A tax audit is the fear of every taxpayer and subject of comedians, TV shows, and social media posts. If you are well-prepared, you can make it go smoothly and increase the odds of a good outcome.
The IRS will assure you that you have been randomly selected for closer examination. You may feel totally unhinged, like you are entering Dante’s Inferno. For one New York man, an audit was the beginning of a five-month-long drama. He methodically gathered all his receipts and filled a box with documents to corroborate his business deductions as a self-employed writer. He heard stories from people who shared his predicament, such as one woman who was summoned to the IRS offices five times. Looking back, he is surprised that he was so smug about his preparations, even waving off his tax accountant with an offer to accompany him. He could handle it. Big mistake.
Losing sleep for two days before his initial meeting with IRS examiners, he was exhausted when he arrived at the IRS office. After passing through tight ground-floor security, he ascended a long escalator leading to another security desk as he towed documents in a cart behind him. He was greeted by an examiner with a shaved head — the bad cop, he decided. He rarely smiled. In a conference room, a second examiner, shorter and friendlier with shoulder-length hair — the good cop — took notes. Two examiners? He wondered, am I this important or in a lot of trouble.
It took three hours to learn his home-office deduction was in question. This time, he listened to his tax accountant, requested a second interview, and made sure his accountant was present. He had claimed 47.3 percent of his apartment for work. The examiner asked for proof of rent, actual floor plan, and square footage. A third meeting was scheduled.
At the third session, an IRS supervisor accompanied the bad-cop auditor. They went back and forth over business use of his apartment. A compromise was reached at 33 percent and the home office deduction was saved, to the great relief of the freelance writer.
What You Should Do When Audited
1 – Gather your documents. Start going through your records to find relevant receipts and documents. If you cannot find a document, request a duplicate. Auditors will not accept the excuse records are missing or lost. What documentation should you bring? Receipts, mortgage statements, brokerage account statements, and pay stubs or W-2 forms. You may bring record books to substantiate certain claims on your tax return. This is important if you are unable to document the items in question to the IRS’s satisfaction, things get a little more complicated. The IRS will propose changes to your tax return.
2 – Contact your accountant, who can explain the audit process and help you prepare. In addition to your accountant, you may need a professional tax lawyer as well.
3 – You can challenge the agent’s assessment and set up a conference with an IRS manager to further review your case, or you can request a formal appeals conference. Keep in mind that interest will accrue on any unpaid tax from the date you filed your return, including the duration of the audit process. Typically, it is not worth appealing unless you are relatively certain you will win.
As long as everything you claim on your tax return is factual, an audit should be no more than a minor inconvenience. If you are an honest taxpayer who knows what to do in the unlikely event of an audit, you should sleep soundly.
After the Audit
What happens after the audit? You will be notified of the findings. The auditor will explain any adjustment to you and/or your representative before finalizing the audit. Promptly contact the auditors if you have information that has not been considered, or if you believe a mistake has been made. They will discuss future filing responsibilities and answer any questions you have concerning the audit.
A tax audit is the fear of every taxpayer and subject of comedians, TV shows, and social media posts. If you are well-prepared, you can make it go smoothly and increase the odds of a good outcome.
What accounting issue does every business leader need to be aware of heading into 2019? In addition to the Tax Cuts and Jobs Act of 2017, new changes in lease accounting, due in January 2019, will affect every public and private company in Arizona. Most business leaders are not ready for these accounting game-changers and should consult their accountant for details. See more from Randy G. Brammer, CPA, CCIFP, Audit Partner, and Michelle L. Flynn, CPA, Tax Partner, as featured in Az Business.
What accounting issue does every business leader need to be aware of heading into 2019? A big change in lease accounting, due in January 2019, will affect every public and private Arizona company. Most Arizona business leaders are not ready for these accounting game-changers and should contact their accountant for advice. Read more from Randy G. Brammer, CPA, CCIFP, Audit Partner, and Michelle L. Flynn, CPA, Tax Partner, as featured in Az Business.
You may have heard of a living trust that is created while you are still alive. It can be set up as a revocable trust, permitting you to change the terms of the trust or dissolve it entirely should circumstances change.
Such a trust can take the title to your home and transfer the control of the property to a trustee. When you die, the trust becomes an irrevocable trust, prohibiting future changes to the terms.
Two Advantages to Placing Your Home in a Trust
Avoiding probate – Most living trusts are structured to avoid probate and its costs. Some states have streamlined the probate process, but it still requires costs, time, and attendance at multiple hearings. If you wish to avoid probate and transfer the title to your home to your heirs, thereby avoiding probate, a trust is a strong advantage. Should you choose to transfer other properties, some of which are out of state, you can avoid probate in other jurisdictions too.
Future Incapacity Protection – Should you become ill and unable to properly manage your own finances, another trustee can be selected to manage your trust to protect your home. Living revocable trusts give you this benefit. If you have a co-trustee who is your spouse, this further simplifies and protects your home. Your spouse can remain as trustee, managing your home and other assets you have transferred to the trust.
Contrary to popular belief, trusts like these generally do not protect against the estate tax, but since there is such a high floor, relatively few estates are subject to the federal estate tax.
Regardless of your situation, such a trust should not be entered into lightly. You should know these key factors before signing on the dotted line:
(1) The complexity of designing a trust as compared with a simplified will can accelerate the costs to use this method of protection. Should you wish to shelter more than just your home, you will need to be diligent and transfer other assets to the trust as you acquire them and remove those you no longer own. All this attention can add legal costs to maintaining the trust. This does not mean you should not do it, but you should be aware of the costs.
(2) Other assets may be subject to probate, meaning even modest bank or investment accounts must go through the probate process. Then, after you die, your estate may face more expenses—the trust must file tax returns and value assets, which potentially may negate the cost savings of avoiding probate.
(3) Do not count on a revocable living trust to automatically protect your home from creditors. There are other ways of protecting your house from creditors that should be discussed with a financial professional.
(4) A little-known major living trust benefit comes into play if the trustor becomes incompetent. Then, the alternate trustee takes over management of trust assets without court costs and delays of appointing a conservator.
(5) A trust is usually easy to change. Trust terms can be changed or revoked, until the trustor dies, when they become irrevocable. This prevents a surviving spouse from disinheriting a beneficiary named in the living trust, maybe a child from the deceased spouse’s first marriage.
Trusts are excellent tools for your home and other purposes. For guidance, contact Steve Buel, Chris Coots, or Jerry Miles to discuss whether putting a home in a trust is the right decision for you.
The digital currency, bitcoin, has frequently been in the news. What is this controversial financial product and how does it work? Is it something you should invest in?
Bitcoin – A Cryptocurrency
Bitcoin is a decentralized digital currency known as a cryptocurrency. Essentially, it is a form of money that exists only as computer code and is not overseen by any central bank. Created in 2009, it is maturing as a recognized asset class on Wall Street. Already, bitcoin futures trade on major markets — allowing investors to bet on bitcoin’s price without holding the coin itself. Although it is not the only cryptocurrency, it has become the most famous.
New Highs and Volatility
This virtual currency surged to new highs as a frenzy of investors wanted to get in on the action. In fact, the price of all cryptocurrencies soared and then crashed back down. Prices of bitcoin approached $20,000 by the end of 2017 and then plunged to below $11,000. Some considered it a correction. The plummet took some of the shine off what had been an incredible year for bitcoin. In December, two major U.S. financial exchanges launched trading in bitcoin futures, giving it more clout. The question today: Is this only the beginning of cryptocurrency madness?
Another major consideration is extreme volatility, with scammers capitalizing on the booms and preying on victims of the busts. The hustles are diverse, including many different types of phishing, spamming and the notorious development of bogus initial coin offerings. It appears that social media impersonation has a role in many of the scams, where so much discussion, speculation and misinformation about cryptocurrency take place.
It is not surprising that the reliability of digital currency is questioned because no government or central bank is regulating the market. In fact, many doubters still cannot believe things have come this far. There are cryptocurrency exchanges. Coinbase is probably the best known, although there are others. At least one was shut down due to accusations about money laundering.
Slow and Expensive
Still, bitcoin is a difficult currency to use in the real world: The network is slow and too expensive for small transactions. The mined block is broadcast to the network to receive confirmations, which can take over an hour or longer, to process. Depending on the kind of traffic the network is receiving, bitcoin’s protocol will require a longer or shorter string.
Bitcoin can be exchanged for other currencies, products, or services. By 2015, there were already more than 100,000 merchants and vendors who accepted bitcoin as payment. International payments are easy and cheap because bitcoin is not tied to any country or subject to regulations. Also, there are no credit card fees for small businesses to pay.
Currency of Choice for Illicit Activities
In 2017, research produced by Cambridge University had estimated that there were 2.9 to 5.8 million people using a cryptocurrency wallet, most of them using bitcoin. Wallets exist in the cloud or on a user’s computer. They are not insured by the FDIC, and the names of buyers and sellers are never revealed; only their wallet IDs are made public. Unfortunately, this has made it the currency of choice for buying drugs or taking part in other illicit activities because buying and selling is not easily traceable to those responsible.
IRS Considers Bitcoin a Real Thing
Although secrecy surrounds these currencies, the IRS considers bitcoin a real thing and it is taxable. If you buy bitcoin and sell it at a profit, it is a capital gain, pure and simple. The bottom line? Be very careful regarding the largely unregulated world of digital currencies. Keep in mind that even though you will hear that these currencies are beyond government control, the IRS still wants its cut.
Wallace, Plese + Dreher (WP+D) believes in supporting our military and recognizes their sacrifices in protecting and defending the U.S. As one of the Firm’s community projects, we organized a drive to collect school supplies for Military Assistance Mission (MAM). With increased Arizona deployments, military children face many challenges and adjustments when family members are deployed. Through our employees’ and Firm’s generosity, we collected backpacks, paper, crayons, pencils, pencil boxes, notebooks, and other school supplies. Our donations will help Arizona military children in grades K-12 start school with the same supplies as their civilian classmates.
On July 3, 2018, Gena Runnels (pictured on right with Margy Bons, Executive Director, center, and Jeanne-Marie Hill, Corporate Relations, left) delivered our donations to MAM’s Phoenix collection facility. Gena’s husband, Ryan, is an active member of the Arizona Air National Guard.
Wallace, Plese + Dreher (WP+D) congratulates our professionals on their well-deserved promotions. Read their bios for an in-depth perspective on services and industry experience. Our people have diverse backgrounds, speak a variety of languages, and possess a wide-range of technical skills. Promotions reflect our workplace culture that encourages continuous learning, career development, and opportunities for advancement.
Jessica A. Cyiza – Tax Senior
Suzanne M. LaCross, CPA – Tax Supervisor
Angela R. Larson, CPA – Tax Supervisor (not pictured)
Corey Y. Ng – Audit Senior
Hannah J. Oglesby, CPA, CFP® – Tax Manager
Loren J. Pruzin, EA – Tax Senior
Contrary to early reports, the Tax Cuts and Jobs Act of 2017 allows taxpayers who buy, build, or substantially improve their homes using either a home equity loan, home equity lines of credit (HELOC) or second mortgages to deduct interest on the loans. However, if you take out the loan to pay for personal living expenses, such as credit card debt, you cannot deduct the interest from your taxes.
The IRS gave this guidance in response to many questions from taxpayers, as well as tax professionals. The agency explained that, as older rules had specified, the loan must be secured by your main home or second home, known in IRS parlance as qualified residences, and must not exceed the cost of the home.
There is a lower dollar limit on mortgages qualifying for the home mortgage deduction: you may deduct interest on only $750,000 of qualified residence loans. The maximum is $375,000 if you are married and filing a separate return, which is also down from prior limits. These limits apply to the combined amount of loans used to buy, build, or substantially improve your main or second home.
The IRS gave three examples to help clarify its thinking:
- If you buy a home with a fair market value of $800,000 with a $500,000 mortgage in January and then, the very next month, you decide to take out a $250,000 home equity loan to put an addition onto that home, all the interest on the loans are deductible. Why? The loans are secured by the main home and do not exceed the cost of the home. At the same time, the amount of both loans does not exceed $750,000.
- You buy a main home with a $500,000 mortgage and then, the next month, you take out a $250,000 loan for a vacation home. The amount of both mortgages does not exceed $750,000, so all the interest is deductible. However, if you take the $250,000 home equity loan on the main home to buy a vacation home, you are out of luck. No deducting the interest.
- You take out a $500,000 mortgage to purchase a main home. Your loan is secured by the main home. The next month, you take out a $500,000 loan to purchase a vacation home. This loan is secured by the vacation home, but, as you have figured out, the mortgages exceed the $750,000 limit, and not all the interest paid on the mortgages is deductible. You get to deduct a percentage of the total interest paid.
The key takeaway is the rules are subtle but complicated, and an error can cost you thousands of dollars. Before making assumptions about the tax implications of any mortgage product, call us to discuss how the new rules may impact you.
Most employers in the United States must pay state unemployment tax, the collection of which is authorized by the State Unemployment Tax Act (SUTA). Although most wages are subject to SUTA tax, certain wages may be exempt. In New York, for example, wages paid to babysitters under 18 years of age, church employees, and certain family members are exempt from SUTA tax. Therefore, it is essential to check with your state unemployment agency to determine which wages are related to SUTA.
Every employer should be aware of two components of SUTA: annual wage base and SUTA tax rate:
Annual Wage Base: The annual wage base represents the maximum amount of wages subject to SUTA tax per employee for the year. For 2018, employers in California and Florida pay SUTA tax on the first $7,000 paid to each employee. Alaska, however, imposes SUTA tax on the first $39,500 paid to each worker. Once the annual wage base has been satisfied for an employee, the employer does not owe any more SUTA tax for that employee for the year.
SUTA Tax Rate: These tax rates are based on varying factors, with the most common being whether the business is new, the employer’s industry (such as construction versus nonconstruction), and the amount of benefits claimed on the employer’s account. Generally, the more benefits claimed on the employer’s account, the higher the SUTA tax rate, which is why it is crucial that you keep turnover at a minimum.
Not Always Only an Employer-Paid Tax
In most states, SUTA is an employer-paid tax. Three states — Pennsylvania, New Jersey, and Alaska — require withholding as well. If you have employees in any of these three states, you must withhold state unemployment tax from their wages at the state-mandated withholding rate and up to the maximum amount of wages allowed for the year.
Impact on FUTA Rate
In addition to paying and withholding applicable state unemployment tax, employers also must file wage reports with the state unemployment agency, usually on a quarterly basis. How you handle these requirements can influence your federal unemployment tax rate.
The Federal Unemployment Tax Act (FUTA) authorizes the IRS to collect federal unemployment tax, which is used to help fund state unemployment programs. Since July 2011, the FUTA tax rate has stayed at 6 percent; and since 1983, the annual wage base has held steady at $7,000. You can take a maximum credit of 5.4 percent against your FUTA tax if:
+ you paid all your state unemployment tax on time,
+ the wages you paid SUTA tax on are also subject to FUTA tax, and
+ your state does not owe the federal government for funds that it borrowed to pay unemployment benefits.
Taking this maximum credit will lower your FUTA tax rate to 0.6 percent.
Call us to learn about the details of SUTA and FUTA.
On May 18, 2018, Scott T. Wallace, CPA presented to the Accounting & Financial Women’s Alliance (AFWA) on new lease accounting and revenue recognition standards. Scott provided details about upcoming changes and offered guidance for planning.
According to the Financial Accounting Standards Board (FASB), the new standard will require organizations that lease assets, referred to as “lessees,” to recognize on the balance sheet assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Unlike current GAAP, which requires only capital leases to be recognized on the balance sheet, the new Accounting Standards Update (ASU) requires both types of leases to be recognized on the balance sheet.
WHO WILL BE AFFECTED BY THE NEW GUIDANCE?
Leasing is an important activity for many organizations, including public and private companies, along with non-profits. Leasing creates access to assets, assists in financing, and reduces an organization’s exposure to risks of full ownership of the underlying asset.
ASU affects all companies and other organizations that lease assets such as real estate, airplanes, ships, and construction and manufacturing equipment.
WHEN WILL THE FINAL ACCOUNTING STANDARDS UPDATE BE EFFECTIVE?
For public companies, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Thus, for a calendar year company, it would be effective January 1, 2019.
For all other organizations, the ASU is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020.
For additional details, visit FASB. Contact us for guidance and planning.