On the Friday before Christmas, I got a wild hair and decided to replace the flooring in my bathroom. Since I have never done any type of flooring in the past and have no idea how to do it, I figured I would just do it myself. So armed with both inexperience and a scary lack of knowledge, I dove right in! The project had many bumps along the way including starting completely over at one point. I made mistakes along the way and so some spots don't look quite as good as I would have liked. After putting in 21 hours over my Christmas break, I finally finished the project. Overall it looks good, and I am happy with it and oh so glad to be done! .
There is a point to this story. I was telling my brother in law about the project, and he said, well at least now you know how to do it. I told him that he was right, now I know exactly how to do it, hire a professional! A professional could have done the job in a couple hours and made it look much better. Instead of me spending 21 hours on this project, I could have spent a couple of hours at the office working and earned enough to pay for the project and had more time to spend with my family over the holiday weekend, not to mention save my fingers from all those hammer-shots they took!
Many small businesses and indepenent professionals view their tax and accounting the same way I looked at my floors, They think that it is just such a small job, it is not worth hiring someone to do it. Or they are unwilling to pay for expertise. What ends up happening is people spend way too long on their accounting and taxes and don't get the perfect result they had hoped for. When, if they had just been doing what they are good at and paid someone to handle the accounting, they would have been much better off!
So here is a quick exercise for you: How much time do you spend in a month on projects that you could outsource? How much could you earn if you spent that time working instead? Now go hire someone to get those tasks done for you!
One of my passions is helping entrepreneurs get back to doing what they do best. Let us take over the tax and accounting work so you can focus your time into things that make you money!
It might seem like obvious advice, but there are people that still make mistakes about reporting income.
If you get a form telling you how much you earned, the IRS also gets a copy of that form. It doesn't matter if it is for wages, interest, capital gains, rent, or something else - the IRS also gets a copy. That means if you don't report at least 100% of the amount shown on the forms you receive the IRS will know you underreported.
But if there is a mistake and the form is wrong, you don't have to report it, right? No. If you don't report it, the IRS will presume you left it off. It won't matter if it was on purpose or an oversight, if you don't report it all, you will receive a matching notice, saying what you reported does not match IRS records. If there is a mistake the best thing to do is to report everything. There are ways to make corrections to the amounts, but you have to report it first.
What if the amount isn't yours? The next step to take here is to contact the provider of the form and get it corrected immediately. Call them to get the process started, but follow up in writing. Keep notes and all correspondence about getting the form corrected. Depending on the time frame of the correction compared to your filing date you might or might not want to report the amount. There is a judgment call here.
Finally, you might receive income that is not reported on a form. Income for services rendered might not be reported on Form 1099-MISC if the amount paid was under $600. Interest income under $10 is not required to be reported on Form 1099-INT. Other income (e.g., babysitting, blood donation payments) might not be reported at all. These are still income, and if the IRS found out about them you would be assessed penalties for failing to report income.
If you have any questions about reporting income, give us a call. We will be happy to walk through the rules with you and make sure you are safe.
Any given individual income tax return has only a .84% chance of being audited by the IRS. That's equal to 1 return out of every 119. The odds seem pretty favorable, but those numbers are for the entire spectrum of income earners.
The IRS released a report that shows your odds of being audited go up when you make more money. For example, making $200,000 - $500,000 means your odds of being audited are at 1.54%. The rate overall seems pretty low, but when you realize this is almost two and a half times the likelihood for taxpayers in the $100,000 - $200,000 range (.64%) you start to understand the implications.
The lowest income earners aren't off much easier. Those making between $1 - $25,000 have a 1.01% chance of being audited, higher than the overall average. And those with no income (due to losses, loss carryforwards, etc.) have a 3.78% chance of being audited.
But the highest income earners are in the worst situation. Those making between $1 million - $5 million have about 1 in 12 odds of being audited (8.42%), and the highest bracket, earners making over $10 million, have 1 in 3 odds of being audited (34.69%).
So what's a taxpayer to do? Making more money means you're more likely to hear from the IRS. They have found that they get better enforcement results when auditing higher income taxpayers. Making less money (well, at least somewhere in the middle of earners) certainly reduces your likelihood for an audit, but you shouldn't have to make financial decisions based on the likelihood of hearing from the IRS.
As long as you properly report your information on your tax return, any request for information from the IRS should be easy to handle. Just don't be surprised that your increased income also brings with it the increased opportunity for receiving an IRS notice.
The There is a tax gap in the United States. Every few years the IRS does an analysis of overall compliance with federal tax laws and uses that information to estimate the annual shortfall of revenues. That shortfall is known as the tax gap, and the most recent estimate put that amount at well over $450 billion. (Yes, "B"illion.) Through enforcement efforts (like audits) the IRS typically recovers about $50 billion per year, but with a gaping difference between the shortfall and collections you can understand why they are eager to enforce where they can.
The first Form 1040 was filed for the year 1913, and since then billions of tax returns have been filed. The IRS uses its wealth of historical data to perform statistical analyses, determining what is or is not "normal," to help them identify when something looks out of line. These red flags are sometimes unavoidable, as even legitimate deductions can cause statistical anomalies, increasing the likelihood of being selected for enforcement action.
Here is a list of what many consider to be red flags for the IRS. None of these guarantee an audit, and none of them are automatically cause for concern. These are all legitimate and legal, but having them may place you outside the boundaries of a "normal" return. That means you might hear from the IRS. It does not mean you shouldn't report it, or that you will lose and owe additional tax.
We will discuss each of these items in greater detail in future posts. For now, remember that these are all legal, and simply having them does not automatically mean you will be audited. But if you ever do get a love letter from the IRS, give us a call and we will help you respond.
One of the most common mistake people make with their taxes is only starting to think about their taxes after the year is over. After all, who wants to think about taxes during the holidays!? The problem is that tax returns are just a summary of your year and once your year is over, there isn't much you can change. Now is the time to think about your taxes and make sure you have made all the right moves to prepare yourself for next year. Small business and independent professionals (real estate agents, insurance agents, direct sellers, etc.) stand to gain the most from some savvy year-end planning. It is not uncommon to find that a few simple moves can save a client thousands of dollars on their upcoming return. No matter your tax situation, you need to review it before the end of the year to find some potential planning opportunities.
We are offering free 30 minute consultations to help you make the right tax moves before the end of the year. Give us a call at 435-275-8400 or schedule online with us at www.thinknextstep.com.
Don't overpay your taxes by thousands of dollars next year simply because you failed to take action now. Let us give you some advice that will point you in the right direction.
Next Step Blog
Our blog is intended as a tool to keep people informed about relevant tax and accounting issues. If you have a question or an idea for a post, let us know!