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Business Taxes, Family Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction

HIDING INCOME FROM THE IRS? HOW WILL THEY FIND OUT?

July 26, 2022 Howard Tax Prep LLC

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have not filed taxes in years, and they want to know how the IRS knows how much income they have receive. So how does the IRS know when a small business owner is POTENTIALLY hiding income? The IRS has many methods to detect the underreporting of income such as: taxpayer interviews, income probes, Indirect methods, accounting records; QuickBooks files, cash expenditures, bank deposits, net worth, and more; however, this article will be covering a method called the vertical analysis.

The vertical analysis method identifies the differences between gross income, and net profit reported by the business owner, and the industry standards gross income and net profit. In plain English, the IRS compares what businesses owners say their profit is in relation to expenses, to what other people in the same industry say their profit is in relation to expenses. So what data, or statistics does the IRS use to create the comparison? The IRS uses a website called Bizstats.

Information in Bizstats expresses expense categories as a percentage of revenue. Per the IRS “Potential underreporting of income which equals 10% or more of the reported income should be resolved with the taxpayer’s assistance.”

To give an example, let’s say that we have a caterer that reports $65,000 in gross sales, and $50,000 in expenses, leaving them with a profit of $15,000. The caterer’s expenses to sales ratio is 77% ($50,000 in cost to make sales (expenses)/revenue brought in.) If the industry standard is 60%, the IRS might believe that the taxpayer is hiding an additional $18,333 in revenue (50,000/60%=$83,333. $83,333-$65,000=$18,333).

So who is Bizstats? Per their website, “BizStats is owned and operated by Bizminer of Camp Hill, PA, a leader in online data analysis since 1998. Bizminer also publishes more than 9 million local and national industry statistical reports at its own web site at www.bizminer.com” Bizstats has business statistics and financial ratios for Sole proprietors, Corporations, S-Corporations, & Partnerships.

Where does Bizstats get it’s information? Per their website, Bizstats get it’s data from “the latest available IRS financial information in a useful, readable format.”

What are some drawbacks to Bizstats data? Bizstats are only available for 1 year, and the information is typically 3 years old. At the time of publication, the current stats were showing data from 2017.

How can I protect myself from a vertical analysis?

#1 Always report the GROSS income generated in your business. An accounting mistake that we often see in our Chicago South Loop tax preparation office, is that people don’t do bookkeeping, so instead of reporting their gross receipts, they report gross income less returns, refunds, etc. in the gross receipts area, which is not correct. Gross receipts are gross receipts, and you account for returns in a separate line item.

#2. Invoice clients, or keep copies of receipts if you’re in a business that doesn’t use invoicing.

#3. NEVER COMMINGLE YOUR FUNDS. Your business income and expenses need to be kept separate

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debt, business tax preparation, business entity creation, business insurance, or business compliance assistance please contact us online, or call our office toll free at 1-855-743-5765 or locally in Chicago or Indiana at 1-708-529-6604. Make sure to join our newsletter for more tips on reducing taxes, and increasing your wealth. Never miss another tip again! Join our newsletter, to receive tax reduction/wealth building tips delivered right to your inbox!

P.S. For wealth building and tax reduction tips, please join Howard Tax Prep LLC newsletter!

General Tax Topics

ACCESS TO 50 STATES UNEMPLOYMENT WEBSITES

February 21, 2022 Howard Tax Prep LLC

Per the IRS, “Remember – unemployment compensation is taxable. Millions of Americans received unemployment compensation last year, and it’s fully taxable in 2021. The American Rescue Plan Act of 2021 allowed an exclusion of unemployment compensation of up to $10,200 for 2020 only.”

This means, that if you received unemployment, you will need to provide your 1099-G statement to your tax preparer. Unfortunately, sometimes, these forms aren’t automatically sent to the recipient in the mail, so the recipient has to access their states website to download the form. Below, please find links to all 50 states unemployment websites.

Alabama https://labor.alabama.gov/uc/unemployment-compensation.aspx

Alaska https://www.benefits.gov/benefit/1687

Arizona https://des.az.gov/services/employment/unemployment-individual

Arkansas https://www.dws.arkansas.gov/unemployment/

California https://www.edd.ca.gov/claims.htm

Colorado https://www.colorado.gov/pacific/cdle/unemployment

Connecticut http://www.ctdol.state.ct.us/UI-online/index.htm

Delaware https://ui.delawareworks.com

Florida https://www.benefits.gov/benefit/1695

Georgia https://dol.georgia.gov/unemployment-benefits

Hawaii https://labor.hawaii.gov/ui/

Idaho https://www.labor.idaho.gov/dnn/Unemployment-Benefits

Illinois https://ides.illinois.gov/unemployment/insurance.html

Indiana https://www.in.gov/dwd/2362.htm

Iowa https://www.iowaworkforcedevelopment.gov/file-claim-unemployment-insurance-benefits

Kansas https://www.dol.ks.gov

Kentucky https://kcc.ky.gov/employer/Pages/Unemployment-Insurance.aspx

Louisiana https://www.benefits.gov/benefit/1722

Maine https://www.maine.gov/unemployment/

Maryland https://www.dllr.state.md.us/employment/unemployment.shtml

Massachusetts https://www.mass.gov/unemployment-insurance-ui-online

Michigan https://www.benefits.gov/benefit/1734

Minnesota https://uimn.org/applicants/

Mississippi https://mdes.ms.gov/unemployment-claims/benefit-information/

Missouri https://labor.mo.gov/DES/Claims/eligibility_web

Montana http://uid.dli.mt.gov

Nebraska https://www.dol.nebraska.gov/UIBenefits

Nevada https://www.mo.gov/work/unemployment/

New Hampshire https://www.nhes.nh.gov/services/claimants/file.htm

New Jersey https://myunemployment.nj.gov/before/about/howtoapply/applyonline.shtml

New Mexico https://www.dws.state.nm.us/en-us/Unemployment

New York https://labor.ny.gov/unemploymentassistance.shtm

North Carolina https://www.nc.gov/services/unemployment-benefits

North Dakota https://www.benefits.gov/benefit/1773

Ohio https://jfs.ohio.gov/ouio/ClaimInformationPage.stm

Oklahoma https://www.workplacefairness.org/file-unemployment-oklahoma

Oregon https://www.oregon.gov/employ/unemployment/pages/default.aspx

Pennsylvania https://www.uc.pa.gov/unemployment-benefits/benefits-information/Pages/benefits-information.aspx

Rhode Island http://www.dlt.ri.gov/ui/ClaimantInfo.htm

South Carolina https://dew.sc.gov/individuals/apply-for-benefits/claims-process

South Dakota https://fileunemployment.org/south-dakota/

Tennessee https://www.tn.gov/workforce/unemployment.html

Texas https://twc.texas.gov/jobseekers/unemployment-benefits

Utah https://jobs.utah.gov/ui/home

Vermont https://labor.vermont.gov/unemployment-insurance

Virginia http://www.vec.virginia.gov/unemployed

Washington https://esd.wa.gov/unemployment

West Virginia https://workforcewv.org/unemployment

Wisconsin https://dwd.wisconsin.gov/uiben/

Wyoming http://wyomingworkforce.org/workers/ui/

Business Taxes, Family Taxes, General Information, General Tax Topics, notary, Self Employed, signing agent, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

Two Ways to Fix Tax Return Mistakes Before the IRS Discovers Them

July 2, 2021 Howard Tax Prep LLC

In our South Loop Chicago tax preparation office, and in our Homewood, Il tax preparation office, we often receive calls from people that have made an error (or errors) on their tax return. The tax law is complicated and constantly changing, so it’s easy to make a small, or large error that causes you to:

1.) underpay your tax, leaving you open to IRS penalties, or
2.) overpay your tax, meaning you gave a gift to the government.

However, if you made an error on your tax return, don’t worry; there’s good news: you can undo your mistake! Here’s even better news: there are two special ways to fix your incorrect tax return that will save you from paying more to the IRS than you would otherwise. We’ll tell you all about them in this article. —there are two easy ways to fix it:

A superseding return
A qualified amended return

A superseding return is an amended or corrected return filed on or before the original or extended due date. The IRS considers the changes on a superseding return to be part of your original return.

A qualified amended return is an amended return that you file after the due date of the return (including extensions) and before the earliest of several events, but most likely when the IRS contacts you with respect to an examination of the return. If you file a qualified amended return, you avoid the 20 percent accuracy-related penalty on that mistake.

Superseding Return Example

You file a joint Form 1040 tax return electronically on February 21, 2022, for tax year 2021, but you later decide you want to file a separate return. Since the joint-filing election is irrevocable, on or before April 15, 2022 (which is the unextended due date for your 2021 Form 1040), you must file a superseding return to undo the joint election.

IRS electronic filing rules for amended returns do not permit you to file this superseding return electronically, because you are changing your filing status (from married, filing jointly, to married, filing separately). That being said, your only other option is to use “snail mail.” Using a paper return via snail mail, you’ll submit either:

1.) A second original Form 1040 return using the married-filing-separately filing status, or
2.) An amended Form 1040X showing the change from joint to separate filing status.
Be sure to write “SUPERSEDING RETURN – IRM 21.6.7.4.10” in red at the top of page 1 of either Form 1040 or Form 1040X.

Qualified Amended Return Example

You realize your return preparer left a $30,000 IRA distribution off your 2019 tax return. Ouch!
Let’s assume you are in the 32 percent tax bracket and had no federal income tax withholding on the distribution: you owe an additional $9,600 in federal income tax on your 2019 tax return due to this distribution.

If you file an amended return before the IRS contacts you about the missing income, then it’s a qualified amended return, and you avoid $1,920 (20percent of $9,600) in audit penalties.

If you don’t file the amended return, and if the IRS contacts you about the missing income, the IRS will propose the $1,920 penalty. You may be able to request penalty relief, but you’ll have to make your case, and the facts may or may not be on your side.

In both circumstances, you’ll also pay interest on the $9,600 back to July 15, 2020 (the COVID-19-postponed 2019 Form 1040 due date). Of course, the earlier you pay the tax, the less interest you’ll accrue. You’ll pay less interest with a qualified amended return because you’re paying the tax sooner.

Business Taxes, General Tax Topics, Self Employed, Small Business, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

Starting a New Business with employees? Get Up to $100,000 in Tax-Free Money from the IRS!

April 2, 2021April 2, 2021 Howard Tax Prep LLC

In our Chicago South Loop tax preparation office, and our Homewood Il, tax preparation office, we have been creating a lot of small businesses. If you’ve listened to the news, or saw anything on social media, then you likely already know that the employee retention credit (ERC) is a good deal—if you qualify. Now, thanks to the recently enacted American Rescue Plan Act of 2021 (ARPA), you can qualify for up to $100,000 of ERC in the third and fourth quarters of 2021 if you:

1.) begin the business after February 15, 2020 (you could start today),
2.)have average annual gross receipts of $1 million or less, and
3.) do not meet either of the ERC tests—the suspended operations test or the gross receipts test—in
place before ARPA was passed.

Finding the $100,000

When you meet the three requirements above, you qualify as a recovery start-up business and, as such, can claim an ERC of up to $50,000 in both the third and fourth quarters of 2021. It works like this: your recovery start-up business ERC is equal to 70 percent of the qualified wages paid to each employee (up to $10,000 per employee per quarter), with an overall maximum credit of $50,000 per quarter.

Recovery Start-Up Business Example
In April 2021, you start a new retail store as a sole proprietorship business. You project your gross receipts to be as follows:

Second quarter—$50,000
Third quarter—$60,000
Fourth quarter—$100,000

In addition, you hire three full-time sales staff whom you pay hourly. Each earns $2,800 in wages each month. For the fourth quarter, you hire an additional part-time salesperson and pay that person a total of $4,000 in November and December 2021. Your proprietorship business qualifies as a recovery start-up business and is eligible for the ERC in the third and fourth quarters of 2021.

For the third quarter of 2021, your total ERC is $17,640: You have three employees who were paid $8,400 each during the quarter. No employee exceeds the $10,000 wage maximum for the quarter. Total qualified wages for the ERC are $25,200 ($8,400 x three employees). Your credit is 70 percent of $25,200, or $17,640.

No employee exceeds the $10,000 wage maximum for the quarter.
Total qualified wages for the ERC are $25,200 ($8,400 x three employees).
Your credit is 70 percent of $25,200, or $17,640.

For the fourth quarter of 2021, your total ERC is $20,440:
You have three employees who were paid $8,400 each during the quarter, and one employee who was paid $4,000 during the quarter. No employee exceeds the $10,000 wage maximum for the quarter. Total qualified wages for the ERC are $29,200 ($8,400 x three employees + $4,000 for the part-time employee). Your credit is 70 percent of $29,200, or $20,440. For tax year 2021, you receive total employee retention tax credits of $38,080.

One Wrinkle But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021.
If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $15,663: $10,282 in federal and state income taxes,4 and $5,381 in self-employment tax. Net result. You have $22,417 more in your pocket this year from claiming the ERC. That’s a nice leg up for a business that started in April 2021.

But you need one more step to calculate your net benefit. You can’t deduct wages in tax year 2021 equal to the ERC earned during the tax year; therefore, your net business income increases by $38,080 for tax year 2021. If you pay a federal and state income marginal tax rate of 27 percent on that income, you’ll pay extra tax of $15,663: $10,282 in federal and state income taxes,4 and $5,381 in self-employment tax. Net result. You have $22,417 more in your pocket this year from claiming the ERC. That’s a nice leg up for a business that started in April 2021.

Takeaways

ARPA added a big incentive for starting a new business. It works like this: your business can qualify for the ERC on 70 percent of the qualified wages paid to each employee (up to $10,000 per employee for each of the last two quarters of 2021), with an overall maximum credit of $50,000 per quarter.

To qualify for the third- and fourth-quarter ERC incentives, your business had to begin after February 15, 2020. The big deal with the two quarters of 2021 is that your business has to be new, but it does not have to suffer from COVID-19 stresses. In fact, it can’t qualify for the recovery start-up business special deal if it otherwise qualifies under the suspended operations test or the gross receipts test.

Business Taxes, Family Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Debt, Tax Deductions, Tax Planning, Tax Reduction, Uncategorized

What is the unpardonable sin in an IRS audit?

October 18, 2020 Howard Tax Prep LLC

Here in our Chicago South Loop Tax Preparation Office, we help clients that have been audited, and we help resolve tax debt. Suppose for a moment that you are one of our clients, and that you’ve just received that lovely letter from the IRS telling you that you are the subject of an IRS audit.

What one record receives special attention? What one record can create a nightmare for you? What one record makes the IRS suspect that you are the keeper of lousy records?

Think of the record people most hate keeping. That’s the one we are talking about. You have probably guessed what that record might be.

Red-Flag Record for the IRS Examiner

Once your audit examination begins, the examiner likes to see this record. If the record is missing or lacking, the IRS examiner knows that your other records probably are lacking, too.

This record—the one you probably hate keeping—is the mileage log on your vehicle or vehicles.

The IRS notes that a taxpayer’s failure to keep a mileage log on vehicles indicates that the activity under examination is not being conducted in a businesslike manner.

Do as the Tax Form Says

As a one-owner or husband-and-wife-owned business, regardless of whether it’s a corporation, a partnership, or a proprietorship, you file a tax form that asks you for the following information about your vehicles:

Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
List your total business/investment miles on each vehicle.
List your total commuting miles on each vehicle.
List your total personal miles on each vehicle.

IRS Form 4562 has columns for answers to the above questions for up to six vehicles used by either a sole proprietor or an owner of more than 5 percent of a corporation, a partnership, or another entity.

The mileage log (we strongly recommend MILE IQ) is the record of proof that you need to use for your answers to the tax form questions.

Do What the Audit Would Require

Above, we said to do as the IRS form says. For additional clarification, it is good to know what information the IRS, in a correspondence audit, requires you to provide related to that tax form:

Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
Send copies of logbooks and other records to support the business mileage claimed.
Provide a copy of your appointment book or calendar of business activities for the year.
If you are claiming actual expenses, provide copies of paid bills, invoices, and canceled checks for automobile expenses. These would include gas, oil, tires, repairs, insurance, interest, tags, taxes, parking fees, and tolls.
Send a copy of the bill of sale or other verification to establish your basis in the vehicle, including the trade-in of another vehicle.

Note that the IRS is looking for

a match of the repair bill odometer reading with the mileage in your logbook;
a match of the inspection slip odometer reading with the mileage in your logbook;
the mileage between repair stops, to see whether that ties in with your claimed mileage; and
a business purpose that ties in with your appointment book or other calendar of business activities.

Takeaways

If you want to avoid big trouble during an IRS audit, keep a good mileage log. This takes just minutes a day.

The mileage log is often one of the first records that an IRS examiner will look at. A good mileage log shows that you know the rules and you respect them. We have seen dozens and dozens of IRS audits end favorably and quickly upon presentation of a good mileage log.

On the other hand, a bad mileage log can turn your IRS examiner into an 800-pound gorilla.

Think of it this way: your mileage log (we strongly recommend MILE IQ) gives you the choice to get in and out of the IRS audit quickly and with your wallet or to spend time with an 800-pound gorilla.

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