I have a lot of clients who used to do their own taxes. I don’t mind. It’s always fun to talk with folks who have an interest in my field, where they are professional tax folks or are simply interested in knowing a little bit about how taxes work.
However, I think that tax-prep software does a disservice to people, especially freelancers and folks who own their own businesses. I’m not talking about how it prepares the forms. (Although, I have seen people mis-interpret questions and then get a love letter from the IRS.) continue reading this article »
This is the one question that I hate to answer. I’ll admit it: the first time I heard the answer to this, I hated it. To this day, I hate replying to the inevitable “deadbeat client” question. So here we go…the dreaded answer, but first, the question that gets you there:
“My client didn’t pay me, can I claim a loss?” continue reading this article »
To go along with yesterday’s post, Audit Red Flags, the next question usually is: “So what happens when you get an audit letter from the IRS?” There are several different letters you can receive, not all of which are “audits.” I’ve seen several where people are informed by the IRs that they are due to receive more money back. To make a long story short: don’t get worried when you suddenly get a letter from the IRS. But what should you do? continue reading this article »
Let me start by saying that no tax preparer has a crystal ball and knows exactly what triggers an audit. In fact, if you asked several experienced preparers what counted as an audit “red flag” you’d get several different replies, including a response or two about how red flags don’t exist.
So what’s the deal? Why are people so convinced that audit red flags exist?
continue reading this article »
In an article posted on the Tax Foundation’s Tax Policy Blog I found some interesting facts about tax prep. The post itself is a comment about how Timothy Geithner (Obama’s nominee for Secretary of the Treasury) himself was caught owing back taxes due to the complexity of the tax code.
- According to the U.S. Treasury Department, the compliance costs of the income tax system amounts to about $140 billion each year—$100 billion for individuals and another $40 billion for businesses. This is roughly 10 percent of individual and corporate income tax revenues.
- The compliance burden also works out to about $1,000 per family every year.
- On average, Americans spent more than half a work week—26 hours—on their taxes each year.
- About 60 percent of taxpayers don’t even prepare returns themselves, but pay tax preparers to complete returns on their behalf. Another roughly 15 percent of taxpayers use tax preparation software. That is, only about a quarter of taxpayers do their own taxes.
- According to the IRS, individual taxpayers (including sole proprietors) spent roughly 3.5 billion hours to comply with the tax system. This is equivalent to hiring almost two and one-half million ”hidden” IRS employees and 20 times the agency’s current work force.
- Businesses spent over 3 billion hours complying with the tax system at a total cost of roughly $40 billion annually.
It will be interesting to see, if confirmed, whether Mr. Geithner will be able to make any significant changes to simplify the tax code.
I doesn’t happen all the time, but sometimes there really is something good for free. Today, the find of the day is free CPA exam review! Yes, you do have to sign up, but you can opt out of the additional emails from them. It covers all parts of the exam and you can drill down to your weaknesses. My only argument is that there is no diagnostic to determine what areas you’re weak on.
There are bookkeepers out that that will tell you they “specialize” in your industry. There’s only one problem: for the most part, a bookkeeper should know how to handle any odd entries that arise, not just ones related to your business. Look at it another way: what happens if you move from having an IT consulting company to buying the building that you’re in an renting out the other office spaces in the building? continue reading this article »
I have talked with numerous accountants/CPAs/EAs who have looked thrilled at the thought of “firing” a client. Usually, once business picks up, they will fire their problem clients. But the question you might have is–what if you’re the client who was fired?
continue reading this article »
Final section! We’re almost there.
I.) Elements of personal pleasure or recreation
While I hate to beat a dead horse, a lot of businesses I’ve seen disallowed have to do with something that started out as a hobby. Do you garden and sell your plants at a farm stand? Are you a antique collector who sells antiques on eBay? A while back I posted a quote in Do you have to suffer for your business? where I mentioned that the Tax Court has actually mentioned in a a ruling that suffering doesn’t have to be part of a business in order to make it a viable business. One thing to keep in mind is that if you do breed poodles and refer to them as “your babies” in the court, your chances just got a little smaller of claiming that your kennel is an actual business.
And with that…I’m done! Next series–freelancing businesses and it’s many intricacies. See you tomorrow.
G.) The amount of occasional profits, if any, which are earned
This falls into the previous categories where the question was about the success of the business. Are you making money in this business? There is a 3-out-of-5 rule where the cannot be losses for more than 3 years in any given timeframe. An additional qualification might be–do your gains in the non-loss years exceed the losses in the years you have a loss? There are a couple of tax court cases out there that cover this. I’ve seen a case where the court ruled that the taxpayer did not have a business simply because, while they had gained $15,000 between the two gain years, it did not exceed the losses in the three loss years which totaled $40,000. The ruling stated that the business was a hobby because the profit would never allow for the business to break even over the five years.
H.) The financial status of the taxpayer
This is a tricky one. They want to know if this is just a rich person’s hobby. If you get into breeding prize poodles and you just keep losing money at it (by giving the puppies away to friends or selling them inexpensively) seemingly have losses to offset your income, the IRS will take that into consideration. It’s basically asking “why are you doing this? Is there a loss motive to your ‘business instead of a profit motive?’” Believe it or not, much like tax shelters, some folks invest into ‘businesses’ in order to have a loss.