BE AWARE OF HOME-BASED BUSINESS TAX AVOIDANCE SCHEMES

BE AWARE OF HOME-BASED BUSINESS TAX AVOIDANCE SCHEMES

Deducting all or most of the cost and operation of a personal residence. For example, placing a calendar, desk, file cabinet, telephone, or other business-related item in each room does not increase the amount that can be deducted.

The Internal Revenue Service had issued a consumer alert regarding home-based business schemes that purport to offer tax "relief." In reality, they provide bad advice to unwary taxpayers that, if followed, results in improper tax avoidance.

The promoters of these schemes claim that individual taxpayers can deduct most, or all, of their personal expenses as business expenses by setting up a bogus home-based business. But the tax code firmly establishes that a clear business purpose and profit motive must exist in order to generate and claim allowable business expenses.

Taxpayers should think carefully before filing a return that reflects such unallowable activities. No matter how convincing the claims that are found in marketing materials for these schemes may appear, nondeductible personal living expenses cannot be transformed into deductible business expenses.

Taxpayers should resist the temptation of quick and easy schemes. Creating a bogus home business or other schemes cross the line and puts the taxpayer on a path that will result in paying interest and penalties on top of the taxes they owe.

Some examples of personal expenses that are not deductible but are commonly claimed as business expenses in home-based business tax avoidance schemes include:

• Deducting a portion of the total house payment is not allowable if the business is not real.
• Paying children a salary for services, such as answering telephones, washing cars or other tasks and then deducting these costs as a business expense is not allowed.
• Deducting education expenses from the salary wrongfully paid to children as employees also is not allowed.
• Deducting excessive car and truck expenses when the vehicle has been used for both business and personal use is not allowed.
• Deducting personal furniture, home entertainment equipment, children’s toys, etc. is not allowed.
• Deducting personal travel, meals, and entertainment under the guise that "everyone is a potential client" is not allowed.
  

  
  

Any tax scheme that claims a person can deduct what would normally be personal expenses should be considered highly suspect.

Here is What to do If You Are Missing a W-2

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Before you file your 2010 tax return, you should make sure you have all the needed documents including all your Forms W-2. You should receive a Form W-2, Wage and Tax Statement, from each of your employers. Employers had until January 31, 2011 to send you a 2010 Form W-2 earnings statement.
If you haven't received your W-2, follow these four steps:

1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or to issue the W-2.

2. Contact the IRS If you did not receive your W-2 by February 14th, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, city and state, including zip code, Social Security number, phone number and have the following information:

• Employer's name, address, city and state, including zip code and phone number
• Dates of employment
• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2010. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.

3. File your return You still must file your tax return or request an extension to file by April 18, 2011, even if you do not receive your Form W-2. If you have not received your Form W-2 by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible.  There may be a delay in any refund due while the information is verified.

4. File a Form 1040X On occasion, you may receive your missing W-2 after you filed your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.
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Moving Soon? Let the IRS Know!

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If you’ve changed your home or business address, make sure you update that information with the IRS to ensure you receive any refunds or correspondence. Keep in mind the following if you have moved or are about to move:
1. Change Your IRS Address Records  You can change your address on file with the IRS in several ways:

• Write the new address in the appropriate boxes on your tax return;
• Use Form 8822, Change of Address, to submit an address or name change any time during the year;
• Give the IRS written notification of your new address by writing to the IRS center where you file your return. Include your full name, old and new addresses, Social Security Number or Employer Identification Number and signature. If you filed a joint return, be sure to include the information for both taxpayers. If you filed a joint return and have since established separate residences, each spouse should notify the IRS of their new address; and
• Should an IRS employee contact you about your account, you may be able to verbally provide a change of address.

2. Notify Your Employer  Be sure to also notify your employer of your new address so you get your W-2 forms on time.
3. Notify the Post Office If you change your address after you’ve filed your return, don’t forget to notify the post office at your old address so your mail can be forwarded.
4. Estimated Tax Payments If you make estimated tax payments throughout the year, you should mail a completed Form 8822, Change of Address, or write the IRS campus where you file your return. You may continue to use your old pre-printed payment vouchers until the IRS sends you new ones with your new address. However, do not correct the address on the old voucher.
5. Postal Service The IRS does use the Postal Service’s change of address files to update taxpayer addresses, but it’s still a good idea to notify the IRS directly.

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Get Credit for Your Retirement Savings Contributions

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You may be eligible for a tax credit if you make eligible contributions to an employer-sponsored retirement plan or to an individual retirement arrangement.  Here are six things the IRS wants you to know about the Savers Credit:
1. Income Limits The Savers Credit, formally known as the Retirement Savings Contributions Credit, applies to individuals with a filing status and income of:

• Single, married filing separately, or qualifying widow(er), with income up to $27,750
• Head of Household with income up to $41,625
• Married Filing Jointly, with incomes up to $55,500

2. Eligibility requirements To be eligible for the credit you must have been born before January 2, 1992, you cannot have been a full-time student during the calendar year and cannot be claimed as a dependent on another person's return.
3. Credit amount If you make eligible contributions to a qualified IRA, 401(k) and certain other retirement plans, you may be able to take a credit of up to $1,000 or up to $2,000 if filing jointly. The credit is a percentage of the qualifying contribution amount, with the highest rate for taxpayers with the least income.
4. Distributions When figuring this credit, you generally must subtract the amount of distributions you have received from your retirement plans from the contributions you have made. This rule applies to distributions received in the two years before the year the credit is claimed, the year the credit is claimed, and the period after the end of the credit year but before the due date - including extensions - for filing the return for the credit year.
5. Other tax benefits The Retirement Savings Contributions Credit is in addition to other tax benefits which may result from the retirement contributions. For example, most workers at these income levels may deduct all or part of their contributions to a traditional IRA. Contributions to a regular 401(k) plan are not subject to income tax until withdrawn from the plan.
6. Forms to use To claim the credit use Form 8880, Credit for Qualified Retirement Savings Contributions.

Top Tax Time Tips

Top Tax Time Tips 

It’s that time of the year again, the income tax filing season has begun and important tax documents should be arriving in the mail. Even though your return is not due until April, getting an early start will make filing easier. Here are the top 10 tips that will help your tax filing process run smoother than ever this year.

1.       Start gathering your records Round up any documents or forms you’ll need when filing your taxes: receipts, canceled checks and other documents that support income or deductions you’re claiming on your return.

2.       Be on the lookout W-2s and 1099s will be coming soon; you’ll need these to file your tax return.

3.       Use Free File: 

4.       Try IRS e-file: After 21 years, IRS e-file has become the safe, easy and most common way to file a tax return. Last year, 70 percent of taxpayers - 99 million people - used IRS e-file. Starting in 2011, many tax preparers will be required to use e-file and will explain your filing options to you. This is your chance to give it a try. IRS e-file is approaching 1 billion returns processed safely and securely. If you owe taxes, you have payment options to file immediately and pay by the tax deadline. Best of all, combine e-file with direct deposit and you get your refund in as few as 10 days.

5.       Consider other filing options There are many different options for filing your tax return.You can prepare it yourself or go to a tax preparer.You may be eligible for free face-to-face help at an IRS office or volunteer site.Give yourself time to weigh all the different options and find the one that best suits your needs.

6.       Consider Direct Deposit If you elect to have your refund directly deposited into your bank account, you’ll receive it faster than waiting for a paper check. 

7.      Review! Review! Review!Don’t rush. We all make mistakes when we rush.Mistakes will slow down the processing of your return. Be sure to double-check all the Social Security Numbers and math calculations on your return as these are the most common errors made by taxpayers.

8.     Don’t panic! If you run into a problem, remember the IRS is here to help.

FAQs - Tax Refund

Answers to Frequently Asked Questions -> Income Tax - > IRS> Tax Refund

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Kayshev Agarwal, CPA
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How does IRS sends refunds:Taxpayers have three options for receiving their individual federal income tax refund: a paper check, direct deposit (electronic funds transfer) into a checking, savings or other account; or a purchase of U.S. Series I Savings Bonds.

Can I ask IRS to deposit refund in more than account. Taxpayers may request that refunds be directly deposited in up to three separate accounts. The refund must be $1.00 or more. Taxpayers have a choice of selecting up to three accounts such as checking, savings and retirement accounts. Note: You cannot have your refund deposited into more than one account in case of Injured Spouse Allocation.

How long it takes IRS to issue the refundIf you file a complete accurate tax return, your refund will be issued within six weeks from the received date. If you filed electronically, refund checks will be issued within three weeks after the acknowledgment date. Refunds from amended returns will be issued within 8–12 weeks. Injured spouse claims can take longer, depending on the circumstances.

I received refund I was not expectingIf you receive a refund to which you are not entitled, or one for an amount that is more than you expected, do not cash the check until you receive a notice explaining the difference. Follow the instructions on the notice.

I received refund smaller than I was expectingOn the other hand, if you receive a refund for a smaller amount than you expected, you may cash the check, and, if it is determined that you should have received more, you will later receive a check for the difference. If you did not receive a notice and you have questions about the amount of your refund, wait two weeks after receiving the refund, then call 800-829-1040.

How do I check the status of my refundTo check on your refund, call the Refund Hotline at 800–829–1954. Please allow 72 hours after you electronically file or 3 weeks after you mail your return before using the automated systems. When you call, you will need to provide your Social Security number, your filing status, and the exact whole dollar amount of the refund shown on your return.

Can I change my mailing address online?If your refund was returned to IRS by the U.S. Postal Service you may be able to change the address IRS has on file for you, online.

What if my refund was lost, stolen, or destroyed?Generally, you can file an online claim for a replacement check if it's been more than 28 days from the date that IRS mailed your refund.

My refund is delayed.Please see our blog titled "FAQs-Refund Delayed"
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Health insurance deduction reduces self-employment tax

Health insurance deduction reduces self-employment tax

Taxpayers should make sure they are aware of many important changes to the tax law before they complete their 2010 federal income tax return.

Here are several important changes that the IRS wants you to keep in mind when you file your 2010 federal income tax return in 2011.

Health Insurance Deduction Reduces Self Employment Tax  In 2010, eligible self-employed individuals can use the self-employed health insurance deduction to reduce their social security self-employment tax liability in addition to their income tax liability. As in the past, eligible taxpayers claim this deduction on Form 1040 Line 29. But in 2010, eligible taxpayers can also enter this amount on Schedule SE Line 3, thus reducing net earnings from self-employment subject to the 15.3 percent social security self-employment tax.

Premiums paid for health insurance covering the taxpayer, spouse and dependents generally qualify for this deduction. Premiums paid for coverage of an adult child under age 27 at the end of the year, for the time period beginning on or after March 30, 2010, also qualify for this deduction, even if the child is not the taxpayer's dependent.

As before, the insurance plan must be set up under the taxpayer's business, and the taxpayer cannot be eligible to participate in an employer-sponsored health plan.

Ten Important Facts About Capital Gains and Losses

Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When a capital asset is sold, the difference between the amount you paid for the asset and the amount you sold it for is a capital gain or capital loss.
Here are ten facts from the IRS about gains and losses and how they can affect your Federal income tax return.
1.    Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2.    When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
3.    You must report all capital gains.
4.    You may deduct capital losses only on investment property, not on property held for personal use.
5.    Capital gains and losses are classified as long-term or short-term, depending on how long you hold the property before you sell it. If you hold it more than one year, your capital gain or loss is long-term. If you hold it one year or less, your capital gain or loss is short-term.
6.    If you have long-term gains in excess of your long-term losses, you have a net capital gain to the extent your net long-term capital gain is more than your net short-term capital loss, if any.
7.    The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2010, the maximum capital gains rate for most people is 15%. For lower-income individuals, the rate may be 0% on some or all of the net capital gain. Special types of net capital gain can be taxed at 25% or 28%.
8.    If your capital losses exceed your capital gains, the excess can be deducted on your tax return and used to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9.    If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
Capital gains and losses are reported on Schedule D, Capital Gains and Losses, and then transferred to line 13 of Form 1040

Taxable or Non-Taxable Income?

Generally, most income you receive is considered taxable but there are situations when certain types of income are partially taxed or not taxed at all.
To help taxpayers understand the differences between taxable and non-taxable income, the Internal Revenue Service offers these common examples of items not included as taxable income:

• Adoption Expense Reimbursements for qualifying expenses
• Child support payments
• Gifts, bequests and inheritances
• Workers' compensation benefits
• Meals and Lodging for the convenience of your employer
• Compensatory Damages awarded for physical injury or physical sickness
• Welfare Benefits
• Cash Rebates from a dealer or manufacturer

Some income may be taxable under certain circumstances, but not taxable in other situations. Examples of items that may or may not be included in your taxable income are:

• Life Insurance If you surrender a life insurance policy for cash, you must include in income any proceeds that are more than the cost of the life insurance policy. Life insurance proceeds, which were paid to you because of the insured person's death, are not taxable unless the policy was turned over to you for a price.
• Scholarship or Fellowship Grant If you are a candidate for a degree, you can exclude amounts you receive as a qualified scholarship or fellowship. Amounts used for room and board do not qualify.
• Non-cash Income Taxable income may be in a form other than cash. One example of this is bartering, which is an exchange of property or services. The fair market value of goods and services exchanged is fully taxable and must be included as income on Form 1040 of both parties.

All other items—including income such as wages, salaries, tips and unemployment compensation — are fully taxable and must be included in your income unless it is specifically excluded by law.
These examples are not all-inclusive. For more information contact us at
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