Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Nov 22

    Most of our clients have never received that dreadful notice from the IRS, initiating an audit — or, much worse, the KNOCK on the door! If you never have, you might not keep much financial documentation.

    If you have, you are probably terrified to part with a single receipt.

    But remember, either way, we’re in your corner.

    However, the IRS is one of the few courts where failure to produce proof of your claims results in the assumption that you are guilty of tax fraud.

    (This is part of the reason why you ALWAYS want a professional on your side in these matters. Would you go to court without an advocate? Would you go before a court with a software-generated defense? “Your honor, here is my lawyer, Siri.”)

    It’s imperative that you are able to protect yourself. And, as great as we are — some of this still does fall in your court. That’s why you must save all the financial documents used to create your tax returns in order to defend yourself in the case of an audit.

    Firstly (and perhaps this goes without saying), retain a paper copy or receipt of any tax-relevant transaction. Scan these documents and archive them electronically, or acquire them in an electronic format. If the purchase has a manual or warranty, store all the documents in the same electronic and physical location.

    Sadly, the IRS has ruled bank or credit card records to be insufficient documentation. As a result, just keep your statements long enough to reconcile your account.

    If the purchase was a business or tax-deductible expense, record the expense and why it justifies the deduction. Store this information with, or on, the receipts.

    Second, keep brokerage statements indefinitely for taxable accounts. You are responsible for reporting the cost basis of any security you sell to calculate the capital gains tax. For a mutual fund with 30 years of reinvested dividends, each dividend payment is part of the cost basis. As a result, the cost basis can sometimes be computed only if you have the complete transaction history.

    Without knowing the cost basis, the IRS could argue that the entire value of the investment be treated as gain.

    If you have lost the record of how much you originally paid for an investment, instead of selling and paying 15% or more of the value in taxes, you can use that investment as part of your charitable giving. Gifting appreciated stock avoids the tax owed and still qualifies for a full deduction. Oddly enough, the IRS still asks for the original purchase date and price for gifted securities, but leaving these blank has no effect on your tax owed.

    Many custodians keep several years of electronic copies of brokerage statements available. And they are now required to send any known cost basis electronically when you transfer securities to a new custodian. If your current custodian has the correct cost basis of your securities, you probably no longer need to keep brokerage statements. However, an approach of “better safe than sorry” is always advisable with the IRS.

    Third, keep IRA nondeductible contribution records forever. You may need those records every year that you withdraw money in retirement to show that a portion of the withdrawal is not tax deductible.

    Or to avoid the hassle, clear out nondeductible IRA contributions by converting all of your IRA accounts to Roth accounts.

    Fourth, keep partnership documents, contracts, commission, or royalty structures forever. This includes property records, deeds and titles, especially those relating to intellectual property. It also includes any transfers of value for estate planning purposes.

    Finally, save all of your tax returns. After you file, save the paper, and/or electronic, copies with the rest of that year’s financial documents.

    Tax returns and all the supporting documentation must be kept at least seven years. The IRS can audit your return for up to three years from your filing date. However, the three-year limit only applies to good-faith errors.

    If the IRS suspects you underreported your gross income by 25% or more, they have up to six years to challenge your return. And because you may file for an extension and then file your return at the October 15 deadline, you must keep your records for at least seven years.

    Regardless of those rules, though, if the IRS suspects you filed a fraudulent return, no statute of limitations applies. Because the IRS is run and organized by fallible people (with all of their attendant biases, emotions, etc.), we suggest keeping your tax returns and documents forever.

    Unfortunately, whenever the IRS challenges you, the burden of producing evidence that your claims are true rests entirely with you, so you had better have your documentation in order.

    Taxpayers collectively spend six billion hours, or 8,758 lifetimes, annually trying to comply with the tax code. Fortunately, as I previously mentioned, YOU don’t have to be the one to do all the heavy lifting. We are on your side…

    “If you don’t have time to do it right, when will you have time to do it over?” – John Wooden

  • Sep 15

    In his book: How Rich People Think, Steve Siebold (http://www.amazon.com/Rich-People-Think-Steve-Siebold/dp/1608102793), explores the thoughts, habits, and philosophies among the rich, as opposed to the middle class, when it comes to wealth:

    • Rich people focus on earning, not saving;
    • They understand that leverage creates wealth, not hard work;
    • See that they are in control of their wealth, not luck or fate;
    • Know that money is earned from focused thought, not hard labor;
    • Don’t see money with emotion, but with logic;
    • Are Action-Takers (as opposed to having a lottery mindset).

    So why do I emphasize that last one? Simple — I’m suggesting you take an action now, which could make a big difference on your 2017 bottom line...

    You know how good coaches are usually famous for making adjustments during the halftime of big games? Well, here I am — acting as your financial coach in matters tax-related, and we’ve hit the halftime mark for 2017.

    You have six months of financial info to use for some quick math about your year as a whole, and to prepare for a pleasant upcoming tax season.

    To begin, all you have to do is take your cash flow for the first half of the year, and multiply by two. Add up your wages, dividends, interest, and any other income, and then–if this represents approximately what you’re expecting for the second half of the year — double the sum.

    Once you have your estimated 2017 income, you can give us a call: 251-633-4070 (or send me an email), and we’ll help you determine the appropriate tax rate and deductions to apply. Because once you’re armed with this info, we can help you determine the amount of taxes you might expect to owe for 2017.

    By then comparing this against your projected withholding, you can adjust the withholding on your paycheck in advance as needed, and ensure a happy visit to our office in the winter.

    This can also be a good time to organize your financial papers and/or get started with some financial software. Getting organized now can make gathering a report of all those deductions a breeze, come tax time.

    We’ve been promised tax changes by the Trump administration. That makes it all the more important to review Uncle Sam’s highest-impact tax breaks, such as donations of appreciated assets, tax-free exchanges and capital-loss harvesting.

    Unlike obvious moves, such as contributing to an Individual Retirement Account or a 401(k) plan, these strategies require a higher degree of awareness and active planning.

    Not all high-impact breaks are for the wealthy. Any homeowner can benefit from a provision allowing taxpayers to pocket tax-free income from renting a residence for as long as two weeks, and low-bracket taxpayers can pay zero tax on long-term capital gains.

    Other important moves can help minimize estate, gift, and inheritance taxes. Really, there are a variety of moves we can make to help you with your planning for the year … but you have to let us help you. It is, after all, why we are here.

    “My favorite things in life don’t cost any money. It’s really clear that the most precious resource we all have is time.” – Steve Jobs

  • Aug 3

    In the flurry of launching a new business, filing your taxes may well be one of the last things on your mind. But, you don’t want to wait until the last minute to figure things out. At best, you could leave money on the table – at worst, suffer penalties or other legal ramifications.

    Avoiding these common startup bloopers can ensure your new business is on the right track to handling its tax obligations properly.

    1. Not keeping track of all of your expenses
    From the moment you launch a business, you can deduct “all ordinary and necessary” business expenses such as office supplies, professional fees, and business mileage. Your biggest mistake is not keeping track of these expenses throughout the year, and trying to gather every receipt when it’s time to file. The bottom line is you can’t deduct what you can’t document, and failing to record as you go most likely means you’re forgetting expenses and leaving money on the table.

    Find a method for documenting expenses that works for you. An accounting program, such as QuickBooks®, will let you record and manage revenue and expenses. In addition, there are dedicated apps such as Expensify for tracking expenses, MileBug for recording mileage, or Shoeboxed for capturing paper receipts. The best method is whichever one you will consistently use.

    2. Mixing personal and business
    New startups and small business owners often invest so much of themselves, their time and their money, into their new company that it’s hard to separate them. But separate them you must! The mixing of business and personal funds makes it extremely difficult to make sure you deduct all of your business expenses and only your business expenses. At the very least, you must have separate business and personal checking accounts. Just imagine the look on an IRS auditor’s face when she finds out you can’t tell your business and personal expenses apart.

    3. Choosing the wrong legal entity
    Your business’ legal structure affects how you report your taxes and how much you pay, so it’s important to choose the right entity. For example, many start out as a sole proprietor or partnership because it’s easiest, but soon find themselves paying way too much in self-employment taxes. Creating a corporation can help lower their tax bill significantly.

    4. Mixing equipment and supplies
    Both first-time and experienced business owners get tripped up by what is considered equipment versus supplies. Equipment are often higher value items that will typically last longer than one year, while supplies are generally things that you use up during the year.

    When it comes to equipment, there are a couple of approaches: 1) You can recover a portion of the cost each year, or 2) you may qualify to write-off the full amount in the year of purchase. There are, naturally, some restrictions on the ability to deduct the full amount. Be sure you talk to us first to find out if you qualify.

    If you mistakenly deduct your equipment or other capital item as an operating expense such as supplies, the IRS could determine that you’re not entitled to any deduction.

    5. Not sending Forms 1099
    When you pay any freelancer, contractor, attorney or other non-corporate entity $600 or more for services over the course of the year, you’re required to issue Form 1099-MISC and send copies to both the entity (business, contractor, individual, etc.) and the IRS. If you fail to do so on time the penalty can be as high as $520 per occurrence.

    6. Deducting too much for gifts
    Maybe you sent some of your best clients a holiday present, or sent them a closing gift after a large purchase, or sent a colleague a thank you gift for an especially nice referral. Great! Business gifts are deductible, but there’s a big catch. You can only deduct $25 per gift. So, if you send Paula a $150 fruit basket, you only get to deduct $25 for it.

    Documentation is going to be important. If you report $2,500 in business gifts, you need to be able to have documentation that shows you gave gifts to 100 different people.

    7. Not making estimated tax payments
    If your business is any legal form other than a C corporation you are personally going to be liable for paying taxes on the profits you earn. Business owners are required to pay in sufficient taxes to cover their expected tax obligations. Those payments can be in the form of payroll withholding – if you or someone in your household qualifies – or through quarterly estimated tax payments. Even if it wasn’t required, it is generally easier to make smaller payments on a quarterly basis than to have to pay the entire bill at year end.

    The best way to stay on top of your estimated tax payments is to get into the habit of setting aside a percentage of your revenue on a regular basis. Then, on a quarterly basis, review your revenue and expenses, calculate your tax liability, and make the appropriate payments.

  • Jul 7

    How to Write Off Katie’s Soccer Camp

    Yes, it is quite do-able. But, like many things in the tax code, the devil is in the details. Let’s see if I can cut through the Tax Mumbo Jumbo for you.

    If Katie (or Bruce) is younger than 13 and goes to a DAY camp (overnight doesn’t work), and you are both working (or “looking for work”) then,…

    Cha-ching.

    You can then choose to pay for the camp using a Flexible Spending Account (FSA) or you can take the child care credit. Remember credits are better than deductions. With both the FSA and the child care credit, other eligible expenses include the cost of day care or preschool, before or after school care, and a nanny or other babysitter while you work.

    The size of the credit depends on your income and the number of children you have who are younger than 13. You can count up to $3,000 in child care expenses for one child, or up to $6,000 for two or more children.

    There are some limitations. The credit is only good for families of a certain income range and the percentage of eligible costs varies with income.

    All told, it’s a good deal which you should take advantage of, if you qualify.

    Bonus… If you have two or more children and child care costs exceed $5,000 for the year, you can benefit from both accounts. You can set aside up to $5,000 in pretax money in your FSA for child care costs, then claim the child care credit for up to $1,000 in additional expenses.

     

    Other strange, but true deductions

    You can pay your significant other (pay attention now) to do legitimate work for you and take a deduction.

    Bruce hired his live-in girlfriend to manage his rental properties. Her duties included finding furniture, overseeing repairs, and running his personal household. He went to Tax Court and fought the IRS which had disallowed the entire deduction. He won a deduction for the portion of his payments which could legitimately be tied to her business work.

    A married couple owned a junk yard and put out cat food to attract wild cats. Why, you might ask? The feral cats they were trying to attract dealt with snakes and rats on the property. That made for a safer junkyard for customers.

    And that made cat food a business deduction. The IRS first thought this was ridiculous, but before the case reached the Tax Court the IRS agreed!

    The details are always important, so be careful and ask us for advice first.

  • May 12

    I’ve written before about what a good tax planning technique hiring your children can be. (See “Hiring Your Children for the Summer: The Job of Last Resort or Just Good Tax Planning,” Taxing Times, June 2015.) It can be an effective way of shifting income from your high rate to as low as zero percent! It can also be good for the kids. However, as a recent tax court decision demonstrates, it’s important to dot your i’s and cross your t’s.

    The case involved Lisa Fisher, a New York attorney, faced with a common dilemma to find summer care for her children, all under the age of nine. So, during the summer, she brought them into her office two or three days a week where they shredded waste, mailed letters, answered phones, greeted clients, and copied documents.

    Fisher took deductions for the $28,770 in wages she paid her kids over a three year period. But, she didn’t keep any payroll files or issue any W-2s. She didn’t keep any records substantiating the work they did or establishing that she paid “reasonable compensation” for the work performed. Nor could she present any documentary evidence, such as cancelled checks or bank statements, to verify that she actually paid them the wages she deducted.

    You know where this is headed. The IRS disallowed the deductions for the children’s wages and imposed an accuracy related penalty. The Tax Court affirmed that decision.

    Bottom line: Hiring your children to work for your business, or rental properties, can be perfectly legal tax planning. But, you have to follow the rules and document everything in order to protect the benefits.

  • Mar 31

    Just prior to Christmas 2015, Congress passed the PATH Act which permanently extended several tax provisions, which had been on a cycle of being temporarily extended for one or two years at a time. (See “Congress Takes a New Tack on Extenders” in the February 2016 issue of “Taxing Times”.) While there were some very important items that were permanently extended by the PATH Act, not everything was. Some provisions which expired at the end of 2016 and may be important to you include:

    • the exclusion from gross income of the discharge of qualified principal residence indebtedness income,
    • the treatment of mortgage insurance premiums as qualified residence interest, which permits a taxpayer whose income is below certain thresholds to deduct the cost of premiums on mortgage insurance purchased in connection with acquisition indebtedness on the taxpayer’s principal residence,
    • the above-the-line deduction for qualified tuition and related expenses, and
    • the 7.5% adjusted-gross-income floor for deducting medical expenses, applicable to individuals age 65 and older and their spouses, which increases to 10% in 2017.

    It is possible Congress will retroactively extend some, or all, of these provisions, but as it currently stands, these provisions have seen the end of the road.♦

  • 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

  • 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.

  • 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.

  • 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.