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Often, timing is everything or so the adage goes.  Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS’s decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don’t think timing matters at all.

What your return says is key

If it’s not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession–not when you file–are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you’re self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS’s interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn’t match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS’s “hit list” for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e.you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven’t complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, WEIGH THE RISK carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.Often, timing is everything or so the adage goes.  Does timing play a factor in raising or decreasing your risk of being audited by the IRS? For example, does the time when you file your income tax return affect the IRS’s decision to audit you? Some individuals think filing early will decrease their risk of an audit, while others file at the very-last minute, believing this will reduce their chance of being audited. And some taxpayers don’t think timing matters at all.

What your return says is key

If it’s not the time of filing, what really increases your audit potential? The information on your return, your income bracket and profession–not when you file–are the most significant factors that increase your chances of being audited. The higher your income the more attractive your return becomes to the IRS. And if you’re self-employed and/or work in a profession that generates mostly cash income, you are also more likely to draw IRS attention.

Further, you may pique the IRS’s interest and trigger an audit if:

• You claim a large amount of itemized deductions or an unusually large amount of deductions or losses in relation to your income;
• You have questionable business deductions;
• You are a higher-income taxpayer;
• You claim tax shelter investment losses;
• Information on your return doesn’t match up with information on your 1099 or W-2 forms received from your employer or investment house;
• You have a history of being audited;
• You are a partner or shareholder of a corporation that is being audited;
• You are self-employed or you are a business or profession currently on the IRS’s “hit list” for being targeted for audit, such as Schedule C (Form 1040) filers);
• You are primarily a cash-income earner (i.e.you work in a profession that is traditionally a cash-income business)
• You claim the earned income tax credit;
• You report rental property losses; or
• An informant has contacted the IRS asserting you haven’t complied with the tax laws.

DIF score

Most audits are generated by a computer program that creates a DIF score (Discriminate Information Function) for your return. The DIF score is used by the IRS to select returns with the highest likelihood of generating additional taxes, interest and penalties for collection by the IRS. It is computed by comparing certain tax items such as income, expenses and deductions reported on your return with national DIF averages for taxpayers in similar tax brackets.

E-filed returns.  There is a perception that e-filed returns have a higher audit risk, but there is no proof to support it. All data on hand-written returns end up in a computer file at the IRS anyway; through a combination of a scanning and a hand input procedure that takes place soon after the return is received by the Service Center. Computer cross-matching of tax return data against information returns (W-2s, 1099s, etc.) takes place no matter when or how you file.

Early or late returns. Some individuals believe that since the pool of filed returns is small at the beginning of the filing season, they have a greater chance of being audited. There is no evidence that filing your tax return early increases your risk of being audited. In fact, if you expect a refund from the IRS you should file early so that you receive your refund sooner. Additionally, there is no evidence of an increased risk of audit if you file late on a valid extension. The statute of limitations on audits is generally three years, measured from the due date of the return (April 18 for individuals this year, but typically April 15) whether filed on that date or earlier, or from the date received by the IRS if filed after April 18.

Amended returns. Since all amended returns are visually inspected, there may be a higher risk of being examined. Therefore, WEIGH THE RISK carefully before filing an amended return. Amended returns are usually associated with the original return. The Service Center can decide to accept the claim or, if not, send the claim and the original return to the field for examination.

Taxes for the “Affluent” in 2013:

1. Top tax rate on ordinary income rises from 35% to almost 44%, an increase of almost 25%
2. The top tax rate on capital gains rises from 15% to almost 24%, an increase of almost 60%
3. Top dividend tax rate increases from 15% to almost 44%, an increase of almost 300%
4. investment income (interest, dividends, capital gains, etc.) for families with AGI > $250K
5. Estate tax exemption- $5M to $1M and rate rises from 35% to 55%, an increase of over 55%
6. Estate gift tax exclusion- $5M to $1M

Proposition 30, a Sales and Income Tax Increase Initiative (If this proposition is passed in November, 2012, the income tax will apply retroactively to all income earned or received since the first of the year, January 2012):

1. Raises California’s sales tax to 7.5% from 7.25%, a 3.45% percentage increase over current law.
2. Creates four high-income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000 and $1,000,000. This increased tax will be in effect for 7 years.
3. Imposes a 10.3% tax rate on taxable income over $250,000 but less than $300,000–a percentage increase of 10.6% over current policy of 9.3%. The 10.3% income tax rate is currently only paid by taxpayers with over $1,000,000 in taxable income.
4. Imposes an 11.3% tax rate on taxable income over $300,000 but less than $500,000–a percentage increase of 21.5% over current policy of 9.3%.
5. Imposes a 12.3% tax rate on taxable income over $500,000 up to $1,000,000–a percentage increase of 32.26% over current policy of 9.3%.
6. Imposes a 13.3% tax rate on taxable income over $1,000,000–a percentage increase of 29.13% over current “millionaires tax” policy of 10.3%.

HAVE YOUR ATTENTION NOW!?!?!? – There are steps you need to take to prepare for these massive changes before the end of this year, and you know we can help.  Contact us!!

We often at times can’t help but think of the IRS as enemy instead of our ally.  However, the IRS has fanned their side of humanity by very quickly responding to the needs and sensitivity of all those affected by Hurricane Sandy.  Locally, we may not be personally affected, but undoubtedly our concerns and thoughts can’t help but be with those who were so dramatically impacted by this storm.  Every effort taken to bring relief to the victims is embraced by all.

“The tax relief postpones various tax filings and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until Feb. 1, 2013 to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively.

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in a Federal disaster area.

Beyond the relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy.” – www.irs.gov

For all the uncertainty over how lawmakers will handle the expiring tax cuts under the fiscal cliff, there seems to be growing clarity surrounding at least one measure: the temporary 2% payroll tax cut.– Bottom line: It’s likely toast.

The payroll tax cut — worth 2% of one’s wages up to $110,100 — was intended to be a temporary way to boost the economy. It was put in place for one year in 2011 but was then extended for this year.  During that time, the measure has saved most of the country’s 160 million workers anywhere from $700 to $1,800 a year.

The payroll tax funds Social Security – The tax cut costs roughly $120 billion a year, but rather than let Social Security funding suffer, the Treasury Department has made the program whole with money from general funds. – Translation: It’s adding to the country’s deficit.

At the same time, letting it expire will take money out of workers’ paychecks while the economic recovery is still tempered. – NEW YORK (CNNMoney) –

For tax year 2013, the Internal Revenue Service announced last week annual inflation adjustments for more than two dozen tax provisions. Some of the most impacting include –

-The annual exclusion for gifts rises to $14,000 for 2013, up from $13,000 for 2012.

-The amount used to reduce the net unearned income reported on a child’s tax return subject to the   “kiddie tax,”  is $1,000, up from $950 for 2012.

-The foreign earned income exclusion rises to $97,600, up from $95,100 in 2012.

Details on these inflation adjustments and others such as the low-income housing credit, the dollar limits for high-deductible health plans and other amounts can be found in Revenue Procedures released by the IRS.

QUESTION: How can I avoid accumulating credit card debt over the holidays?

ANSWER: Too many people find themselves with a large amount of credit card debt after the holidays, thinking they’ll pay the balance with their tax refund. When you think about it, getting a refund check means that you let the IRS use your money throughout the year without paying you any interest. One option is to adjust your withholding so you have more money in each paycheck instead of “loaning” the money to the IRS and having to wait for a refund. But don’t go overboard. You should only lessen the periodic tax withholding to match the expected refund so you won’t end up owing money unexpectedly. You can also adjust your withholding for a limited time, so you can increase your paycheck leading up to the holidays and then readjust your withholding in January. The IRS offers a Withholding Calculator, which lets you see how a change in withholding will affect your pay check. It’s also a good idea to check with your tax professional before making any changes.