James L. Beddow, PC

The result of the Housing Assistance Tax Act of 2008, bank and other merchant service providers must begin issuing a Form 1099-K to anyone whose total gross receipts from credit card transactions exceeding $20,000 and 200 transactions in a calendar year. This will no doubt be a painful time for many online sellers that haven’t reported all of their income in the past, but this is a high floor for reporting.

There was a recent tax court case in which an IRS revenue officer who sold on eBay was assessed over $53,000 in tax, penalty and interest for sales on eBay for tax years 2004 and 2005.  What’s remarkable is that it went to tax court.  Did she somehow believe she didn’t have to report her income.

It’s important to remember that you’re required to report your income regardless of how much it is.

Have you ever wondered why your CPA keeps digging for answers until he understands a transaction or nitpicks you for the right details of a deduction? The IRS released IR-2010-82 on July 6, 2010, announcing the disbarment of a CPA. Here’s the announcement from the IRS website:

IR-2010-82, July 6, 2010

WASHINGTON — The Office of Professional Responsibility (OPR) has prevailed in an agency appeal involving issues which include the due diligence responsibilities of a CPA under the Rules of Practice before the IRS (Circular 230).  The May 28th decision of the Appellate Authority has upheld the Administrative Law Judge’s (“ALJ”) disbarment of CPA Tim W. Kaskey finding, among other things, that Kaskey failed to exercise due diligence in preparing tax returns for a corporation and its husband and wife shareholders.

“This is yet another decision highlighting that practitioners have a duty to the system as well as to their clients. Practitioners who do not take this duty seriously can expect to be held accountable,” said Office of Professional Responsibility (OPR) Director Karen L. Hawkins said.

Kaskey is a CPA and tax advisor who also prepared individual and corporate tax returns.

OPR alleged that Kaskey failed to exercise due diligence under Circular 230, section 10.22 when he failed to determine the correctness of the representations he made to the IRS on the tax returns of a corporation and its married shareholders.  OPR also alleged that Kaskey’s misconduct included a failure to comply with the requirement to advise clients of potential penalties and any opportunities to avoid such penalties by disclosure contained in Circular 230, former section 10.34(b) (now section 10.34(c))

When Kaskey failed to respond, or appear, at the administrative proceeding, the ALJ deemed the allegations against Kaskey admitted and entered a default judgment for disbarment.  Kaskey appealed. On review, the Treasury Appellate Authority agreed that disbarment was proper.  Kaskey defended against the due diligence allegations by arguing that his clients had misrepresented their income to him. The Appellate Authority observed that there was “a great deal of evidence reflecting the lack of due diligence by [Kaskey] in the preparation of these returns…[and that] “it was inconceivable that [the individual taxpayers] could pay their living expenses based on the income reported on their returns.”

“Practitioners who think OPR isn’t serious about due diligence should take heed,” added OPR Director Hawkins.  “Practitioners may not ignore the implications of information already known, and must make reasonable inquiries if the information furnished by a client appears to be incorrect, inconsistent, or incomplete.”

This is not good news. (Disclaimer: At this point, this is all third party information. While I believe the sources are accurate, there has been no announcement from the IRS.)  It appears that the IRS has started requesting electronic QuickBooks files in examinations of entities that use QuickBooks and supposedly the IRS will make an announcement to practitioners in the next week or so. A CPA that I know personally in California stated that he has a audit document request in which a Revenue Agent referred to an IRS national directive when requesting the QuickBooks file. I’ve also learned that the IRS assembled a QuickBooks training manual for Revenue Agents in in January of this year and that the IRS has obtained a large number of QuickBooks user licenses from Intuit.  The National Association of Enrolled Agents allowed a subcommittee of their organization to review the training manual for the IRS.

The implications of this are far-reaching. Having the entire QuickBooks file available means than an agent could conduct an audit fishing expedition over any number of years that the file contained.  Placing a password protected closing date on the QuickBooks file would be virtually useless since those passwords are easily busted.

The Georgia Department of Revenue electronic payments system is operational again after a June 7 flood took them offline. This flood was apparently caused by an overheated appliance setting off a sprinkler head.  This begs the questions why are they using water sprinklers in a computer room and hasn’t anyone in the department of revenue considered disaster planning?  People in private industry would lose their job for that kind of nonsense. Anyway, they can take your money electronically again.

Due to computer equipment that overheated on Sunday afternoon which activated a sprinkler system and resulted in flooding on four lower floors, the Department of Revenue headquarters building experienced a computer system outage which disabled online systems and halted ground floor customer service operation on Monday.

Following is the status of certain DOR online tax systems as of Tuesday afternoon:

Georgia Registration Tag and Title System (GRATIS):

– Taxpayers cannot renew their annual tag registration online from a personal computer.

– GRATIS is fully functional, however, at the DOR’s Tradeport Processing Center and at all County Tag Offices throughout the state.

Alcohol Liquor Licenses:

– The Department will issue temporary liquor licenses that will be valid through June 30.  DOR staff at 1800 Century Boulevard are available to process liquor license applications and receive payments.

Tax Payments for Online E-File/E-Pay, Refund Inquiry, and General Inquiries:

– Tax payments for online e-file/e-pay can be mailed to the Department or delivered to any DOR Regional Office.  Taxpayers who make a diligent effort to pay timely will not be assessed a penalty.

I’ll post updates here as I receive them.

From CBS Money Watch, here’s some things not to do on your tax returns unless you can support them.  The IRS has a top secret formula for choosing returns for audit.  And remember less than 1% of returns are audited, but that’s 3% of returns with incomes over $200,000.   New tax law changes aren’t in the IRS formula yet. This includes the first time homebuyer credit, the home buyer tax credit and the new car sales tax deduction. The first time homebuyer credit program is loaded with fraud, so much that Congress amended that law to require a closing statement be submitted with the returns that contain that credit.  Here’s their list of things to avoid unless you have good records and can support the deduction:

• Business Use of Your Car – If you’re claiming this deduction you should have a mileage log to support the business use of your car. Anything less is likely unacceptable in an audit.
• Home Office Deductions- This one isn’t worth the trouble but some people can’t resist it.
• High Itemized Deductions like charitable contributions and miscellaneous deductions  for your income
• Non-Cash Charitable Contributions – The last great place on an individual return to lie and the IRS knows it.
• Investment Income Discrepancies
• Math Errors
• Home Buyer Credit
• New-Car Sales Tax Deduction

At the end of the day, audits, audit representation and penalties are expensive.

As I’ve written before, the states are becoming more and more aggressive about collecting taxes from non-residents as the economy has declined. Tax collections in many states are extremely low so states like California (of course) and Connecticut are exchanging information with the Internal Revenue Service in order to identify where money was earned.  Here’s a detailed article in the New York Times  detailed their efforts. Real estate transactions and detailed employee time tracking records discovered during payroll audits are leading to letter to non-residents. The shortcut is to file the non-resident tax return, then take the available credits for out-of-state taxes on your residential tax return.

Beginning in February, 2010, the IRS will begin a new round of audits in its National Research Program. These will be detailed examinations designed to determine the extent businesses comply with employment tax rules. The IRS uses the results to set statistical metrics used to make choosing returns to audit more efficient.  Supposedly the IRS will focus on four areas:

• S Corporation officer salaries and compensation
• Work classification issues – The classic independent contractor vs. employee issue that I’ve written about previously.
• Fringe benefits accounting and documentation for company cars.
• Accountable vs. Nonaccountable employee reimbursement plans. If done properly these are tax free, but taxpayers apparently abuse these.

Call me if your employment records aren’t and plans are not in order. There are many things you can do to reduce the bite of an audit, but it’s critical you be proactive about it. Once the notice from the IRS arrives, it’s too late.

The IRS has published their tips to choosing a tax preparer:

1. Check the person’s qualifications Ask if the preparer is affiliated with a professional organization that provides its members with continuing education and resources and holds them to a code of ethics.

2. Check on the preparer’s history Check to see if the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs or the state’s bar association for attorneys.

3. Find out about their service fees. Avoid preparers that base their fee on a percentage of the amount of your refund or those who claim they can obtain larger refunds than other preparers.

4. Make sure the tax preparer is accessible. Make sure you will be able to contact the tax preparer after the return has been filed, even after April 15, in case questions arise.

5. Provide all records and receipts needed to prepare your return.  Most reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items.

6. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

7. Review the entire return before signing it Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

8. Make sure the preparer signs the form.  A paid preparer must sign the return as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return. The preparer must also give you a copy of the return.