Did you receive an audit notification? Every audit notification may not be legitimate and it is important to make sure it is official. The Internal Revenue Service (IRS) will notify you either by letter or phone. The IRS does not notify taxpayers about audits through email. If you do get an email stating you have been selected for an audit, it is probably fraudulent. If you determine that you are definitely getting audited, your next step is to learn what is involved.
What is an Audit?
According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”
It is an audit — not an arrest or trial — so do not panic. Contrary to popular belief, an audit does not automatically mean you made a mistake. However, an inconsistency can trigger an audit if there is a discrepancy between what is on a tax form and what was reported. The IRS may choose to audit a taxpayer based on random selection or statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail. Although in some cases, it may be at an office, taxpayer’s home, or place of business.
Both businesses and individuals may be audited, even sole proprietorships, and there may be some differences in how they are handled. One thing that all audits have in common is access to records. Did you deduct business expenses or make some substantial charitable contributions? Be prepared to show the IRS receipts. The good news is that in many cases the IRS accepts electronic records.
What Happens Next?
There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or appeal. The audit does not have to be the end of the road. There is a substantial appeal process and a long, expensive court trial may not be necessary.
The important thing to remember is that you do not have to go it alone! Our professionals can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We are ready to work through the details and help you gather any records you may need.
Did You Receive an Audit Notification?
Fraud Alert | Synthetic Identities
The most common identify theft is synthetic. By combining some factual stolen information with completely fake information, thieves convince banks and credit monitoring companies that a fake identity is real. The “bad guy” is not pretending to be the person whose information was stolen or acquired; rather, the data is being used to create a brand-new identity. Thus, synthetic identity theft is born.
How do these scams work?
Synthetic Identity Theft Method No. 1
Fraudsters specializing in synthetic identity theft focus on stealing Social Security numbers by looking for underused SSNs, such as those belonging to children, seniors, or incarcerated individuals. Once a number is found, it is added to a new identity, and the thief applies for a credit card or loan. Though the application may be rejected, it generates an inquiry with a credit rating institution. Once that exists, it is easier to legitimize the synthetic identity.
Now, when a new application for a credit card or loan is submitted, it is more likely to succeed. Thieves can then open small accounts designed for people with little or no credit history and work on building a positive credit profile. Once that positive history is there, the fraudster can draw increasingly larger lines of credit.
Eventually, the real owner of the SSN gets messages about accounts that are not being paid. You never knew that your SSN was stolen since the credit checks did not initially appear on your credit reports.
Synthetic Identity Theft Method No. 2
Credit Profile Numbers (CPN), nine-digit numbers that look like SSNs, are created by credit repair companies. They are at the core of this scam. The object is to defraud financial institutions by creating a new persona and using it to apply for credit cards or loans rather than having to use an SSN that is attached to a poor credit history. It is illegal to use a CPN in place of an official SSN. Who is selling these CPNs? The illegitimate credit repair companies are selling the CPNs and creating trouble for their clients.
How can you protect yourself from synthetic identity theft?
With current technology, it is almost impossible to prevent synthetic identity theft. It is extremely difficult to track down and verify that the information is stolen until after the damage has been done. There are ways to minimize the risk and check whether you have been a victim.
- Regularly acquire copies of your credit reports. You are looking for a fragmented file — a sub-account within your credit report. This would reveal any accounts opened with your SSN under a different name.
- Do not throw private information in the trash. Avoid throwing in the garbage anything with SSNs or other personal identifying data. Make sure to shred documents and mix the shreds so they cannot be pieced back together.
- Do not click on unknown or strange links online. Do not enter information into unsecured websites. Some hackers use links that take you to fake websites. Make sure you see “HTTPS” in the web address. If you do not, it is not secure. Only secured, verified websites receive high-level HTTPS TLS/SSL certificates from official certificate-granting authorities.
- Create strong passwords and change them every six months. Strong passwords combine letters, numbers, and symbols. Also avoid using the same password for all your accounts.
- Do not carry your Social Security card with you. Put the card somewhere in your home where it is secure.
If identity theft happens to you or someone you know, many public and private entities exist to help identity theft victims recover from fraud. The federal government provides resources to help you understand your rights and responsibilities. You can start with the Federal Trade Commission.
Managing 529 Plans in 2018
For families trying to save for their children’s college education, 529 college savings plans, named for a section of the tax code, has been the best option.
The benefits include:
- Families invest through these accounts without earnings being taxed as long as the funds are used to pay for college expenses.
- Earnings have been typically free from federal and state taxes.
- Grandparents, aunts, uncles and anyone else who cares can contribute to the account.
- Those that operate like a 401(k) retirement plan invest in stocks, bonds or money market funds.
How does the new tax law affect 529 college savings plans? In fact, the new tax law may make them more attractive from a tax perspective.
You cannot deduct 529 contributions on your federal tax return. With state income taxes no longer deductible over $10,000 on federal tax returns, you want to take advantage of other deductions. Many states allow residents a limited deduction or credit against state income taxes for contributions to state-run 529 plans.
Even if you do not qualify for a state income tax deduction, a 529 plan is a great way to save for college:
- All growth of investments inside the plan is withdrawn tax-free for approved college expenses, which applies to any accredited school in any state, no matter which state plan used to invest.
- The money can be transferred between members of the same family. If a sibling gets a full-ride scholarship, it is possible that another family member can use the 529 account.
- Assets in a 529 plan count far less against the family in the financial aid formulas than student assets.
- Plans held by grandparents do not count at all. However, you need to be shrewd about withdrawals.
Typically, a 529 plan offers a limited number of mutual funds and the eventual results depend on market performance and investment choices. Most plans offer age-based funds that promise to become more conservative as your child gets closer to needing the money for college.
The best ways to start investigating 529 plans is at www.SavingforCollege.com, where you can compare various plans for performance and fees. You can link directly from the site to application forms for various plans. It is worth comparing your state’s plan to those offered by other states since fees can be challenging over the long run of the investment.
WP+D Official Spelling Bee | March 30, 2018
On March 30, 2018, WP+D held its first official Spelling Bee at both offices in Chandler and Scottsdale. In Chandler, participants included Allison Dozbaba, Christina Henning; Christy Kaiser; Jake Klein, Julie Lahm; Hannah Oglesby; Priscilla Sanchez; Loren Pruzin; and Dawn Westing. In Scottsdale, participants included Lindsey Erickson, Danielle Jennings, Pat Rae, Jacqueline Wingler; and Jordan Zwick. Brendan Higgins facilitated in Chandler and Corey Ng in Scottsdale. The top spellers and champions were Christina Henning and Danielle Jennings.
Estimated Taxes
When you are an employee, your employer withholds taxes from every paycheck and sends the money to the IRS. When self-employed or earning income other than a salary, you need to pay estimated taxes each quarter. Income subject to quarterly payments include:
+ Interest income.
+ Dividends.
+ Gains from the sales of stock or other assets.
+ Earnings from a business.
+ Alimony.
At filing time, if you have not paid enough income taxes through withholding or quarterly estimated payments, there may be a penalty for underpayment.
When are estimated taxes due?
The IRS does not break the tax year into four three-month quarters. The first quarter is January 1 to March 31. The second quarter is only two months long from April 1 to May 31. The third quarter is three months from June 1 to August 31 and fourth quarter is the final four months of the year.
Installment payments are due on April 15, June 15, September 15, and January 15 of the following year, with adjustments made for weekends and official holidays.
See below to determine if you need to make quarterly estimated taxes.
- Do you owe less than $1,000 in taxes for the tax year after subtracting federal income tax withholding from the total amount of tax you expect to owe this year? If yes, you are safe. There is no need to make estimated tax payments.
- Do you expect federal income tax withholding, plus any estimated taxes paid on time, to amount to at least 90 percent of the tax that you will owe for this tax year? If yes, you are clear and do not need to make estimated tax payments.
- Do you expect your income tax withholding to be at least 100 percent of the tax on your previous year’s return? If yes, you do not need to make estimated tax payments.
If none of these is the case, then you must make estimated tax payments. To avoid a penalty, your total tax payments, estimated plus withholding, during the year must satisfy one of the requirements just covered. These are general guidelines and there may be other reasons that allow you to avoid estimated payments or require you to file them.
The safest option to avoid underpayment penalties is to aim for 100 percent of your previous year’s taxes; meaning 110 percent of your previous year’s taxes to satisfy the safe-harbor requirement. If you do this, you are likely not to have to pay an estimated tax penalty, no matter how much tax you owe with your return. This may be the case for those with high incomes.
If you expect your income this year to be less than last year’s and believe you will owe at year-end, you can choose to pay 90 percent of your estimated current year’s tax bill.
How do you pay your estimated taxes? Should you pay in equal amounts? Usually it is in four equal installments. However, you might end up with unequal payments if:
+ You had your previous year’s overpayment credited to your current year’s estimated tax payments.
+ If you do not figure your estimated payments until after April, when the first one is due.
+ If you unexpectantly make a lot of money in one quarter.
Basically, there are no good reasons to pay penalties. Follow the rules. Your best bet is to contact us to make sure you are paying the right amounts at the right times.
International Tax Provisions | Tax Cuts and Jobs Act of 2017
All U.S. owners, who own 10% or more of a foreign company, must include their pro-rata share of the accumulated earnings of the foreign company as income in 2017. This is effectively requiring the U.S. owner to pay a transition tax on the untaxed foreign earnings.
Deemed Repatriation for 2017
All U.S. owners, who own 10% or more of a foreign company, must include their pro-rata share of the accumulated earnings of the foreign company as income in 2017. This is effectively requiring the U.S. owner to pay a transition tax on the untaxed foreign earnings.
This deemed repatriation regime applies to all types of U.S. owners, with varying impacts. The income is taxed at a reduced rate. However, an election can be made to pay the tax in installments. The installment payments for years one through five is 8%; year six is 15%; year 7 is 20%; and year eight is 25%. The initial payment is due April 17, 2018.
Special Rule for S Corporations
S corporation owners can elect to defer paying the tax indefinitely until a triggering event occurs. The decision should be analyzed on a case-by-case basis.
All taxpayers owning 10% or more of a foreign company(ies) need to include additional information and disclosures with their 2017 tax return, even if no tax is due.
Ballot Measure to Amend Arizona Constitution Prohibiting Taxation of Services
A ballot measure was filed with the Secretary of State to amend Arizona’s Constitution to protect taxpayers from sales tax on services. The measure is supported by the Citizens for Fair Tax Policy, Arizona Retailers Association, and Arizona Association of Realtors. For the proposition to make it to the November ballot, at least 225,963 signatures are required by July 5, 2018.
According to the Citizens for Fair Tax Policy, if the amendment passes, sales taxes from professional services to haircuts would be banned. Currently, these services are not taxable and the amendment would put an end to efforts for new taxes. The Protect Arizona Taxpayers Act would not impact existing sales taxes on tangible goods, which could still be raised, modified, or extended.
Why Now?
Recently, a new sales tax on services was proposed in the Arizona Legislature. This year, Oklahoma and Illinois discussed taxing services, and North Carolina and Washington State started imposing new sales taxes on services.There are concerns that politicians often share ideas that may not benefit Arizona.
Other concerns involve economic and technology changes. Some tax revenues can decrease dramatically with less people purchasing goods in favor of services. For example, people may use Uber instead of purchasing a car.
According to the Arizona Department of Revenue, the following services are exempt from sales taxes:
Hospitals — $810.1 million
Doctors — $454.0 million
Legal — $184.9 million
Securities brokerage — $116.8 million
Auto repair and maintenance — $105.3 million
Accounting, tax prep, bookkeeping — $82.0 million
Travel arrangement and reservation — $69.9 million
Advertising, public relations — $41.2 million
Waste collection $39.0 million
Investment advice — $35.6 million
Technical and trade schools — $31.8 million
Child day care — $22.1 million
Beauty salons — $18.7 million
Chiropractors — $13.7 million
Parking lots and garages — $11.0 million
Death care services — $9.3 million
Pet care (not veterinary) — $3.5 million
Nail salons — $3.1 million
Barbers — $558,000
More information on the ballot measure can be found at the Secretary of State’s website and Protect Arizona Taxpayers.
Voted No. 1 Accounting Firm | 2018 | Ranking Arizona
Wallace, Plese + Dreher (WP+D) proudly announces its recognition as the No. 1 Accounting Firm by Ranking Arizona. “Mutual respect with clients and other professionals earned our No. 1 ranking,” said Mark R. Dreher, CPA and Managing Partner. “Committed to Arizona’s business community, our partners and employees are engaged in community, non-profit, professional, and trade organizations. Participation in these organizations increased the Firm’s recognition and helped to earn our No. 1 ranking.”
Ranking Arizona is the largest business opinion poll in Arizona. Voters base their opinions on quality of service and confidence in people delivering the service. More than 20,000 businesses were involved and over 3 million votes cast. Companies that earn their ranking represent the best of Arizona business.
Selecting the Right Tax Professional
Recently, the Arizona Department of Revenue (ADOR) shared recommendations for selecting the right tax professional this filing season. Consider the following when choosing a tax professional:
+ What kind of formal training does the professional have and how current is their training?
+ Where did they receive their training?
+ What professional licenses or designations do they hold?
Examples: Accredited Tax Preparer (ATP), Accredited Tax Advisor (ATA), Certified Public Accountant (CPA), Enrolled Agent (EA), or Registered Accounting Practitioner (RAP).
+ Do they belong to any professional organizations?
+ How long have they been doing tax returns?
+ What is the tax preparation cost and how are fees calculated? Are there any special fees?
+ Do they offer e-file services?
+ Is the tax professional available year-round?
+ Will they represent you if audited by the IRS or ADOR?
+ Are there additional fees for audit representation?
+ What security measures do they have in place to safeguard clients’ tax records?
Arizona law requires tax professionals who prepare income tax returns to follow standards of ethics and conduct.
The deadline for taxpayers to file 2017 taxes is Tuesday, April 17. Officially, it is April 15, but with the date falling on the weekend and with Monday, April 16, being District of Columbia Emancipation Day in Washington D.C., the last day to file tax returns is April 17.
Sara B. Nance, CPA | ICAN | Board of Directors
The Firm’s commitment to the non-profit sector is demonstrated by our involvement in community projects and participation on boards. Recently, Sara B. Nance, CPA was added to ICAN: Positive Programs for Youth’s Board of Directors. ICAN, a free youth center in the East Valley, is dedicated to preventing gang involvement, substance abuse, and juvenile delinquency. ICAN offers support programs to disadvantaged youths, teens, and families.
