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

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:

  1. A superseding return
  2. 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.

Although we’ve given you the basics, this is not an all-inclusive article. Should you have questions, need help with tax debtbusiness tax preparationbusiness entity creationbusiness 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!

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!

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.

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!
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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, Uncategorized

What is the unpardonable sin in an IRS audit?

IRS audit

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.

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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:

  1. Do you have evidence to support the business/investment use claimed? (If “yes,” is the evidence written?)
  2. List your total business/investment miles on each vehicle.
  3. List your total commuting miles on each vehicle.
  4. 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

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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:

  1. Send copies of repair receipts, inspection slips, and other records showing total mileage for the year.
  2. Send copies of logbooks and other records to support the business mileage claimed.
  3. Provide a copy of your appointment book or calendar of business activities for the year.
  4. 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.
  5. 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.

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!
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Business Taxes, General Information, General Tax Topics, Self Employed, Small Business, Tax Deductions, Uncategorized

Economic impact payments: What you need to know.

stimulus

Check IRS.gov for the latest information:

No action needed by most people at this time

THE INFORMATION HAS BEEN COPIED AND PASTED FROM IRS NEWSWIRE. ISSUE NUMBER:IR-2020-61, March 30, 2020

“WASHINGTON – The Treasury Department and the Internal Revenue Service today announced that distribution of economic impact payments will begin in the next three weeks and will be distributed automatically, with no action required for most people. However, some seniors and others who typically do not file returns will need to submit a simple tax return to receive the stimulus payment.

Who is eligible for the economic impact payment?
Tax filers with adjusted gross income up to $75,000 for individuals and up to $150,000 for married couples filing joint returns will receive the full payment. For filers with income above those amounts, the payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Single filers with income exceeding $99,000 and $198,000 for joint filers with no children are not eligible.

Eligible taxpayers who filed tax returns for either 2019 or 2018 will automatically receive an economic impact payment of up to $1,200 for individuals or $2,400 for married couples. Parents also receive $500 for each qualifying child.

How will the IRS know where to send my payment?
The vast majority of people do not need to take any action. The IRS will calculate and automatically send the economic impact payment to those eligible.

For people who have already filed their 2019 tax returns, the IRS will use this information to calculate the payment amount. For those who have not yet filed their return for 2019, the IRS will use information from their 2018 tax filing to calculate the payment. The economic impact payment will be deposited directly into the same banking account reflected on the return filed.

The IRS does not have my direct deposit information. What can I do?
In the coming weeks, Treasury plans to develop a web-based portal for individuals to provide their banking information to the IRS online, so that individuals can receive payments immediately as opposed to checks in the mail.

I am not typically required to file a tax return. Can I still receive my payment?
Yes. People who typically do not file a tax return will need to file a simple tax return to receive an economic impact payment. Low-income taxpayers, senior citizens, Social Security recipients, some veterans and individuals with disabilities who are otherwise not required to file a tax return will not owe tax.

How can I file the tax return needed to receive my economic impact payment?
IRS.gov/coronavirus will soon provide information instructing people in these groups on how to file a 2019 tax return with simple, but necessary, information including their filing status, number of dependents and direct deposit bank account information.

I have not filed my tax return for 2018 or 2019. Can I still receive an economic impact payment?
Yes. The IRS urges anyone with a tax filing obligation who has not yet filed a tax return for 2018 or 2019 to file as soon as they can to receive an economic impact payment. Taxpayers should include direct deposit banking information on the return.

I need to file a tax return. How long are the economic impact payments available?
For those concerned about visiting a tax professional or local community organization in person to get help with a tax return, these economic impact payments will be available throughout the rest of 2020.

Where can I get more information?
The IRS will post all key information on IRS.gov/coronavirus as soon as it becomes available.

The IRS has a reduced staff in many of its offices but remains committed to helping eligible individuals receive their payments expeditiously. Check for updated information on IRS.gov/coronavirus rather than calling IRS assistors who are helping process 2019 returns.”

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.

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Congress Reinstates Expired Tax Provisions—Some Back to 2018

congress 3

Congress let many tax provisions expire on December 31, 2017, making them dead for your already- filed 2018 tax returns.

In what has become much too common practice, Congress resurrected the dead provisions retroactively to January 1, 2018. That’s good news. The bad news is that we have to amend your tax returns in our Chicago south loop tax preparation office to make this work for you.

And you can relax when filing your 2019 and 2020 tax returns, because lawmakers extended the “extender” tax laws for both years. Thus, no worries until 2021—and even longer for a few extenders that received special treatment.

Back from the Dead

The big five tax breaks that most likely impact your Form 1040 are as follows:

  1. Exclusion from income for cancellation of acquisition debt on your principal residence (up to $2 million)
  2. Deduction for mortgage insurance premiums as residence interest
  3. 7.5 percent floor to deduct medical expenses (instead of 10 percent)
  4. Above-the-line tuition and fees deduction
  5. Nonbusiness energy property credit for energy-efficient improvements to your residence

Congress extended these five tax breaks retroactively to January 1, 2018. They now expire on December 31, 2020, so you’re good for both 2019 and 2020.
Schedule-button-nbor click here to call us 1-855-743-5765.

Other Provisions Revived

Congress also extended the following tax breaks retroactively to January 1, 2018, and they now expire on December 31, 2020 (unless otherwise noted):

  • Black lung disability trust fund tax
  • Indian employment credit
  • Railroad track maintenance credit (December 31, 2022)
  • Mine rescue team training credit
  • Certain racehorses as three-year depreciable property
  • Seven-year recovery period for motorsports entertainment complexes
  • Accelerated depreciation for business property on Indian reservations
  • Expensing rules for certain film, television, and theater productions
  • Empowerment zone tax incentives
  • American Samoa economic development credit
  • Biodiesel and renewable diesel credit (December 31, 2022)
  • Second-generation biofuel producer credit
  • Qualified fuel-cell motor vehicles
  • Alternative fuel-refueling property credit
  • Two-wheeled plug-in electric vehicle credit (December 31, 2021)
  • Credit for electricity produced from specific renewable resources
  • Production credit for Indian coal facilities
  • Energy-efficient homes credit
  • Special depreciation allowance for second-generation biofuel plant property
  • Energy-efficient commercial buildings deduction

Temporary Provisions Extended

Congress originally scheduled these provisions to end in 2019 and now extended them through 2020:

  • New markets tax credit
  • Paid family and medical leave credit
  • Work opportunity credit
  • Beer, wine, and distilled spirits reductions in certain excise taxes
  • Look-through rule for certain controlled foreign corporations
  • Health insurance coverage credit

If you have questions about the extenders, please call us at 855-743-5765. 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.

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