• IRS Letter 531: Notice of Deficiency. This is a notice from the IRS that you owe additional tax for certain years that are listed in the notice. If you do not agree with the additional assessment of taxes for the year(s) listed, you may file a petition with the tax court within ninety days of the date on the notice.

• IRS Letter 692: Request for Consideration of Additional Findings. This letter from the IRS is sent with a report detailing adjustments made to your tax return. If you do not agree with these adjustments, you must submit a Request to Appeal/Protest within 15 days of the date on the notice.

• IRS Letter 915: Letter to Transmit Examination Report. This letter from the IRS is sent to notify you of adjustments in your tax amount. If you do not agree with these adjustments, you must file an Appeal/Protest within thirty days of receiving the letter.

• IRS Letter 950: 30 Day Letter Straight Deficiency or Over Assessment. This letter is sent after IRS Field Audits. It is used for unagreed, straight deficiency or straight over assessment. If you do not agree with the findings, then you must file an Appeal/Protest within thirty days of the date on the letter.

• IRS Letter 3391: 30 Day Non-filer Letter. This letter from the IRS is sent to notify you of any proposed adjustments in tax liability due from returns which you have not filed. If you do not agree with the adjustments, you must file an Appeal/Protest within thirty days from the date on the letter.

To learn more on the letters listed above or if you received a letter not listed, check out the information provided by the IRS:

http://www.irs.gov/individuals/article/0,,id=96199,00.html?portlet=1

Understanding why the IRS is contacting you can help expedite the process and get the IRS out of your life as quickly as possible.  Furthermore, understanding the correspondence will help you decide whether it’s necessary to enlist the services of a tax attorney.

In some situations, the IRS sends correspondence after an audit without any prior communication.  Alternatively, the IRS correspondence may serve as notice that they are planning to audit your return.

The following explains various types of audit letters and notifications:

• IRS Form 566(CG): Correspondence Audit. A correspondence audit is requested when there are questions regarding specific items on your tax return. This is the most common type of audit, and is conducted by correspondence with the IRS through the U.S. Mail. This type of audit is triggered by the IRS computer systems when there is an error in computing the tax contained within the tax return itself. This is usually due to a mathematical error on the tax return, and you will be either issued a refund or assessed additional tax accordingly. The IRS may also request through Correspondence Audit additional information or documentation from you to substantiate such items as income, deductions, credits, and expenses claimed by you on your tax return.

• IRS CP 2000: Automatic Adjustment Notice. In most cases, this letter from the IRS is simply a Request for Information. It will contain a proposed change to your income tax return which may propose that you owe additional tax. This proposed change is generated by a “matching error,” which is a discrepancy between information you provided on your tax return and information provided to the IRS by other sources. The IRS compares the income, payments, credits, and deductions you provide on your tax return with the information your employers, banks, businesses, and other payers report to the IRS. If the information you provided on your tax return and the information provided by other sources do not “match,” then the IRS sends the CP 2000 Letter. This letter proposes any corrections and changes in the amount of your tax liability based upon the information provided by other sources. If you agree with the proposed changes to your return, then you can accept the changes by paying the amount of tax owed. However, if you do not agree with the proposed changes, you may provide documentation to the IRS to prove or explain any discrepancies which triggered the changes. If you do not respond to the CP 2000 Letter, the IRS will treat the proposed changes as correct and continue to assessment of the additional amount of tax in the proposal. For a step-by-step guide to answering questions concerning the CP 2000 letter, see the IRS website: http://www.irs.gov/individuals/article/0,,id=136857,00.html

• IRS Form 3572: Audit at the IRS Office. These types of audits are usually directed at self-employed persons and small businesses. This type of audit requires the taxpayer to gather and provide requested information and documentation at a meeting with a field agent at the local IRS office. This type of audit is usually conducted to allow a taxpayer to prove certain deductions, credits, or business expenses. In this situation, it is the duty of the taxpayer to provide documented proof of any item questioned by the IRS.

• Field Audit. This type of audit is the most comprehensive form of IRS audit, and is most common for businesses. In conducting this audit, the IRS will send field auditors to the business owner’s home or business and conduct an on-site examination of the business’ records. The field auditors’ main objective in a Field Audit is to determine whether your deductions are accurately stated on your tax return. Usually the field auditors not only inspect business records, but also the business facility and physical items claimed as deductions, expenses, etc. Field Audits usually require several visits from the auditors and are the most complex and difficult to resolve.

“Red Flags” for Audit

Only one percent of all individual income tax returns filed each year are audited, and only three percent of returns for individuals makings $200,000 or more are audited each year. Although this number is far lower than most people think, there are a few common items known as “Red Flags” which draw attention to your tax return.

• Excessively High Itemized Deductions. If your deductions are disproportionately high compared to your income, then the IRS computer system will flag it for review. Generally, you should itemize your deductions in the following situations:
• If you do not qualify for the standard deduction, or the amount you can claim is limited.
• If you had large uninsured medical and/or dental expenses during the year. These can be claimed if they are in excess of 7.5% of your Adjusted Gross Income (AGI).
• If you paid interest and taxes on your home.
• If you had large unreimbursed employee business expenses or other miscellaneous deductions.
• If you had large uninsured casualty or theft losses.
• If you made large contributions to qualified charities.
• If you have total itemized deductions that are more than the standard deduction to which you are entitled.

• Non-Cash Charitable Contributions. If you have made non-cash contributions to a qualified charity in excess of $500, then you must fill out IRS Form 8283 in order to claim the deduction. This form itself will raise a red flag in the system. You will likely be required to provide supporting documentation of your donation from the charity.
• Home Buyer Credit. If you are claiming the Homebuyer Tax Credit, you must fill out your income tax return on paper and cannot file electronically. You must also include with the income tax return itself IRS Form 5405 along with additional documentation listed on that form. If Form 5405 and supporting documentation are not included in filing your original income tax return, then the credit may be disallowed and your return flagged for audit.

• Home Office Deductions. In order to claim this deduction, the area in your home used as your office must be used regularly and exclusively for the purpose of business. If the amount you deduct for your home office is disproportionately high (based upon the amount of square footage of the home itself compared to the amount of square footage of the office space), then your return may be flagged for audit.

• Job Expenses. In order to claim this deduction, the job-related expenses must exceed 2% of your Adjusted Gross Income (AGI) and must be expenses that have not been reimbursed by your employer.

• Rental Losses. Unless you are actively participating in in the business of renting properties as your business, it is most likely that the IRS will consider your rental properties as a source of Passive Rental Income or Loss. The Passive Loss Allowance maximum is $25,000; therefore if you attempt to claim Rental Losses near the $25,000 limit, then your tax return is likely to be flagged for audit.

• Small Business Losses. If you report losses on your small business, then you are highly likely to be audited. You must be able to prove these losses by documentation, and must also be able to prove that the business venture has been established legitimately to make a profit.

• Schedule C Business Expenses. If you report expenses of your small business, then you are highly likely to be audited. You must be able to prove ordinary and necessary business expenses by documentation and often by proof through physical inspection of the business facility, equipment, etc.

If you have further questions, please contact me for a consultation where I can  review your return and tailor a tax plan to your specific needs.

Traditional IRAs

Individuals who are not active participants in an employer pension plan may make deductible contributions to an IRA. The annual deductible contribution limit for an IRA for 2010 is $5,000. For 2010, a $1,000 “catch-up” contribution is allowed for taxpayers age 50 or older by the close of the taxable year, making the total limit $6,000 for these individuals. For 2010, the AGI phase-out range for deductibility of IRA contributions is between $56,000 and $66,000 of modified AGI for single persons (including heads of households), and between $89,000 and $109,000 of modified AGI for married filing jointly. Above these ranges, no deduction is allowed.

Spousal IRA

If an individual files a joint return and has less compensation than his or her spouse, the IRA contribution is limited to the lesser of $5,000 for 2010 plus age 50 catch-up contributions, or the total compensation of both spouses reduced by the other spouse’s IRA contributions (traditional and Roth).

Roth IRA

This type of IRA permits nondeductible contributions of up to $5,000 a year. Earnings grow tax-free, and distributions are tax-free provided no distributions are made until more than five years after the first contribution and the individual has reached age 59¹/₂. Distributions may be made earlier on account of the individual’s disability or death. The maximum contribution is phased out in 2010 for persons with an AGI above certain amounts–$167,000 to $177,000 for married filing jointly.

Roth IRA Conversion Rule

If you have funds in a traditional IRA (including SEPs and SIMPLE IRAs), §401(a) qualified retirement plan, §403(b) tax-sheltered annuity or §457 government plan, it may be advantageous to consider rolling a portion of such into a Roth IRA this year.  A rollover is treated as a taxable distribution, hence, you will pay tax on the amount converted.  However, depending on your current age and projected AGI for 2010, a Roth conversion may provide you significant tax savings.

Beginning in 2010, taxpayers are able to make Roth IRA conversions without regard to their AGI. If you convert to a Roth IRA in 2010, you have the option of spreading the income ratably over two taxable years (2011 and 2012). This opportunity is available only for conversions in 2010. For conversions in 2011, the tax will have to be paid in the year of conversion.

401(k) Contribution

The §401(k) elective deferral limit is $16,500 for 2010. If your §401(k) plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §401(k) account, for a total maximum contribution of $22,000 ($16,500 in regular contributions plus $5,500 in catch-up contributions).

SIMPLE Plan Contribution

The SIMPLE plan deferral limit is $11,500 for 2010. If your SIMPLE plan has been amended to allow for catch-up contributions for 2010 and you will be 50 years old by December 31, 2010, you may contribute an additional $2,500.

Catch-Up Contributions for Other Plans

If you will be 50 years old by December 31, 2010, you may contribute an additional $5,500 to your §403(b) plan, SEP or eligible §457 government plan.

Maximize Retirement Savings

In many cases, you are required to set your 2011 retirement contribution levels before January 2011. You may want to increase your contribution to lower your AGI in order to take advantage of some of the tax breaks described above or to avoid future tax rate increases. Maximizing your contribution is generally a good investment move and can provide an array of tax saving opportunities.

Need Help?

If you have further questions or concerns as you make plans to maximize your retirement investment, give our office a call.  We are currently offering complimentary phone consultations for issues concerning retirement investments.

With a month and a half left before our tax code reverts back to the pre-Bush era, Obama’s debt panel released (3) new tax reform options:

The co-chairmen of President Obama’s National Commission on Fiscal Responsibility and Reform released a discussion draft in advance of its final report to be issued on December 1.  The report presents three tax reform options:

Option 1: The Zero Plan

• Consolidate the tax code into three individual rates and one corporate rate
• Eliminate the AMT, Pease, and PEP
• Eliminate all $1.1 trillion of tax expenditures
• Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
• Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low

Option 2: Wyden-Gregg Style Reform Individual Tax Reform

• Repeal AMT, PEP, and Pease
• Establish 3 rates – 15%, 25% and 35%
• Triple standard deduction to $30,000 ($15,000 for individuals)
• Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
• Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
• Limit charitable deduction with floor at 2% of AGI
• Cap income tax exclusion for employer-provided healthcare at the amount of the actuarial value of FEHBP standard option
• Modify and repeal several other tax expenditures
• Dedicate portion of savings to deficit reduction Corporate tax reform * Reduce corporate tax rate to 26%
• Permanently extend the research credit
• Eliminate and modify several business tax expenditures, including:
• Domestic production deduction
• LIFO method of accounting
• Energy tax preferences for the oil and gas industry
• Depreciation rules
• International tax reform including a territorial system

Option 3: Tax Reform Trigger

• Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
• Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
• Haircut would limit proportion of deductions and exclusions individuals could take to around 85% in 2015. Similarly, corporations would only take some proportion of their general business credits
• Set haircut to increase over time until tax reform is enacted

Please note, I try to avoid asserting political opinions into my website, thus, I present the information below solely to increase awareness of the current tax issues at the state level.  However, I welcome comments that would encourage a healthy discussion thereof.

FLORIDA STATEWIDE TAX ISSUES

Amendment 1 on the statewide ballot would repeal taxpayer financing of statewide political campaigns.

Amendment 2 on the statewide ballot would give active duty members of the U.S. military and Florida National Guard deployed outside the continental U.S., Alaska, or Hawaii a property tax exemption.

Amendment 4 on the statewide ballot would require the utilization of taxpayer-funded elections to make actual changes to pre-approved comprehensive land use plans.

Amendment 8 on the statewide ballot would repeal a constitutional class size mandate in public schools.

Referendum 1 on the statewide ballot would ask Congress to add an amendment to the U.S. Constitution requiring a balanced federal budget.

Cuba yesterday announced a new tax code that it claimed was friendlier for small business, as thegovernment struggles to build a larger private sector within the state-run economy.

Hmmm…maybe Castro is trying to capitalize on US’s uncertain tax future…

The issue: 2011 tax-withholding tables. Treasury officials usually release the tables, which determine the take-home pay of millions of wage-earners, by mid-November because it takes payroll processors weeks to adjust their systems before Jan. 1.

But congressional leaders recently postponed voting on taxes until after the election and lawmakers don’t reconvene until Nov. 15. The Senate is scheduled to take up several nontax issues when it returns and is expected to leave for Thanksgiving soon after, possibly pushing a vote on taxes into December.

Wall Street Journal, Delays to Tax Tables May Dent Paychecks, by Laura Saunders:

“Things get very dicey after the first of December” because of employers’ need to know the 2011 rates, said Michael Graetz of Columbia University Law School, a former Treasury official. …

Some Capitol Hill tax staffers have suggested that the Treasury could set 2011 withholding at current levels for joint filers earning less than $250,000 ($200,000 for single filers), on the assumption that Congress seems likely to enact this change. Others have suggested that if Congress doesn’t act in time, Treasury officials might consider a one- or two-month grace period in which it maintains current tables until Congress passes tax legislation.

Treasury officials declined to discuss what they will do if lawmakers don’t come to a quick decision. … Treasury officials’ most obvious option is the least attractive. If they publish tables based on expiration of the Bush tax cuts, which occurs Jan. 1, millions of low- and middle-income taxpayers who have paid little or no income taxes for a decade would likely see increases in January. Prof. Graetz estimates that higher withholding could take up to $10 billion a month out workers’ pockets due to higher tax rates alone.

This IRS screw-up could be costly for the unfortunate taxpayers affected.  When the First-Time Homebuyer’s Tax Credit appeared in 2008, it was structured as 15-year, no interest loan, with the 1st of the 15 installments due at the time of filing the taxpayer’s 2010 tax return.  The Credit in 2009 and 2010, however, does not require repayment unless either the home is sold within 36 months of the purchase date or the home ceases to be the taxpayer’s primary residence.

The problem arises if the IRS recorded a 2008 purchase date for a home purchased in 2009 or 2010.   Accordingly, the IRS will be trying to collect the first installment payment by April 15, 2011 from the 2008 first-time homebuyers–including those with an improper 2008 purchase date.

Finally, here’s a few pointers for those of you who took advantage of the Credit in 2009 or 2010 and receive a deficiency notice from the IRS:

1. Don’t freak out!
2. Contact the IRS immediately.
3. Find out where the tax assessment is coming from (i.e. your 2007 1040).
4. Be prepared to dig up your closing documents to correct the recording date.
5. If you cannot resolve the issue by following the above steps, you may need to contact a tax attorney.

However, I found the article below interesting not only because it challenges the typical arguments against the estate tax, but because it was written by someone whose inheritance was actually diminished by the estate tax.

Tax Mickey's Estate...but don't take away his Magic Kingdom!

USA Today op-ed, Mickey Mouse, the Estate Tax and Me, by Abigail Disney:

[T]he estate tax will automatically be reinstated after a year’s hiatus — in its 2001 form. … In a far stricter tax environment, my grandfather still managed to accumulate and pass on ample funds to make three subsequent generations very comfortable indeed. And as an inheritor I am here to tell you, the estate tax is not as much of a bogeyman as you’ve been led to believe. Let’s start with the facts:

• First, the estate tax is not a double tax. … People like me, who inherit assets such as Disney stock, can spend our lives watching those assets grow, and when we pass them along to our children, they have not been touched or diminished at all by the tax system. The only thing I have paid taxes on is the interest from these assets, not their increased value.
• Second, opponents of the estate tax claim family farms will have to be broken up to pay the tax, but good luck finding an example of this. …
• Third, the estate tax incentivizes people like me to do good with our wealth because there is no estate tax on donations to charity. My filmmaking and foundations rely on a tax code that supports a vigorous non-profit sector, a vital part of our society that is bigger and stronger because of the many millions of dollars that flow into it as a result of the estate tax and other tax provisions.

To those who believe the estate tax is unfair, I say that there is no tax more fair than this one. I recently signed the Call to Preserve the Estate Tax organized by United for a Fair Economy because the estate tax is an expression of our deepest American values: that we live in a meritocracy, not an aristocracy; that every generation is a fresh start; and that we choose to build a society in which wealth and opportunity do not accrue to people simply for being born wealthy. …

The estate tax is the cornerstone of a progressive system that leaves wealthy heirs with ample funds while providing the government with the resources it needs to build an environment for the common good. By preserving it, we not only restore billions in revenue to the national treasury — we also restore our most cherished collective ideals as a nation.

“Tax me” may be the least popular sentence in America, but it’s what I am asking, and I hope that our leaders are listening.