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Archives for May 2018

Do You Need to Worry About Being Audited?

May 25, 2018 by Dana Lee CPA LLC Team

Do you need to worry about being audited?

The question has probably crossed your mind. What’s the reality? Unless you filed an extension, it’s likely that your annual tax preparation marathon is over. Whether you did your taxes yourself or had a professional complete your return, you probably breathed a sigh of relief as they were filed.

At the same time, you may have been thinking about some tax-related issues that weren’t so pleasant. Did I declare all my income? Was I entitled to the deductions I claimed? What about credits? Should I really have taken them?

Multiple Reasons

Even if you’re certain you completed your forms and schedules with absolute accuracy, here’s some bad news: You can be audited if your return is chosen at random, or as the result of the IRS’s computer screening. The latter looks at your numbers and compares them to what is considered the “norm” for returns similar to yours.

Hopefully, you won’t have to revisit last year’s tax return. A random audit is possible, though.

You can be audited if you have investors or business partners who’ve been selected for audits. The IRS also looks for specific red flags, such as unusually high or low numbers in certain areas, as well as other situations.

Communicating with the IRS

If you’re selected for an audit, how will you find out? The answer to that question is very important. The IRS will only notify you via a letter that arrives in the U.S. Mail. The IRS will not email you nor call you on the phone.

Imposters claiming to represent the IRS have scammed hundreds if not thousands of people via phone or email contact. These scammers often insist that you owe money (even if you don’t believe you do) and that you must settle your debt immediately or face dire penalties.

In the case of email, scammers may not even ask for money. They want any personal information they can get from you, especially your Social Security number. For example, they may ask you to validate your personal information. Never click on any links or open any attachments in such messages. If you’d like, you can report it to phishing@irs.gov. You can also read more about tax scams on the IRS website.

How Audits Work

You won’t necessarily be sitting across a desk from an IRS agent for an audit, though you may be. Some audits are conducted in person, at places like:

  • An IRS field office
  • An accountant’s office
  • Your home, or
  • Your place of business

Sometimes, audits are even conducted long distance through the mail.

What You’ll Need

Obviously, the IRS is going to want to see the documentation for the information you provided on your tax return, records of income, expenses, itemized deductions, etc. This is why you’re urged to take such care with your historical tax returns. The IRS recommends that you keep copies of everything for at least three years from the date of filing. This includes things like receipts and bills, canceled checks, medical and dental records, and legal papers.

The IRS can require a six-year history for audits if it finds what it calls a “substantial error.” But if you’re going to be audited, it’s more likely to be within two years.

Three Possible Conclusions

What happens when the audit is complete?

  • No Change. The IRS determines that there were no errors or misstatements in your return.
  • Agreed. The IRS finds reason to make changes to your return, and you agree that they’re warranted.
  • Disagreed. The IRS finds reason to make changes to your return, but you don’t agree with their findings.

With the third situation, you have three options. You can go through the IRS’s Alternative Dispute Resolution (ADR) program, which provides mediation services. Or you can file an appeal. You can also simply request a conference with an IRS manager.

Don’t deal with tax issues on your own. Call us right now to find out how we can provide you with the answers you need.

Filed Under: Tax Regulations

Do You Sell Online? Know Your Tax Obligations

May 11, 2018 by Dana Lee CPA LLC Team

Many people today are turning to internet as a way to connect with potential buyers for all kinds of things, like clothing, electronics, cars, antiques, collectibles, and even used household items. Depending on the situation, you could have tax obligations if you sell online.

Is It a Business?

The IRS draws a distinction between what it calls “the Internet equivalent of an occasional garage or yard sale” and an “online auction seller business.”

Example.

Richard is moving and decides to sell online a plant stand and a snow blower he won’t need anymore through an online auction site. He sells the items for less than what he originally paid for them. Richard’s “losses” are not deductible because he sold “personal use” items, and he need not report his sales for tax purposes.

In contrast, an individual who has recurring sales and purchases items for resale with the intention of making a profit may be operating an online auction seller business.

Example.

Maria routinely scours the city where she lives looking for bargains on handmade jewelry and scarves. She puts her weekly finds up for sale on an Internet auction site, hoping to make a profit. Maria has started an online auction business and needs to report her business income and expenses on her tax return.

Selling Appreciated Assets

Online auction sales of art, antiques, collectibles, or other assets for more than they cost result in reportable gains. Depending on the specific situation, the gains would be considered either business income or capital gains.

Selling Depreciated Business Assets

If you sell online depreciated business assets you might have ordinary gains or capital gains, depending on the situation. You will need to include Form 4797, Sales of Business Property with your tax return.

Connect with us today for all the latest and most current tax rules and regulations.

Filed Under: Tax Regulations

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