Over the past several years, it seems we are asked the same questions over and over again. So here are a few of the most frequently asked questions, backed up by a few suggestions. I hope that they will give you some insight, and help you for your future planing. Please remember these are just overviews of a few tax laws, which go into much greater detail than we have room for. If we follow a few simple rules and take time out to educate ourselves, and learn a few tricks of the trade, it can make things a lot more bearable when tax time rolls around every year. For more in-depth reading I recommend Publication 17.
Answer:Every necessary and reasonable expense that is required to maintain your out-of-town employment, if you
maintain a permanent residence. The IRS says in order to be eligible for certain out-of-town expenses, you
must maintain a tax home, or have a main place of stay. If you travel from job to job without maintaining a residence, they label you as a transient worker, which disqualifies you for any out-of-town deductions. If you maintain a tax home, or have a main place of stay, you can deduct meals (the standard meal allowance is a $30 a day), travel (which includes traveling from your tax home to the job, back and forth from the job to the motel every day, and even coming home on the weekend every so often, and traveling back to the motel returning from your weekend visit. The only miles that are not deductible are personal miles such as cruising down to you local watering hole after work), and lodging (which includes motel rooms, apartments and any expenses you incurred maintaining the apartment). Lot rents for travel trailers, laundry services, tips to waitress and bellboys and just about any other expense that you incur that involves you maintaining your employment is also deductible.
Suggestion:Make sure that you maintain some type of residence, whether it is your tax home, a rental apartment or room and board with Aunt Martha and Uncle Bob. And when hiring in on new jobs always use that same address when filling out your paper work, so you will have one address on all of your W-2's at the end of the year.
Answer: That depends on how much out of town expenses you have and if you are able to itemize your deductions. You should get some back or break even if you have worked out-of-town the majority of the year, or have other business deduction to offset your claim of married and nine.
Suggestion:Rule of thumb, if you must claim married and nine:Never claim married and nine when working at home, and only claim married and nine when working out-of-town. If you claim married and nine while working at home or your main place of stay, you won't have your out-of-town expenses to offset your claim, providing you’re not married and have nine dependents!
Answer: I would suggest keeping all of them. The most important receipt of all is your motel or lodging receipts. I also highly recommend maintaining some type of a logbook, especially for items under $75.00. You are not required to keep receipts for anything under $75.00, but you must keep accurate written records in place of the receipt. This rule does not apply to motel or lodging receipts.
Suggestion:Obtain a credit card that will enable you to get a year-end report. Most banks will issue a credit card under a secured deposit in case your credit history is preventing you from getting credit.
Answer: You must make this decision the first year you place the vehicle in service, I recommend the standard mileage rate to start off with. If later you decide you don't like the standard mileage rate, you can switch to the actual expense and depreciate your work vehicle, but you can't switch from actual expenses to the standard mileage rate. Using the standard mileage rate, you don't have to keep up with receipts, and you will usually come out ahead using the standard mileage rate. For 2000 the standard mileage rate is 32.5 cents a mile.
Make sure you keep accurate written records. If you are a traveler this can be one of you biggest deductions.
Answer: The IRS does not allow you to depreciate personal property, (except your work vehicle, when working out of town). The only way you would be able to depreciate your travel trailer is if it were a condition of your employment or you were a subcontractor and used it exclusively for your office.
You can however, deduct the mortgage interest you pay on your travel trailer, recreational vehicle, or even your boat, if it qualifies as a second home. For any living accommodation to qualify as a second home, it must have sleeping, cooking, and toilet facilities. So if your travel trailer, recreational vehicle, or even your boat has a place to sleep, a kitchen, and a toilet and otherwise meets the requirements to be considered your qualified second home, the good news is that you can deduct the mortgage interest, and if you’re out of town working you can also deduct the lot rent, water, sewer, electricity, etc....
To have a second home, you must have a first (main) home. Generally, this is the home where you spend most of your time.
You can have only one main home at a time. Second Home
If you do not rent out your travel trailer, boat, or RV to others, and your travel trailer, boat, or RV has the necessary living facilities, you can deduct the mortgage interest you paid on it, even if you don't use your travel trailer, boat, or RV during the year.
However, if you rent it out part of the year, you also must use it during the year for it to be a qualified second home. You must use this home more than 14 days, or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. If you do not use the home long enough, it is considered rental property and not a second home. And you'll have all the rental property rules to deal with instead of the rules for a qualifying second home.
Answer:If you qualify, you may elect to exclude a maximum of $72,000 per year in foreign earned income from your U.S. taxable income in 1998 and later years, $74,000 in 1999 and $76,000 in the year 2000.
The amount of income you may exclude depends on (1) the number of days during the year in which you were a bona fide resident or (2) the number of days you were physically present in the country during a 12-month period. If you are out of the country for the entire year, you may exclude all of your earned income up to the $72,000 limit. However, if you are out of the country for only part of the year, you generally must prorate the exclusion based on your number of qualifying days during the taxable year.
You were a bona fide resident of a foreign country for 300 days during 1998. The maximum amount of income you may exclude from U.S. taxed is 300 / 366 x $72,000, or $59,016. Your exclusion is, of course, limited by the amount of foreign income you earn. If you earn less than the maximum allowed, you may exclude only that amount.
Suggestion:If you do find you’re self-working in a foreign country, keep a copy of your calendar of days in and out of the U.S. The calendar can be supported by airline tickets or stamped passports documenting arrival and departure dates.
Answer:Yes, if at the end of the year, you live together in a common law marriage that is recognized by the law of the state in which you live or the state where the marriage began, you are treated as married.
Suggestion:Open a joint bank account with both of you using the same last name, or get married!
Answer: Filing a joint return will save taxes where you or your spouse earns, all or substantially all, of the taxable income. Where both of you earn taxable income, you should figure your tax on joint and separate returns to determine which method provides the lower overall tax.
Separate returns may save taxes where filing separately allows you to claim more deductions. On separate returns, larger amounts of medical expenses may be deductible because lower adjusted gross income floors apply. Moreover, unless one spouse earns substantially more than the other, separate and joint tax rates may be the same, regardless of the type of returns filed.
Suggestion:We can figure your taxes both ways to see which is best for you.
Your chances of being audited greatly depend on the amount of income and deductions you report. On average persons earning below $50,000 stand 1% chance of having their returns examined. taxpayers earning between $50,000 and $100,000 stand a slightly higher chance with those earning $100,000 or more being the most likely candidates with a chance of 5%.
Personal tax returns can be selected for audit by three different methods:
The first method, is the DFS scoring method, (Discriminate Function System). Every personal tax return is given a DFS score, based on a combination of factors, such as the amount and type of income, and the amount of certain deductions, when it is processed through the IRS computer. The higher the score, the more chance of an audit. Several months after the return is filed the District Director, of your residential area, makes up a budget of available manpower to perform audits. This includes the number of audits he expects his district to accomplish during the next year. Based upon the budget, the IRS computer automatically selects from the highest scores down until enough returns have been selected to satisfy the budget requirements of the district.
The second method, comes from the Adjustment Section of the computer center. This is the mistake section. If you make a mistake in addition or completion of your tax form the computer can't process it without human help. Thus, your return gets passed over to the Adjustment Section for correction. If they can't figure out your mistake, it's referred for Audit.
The third method, is The Special Project Method. Also a computer method of selection. If the IRS determines that there is tax abuse in a specialized area, the computer searches the database for deductions in that particular area and bang, the whole lot is audited. This method can also be used for certain types of occupations, such as doctors, tax preparers etc. For example... say the IRS passed laws regarding Offices in the Home and Personal Computers. If the IRS determined that in 1985 most taxpayers didn't heed the rules (proper way of listing the deduction) or failed to segregate the computer from other items listed on form 4562, there will be a project to audit tax returns for which there is an (assumed) incorrect business deduction.
Suggestion:Your best defense against an audit, is to accurately report all income that has been reported to the IRS. How do you know what income has been reported and what hasn't?
If anybody has reported your income to the IRS, they are required by law to make You aware that the income has been reported to the IRS. This is done in several ways, but more than likely only two of them will effect you,
W-2 forms: Are used to report employee income and gambling income, which by the way is a W-2G for gambling.
1099 forms: There are several different flavors of 1099 forms, and they are used to report income other than employee income such as, income for subcontractors, unemployment compensation, interest income from bank accounts, dividend income from stocks & bonds, state refunds, Etc...
So if you receive a notice in the mail that says this income has been furnished to the IRS, be sure to include this into your yearly income, so your numbers match the IRS's numbers.
Also, you should never leave out a legitimate deduction simply because you're afraid of being audited.
Answer: If you do receive notice of an IRS audit, carefully go over the notice and make sure that the year in question is within the statute of limitations, which is three years from the due date of the return. As of April 16, 1997 the last year open for audit is 1994, all years prior to that would be barred from examination. If your notice is typical, it will indicate the areas in question. Normally check marks indicate designated categories such as itemized deductions, travel, entertainment, ect... Other areas of concern may also be included with handwritten notes.
If your notice asks you to call and confirm an appointment date, it will also give you a time limit in which to respond to the notice, which is usually ten days. Do not delay, it is very important that you respond to this notice within this time limit. If you ignore the first notice, I can assure you they will not go away. But first, consider the amount of time you need to gather your records, and to prepare yourself for the audit. Then if necessary, reschedule your appointment accordingly (three or four weeks is not uncommon).
When re-scheduling your appointment try to request a late afternoon time like 3:00 or 4:00 PM. At this time of the day most workers, including IRS agents, begin to tire and are thinking about the 5:00 whistle, so if possible schedule your appointment in the late afternoon.
Do not discuss your case over the phone when confirming or re-scheduling your appointment and don't volunteer information over the telephone. More than likely you will be speaking with a receptionist, but in the event that you do happen to speak with the agent and they do ask questions, be very polite and tell them you will discuss these matters with them at the audit.
If you have previously been audited for the same issues that are in question, inform the IRS agent that you have already been audited and in most cases you will be excused from having your return examined for the same issues.
Suggestion:Read Publication No.1, "Your Rights as a Taxpayer". It is very important that you know the rules and even more important to let the IRS know you are not an uninformed taxpayer. The more rights you assert, the better off you will be. You begin to assert those rights by being the one to establish the ground rules of an audit.
Three of those ground rules are;
1. You have the right to conduct the audit at a time and place that is convenient to you. Use this right to prepare and avoid being caught off guard.
2. You have the right to record an audit as long as you give the IRS the same right. Using this right prevents the IRS from changing the rules midway through the audit.
3. You have the right to limit the scope of the audit to avoid time and trouble discussing issues not relevant to your tax liability.
Answer:When you sit down with the IRS auditor, the agent will usually begin by explaining the nature of the audit and the issues that are in question. The office audit will usually take about an hour, and is similar to a game of cards, the stakes being whatever items on the tax return are in question. The rules of the game are quite simple. The auditor leads with a question, and you respond with an answer. If the answer is correct you score a point, if the answer is incorrect, the IRS scores a point. At the end of the hour, you tally up all the points. The points scored by the IRS are converted into taxes that you owe, and of course your points don't count! The moral of the story is, to win you can't have any wrong answers!
It is not unusual for an audit to require several sessions of providing substantiation. In most cases, after your original interview, you may be asked to provide additional information about your return. The agent will usually allow you to present this information by mail and if permitted, you should seize the opportunity to do so. The less visible you are to the agent, the better off you will be. It is impossible for the agent to ask questions of a piece of paper, but if you return with it, your chances of being questioned about it are much greater.
Suggestion:Being organized is probably your best defense!
When you present your evidence to the IRS agent, it is very important to be as organized as possible prior to your audit appointment. It is important that you impress your agent with how well organized you are. Make a list of all audit issues that are indicated and arrange your documentation in the same order. If you take a bag of receipts to "dump" on the auditor’s desk, the auditor will probably make you take them home and organize them.
When you do bring your documentation to the interview, bring only those items questioned by the IRS, do not volunteer information, and make sure that the items you do bring are complete and accurate. If you can convince the agent that you were honest in 90% of the areas tested, the agent is likely to concede the last 10%.
There are generally three types of audits:
Correspondence audit: The Internal Revenue Service sends a letter asking you to verify certain items of income and deductions on your tax return. Generally, you can respond by mailing copies of your documentation (never mail original documents) back to the IRS. If the IRS finds that you owe tax and you don't agree, you may request an office audit.
Office Audit: You will receive a letter from your local IRS office, (in reference to the address on the tax return in question) requesting that you call for an appointment. The items in question will be listed in the letter. After making your appointment, you and/or your representative will take the records into the IRS office, and there you will verify your deductions and discuss with the agent any points of law on which you may not agree. If an agreement is reached with the auditor, your case will be closed. If you don't reach an agreement, you may appeal.
Field audit: This type of audit is normally used for businesses. The auditor will come to your home or place of business. A field audit may also be conducted in your Enrolled Agent’s (EA’s) Office, an especially good idea if your bookkeeping was done there as well.
Suggestion: You have the right to conduct the audit at a time and place that is convenient to you. Use this right to prepare and avoid being caught off guard.
At the conclusion of the auditor's examination, a report of the proposed adjustments will be prepared by the examining agent for your review and agreement. This report will normally be mailed to you after you have provided the examiner with all of your documentation and after all issues have been thoroughly discussed and argued. Along with the agent's report, you will receive an agreement form and a copy of publication 5, which explains your appeal rights within and without the Internal Revenue Service. Before you sign this agreement form, you need to understand that once you sign the agreement form, you are waiving your appeal rights with regard to any of the issues contained in the agent's report.
If you don't agree with the auditor, you may appeal your case using the following procedures: First, you may appeal to the auditor’s supervisor. Next, you may appeal your case to the appellate division of the Internal Revenue Service. The appeals officer, although an IRS employee, is often more knowledgeable of the law. Consequently, it is common to reach an agreement at this level.
If you still don't agree with the appeals officer, you may appeal to tax court. This may be done without paying the tax due if you file within the time allowed. The IRS will issue you a Statutory Notice of Deficiency if there is no agreement. You have 90 days from the date this notice is issued to file a tax court petition and have your case heard without paying the tax. Depending upon the amount owed, you may elect to file your case in Small Case Tax Court where an attorney is not needed. Otherwise, you would file your case in regular Tax Court.
Just knowing this right can prevent you from ever having to use it. Petitioning the Tax Court is the ultimate appeal of a decision made by an IRS auditor. Statistics show that citizens who use their right to appeal auditor decisions, along with their right to petition the Tax Court, win 64% of the time. Statistics also show that, in most cases, when a Tax Court petition is filed, the case never goes to trial. In every case, the IRS tries to avoid a trial and negotiates a settlement. Tax Court is your court - but only when you know how to use it.
As an alternative to Tax Court, you may pay the amount of tax due and file a suit for refund in either a US District Court or US Claims Court. Tax Laws are subject to change at any time so consult with your local Enrolled Agent for the latest information.
Suggestion 1: In an audit, there are forms the auditor may ask you to sign that can take away your right to appeal, your right to claim deductions and your right to prevent enforced collection action. Form 872 is one of these forms. It extends the amount of time the IRS can take to assess a tax…time they may not have if you don't sign.
Keep in mind that it ain't over till the fat lady sings. I mean, till you sign on the dotted......line, and if you don't agree with the agent, you don't have to sign.
Suggestion 2: Before you sign the agreement form, and consent to the assessment and collection of tax and penalties, you should be convinced that there is little chance of winning your case by appeal. Depending on the issues and the amount of tax involved, it may be to your advantage to agree to the adjustments proposed. On the other hand, if you feel like you have been treated unfairly, you may want to file a protest with the appeals division of the IRS. For amounts of tax under $1,000, a brief written statement of appeal is all that is required. If the amount of tax is over $10,000 or you feel that the issues involved are beyond your capabilities, you may want to contact a CPA or other tax professional to represent you before the appeals division.
Like it or not, this is the system of audit selection in the United States. There are two ways to approach it. One is to gripe and complain and get nowhere. The other is to become knowledgeable of the system and figure out how to deal with it from a position of knowledge and strength.The single best advice that I could possible give to any of you, would be to keep a logbook of your daily activities. The IRS has significantly eased its record-keeping rules by raising the requirements for many employee business receipts from $25 to $75 starting October 1, 1995.The tax law allows deductions for any expense for traveling, entertainment, gifts, or listed property, as long as the expense is substantiated by adequate records. Taxpayers are required to maintain documentary evidence (such as receipts) for (1) any lodging expenditure, and (2) any other expenditure of $25 or more. However, the $25 receipt threshold which was established in 1962 has been amended. Effective October 1, 1995, the receipt threshold has been increased from $25 to $75.This means that anything under $75 you don't have to maintain a receipt for, but you must be keeping written records. Only by keeping a logbook are you able to take full advantage of this new threshold.Back to Top