Tax Attic

Useful tax tips and information from Jerry Coon of Action Tax Service.

Tax Attic

May 23, 2013 // 0 Comments

The Michigan Chapter of the National Association of Tax Professionals holds its annual state-wide convention in May after the end of the tax season. Last week, one hundred and ten tax professionals made the trek for the convention to the Eagle Crest Marriott in Ypsilanti/Ann Arbor. It’s always interesting to talk to other preparers and compare notes regarding the recently completed tax season. It’s always good to see friends of many years and to note they are still walking, talking, and able to take nourishment after another grueling tax season. Not one of us has figured out how to keep from getting a year older. We might have figured out how to deal with getting a year older just not how to stop the affect of that additional year from happening. Most said it was a late starting tax season. Normally we start e-filing returns on January 16. This year, the Internal Revenue Service didn’t accept returns until January 30. Due to recent adverse publicity, we might now think that perhaps it was because they had shifted manpower from the returns processing unit over to the non-profit applications processing unit. Even on January 30, they only accepted a limited number of returns. Most returns couldn’t be filed until late February or well into March. In addition, in an effort to keep from filing a string of corrected statements, many financial companies, such as Edward D. Jones and Merrill Lynch elected to ask for and received permission from the IRS to delay sending out their initial brokerage statements. The net result is that many preparation firms like Action Tax Service saw an increased level of activity the closer it got to April 15. That is not how the tax season usually develops. The further net result, and this seems to have happened across the state, is that more extensions were filed this year than in previous years. April 15 just got here too fast this year. As the saying goes, better luck next year! The Chapter always imports at least one talented tax speaker from out-of-state to come to this convention and this year was no exception. We do have a number of great speakers who are based in Michigan but it’s always nice, from time […]

Tax Attic

May 16, 2013 // 0 Comments

One of the largest businesses in the world recently issued its 2012 financial data. It was an outstanding report but the stock market barely noticed. In its fiscal year beginning October 1, 2011 and ending September 30, 2012, it had revenues collected of just under 2.5 trillion dollars based on servicing 237 million clients. It spent forty-eight cents to collect $100 of revenue. Forty-eight cents! That’s a profitable operation. Of course, the business in question only has one share-holder so it’s easy to see why the stock market didn’t shoot up when the data was released. The business in question is the Internal Revenue Service. I would imagine when the IRS issued its 2012 fiscal year report called the “2012 Data Book”, the most interested parties were those people who deal with the IRS on a professional basis such as Certified Public Accountants, Enrolled Agents, Attorneys, Registered Tax Return Preparers, and other tax professionals. In reality, however, the report contains details of interest to all taxpayers. In addition to all of the financial data they report, the IRS also reports how many returns were filed by category; how may returns were audited by category; how many people were assisted by the IRS; how many penalties were assessed by category; and how many criminal investigations were initiated and the final result of those investigations. For example, as stated above, the IRS processed 237 million total business and individual tax returns. 145 million were filed electronically. 146 million individual tax returns were processed, an increase of 1.8%, with 120 million receiving refunds. Of particular interest to all interested parties, the IRS audited approximately 1% of the individual tax returns filed. About 25% of those audited returns were completed in person. The other 75% were correspondence audits in which the taxpayer gets a letter to provide proof of a deduction via the mail. The IRS projects that the correspondence audit percentage will grow in the future because of the demonstrated cost savings. It’s cheaper to audit a taxpayer by mail than to pay a revenue agent, revenue officer, or tax examiner to meet with the taxpayer in person. By category, 32.9% or 487,408 of the returns audited contained the Earned Income Tax Credit. That should also be instructive […]

The answer to the question I’ve heard one hundred times

May 9, 2013 // 0 Comments

I have answered this question about one hundred times this last tax season and promised to write an article about it soon after April 15. The question concerned the differences between a Roth Individual Retirement Account (IRA) and a Traditional IRA. There has been much discussion about tax rates going up. My personal opinion is that unless our federal government figures out a way to stop spending over a trillion dollars more than it takes in every year, the rates inevitably will go up. Whether you are a Republican, a Democrat, a Libertarian, a Tea Party member, a Socialist, a Communist, or a non-partisan who belongs to none of the above, you have to agree that something is wrong in Washington DC. The federal government continues to grow while the rest of the economy either shrinks or barely grows in an overall sense. When reality ultimately sets in, and that may happen when interest rates are allowed to rise, those tax rates may also jump up. That’s when the differences between the Roth and the Traditional IRA will become important. Let’s go over those differences. First, contributions to a Traditional IRA may be tax deductible. If deductible, the contributions will lower adjusted gross income (AGI) and that can be a distinct advantage. Most phase-outs of deductions and credits are based on AGI. By lowering AGI, more of a deduction may be allowed or more of a credit may be allowed. That can be a major factor in lowering a taxpayer’s final tax bill. Adversely, contributions to a Roth are never tax deductible. The amounts contributed to a Roth come from after-tax money while the amounts going in to the Traditional basically become pre-tax because they are deductible. The Traditional therefore gets its tax advantage up-front. Putting $5,000 into a Traditional today may get a deduction for $5,000 today. Putting $5,000 into a Roth today does not affect the tax return at all. Second, the Roth gets its tax advantage later when withdrawals take place because withdrawals from a Roth generally are not taxable. Non-taxable withdrawals include the original $5,000 as well as earnings as long as the rules are followed. For example, the original $5,000 grows to $20,000 in the Roth. The entire $20,000 can […]

Tax Attic

April 25, 2013 // 0 Comments

For tax professionals, the week after the end of tax season is a time of reflection. We try to analyze what went wrong during the season and celebrate what went right. To some extent, this was a particularly trying season. It’s easy to blame things on the federal government but this time, it really was the federal government’s fault, Congress in particular. When they passed the American Taxpayer Relief Act of 2012 on January 5, 2013, it contained over two hundred provisions that affected the 2012 tax year. I took my first income tax class in 1978 and started preparing returns in January, 1979. In those days, we prepared returns by hand so when Congress did make late changes, the Internal Revenue Service simply made changes to the instructions and told tax preparers to use, for example, line 21 of the Form 1040 or line 17 of the Schedule A or line 6 of the Schedule C, etc. etc. Well, today, hardly anyone does returns by hand and the IRS certainly doesn’t process all that many returns by hand either. We all use software. Our software has to seamlessly be integrated with the IRS’ software or, how shall we say it nicely, all hell breaks loose. I have to believe from the amount and frequency of software updates we received all tax season, this year was a software programmer’s nightmare. As late as 9pm on April 15, we encountered a glitch in the filing system. It did get straightened out before midnight but that was cutting it a bit close. In fact, that’s ridiculous. I don’t think it’s too much to ask Congress to stop making these late, late changes. They have all year; why wait until January 5 of the next year? Shame on them. Another situation that we encounter year round is one of clients not being able to locate copies of prior year tax returns. While it’s true that we live in the age of technology, taxpayers still have many reasons to have a paper copy of their tax return in their possession. Many people are taking advantage of the continued low interest rate environment to refinance property, perhaps for the second, third or fourth time. The bank or finance company wants […]

Tax Attic

April 18, 2013 // 0 Comments

April 16 is among my most favorite days of the year. Of course, for tax professionals, that’s the day after the last day of the tax season. Another tax season, my thirty-fourth, is in the books, so to speak. Over the years, I have developed a routine of sorts. I’m a fisherman that lives on the west bank of the Rogue River. I haven’t had the opportunity to fish since the tax season began. I do get to look at the Rogue every day and do think about fishing so one of my first stops is to purchase a fishing license. Now I can legally put on my waders and chase those elusive trout. As I’m looking out the window right now, it might be wise, however, to not step into the water this year. The water is high and fast; I’m slightly short and sixty years old; the river would win and I would probably stop rolling about where it intersects Rogue River Dr. I’m also a golfer that has been able to catch a few moments here and there of golf events on television like The Masters but hasn’t had the time to even hit a bucket of balls. So another part of my routine is to get out the golf clubs and make sure they have survived the winter. If it gets warm enough, I may go hit a few balls. Other years, my friends have been out playing for a few weeks now. This year, we will be starting on more of an even footing because the weather has been, to put it mildly, slightly lousy. We will be playing once the courses dry out that is. Another something I will be adding to my routine is taking a ride to the local Cabelas store. If you like shopping at Cabelas, being able to say “local Cabelas” has a nice ring to it. Driving thirty minutes is certainly easier than driving the couple of hours to Dundee or to Hammond. I haven’t been to new store so I’m looking forward to taking in the Cabelas experience. Deb has also created quite a list of items she would like me to get started working on so one of my stops is always […]

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