Audit Rates Decline for Sixth Year in a Row – But don’t get complacent…

The IRS reported audit rates declined last year for the sixth year in a row and reached their lowest level since 2002. That’s good news for people who don’t like to be audited (which is everybody)!

But don’t get complacent. A closer look at the IRS data release reveals some audit pitfalls you should know about. Here is what you need to know:

Audit Rate Statistics for Individuals

Audit Rate Statistics for IndividualsSource: IRS Data Books

Observations

  • Low statistics for audit examinations obscure the reality that you may still have to deal with issues caught by the IRS’s automated computer systems. The most common are math or typo errors and missing forms. These could be enough to trigger a correspondence audit, which is done through the mail. While not as daunting as a full audit, you’ll need to keep your records handy to address any problems.
  • Average rates are declining, but audit chances are still high on both ends of the income spectrum: no-income and high-income taxpayers.
  • No-income taxpayers are targets for audits because the IRS is cracking down on fraud in refundable credits designed to help those with low income, such as the Earned Income Tax Credit (EITC). The EITC can refund back more than a low-income taxpayer paid in, so scammers attempt to collect these refund credits through fraudulent returns.
  • High-income taxpayers have increasingly been a target for IRS audits. Not only do wealthy taxpayers tend to have more complicated tax returns, but the vast majority of federal income tax revenue comes from wealthy taxpayers. Based on the statistics, the very highest income taxpayers can assume they will be audited about every six years.
  • Complicated returns are more likely to be audited. Returns with large charitable deductions, withdrawals from retirement accounts or education savings plans, and small business expenses and deductions (using Schedule C) are more likely to be the subject of an audit.

Stay Prepared

Though audit rates are declining, don’t discount the possibility that you may still be selected randomly for an audit. Always retain your tax records and support documents for as long as you need them to substantiate claims on a return. The IRS normally has a window of three years from the filing date to audit a return, but this can be extended if the agency believes there’s any fraudulent activity going on.

If you do receive an audit letter from the IRS, it’s best to reach out for some professional assistance as soon as possible.

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Look for Tax Help When Disaster Strikes

Disaster Losses

When natural disasters occur, they often leave many people with severely damaged or destroyed homes and businesses. Some lose everything they own. If you are affected by a disaster that is declared by the President to qualify for federal assistance, there are several provisions in the tax law that may provide relief.

Extended tax deadline and interest abatement. The IRS is authorized to postpone the deadlines for filing returns and paying taxes for up to one year in a Presidentially declared disaster area. Also, the IRS will not charge interest that would otherwise accrue for the extension period.

Faster refund. Taxpayers suffering losses in a federal disaster area have a choice of which tax year to deduct the casualty loss. You may deduct it on the return for the year the loss occurs, or it can be claimed on your prior year’s tax return. Amending your prior year’s return may give you a refund of much-needed cash sooner than waiting to deduct the loss on your current year’s tax return.

Tax-free gain. If the insurance payments you receive exceed the tax basis of your property, you will end up with a casualty gain. Casualty gains in federal disaster areas receive special tax treatment. For example:

  • Individuals may qualify for up to a $250,000 gain exclusion ($500,000 for married couples) on their principal residence. That’s because the destruction of the residence is treated as a “sale” for tax purposes.
  • No gain is recognized on the insurance reimbursement for the contents of a building as long as those contents were not separately listed on the insurance policy.
  • If you replace your property with similar property within four years, you may be able to avoid or postpone paying tax on any gain from your involuntary conversion.

If you suffer a casualty loss, call to discuss the best tax course of action in your situation.

Six tips for business success

Tips for success

It’s difficult for smaller companies to compete with the management capacity of large chain stores or franchise operations. However, small companies can act more quickly than big companies. So, if you know what to monitor and where to get information, your business can be as successful as any.

Consider the following ideas for saving time and money and making your business more profitable.

1. To sell right, you have to buy right. If you’re going to offer your customers prices that are competitive, you must first buy competitively. Attend wholesale auctions, buy factory direct where possible, and establish a buying co-op with other small but noncompeting businesses.

2. Treat your customers right and they’ll keep coming back. Customer service pays off in higher profits. Your entire staff should be aware that it is the customer who provides the money to meet payroll and pay for future salary increases.

3. Learn from other people in small businesses. Develop a circle of friends in similar businesses around the country. Discuss ideas and business problems with them on a regular basis. You’ll find out what others are doing to manage problems with inventory, receivables, personnel, fixed assets, computers, etc.

4. Try new ideas. Be innovative and unconventional when necessary. The fact that something isn’t currently being done in your industry or in your area shouldn’t keep you from trying something different if it will give you a better product or better service for your customers.

5. Ask your employees. Companies that ask employees for suggestions get good results. Your employees are directly involved with both your customers and your product and are in a good position to suggest improvements.

6. Make costs everyone’s concern. Motivate your employees to be concerned about net profit. They should be as concerned with controlling costs as with generating sales. To encourage participation, consider implementing a bonus program based on a percentage of costs saved.

Women need a financial plan

Traditionally, women have kept the household accounts while their husbands handled investing. But these days, women are likely to have their own careers. They get married later in life and may get divorced. And on average, they live about seven years longer than men. So whether by choice or necessity, many women will be responsible for their own money at some point in their lives. Here are some ideas to help get your financial plan in order.

Retirement fund. Saving for retirement is crucial. Even small amounts can go towards U.S. savings bonds or mutual funds with an automatic savings plan. If you have more money to work with, diversify your holdings among several types of investments. The younger you are, the more you should consider growth investments, which are likely to increase your nest egg in excess of the inflation rate. True, your strategy may change over time, depending on your age, total assets, tax bracket, and tolerance for risk. But you should never totally stop investing for growth.

Disability insurance. Of course, picking winning investments isn’t the only goal of good financial planning. Adequate insurance is also essential. For example, disability is far more common among middle-aged people than death, yet disability insurance is often overlooked. Consider supplementing any employer’s coverage with your own policy. Most people aim to replace 60%-80% of pretax income, since disability payouts are generally tax-free. A disability policy should cover partial disability as well as total disability. You should be able to save money on premiums by opting for a longer waiting period before receiving benefits.

Life insurance. If you have dependents, you need enough life insurance to protect them. This is true even if you’re a married stay-at-home mom, if your absence as caregiver would create financial hardship for your family.

Estate plan. Finally, prepare an estate plan that meets your needs. Review it with your accountant and your attorney every few years to ensure that you stay current with the tax law and with changes in your personal circumstances.

If You’re Expecting a Refund,

The end of tax season is approaching and if you’re getting a refund, here are four useful tips to know.

  1. The average refund is more than $2,000. About three-fourths of Americans get a refund from the IRS every year, and the average check last year was $2,895. Since a refund is really your money, it’s like giving the federal government an interest-free loan every year.
    Tip: If you’re getting a big refund this year due to overpayment of tax, it may be worth adjusting your withholdings to eliminate overpayment for 2018. Just remember to adjust for new tax law changes.
  2. Most refunds arrive within three weeks. The IRS says it issues nine of 10 refunds within 21 days. However, electronically filed returns will usually get a refund faster than those filed by paper in the mail.

    Tip: You can start checking on the status of your refund within 24 hours after you’ve filed an electronic return, or four weeks if you filed a paper return. Go to https://www.irs.gov/refunds.

  3. Sometimes refunds are wrong. If your refund isn’t what you expected, there could be multiple reasons why. There could be a typo or calculation error, or the IRS may have disallowed some deductions or credits. If you owe other debts to the government, they may have these debts garnished from your refund check.

    Tip: If your refund amount is different than the amount on your tax return, try to understand why this is the case before you cash the check. Follow up with the IRS for an explanation about the missing amount. Amounts cashed that are larger than you expect can actually cause problems if the IRS expects repayment.

  4. Con artists prey on refund checks. Year after year, IRS scams are among the most commonly reported frauds. Con artists call unsuspecting taxpayers and claim to be from the IRS. They say that the taxpayers owe money or that a refund was issued in error and demand immediate payment.

    Tip: An IRS agent will never call a taxpayer over the phone without sending an official letter first, and will neither threaten a taxpayer nor demand immediate payment. They’ll never ask for credit card or debit card numbers over the phone. If you are contacted by a suspected scammer, report it to the IRS at 800-366-4484.

2018 Health Savings Account Limits Time to plan your 2018 deductions?

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The savings limits for the ever-popular Health Savings Accounts (HSA) are now set for 2018. The new limits are outlined here with current year amounts noted for comparison purposes.

What is an HSA?

An HSA is a tax-advantaged savings account to pay for qualified health care costs for you, your spouse, and your dependents. When contributions are made through an employer, they are made on a pre-tax basis. There is no tax on the withdrawn funds, the interest earned, or investment gains as long as the funds are used to pay for qualified medical, dental, and vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax-advantaged account you must be enrolled in a “high deductible” health insurance program as defined by HSA rules.

The limits

Annual HSA limits for 2018

  • $3,450 self
  • $6,900 family
  • add $1,000 for age 55+ catch-up provision

Note: To qualify for an HSA you must have a qualified High Deductible Health Plan (HDHP). A plan must meet minimum deductible requirements that are typically higher than traditional health insurance. In addition, your coverage must have reasonable out-of-pocket payment limits as set by the above noted maximums.

Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information discussing the program and its potential benefits.

The Confusion of the Federal Tax Filing Date April 15th, April 18th, or April 19th?

 

How can something as simple as an April 15th filing due date for individual tax returns and 1st quarter estimated tax payments be made complicated? Glad you asked, here is what you need to know.

Explanation

The ingredients. Washington D.C. Emancipation Day, Maine and Massachusetts Patriots Day, the location of IRS filing centers, and a weekend. Mix these ingredients with tax code and revenue procedures to create a filing date maze that takes an IRS analyst to figure out.

The recipe

  • When April 15th lands on a weekend the filing due date is automatically moved to the next Monday as long as it is not a recognized legal holiday.
  • If April 15th falls on a legally recognized holiday, move the filing date to the next non-weekend, non-holiday date.
  • The due date must allow for individuals to drop their tax returns and payments off at their scheduled filing center. So, if the filing center is closed due to holiday, move the filing date to the next available non-holiday, non-weekend date.
  • Recognized legal holidays are based on Washington D.C. Why? Because the law says so. This brings the April 16th Emancipation day uniquely observed in Washington D.C. into play for determining tax filing due dates.

The result; a mess.

When Emancipation Day lands on Saturday, April 16th, it is observed on April 15th. Thus the filing due dates for tax returns and first quarter estimated tax payments moves to April 18th. But wait, a tax-filing center is located in Massachusetts and it is closed on April 18th for observance of that state’s Patriots Day celebration. Since only Maine and Massachusetts observe this holiday they get til April 19th to file their individual tax returns. But estimated tax payments are still due on April 18th for them because they are sent to a center in a different state that is open on the 18th.

 

Your best bet?

Always be prepared to file your tax return AND 1st quarter estimated tax payment on or before April 15th. You can then keep your filing life simple despite the date mess created by Washington.