With tax season here, its time to start gathering the data needed to prepare your 2011 income tax returns. This information will trickle in over the next few months. Some of the envelopes you receive will be marked “Important Tax Document”, but some may not. To make this tax season easier on everybody, here are a few suggestions.
What did you deduct last year?
Review your 2010 income tax return and make a list of items that were on that return.
Examples would be: W2’s from employers, interest and dividend income from banks and other financial institutions and brokerage houses, and donations to charities. Another (and better) alternative is to use the tax data organizer provided by the office. If you do not receive one by the end of January, call, and the office will provide one.
Get a large, 9 by 12 envelope, and mark it “2011 tax data”. Keep it with your list prepared from last year or your tax organizer. Place it where you put your incoming mail or where you open your mail. As the various documents come in, check them off the list, fill in the appropriate amounts in your summary document (list or organizer), and immediately put the documents received in the envelope. The envelope will be needed for your tax interview, and it will also be very valuable if you should happen to be audited for the year.
Review your check books
Go through your check book, or books, for calendar year 2011 and list disbursements you have made that could be tax deductible. If you use the tax organizer it will help you identify deductible items. These should include property tax payments, auto license payments, charitable donations, purchase of uniforms, medical expenses and anything else you feel may be deductible. Questionable items can be sorted out during your tax preparation interview. Be sure to include the check number of each item on the list. If your bank returns the canceled checks to you, find the check and include it in the 2011 tax envelope. It is better to give the office too much data than not enough.
If you donated non-cash items such as clothing or household furniture, be sure to provide the receipt. List what was given and an estimate of its used value.
Basis of Stocks and Bonds
A frequently missed item in regards to documentation, is the cost of any stocks or bonds sold during the year. Some investment companies provide that information with your year-end tax statements, but not all of them do. If you sold stocks, you may want to contact your broker for the cost information, or you can give the broker permission to talk to the office, and the office can call for the missing information.
Internal Revenue Service rules require that most tax documents be mailed to you by January 31. These documents include W2’s, 1099-int’s and 1099-div’s. If you are expecting one of these documents and do not get it by February 15, you should contact the issuing agency and ask about it.
Those Troublesome K-1’s
One major document you may need to complete your return is a K-1. You get one of these forms when you are a participant in a partnership, a limited liability company, or a subchapter S corporation. The business return that generates the K-1 is not required to be filed until April 15 and the issuing company can request a six month extension to file its return. When the K-1 arrives late in the filing season or is not available until after April 15, the office will request an extension of time to file your return. If you think you have everything to complete your return except for a missing K-1, call the office. It may be a good idea to bring in everything you have, so the office can get started on your returns.
With a little assistance from you, this tax season will be smoother for you and the office.
TAXABILITY OF PRIZES, AWARDS AND REBATES
Is that $50 rebate you received from buying a computer monitor taxable income? What about the 12 pound turkey you received from your employer for Thanksgiving, or the $100 gift certificate you received for that cost saving idea you put in the company suggestion box? And what about that $2 you won on the scratch-off lottery ticket that you turned back-in for another lottery ticket? Let’s look at these and other items that may need to be included on the front page of your federal income tax return as taxable income.
Rebates
A rebate, even if for a car, is not income unless the item for which you received the rebate was used in a trade or business, or you took a tax deduction for the full amount of the item in one year and received the rebate check in the following year. Medical devices may be a good example of this. Suppose you purchased a wheel chair in 2011 for $5,500, and the cost was deducted on your Federal income tax return, Schedule A as an itemized deduction. If you receive a $200 rebate in 2012 you will have taxable income in the amount of the rebate. However, if you anticipated the rebate, and only deducted $5,300 for the wheel chair on your 2011 tax return, the $200 received in 2012 would not be income. If you resell the item, you are required to reduce its cost by any rebate you received and use this reduced cost as the “basis” for determining any gain or loss.
Gifts from Your Employer
Turkeys, hams and gift baskets should fall into the category that the IRS calls “De Minimis” fringe benefits, or minimal value benefits so they would not be taxable income. Your employer is not required to include these items in your paycheck, so you do not need to include them as income on your tax return. However, gift certificates received from your employer, even if minimal, fall into the taxable income category. Your employer is required to add the value of that gift certificate to your paycheck, and thus it will be on your W-2 and taxed. You can receive a prize or award as either an employee or a non employee. If you receive it as an employee, your employer is required to add the value of that prize or award to your paycheck and withhold income taxes from it. If you receive it as a non employee, and the value of the prize or award exceeds $600, the paying business or organization is required to issue you federal form 1099-MISC. A copy of that form is sent to the IRS so they will be looking for that item on your tax return. Even if the value of the item is less than $600, it is still taxable income and should be reported on the “Other Income” line of your tax return.
Gambling Winnings and Losses
Yes, the $2 winning lottery ticket is income. In fact, all gambling income, both legal and illegal, is taxable income. There is good news and bad news as far as gambling income is concerned. The good news is, gambling losses (the cost of the lottery ticket, cost of the horse race bet etc.) are deductible up to the amount of gambling winnings. The bad news is, the losses go on schedule A, Itemized Deductions, so if you don’t itemize you don’t get the deduction for the losses. In addition, the costs of raffle tickets do not qualify as gambling losses.
A rule of thumb in deciding if a prize or award is income is: if you had to do something to qualify, such as dropping your business card in a fish bowl, or maintaining perfect attendance at work for a month, the market value of the prize or award is probably taxable. If you are not sure whether or not your prize or award is taxable, call the office for help in making the decision.
KNOWLEDGE
The holidays have come and gone, and we hope you had a wonderful holiday season. During Christmas, it is said about Santa Claus “he knows when you are sleeping and he knows when you are awake, so be good for goodness sake.” Santa knows, but the IRS suspects. And, oh boy, do they suspect. And when they suspect, they audit. As we get into the 2011 tax return preparation season, be careful. The IRS audit rates are up.
The IRS Is Coming To Town
Commissioner Mark Everson released the following information about the current audit activity.
“The individual enforcement categories bear out the significance of our invigorated enforcement efforts. And all these numbers are for fiscal year 2007 that ended September 30. Total individual returns audited increased by over 6% to 1,293,681 in 2007 from 1,215,000 in 2005. That’s the highest number since 1998. Some people have dismissed our audit increases because of our use of correspondence, or letter exams. While correspondence exams are an effective, efficient enforcement tool that we continue to rely on, it’s important to note there’s an even bigger increase in our field exams – these are the traditional, sit-down audits. The number of field audits increased nearly 23% in 2007 from the previous year, and they climbed by more than half from the level in 2004.
An important part of our enforcement effort has targeted high-income taxpayers. We’ve put a lot of emphasis in increasing audits in this area because it’s critical to ensuring faith in the tax system. If you earn more than $100,000 or you’re a millionaire, you’re a lot more likely to be audited these days than just a few years ago.
Audits of individuals with income of $1,000,000 and higher increased to 17,015 from 12,835, a nearly 33% increase in just one year. About 1 in every 16 of these taxpayers faced audits last year. If you’re earning that kind of money, and we notice a problem, you’re going to hear from us. Audits of individuals with incomes over $100,000 surpassed 257,000, an 18% increase from 2005. That’s the highest figure in more than a decade, and well over double the 92,000 completed in fiscal year 2001.
Let’s turn to businesses. We saw an increase in our efforts to review S corporations and partnerships, while our other activity involving small business and large corporations, remained relatively stable. Our business numbers reflect that we have placed more emphasis in the growing area of these flow-through returns involving S corporations and partnerships:
Audits of S corporation returns increased to 13,984 from 10,417, a 34% increase. This is the highest level since 2000.For partnerships, audits of these flow-through returns increased to 9,777 from 8,489, a 15% increase. This category is at the highest level since 1998.
Audits of small businesses organized as corporations remained about the same. 17,871 audits were completed in 2007, up slightly from 17,858 in 2005. Both of these figures are more than double the 7,294 audits of small businesses in 2004.”
You better watch out!
So what do these figures mean for you? It means that you ought to carefully gather your financial records and work very hard to organize your data, perhaps with the assistance of an organizer document. It means that you must review your financial accounts to insure that you fully report all of your income to the office so the office can properly prepare the return. It is one thing to be audited; it is quite another thing to owe more tax. Time spent in the tax preparation process will reduce time spent in the audit and will minimize the opportunity for the IRS to assess additional tax.
Please contact the office if you have any questions.
Cynthia Harelson, CPA PC 