Showing posts with label anxiety / audits / tax problems. Show all posts
Showing posts with label anxiety / audits / tax problems. Show all posts
Thursday, April 22, 2010
Audit potential?
June --
Been tracking (officially) my income/expenses from writing for just about a year now. I've actually been teaching creative writing and submitting fiction pieces to literary journals for several years (more than a decade). I have done my taxes through a software program, but I am paranoid that I have done something wrong, mostly because I haven't made any money on my authorship.
Additionally, my husband, for whom I prepare his taxes, is self-employed but hasn't made any money in a couple of years. He is a management consultant.
Will all of this trigger an audit? I would be more than willing to pay for advice!
Many thanks,
Kristine
Walnut Creek, CA
Dear Kristine,
An indie who is legitimately pursuing his or her profession should never fear an audit.
As long as you can prove the legitimacy of your business -- how to do this is explained in my book Self-employed Tax Solutions -- and as long as your records are accurate you would smoothly fly though an audit.
Audits can be random or for specific reasons. Even indies with profits year after year can be audited. They, too, must keep just as accurate records as do indies with losses year after year. Here are lots of posts on recordkeeping . And you might want to check out my petite publication on recordkeeping, The Confident Indie: Five Easy Steps.
-- June
Sunday, February 14, 2010
Good Questions About Income, Expenses & Audits
Hi June,
Just finished listening to your CD and I thought it was good but rather short. I had hoped it would have been more of a version of your book less the worksheets. I much prefer an audiobook since as an indie I spend most of my time in the car and like to use the time to learn.
You have a great reading voice and may want to consider a more extensive audiobook version.
I do have a question I hope you may be able to answer. When one receives large amounts of cash as a gift at various times of the year how can you deposit this and make sure it is seen as personal? With a large immediate and extended family this can add up to thousands of dollars and I am not comfortable asking family to write notes saying they were nice enough to give me and the kids generous gifts.
Also, when I quote a job I include all expenses and there may be many varied expenses to complete the job ranging from nails to build a set to nail polish for a model sitting in the set.
I keep a docket for the jobs but an auditor who did not understand my indie lifestyle seemed to think the invoice should have had every nail and screw on the invoice and if I bought lunch for those at the shoot I should have the client and those around sign a meal log.
There is no indication in the code that this needs to be done and in the end I won in the appeal but the blood, sweat and tears only made me resent the CRA/IRS more.
The other issue I had was with unique gifts I give clients as a thank you for the work. If a client tells me they love hockey I will send an expensive stick to them and so on. What I have learned from an audit is if you think some accountants don't understand the work of an indie it pales in comparison to a government auditor.
Last question is if an indie is audited do you suggest they go it alone or get a representative to deal with the government. I understand if you can not answer all or any of my questions but they may make for good blog posts for you.
All the best,
Cliff
Dear Cliff,
I am trying to catch up with a huge backlog of emailed questions and some of this I may have dealt with already. But, a refresher never hurts.
First of all, thank you so much for your comments on my CD -- and my reading voice. I cannot do a CD of my book -- publisher constraints and the like. I do have additional CDs in the works but time is limited and client work comes first. I do have a new petite publication -- 75+ pages -- coming out very very soon -- The Confident Indie: Five Easy Steps. More about it soon.
On to your questions ...
Family gift money coming in: Make copies of the checks. Keep a list with specifics -- from whom, why, date -- of gifts by check or cash. Get pictures of family members. Make copies. Staple the family member's photo to the copy of the check. Save the birthday cards or anything that would help you prove where the money came from. And, I'm sure you always send a thank you note -- mom brought you up right! Well, copy the thank you note, or keep the dated emailed thank you. If the money was not a gift and not income, then send an acknowledgement of receipt of the money and keep a copy. That way you don't have to request anything from the giver.
If you are asking about reimbursed expenses, there's a lot on this blog about reimbursed expenses -- expenses -- reimbursed . If you are asking about expenses in general: Save receipts, of course. Photos do wonders as proof. Take a picture of the model with the polished nails sitting on the thing that was built with nails. Make notations -- including the date -- on the photo. Keep it with your receipts. Use your creativity in your recordkeeping.
No matter how much you spend on a hockey stick you may deduct only $25 as a business expense.
In an audit it depends on the tax pro and the taxpayer as to which one, or both, should handle the audit. I've had some clients who, with my coaching, did great by themselves. Other clients I would not let near the IRS. Years ago a client went to her own audit. She told the IRS auditor that she paid more in taxes in a year than the IRS auditor earned in a year. That audit did not fly well.
-- June
Just finished listening to your CD and I thought it was good but rather short. I had hoped it would have been more of a version of your book less the worksheets. I much prefer an audiobook since as an indie I spend most of my time in the car and like to use the time to learn.
You have a great reading voice and may want to consider a more extensive audiobook version.
I do have a question I hope you may be able to answer. When one receives large amounts of cash as a gift at various times of the year how can you deposit this and make sure it is seen as personal? With a large immediate and extended family this can add up to thousands of dollars and I am not comfortable asking family to write notes saying they were nice enough to give me and the kids generous gifts.
Also, when I quote a job I include all expenses and there may be many varied expenses to complete the job ranging from nails to build a set to nail polish for a model sitting in the set.
I keep a docket for the jobs but an auditor who did not understand my indie lifestyle seemed to think the invoice should have had every nail and screw on the invoice and if I bought lunch for those at the shoot I should have the client and those around sign a meal log.
There is no indication in the code that this needs to be done and in the end I won in the appeal but the blood, sweat and tears only made me resent the CRA/IRS more.
The other issue I had was with unique gifts I give clients as a thank you for the work. If a client tells me they love hockey I will send an expensive stick to them and so on. What I have learned from an audit is if you think some accountants don't understand the work of an indie it pales in comparison to a government auditor.
Last question is if an indie is audited do you suggest they go it alone or get a representative to deal with the government. I understand if you can not answer all or any of my questions but they may make for good blog posts for you.
All the best,
Cliff
Dear Cliff,
I am trying to catch up with a huge backlog of emailed questions and some of this I may have dealt with already. But, a refresher never hurts.
First of all, thank you so much for your comments on my CD -- and my reading voice. I cannot do a CD of my book -- publisher constraints and the like. I do have additional CDs in the works but time is limited and client work comes first. I do have a new petite publication -- 75+ pages -- coming out very very soon -- The Confident Indie: Five Easy Steps. More about it soon.
On to your questions ...
Family gift money coming in: Make copies of the checks. Keep a list with specifics -- from whom, why, date -- of gifts by check or cash. Get pictures of family members. Make copies. Staple the family member's photo to the copy of the check. Save the birthday cards or anything that would help you prove where the money came from. And, I'm sure you always send a thank you note -- mom brought you up right! Well, copy the thank you note, or keep the dated emailed thank you. If the money was not a gift and not income, then send an acknowledgement of receipt of the money and keep a copy. That way you don't have to request anything from the giver.
If you are asking about reimbursed expenses, there's a lot on this blog about reimbursed expenses -- expenses -- reimbursed . If you are asking about expenses in general: Save receipts, of course. Photos do wonders as proof. Take a picture of the model with the polished nails sitting on the thing that was built with nails. Make notations -- including the date -- on the photo. Keep it with your receipts. Use your creativity in your recordkeeping.
No matter how much you spend on a hockey stick you may deduct only $25 as a business expense.
In an audit it depends on the tax pro and the taxpayer as to which one, or both, should handle the audit. I've had some clients who, with my coaching, did great by themselves. Other clients I would not let near the IRS. Years ago a client went to her own audit. She told the IRS auditor that she paid more in taxes in a year than the IRS auditor earned in a year. That audit did not fly well.
-- June
Thursday, September 24, 2009
Checks from Uncle Sam
June --
A couple times in the past 5 years I have gotten checks from the IRS after I thought I was square with them.They never send any information about where i made my mistake. How does one go about finding out that information?
-- Lisa
Lisa --
Call the IRS at 800.829.1040. Have the tax return for the year of the payment right there in front of you when you call. Also call early in the morning. That's when the IRS is least busy. Have a cup of coffee, too, because you may be on hold a while.
Usually there is a year noted in the upper right corner of the check, for instance December 2007 lets you know it was for something that happened in 2007. If you cashed the check and don't know what year, have your three back years' returns by the phone.
-- June
A couple times in the past 5 years I have gotten checks from the IRS after I thought I was square with them.They never send any information about where i made my mistake. How does one go about finding out that information?
-- Lisa
Lisa --
Call the IRS at 800.829.1040. Have the tax return for the year of the payment right there in front of you when you call. Also call early in the morning. That's when the IRS is least busy. Have a cup of coffee, too, because you may be on hold a while.
Usually there is a year noted in the upper right corner of the check, for instance December 2007 lets you know it was for something that happened in 2007. If you cashed the check and don't know what year, have your three back years' returns by the phone.
-- June
Monday, August 17, 2009
There’s no shortage of bad advice out there.
Indies, an alert: Be careful. Know your source.
Sammy Segar, CPA, is the composite figure I use in my writings to depict the tax pro who totally misunderstands indie life; my recent blogpost, You Do Not Need A Business Checking Account, woke the real Sammy Segars out of their after-lunch naps.
Last Friday The Wandering Tax Pro, Robert D. Flach took respectful disagreement with my post in his You Do Need A Business Checking Account.
Flach advocates a separate business checking account because an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’” But then he steps on his own message by citing the chronic problem of indies with business checking accounts – what to do when the money gets low. Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.
He quotes my observation that in an IRS publication “you are urged to open a business checking account.” But he fails to include the rest of the comment, which was my main point: “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”
Flach says: “a separate business checking account is not a strict requirement.” I am not sure how a “strict requirement” differs from a plain requirement but the IRS didn’t require – it “urged,” which is no requirement at all.
Mr. Flach’s website does indicate that he works with self-employeds. He offers information to the “sole proprietor and one-man LLC.“ Well, if we were still in the 20th century I could understand, but this is the 21st. One-man!
Another response to my post came from The Tax Lawyer's Blog . Let’s call him Attila Attorney.“ In a recent post,” he writes in astonishment, “she advises her business clients to commingle their business funds with their personal funds. You read that write. She advises the commingling of funds.” Yes, indies, you read that right. He did say “write.”
Then he warns: In advising that an indie doesn’t need a separate checking account I am “engaging in the unlicensed practice of law and it’s dangerous.” I’m not sure if he means dangerous to me or to you indies. I didn’t realize that advising against setting up a business checking account was fraught with such peril.
Oh -- and I was not going to mention this but I just had to. He says: “First, Ms Walker may be the most brilliant, competent, well-meaning person on the face of the planet …” Well, my mother and my husband always thought so and I’m pleased to know that A. Attorney, Esq., is considering the possibility.
He follows that with, “Second, and more importantly (his seventh grade teacher would have corrected that to “important”), Ms. Walker is giving business owners horribly bad advice.” (Oh, wait. Maybe I shouldn't correct his grammar because I'm not a licensed teacher.)
He has warned of danger and spoken of horror. But should we be getting goose-bumps and feeling our hair standing on end? Not really, because there is nothing illegal, immoral, fattening or unwise for a sole proprietor, who is not an LLC, to conduct business by depositing income or paying for business expenses from a personal checking account. For that matter, for reasons explained on my website and blog, it’s smart.
Attila Attorney then abruptly changes the subject to the protections that await the indie who does exactly what the lawyers want him to do – form a corporation.
He warns indies – likely in his thinking they are all corporate monarchs -- against “a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation.” Well, duh! That would be a serious mistake.
But can Attila keep his attention span focused long enough to note that my blogpost never mentioned corporations? Did I advise: Don’t set up a separate checking account, even if you form a corporation? Of course not. Whatever his motive for changing the subject, it gives him a chance to plug incorporation – a legal step near and dear to the hearts of many lawyers.
And when Jeff Day, an enrolled agent, in a comment to the post disagrees with Attila the Tax Lawyer, Attila responds to Jeff with: “If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.”
I’m trying to think of a word that properly describes his assertion that advising against a business checking account is practicing law without a license or not advising to incorporate is “malpractice.” “Preposterous” somehow doesn’t seem strong enough.
Of course, the issue we should be looking at today isn’t practicing law without a license or malpractice or man-only businesses. It’s Attila and Sammy giving tax and legal advice to self-employed independent professionals without really understanding how indie businesses function.
June Walker
Sammy Segar, CPA, is the composite figure I use in my writings to depict the tax pro who totally misunderstands indie life; my recent blogpost, You Do Not Need A Business Checking Account, woke the real Sammy Segars out of their after-lunch naps.
Last Friday The Wandering Tax Pro, Robert D. Flach took respectful disagreement with my post in his You Do Need A Business Checking Account.
Flach advocates a separate business checking account because an indie should “do as much as possible to give your self-employment activity the appearance of a real business entity so that the IRS does not come back and say that it is really a ‘hobby.’” But then he steps on his own message by citing the chronic problem of indies with business checking accounts – what to do when the money gets low. Well, he says, “loan” money to the business account from your personal account and then return it later. If you have attended my seminars or read my book you know: That leaves a very wiggly audit trail for the IRS to follow.
He quotes my observation that in an IRS publication “you are urged to open a business checking account.” But he fails to include the rest of the comment, which was my main point: “The very next example from the IRS in the publication is the mixed use – personal and business – of your automobile. So, let’s see how efficient two checking accounts would be in this situation – hmm … guess you are expected to pay for each gas purchase with two checks – one for the personal use amount of gas and a business check for the business use portion.”
Flach says: “a separate business checking account is not a strict requirement.” I am not sure how a “strict requirement” differs from a plain requirement but the IRS didn’t require – it “urged,” which is no requirement at all.
Mr. Flach’s website does indicate that he works with self-employeds. He offers information to the “sole proprietor and one-man LLC.“ Well, if we were still in the 20th century I could understand, but this is the 21st. One-man!
Another response to my post came from The Tax Lawyer's Blog . Let’s call him Attila Attorney.“ In a recent post,” he writes in astonishment, “she advises her business clients to commingle their business funds with their personal funds. You read that write. She advises the commingling of funds.” Yes, indies, you read that right. He did say “write.”
Then he warns: In advising that an indie doesn’t need a separate checking account I am “engaging in the unlicensed practice of law and it’s dangerous.” I’m not sure if he means dangerous to me or to you indies. I didn’t realize that advising against setting up a business checking account was fraught with such peril.
Oh -- and I was not going to mention this but I just had to. He says: “First, Ms Walker may be the most brilliant, competent, well-meaning person on the face of the planet …” Well, my mother and my husband always thought so and I’m pleased to know that A. Attorney, Esq., is considering the possibility.
He follows that with, “Second, and more importantly (his seventh grade teacher would have corrected that to “important”), Ms. Walker is giving business owners horribly bad advice.” (Oh, wait. Maybe I shouldn't correct his grammar because I'm not a licensed teacher.)
He has warned of danger and spoken of horror. But should we be getting goose-bumps and feeling our hair standing on end? Not really, because there is nothing illegal, immoral, fattening or unwise for a sole proprietor, who is not an LLC, to conduct business by depositing income or paying for business expenses from a personal checking account. For that matter, for reasons explained on my website and blog, it’s smart.
Attila Attorney then abruptly changes the subject to the protections that await the indie who does exactly what the lawyers want him to do – form a corporation.
He warns indies – likely in his thinking they are all corporate monarchs -- against “a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation.” Well, duh! That would be a serious mistake.
But can Attila keep his attention span focused long enough to note that my blogpost never mentioned corporations? Did I advise: Don’t set up a separate checking account, even if you form a corporation? Of course not. Whatever his motive for changing the subject, it gives him a chance to plug incorporation – a legal step near and dear to the hearts of many lawyers.
And when Jeff Day, an enrolled agent, in a comment to the post disagrees with Attila the Tax Lawyer, Attila responds to Jeff with: “If you have a serious business, it’s unwise to operate as a sole proprietorship and probably malpractice for a lawyer not to point that out to his clients.”
I’m trying to think of a word that properly describes his assertion that advising against a business checking account is practicing law without a license or not advising to incorporate is “malpractice.” “Preposterous” somehow doesn’t seem strong enough.
Of course, the issue we should be looking at today isn’t practicing law without a license or malpractice or man-only businesses. It’s Attila and Sammy giving tax and legal advice to self-employed independent professionals without really understanding how indie businesses function.
June Walker
Monday, May 11, 2009
Check your sources BEFORE you act!
June --
IT consultant. Thank you for taking my comment.
I have been an independent contractor for 7 years.
The problem I have now is that I have been trying to purchase a house and the person helping with my loan advised me to amend my 2007 taxes and take no deductions and even had me add some income to it to make the numbers for the loan as my AGI was low due to the deductions.
He also advised me to file 2008 with no deductions and add some income to that as well.
Now my problem is that I have not received financing and am stuck with a huge tax liability as I did not take my deductions.
I am not sure where to go now.
Any help is appreciated.
Vipul
Vienna, VA
Dear Vipul,
As I alert indies all the time: Know the source of the info you use. Even though they are both trades people, would I ask my plumber to fix an electrical problem? Did the person helping you with the loan know anything about taxes? Did you ask him?
Inflating income to get a federal loan is fraud. Yup. It's really bad.
You need to go to a legitimate tax professional experienced with self-employed taxes and have her file amended tax returns for 2007 and 2008.
In my book, Self-employed Tax Solutions, I warn about just such a situation. Sammy Segar the clueless CPA advises the musician Miles Mingus just as your loan guy advised you.
Best,
June
IT consultant. Thank you for taking my comment.
I have been an independent contractor for 7 years.
The problem I have now is that I have been trying to purchase a house and the person helping with my loan advised me to amend my 2007 taxes and take no deductions and even had me add some income to it to make the numbers for the loan as my AGI was low due to the deductions.
He also advised me to file 2008 with no deductions and add some income to that as well.
Now my problem is that I have not received financing and am stuck with a huge tax liability as I did not take my deductions.
I am not sure where to go now.
Any help is appreciated.
Vipul
Vienna, VA
Dear Vipul,
As I alert indies all the time: Know the source of the info you use. Even though they are both trades people, would I ask my plumber to fix an electrical problem? Did the person helping you with the loan know anything about taxes? Did you ask him?
Inflating income to get a federal loan is fraud. Yup. It's really bad.
You need to go to a legitimate tax professional experienced with self-employed taxes and have her file amended tax returns for 2007 and 2008.
In my book, Self-employed Tax Solutions, I warn about just such a situation. Sammy Segar the clueless CPA advises the musician Miles Mingus just as your loan guy advised you.
Best,
June
Monday, May 4, 2009
Audit Choice
Hi June,
Graphic design / music. Three years.
I'm being audited by the IRS this year for 2006. I don't know why. I made nothing. My accountant says it's because I made $1000 but we deducted $3000. It was the year I bought my laptop. I'm so glad I purchased your book, Self-employed Tax Solutions, a year ago.
I've been gathering my receipts and realized that about 5 of the important receipts i used for 2006 actually are dated jan-mar of 2007. If didn't use them for 2007 tax year, is it okay to have used them in 2006? I should have looked more carefully.
Best,
Sandy
Hi Sandy,
Just about all audits are randomly chosen. You might also think of them as chosen from batches. An unmarried photographer with a loss for a several years may be in one batch. Another photographer with several years of loss but married to a high-earning spouse may be in another batch because the situation may look like a home-made tax shelter -- an expensive hobby supported by a spouse. So, none of us laymen knows why you were chosen. I doubt your accountant is correct.
You are a cash-basis taxpayer -- explained here. You cannot use 2007 receipts for 2006. Yes, you should have been more careful. As careful as you would be were you designing my promo material and had to approve proofs before having 5000 printed.
Best,
June
Monday, November 24, 2008
Taxpayer Advocates Help with IRS Problems
I received an email from someone explaining a complex IRS audit in progress. Although the problem is not of general interest to my readers the question and my response are.
After explaining the situation, Mary, from Williamsburg, Washington, asked: Is there any statute stating that because of undue hardship, monetary, and time, the IRS must grant our request for a change of venue?
Whenever you deal with the IRS and the actions of the IRS cause you undue hardship, you should contact the Local Taxpayer Advocate (LTA) office. The service is offered by the IRS. It gives free, independent, and confidential tax assistance to taxpayers unable to resolve their tax problems through normal channels or individuals experiencing a hardship. The Taxpayer Advocate Service helps individual and business taxpayers resolve problems with the IRS.
In Washington the LTA contact info is:
915 2nd Ave.,
Stop W-405,
Seattle, WA 98174
206-220-6037
206-220-6047
The Taxpayer Advocate Service toll-free phone number is 877-777-4778.
Sunday, September 21, 2008
1929: America Before the Crash
Economic mayhem. Do you understand what's going on? Most of us don't. And even more disturbing, we fear that those who are supposed to understand do not.Life savings and retirement plans dropping in value. What's a trillion dollars anyway? Unemployment at 5%. During the Great Depression it was 25%. So it's not so bad now. Right?
What does the viability of an insurance company like AIG have to do with whether I can use my credit card for a cash advance?
Are we really heading toward another Great Crash like the one in 1929?
Well, you know my big push is always toward educating yourself. Learn as much as you can. The best single place to find out what it was like in 1929 and to see what similarities there are to now is to read Warren Sloat’s remarkable book, 1929: America Before the Crash.
The book has a long history. When originally published to critical acclaim in 1979, the Chicago Tribune called it “a powerful and dramatic history of the times” and the New York Times said it had “all the ingredients of a story to match – or outmatch – Watergate.” As its reputation continued to grow, 1929 has recently been republished as a trade paperback. Only recently Newsweek cited the book as an example of how a writer can encapsulate the story of a pivotal year in history.
Sloat takes us up to the Crash. We all attend a party on October 21, 1929 given by Henry Ford in honor of Thomas Edison and the 50 year anniversary of the invention of the lightbulb. The partygoers honoring Edison included President Herbert Hoover, Orville Wright, Madame Marie Curie, John D. Rockefeller, Jr. Enjoying the height of success and prosperity they were blind to the destiny that waited only days hence in the caverns of Wall Street.
Sloat's book is a sweeping narrative that includes portraits of many of the leading figures of the era, from an elderly Thomas Edison to a young Charles Lindbergh, it depicts the US on the brink of disaster. It’s instructive yet fun to read.
By the way -- the author is my husband.
Recently Warren received an email from a 30-something reader. “Your book is filling in all sorts of holes about our current economic and business zeitgeist,” he wrote.
If you're interested in learning more about then, and perhaps now, you can purchase 1929 here.
June Walker
The Author's Wife
Sunday, June 22, 2008
Dad is wrong. Don't cheat.
Hey June!
I am a profession ballet dancer and teacher. This is my first year as an indie.
My question for you has to do with audits. Since I get 1099s that my employer fills out, what should I do if they are wrong (i.e. too short)? I asked my dad and he said not to worry because if I get audited they can only go by the 1099 and whatever amount is written on there. But I worry because that almost sounds too good to be true. If I get audited, is there any way that they can prove I made more money than my 1099 states? Help!!! AM I being too paranoid?
I am a profession ballet dancer and teacher. This is my first year as an indie.
My question for you has to do with audits. Since I get 1099s that my employer fills out, what should I do if they are wrong (i.e. too short)? I asked my dad and he said not to worry because if I get audited they can only go by the 1099 and whatever amount is written on there. But I worry because that almost sounds too good to be true. If I get audited, is there any way that they can prove I made more money than my 1099 states? Help!!! AM I being too paranoid?
Tiffany
Fayetteville, GA
Well, Tiffany, Dad is wrong.
Hiding income is fraud. You are breaking the law if you do not claim all your income.
Hiding income does not give a positive, professional image of your business. It raises questions, such as whether you are a legitimate business. Do you want to be looked upon with respect in your business community?
There are many ways for the IRS to verify income. In an audit of an indie, the IRS does not simply look at 1099s. Every bank statement is reviewed and must match income. If the money coming in on the statements doesn't match the income on your tax return you must be able to explain why. If your lifestyle is Porsche but your income is Hyundai, then the IRS digs deeper.
Let's say that Dana's Dance school hired you to teach and Dana's bookkeeper incorrectly completed your 1099 with $500 income instead of $5,000. In an audit Dana would use $5,000 as her teaching expense. And she can prove it via checks or fees from her students. If the enterprising IRS auditor decided to check your return and found only $500 claimed as income you'd be in trouble. Is Dad going to pay your penalties and interest for you?
I say in my book, Self-employed Tax Solutions : The IRS is not a morality agency, it is a monetary agency. It doesn't care what you do for a living as long as you pay taxes on the income you make doing it. If you make your living as a hit man or a lady of the night or a drug dealer, be sure to pay the IRS its fair share. Remember the Chicago mobster, AI Capone? He wasn't sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the money he earned in his self-employed endeavors.
When the IRS calls for an audit its only purpose is to collect more tax money with some interest and penalty to boot. Criminal activity is not suspected. But if you are caught in outright cheating -- particularly in deliberately failing to report a significant amount of income -- the IRS will not hesitate to prosecute you.
If you are ever audited, and the IRS refuses to accept some of your deductions, you will have to pay the additional tax on the lost deductions and interest on that additional tax amount. You also may have to pay a late payment penalty of up to 25% of the tax owed. You'll be out some money, but you've simply had a legitimate disagreement with the IRS about a deduction: you will not be hit with criminal charges or fraud penalties.
A fraud penalty can be as high as 75% of the tax owed. That is in addition to the tax owed plus interest.
I think you better have a talk with Dad. Or maybe buy him my book for his birthday.
Best,
Fayetteville, GA
Well, Tiffany, Dad is wrong.
Hiding income is fraud. You are breaking the law if you do not claim all your income.
Hiding income does not give a positive, professional image of your business. It raises questions, such as whether you are a legitimate business. Do you want to be looked upon with respect in your business community?
There are many ways for the IRS to verify income. In an audit of an indie, the IRS does not simply look at 1099s. Every bank statement is reviewed and must match income. If the money coming in on the statements doesn't match the income on your tax return you must be able to explain why. If your lifestyle is Porsche but your income is Hyundai, then the IRS digs deeper.
Let's say that Dana's Dance school hired you to teach and Dana's bookkeeper incorrectly completed your 1099 with $500 income instead of $5,000. In an audit Dana would use $5,000 as her teaching expense. And she can prove it via checks or fees from her students. If the enterprising IRS auditor decided to check your return and found only $500 claimed as income you'd be in trouble. Is Dad going to pay your penalties and interest for you?
I say in my book, Self-employed Tax Solutions : The IRS is not a morality agency, it is a monetary agency. It doesn't care what you do for a living as long as you pay taxes on the income you make doing it. If you make your living as a hit man or a lady of the night or a drug dealer, be sure to pay the IRS its fair share. Remember the Chicago mobster, AI Capone? He wasn't sent to prison for murder, bootlegging or racketeering; he was convicted of tax evasion for not reporting the money he earned in his self-employed endeavors.
When the IRS calls for an audit its only purpose is to collect more tax money with some interest and penalty to boot. Criminal activity is not suspected. But if you are caught in outright cheating -- particularly in deliberately failing to report a significant amount of income -- the IRS will not hesitate to prosecute you.
If you are ever audited, and the IRS refuses to accept some of your deductions, you will have to pay the additional tax on the lost deductions and interest on that additional tax amount. You also may have to pay a late payment penalty of up to 25% of the tax owed. You'll be out some money, but you've simply had a legitimate disagreement with the IRS about a deduction: you will not be hit with criminal charges or fraud penalties.
A fraud penalty can be as high as 75% of the tax owed. That is in addition to the tax owed plus interest.
I think you better have a talk with Dad. Or maybe buy him my book for his birthday.
Best,
June
PS: The people who pay you are not your employers. Only employees have employers. Employees receive W-2s not 1099s.
PS: The people who pay you are not your employers. Only employees have employers. Employees receive W-2s not 1099s.
Tuesday, July 17, 2007
Tax Anxiety
Caroline, from Manhattan, sent a request for my expense list , noting her profession as “artist/home studio/day job (also 1099) (yikes).” She said she’d been doing it for 4 or 5 years.
When I sent the expense list to Caroline I included a note: "Yikes! Yours is not a unique situation."
I thought the correspondence that followed would be of interest to many of you. Here it is.
Thanks June.
It was a step up for me to hire an accountant several years ago. She has a good heart but severe anxiety issues.
She keeps leaving messages on my cell phone marked “urgent" saying that for 2007 I’m going to owe 15K etc. I haven't filed this year yet but last year I paid about $900.
If I’m making almost the same amount of money, why would it jump to such crazy numbers? Is it just that I’m naive?
I have two questions:
How much do you charge? I made 23k last year on a 1099, have a home studio -- my entire living room plus closets etc.
AND
Can I use the $41.00 a week expressbus/subway pass as a deduction? I use it to take me to absolutely everything. Cabs are just too expensive anymore.
Thanks for all the info.
Best regards,
Caroline
Hi Caroline,
"... she has a good heart but severe anxiety issues." Were she your friend you'd help her. As your tax advisor, get rid of her. .
Saying that you owe 15K means nothing because it's a stand alone piece of info. Sort of like my asking you if the blue watercolor that I have is a good painting.
Also, there is no way that you could owe $15,000 if your only income were $23,000 gross self-employed income.
Subway expense is deductible if you are going from one business location to another. Here's lots of info on that if you check out the auto expenses category on my blog.
Based on your questions and accountant situation, before you make any decisions about a new tax pro, you need information -- more than I can give in an email. The least expensive, easiest way to get a basic understanding of indie taxes is to read my book, Self-employed Tax Solutions. Here's a link to the table of contents . See what you think. And here's a link to purchasing -- about $13 on Amazon.
I can send you more information on my services and how I work with new clients, however, I think your first step should be in the direction of educating yourself.
Best,
June
Thank you, June. You are very kind and generous with your time. I will buy the book and take it from there. You have really helped me just with this e-mail. because when it comes to money, I just assume I’m making the wrong and bad choices.
All the best,
Caroline
You are most welcome, Caroline.
When in doubt about your own skills with money, think about putting a paintbrush or sculpting clay in the hands of a typical accountant. What would you end up with?!
Always ask questions when interviewing a tax pro . Then make your decisions not just on the answer but how your question was received and how the answer was presented.
Good Luck!
June
PS
I might use our email on my blog. If I do I won't use any identifying info.
June -- That is soo great, transforming anxiety and angst into something that could help others with number dysfunction. I look forward to seeing it on your site. Also I have forwarded the blog/site address to lots of friends with similar fear.
I eagerly await the arrival of your book.
Happy holiday!
Caroline
When I sent the expense list to Caroline I included a note: "Yikes! Yours is not a unique situation."
I thought the correspondence that followed would be of interest to many of you. Here it is.
Thanks June.
It was a step up for me to hire an accountant several years ago. She has a good heart but severe anxiety issues.
She keeps leaving messages on my cell phone marked “urgent" saying that for 2007 I’m going to owe 15K etc. I haven't filed this year yet but last year I paid about $900.
If I’m making almost the same amount of money, why would it jump to such crazy numbers? Is it just that I’m naive?
I have two questions:
How much do you charge? I made 23k last year on a 1099, have a home studio -- my entire living room plus closets etc.
AND
Can I use the $41.00 a week expressbus/subway pass as a deduction? I use it to take me to absolutely everything. Cabs are just too expensive anymore.
Thanks for all the info.
Best regards,
Caroline
Hi Caroline,
"... she has a good heart but severe anxiety issues." Were she your friend you'd help her. As your tax advisor, get rid of her. .
Saying that you owe 15K means nothing because it's a stand alone piece of info. Sort of like my asking you if the blue watercolor that I have is a good painting.
Also, there is no way that you could owe $15,000 if your only income were $23,000 gross self-employed income.
Subway expense is deductible if you are going from one business location to another. Here's lots of info on that if you check out the auto expenses category on my blog.
Based on your questions and accountant situation, before you make any decisions about a new tax pro, you need information -- more than I can give in an email. The least expensive, easiest way to get a basic understanding of indie taxes is to read my book, Self-employed Tax Solutions. Here's a link to the table of contents . See what you think. And here's a link to purchasing -- about $13 on Amazon.
I can send you more information on my services and how I work with new clients, however, I think your first step should be in the direction of educating yourself.
Best,
June
Thank you, June. You are very kind and generous with your time. I will buy the book and take it from there. You have really helped me just with this e-mail. because when it comes to money, I just assume I’m making the wrong and bad choices.
All the best,
Caroline
You are most welcome, Caroline.
When in doubt about your own skills with money, think about putting a paintbrush or sculpting clay in the hands of a typical accountant. What would you end up with?!
Always ask questions when interviewing a tax pro . Then make your decisions not just on the answer but how your question was received and how the answer was presented.
Good Luck!
June
PS
I might use our email on my blog. If I do I won't use any identifying info.
June -- That is soo great, transforming anxiety and angst into something that could help others with number dysfunction. I look forward to seeing it on your site. Also I have forwarded the blog/site address to lots of friends with similar fear.
I eagerly await the arrival of your book.
Happy holiday!
Caroline
Tuesday, April 24, 2007
What a mess!
Hi June,
I'm in a real tax mess and need help getting out of it BIG-TIME!
I've been self employed for about 16 of the last 20 years and got in trouble in my early 20's with the IRS by not having enough money at the end of the month to pay taxes on my meager earnings, this went from about 1986 - 1995 (very low yearly income).
Then I was an employee for about 3 years until I "discovered" the Internet and realized that there's a TON of money to be made on it. I spent from about 1999 - 2002 struggling along and from 2002 thru the present, my income has increased substantially, however, because of all my prior problems, I've neglected to straighten things out with the IRS, mainly out of fear, however, I know I'm digging a deeper hole.
Even with the fear, I've tried a few times to resolve everything, however, it always required too much money and with low income (back then) liens and bad credit, it was impossible to satisfy the IRS, and honestly, I don't think the two CPAs I was working with knew enough about being self employed.
Right now, I need to find a way to protect my income (Corporation/Trust?) and I need to start getting this mess straightened out, buy a home and stop paying rent at a higher rate than a mortgage.
Is there any such thing as a self employed tax expert that can protect my income, work with the IRS on my behalf and get me back on track for the first time in 20 years, my wife and I would really appreciate it, this drives her nuts ;-)
Thanks for reading.
Eric
Hello Eric,
I did my best to figure out just what you're saying and I attempted to ascertain just what services and/or help you're looking for. Here's what I think:
Some years you have and some years you have not filed a tax return.
Which years are which is not clear.
You owe the IRS [and state(s)?] back taxes. 16 years!!! Really?
How much you owe and to whom for which years is not clear.
"Protect my income" doesn't mean anything. It's a term tax novices like to throw out.
Do not:
Incorporate or set up a trust
Do:
Complete a list with the following column headings --
year -- tax return filed: yes or no -- $$ amount owe feds -- $$ owe state -- rec'd IRS notice -- if not filed: have records so can file
Bring the list with you to your meeting with the tax professional.
Yes, there is a tax pro who can help you. An accountant may be enough. Depending on how much you owe, you may also or instead need a tax attorney. Start by finding a local accountant-- one you can meet with face-to-face -- one who is familiar with offers-in-compromise. That's an offer to the IRS to pay a portion of what you owe. In exchange for paying less than you owe you promise the government to play by the rules from now on. The accountant must also be familiar with self-employeds. Contact your local Small Business Association or the business organization at your community college for a tax pro recommendation.
File all back tax returns.
Get on a payment schedule. You must keep that payment schedule or you'll lose the offer-in-compromise agreement.
Be really nice to your wife so she does't leave you for creating such a mess.
Good Luck!
June
I'm in a real tax mess and need help getting out of it BIG-TIME!
I've been self employed for about 16 of the last 20 years and got in trouble in my early 20's with the IRS by not having enough money at the end of the month to pay taxes on my meager earnings, this went from about 1986 - 1995 (very low yearly income).
Then I was an employee for about 3 years until I "discovered" the Internet and realized that there's a TON of money to be made on it. I spent from about 1999 - 2002 struggling along and from 2002 thru the present, my income has increased substantially, however, because of all my prior problems, I've neglected to straighten things out with the IRS, mainly out of fear, however, I know I'm digging a deeper hole.
Even with the fear, I've tried a few times to resolve everything, however, it always required too much money and with low income (back then) liens and bad credit, it was impossible to satisfy the IRS, and honestly, I don't think the two CPAs I was working with knew enough about being self employed.
Right now, I need to find a way to protect my income (Corporation/Trust?) and I need to start getting this mess straightened out, buy a home and stop paying rent at a higher rate than a mortgage.
Is there any such thing as a self employed tax expert that can protect my income, work with the IRS on my behalf and get me back on track for the first time in 20 years, my wife and I would really appreciate it, this drives her nuts ;-)
Thanks for reading.
Eric
Hello Eric,
I did my best to figure out just what you're saying and I attempted to ascertain just what services and/or help you're looking for. Here's what I think:
Some years you have and some years you have not filed a tax return.
Which years are which is not clear.
You owe the IRS [and state(s)?] back taxes. 16 years!!! Really?
How much you owe and to whom for which years is not clear.
"Protect my income" doesn't mean anything. It's a term tax novices like to throw out.
Do not:
Incorporate or set up a trust
Do:
Complete a list with the following column headings --
year -- tax return filed: yes or no -- $$ amount owe feds -- $$ owe state -- rec'd IRS notice -- if not filed: have records so can file
Bring the list with you to your meeting with the tax professional.
Yes, there is a tax pro who can help you. An accountant may be enough. Depending on how much you owe, you may also or instead need a tax attorney. Start by finding a local accountant-- one you can meet with face-to-face -- one who is familiar with offers-in-compromise. That's an offer to the IRS to pay a portion of what you owe. In exchange for paying less than you owe you promise the government to play by the rules from now on. The accountant must also be familiar with self-employeds. Contact your local Small Business Association or the business organization at your community college for a tax pro recommendation.
File all back tax returns.
Get on a payment schedule. You must keep that payment schedule or you'll lose the offer-in-compromise agreement.
Be really nice to your wife so she does't leave you for creating such a mess.
Good Luck!
June
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