two sides agreed to a seven-year budget plan with some spending cuts and tax increases.

Polls gave Clinton the nod in this duel. His approval ratings rose and he was elected to a second term that fall. Many criticized Gingrich for his behavior during this time, especially when he complained about being forced to exit Air Force One from the back of the plane.

President Jimmy Carter vs. Congress

Duration: 18 days, began Sept. 30, 1978, ended Oct. 18, 1978.

What happened: Democratic President Jimmy Carter found himself at odds with Congress even though Democrats controlled both the House and Senate. Carter vetoed a defense bill that included funding for a nuclear-powered aircraft carrier and public works legislation that included funding for water projects.

He saw these projects as wasteful spending. More critically, funding for the Department of Health, Education and Welfare was delayed because of a dispute involving Medicaid funding for abortion.

Carter succeeded in getting the projects he opposed stripped from legislation and the House and Senate passed a bill that expanded the exceptions to the Medicaid abortion ban to include rape and incest.

Obamacare or bust

Duration: 16 days, began Oct. 1, 2013, ended Oct. 17, 2013

What happened: Republicans in Congress sought to delay or defund the Affordable Care Act, known as Obamacare, after failing in their efforts at outright repeal. They attempted to force President Barack Obama’s hand by approving a temporary measure that would fund the government but would cut funding to implement Obamacare.

The Senate, controlled by Democrats, rejected the plan. The resulting impasse shut down the government. The standoff ended when Republicans conceded defeat and a deal was worked out to reopen the government. Polls showed that Republicans took the brunt of the blame.

Abortion shutdown

Duration: 12 days, began Sept. 30, 1977, ended Oct. 13, 1977.

What happened: This was the period when Democrats controlled both Houses of Congress and the White House. Still, the House and Senate could not agree on the exceptions to the ban on Medicaid funding for abortions.

House Democrats wanted to continue a ban on using Medicaid to pay for abortions, except in cases when the mother’s life was in jeopardy. Senate Democrats wanted funding to be allowed in cases of rape or incest.

The shutdown ended when a short-term funding bill was passed that allowed for more time for the two sides to negotiate. Republicans ended up benefiting politically because it was an intraparty fight among Democrats that had shuttered government.

 

Federal Government Shutdown Impact on Farmers, Investors, Craft Brewing

The federal government shutdown impacts several departments of the federal government. They all are linked to the IRS because the IRS is the primary source of revenue that is later allocated to all government departments.

Farmers, investors left in dark amid government shutdown 

The U.S. Department of Agriculture will delay the release of major crop reports due out Friday because of the ongoing government shutdown, leaving investors and farmers without key information at an uncertain time for ag markets, Successful Farming reports. The World Agricultural Supply and Demand Estimates report, as well as crop production and grain stocks reports, will continue to be put off until the shutdown ends. It could be a lengthy wait, as President Donald Trump and congressional Democrats remain at a seemingly intractable impasse over the president’s demand for $5 billion in border wall funding. “The longer it goes on, the more distorted our reference points get,” grain market analyst Todd Hultman told the Associated Press late last week.

Now it’s serious: Government shutdown crimps craft brewing

Craft brewers in Iowa and across the country may need a drink if the partial government shutdown doesn’t end soon. BeverageDigest.com reports that microbreweries are expected to encounter delays in getting permits approved because of staff furloughs at the federal Bureau of Alcohol, Tobacco and Firearms. The problem could impact your beer selection in Iowa, reports the Press-Citizen, because breweries that like to keep customers coming back with new brews will have a longer wait to get label approval. Brewers who need to borrow money may even be placed on hold, reports BeverageDigest.com, because they may not be able to get the paperwork needed from the ATF for loan documentation.

Courtesy of Corridor Business Journal

USDA Food Stamps will be Funded Through February

WASHINGTON (AP) – The Trump administration says benefits under the Supplemental Nutrition Assistance Program, also known as food stamps, will be funded through February should the government shutdown continue.

Agriculture Secretary Sonny Perdue is asking states to issue the February benefits on or before Jan. 20 so that they can be paid to the nearly 40 million Americans in the program. SNAP is already fully funded for January.

The administration announced its plans as the White House worked to limit Republican defections on spending bills in the House this week, which Democratic leaders have scheduled in hopes of driving a wedge between GOP lawmakers on the shutdown. Democrats set a vote for Thursday on the agriculture bill, which is largely made up of payments for food stamps, knowing that it would put pressure on Republicans to abandon their leaders and vote for the measure. Click here for more.

01.07.18 Federal Government Shutdown Impact on IRS and USDA

Source: Kristine A. Tidgren with ISU Ag Law and Taxation Center

Update: Late January 7, 2019, IRS announced that it would begin processing individual returns on January 28, 2019. The announcement also stated that IRS would be paying refunds, even if a government shutdown continues. Citing 31 U.S.C. 1324, the announcement stated that Congress has given IRS authority to pay refunds, despite lapses in annual appropriations. The notice stated that the agency would be issuing an updated Lapsed Appropriations Contingency Plan in the coming days that would include more details, including the IRS plan to recall a “significant portion” of its workforce.


Until the government shut-down is resolved, expect to hear this message if you try to contact IRS, “Welcome to the Internal Revenue Service. Live telephone assistance is not available at this time…”

IRS Impact

Only 12.5 percent of IRS employees (around 9,946) are working right now. The rest (66,942) are on furlough, pending an end to the shutdown or a new “Lapse in Appropriations Contingency Plan” calling some back to work.

In the meantime, most of the few employees still on duty are performing tasks deemed “necessary for the safety of human life or protection of government property.”

Continuing Functions Include:

  • Completing and testing upcoming filing year programs
  • Electronic returns that are processed systematically (not including the processing of refunds)
  • Processing paper returns through batching
  • Processing Remittances including payment perfection
  • Working on tax forms design and printing
  • Protecting statute of limitations expirations

In other words, a lot of information technology professional remain on duty.

These functions are not deemed essential and are currently suspended:

  • Service center processing after the point of Batching (i.e. Code & Edit, data transcription, error resolution, un-postables)
  • Issuing refunds
  • Processing Non-Disaster Relief transcripts, Income Verification Express Service/Return and Income Verification Services
  • Processing 1040X Amended Returns
  • Most Headquarters and administrative functions not related to the safety of life and protection of property
  • All audit functions, examination of returns, and processing of non-electronic tax returns that do not include remittances
  • Non-automated collections
  • Legal counsel
  • Taxpayer services such as responding to taxpayer questions (call sites) (during Non-Filing Season)
  • Information systems functions (except as necessary to prevent loss of data in process and revenue collections)
  • Planning, research, and training and development activities

In other words, you can send your payments, but you cannot receive a refund. You cannot contact IRS with questions, and you cannot conduct important functions such as faxing Forms 2848 to the IRS CAF Unit.

The tax court was also shut down beginning December 28, 2018, and “will remain closed until further notice” according to the website. Trial sessions already scheduled, however, will continue as scheduled.

Congress funded Tax Cut and Jobs Act implementation for IRS through September 30, 2019. Guidance has continued to issue. The review process currently underway for final 199A regulations is apparently continuing as well.

The IRS Contingency plan was only technically effective through December 31, 2018. As of this afternoon, however, no new plan has been issued. We are watching to see if more workers are called back as the beginning of filing season looms. We are also watching for an announcement of how the shutdown may impact the starting date of the 2019 filing season. We were already facing difficulties given the extensive nature of the new tax laws and the lack of final guidance and forms.

USDA Impact

USDA is also largely shut down. The agency announced today that the January 11 crop reports would be delayed. Market facilitation program payments were mailed before the FSA offices were closed last Friday, but applications that have not been processed are now on hold until further notice. Secretary Perdue is considering extending the January 15, 2018 deadline. Diffficulty also faces farmers seeking to pay off marketing assistance loans. Such payments cannot be arranged (to authorize sale of the crop) until FSA offices reopen.

Itemized Deductions Still Exist for 2018 Tax Return!

 

When Congress initiated our modern income tax system with the 16th Amendment to the Constitution in 1913, no one envisioned the massive system of red tape and intricate rules that we have today. As our system grew after World War II, Congress realized that they could use the income tax system to not only raise revenues to run the Federal government, but to also promote various moral, ethical or political themes.

Contrary to popular belief however, the home mortgage interest deduction was not one of those politically or ethically motivated deductions, it was just one of those things that was allowed at the beginning of the income tax system through the deduction of any form of interest. It was never changed over the years because in the early years few Americans had mortgages, and after World War II the huge number of returning service men and women that needed mortgages essentially forced Congress to leave the deduction alone!

So what are the normal deductions available to all Americans? When we prepare our annual tax returns the IRS tells us that this year about 15% of us will be able to “itemize” deductions. Years ago when we still prepared our tax returns by hand at the kitchen table, the use of itemized deductions required people to prepare the “long form”, so some folks still call it the long form today. Let’s discuss these itemized deductions, what they are, when to use them, and how to maximize their value.

Congress provides taxpayers with a “standard deduction” that they are allowed to subtract from income to determine their net taxable income. In 2018 the standard deduction for a married couple is $24,000, and $12,000 for single taxpayers. Additionally for most taxpayers Congress allows them to deduct individual “itemized” deductions on Schedule A if they add up to more than the standard deduction. Of course this usually results in less income tax for people who have more itemized deductions than the standard deduction. So either way everyone is allowed to deduct either the standard deduction or itemized deductions, whichever is higher.

Even if your itemized deductions are less than the amount of your standard deduction, you can elect to itemize deductions on your federal return rather than take the standard deduction.

If you do not itemize your deductions and later find that you should have itemized — or if you itemize your deductions and later find you should not have — you can change your return by filing Form 1040X to amend the return.

You and your spouse may use the method that gives you the lower total tax, even though one of you may pay more tax than you would have paid by using the other method. You both must use the same method of claiming deductions. If one itemizes deductions, the other should itemize because he or she will not qualify for the standard deduction.

So what are these itemized deductions? There are 5 main categories, and they are added up on IRS Form 1040, Schedule A. Surprisingly only 2 or 3 categories provide any real deductions for most people. Let’s do a short review of all of the main categories and point out some planning ideas as we go through them.

Medical expenses
Congress allows you to add up all of your medical costs for the “diagnosis, cure, mitigation, treatment or prevention of disease” within certain guidelines. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They do not include expenses that are merely beneficial to general health, such as vitamins, joining a fitness club or a vacation. An easy way to summarize whether a medical bill is deductible or not is to ask whether it was prescribed by a doctor-if so it is probably deductible, if not, sorry it is probably not deductible, except for health insurance.

The tax problem with medical expenses is that they actually provide no deduction for most people! Why? Medical costs get to be included in the list of itemized deductions only if they are more than a percentage of income, which is 7.5%. So if your family income is $100,000 and you spend $7,000 for medical costs, you get no deduction. Even if you have more than 7.5% of income in medical costs, you are only allowed to deduct the amount that is more than 7.5%. Again, if your family income is $100,000 and you spend $10,500 on medical bills, you can only include $3,000 in your list of itemized deductions.

So what can we do to plan for medical costs-it sounds like a waste of time? Well for most of us, it is a waste of time. However, if you have kids needing braces, or you have major dental, eye or medical expenses coming soon, about the only way to plan for deducting medical costs is to try and bunch all of your costs in one year. If you have had little medical expenses this year, you might want to hold off and get things done the first of next year, with the opposite being true if you already have spent a lot of money this year on medical costs, glasses, dentists and health insurance, the main categories of expenses.

Taxes
The list of deductible taxes includes state and local income tax and property tax. It does not include Federal tax. This deduction includes state tax withheld from your paycheck, which is commonly overlooked by people preparing their own returns. Sales tax may be deductible instead of state income tax based upon the year and the whims of Congress. This deduction is one of the very few itemized deductions that all Americans get to include in the Schedule A list.

The total deduction for taxes paid this year is limited to $10,000, regardless of the type. For most people that are home owners there is not a lot of planning opportunity here however because their property tax and state income tax will often exceed the $10,000 limit. About the only option is to move to a low income tax state.

Interest
The home mortgage interest deduction is the thing that usually allows people to accumulate enough itemized deductions to exceed the standard deduction. As a general rule if you don’t have a home mortgage you won’t be able to itemize. Congress allows you to include home mortgage interest in your list of itemized deductions within certain guidelines. You must own the home, the mortgagee must have a lien against your property, you have to actually pay the interest, and you are limited to interest on a loan for the first $1 million dollars (or a lower limit of $750,000 on new loans after 12/15/2017) of debt. These rules are pretty intricate, so we will leave their discussion to our office, but the simple thing to remember is to always retain IRS Form 1098 each year, because that is where the amount of interest you paid is reported.

Is there any planning you can do with home mortgage interest? Actually yes there is. First time homebuyers should always buy a home early in the year so that they get a full year of interest deductions to add in to the itemized list and possibly exceed the standard deduction. Existing homeowners should always go to their mortgagor near the end of the year and make an extra payment to pay any interest that has accrued since the last payment-this makes sense for both income tax and financial planning purposes.

There is no longer ANY deduction for equity lines, 2nd mortgages, HELOC’’s or similar items unless the borrowed money was used to improve your home.

Finally, let’s shoot down the myth that paying home mortgage interest is a good thing, tax-wise. If you pay $10,000 in mortgage interest, it does not save you $10,000-it saves you $10,000 times your tax rate, so if you are in the 25% tax bracket paying $10,000 in interest saves you $2,500 in income tax, but you are still “out of pocket” the other $7,500. We don’t have a 100% tax rate in America, so reducing the amount of interest you pay is a worthy planning goal.

Charity
You are allowed to deduct contributions to an IRS approved not for profit institution such as a charity or church in the United States. Since an individual is not an IRS approved institution there is no deduction for money given to them. The best planning ideas for charity involve trying to make contributions in one year. If you have given quite a bit this year, consider going ahead and paying next year’s amount in this year as well. If you are going to make a special gift, do it in a year that you already know you will have enough itemized deductions to exceed the standard deduction. The other thing to remember for charities is that you must have a receipt.

Other Deductions
This list is short, sweet and gone. There are no longer any deductions allowed for work boots, dues, uniforms, lock boxes, mileage or similar miscellaneous expenses. Bluntly, your employer should be reimbursing these amounts if they are work related.

Summary
This discussion of one of the most basic tax planning concepts of itemizing deductions rather than using the standard deduction includes many summaries that overlook the intricate rules involved. At our office we make sure to closely examine the rules every year for you to try and get the best treatment possible when it comes to this issue, and we are always happy to answer any questions you may have on any of the individual items in this newsletter.

 

This post content is courtesy of Bob Jennings of TaxSpeaker.com