What is a “tax audit”, really? Tax audits fall into two categories. The first category being the full scale audit where you meet face to face with an IRS agent, the “real deal” tax audit that everyone dreads. The second category is known as an unreal audit or paper audit. Basically, you get a letter from the IRS that you under reported income, had math errors, or that you did not file a tax return and the IRS has filed a substituted tax return on your behalf.

Who is going to be picked? This depends on the complexity of the tax return and the amount of adjusted gross income. Tax returns with adjusted gross income of $500,000 to $1 Million had a 2.9% chance for a full scale audit and a 9.4% chance for an unreal audit. On the other end of the scale your odds of being selected for an audit decrease with your income. Tax returns with adjusted gross income of $50,000 to $75,000 had just a 0.7% rate of selection for full scale audit vs.7.1% for unreal audit.

What triggers an audit? Some areas of concern that the IRS is looking at are tax returns with Schedule C an E income. On recent audits, the IRS has discovered that taxpayers were trying to take personal expense as deductions for businesses and rental property. This is not allowed. The NAICS number that is entered on Schedule C, 1120 forms, and 1065’s are tracked by the IRS. Through database analysis the IRS can gauge what your income and deduction ratios should be compared to industry averages.

Who is preparing your taxes? Another part of the database analysis that is rumored to be looked at is your tax preparer. The IRS can see how many tax returns have been completed by the preparer and how they break out by category. For example, if your tax preparer suddenly starts preparing a large number of low income tax returns with all large tax refunds this may be an area of concern.

What can you do? For the most part, audit risk can be reduced by simply verifying financial documentation. Check to make sure the correct social security numbers are reported, all income has been reported, and the math is correct. Of course, also ensuring that all of the correct forms are filed and properly completed is a requirement. It can be complex! From 2000 until 2010 tax law have seen over 4,000 changes. This, on average, is over 400 changes per year that taxpayers have to navigate to prepare tax returns!

The bottom line: the best way to lower your chances of being audited is to have your tax returned prepared by professionals at Fredrick James. We keep up with all of the tax code changes and will ensure that your tax return is accurate and properly filed to keep you out of trouble with the IRS!

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

• Business Miles: 55.5 cents per business mile
• Charitable Miles: .14 cents per charitable mile
• Medical Miles: .23 cents per medical mile
• Moving Miles: .23 cents per medical mile

It is important that you document the following items for all mileage that you intend to deduct for tax purposes.  There are 6 pieces of information needed to document your mileage and tax deduction:

1. Who: The client’s name that you drove to for business purposes. The charity’s name that you drove to for charitable purposes. The company’s (new employer) name that you drove to for moving purposes.
2. What: What was the business purpose of the miles? What was the charitable purpose of the miles? What and who did you move for your new job?
3. Where: Where did you go for business purposes? Where did you go for charitable purposes? Where was your old job located. Where was your old home located? Where is the new job located?  Where is your new home located?
4. When: What date did you drive the business miles? What date did you drive for charity? What date or dates did you move?
5. Beginning and ending mileage
6. Receipts (if any, for additional documentation and deductions): Tolls (additional deduction to the miles), Charitable Letters (to prove you were a volunteer), Moving Receipts (fuel, meals, storage)

With the documentation listed above you will have everything you need to claim your tax deductable mileage and make your tax accountant smile.

You can visit us at FredrickJames.com. We serve clients throughout the world through our virtual office. Read more about our virtual office. If you have any questions or need assistance with your accounting, payroll or taxes please Contact us Today!

Yes, we are back, rested and ready to hit the road running after a little break over the Holiday season!  To start off the new 2010 tax year, I wanted to cover a topic that will affect most taxpayers in a positive way , the Making Work Pay Tax Credit.

This tax credit is worth up to $400 for each individual taxpayer or up to $800 for married couples who file Married Filing Joint so it’s definitely worth checking out.

How it works:

This credit is 6.2% of a taxpayer’s income which maxes out at $400.  If you are married it works the same way, the credit is 6.2% of the couples total earned income with the maximum credit of $800.

Higher income taxpayers will be subject to the credit phasing out.  A single taxpayer will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $74,999 and the credit is completely phased out at $95,000.  If the taxpayers are Married Filing Joint they will have their credit reduced by 2% of the amount of Modified Adjusted Gross Income (MAGI) if they make over $149,999 and the credit is completely phased out at $190,000.

Earned income from wages or self employment taxable income is required for this credit.  However military personal who receive combat pay which is excluded from income are eligible for this credit.

You must be a US Citizen or a resident alien with a valid Social Security number to be eligible for the credit.  Dependents of taxpayers are not eligible for the credit.

Taxpayers who are Social Security recipients, retired railroad workers and disabled veterans are eligible for a 1 time $250 tax credit.  If they also work and meet the thresholds they may qualify for an additional $150 totaling $400 in a tax credit.  Unfortunately, if you received a pension and no earned income (or those who do not receive Social Security, Veterans Affairs or Railroad Retirement Board income), you will not be eligible for the Making Work Pay Credit.

This credit is claimed on Schedule M.

With the recent changes to the federal income tax withholding tables, some tax payers may find that too little was taken out of their paychecks over the tax year.  If you’re not eligible for the Making Work Pay tax credit, this could mean a smaller than usual refund OR you may even end up owing tax. There is special relief that the IRS may grant if an estimated tax penalty applies. If you receive a estimated tax penalty from the IRS you can request a waiver by filing form 2210.

If you are in one of these categories, keep an eye on your withholdings:

• Pensioners
• Married couples with two incomes
• Individuals with multiple jobs
• Dependents
• Some Social Security recipients who work
• Workers without valid Social Security numbers

If you’re still not sure about your qualification for the Making Work Pay tax Credit or if you’ve got questions regarding your estimated tax penalty, I would highly recommend contacting your accounting or tax professional to guide you through this. Tax issues like these can become very complex and may be affected one way or the other by other factors within your financial situation. Most accountants and tax professionals offer a free initial consultation; at that point they can advise you on your options and let you know if they may be able to help you reduce your tax bill.

Last week I went over the different types of accountancy services generally available to business owners. This week I wanted to follow up with some advice on an even more individual level: finding an accounting professional you can get along with, communicate with and work with. Yes, that’s a big deal.

Choosing the Right Accountant Can Make or Break You

Before I start, I want to clarify that accounting is an investment in your business, rather than an annoying expense. Finding the right accountant who understands your goals and is willing to work with you toward achieving them is worth his weight in gold. You will see a much higher return on your investment through smart tax planning and good financial reports that will help you more easily obtain credit in these credit-strapped times.  Having reconciled financial statement can become the difference between getting the loan you need to grow your business and getting the denial letter.  Those financial statements can also become the difference between negotiating fair market value or losing out because your potential partner did not trust the excel spreadsheets and tax returns that you supplied.  I can go on and on with examples, but the point that I am trying to stress is that your accountant should provide value that will pay for itself in the future.  Financial Statements are just the minimum; there are so many other ways that a good accountant can provide value.

Regardless of which type of service you decide to use, be sure that you get along with your accountant and you can envision yourself working with them for the long haul. It does you no good to hire an accountant or bookkeeping service if you dread each interaction with them. Keep in mind too that it is much harder to change accountants once you’ve already gotten established with one, so definitely pay attention to your first instincts and ask a lot of questions during your consult to evaluate their communication style:  Do they answer your questions or deflect? Do they make sure you understand their explanation or rattle off a bunch of jargon then move on? Do they seem sincere or do you feel like you’re being sized up like a juicy morsel?

While price is always a consideration, your main concern should be on the overall results a firm can deliver as the primary factor in determining which accountant or accounting firm to select.  A good accounting firm should become a valuable asset, providing a range of services designed to help your business grow and become more profitable.

_{Some other things to look for in a good accountant:}

• _{The ability to explain the results of their services in plain English.}
• _{Knowledgeable, professional, personal, helpful, informative and friendly.}
• _{Be able to help you set up your new company in a tax savvy manner, keep track of income, expenses, assets and liabilities, reporting, benchmarking, forecasting, provide tax planning for personal & business income, personal and business finance advice, loan packaging, handle responses to various governmental State & IRS letters, preparing for Audits, business growth consulting, IT consulting, Advertising and Marketing Growth Consulting.}
• _{Able to help you set goals and offer creative business advice that will benefit your company as well as insightful recommendations.}
• _{Be your most trusted business advisor and should be involved in many of your business decisions and ready to advise you from a financial perspective.}
• _{Contact from your accountant throughout the year with proactive advice and recommendations.}
• _{Answers their phone & email messages in a timely manner.}
• _{Refers their clients to other reputable professionals in the finance and legal arena.}
• _{Understands the word “value” which ultimately means superior service, innovative ideas,  forward thinking approaches and a relationship that you can rely on throughout the years.}

Good accountants generally have great reputations and rave reviews from their clients; most of their business comes from client referrals. Talk to your friends and business associates. Ask them about their accountant.

If your accountant is not listening or giving you the right advice, if you’re frustrated, confused and/or annoyed, then you are going to have a very hard time achieving your financial goals and should consider a new accounting relationship.

The best advice I can give you is: give yourself the time to research and meet with several professionals to help you choose the right type of accounting relationship and the right personality fit for you.  Make sure you clearly communicate your expectations and define your roles.  Remember that your accountant is an investment in your business and that your investment in a good accountant will pay off.  Finally, communicate with your accountant as often as possible or at least on a monthly basis.  Your accountant’s knowledge of your industry, tax tips and great advice will pay dividends as your business grows and helps fulfill your goals and dreams.

_{Fred Daus is the Chief Executive Officer and founder of Fredrick James Accounting, Tax & Consulting. He is a member of National Society of Accountants and the National Society of Tax Professionals and has been helping clients save money since 2001. Fredrick James is an innovative, full service accounting firm in Clearwater, Florida. Visit our website www.FredrickJames.com or call 727-474-0922 for more information}

Because we are a progressive accounting firm that believes in utilizing the latest tools and technology to help us educate our clients and improve their lives, it was a natural fit to settle in here.

Now that the stress of Tax Day is behind you, join us this next year as we bring you information, updates and news on the latest tax laws, tips for saving money, investing wisely and more.

We want to help ensure that next Tax Season is something you won’t need to anticipate with trepidation!