News Letter Page 4
Multiple Years Another Problem
Another major issue is the number of years included in the electronic data. Every tax year stands independent of the other in an audit. Therefore, turning over multiple years of accounting data is a problem and can result in an audit of additional tax years. Software should allow for firewalls to exist between the years, but currently, it is difficult to separate different years in the accounting data, although there are some ways to work around the problem.
What Should You Do?
Extreme caution should be the focus when maintaining your electronic personal and business financial records going forward. To the extent possible, use different programs and data files to maintain your personal records, financial planning records, and non tax business records, such as customer lists. In addition, pressure should be brought upon software vendors to make them adjust their software to allow this partitioning of data.
I will be monitoring the IRS’s practices in this regard and will keep you apprised of any new developments. I will be glad to discuss with you how to implement these suggestions.
RULES FOR DEDUCTION OF EMPLOYEE BUSINESS EXPENSES
If you itemize deductions and you work as an employee, you may be able to deduct certain work-related expenses. However, the rules for deducting employee business expenses can be complicated. One source of confusion for taxpayers is that, unlike the business expenses of self-employed persons, unreimbursed expenses of W-2 employees are treated unfavorably. Self-employed persons may take above-the-line deductions for business expenses. Regular employees must itemize to take business expense deductions and the deduction is limited.
Expenses that qualify for an itemized deduction include:
• Business travel away from home
• Business use of car
• Business meals and entertainment
• Travel
• Use of your home
• Supplies
• Tools
• Miscellaneous expenses
Only unreimbursed expenses qualify for the deduction. If your employer reimburses you under an IRS qualified plan, the reimbursements are not included in your income and you may not deduct the reimbursed amounts. Only employee business expenses that are in excess of 2% of your adjusted gross
income can be deducted. For example, if you have $50,000 in adjusted gross income, 2% of that is $1,000. Therefore, you may only deduct expenses that exceed $1,000. Of course, it is important to keep good records to prove any unreimbursed business expenses you may have during the year.
SAFEGUARDING TAX RECORDS DURING HURRICANE SEASON
During this hurricane season, it is important to keep your financial information safe. I have two important recommendations:
1. You should create an electronic set of backup records and store the records away from the original set.
2. You should document your ownership of valuables by photographing or videotaping your home and its contents.
START-UP AND ORGANIZATIONAL EXPENSES ARE DEDUCTIBLE
It is important to know that the tax laws allow you to deduct a portion of your business startup expenses. Typical types of startup expenses include fees paid to consultants, fees for legal services, advertising costs, employee training costs, and travel and related expenses to find potential distributors, suppliers and customers.
You can deduct up to $5,000 of expenses in the year you begin your trade or business. The deduction is targeted to small businesses. Thus, if your startup expenses exceed $50,000, the $5,000 must be reduced dollar for dollar by the amount that exceeds
$50,000. For example, if your startup expenses are $52,000, you may only take a $3,000 deduction. The rest of the startup expenditures can be deducted over 180 months beginning with the month the business begins.
ANOTHER BLOW FOR THE POST OFFICE
Taxpayers in many states have come to rely on getting their state tax forms placed conveniently in their mailbox each year. However, if you live in Ohio, don’t look for them next year. The reason? It costs over $1.2 million to send them out, according to the State of Ohio. It will be interesting to see if the State’s collections will go down with this strategy. You may expect other states to follow, given the budget problems around the U.S. Mailed tax forms may become a thing of the past.
VOLUNTEER TAX PREPARERS HAD DECLINING ACCURACY RATES, TREASURY STUDY FINDS
Fewer tax returns are being prepared accurately by volunteer tax preparers, according to a new Treasury Department study. The report found that accuracy rates for tax returns prepared at Volunteer Program sites during 2011 decreased from the 2010 filing season. Of the 36 tax returns prepared for Treasury auditors, only 14, or 39 percent, were prepared correctly. Volunteers prepared the tax returns inaccurately because they did not follow all guidelines, used intake sheets incorrectly or, in some cases, knowingly modified the facts the auditors presented, Treasury said. The Treasury study has been criticized as having been based on too small a sample of returns.
IRS’sNumbers Better
In its own study, the IRS reported an overall, weighted accuracy rate of 87.18%. The errors the IRS found include interest income, other income, and itemized deductions. In most cases, the identified errors included incorrect tax law determinations. The IRS said it will use these findings to assist in updating quality forms and improving volunteer training materials for the 2012 filing season.
Observations: The Volunteer Income Tax Assistance program funded by IRS grants is an important service for low-income and elderly taxpayers. However, the volunteer preparers are not subject to the same standards imposed on private tax preparers. Given these findings, perhaps volunteer preparers also should be subject to the competency testing and continuing education requirements currently in force for private tax preparers.
I assure you that I will be keeping a watchful eye on Congress and on IRS actions which may affect your personal finances and your business. I will be happy to address any concerns and answer questions you have about any of the issues covered in this newsletter.
