Statistics by the IRS show that between 60% and 90% of taxpayers do not file a gift tax return despite having engaged in a transaction requiring such a return. To nab the culprits, the IRS is using records obtained from third parties such as land records maintained in state and county offices to uncover intra-family land transfers for little or no consideration. Although land records at state governments are publicly available, the percentage of such suspected land transfers is relatively small compared to the humongous volume of other records. So the IRS has put the onus on state and local governments to provide it with the relevant records.

In the event that state or local governments do not provide the necessary information to the IRS, the Inland Revenue Code expressly allows the IRS to petition for a John Doe summons “which does not identify the person with respect to whose liability the summons is issued.” In other words, the IRS can name John Doe as a defendant representing any and all taxpayers who have transferred land for little or no consideration.

However, in order to issue such a summons, the IRS must establish three things. Firstly, the summons relates to an investigation of an ascertainable group of people; secondly, there exists a reasonable basis for believing that the group of people may have failed to comply with the IR Code; and finally, the records sought are not readily available from other sources.

Although failing to file a gift tax return may have severe consequences, the reality is that the majority of examinations have not resulted in assessed tax or penalties. This is because the Inland Revenue Code bases the civil penalty amount on the amount of tax due so failure to file a gift tax return generally results in no penalty if no tax was due on the taxpayer’s gift.

But if the gift is large enough to trigger a gift tax and no gift tax return was filed, you should not wait it out hoping that the IRS will fail to assess the tax and penalties while the tax is still enforceable. This is because Section 6501 (c) (3) of the Inland Revenue Code gives the IRS an indefinite amount of time to assess the gift tax when you fail to file a return. Another action the IRS may take is to press criminal charges under Code Section 7203, although the agency has not often done so.

 

 

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If you have a hobby on which you spend money, can you claim your expenses as tax deductions? The simple answer is “no”. But there are circumstances in which you CAN claim your hobby expenses as tax deductions. The bottom line is if your hobby is deemed to be a business, then you can claim its expenses as tax deductions.

In any business, there are two categories of expenses that the IRS recognizes. They are ordinary expenses and necessary expenses. By definition, ordinary expenses are those that are common and accepted in your trade whereas necessary expenses are those that are appropriate for the business. A business, on the other hand, is an activity that is carried out for the purpose of profit. So a hobby that is carried out as a business is termed as a “hobby business”.

Hobby businesses are usually run from home and are often based on semi-recreational activities that you are fond of. Some examples are wedding photography, furniture refurbishing, a music band for hire etc. Being able to claim expenses from these activities against your taxes is the benefit of having a hobby business.

Most people with hobby businesses have steady jobs. Even if you incur a loss in your hobby business, you should declare it as the loss will not only reduce your overall taxes but may even drop you down into a lower tax bracket.
The difficult part is proving your hobby is a hobby business. If you consistently deduct your hobby business losses from your other income year after year, you'll probably attract the attention of the IRS. Make sure that the IRS will consider your hobby a real business before you start claiming deductions for the expenses.

So how does the IRS determine if your hobby is a business? They look for a few criteria

• The time and effort put into the hobby shows an intention to make a profit

• The taxpayer depends on income from the hobby as livelihood

• The causes for losses in the hobby – are they due to circumstances beyond the taxpayer’s control or did they occur in the start-up phase of the business?

• The amount of knowledge/expertise/experience needed to carry on the hobby as a successful business

• Whether any profit has been made from similar activities in the past

• Whether any profit has been made over the years

Here’s one popular way you can prove your hobby is a business – show a profit 3 times over 5 consecutive years. This means you should not show a loss in your hobby for 3 straight years. You may (and should) use other forms of “evidence” to show your hobby is a business, such as business cards, up-to-date financial records, a separate business bank account, a business license and permit, advertising expenses etc.

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Everyone dreads IRS audits.  The best way to deal with IRS audits is to avoid them.  Stay in the IRS’ good books.  Don’t do anything that might raise red flags with Uncle Sam.  The bottom line is to prepare an accurate tax return.  Here are some simple mistakes people make on their tax returns that are common causes of IRS audits.

  • Not listing all Forms 1099-INT, Interest Income, on Schedule B, in such a way that the computer or unskilled IRS worker could find the interest income on the return.
  • Not listing all Forms 1099-B, Sale of securities, on Schedule D.  The most common mistake I’ve seen people commit is the failure to report the transfer of money from one mutual fund to another mutual fund.
  • Not listing all Forms 1099-DIV, Dividends, at gross dividends on Schedule B and deduct the non-taxable distributions and capital gains distributions.
  • Not reporting all Forms 1099-MISC, Miscellaneous Income, on the appropriate schedule.  Also, listing non-employee compensation with wages and failing to complete a Schedule SE, Self-employment earnings triggers audits.

Another thing that causes IRS audits is mixing personal and business expenses such as meals, entertainment and travel.   The IRS presumes all expenses being claimed as tax deductions are personal unless you can prove otherwise with documentary evidence.  The same goes with the use of certain assets.  Many business owners mix use cars, mobile phones, home computers, boats, hunting leases, and vacation homes.  Each mixed-use asset carries with it stringent, detailed record keeping rules.

When you are audited, the IRS agent will want to see not only canceled checks and paid receipts or invoices, but also copies of insurance policies, contracts, calendars, logs, travel and conference agendas, journals, and diaries.  Section 280F, 280A, and 274 of the Internal Revenue Code require car logs, logs of vacation home use and who, what, where when and why of all travel, meals and entertainment.  The IRS will request to see the actual hotel bill and not merely the credit card receipt.  Credit card statements and canceled checks also need to be further supported by the actual receipts.

Even though you don’t have to have a receipt for an expense under $75, you still have to write down detailed information such as the date, time, place, name, and business purpose of the expenditure.

 

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If the IRS has audited your case and billed you for a certain amount of taxes that you feel is unwarranted, you may request for an audit reconsideration. Under Section 6404 of the Inland Revenue code, the IRS can grant you abatement of any assessment of tax and penalties or interests. Some of the valid reasons for audit reconsideration are if you 
• did not appear for an audit due to some valid reason

• moved and did not receive the correspondence from the IRS

• submitted documents that were not considered in the IRS assessment

• have new documentation to present

• were billed a tax for which the statute of limitation had passed

• did not file a tax return resulting in the IRS creating a substitute return under Section 6020(b) of the Inland Revenue code and you subsequently filed a return that showing the correct tax

• you discovered an IRS error in computation

All these apply only if you have not paid the assessed tax for which you are requesting reconsideration. If you have paid the assessment which you believe was in error, then you should file a claim for refund instead.

The documents you need to submit for an audit reconsideration are:

• A statement about the issues at hand

• Documents to support your position. You should show your Form 1099, any canceled checks, bank statements, loan documents etc

• Documents previously sent to the IRS (don’t assume they still have them)

• Copies of all correspondence from the IRS to you

It normally takes several months before the IRS takes any action on audit reconsideration requests so be prepared to wait.

If you are in a difficult financial situation or have been given the runaround by the IRS in your reconsideration request, you should contact the National Taxpayer Advocate’s Office and ask to expedite resolution of the request. This is done by filing Form 911, Request for Taxpayer Advocate Service Assistance.

Once your submission is reviewed by the IRS, the agency will inform you of the outcome i.e. whether the assessed tax will be changed. If you do not agree with the result, you can file an appeal with the Appeals Office. Alternatively, you may want to pay the assessed tax and apply for a refund. If you application for refund is rejected in whole or in part, you may ask for an Appeals conference or file a refund suit in federal district court or the Court of Federal Claims.

 

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In case you are unsure of what qualifies your donation to a charitable society to be tax-deductible, you have to know the meaning of “tax exempt organization”. An organization that is tax exempt means it has been exempted from paying income taxes on their profits. These are listed under Section 170(c) of the Inland Revenue Code. 

There are categories of qualified charitable organizations under section 170(c) of the Internal Revenue Code. These are:

• A state or United States possession (or political subdivision thereof), or the United States or the District of Columbia (if your donation is made exclusively for public purposes)

• A community chest, corporation, trust, fund, or foundation, organized or created in the United States or its possessions, or under the laws of the US, any state, the District of Columbia or any possession of the United States, and organized and operated exclusively for charitable, religious, educational, scientific, or literary purposes, or for the prevention of cruelty to children or animals

• A church, synagogue, or other religious organization

• A war veterans' organization or its post, auxiliary, trust, or foundation organized in the United States or its possessions

• A nonprofit volunteer fire company

• A civil defense organization created under federal, state, or local law (this includes unreimbursed expenses of civil defense volunteers that are directly connected with and solely attributable to their volunteer services)

• A domestic fraternal society, operating under the lodge system, but only if the contribution is to be used exclusively for charitable purposes

• A nonprofit cemetery company if the funds are irrevocably dedicated to the perpetual care of the cemetery as a whole and not a particular lot or mausoleum crypt

The section in the Inland Revenue Code that governs these tax exempt societies is 501(c). These organizations receive most of their financial support from the public rather than from a small group of individuals (such as shareholders). They also use most of their donated money to further their exempt-organization goals instead of investing their money to make more profit.

In Section 501(c) itself, there are differences insofar as tax-deductibility is concerned. Donations to 501(c)(4) tax-exempt groups are not deductible by the donors. But if you give a gift to an IRS-approved 501(c)(3) organization, you can deduct that gift on your taxes.

To deduct a charitable donation, you must file Form 1040 and itemize your deductions under Schedule A. If your total deduction for all non-cash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return. If your contribution is more than $5,000 (which usually includes property or other non-cash assets), you must also complete Section B of Form 8283. This generally requires an appraisal by a qualified appraiser.

 

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