Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Feb 3

    How The Tax Code Makes Regular Taxpayers Angry

    Many people think that preparing taxes for a living is a somewhat easy assignment.

    Bless their hearts.

    It’s NOT just “filling in the boxes” and having the spreadsheets or the software spit out the results. I WISH it were so simple. There are three big reasons why it’s much harder than that — even for many professionals.

    1) The tax code is incredibly long. The version of the tax code we are using right now is more than 75,000 pages long (and that is about 186 times LONGER than it was back in 1913 when we started with it) — and it will likely be getting longer this coming year.

    2) The code also happens to be pretty complicated and laden with contradictory incentives. Take this credit, and watch that other credit go bye-bye. Fail to deduct this item, and then you won’t be able to deduct that other item. You get the picture.

    Sorting through all of them is most definitely NOT a task for a computer software program. It requires sitting down with an individual, a business owner, a family, determining what they most care about, and then use that complicated code to plan for it all properly. Really, that’s the only way to do it. Everything else is just “after the fact” clean-up work.

    Which is why it’s so critical to meet with someone before the end of the year to make sure that you’re set up to hold a tax position which represents the real picture of where you really want to be going.

    This is the essence of tax planning. Some may say that this is overstating it — but, after years of doing this, I’ve become convinced that it’s the truth. I’m in the business of helping you fulfill your dreams by helping you hold on to as much income/revenue as possible!

    3) Oh, and as I alluded to previously, there is one more big reason this job is no cupcake — staying up to date with how the law is constantly changing.

    And I’m as patriotic as the next person … but, Congress makes THIS task no cupcake.

    Despite what certain fringe voices might claim (and they cite all kinds of “facts” behind their claims), the truth is that we don’t have the choice to “not file” or “not pay” what the tax laws say we owe. That’s why the IRS audits returns and has all sorts of “encouragements” (liens, refund offsets) to encourage us to file by each April 15, and to do so correctly.

    But, even with automatic payroll deductions, etc. we U.S. taxpayers are trusted to fill out the forms, ensure the correct amount was withheld and let the IRS know what our true final bill was. That’s called tax filing. And if we discover that we owe the U.S. Treasury, then our system (as it stands now) relies on us to send in the necessary payments. This, of course, is what we spend much of our time on around here at Team Lindsey — helping YOU do this ethically, but ensuring you’re not overpaying.

    But, Congress makes this much harder than they need to.

    They do this — probably unintentionally — by tinkering with our tax laws so much. They change them, sometimes slightly, sometimes quite a bit, and they do so constantly. What’s worse is the annual rite of procrastination in the House and Senate. I see this all the time. As a regular course of business.

    And these delays in tax changes — or the decision to make some laws retroactive months later (extenders, estate tax, etc.) — totally screw up basic tax planning, sometimes negating options that could have been used to legally lower a tax bill.

    (Which, incidentally, is why I have to pay so much attention to what’s happening in the legislation NOW, during the offseason. I do this so you don’t have to.)

    So some people fudge their returns. And, unfortunately, they feel justified in doing so.

    One recent example was the first-time homebuyer credit that was created a few years back … then revised … and revised again. Many homebuyers had to “pay back” a credit that was taken under existing law — then later canceled.

    And I know (from conversations with real people) how many felt justified in finding ways to “skim back” (i.e. fudge) that $500 back into their returns because they were annoyed at how Congress handled it.

    And there are plenty of other tax laws with similar histories that tick off filers enough so that they look for ways of getting payback when they fill out their 1040s.

    Now, I’m not condoning these taxpayers’ decisions to “even up” the tax code where they may find it unfair. Life can be unfair and taxes are a part of that often unfair life.

    But, Congress can do a lot to prevent these “they hurt me, so I’ll hurt the tax system right back” attitudes, by doing its tax-writing job in a more rational and professional manner.

    Until it does, well, then, Capitol Hill is going to keep creating bad attitudes.

    But, here’s where some hope comes in…

    For my clients and contacts, you can rest assured that we are paying attention … and that we will be on top of even these woefully-procrastinating legislators. We’ll do all that is ethically possible to make sure you don’t make moves that you’ll regret after the fact.

    And the best way to help us help YOU, is by giving us a call to talk things through NOW, while we can still make a difference with 2016 returns.

    “You can conquer almost any fear if you will only make up your mind to do so. For remember, fear doesn’t exist anywhere except in the mind.” – Dale Carnegie

  • Dec 31

    Last year, in Phenix City, Alabama, tax preparer Lasondra Miles Davis was ordered to pay $1,941 in restitution to the IRS, sentenced to two years in prison, and one year of supervised release for her involvement in a stolen ID tax fraud.

    Davis pleaded guilty to one count of aggravated ID theft. Her mother, Teresa Floyd pleaded guilty earlier in the year to one count of conspiracy to defraud the U.S. and one count of aggravated ID theft.

    News outlets cited court documents that said that between March 2011 and May 2014, Davis and her mother operated several tax preparation businesses where she obtained stolen IDs. Floyd then used the information to file more than 900 false federal income tax returns that claimed more than $2.5 million in refunds.

  • Oct 28

    In what may come as a shock to many of you, the country is broke and is looking for additional revenues. You should know, it will be looking in every nook and cranny to replenish the federal coffers. What you may not know is the Internal Revenue Service seems already to be engaged in revenue-finding-missions. Among the objects of their affection – in the tax audit – are sole proprietors filing Schedule C, and substantiation requirements for every possible deduction.

    The IRS now views the Schedule C as the repository of all manner of evil taxpayer intentions to reduce their tax liabilities (and, from the perspective of the IRS, federal revenues). IRS agents are reportedly beating the bushes of sole proprietors primarily to reduce, or eliminate, claimed deductions as unsubstantiated to increase both income and self-employment tax liabilities.

    All deductions are a matter of legislative grace, and that grace comes with a price: at a minimum to maintain books and records to support the expenditure, and, in many cases, to meet more exacting substantiation standards than the Code imposes as a condition to deductibility in various circumstances. One might not think of charitable contributions as a source of major contention with the IRS, but in the case of non-cash contributions, the taxpayer is technically required to establish, both the fair market value of the property and the property’s adjusted basis. In some cases, the Code requires an appraisal of property (where the value exceeds $5,000) contributed to a charity.

    However, the property’s adjusted basis comes into question in two cases: first in most cases where the property is inventory in the hands of the donor, and secondly, if tangible personal property that is unrelated to the charity’s exempt function, the amount of the contribution is limited to the donor’s adjusted basis in the property. For example, if a taxpayer donates used clothing to a charity that does not distribute them to poor or indigent individuals, the deduction is limited to the lesser of your basis or fair market value. Now, it may seem like common sense that the current value of almost all used clothing is less than what was paid for it but technically, a claim for a deduction of such items requires some proof of both the fair market value and the cost basis of the property.

    And such was the case I recently read about in Surgent’s Tax Issues Newsletter where a taxpayer was denied a claimed $850 deduction for clothing donated to charity. Yes $850! The return was under audit and the taxpayer submitted photographs of all the clothing donated and matched them up to the current list of retail prices published by The Salvation Army and recognized by the IRS– but that wasn’t enough. The auditor wanted purchase receipts of each item to establish the cost basis. Even if the taxpayer was in the 35 percent tax bracket, the amount of tax at issue was only $298. The IRS correctly assumed the taxpayer would throw in the towel rather than incur additional time, effort and costs to substantiate the deduction. So, the IRS pressed the issue hard enough to deny any deduction. Hooray, the deficit was reduced $300!

    From a practical standpoint, trying to establish the cost of most any item of personal property even shortly after its purchase, much less a couple of years down the road, is extremely difficult. So, nothing prevents the IRS from using similar audit strategies where larger sums of money are involved.

    Echoing the motivation Willie Sutton once famously gave for robbing banks, the Internal Revenue Service knows where the money is.

  • Oct 14

    Q. My husband and I sold our home on Fowl River that we purchased in 1973 for $459,000, and reinvested the profits in a smaller condo in town. Will we be required to pay the new 3.8% Medicare surtax (now referred to as the net investment income tax) on the gain? I understand it applies when your income is above $250,000.

    A. The 3.8% net investment income tax applies to the lesser of the net investment income for the year, or the excess of modified adjusted gross income over the $250,000 threshold. However, it does not apply to items, such as the gain on the sale of your personal residence, which do not have to be reported on your tax return.

    Do you have a question for the Taxpert that you’d like to see answered in a future Taxing Times? Or perhaps just an issue you’d like the Taxpert to address? Send the Taxpert a note to Taxing Times, 1050 Hillcrest Rd., Ste A, Mobile, AL 36695 or an email to taxpert@CPAMobileAL.com.

  • Sep 16

    Since 2002, the above-the-line deduction for certain classroom expenses of elementary and secondary schoolteachers was in doubt nearly every other year. The temporary provision was renewed six times as an “extender” item – each time retroactively – until late last year when Congress made it permanent, expanded the deduction to cover professional development expenditures and indexed its $250 maximum amount for inflation. Now, qualifying educators can rely on the deduction each year and potentially realize a greater benefit from it.

    Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. An ordinary expense is one that is common and accepted in your educational field. A necessary expense is one that is helpful and appropriate for your profession as an educator. An expense does not have to be required to be considered necessary. Expenses incurred to meet the minimum requirements of the educator’s present job or to qualify for a new profession may not be deductible.

    Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education.

    An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in school for at least 900 hours during a school year.

    Naturally, the IRS recommends that educators keep all receipts and other documentation in order to substantiate their qualified expenses.

    Any unreimbursed educator expenses that exceed the $250 ceiling may be claimed as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income- (AGI) floor.

  • Aug 19

    Don’t you just love Congressional tricks?

    One of my personal “favorites” is when they cram a bunch of unrelated business into their bills.

    Which is just what happened about a year ago, and it could affect you…

    H.R. 3236, popularly known as “The Surface Transportation and Veterans Health Care Choice Improvement Act of 2015” (yes, that’s how these things are named) brought some tax-law-related changes.

    Individual tax returns are still due on April 15th — and a six month extension period is still available. But …

    * Partnership tax returns are due March 15, NOT April 15 as in the past. If your partnership isn’t on a calendar year, the return is due on the 15th day of the third month following the close of your tax year.

    * C corporation tax returns are due April 15, NOT March 15. For non-calendar years, it is due on the 15th day of the fourth month following the close of the tax year.

    * S corporation tax returns remain unchanged–they are still due March 15, or the third month following the close of the taxable year.

    On TOP of that, another doozy: audits can get you for six years now, instead of three. Without going into all of the details, essentially if you withhold reporting of 25% or more of your income, the IRS has six years to figure it out. They’ve always had unlimited time for fraud or criminality … but there was some wiggle room for underreporting in the past. No longer.

    All this (and MORE!) in one measly highway bill.

    So, it pays even more to work with a pro, yes?

    These sort of issues are what we specialize in worrying all about — so you don’t have to. Because YOU have to keep your head in a bigger picture.

    Entrepreneurs know that hard work and a great idea don’t guarantee success. Fortunately, most of them also know that failure isn’t final — almost every successful business owner client of mine has crashed and burned at least once in his/her career.

    One of the best ways to pick yourself, or your business, back up off the ground is to take a fresh look at things that you “thought” were set in stone. Here are some strategies I compiled for you to possibly give your business a fresh lease on life, come fall, or into 2017…

    Re-target your market. In the heat of start-up passion, entrepreneurs frequently try to interest too broad a market: “Everyone will want to buy this!” The result: getting lost in the crowd. The more closely you define your market, the more success you will experience.

    Re-examine your price. Price is obviously supremely important. See how you can lower your overhead or cut production costs. Perhaps there’s a new way to package your products, so that your average transaction value can go up?

    Identify and push your best product. Focus on what works. If your hot product is coffee cups, look for ways to highlight and expand that niche instead of veering into new territory. How about different colors and holders for those cups?

    Make your marketing materials more memorable. Emphasize the benefits — SPECIFICALLY how features of your product or service will improve business or the quality of life for your customer. And scrutinize your advertising. Using big media is not always the answer, especially when you have narrowed your market. Don’t overlook narrowly-targeted marketing efforts or joint promotions.

    Keep promoting! Make sure your message sinks in. Find affordable ways to reach your target market, and use these avenues as often as you can. Try social advertising!

    These ideas are to get you started. There may be longer conversations to be had. If so, that’s what we’re here for.

  • Jul 21

    NOTICE OF INTENT TO LEVY.

    Admittedly, it’s an intention-grabbing way to start a letter, especially when the return address says Internal Revenue Service. And grab Greg’s attention, it did.

    The Athens, Georgia, veteran said the notice, which arrived earlier this year, cited taxes on three months of income he had failed to include on his 2013 tax return – and this was the first he’d heard of it.

    After leaving the military, then 27-year-old Greg, had taken a job in information technology. “I guess when I filled out my taxes for 2013 I messed something up, so I didn’t get my private sector job included into the taxes owed,” he said. Now he owed the IRS more than $1,700.

    The IRS doesn’t keep track of how many millennials incur tax debt, but a survey by NerdWallet found that they are more afraid of filing their taxes than any other generation. 80% of millennials, defined by the survey as 18 to 34-year-olds, fear they will make a mistake, underpaying or overpaying.

    Millennials are generally financially inexperienced and, increasingly, part of a gig economy—driving for Uber, YouTube ad sales,–that requires more care with their taxes than some are able, or willing, to take. For example, people who work in contract jobs typically don’t have any taxes withheld and need to set up estimated tax payments on their own.

    While 38% of all taxpayers will seek help from a tax pro, fewer than 10% of millennials go to the IRS when they have a tax question, and only about a quarter seek help from a tax professional, the survey found. Instead, they tend to turn to a largely unreliable, if well-meaning, group—friends and family. Millennial taxpayers in particular bemoan the long wait times on the phone with the IRS and the agency’s weird penchant for mail (like, so yesterday).

    If the multiple letters from the IRS urging debtors to set up payment plans are ignored, the IRS will use its resources to grab whatever resources debtors have. If you don’t contact them, the IRS will take action to collect the taxes.

    Someone facing a tax bill that can’t pay can usually set up a payment agreement online. No contact with the IRS necessary.

  • Jun 10

    Between January 2011 and February 2013, Patrice Taylor, an Albany, Georgia resident, conspired with her husband, Antonio Taylor and Jarrett Jones to file over 1,100 fraudulent tax returns. At least 1,089 of the returns were e-filed from two IP addresses registered to Taylor, both located at her home. Patrice was employed at Tift Regional Hospital and used the personal identifying information of five patients to file fraudulent federal income tax returns. Taylor also used the identities of 531 sixteen-year olds to file fraudulent returns.

    The individuals were sentenced to prison terms up to 147 months and ordered to pay restitution to the IRS totaling $2,310,563.

    In Tampa, Florida, law enforcement officers recovered lists and medical records containing the personal identifying information of more than 7,000 victims.

    In Montgomery, Alabama, Keisha Lanier and Tracy Mitchell were sentenced for their roles in a large-scale identity theft ring that filed more than 9,000 false federal income tax returns that claimed more than $24 million in fraudulent refunds. The defendants obtained the stolen identities from various sources, including from the U.S. Army, several Alabama state agencies, a Georgia call center and employee records from a Georgia company.

    Identity theft is growing worse every year. The Federal Trade Commission reported that it has been the top consumer complaint for 16 years straight.

    “Tax-related identity theft is an evolving criminal activity that can happen to anyone.” Rep. Jim Renaccie, R-Ohio, CPA turned lawmaker, said in a statement last month. “In fact, last tax season, my identity was stolen and used to file a fraudulent tax return.”

    In the U.S., someone dies every 7 seconds but there is an identity theft victim every 2 seconds. Seventy percent of those whose identities are stolen need the help of an attorney to resolve the issue. Costs can run into the thousands as well as hundreds of hours of your time.

    Being a victim of identity theft is no picnic. But it is a major warning sign to take action. If you have been a victim, it is self-evident that your information is being bought and sold. Few victims have the highly technical skills and complex tools required to find where their data has been spread and to stop it.

    Ideally you need to have a plan in place before the theft. Unfortunately, most don’t. Fortunately, it’s not too late to protect yourself from further breaches. If you have been a victim, or know someone who has, and would like a referral to someone I know and trust to help, give us a call, or shoot us an email and we’ll be happy to put you in touch.

  • May 12

    “Success is simple. Do what’s right, the right way, at the right time.” – Arnold Glasgow

    Now’s the best time to get rid of unnecessary paperwork, as well as to ensure that you caught everything for your 2015 tax return.

    But before I get to what to do if you find something pertinent to your recently-filed tax return, here’s a guide for how long to keep your records…

    Taxes: Seven years
    Richard’s Reasons Why:
    There are three, actually:
    1) The IRS has three years from your filing date to audit your return if it suspects good-faith errors.
    2) The three-year deadline also applies if you’d like to make some sort of amendment because you discover a mistake in your return and can claim a refund.
    3) The IRS has six years to challenge your return if it thinks you underreported your gross income.
    All this adds up to keeping that info for seven years. Beyond that, there’s no reason — except for posterity.

    IRA contribution records: Permanently
    Richard’s Reason Why:
    You’ll need to be able to prove that you already paid tax on this money when the time comes to withdraw.

    Bank records: Usually just one year
    Richard’s Reason Why:
    Those related to your taxes, business expenses, home improvements and mortgage payments will obviously need to be included for next year’s taxes. But, unless there is some sort of emotional or posterity reason, get rid of everything after one year.
    Brokerage statements: Until you sell
    Richard’s Reason Why:
    To prove whether or not you have a capital gain or loss for tax purposes; after this point, shred it.

    Household bills: From one year to permanently
    Richard’s Reason Why:
    When the canceled check from a paid bill has been returned, you can shred the bill with a clear conscience. However, bills for big purchases — such as jewelry, rugs, appliances, antiques, cars, collectibles, furniture, computers, etc. — should be kept in an insurance file for proof of their value in the event of loss or damage.

    Credit card receipts and statements: 45 days/Seven years
    Richard’s Reasons Why:
    Some families don’t even bother to match up their statements, but if you do so, shred the receipts once you’ve verified everything. There’s no reason to keep everyday receipts – unless they support a deduction — beyond this point. For tax-related purchases, you need only keep the statements (and receipts supporting tax deductions) for seven years — after that, shred it, baby!

    Paycheck stubs: One year
    Richard’s Reason Why:
    This is to verify that when you receive your annual W-2 form from your employer, the information from your stubs match. If so, shred all of the stubs … if not, request a corrected form, known as a W-2c. After that’s been handled — shred.

    House/condominium records: Six years/permanently
    Richard’s Reasons Why:
    You’ll want to keep all records documenting the purchase price and the cost of permanent improvements — such as remodeling, additions and installations, as well as records of expenses incurred in selling and buying the property, such as legal fees and your real estate agent’s commission, for six years after you sell your home.

    Holding on to these records is important because any improvements you make on your house, as well as expenses in selling it, are added to the original purchase price or cost basis. Therefore, you lower your capital gains tax when you sell your house.
    Now, in this cleansing process, sometimes you’ll find a receipt or documentation which really would have changed your prior year tax return. That’s when you might have us file an “Amended Return”. However, this decision should be balanced against the cost of doing so, as well as the expected benefit — often these items can be dealt with the following year.
    But here are some other, common reasons to amend…

    * You neglected to report some income earned.
    * You claimed deductions or credits you should not have claimed.
    * You did not claim deductions or credits you could have claimed.
    * You filed under one filing status, but you should have filed under another.

    If you find something like this, let us help you.

    Regardless, let this be a cleansing process for you, and sleep easy knowing you’ve handled this stuff properly.

    Oh, and make sure you use a good shredder!

  • Apr 29

    Wesley Snipes, best known for his action roles in such films as Blade and Passenger 57, has gone on the offensive against the IRS. Snipes has petitioned the U. S. Tax Court to allow him to enter the IRS’s Fresh Start initiative to lower the amount of unpaid taxes that the IRS is assessing him. Mr. Snipes offered to pay $842,000, but the IRS is demanding the actor pay the full $17.5 million.

    Snipes’ current fight with the IRS is just about civil tax collections. Although convicted in 2008 on three misdemeanor counts of failing to pay his taxes for 1999, 2000, and 2001, he was acquitted of all felony charges. He had followed the advice of a tax protester organization that claimed income taxes were illegal, but ultimately acknowledged his errors.

    Mr. Snipes attempted to bargain with the Internal Revenue Service using an offer in compromise or installment agreement. He was trying to work it out with the IRS. He even paid off amounts for previous years. Mr. Snipes claims in court that the IRS is making arbitrary determinations, and abusing its discretion. After all, the whole purpose of the IRS offer in compromise program is to provide a resolution that is in the best interest of the taxpayer and the government. The idea is to resolve things and move on, keeping the taxpayer in compliance.

    However, as noted elsewhere in this newsletter, the IRS rarely gives up a tax debt if you have the resources or the ability to earn more money to pay the debt in full.