Yes, you can start a dialogue with the IRS if you feel that its findings are incorrect.

The very thought of having to communicate with the Internal Revenue Service about something you believe is an agency error is intimidating to most people. The tax code is massive and often difficult to decipher, and everyone gets at least a little nervous they consider engaging the governing agency.

But there are numerous reasons why you might dispute something that the IRS has communicated to you. You might think, for example, that the law was not interpreted correctly, so a decision may not have been the right one. Or you don’t believe that a collections effort should have been initiated against you, or you feel that your offer in compromise should have been accepted.

There are three things you need to do first:

• Double- and triple-check any IRS publications that you consulted to make sure you read them correctly, as well as to be sure that you’re very clear on what your position is and why.
• Decide whether you are going to go it alone or whether you would like a CPA or attorney to represent you.
• Prepare to file a written protest to request an Appeals conference.

Note: You may be able to bypass this formal document if you qualify for something like the Small Case Request. Check with us to see which procedure will be appropriate in your case.

Even if you choose to let us guide you through this complex process, you can start gathering information for the written protest. The IRS expects it to contain a great deal of detail, including:

• Your contact information,
• A clear statement indicating that you intend to appeal to the Office of Appeals because of changes that the agency suggested,
• The letter that the IRS sent you that outlined the changes it believed needed to be made,
• The pertinent tax period(s) or year(s),
• A list of the items with which you take exception,
• Your rationale for disagreeing, including supporting facts,
• Your signature, of course, and
• A statement and signature from any professional who helped you prepare the protest document.

Talk to us if you’re protesting a lien, levy, seizure, or denial or termination of an installment agreement. These disagreements require a different procedure.

Be Proactive

You may assume that the IRS is always right and therefore may be uncomfortable second-guessing the changes the agency made to your tax return. But you have a perfect right to protest – as long as you’re certain of the rationale for your dispute.

The best way to avoid having to go through this process, of course, is to be exceptionally careful about your tax return in the first place. This requires planning throughout the year and a thorough understanding of all of the information you supply to the IRS. If your return contains more than some simple income and deductions, we’d be happy to work with you from start to finish.

Filed under: Taxes by Katie Bluhm
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Don’t panic: It isn’t necessarily bad news. But you may need to deal with it.

Getting a letter actually addressed to you personally is becoming a thing of the past, what with email and social media taking over a lot of our correspondence.

But a letter addressed to you from the IRS? Your first reaction may well be to wonder what you did wrong.

The IRS doesn’t always deliver bad news by mail. The agency may want to inform you that you have a larger refund than you expected. Or that it simply needs some additional information or some extra time (if the processing of your return is delayed). Sometimes, you don’t have to take action on the notice.

But sometimes you do. The IRS will send you a letter through the U.S. Mail if:

• You owe more than you submitted,
• You need to answer a query about your return, or
• You must verify your identity or provide more information.

If you get a message that claims to be from the IRS in email or on social media, it’s not. The agency only communicates with taxpayers via U.S. Mail. Go to this page to see how to report the fraudulent note.

Letters from the IRS, though, need to be responded to quickly. If you are given a deadline, you must answer within that timeframe. If you don’t, you may incur additional interest and penalty charges. You may also put your right to appeal in jeopardy.

Money you owe needs to be submitted as soon as possible. If you absolutely can’t pay in full, at least pay what you can. Payments can be made online. You can also request an Online Payment Agreement or Offer in Compromise. We can tell you more about these options.

Here are some other tips from the IRS:

Read through the entire letter at least once and make sure you understand what is being said. Let us know if you are at all unsure of the situation. Your return may have been changed by the IRS, in which case you should compare the modifications to your original return. The agency may also believe that the return was submitted fraudulently and not by you. You’ll be asked to verify your identity if identity theft is suspected.

Contact the IRS immediately if you don’t agree with its findings or if you have questions. There should be a phone number in the upper right-hand corner of the letter. Before you call, gather together your return and any other documents that relate to it. You can also respond in a letter of your own, but know that it can take at least 30 days to get a response from the agency.

Of course, you will also be contacted by the IRS through the U.S. Mail if you’ve been selected for an audit. Again, this doesn’t mean that the agency suspects that there are errors in your tax return. Some taxpayers are selected randomly. You don’t want to go through an audit alone. We have dealt with the IRS and know how this process will work, and can assist you throughout.

So whether you get an audit notice from the IRS or any other kind of correspondence that concerns you, let us help.

Filed under: Taxes by Katie Bluhm
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Oops! Did you determine that you made an error on an income tax return that you already filed? It’s not unusual. That’s why the IRS has a special form that will fix it.

Maybe a 1099 that you had forgotten about came in after you’d filed your income taxes for the previous year. Or a big business deduction slipped your mind. Or as you glanced through your return before filing it, you noticed that one digit in your Social Security number was incorrect.

Sometimes, post-filing errors are your own fault and sometimes not. Whatever the reason, you should file an amended return as soon as you discover the error, because it takes some time to get it processed. The IRS recommends you file a Form 1040X when you need to register a change – or changes — in your filing status, income, deductions, or credits.

Note: Keep in mind that there are exceptions to the general rules and additional forms that may be required depending on your situation. Also, there are some errors that, for numerous reasons, don’t warrant an amended return. So please talk to us before you file one.

Figure 1: You’ll need to file an IRS Form 1040X to correct a Form 1040, 1040A, 1040EZ, 1040NR, or 1040NR-EZ.

Though we strongly urge you to let us help you prepare and submit an amended return, here are answers to some questions you may have about the process.

What’s Needed: If you need to file an amended return, you’ll have to get a paper copy of the IRS Form 1040X. Besides the form itself and IRS instructions, you’ll need your original return and all of its supporting forms, schedules, worksheets, and instructions.

Where It Goes: Even if you originally filed electronically, you’ll have to complete and submit this the old-fashioned way: through the U.S. Mail. (See page 12 of the IRS instructions for this form to find the appropriate mailing address). Note: If you have discovered errors in more than one year, you’ll have to submit separate 1040X forms in separate envelopes.

How Long You Have to Submit It: The IRS wants to see your 1040X within three years of the date that your original form was filed (including extensions) or within two years of actually paying the tax – whichever date is later.

How Long It Takes the IRS to Process Your 1040X: It may not even show up in the IRS’ system for three weeks. Expect to wait up to 16 weeks for the change to be completed.

How You Can Check the Status of a 1040X: The IRS provides an online tool called Where’s My Amended Return? , which only has updates on certain types of amended returns. You can also call an automated toll-free number (866-464-2050).

What the IRS Does If It Has Questions About Your 1040X: It will contact you through the U.S. Mail.

Figure 2: The IRS Form 1040X is structured differently from the other forms in the 1040 family. It will actually replace your original return.

The Form 1040X is not as lengthy as the 1040, but it in essence becomes your new tax return for the year. You’ll supply your original entry or any adjustment that the IRS has already made in one column and then the new amount in another, with the difference in between.

Keep in mind that an amended federal form may have an impact on your state return. We can help you determine this and advise you on how to proceed.

You know how important it is to get everything right on your income tax return. Accuracy is just as critical – if not more so – when you file an amended return. You don’t want to have to correct your corrections, and we don’t want you to, either. So let us know if it looks like a Form 1040X is in your future.

Filed under: Taxes by Katie Bluhm
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It can reduce your income tax obligation, but be sure you understand the IRS’s rules.

One of the many ways the internet has changed business over the last two decades is the increasing numbers of part-time entrepreneurs. Simple do-it-yourself website design tools have made it possible for anyone to create a virtual storefront that looks impressive — even if its CEO is working out of his or her spare bedroom.

At the same time — whether it’s good or bad — businesspeople have found it easier to do office work at home.

If you’re in one of these two situations, you may be able to take the Home Office Deduction on your IRS Form 1040. There are two primary requirements:

• You have to use your home office space exclusively for business.
• The area of your home that you’re claiming must be used as your “principal place of business.”

Prior to the 2013 tax year, doing the required calculations to determine the costs associated with the business use of a portion of your home was quite complicated. It can be a less complex task now, if you use what’s called the Simplified Option. However, you can still claim the Home Office Deduction using the Regular Method.

Warning: Once you select one of these options for a given tax year, you must stick with it through that year. If you change from the Simplified Option one year to the Regular Method the next, you’ll need to know how to handle depreciation. We can help with this.

Here are some of the specifics. Where you used to have to maintain records of actual, legitimate expenses (and you still can, using the Regular Method), you now have the option to take a standard deduction of $5/square foot (maximum 300 square feet) for the section of your home that you’re claiming.

Filing can be less time-consuming, too, using the Simplified Option. In previous years, you had to enter some home-related itemized deductions on the Schedule A and the rest on Schedules C or F. You can still do so using the Regular Method. But now you can claim them in total on the Schedule A.

Do you want to work with depreciation for your Home Office Deduction? If so, you’ll have to stick with the Regular Method. Using it, you can:

• Take a depreciation deduction for the area of your home that you use for business, and
• Recapture that depreciation when you sell your home.

Figure 1: The Simplified Option makes it easier to file for the Home Office Deduction, but it may not be best for your situation. We can help you sort it out.

If you’ve decided that you want to use the Simplified Option, there’s no depreciation deduction, and, of course, no recapture of it.

Loss carryover is affected, too. Using the Simplified Option, you cannot:

• Carry over any amount that exceeds your gross income limitation, or
• Claim a loss carryover that was derived from the use of the Regular Method in the previous year.

One thing that’s stayed the same in both is this: the Home Office Deduction can’t be higher than the gross income you’re declaring from the business use of your home minus business expenses.

Obviously, determining what the amount of your home office deduction will be is still a complex operation, even though the new rules are called the Simplified Option. We can’t recommend that you attempt either alternative without consulting with us. It may or may not be an effective way to lower your tax obligation, and you might spend hours trying to figure this out on your own. So let us help.

Filed under: Taxes by Katie Bluhm
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Even if you guard that critical 9-digit number carefully, you can still have a fraudulent tax return filed using it.   Your first thoughts when you become the victim of a tax identity thief might go along the lines of: Did I click on a link in an email that I shouldn’t have? Is my virus protection not strong enough? Was there a breach on my software developer’s servers, or on those of my tax preparer? Should I have entered my Social Security number on a non-tax-related site? Then the creepy feelings of having been invaded kick in, and you can’t decide what to do first.   Figure 1: Tax identity theft occurs in numerous ways, and it may well have nothing to do with a previous tax filing of yours.   Tax identity theft simply means that someone got your Social Security number and filed a fraudulent return with it, claiming a refund. You would probably find out about it when you got a letter from the IRS stating that your Social Security number was used to file more than one return. Or you owe more tax than you thought you did. Or a return came in using your Social Security number, claiming wages from an employer who wasn’t yours.   How did they get your number? Forbes lists 10 ways it can happen. Basically, anyone who works for an employer who has your sensitive personal information of yours can use it or sell it. The FTC recommends several steps you can take to avoid being a victim of tax identity theft, including: Don’t carry anything with you that has your Social Security number on it. If you must provide your number to anyone but the IRS, ask how they are going to keep it safe. Take outgoing mail to a U.S. Post Office location, and try not to let your incoming mail sit in your box for a prolonged time. Shred, shred, shred. Online tax identity theft can also be the culprit, so stay as safe as you can there, too. Many websites insist on complex passwords and suggest you change them occasionally. Ideally, you should do this for any site that requires a password, especially anything that contains personal and/or financial information. Keep track on your passwords on paper instead of a computer program that stores them.   When you dispose of desktop hardware and mobile devices, use utility software and/or check your owner’s manual for information on how to delete all information.   Be discriminating about with whom you share information with online – especially your Social Security number. Just as you should never disclose anything sensitive to someone who calls you on the phone, even if they claim to be with a business you patronize, stay mum if someone approaches you online and asks personal questions. Find the number for the business itself and initiate a call if you believe it might be a legitimate request.   Never send your Social Security number, site passwords, account numbers, or similar information to anyone in an email message. Pick up the phone instead. And keep tax identity theft in mind anytime you post something on social media.   If tax identity theft should happen to you, the IRS suggests several steps to take, including: Respond to the IRS’s letter immediately. Contact law enforcement. You’re the victim of a crime. Get a “fraud alert” placed on your credit records by contacting Equifax, Experian, or TransUnion. Let all your financial institutions know about the breach. Tell us about it. We can help you with your next steps, especially where tax-filing is concerned. Report it on the FTC website. How long will it take to clear your record? That depends on a number of things. But you can try to minimize the damage by reporting the situation quickly.

Filed under: Taxes by Katie Bluhm
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Filed under: Taxes by Katie Bluhm
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A business structure is simply an organizational framework. The IRS requires you to select one for your company, since this designation will determine the tax forms you’ll file as well as who is responsible for the company’s liabilities and debts. If you’ve already formed a company and have been operating as one of these structures, you should occasionally re-evaluate your status, especially if you’re growing and/or adding to your organizational structure.

 

Here are the most common used business structures and some of their attributes.

 

Sole Proprietorship

 

Whether you’re selling handmade items on Etsy or working solo in a profession like law or real estate, you’re most likely a sole proprietor (though you have other options). While you may have taken this route so you could be your own boss, there are drawbacks, including the fact that you are 100 percent responsible for your company’s liabilities. You may also find it difficult to get financing.

 

Figure 1: If this IRS form looks familiar and you don’t have any employees or partners, you’re most likely a sole proprietor.

 

The IRS defines a sole proprietor as “someone who owns an unincorporated business by himself or herself.” If you fit this definition, and you netted more than $400 as a self-employed person, you’re required to file a Schedule C with your Form 1040 that outlines your income and expenses. Since you are your own employer, you must pay Self-Employment Tax, the Medicare and Social Security taxes that employers pay for W-2 employees, as well as quarterly estimated taxes.

 

Note: Even if you have an employer who issues you a W-2 form, you must still complete a Schedule C for any side businesses you have.

 

Limited Liability Company (LLC)

 

Individuals (and other business entities) can also structure themselves as LLCs. The regulations for these vary by state, and tax obligations are a little more complex than for a sole proprietorship. We can help you decide if this is a good choice for you.

 

C Corporations

 

Businesses that choose this structure are generally larger companies with many employees. Since the company functions as a separate legal entity, no individuals are subject to personal liability. They file the IRS Form 1120 (among other documents) instead of a 1040, and they can sell stock in the company to raise revenue. 

 

On the downside, C Corporations have complex administrative requirements. They must pay corporate tax, and their shareholders pay tax on dividends on their own returns.

 

Partnerships

 

Partnerships — and there are multiple types — are also very complex entities. They consist of two or more individuals who are not considered employees, but who are personally liable for the partnership’s debts and other obligations. 

 

The partnership itself is not required to pay income tax like corporations do.  Rather, they file a Form 1065 to report income, deductions, etc. Profits or losses are then “passed through” to the partners, who file Form 1040 as if they were sole proprietors, but who must attach a Schedule K-1 to the 1065.

 

You can see from this brief discussion that the business structure you select has enormous influence on your income tax obligations and your personal liability. Before you make a decision, or if you’re considering changing an existing structure, let us walk you through all of the possible implications for your company.

Filed under: Taxes by Katie Bluhm
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Even if your 2014 refund hasn’t hit the mailbox yet, it’s time to get a jump on your 2015 taxes.

What does the phrase “tax planning” mean to you?

1. Hurriedly giving charitable donations in December to try to knock down your total income tax obligation
2. Setting aside time for tax preparation as soon as your tax forms come in after the first of the year
3. Making tax planning a year-round element of your larger financial planning

There’s nothing wrong with the first two here, but we also hope you’re practicing #3. If not, here are five ways you can do that.

Run your financial reports conscientiously.

Figure 1: Reports are a critical part of your year-round tax planning. We can create and analyze the standard financial reports you’ll need.

All of that hard work you do entering transactions and receiving payments conscientiously pays off in reports that can help you make better business decisions every day. But reports are also an important element of your tax planning. There are many simple ones that you’ll want to generate regularly to keep an eye on your income and expenses, but some, like the Trial Balance and Statement of Cash Flows, are more complex and can require a professional’s interpretation.

If you’ve not already done so, talk to us about setting up a regular schedule for these standard financial reports, either monthly or quarterly. We can explain how the insight you receive can have an impact on your tax obligations.

Consider your “green” options. Energy conservation is not just a good idea — it can help you save money on your taxes. The government makes a number of energy credits available to businesses and consumers who install and use products that are energy efficient. You can get more information here.

Watch expenses like the proverbial hawk. Business expenses will offset your income and help you lower your tax bill, but they need to be the right expenses. And they need to be documented comprehensively and accurately.

Technology can be your friend here. There are applications that help you rein in travel expenses, for example. You can lay out your policies within them, and they will flag expenses that are out of your reimbursable and/or billable range. Others help you track and manage receipts. There are also numerous time-and-billing applications that will help you ensure that all hours worked are recorded and billed back to the appropriate customers.

These solutions are easy to use and inexpensive, and they can help you trim the fat and charge your customers for the expenses you incur for them. We can help you explore and implement what’s available.

Are you getting too much of a refund, and you’re tired of loaning the government your money without getting any interest? Or conversely, are you having to pay too much at filing time? Evaluate your withholding to determine whether you should be claiming more or fewer allowances. You can talk to us about this. If you need to complete a new Form W-4, you can find one here.

Figure 2: Allowances are often the culprit if you’re regularly receiving a large refund or you frequently have to pay at filing time. We can help you evaluate your situation.

Use a recommended small business accounting product. Whether it’s desktop software or a cloud-based solution, there’s simply no reason why you should still be using Excel and paper. You need solid financial information year-round that culminates in a thorough, accurate set of forms and schedules come tax time. In fact, your income tax obligation is good enough reason to invest a modest amount of money and some training time to automate your finances. There are many other benefits, but tax planning is a significant one.

We want to help you take some of the dread and anxiety out of tax deadlines. Setting up a year-round planning strategy will do just that.

Filed under: Taxes by Katie Bluhm
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It’s not just self-employed individuals who are required by the IRS to pay estimated taxes.

There are numerous advantages to being self-employed. The top benefit that most full-time, must-report-to-the-office employees most envy the most is your ability to establish your own work schedule. You don’t have the commuting expenses, nor the hassle. No endless meetings with co-workers, and no dealing with office politics.

Self-employment has one major disadvantage, though: the self-employment tax. One of the benefits of being a W-2 employee of a company is, well, the W-2, which documents how much you paid into Social Security, as well as the big chunk your employer kicked in.

Others Owe, Too

But estimated taxes are not just for the self-employed. They’re owed by anyone who has at least some income that isn’t subject to withholding by an employer. For example, if you receive interest or dividends, rent, or income from selling an asset, you are required to pay estimated taxes.

Figure 1: The IRS establishes a payment schedule for your estimated tax payments.

In addition, if you’re not deducting enough income tax deducted from your salary, pension, or other income, you’re obligated to send the IRS a payment four times a year. This is why it’s so important that you enter the correct number of allowances on your W-4 (and even add an additional amount if necessary), and that you track all income. Failure to submit enough income tax dollars prior to filing your 1040 – and by the IRS’ scheduled deadlines — will result in penalties, even if the IRS owes you a refund.

How to Pay

The form you use to submit your estimated tax payments depends on what type of business entity you are. If you are a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you’ll need to make quarterly estimated payments if you think you will owe $1,000 or more (after you subtract withholding and refundable credits) or more come filing time. You would use the Form 1040-ES (Estimated Tax for Individuals) to calculate and pay. Corporations should use the Form 1120-W (Estimated Tax for Corporations) if they expect to owe $500 or more when they file.

If you are sending a check or money order, you can fill out and print the vouchers included at the end of Form 1040-ES on the IRS site.

Figure 2: If you are sending a check or money order to make estimated payments, you can use these voucher forms found on the 1040-ES page.

There are multiple ways to pay estimated taxes electronically, either by credit or debit card, or by withdrawal from a bank account. They’re listed here, and they include   EFTPS (the Electronic Federal Tax Payment System), a free service provided by the U.S. Department of the Treasury.

As Always, Exceptions

There are some individuals and businesses to whom these mandates don’t apply. Farmers and fishermen, as well as some household employers and higher-income taxpayers have different rules that are explained in the Form 1040-ES instructions.

Also, you’re not required to pay estimated taxes if:

• You were a U.S. citizen or resident alien for all of the previous year, and
• You had zero tax liability for the full 12 months of the previous year.

How to Estimate Your Estimated Taxes

That’s the tricky part, especially if you are self-employed or for some other reason don’t know for a fact how much you’ll owe in income tax for the current year. You can use the previous year’s return as a guide, but there have, of course, been tax code changes since then. And your income and deductions may well be different this year.

This is really an area where you should sit down with us and make a plan. This might involve running monthly or quarterly reports, creating projections, etc. These are good habits, especially if your income is unpredictable. Year-round tax planning will not only help you make those quarterly payments – it will provide a clearer view of your company’s overall financial health.

Filed under: Taxes by Katie Bluhm
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It’s a very important distinction, and one that can get you in hot water if you misclassify workers.

Full-time employees of companies often look at independent contractors with envy. They can generally work whatever hours they want. They can sit at a computer, make phone calls, and create products in their jammies if they’d like. They don’t have to make up an excuse to take a mental health day, and they can run errands at times when the stores aren’t as busy.

It is true that self-employed individuals have many freedoms not afforded to those who must show up at an office or warehouse or retail outlet at scheduled hours several times a week. But where income taxes are concerned, that envy goes the other direction. Besides not getting benefits like paid time off, health insurance, and retirement plans, independent contractors bear a much heavier load, as they must kick in the money that employers cover for their full-timers.

The differences in these two types of job status may seem obvious. But even major corporations who have teams of lawyers and compensation specialists and human resources professionals have been scrutinized – and in some cases, penalized – for misclassifying workers. Here’s what you need to know as an employer.

Contractors Contract

There’s a good reason why independent contractors are called contractors: they “contract” with companies to provide services. They work for an hourly or by-the-project rate that’s arrived at ahead of time by mutual agreement. There are numerous types of professions that count independent contractors among their ranks, including artists and writers, doctors and dentists, lawyers, accountants, and, well, contractors and subcontractors.

Contractors, according to the IRS, are part of a larger group called the “self-employed.” This larger classification can also include members of a partnership and individuals who are in business for themselves (including part-time businesses).

When you employ independent contractors, you owe them payment for services rendered. Nothing more. You do not contribute a penny to their income tax obligations. They are required to file an income tax return annually and submit estimated taxes quarterly. They must also pay the IRS self-employment tax (SE tax), which consists of the Social Security and Medicare taxes that are paid by the employer when one is an official employee.

Common-Law Employees

The Internal Revenue Service’s term for an individual who is an official employee of a company is common-law employee. The IRS has established a set of criteria to help employers determine the “degree of control and independence” that exists in the working relationship.

The factors to be considered are:

• Behavioral. Can you, as an employer, control what the individual does and how he or she does it?
• Financial. How is the worker paid? Are necessary expenses reimbursed? Do you supply the tools and supplies needed to carry out the prescribed tasks?
• Type of Relationship. Is the individual entitled to benefits like health insurance, vacation pay, and/or a pension plan? Will your relationship be ongoing? Is the work that the individual will do a “key aspect of the business”?

Figure 1: Need assistance determining whether an individual is an employee or an independent contractor? Let us help you communicate with the IRS.

That seems fairly cut and dried, but believe it or not, it’s sometimes difficult to make a clear distinction. Some factors may point to an employer-employee relationship, while others may signal that the individual is an independent contractor.

The IRS has a very complicated form that you can fill out to determine the status of an individual. If you feel that you need direction in this process, let us help you. Doing this incorrectly can lead to problems that you shouldn’t have to face.

Filed under: Taxes by Katie Bluhm
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