Why is it taking so long to get my Tax Refund???

Your IRS refunds are going to be delayed by an extra week this year. The culprits are the fraudulent tax returns and the modernized E-File system initiated by the IRS in 2009

Fraudulent Tax Return filing has been on the rise for the last couple of years. There has been such an increase that the IRS had to implement a series of robust fraud filters to detect these refund returns.  The only problem is that the filters may have upheld a portion of the legitimately filled refund returns as well. Fraudulent filed tax returns and Tax Scams have become so pervasive that on February 16, the IRS posted a news article “IRS releases the Dirty Dozen Tax Scams for 2012″.

On the top of the list was Identity Theft. The IRS believes that over $1.4 Billion fell into the wrong hands in 2011. Identity theft is very complex and difficult to track down. For this reason, the IRS Identity Protection Specialized Unit has been setup.

In 2009 the IRS started to implement Modernized e-File (MeF) in three phases. MeF is an Internet-based real time transaction based system that allows for faster turnaround times of tax returns. MeF will replace current legacy e-file system that transmitted tax returns in several batches per day, rather in real time. At the start of 2012 will conclude the last phase of MeF rollover. Unfortunately, the IRS has experienced a few glitches in the new software and some sporadic system failures to the e-filling system.

As a result of the combination of fraudulently submitted tax returns and the rollover to the Modernized e-File system your Tax Refund could be delayed for 2012. Currently the IRS projects a refund to be deposited in your bank account within 10-21 days.

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!

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!

The Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business purposes.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

As a result of the December 17, 2010 tax law changes, the Internal Revenue Service announced on December 23, 2010 that the upcoming tax season will start on time for most people, but taxpayers affected by three recently reinstated deductions need to wait until mid- to late February to file their individual tax returns. In addition, taxpayers who itemize deductions on Form 1040 Schedule A will need to wait until mid- to late February to file as well.

These late changes in the law mean that the IRS will need to re-program its processing systems for three provisions that were extended in the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 that became law on December 17, 2010. People claiming any of these three items — involving the state and local sales tax deduction, higher education tuition and fees deduction and educator expenses deduction as well as those taxpayers who itemize deductions on Form 1040 Schedule A — will need to wait to file their tax returns until tax processing systems are ready, which the IRS estimates will be in mid- to late February.

On the upside, the IRS is giving all taxpayers until Monday, April 18 to file their 2010 tax returns and pay any tax due because Emancipation Day, a holiday observed in the District of Columbia, falls this year on Friday, April 15.

By law, District of Columbia holidays impact tax deadlines in the same way that federal holidays do; therefore, all taxpayers will have three extra days to file this year. Taxpayers requesting an extension will have until Oct. 17 to file their 2010 tax returns.

Recently I was talking to one of my regular clients and discovered he and his wife are in the process of adopting a child. While they are very excited new parents to be, being a tax accountant, I’m pretty excited too since this gives them a whole new credit to apply to reducing their personal tax liability!

Most people don’t realize there is an adoption credit or that it was recently expanded by the Affordable Care Act of 2010.  But there you have it, one more benefit to adopting a child.

So here are the Adoption Credit changes that affect tax years 2010-2012:

• The Adoption Tax Credit has been increased to $13,170 for 2010.  For 2011 and 2012 the credit will be indexed for inflation.
• The Adoption Tax Credit is now refundable on the tax return.  So if you don’t have a tax liability on your 2010-2011 tax returns then you will receive a refund of the qualified Adoption Tax Credit expenses that you paid in the tax year.  If you had Carryover Adoption Tax Credits from previous tax years (subject to the 5 year rule) that have not been used, you may be able to receive the refundable Adoption Tax Credit in 2010.

Qualified adoption expenses include any and all costs directly relating to your adoption and that are reasonable and necessary for your adoption. Expenses include:

• Adoption fees
• Legal fees
• Court costs
• Travel expenses, meals and lodging while away from home

Fred’s Tax Tip: Document Everything!

The IRS will be requiring Adoption Tax Credit filers to submit substantiating documentation with their tax returns to prove that they are entitled to the Adoption Tax Credit. The 2010 tax returns with the Adoption Tax Credit and attached supporting Adoption Tax Credit documentation must be filed by mail and cannot be filed electronically.

Acceptable documentation for the Adoption Tax Credit includes:

Adoption is Final

• An adoption order or Decree
• A Hague Adoption Certificate
• An I-3 VISA
• A Foreign adoption decree translated into English

Adoption is not Final:

• An Adoption Taxpayer Identification Number for the child
• A Completed home study by a placement agency
• Hospital document authorizing the release of a newborn to the adoptive parents
• A court order
• An original affidavit or notarized statement from an adoption attorney or government official

Here are the general rules for the Qualified Adoption Tax Credit:

1. Adopt an eligible child (Any child 17 years old or younger or a child of any age who is a US citizen or resident alien and who is physically or mentally incapable of caring for himself or herself)
2. Pay Qualified Adoption Expenses from your own pocket (Qualified Adoption Expenses you paid from your pocket minus amounts reimbursed or paid by an employer, government agency or another organization)

Also, keep in mind that if you have additional expenses related to the adoption process that are paid in the year following the year in which the adoption was finalized, you can still deduct those expenses for the year in which they occurred.

In other words:

If the adoption is final in 2009 then the expenses paid in 2010 can be claimed

If the adoption is final in 2010 then the expenses paid in 2009 and 2010 can be claimed

If the adoption not final in 2010 then the expenses paid in 2009 can be claimed

So if you’re adopting this year or next, I hope this information will help you when you talk to your tax professional. As with any life change, it’s always a good idea to talk to your tax accountant or tax preparer to help you plan for the coming year and discuss ways to reduce your tax liability while making your money work FOR you.

If you have questions or would like to discuss your own situation, feel free to call my office at 727-474-0922 or email me.

Congratulations to Justin & Rachel, we hope to meet your new baby girl soon!

Last week we went over the individual tax payer’s record keeping requirements, this week I want to discuss what business owners should be holding onto and for how long.

Obviously businesses have a more extensive list of record keeping requirements than individual do but it’s an important detail not to be overlooked as it will help you to avoid unpleasant surprises in an audit.

Businesses are all different, but in this case documentary evidence for business deductions, those that are reasonable and ordinary in the course of business, is generally the same for all types of business entities.

One big mistake a lot of smaller businesses make is not having a separate business checking account. This is a big “no-no”. Get your business checking account set up if you don’t have one and use it for all transaction to prove gross income and business expenses.  If faced with an audit, you can bet the auditor will probably reconcile this account and if any personal deposits or disbursements appear, you’d better have the paperwork to back that up.

What to keep for business deductions:

• Receipts
• Canceled checks
• Bills
• Petty cash slips
• Bank statements (bank statements are very important for electronic receipts)

Receipts should list the name and location of vendor, dates, itemized charges, number of people, and written explanation of the expense to prove its business purpose.  For entertainment expenses, you must document the business relationship of those attending.

Canceled checks are very important for proving amounts, but do not necessarily prove business purpose.

Business expenses should be recorded as close as possible to the actual time of the expense.

There are a few exceptions for Travel, Meals and Entertainment where documentation is relaxed:

1. Under an accountable employee reimbursement plan that adopts the per diem method, which is a fixed daily reimbursement amount
2. A travel expense (except for lodging) less than $75
3. A receipt for transportation is not available (e.g. taxi fare)

I would highly recommend NOT making estimates, they are rarely allowed (except in extraordinary situations where records are destroyed). This is especially true for Travel, Meals and Entertainment, and deductions related to listed property (items commonly used for personal use), all of which have very strict deductibility requirements.

Fred’s Fast Tax Tip: Records for business assets should be retained through the statute of limitations for the tax year in which the assets are disposed of. This is important for audits that investigate depreciation expense.

Employment records must be retained for 4 years after the tax is due or paid, whichever is later.

As important as proper record keeping is for successfully responding to tax audits, record keeping is just as important for effectively managing a business (small or large) in terms of cash flow, short-term working capital needs, and profitability over the long-run.

Record keeping and analysis of accounting reports ultimately reveal where a business needs improvement and where growth opportunities exist. So, you’ve got even more good reasons to keep on top of your business record-keeping! If it all gets to be too much, and you’re losing the battle then I would recommend you find a qualified bookkeeper to help you whip your books in shape. Then kick back, put your feet up on the desk and give yourself some much deserved praise for being such a savvy business owner!

Many people don’t think they make enough to worry about tax planning, but what they don’t realize is no matter what your income level, tax planning can help you make adjustments that will significantly reduce your tax liability.

If given the choice, would you rather owe $148.67 or be getting a check for $352.10? See, not bad, huh?

With a little planning, knowledge and effort on your part, you could actually be looking forward to tax day for once!

Here are some ways the Average Joe can save on taxes:

1. Self-employed? Make sure you’re taking full advantage of tax deductions including most ordinary business expenses which can include money spent generating business, retaining clients, vehicle expenses, health insurance and capital expenditures.
2. IRAs. If you’re like a good amount of American’s you’ve seen your retirement savings sucked dry by the stock market. Planning now will ensure proper handling of IRA retirement contributions including the new unlimited Roth IRA conversion provision available in 2010, and allow you to address issues with retirement plans that have declined in value.
3. Education. If you or a dependent are attending school you need to be sure to claim all credits and deductions available to you–it’s free money, don’t miss out on it!
4. Bankruptcy/Foreclosure. You’ve already suffered enough if you’ve endured bankruptcy or a foreclosure this year, so a little planning now will avoid further headaches ahead. Minimize the taxable income impact of a home foreclosure or bankruptcy petition.
5. What If? There are several big tax changes waiting for Congress to either reverse or put into action, all of which could dramatically affect your tax bill. Planning now, as best you can, for potential tax rate hikes after 2010 for ordinary income and investment income keeps you from being blind-sided in the coming months.

So, hopefully these tax saving ideas will inspire you to take a look at your own situation and get you thinking about asking for some tax advice this year. Knowing what to expect and how to maneuver your finances throughout the year for maximum tax savings is the beginning of taking control of your finances, rather than letting your finances control you.

There are two general categories for discharged debts: consumer loans (credit cards, automobile loans, mortgages) or business related loans (bonds, commercial mortgages, equipment loans). Each type is treated slightly differently when it comes to income tax recognition and/or exclusion. Today we’re going to cover the personal or consumer related loans.

Let’s go back to my $10,000 Italian vacation debt scenario. Suppose that I charged that entire amount on my personal credit card. Over time, my unpaid balance would be increasing due to interest charges. The bank decides to write-off the entire debt balance totaling $12,000 and issues me a Form 1099-C.

You can't ignore charged off debt as taxable income.

Quick Fact: Historically, credit card companies have not always issued 1099-Cs on charge-offs. Credit card companies are, however, required to submit to the IRS and taxpayer 1099’s for the debt it writes off, under most circumstances.  This means that if you do not include this canceled debt on your tax return and/or include a reason for income tax exclusion, the IRS will find out and send you a letter regarding the income that you did not claim on your tax return along with the additional taxes that are due.

So, my credit card debt has been charged off, I decide to be a good taxpayer and include the 1099-C of $12,000 in my tax return. Does this mean my taxable income increases by the same amount? Well…it depends.

There are two common tax law exceptions that may allow taxpayers to avoid recognizing some or all of their canceled debt income:

Bankruptcy Exclusion.

Declaring bankruptcy and having the court cancel all credit card debt, would mean the entire $12,000 from our example would be excluded from income. The bank may still send a 1099-C anyways, which would still need to be reported on your personal tax return along with your special bankruptcy exclusion.

Common Tax Law Exclusion.

This addresses debtor insolvency, or in other words you can’t pay back your debts and your liabilities exceed your assets. There are variables in this equation that could mean the entire debt is excluded, or a portion of the debt can be considered taxable income.

Generally, if assets-debts+charged off debt as income leaves you with a negative net worth, the entire amount will be excluded.

If, however, assets-debts+charged off debt as income leaves you with a positive net worth, the amount of canceled debt as income that creates a positive net worth is now considered taxable.

Of course these are very basic examples to provide an understanding of the concept, keep in mind though that there are multiple factors that go into determining taxable income and it’s important that you speak with a tax professional who can explain some of the more complex issues you may face.

Next week we’ll get into the business side of charged off debts as taxable income…

At first, it may not make sense that the IRS would be concerned with a debtor’s written off debt. But the tax code is quite clear in stating that (under many circumstances) discharged debt is considered taxable income. This fact may leave you scratching your head and saying to yourself, “What?!? If I don’t have the money to pay off my debts, then how can I pay income taxes on my discharged debt? It makes no sense to me!”

Those who exploit tax code loopholes make it harder on everyone.

It is important to realize the tax code is written by very educated individuals that are trying to prevent abuses by a minority of unscrupulous taxpayers. Of course, the honest taxpayer must suffer in the process. The reasoning behind this seemingly silly tax law actually makes some sense (in theory).

For example, I borrow $10,000 from my local bank to go on a week-long luxury vacation to Italy. After having a grand time enjoying the excellent food, wine & culture I come back home with a full belly and empty pockets. In fact my pockets are so empty that I don’t have any money to pay off my bank debt. Eventually, the bank decides that it will not be able to collect on my loan and thus writes it off the debt from their loan portfolio (and their tax return).

The way the IRS sees it, the bank gave you $10,000 tax-free and the bank also took a tax deduction. So you benefit, and in some way the bank benefits. The IRS sees that as being unfair…to the IRS! Not surprisingly, there are those out there who would take advantage of such a loophole in order to disguise otherwise taxable income as tax-free discharged debt. Thanks to them, this code had to be created with provisions to close this loophole.

Unfortunately, in practice, this tax law adversely affects the honest taxpayers. If an honest taxpayer can’t pay their debts due to job loss or illness, then why should they be put into the same group as a dishonest taxpayer and be forced to pay income tax on discharged debt?

The good news is that Congress has attempted to help the honest taxpayer by creating several exceptions to recognizing discharged debt as income. The bad news is these exceptions are limited in scope and in some instances may only delay income recognition to a future date.

Tune in next week as the saga continues…

Make sure you have your “parachute” packed when making the leap from employee to sole proprietor!

This may be your first foray into realms outside of employment with little to no understanding of the tax implications involved in such ventures. Did you know that for most Sole Proprietors as much as 50.3% of every dollar of profit that they make could be owed to the IRS, Social Security and Medicare?

We understand it can be difficult knowing where to turn for accurate advice or information to educate yourself about your new circumstances. Here at Fredrick James Accounting, we embrace the mantra “knowledge is power”. Our focus is the empowerment through education of independent contractors, the self employed and small business owners to be able to make educated decisions regarding their tax liabilities

“I guarantee anyone who takes advantage of this consultation will save $300.00 dollars in taxes at a minimum, if their income is at least $3,000.00 and they follow my instructions, or I will refund their consultation fee.” –Fred Daus, CEO Fredrick James Accounting, Tax & Consulting

Our firm is now offering a 1-hour personal consultation & informative course that can save you a minimum of $300* on your taxes, guaranteed!

New to Self Employment Business Orientation: How To Avoid Tax Problems & Pave The Way To Success.

Get answers to your questions:

Deductions: what is and is not deductible

How much should I set aside for taxes, Medicare & Social Security?

Do I have to pay State Taxes?

Do I need to charge Sales Tax?

Do I have to make quarterly payments?

Do I qualify for the mileage deduction?

What can I do to reduce my tax liability?

One hour of your time will result in big tax benefits as you make every day decisions regarding your side job, self employment or small business. In this personalized, private session with CEO Fred Daus, he will go over the main topics that could affect you, answer any questions that you have and provide you with a business tax reference guide that will help you make good business decisions that will have positive tax results.

Sign up now or call our office at 727-474-0922 for more information!
Click the button to sign up and save at least $300* on your taxes or your money back, guaranteed.

We prefer to provide this service in person, however if you are not in the Tampa Bay area we would be happy to provide your consultation via phone or web meeting. Once notice of payment has been received by our office, we will contact you to schedule your appointment, thank you!

*The New to Self Employment Business Orientation will save you at least $300.00 dollars in taxes, if your income is at least $3,000.00 and you follow the instructions provided, or we will refund your consultation fee.

_{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}