Top 10 Tax Mistakes To Avoid At All Costs

Top 10 Tax Mistakes To Avoid At All Costs

A tax audit involves the time and expense of being examined and often a tax dispute. Avoid these common mistakes and you’ll reduce your chances of grief from the IRS.

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IRS Criminal Prosecutions Climbed 23% under Obama

IRS Criminal Prosecutions Climbed 23% under Obama

The number of criminal prosecutions referred by the Internal Revenue Service to the Justice Department has increased 23.4 percent during the Obama administration.

Prosecutions in fiscal year 2013 alone jumped 30.6 percent from the previous year, according to a new report by Syracuse University’s Transactional Records Access Clearinghouse.

Convictions for tax crimes under the Obama administration are also drawing slightly longer average prison terms, 27 months under Obama, compared to 25 months during the George W. Bush administration, according to information obtained by TRAC under the Freedom of Information Act from the Executive Office for United States Attorneys.

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WEALTH REDISTRIBUTION IS HERE!

WEALTH REDISTRIBUTION IS HERE!

 

(Disclaimer:  I wrote this a couple of year ago and the numbers have changed since then, “but NOT for the better!”)

 

I wonder how many people are aware of how much money a low income person can get from their income tax return this year.

 

As an example. We’ll say a person earns between $12,750 and $21, 800 and is married filing jointly and has 3 dependent children.  That person is truly worthy of some assistance but how much assistance should other taxpayers have to bear for that individual and at what point do we remove the incentive to work?

 

In the example above, the taxpayer can receive $5751 in Earned Income Credit, up to $3000 in Additional Child Tax Credit.  Specifically, at between $12, 750 and $21,800 of income, the taxpayer would have ZERO tax withheld, pay ZERO taxes and yet still receive a Federal Refund of $8751.  THAT’S $8751 THAT COMES ENTIRELY OUT OF THE POCKET OF OTHER TAXPAYERS!

 

On top of this, the low income would qualify the taxpayer for around $300+ per month in Food Stamps as well as Housing Assistance of up to $700 per month and either free or low cost health care through Medicaid.  The kids can also get FREE breakfasts and/or lunches if they are in public schools.  On the lower end, they would also qualify for SSI or up to $300+ per month.

 

I honestly am all for helping low income people who cannot help themselves or who are the victim our recent terrible economy.  But consider the following.  The low income person can literally DOUBLE their income 100% TAX FREE though all of these welfare programs (and YES, the Earned Income Credit IS a welfare program!).  They have ZERO incentive to work harder or for the second spouse to get a job when they can take your tax dollars and my tax dollars instead.

 

I am convinced that most Americans do not really know how much money is being paid out for these welfare programs and thought this information might be of interest.

 

BUT THERE IS ALSO ANOTHER SIDE TO THIS STORY

A couple can have a million dollars in IRA’s and not take any income out of it.  They also own a home worth a half million dollars and they drive two brand new Mercedes.  They are debt free and basicly retired.  They are legal guardians of their three grandchildren.  While most welfare is “means” tested for not only income but for assets as well, the Earned Income Credit is only tested for income.  Therefore, if either or both of these two spouses were to go out and get part time jobs making a total of $12,750 to $21,800 per year, they too would qualify for the maximum earned income credit of $5751 and could get the child tax credit of $3000.  That works out to $8751 to be paid by the taxpayers to someone who is a millionaire.

 

Both of the above scenarios need to be corrected.

Humor

A pastor was visiting one of the shut-in members of his church one day and noticed a bowl of almonds sitting on the table and asked if he might have some.  The kind lady assured him it would be fine.  After a quite lengthy visit, the pastor realized he had eaten a large number of the almonds and ask the lady to forgive him for eating so many of her almonds.  She quickly assured him that it was not a problem since she could only lick the chocolate coating off of them anyway.

What is an Enrolled Agent (EA)?

We are regularly asked, “What is an Enrolled Agent (EA)?”

Although there are over 50,000 Enrolled Agents (EA’s) nationwide,  many folks are not familiar with the term so I thought I’d give a brief review.

I’ll start out with a direct quote from the IRS website, “Enrolled agent status is the highest credential the IRS awards.”

OK, that’s sounds real good but what does an EA actually do?

An EA can prepare your taxes, but so can CPA’s and a half million others at the national chains and the local mom and pop operations.  But that where the similarity stops.

I have prepared a chart to compare the differences.  IMPORTANT:  There are excellent tax preparers who are unlicensed, or who are CPA’s or who are EA’s.  There are also some very bad tax preparers who are unlicensed, or who are CPA’s or who are EA’s.  One of the best tax preparers I know has been preparing taxes for over 30 years but is unlicensed.

The point here is not to make any of the three groups look bad, but to point out the differences.

UNDERSTANDING THE DIFFERENCE

BETWEEN TAX RETURN PREPARERS

ITEM

ENROLLED AGENT (EA)

CERTIFIED PUBLIC ACCOUNTANT (CPA)

NON-LICENSED PREPARER

(Note: this includes hundreds of thousands of preparers including most at the national and regional tax preparation chains, as well as at local mom & pop tax preparers)

Testing – total time alloted 3 Exams totaling 10.5 hours Varies by state NONE
Testing – time related to taxes 100% of exam Usually, 25% of exam NONE
How many test questions? 300 Varies by state NONE
Continuing Education required – average hours per year 24 Varies by state NONE – Although an employer may require some continuing education
Continuing Education required – hours per year if a member of NAEA 30 Not Applicable Not Applicable
Continuing Education required – hours per year for tax preparers at Heritage Income Tax. 40 Not Applicable Not Applicable
Can represent clients before the IRS if they prepared the original return YES YES YES
Can attend an office audit on behalf of a client without the client being present YES YES NO
Can represent clients other than those they prepared themselves before the IRS. YES YES NO
Can represent clients at all levels of the IRS. YES YES NO
Can represent clients for lien releases, garnishment releases, payment arrangements, debt collection, offers in compromize, and all dealings before the IRS YES YES NO
Credential granted by: IRS – with authority to practice nationwide State – with authority to practice in the state where they are licensed NO Credential

 

Depreciation, Expensing and Taxes

September 11, 2013

Bruce Bartlett wrote an article with a nice breakdown of the history of depreciation in the United States. An interesting point he makes is that depreciation was initially an accounting gimmick:

If the railroads treated capital expenditures the same way that operating expenses were treated, they would have huge losses for many years that would discourage investors. So the idea of depreciation was born – writing off capital investments over time.

Maybe that helped businesses sell projects to investors, but the addition of the corporate income tax in 1909 made depreciation rules important for taxes, too.

In the article, Bartlett lays out two common economic arguments why depreciation rules can be bad for tax purposes.

The first argument is that under current depreciation rules, inflation erodes the value of the tax right off. These types of depreciation rules understate the cost of the equipment to business, overstate the profit, and lead to higher taxes for the business.

The second argument is that as technology changes more rapidly, high-tech equipment becomes irrelevant sooner than it physically wears out.

Expensing solves both these issues and offers other benefits of its own – namely, increased investment and economic growth.

Expensing is effective in increasing investment, because it lowers the cost of capital. As the Tax Foundation’s Steve Entin wrote in a recent report:

The rules for how quickly a company can write off investments in plants, equipment, and buildings directly impact the cost of doing business. The higher those costs are, the slower the economy will grow. The lower the cost, the bigger the economy will be, and with it the number of jobs and the level of wages.

But it’s important for long-term economic growth that expensing not just be used as a short-term solution to stimulate investment, as it has been used in the past.

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IRS to Increase Audits of Prior- and Subsequent-Year Tax Returns

e Internal Revenue Service needs to strengthen its correspondence audit selection process by auditing more of the prior- and subsequent-year tax returns of noncompliant income tax filers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that the IRS relies heavily on the correspondence audit process to examine individuals who are suspected of underreporting their tax liabilities.

The correspondence audits often result in significant additional tax assessments, and the IRS has found audits conducted by correspondence to be more economical than other types of audits, such as face-to-face audits in IRS offices or out in the field meeting with taxpayers. Statistics indicate that in fiscal year 2012, the IRS conducted 1.1 million correspondence audits and recommended approximately $9.2 billion in additional taxes.

For its report, TIGTA set out to determine the effectiveness of the filing checks made during the correspondence audit process in the IRS’s Small Business/Self-Employed Division. Filing checks are used, in part, by the SB/SE Division to determine whether the same pattern of noncompliance identified on an audited tax return is present on the prior- and subsequent-year tax returns, and if those tax returns also warrant an audit. When they are properly completed, filing checks enable the IRS to better leverage its auditing resources by increasing the overall compliance coverage of every audit.

TIGTA evaluated a statistical sample of 102 out of 7,470 single-year correspondence audits in which the taxpayers involved agreed that they understated their tax liabilities by at least $4,000. Similar tax issues also existed on the prior- and/or subsequent-year tax returns for 43 of the 102 taxpayers. TIGTA found that 32 of the 43 individuals did not have those tax returns audited and, as a result, may have avoided additional assessments ranging from $2,343 to $18,874.

TIGTA pointed out in its report that one factor that may have contributed to the limited number of prior- and/or subsequent-year tax audits in the sample it examined is the emphasis the IRS places on keeping its audit inventories free of older tax years so there is enough time to complete audits and assess any resulting taxes within the three-year statute of limitations for assessments. There are also some control issues involving how current-year audit results are used to decide whether to audit any prior- and subsequent-year tax returns.

TIGTA recommended that the IRS develop and implement procedures that instruct its auditors how they should use current-year correspondence audit results when deciding whether the prior- or subsequent-year tax returns also warrant an audit. To ensure that the instructions are followed, TIGTA also recommended that the procedures should include instructions for monitoring how well current-year correspondence audit results are used in deciding to audit prior- and/or subsequent-year tax returns.

The IRS agreed with TIGTA’s recommendation and plans to develop an Internal Revenue Manual section to address the case selection and delivery process, in addition to the duties and roles of IRS analysts and examiners.

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Consumers could be surprised at tax time due to federal health law

Some families may end up owing Uncle Sam a sizable refund if they accept government help on buying health insurance next year under President Obama’s Affordable Care Act.

A study published Monday in Health Affairs estimates that 38% of families that qualify for federal premium subsidies might have to repay some portion if changes in their household income aren’t reported to the government.

These subsidies are a crucial part of the federal healthcare law intended to help make insurance more affordable for lower- and middle-income people. Individuals earning less than $46,000 a year, and families below $94,000 annually may qualify for these premium tax credits.

But a raise, bonus or other unexpected income during the year could alter a person’s eligibility and subsidy amount, triggering a repayment when the person files income tax forms for 2014. Some policy experts worry that experience could sour people on the healthcare expansion.

“There’s the potential for some sizable repayments,” said Ken Jacobs, the study’s lead author and chairman of the UC Berkeley Center for Labor Research and Education.

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Today’s Humor

The mother was telling her three boys the story of the birth of Christ and how the Wise Men brought gifts of gold, frankincense, and myrrh for the infant Jesus.

After giving it a lot of thought, her six-year-old observed, "Mom, a Wise Woman would have brought diapers."

__________________

Did you hear about the barber who specializes in Mohawk haircuts?  He doesn't do it for a living, though.  He just cuts hair on the side.

__________________

Alice was supposed to bake a cake for the church ladies' group bake sale, but she forgot to do it until the last minute. She baked an angel food cake and when she took it from the oven, the center had dropped flat.

She said, "Oh dear, there's no time to bake another cake." So, she looked around the house for something to build up the center of the cake.

Alice found it in the bathroom .. a roll of toilet paper.

She plunked it in and covered it with icing. The finished product looked beautiful, so she rushed it to the church.

Alice then gave her daughter some money and instructions to be at the sale the minute it opened and to buy that cake and bring it home.

When the daughter arrived at the sale she was too late... the attractive cake had already been sold.

Alice was beside herself.

A couple of days later, Alice was invited to a lunch at a friend's home.  After the lunch the cake in question was presented for dessert.

As soon as Alice saw the cake, she started to get out of her chair to rush into the kitchen to tell her hostess all about it, but before she could get to her feet, one of the other ladies said, "What a beautiful cake!"

Alice sat back in her chair when she heard the hostess (a prominent church member) say "Thank you.  I baked it myself."

 

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