…Grassley called the chances of achieving full repeal “zero,”…
…the “boundaries” of a “nebulous” deal likely encompassing an exemption of between $4 million and $6 million and a 15 percent to 35 percent tax rate.
Home Sale Due To Financial Difficulty
Subject: sale of homeIf I own a home for less than 2 yrs (more than one year), and need to sell due to financial reasons...meaning I'm unable, as a single able to maintain the home's expenses, what are the tax consequences on the gains. I'm estimating gains to be around $50,000. Current earnings vary and she'll probably earn around $40,000 on income from employment. At what rate does she have to pay the tax on the gains, and is there some way around having to pay that tax? Thanks
You should consult with a tax pro and go over your reasons why you are no longer able to afford your home. If it is because of an unforeseen event, such as losing your job or an illness, you will qualify for the pro-rated exclusion of gain.
You can see more on this on my website.
S Corps & Loan Qualifications
Subject: Section 179 expenseI don’t know if you can help me or not but I am trying to analyze tax returns for a borrower who has an S Corp and on his Sch E there is income loss under the Section 179 heading is this income that I should be able to use when qualifying my borrower or is this truly a deduction like when Sch C people write off expenses? I would appreciate any assistance you could give me. Thank you.
As pass-through entities, S corps are taxed very similarly to sole proprietor Schedule C, as part of the owners' 1040. Section 179 expense for new business equipment purchases is required to be shown on a separate line from the other net income or loss from the S corp because it has its own limitation on the 1040 based on the Section 179 deductions from other K-1s, as well as directly from Schedules C, E and F on the 1040.
I know that different lenders have different policies in regard to using a borrower's AGI for loan qualification purposes. Some lenders use the reported AGI with no adjustments of any kind allowed. Others do allow an add-back for some kinds of quasi-personal expenses that were run through the business schedule for tax purposes.
Normally, the Section 179 deduction wouldn't (and definitely shouldn't) be one of those adjustments. There may be other quasi-personal expenses buried in the S corp's net bottom line. You should ask your borrower and his/her tax preparer for details on those kinds of things if you are so inclined to make that kind of adjustment.
Just adding back the Section 179 would not be appropriate unless your borrower confesses to running personal use assets through his/her business. In that case, you may also want to factor in possible future IRS tax or fraud charges, since they are currently putting S corps under their microscope as I explained in a recent blog posting.
I hope this helps.
Thank you very much and this helps greatly.
“People affected by Hurricane Katrina have more than enough concerns –– taxes shouldn’t be among them,” said IRS Commissioner Mark W. Everson. “We hope the relief we are providing will help taxpayers in their financial recovery from this devastating storm.”
State Licensing of CPAs
Besides high and complicated taxes, another big area of contention has to do with ridiculous regulations that overly control our personal and professional lives. This news piece from Spidell, claiming that Illinois and some other states are requiring CPAs to be licensed in their states if they prepare any nonresident tax returns for their states, borders on insanity.
Maybe it’s because I prepare income tax returns for over 20 states (including Illinois) from here in my home office on a mountain top in the Ozarks. It’s bad enough that I have to maintain my CPA licenses with both Arkansas and California and deal with their different renewal and CPE requirements, even though I haven’t even been to the PRC in twelve years. To imagine having to go through that with 20 different state boards of accountancy is mind boggling.
Perhaps this is just meant to be a method of generating more business for CPAs who are residents of those states. My clients who need Illinois tax returns would have to hire an Illinois CPA to do those returns after I prepare the Federal and other state tax returns.
I can understand licensing CPAs who open physical branch offices within a state. However, requiring all of us who may prepare state tax returns from outside their borders is a classic case of over-reaching.
The Enemy Is Hiring
This help wanted ad was part of today’s email newsletter from the IRS. While not everyone would be willing to work for the Dark Side, it is interesting to see what they are paying the auditors those of us on the good side have to do battle with. Using a 2,000 hour work year (50 weeks X 40 hours), it works out to $36 per hour. Of course, the value of the intangible income (power tripping, striking fear in the hearts of mere mortals, etc.) can only be assessed by each person.
IRS is Accepting Applications for Revenue Agent Positions
The Internal Revenue Service is accepting applications through September 9, 2005 for revenue agent positions in its Large and Mid Size Business (LMSB) Division in a variety of locations.
IRS is seeking tax professionals who are experienced in the areas of financial products, employment taxes, international concerns, information systems (CAS), and general corporate accounting. Minimum starting salary is $72,035 based on a 40 hour workweek with many opportunities for career advancement. Other benefits include health and life insurance, 401(k) and vacation and sick leave.
Revenue agents within LMSB are responsible for coordinating and administering the tax examinations of the largest national and multinational corporations in America. In addition, revenue agents address a multitude of complex technical tax issues ranging from tax shelters to global operations.
Qualified applicants will be scheduled for interviews in October 2005. Final selections and job offers will be made in December 2005 with a start date of March 2006.
Although applications will only be accepted online, you may contact your area recruiter with any specific questions:
West Coast: Iwona.I.Gwizdak@irs.gov
East Coast: Rose.Brantley@irs.gov
Central Region: Rosalind.Y.Lewis@irs.gov
Withdraw Without Penalty – Eight exemptions related to life cycle events
Reporting On Tax Cuts
In spite of the fact that the Left's lies about the effects of tax rate cuts are consistently disproved, there are still plenty of them calling for their repeal.
Deducting Losses From Side Ventures – IRS loses two cases trying to disallow business losses as being from hobbies.
Corrected 2005 Calif. Tax Rates
Spidell has the newly corrected California individual income tax rates for 2005 available in this pdf file.
Estate Tax May Not Be Repealed for Good – RINOs are wimping out from the attempt to remove this vestige of Karl Marx.
…AMT affects some four million families this year. Projected out, that figure is going to balloon to roughly 21 million next year and, within 10 years, 51 million taxpayers will learn the meaning of the three-letter acronym, according to statistics supplied courtesy of the Treasury Department.
Accounting For Loans
Subject: Setting up leases in QuickBooks
We found your web page with tips on QB. We found it very useful, but we were hoping you could help us with a question.
We are a small business that sells less than 10 cars a month. We carry the lease on some of the cars and would like to be able to track payments and have them show against the outstanding balance in QB. Is there a way to use the Loan Manager to track Asset loans as opposed to a Liability loan? If so, could you please give us instructions on how to set this up. If not, do you know of an add-on that would be able to handle this?
As much as I like QuickBooks as the best bookkeeping program for small businesses, the impression (given by Intuit) that it can handle all kinds of record-keeping is just plain wrong.
I have written before of how inadequate the billing function in QB is, except for simple basic matters. As a result, we have been using TimeSlips for decades.
Keeping track of loan amortization activity is something else that QB has no capacity for. Quicken had an elementary amortization function that always required manual over-rides to match the actual payment timing.
There are two loan amortization programs that I can recommend.
For simple low volume loan tracking, TValue 5 from Time Value Software is excellent. I have been using it for several years for cases where a standard consistent payment schedule isn't enough.
For high volume note servicing, the best software is NoteSmith. I have several clients who have been using this for many years to handle their notes. Some of them have several hundred notes outstanding at a time and NoteSmith has allowed them to keep track of them very efficiently.
Unfortunately, neither of these programs has the ability to export loan activity data to QuickBooks. While this does result in some duplication of data entry between the two programs, it isn't that bad a situation. For clients with only a few notes, editing each payment detail in the QB register gives us a match to the detailed amortization schedules. For those with hundreds of notes,we usually make lump sum adjusting journal entries to bring the QB balances into synch with the NoteSmith detail.
Either of these should work for your situation.
Subject: Sale of primary residence
I will appreciate if you can help me.
To take advantage of the $500,000 capital gain advantage, does the property have to be in both husband and wife's name or the requirement is that you should be filing a joint return.
In order to claim the full $500,000 exclusion, you do have to file a joint 1040.
It is only required that one of the spouses had owned the home for two out of the previous five years.
However, it is required that both spouses occupied the home as their primary residence for two out of the previous five years.
If both spouses didn't meet the two-year use test, the amount of gain that can be excluded is pro-rated.
Your personal tax advisor can help work with real numbers for your situation.
Light-Duty Hybrid and Diesel Vehicle Tax Credits in the Energy Bill – I’m not sure how many people will be buying certain energy efficient vehicles based on their special tax credits; but here is a table of some of those vehicle credits.
Vehicle Mileage Costs
Many employers use the IRS’s official rate for vehicle costs for reimbursements to their employees. With the steep rise in fuel costs this year, it is obvious that the IRS’s current 2005 rate of 40.5 cents per business mile, which they actually established last November, is behind the times.
According to this article about Arkansas government employees, they have been paid 37 cents per mile driven for work purposes, and will now have it raised to 39 cents.
Historically, when there is a huge increase in the cost of fuel, the IRS big-wigs takes take their time to see if it is a fluke or something that will last for a while. Since everything I have seen indicates that $3.00 per gallon will soon be the norm, I am betting that there will be a mid-year change in the IRS’s official rate for 2005. The last time they did this was in 1999, with a reduction in the standard rate as of 4/1/99 from 32.5 cents per mile down to 31.0 cents. This year’s change will probably be effective as of October 1, 2005.
As always, this kind of situation points out the importance of keeping records of your actual operating costs so that, at tax time, your preparer can use them to deduct the higher of the standard rate or pro-rated actual costs. Of course, some vehicles, such as those that used Section 179, don’t have the option of which method to use. They must stick with the actual costs.
Self-Employed Embrace Pensions – Not being captive of somebody else’s pension plan (Enron, et al) is the only way to truly feel safe. There are several ways in which to set up plans, with and without the use of a corporate entity.
A Personal Guide to Personal-Finance Blogs – A ridiculously short list of financial blogs from the Wall Street Journal
Can You Work and Collect Social Security? Understand Your Benefits – Some basics from NATP
Look Before You Leave... Your Assets – Good estate planning tips from Gail Buckner
CPA No Longer Chicken Of 1031 Exchanges
I thank you for the excellent service you provided us, including the "short course" for our accountant. He told me later that you had convinced him and that he would have done just what we did. GREAT !!!! Look forward to your response. Thanks again.
I should also point out that I have yet to receive a single note of disagreement over my interpretation of like kind in this regard.
This kind of thing, where I have to educate IRS employees and other tax practitioners on the proper way to handle things, has gone on for decades. Nobody in the tax profession, especially me, can truthfully make the claim to know everything about the tax laws. No such person exists. The laws and rules literally change daily and we all have to learn new things constantly. However, in situations like this, I can’t help but wonder how many people were the victims of the misinformed tax pros. With thousands of poultry houses in this area (Tyson country), this easily could have cost a lot of farmers a ton of taxes that could have easily been legally avoided.
Feds bust two Los Angeles tax preparers for using idiotic claim that income is not subject to tax. – And all of their idiot clients will soon also be in deep doo-doo.
Previously released 2005 California tax rates incorrect – FTB is supposed to correct them next week.
“This new GAO report tells us that good numbers on tax compliance remain rare. The IRS needs more precise information about the tax gap in order to better target its resources and, as a result, stay focused on the tax cheats and leave honest taxpayers in peace.” – Senate Finance Committee Chair Chuck Grassley, R-Iowa
The era of big tax cuts may be over - Our GOP rulers have very clearly shown their utter disregard for limits on government spending. Are they going to next wimp out on reducing tax rates? There is still one political party that strongly believes in low taxes and low government spending.
Subject: query regarding blogads on the taxguru siteHello,I manage an internet store that sells t-shirts and mugs for tax attorneys and accountants (www.taxshirts.com). I was wondering whether your site accepted blogads, and if so, what the weekly rate is.Thanks so much,Lisa Binder
Currently, the only ads I have on my sites are the standard vendor affiliate programs. I am not set up with BlogAds. However, you are the second person to inquire about that; so I will look into setting that up if there appears to be sufficient demand.
Good luck with your product sales. Thank you for your interest in advertising on my sites.
Stock Picking Scam
Today’s Braingle Brain teaser covered how so-called stock market gurus pull in gullible victims. Again, this isn’t new, but is crucial to remember.
Ok, so here is the deal. One day, you get a call from some random guy who says "Next week, ABC stock is going to move up. I'm not asking you to buy any stock from me, but just take a look." You do so (why not, it can't hurt...) and he was correct. Sure enough, next week you get another call from the "Lucky Guesser". His pick? "DEF is going to go down." And guess what! He was right again!
For five weeks, this guy predicts the behavior of stocks. The sixth time he calls he says, "I've been right the past five times. This time I have a stock for you and I do want you to buy some shares through me. What do you say?"
Well, what do you say. Do you buy shares from this guy?
Answer:Heck no! He's playing you like a puppet. First week he calls 100 people, says to half ABC will go up and to the other fifty, he claims it will go down. When ABC goes up, he called the fifty he'd correctly predicted to and told half DEF would go up, and half it would go down. By the time he's at week five, he has a few people (2-4) thinking he's a stock market god.
2005 California Tax Rates
While Federal individual income tax rates and brackets, as adjusted for inflation, are made public relatively early (9/23/04 for the 2005 rates), the California Franchise Tax Board takes its sweet time announcing theirs. According to this article from CCH, the 2005 inflation adjusted rates have just been released. I wasn’t able to find this on the FTB’s website, or even on Spidell’s.
Update: Spidell has produced a pdf document with the newly announced 2005 figures.
A Lesson In Taxation
Many of us may have seen the following over the years; but it’s always nice to have it handy to balance out the left’s anti-taxcut propaganda. Thanks to Virginia tax practitioner Len Boush for finding this on the Yahoo stock bulletin for H&R Block and passing it along.
A LESSON IN TAXATION
Sometimes Politicians can exclaim; "It's just a tax cut for the rich!!", and it is just accepted to be fact. But what does that really mean?
Just in case you are not completely clear on this issue, we hope the following will help:
Tax Cuts - A Simple Lesson in Economics.
This is how the cookie crumbles. Please read it carefully.
Let's put tax cuts in terms everyone can understand. Suppose that every day, ten men go out for dinner. The bill for all ten comes to $100.00. If they paid their bill the way we pay our taxes, it would go something like this:
The first four men (the poorest) would pay nothing.
The fifth would pay $1.00
The sixth would pay $3.00
The seventh $7.00
The eighth $12.00
The ninth $18.00
The tenth man (the richest) would pay $59.00
So, that's what they decided to do
The ten men ate dinner in the restaurant every day, and seemed quite happy with the arrangement, until one day, the owner threw them a curve.
"Since you are all such good customers," he said, "I'm going to reduce the cost of your daily meal by $20.00"
So, now dinner for the ten only cost $80.00. The group still wanted to pay their bill the way we pay our taxes. So, the first four men were unaffected. They would still eat for free. But what about the other six, the paying customers? How could they divvy up the $20.00 windfall so that everyone would get his "fair share"?
The six men realized that $20.00 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being "PAID" to eat their meal.
So, the restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay. And so:
The fifth man, like the first four, now paid nothing (100% savings)
The sixth now paid $2.00 instead of $3.00 (33% savings)
The seventh now paid $5.00 instead of $7.00(28% savings)
The eight now paid $9.00 instead of $12.00 (25% savings)
The ninth now paid $14.00 instead of $18.00 (22% savings)
The tenth now paid $49.00 instead of $59.00 (16% savings)
Each of the six was better off than before. And the first four continued to eat for free. But once outside the restaurant, the men began to compare their savings. "I only got a dollar out of the $20.00", declared the sixth man. He pointed to the tenth man "but he got $10.00!"
"Yeah, that's right", exclaimed the firth man. "I only saved a dollar, too. It's unfair that he got ten times more than me!"
That's true"! shouted the seventh man. "Why should he get $10.00 back when I got only $2.00?? The wealthy get all the breaks"!!
"Wait a minute", yelled the first four men in unison. "We didn't get anything at all. The system exploits the poor"!!
The nine men surrounded the tenth and beat him up. The next night the tenth man didn't show up for dinner, so the nine sat down and ate without him. But when it came time to pay the bill, they discovered something important. They didn't have enough money between all of them for even half of the bill!!
And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes are perceived to get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up at the table anymore. There are lots of good restaurants in Europe and the
Tax Man Song
For obvious reasons, George Harrison’s song has been a big favorite of mine. We’ve used excerpts of it in several of my audio and video recordings, usually as performed by George or the Beatles. A few years back, I happened to see the bluegrass group Nickel Creek perform the song on PBS's Austin City Limits show. Since them, I have been looking for a copy of their version. None ever show up via the file sharing services. I even wrote to Nickel Creek, offering to pay for a copy of the song. I never heard back from them.
Last week, PBS replayed that particular episode of Austin City Limits. This time, I was ready with our new hard drive digital video recorder. I recorded the show, and then made an MP3 file with just the TaxMan song. It’s not necessarily better than the classic version of the song we all know so well. It’s just an interesting interpretation. I have it on my website for non-commercial amusement purposes only.
Section 179 For Child Care Business
Subject: Section 179 for SUV Valid for Child Care Business?
I've been reading your blog with great interest and have almost gotten the answer I need, specifically around section 179 deduction for a 6000lb or greater SUV in 2004.
The only open question I had was if a Child Care business qualifies for this vehicle deduction. My wife decided to start a child care business last year and we purchase an SUV so she could have a very safe vehicle for her business. After a couple of months of finding the right family, she started taking care of 3 children and has been with the family ever since. The SUV is mainly (more than 80%) used by her to travel to and from our home to the family's home, pick up the children from school and take them to various other activities. In my view, the SUV is an integral part of this business and I wondered if we can deduct the cost of the car as a Section 179 expense against the child care business.
Thank you so much for your answer.
As always, anyone with a business should be working with a tax pro to legally minimize your taxes and to see how simple matters like Section 179 apply to you.
Equipment purchased for a child care business is just as eligible for the Section 179 deduction as for any other kind of business. The same restrictions apply, such as the taxable income limitation and the requirement that the item be used more than 50% for business.
This second point is one that you and your wife will need to work on with your own personal tax advisor. Specifically, the wording of your question makes me wonder where her business is located for tax purposes. If the kids are brought back to your home to be taken care of, then all miles related to that would count as business related. If, on the other hand, all of her work is done at the parents' homes, there could be a problem counting the drive back and forth from your home as business miles and not as nondeductible commuting.
Good luck. I hope this helps.
thank you very much for your answers. You answered exactly what I needed to know and also thanks for making me aware of the commuting miles.
It's really great to have your site.
A Super-Charged Roth IRA – Gail Buckner on Roth style 401(k) plans
Energy Tax Incentives Act of 2005 – Summary of new law from QuickFinders
Pennsylvania Tax Protester Convicted for Not Filing Returns – Another tax protesting scammer, Larken Rose, may soon be residing in the old gray bar hotel. It’s about time. This scoundrel has been spouting his garbage for several years.
Senators Say Study Indicates IRS May Be Wasting Millions on Training – Big news – a government agency wasting taxpayer dollars?
If the NY Times Actually Had Any Credibility:
Fortunately, everyone understands that the Times is nothing but a propaganda outlet for the DemonRats. Doing the opposite of what they advise usually works out the best.
QuickBooks 2006 Beta Testing
For the past several years, I have been beta testing the upcoming versions of QuickBooks as they got the program ready for its annual release. For the 2006 version, Intuit is opening the doors to even more testers, as they hope to uncover more problems before releasing the final version to the public. For the first time that I can recall, they are also offering a prize to one of the 5,000 testers.
Warning: The file that needs to be downloaded is 387 MB; so only apply if you have a good broadband internet connection. In previous years, those of us without broadband had a choice to receive a CD-ROM of the program. That’s not available this year. We just had DSL service installed a few weeks ago; so I am going to give this download a try later tonight after my online radio shows are over.
Following is the email I received from Intuit announcing this opportunity.
Subject: QuickBooks Test Drive Offer To Your Clients
(This email is being sent to you because you are a valued QuickBooks ProAdvisor(R)).Dear Kerry Kerstetter,Recently Intuit sent out an offer to a group of QuickBooks users encouraging them to test-drive the next version of QuickBooks (codenamed "Denali") with a prize drawing as an incentive for participation.You may have seen this email, or had inquiries about it from your clients. We have received questions about it, and want to assure you that this is a legitimate request from Intuit. We are truly offering one lucky winner the option to choose from the list of prizes below. We would appreciate it if you would participate in this test and forward this request to your clients encouraging them to participate too. The first 5,000 participants will be entered in the drawing for the winner's choice of prize mentioned below. If you have any questions, please feel free to contact Chris Rabourn at 650-944-2635.Below is the original email:Dear Kerry Kerstetter,Welcome to the Denali 5000! "Denali" is the codename for our next version of QuickBooks, and we are asking 5000 of our QuickBooks drivers to take Denali ONCE around the track! By participating in this test, you will _help us make QuickBooks better, get a sneak peek at the next version of QuickBooks, and have a chance to win your choice of a 7-day trip to Hawaii for two, a 42" plasma TV or $2,000 in cash!To participate in this test, you will need to download and install the Beta version of QuickBooks, update a copy of your current QuickBooks data file, do a few activities and then complete a short survey. You will then uninstall the Beta version and continue using your existing version of QuickBooks. For most participants, this will take 30 to 60 minutes. In case you experience any difficulty, we will have a team of support engineers available to help you.If you are interested in helping us with this field test, please click on the link below to complete an online Non-Disclosure Agreement for pre-release software. You will then have access to The Denali 5000 website where you can download the software. Because of the large file size, high speed internet access is required. The Denali 5000 is open to current QuickBooks for Windows users only. The online survey is the official entry form for the sweepstakes drawing, and only the first 5,000 users who complete the online survey are eligible for the sweepstakes drawing.Please copy this link into your browser: http://beta.intuit.com/D5KSU/default.htmlThank you for helping us make QuickBooks a better product for you and the millions of other QuickBooks users!-- The QuickBooks "Denali" TeamA single prize will be given away to one Grand Prize Winner. The Grand Prize Winner will select one of the following three prizes: a 42" Plasma Screen Television, or a trip for two to Hawaii, or a cash prize of two thousand dollars ($2,000). To see the contest rules, please copy this link into your browser: http://beta.intuit.com/D5K/content/readme.cfm
Residence Sale After 15 Months
Subject: Sale of Primary Residence question
I’ve pulled some valuable information off your site, and I thank you.
One thing that is not clear to me ~ If I sell my primary home which I have owned and lived in just 15 months, (and never rented) ~ what taxes will I be subject to?
I would greatly appreciate your clarification. I understand what happens after two years, but it’s rather gray in that 1-2 year span.
It all depends on why you are selling before you have been in the home for the full 24 months.
If you have a qualifying reason, then you would be entitled to exclude approximately $156,250 of profit ($250,000 / 24 X 15). Any profit above that would be taxed as long term capital gain.
If you don't have a qualifying reason for moving out so soon, all of your profit will be subject to taxation as long term capital gain.
What you do with the sales proceeds will have absolutely no effect on this issue.
You can see more on this on my website.
As always, you need to consult with a tax pro who can crunch your actual numbers to see how much, if any, tax you will have to pay on this sale.
IRS Audits of Amended Returns
Subject: Amended returns causing an AuditHello Kerry,
Fellow CPA here from CA. Earlier in the year you mentioned anecdotal evidence of increased audits for amended returns. I searched through the last few months of posts and didn't see any more information. Is there any new news?
I have a new client that would benefit to the tune of $2-3k if I amend a prior self-prepared 1040, but I want him to be aware of the potential risks.....
In other words, is the coast clear yet?
Honestly, I don't know if it is because I haven't prepared any amended tax returns since this IRS program came to light. This has cost a number of clients several thousands of dollars in lost refunds; but we figured that was better than having to undergo the time consuming process of a full blown IRS audit. It is quite a dilemma.
I have yet to hear from IRS personnel that this policy has been dropped; but I will make some low key inquiries on this when I next speak with them.
We would all be very interested in hearing from other practitioners around the country as to their recent experiences with amended returns with refunds over $5,000. Hopefully some will write in and let us know if their clients were able to actually receive those refunds without an audit. Any feedback would be appreciated and quite helpful for those of us who want to know if the water is safe from the IRS sharks.
Thanks for the quick reply.
I know that another CPA in our office had a client file a 2003 1040X with a large (>$10k) refund earlier this year; it has now turned into an audit case.
However, extrapolating from that incident may not be 100% legitimate. From what I understand, there were plenty of unusual items on both the original and amended return that could've triggered/flagged for an audit without the added help of the amendment
Although that may be a coincidence, it doesn't sound like it. If that audit was started after the 1040X was filed, and a notice was received from the Service Center that it was being sent to the local field office, it sounds exactly like what happened with my two clients. The auditors then go nuts on their fishing expedition, trying to find enough things that were not even changed on the 1040X in order to convert that refund into a tax due.
Hopefully, we will receive some input from other tax pros, which I will post on my blog.
Exploring the "Tax Gap"
Ohio CPA Dana Stahl has picked up the torch to get to the bottom of the IRS’s “Tax Gap” figures:
Subject: IRS Tax TalkMr Guru - I've been participating in an IRS "Tax Talk" today. One presenter mentioned that "Tax Gap" study from a couple of months ago, where IRS determined there is an over $300 billion tax gap in taxes that should be collected vs taxes actually collected. The presenter stated IRS examined over 46,000 1040's from 2001 & then came up with their findings. I asked the presenter if there was someplace that I could look at this study in more detail. I didn't go into our theory that these type of studies with their conclusions are merely WAGs. It will be interesting to see if there is actually a way to review these studies & their conclusions. I'll let you know.
…the presenter asked me to email her my question and then she would "get back to me". I'll be waiting anxiously!
I wrote back:
I would be very interested in seeing what documentation they provide you. I doubt that it will be much more reliable than what I found several years ago when I spent a lot of time trying to track down the actual data behind one of those IRS press releases about the tax gap. I followed the chain of command all the way into IRS headquarters in DC, where they finally admitted that they made the numbers up.
How studying a certain number of tax returns to determine the tax gap makes sense is something I don't understand, since the main component of the mysterious tax gap is supposed to be people who don't even file tax returns.
They don't even have the decency to admit that they really have no way of knowing the size of the underground economy because such measurements are by definition impossible to make; so they persist with the pretense of knowing exactly how large the tax gap amounts are, with the implication that they could zero out that gap if they were only given enough money and power.
As always, it's nothing more than a propaganda ploy that IRS uses to convince our rulers and the public to give them more money and power. It's just one more (of many) indications of the lack of true journalistic skills nowadays that the mainstream media just continue to report the IRS's tax gap numbers as gospel without the least bit of investigation into their source, as you and I are doing.
Thanks for keeping me in the loop on this.
Two Primary Residences
Subject: We have two homes and...
we want to get married. His home has 400,000 equity and mine has 500,000. We were going to sell mine that will hit two years in March. If we got married in January and sold in March...could he qualify with me as this being our primary res.? And we would move into his. OR does he have to live here with me to qualify?
You will only qualify for a $250,000 exclusion. Your example sounds just like the following from the IRS website:
Example 1 one spouse sells a home.
Emily sells her home in June 2004. She marries Jamie later in the year. She meets the ownership and use tests, but Jamie does not. Emily can exclude up to $250,000 of gain on a separate or joint return for 2004.
Basically, the only way to increase that exclusion above $250,000 would be to add your fiance's name to the title and have him occupy it as his primary residence. It's worth $342.47 of tax free gain for each day that he meets the ownership and use test.
What you really need to do is make a thorough and complete calculation of the cost basis of your home so that you can keep your gain to the lowest amount possible. The amount of equity you may have in the home is a completely different number than your cost basis or your potential profit. If you haven't been keeping track of how much you have invested in the home, you need to get started reconstructing that ASAP. Be sure to include the costs of any appliances, furnishings and fixtures that you will be including as part of your home sale.
And most important, work with a tax pro who understands how to minimize the taxation of home sales.
Vehicle Trades & Section 179
Subject: Section 179
Dear Kerry,I wanted to inquire as to your fee to get a determination on the following tax issue:I purchased an SUV for my business in Dec 2002 and took the sec .179, (24k) plus 1st year accelerated depn (approx 7k).Traded it in Sept of 2003. for another that was 7,000 more and reported a like kind exchangeNow, Aug 2005, I want to trade it for a station wagon. (non qualifying under sec 179). Value of the trade is about 31,000 and the new car is about 60,000.What are the recapture issues. When will it not matter, etc.Thank you,
While the new station wagon may not qualify for the huge Section 179 deduction that vehicles over 6,000 pounds do, it does qualify as a like kind asset for an exchange from your current SUV.
Since you are trading up and not receiving any cash out of this transaction, the only way any Section 179 recapture would kick in is if the new vehicle is used less than 50% for business purposes before December 2007 (five years after the original SUV was purchased). If that happens, a pro-rated recapture would be required.
If that's a possibility, you should work with your personal tax pro to see how much that would cost you in actual tax dollars.
Customizing QuickBooks Reports
I received this in response to one of my QuickBooks tips on setting up reports.
Subject: Please help me with your expertiseFor example, Sherry’s Tax Free Exchange Corporation holds millions of dollars in trust for clients to reinvest. I wanted to use QuickBooks to keep track of each client’s funds balance without having to keep separate records. QuickBooks doesn’t allow a report of an account’s activity to be sorted by the memo field, which is where I include the client’s name for checks written and wires sent. I found that I could go into the liability account I have set up for client trust funds and reverse the memo and payee entries (using Windows copy & paste) so that the client’s name was in all of the payee fields for all of the activity related to him. I configured (and memorized) a report to list all of the activity in the Client Trust Funds sorted and subtotaled by Payee. It allows me a perfect reconciliation of exactly how much money we are holding for each client.Will you kindly tell me the configuration of your report to list all activity in the Client Funds sorted and subtotaled by Payee? Many thanks.
I tried to save my report as a template that you could import and use; but it wouldn't let me.
What I set up was really just a basic Transaction Detail By Account for the Trust Funds Liability account totaled by Payee. I set the date range very wide and well into the future to cover all activity for several years to come.
In order to print out just the activity for any one client's trust fund activity, I check the box next to "Page break after each major grouping" in the "Print Report" window.
Good luck. I hope this helps.
TP buying a replacement property thru his newly formed one member LLC. He lends his LLC $ 100 to be able to buy this property in cash. If he turns around and refinance it for $200, can he distribute it without paying any income tax?
It will depend on his basis in the LLC, normally by the balance in his capital account. If it has a positive credit balance of more than $200,000, such a distribution would have no tax effect.
However, if a $200,000 distribution puts that capital account into a negative debit balance, the excess is required to be reported as taxable income to him.
A common way around this is to avoid pushing the capital account into a negative balance and post any payment amounts that would do so as a "Loan To Member: on the LLC's books. To better document the status of a loan between TP and the LLC and protect against any possible IRS reclassification, it would be a good idea to draw up a loan agreement and have TP actually make payments on that loan.
I hope this helps.
IRS Summons On CPA
Great web site! I am a CPA in South Carolina. I have received an IRS Summons for me to appear with any records I may have regarding a former client. The summons came from a local agent in the small business/self-employed division. All source documents/records were returned to the client previously.
It has always been my understanding that in tax prep engagements (non-attest work), my responsibility is to only keep a copy of the tax return for my files.
Do you agree?
Lastly, any words of advice on how to proceed based on your experiences would be greatly appreciated. I am a little concerned about having a conversation with an agent regarding a former client that I am not representing in an exam. The last thing I want to do is to say or do anything that would damage some position or strategy the taxpayer or their representative may have taken that I am not aware of.
Any thoughts/advice would be most welcome.
Thanks in advance,
It sounds like a standard wide net fishing expedition by the IRS agent to round up documents that the taxpayer has refused to provide willingly. Such a request in no way means that you have or ever had any legal requirement to retain any original source documents or copies of them. Even if you only have copies of the 1040s that you prepared, IRS agents prefer to ask us preparers for them rather than wait the several months it would take to obtain them from inside the IRS system. What they would also need to see would be copies of any worksheets that you used as part of the tax prep process that weren't attached to the return that was filed. For example, some preparers do not attach detailed depreciation schedules to their 1040s (a big pet peeve of mine).
As we all know far too well, only attorneys have client confidentiality protection, and we mere CPAs have to do what IRS demands in this regard. I have never thought that to be morally right; but unfortunately, the courts have always helped IRS enforce those kinds of summons in support of their perceived mission - more money for the government.
In regard to how I would respond to the summons, I would make photo-copies of the 1040s for the years being requested, along with any backup worksheets or other documents, such as client organizers, that are in your files. I would then mail them to the agent. In regard to personally discussing anything with the auditor, I don't see how the summons covers that. I would just send copies of the documents you have, along with a signed statement that these are all inclusive of what you have in your possession for that client; and refuse to have any conversations with the auditor, where he will try to get you to say something incriminating about your former client.
Of course, if the former client's case goes bad and he is indicted on criminal tax evasion charges, there is always a chance that you could be subpoenaed as a witness and have to testify at the trial. It sounds like that kind of situation would be a long ways off; so hopefully you won't have to go through that.
Good luck. I hope this helps.
Please let me know if there are any strange twists to this that you wouldn't mind sharing with me and my readers.
You are exactly right. It is the standard fishing expedition. I get a strong sense the taxpayer has been unwilling to cooperate.
I will compile more complete notes on this and forward to you. It may be helpful to someone else later on.
Thank you very much for your help and info. I look forward to staying in touch.
Exchanging Poultry Houses
Over the past few decades, I have had several debates about what constitutes “like kind” as part of Section 1031 tax deferred exchanges. A new type of disagreement that I had never heard of in my 27+ years of consulting on 1031 exchanges came up a few weeks ago, as Sherry was working with an exchange client who wanted to dispose of a poultry farm and replace it with a different kind of farm property. Their CPA had told them that such an exchange was not legal, which led to the following email exchange between me and that client’s CPA.
From The Exchange Client:
Our accountant tells us that the 4 poultry houses (with a Tyson contract) will not fall under a 1031 because they are a single purpose agricultural unit and would be considered a personal business and "theoretically" could be moved. We questioned this because we thought we could use them in the exchange also and further reduce the tax load.
My first email to the client’s CPA:
As you know, some kinds of real estate are allowed by IRS to be depreciated under Section 1245, while others are under Section 1250. The definition of like kind for 1031 exchanges does not distinguish between depreciation classes.
The only description given in IRS rules, regulations and instructions has been "real property for real property" without regard to class. In all of my years working in this area, I have never seen or heard anything from IRS requiring that the original and replacement properties be depreciable under the same code section (1245 or 1250). What is more critical is how state law classifies the property. If they treat it as real property and not personal property, then it falls under the same general classification for 1031 exchanging.
Over the years, I have actually prepared a number of returns where Section 1245 real property has been exchanged for 1250 real property and IRS has never had any problems.
I just pulled out one of my main reference sources regarding 1031 exchanges, the Thomson-West book "Tax Free Exchanges Under Section 1031." I couldn't find any distinction regarding exchanging between Section 1245 and 1250 properties. They have a short list of some examples where different kinds of real property have been treated as qualifying like kind under Section 1031. Some of these aren't even under Section 1245 or 1250; so the definition of like kind for real property is very very wide.
I will copy these pages and fax them to you later this afternoon.
I hope this clears up any confusion you may have.
Kerry, I got your fax. I agree that there are no class distinctions regarding section 1250 property and that the the choices here are very broad. However, the exchange of 1245 property for real estate is denied by the regs. How do you get around the IRS definition of poultry houses?The fact that your exchanges have never been challenged doesn't mean the IRS agrees with them. I'm wondering if your contracts are being attached to returns, and whether they separately identify all the section 1245 property involved. If not, maybe we should try one and see if it flies. If you have no objections, we could do the client’s contract in that manner, and I'll submit a copy with their return.Let me know. Thanks.
As I've said, we've never had any problems with IRS accepting the classification of poultry houses as business real property as long as they were assessed by the local counties as such.
This is very similar to a situation I have frequently encountered over the past 20+ years when discussing 1031 exchanges with various people. A common misconception is that only the exact same kinds of real estate must be involved in an exchange. For example, a single family rental house can only be replaced with another single family rental house. Or an office building can only be replaced with an office building; and so on. I have heard this from many tax pros, as well as from IRS auditors. When I explain that the definition of "like kind" is any type of business or investment real property for any type of business or investment property, they ask me when the rules were changed to allow this kind of cross-over between different kinds of real estate. I then explain that those were always the rule and it was never restricted to the same exact kinds of real estate. IRS's own instructions for valid like kind exchanges include examples of different types and classes of real estate being involved.
However, as you know, with personal property, the definition of valid "like kind" is much more narrow and is where the depreciation classes used are extremely important in deciding whether the original and replacement property qualify for Section 1031 treatment.
The 8824s reporting the exchanges have always included complete descriptions of the properties involved; so IRS has had plenty of chances to see where special use properties such as poultry houses and self storage units have been exchanged for completely different kinds of real properties. IRS has never had any problems with the returns I prepared and we have never heard of any problems with tax returns that were prepared by other accountants for these same kinds of exchanges.
I've never attached an actual exchange agreement to the tax returns that I have prepared, and I have no way of knowing if any other tax preparers attached any to the returns they prepared. However, I have always been a big believer in attaching a ton of explanatory info to tax returns when there are things that may be considered out of the ordinary. That is the main reason I have never believed in the IRS's electronic filing program. If you feel such a need to attach a copy of the exchange agreement to the clients' 1040, by all means do that. I am completely confident that there will be no problem from IRS in regard to this.
What I didn’t include in any of emails was the fact that I also went through the TaxTools questionnaire / flowchart regarding qualification for a 1031 exchange with this client's info and it qualified with no problem. In fact, it never asks for the type of depreciation that was claimed on either the original or replacement property. As I mentioned earlier, I had never seen or heard of that being a factor in determining like kind status of property. As long as the county assessed the poultry houses as real property (which it did) and not personal property, IRS would honor that as like kind for an exchange into other types of business or investment real property.
Bush says tax cuts responsible for growing economy – Lower tax rates have always encouraged more economic activity, in spite of what DemonRats and RINOs say. They are as incompetent at understanding basic economic principles as they are at dealing with national security.
Democrats believe the tax cuts have done little more than drain the U.S. budget and even some Republicans doubt the wisdom of extending them.
The better possibility:
In his radio address, Bush renewed his call for making permanent the tax cuts he pushed through Congress in his first term.
When I first started in the tax prep business 30+ years ago, the first extension (Form 4868) we filed on April 15 was only for two months, until June 15. Some years back, that was changed to the four months that we now obtain from the 4868. According to this IRS announcement, the 2005 4868 will be for six months. This will save us a ton of time filing the 2688s that are due in by August 15.
New Form 4868 Planned to Provide a 6-Month Extension Period
A draft of the revised IRS Form 4868 is now available on IRS.gov. This revision will give taxpayers a 6-month extension without the need to file an intervening form. For Tax Year 2004, a taxpayer filing a Form 4868 had until Aug. 15 to file the return. The taxpayer needed to file Form 2688 to get an additional 2 months and had to supply a reason for needing the additional time. Provided the necessary regulations are approved taxpayers will be able to use the revised form for Tax Year 2005. It is estimated that this change may save 9 million hours.
It is interesting that so many people are ready to scrap the space shuttle because it was designed in the 1970s; yet refuse to allow anyone to touch their sacred 1930s Social Security program.
We need a complete overhaul of the tax code – Understatement of the century. Actually, a better approach would be to scrap it entirely rather than continuing the Frankenstein monster approach that has always resulted in the same kind of mess that we’ve always received from our imperial rulers in DC.
Accountant or Spy?
From Ron Braun
There is something to be said for investing in real tangible things instead of in imaginary assets, such as internet stocks.
The only way to make guaranteed income in the stock market
From Cheapskate Monthly
Estates of Pain – People are dying to get out of Connecticut and escape its estate tax of up to 16%.
IRS's Tougher Stance Faces Resistance – Good look at the current status of IRS enforcement actions.