How Long Does The IRS Have To Audit My Tax Return?
In most cases the IRS has 3 years from the last day of the date your return was filed OR your return was due. However, this time limit, also known as the statute of limitations, can be extended under certain circumstances.
The statute of limitations can be extended for any of the following reasons:
- If substantial errors or omissions are found.
If the IRS identifies a substantial error (defined as an omission of income that exceeds 25% of the gross income reported on the return) on your tax return, they may have up to six years from the date the return was filed to initiate an audit. - If no return was filed or a fraudulent return was filed.
If you did not file a tax return or filed a fraudulent return with the intent to evade taxes, there is no statute of limitations. The IRS can initiate an audit at any time. - Extended agreements.
If you and the IRS enter into an agreement to extend the statute of limitations, such as for a specific issue under review, the timeframe for audit can be extended. - Financial Reasons.
The statute of limitations can also be affected by certain actions that put a hold on IRS collections activities. Examples include a submission of an Offer In Compromise, Bankruptcy Filing, Consideration of an Installment Agreement by the IRS to name a few.
It’s a good idea to have a tax professional review your information if there is a question as to when the stature of limitation for audits and or the assessment of additional tax will be reached.
Taxes Are Voluntary Right?
WRONG. This is an old and false argument which the courts have dismissed time and time again.
U.S. taxes are not voluntary. The U.S. tax system is based on the principle of compulsory compliance, meaning that taxpayers are legally obligated to pay their taxes as required by law. The Internal Revenue Code establishes the tax laws and regulations that govern federal taxes.
Citizens and residents are generally required to pay taxes on their worldwide income, subject to certain exemptions, deductions, and credits as provided by the tax laws. Failure to comply with tax obligations can result in penalties, fines, and legal consequences.
Can’t Pay Your Taxes, What Can You Do?
If you can’t pay the taxes you owe, don’t just ignore the IRS. Instead consider your options.
The IRS offers a number of plans for those that can’t pay. These plans include: long and short-term payment plans, temporary collection delays for those experiencing financial hardships, and Offers In Compromise for those who can’t afford to pay the full amount in the foreseeable future.
Payment plans are known as Installment Agreements and will automatically be accepted by the IRS for amounts of $25,000 or less with payment periods of up to 24 months. Amounts greater than $25,000 and/or longer than 24 months will require you to supply additional information about assets, liabilities and current income but are also available for those that just can’t pay. You can file a request for an installment agreement on the IRS website or by filing IRS form 9465.
Just need more time? You may be eligible for a Temporary Delay or even a suspension of collections if you can’t pay because of lack of assets and income (due to a financial hardship like a job loss or medical condition). You can make a request for a Temporary Delay by calling the number on the IRS collection notice you will receive. If you need a temporary delay you will need to provide the information on IRS form 433A.
An Offer In Compromise allows qualifying taxpayers to settle their taxes due for less that the full amount owed, based on the quick sale value of their assets and income less allowable living expenses. This option can be complex and it will not work for taxpayers with assets, income or future income prospects. The final amount they IRS will accept is based on the present value of what the IRS could expect to collect from you over 5 years. It also requires all tax returns to be filed to date before submission and for you to stay current in tax filing and payment for a period of 5 year after the date of acceptance. If you violate these rules the IRS can reassess any tax forgiven. This option requires careful evaluation and may require the assistance of a tax professional.
The IRS knows that financial difficulties can arise, and these programs exist to assist those who need help so they can get back in compliance. But when tax liabilities are ignored, the IRS also has the means to take swift and decisive action to collect what is owed. They can seize assets, garnish wages and levy bank accounts. So be sure not to ignore IRS notice and unpaid taxes.
How To Properly Use Your Accounting System
Proper use of your accounting systems requires the system to be set-up properly. Set-up is a little different for each kind of business.
Set-up starts with having a chart of accounts that is designed for your business. The kinds of revenue and expenses that a dentist’s office will have are different than those of a plumbing contractor or that of a restaurant.
Once your system is set-up you need to use it properly, and make sure the date / information you enter is accurate and up to date. For example: recording sales, payments received and expenses paid by check, ACH of credit card then verifying bank and credit card information by reconciling them to the information you entered. Importing information directly form your bank or credit card means giving up the verification process, and often leaves holes in your systems, as to who was paid and what they were paid for. The IRS will require you to provide more than just a bank transaction code and bank or credit card statement. You also need to make provisions for holding on to receipts and invoices, as well as a way to track them back to your accounting systems and bank or credit card statements.
Use the data your accounting systems provides you a way to see how your doing plan, make business changes based on facts not supposition, be prepared for cash demands and do tax planning.
Accounting Systems
4 Things You Should Get From Your Accounting System
Business accounting is about more than just getting information to do your taxes. It should provide you with useful information that helps you understand how you are doing, provide a way to manage cash flow, prevent fraud, and do tax planning.
- Providing useful information to assist in decision making.
A good accounting system lets you track the revenue sources of your business and their profitability. For example, we have an Air Conditioning Contractor who thought that the new construction part of their business was the most profitable, as it created large sales and made the service part of their business look insignificant. When in truth once we set up their accounting system to track revenue and expenses by profit center, Construction vs Service, they found that service (with only 30% of the sales) produced 70% of their profit. - Managing cashflow is essential. Managing cash flow allows you to understand how much money you will need to meet obligations before it comes time to write the check and you discover there is no money in the bank. To do this you need to record expenses payable at the time of purchase along with the due date the expense needs to be paid. An up-to-date accounts payable system along with an up-to-date accounts receivable system are crucial to knowing how much cash you will need and when you will need it.
- Prevent fraud before it happens. Fraud prevention has become an important tool for every business. In a world where bank and credit card fraud are ever increasing, it’s important to verify charges to your bank and credit card accounts, and not just use what is on the bank statements. Recording your actual payments and charges when made gives you something to check the statements against so that unauthorized charges don’t slip through.
- Tax planning before tax time. Tax planning lets you take every legal advantage of the tax code, including setting up pensions, accelerating expenses, hiring relatives or your children, etc. The first thing you need to have when doing tax planning is the knowledge of just how much income you will have as taxable income. With that knowledge your tax professional can suggest strategies that are best for you.
An accurate up-to-date accounting system is the key to all of these things. There is no better way to use that information than to review it at least monthly so that you can adjust how you operate your business for changes in the market and profitability.
Garbage In Garbage Out
Accounting System Input Determines Accounting System Output
The first thing I learned about computers back in the days when programs were written on punch cards, was garbage in garbage out. This old adage is even truer today than it was when I learned over 40 years ago.
I was reminded of this fact the other day when a new client gave me access to his QuickBooks files and told me it was up to date. The problem was all of the data had been directly imported from his bank account. Most of the data was for items paid or receive through Zelle or using a business debit card. What was missing was the name of the person or business he paid, along with exactly what was paid for.
Without this information it was impossible to tell what was revenue and hence income for tax purposes and what were business expenses, along with how they should be classified for tax filing. Worse yet while all bank transactions were reported and we have a record of anything that went into or came out of the bank account, we had no way of know if any unauthorized transactions had taken place.
In today’s world we see fraudulent transactions in bank accounts on a weekly basis when we reconcile our client’s bank accounts. This has led us to help our clients recover tens of thousands of dollars for their banks.
There is a right way and a wrong way to use an accounting system. QuickBooks and other software are nothing more or less than accounting systems and just like the old adage if what you put in or import is garbage that when you get out will also be garbage (and of very little value).
Follow us to learn more about the proper use of accounting systems in a future post.
FICA Tax — An Explanation
Who the heck is FICA, and why is he getting my money?
That is the question my kids asked when they received their first paycheck. As I explained to them, and they will have to explain someday to their children, FICA is the money the government uses to pay older people Social Security and provide Medicare. People like grandpa and grandma. I won’t tell you what the kids said, I will leave that to your imagination.
I was asked this question aging recently by a reporter and had to give a little better answer, so here is what I said.
FICA is the tax that funds Social Security and Medicare. These two programs provide benefits to older Americans and people with disabilities. FICA was created during the Great Depression to help address the problem of poverty among the elderly. It continues to play an important role today by providing funding for Social Security and Medicare.
FICA taxes paid by employees, through withholding by employers, are matched by the employer and paid into the IRS. The tax rate is made up of two components. The first component is the Social Security piece which applies to earned income at a rate of 6.2% for employees and 12.4% for those that are self-employed. The second component is the Medicare component which applies to earned income at a rate of 1.45% for employees and 2.9% for those that are self-employed. The combined rate for both components is 7.65% for employees and 15.3% for the self-employed.
Are You Ready For A Bigger Meaner IRS?
With the IRS adding 87,000 employees, and many of these employees being assigned to compliance, the fact is you are going to be seeing more audits and more additional information requests for IRS.
While this may make many taxpayers nervous, worrying will not help. Instead, it’s important to get in the habit of documenting the items you claim on your tax returns.
For business owners this means keeping invoices and receipts, as well as making sure your accounting records show who you paid and why you paid them.
While you can download information directly from your bank to your accounting software with amounts it often does not include payee information or classification. Good accounting records require both. Sales journals need information showing who as well as how much and how payment was received.
Auditors will want more than just bank statements should an audit occur. Remember auto expense deductions also require mileage logs. Meals also require documentation as to who, what, where, and when along with a notation as to what business was discussed.
For individuals, it’s important to track income that is not reported on a W2 or 1099 such as tips. If you itemize you also need written receipts for charitable deduction of $250 or more and documentation for medical expenses, along with proof of taxes paid.
Need help understanding the records you need to keep? Speak to your tax professional and let them guide you. Tax pros can do more than just completing your tax return.
Don’t Be Mislead!
The IRS warns about Offer in Compromise (OIC) “mills” that often mislead taxpayers into believing they can settle a tax debt for pennies on the dollar.
These scammers mislead people who don’t meet the qualifications into paying excessive fees. While it is true that those that can’t pay may be able to reduce what they owe, it’s also true that those with the ability to pay, with income and or assets that could be used to pay the tax due.
IRS Warns High Income Taxpayers
The IRS warns high-income taxpayers about abusive transactions involving Charitable Remainder Annuity Trusts (CRATs) and monetized installment sales. These types of transactions can be abused by promoters of tax schemes with the taxpayer being on the hook for potential penalties.
These schemes can take many shapes, ranging from abusive deals involving syndicated conservation easements and micro-captive insurance arrangements. They can also involve an international component, such as hiding cash and digital assets offshore or using Maltese foreign individual retirement accounts or foreign captive insurance.
If a tax plan seems too good to be true, or the promoter tells you their plan is proprietary, or asks you to sign a non-disclosure agreement it might just be bogus. Before investing be sure to talk to an independent tax professional who is not affiliated with the promoter.