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IRS's audit priority shifts, with "high-income" groups targeted Under growing pressure from Congress and the general public to do something dramatic about the growing ranks of tax shelters and tax cheats, the IRS has announced a major shift in its audit focus. Starting immediately, and scheduled to be running at full steam by January 2003, the IRS's best agents will be devoting themselves to identifying and rooting out tax abuse in the following "problem" areas:
Abusive schemes and promoter investigations; Offshore credit card abuse; and Non-filing by higher-income taxpayers. The IRS warns high-income taxpayers-those who have the resources for creating and investing in partnerships, trusts, and other tax liability reduction vehicles-to expect more intrusive examinations. Although one IRS official threw out $100,000-or-more as an income figure as one profile for someone within this new targeted area, realistically the IRS must narrow down this group further by using other "filters." The reality is that, although the IRS has a new focus, it will continue to operate with a limited audit staff that can only examine a small fraction of taxpayers. One new tool the IRS will use is the "Unreported Income Discriminate Index Formula" (UI DIF), which rates the probability of income being omitted and will allow the IRS to identify many more returns at high-risk for unreported income. Abusive schemes/offshore accounts The IRS will take action against abusive transactions' promoters. In addition to combating corporate tax shelter abuse, the IRS will pursue scams targeting individual taxpayers, some of which include:
Reparation claims; and Employment tax schemes. National Research Program The National Research Program (NRP) is part of the IRS's new initiative. Beginning this autumn, the IRS will review about 50,000 returns from the 2001 tax year in order to update statistics that will make its overall examination process more effective. According to IRS predictions, only 2,000 NRP examinations will check each line of a return, while the rest of the examinations will use less intrusive audit measures. Don't overlook these tax deductions Every year, millions of Americans pay higher taxes than necessary because they fail to take legitimate deductions. Don't overlook deductions which can help you minimize your income tax bill. For example: Be aware of new deductions for 2002. This includes the deduction for college tuition and related fees ($3,000 limit) and the deduction for teachers who buy their own classroom supplies ($250 limit). Since these are "above the line" deductions, you don't have to itemize deductions on your tax return to claim them. Keep track of your mileage. You can take a deduction for charitable driving. Keep a record of your trips and deduct 14 cents per mile as a charitable contribution. Mileage is also deductible at 13 cents per mile if you use your car to go for medical appointments or treatment. You'll have to itemize your deductions on your 2002 return to claim these mileage expenses. Write off job-hunting expenses. Job search expenses (such as costs of resume preparation, employment agency fees, and travel to a job interview) may be deductible as a miscellaneous itemized deduction, even if they don't produce a new job. You must be looking for a job in your current field, however, and it can't be your first job. Tax Tips for Transferring the Family Business Transferring control and ownership from one generation to another is one of the most daunting challenges facing family-owned businesses. In addition to the emotional issues involved, there's the critical need of minimizing the cost of the transfer. Many business owners worry about the estate tax, and whether they'll be able to transfer ownership without raiding the business's cash reserves to pay those hefty taxes. There are ways to control the tax burden, but you likely will need expert help. Here's a brief overview of some of the options facing a business owner seeking to transfer a business to another family member. Transferring to a spouse. Assets, including the value of a business, can pass tax-free from one spouse to another. So a spouse inheriting a business will incur no estate-tax liability. The estate tax itself starts at 18%, for estates with up to $10,000 in taxable assets (See your CPA to define "taxable assets"). It scales up to a marginal rate of 50% for estates with taxable assets of more than $2.5 million. But the tax doesn't kick in until the value of the estate exceeds $1 million for 2002 (This changes annually). So if all the value of your estate is in the business and the business is worth $1,010,000, you would pay less than $4,000 in estate tax on only that last $10,000. Of course, that's a gross simplification. Most people who have built businesses of significant value have a variety of options for passing on the business to other family members while further minimizing estate-tax considerations. These options include:
The value of the business can be transferred in the same way. You should work with a team of experts - perhaps an attorney, business appraiser, and especially your tax professional who are all well-versed in small-business issues - to determine the value of your business and the value of any transfer or gifting of minority shares in the business. Warning: Because valuations of closely held businesses are somewhat subjective, they are prominent on the Internal Revenue Service's radar screen. Neither you nor your heirs should cut corners on expert advice in this area. Making taxable gifts. It may make sense to give away part of the value of your company as a gift, even if the gift is subject to the gift tax. Why? Even if the gift is in excess of your $11,000-per-person limit, it might not result in a tax in the current tax year. That's because beyond the $11,000-per-person limit, you have a $1 million exemption from current gift taxes on taxable gifts. People don't generally get taxed when they give a taxable gift; the value is just applied against the $1 million exemption amount. If you use up the credit, you then pay a tax just as if it was an inheritance. So, theoretically, you could make a gift of a business worth $1 million to a relative (or anyone else) without incurring any gift tax. Of course, if you'd made taxable gifts previously, thus reducing the $1 million exemption, you'd be subject to a tax on at least part of the value of the transfer. Remember, the law keeps changing. Congress and the White House created an estate-planning monster with the tax bill approved in 2001. Among other features, while the special additional exemptions for some family-owned businesses phase out in 2004, the estate-tax exemption increases three times between now and 2009 before the estate tax is scheduled to be eliminated in 2010. Congress amazingly (or cynically) decided to minimize the apparent long-term cost of estate-tax reduction by saying that the exclusion would go back to the current $1 million exemption in 2011. But making long-terms plans based on current rules probably isn't prudent - not one tax or estate-planning pro expects the estate-tax law to remain unchanged for the rest of the decade. For now, the estate-tax-free transfer options for small businesses are getting broader - but the need for experienced and savvy professional guidance probably has never been greater. Top Ten Reasons Small Business's Fail Watching a small business die is never easy, if for no other reason than it can happen in so many different ways. And, no matter the cause, it's never funny. Here, in hopes that a bit of foreknowledge may make a dent in the death rate, are the top 10 reasons small businesses fail:
Bucking the general inflationary trend, the optional standard mileage rates to be used in 2003 for calculating the deductible costs of operating an automobile for business, medical or moving expenses are going down. This drop, recently announced by the IRS, is primarily the result of falling gasoline prices. New rates Effective as of January 1, 2003, the standard mileage rates for passenger vehicles will be:
For medical reasons: 12 cents per mile (down from 13 cents per mile in 2002). For deductible moving expenses: 12 cents per mile (down from 13 cents per mile in 2002). Depreciation/FAVR allowance As components of the standard business mileage rate, the following key tax figures are also revised for 2003:
A taxpayer who may have misplaced or lost a copy of his tax return that was already filed with the IRS or whose copy may have been destroyed in a fire, flood, or other disaster may need information contained on that return in order to complete his or her return for the current year. In addition, an individual may be required by a governmental agency or other entity, such as a mortgage lender or the Small Business Administration, to supply a copy of his or a related party's tax return. In such circumstances, you may obtain a copy of your tax return by filing Form 4506, Request for Copy or Transcript of Tax Form, along with the applicable fee, to the IRS Service Center where the return was filed. Also, tax account information based on the return may be obtained free of charge from IRS Taxpayer Service Offices. You may also request a transcript that will show most lines from the original return, including accompanying forms and schedules. Fees There is no charge to request a tax return transcript of the Form 1040 series filed during the current calendar year and the three preceding calendar years. For other requests, a fee of $23.00 per tax period requested must be paid in order to obtain copies of a return. Taxpayers seeking tax account information (such as adjusted gross income, amount of tax, or amount of refund) should contact their local IRS Taxpayer Service Office, which will provide the account information free of charge. Timing of requests A request for a copy of a return must be received by the IRS within 60 days following the date when it was signed and dated by the taxpayer. It may take up to 60 calendar days to get a copy of a tax form or Form W-2 information. If a return has been recently filed, the taxpayer must allow six weeks before requesting a copy of the return or other information. The IRS cautions that returns filed more than six years ago may not be available for making copies; tax account information, however, is generally available for these periods. You may be able to save some time by going directly to your tax return preparer for the information. Although a return preparer may retain a copy of the taxpayer's return, however, there is no absolute requirement to do so. Preparers must retain for three years either a copy of each completed return and claim for refund or a list of the names and taxpayer identification numbers of taxpayers for whom returns or claims have been prepared. Tax treatment of costs of starting a new businessAs a new business owner, you probably expect to incur many expenses before you even open the doors. What you might not know is how these starting up costs are handled for tax purposes. A little knowledge about how these costs will affect your (or your business') tax return can reduce any unexpected surprises when tax time comes around.Starting a new business can be an exciting, although expensive, event that finds you, the small business owner, with a constantly open wallet. In most cases, all costs that you incur on behalf of your new company before you open the doors are capital expenses that increase the basis of your business. However, some of these pre-opening expenditures may be amortizable over a period of time if you choose. Pre-opening expenditures that are eligible for amortization will fall into one of two categories: start-up costs or organizational costs. Start-up Costs Start-up costs are certain costs associated with creating an active trade or business, investigating the creation or acquisition of an active trade or business, or purchasing an existing trade or business. If, before your business commences, you incur any cost that would normally be deductible as a business expense during the normal course of business, this would qualify as a start-up cost. Examples of typical start-up costs include attorney's fees, pre-opening advertising, fees paid for consultants, and travel costs. However, deductible interest taxes, and R & D expenses are treated differently. Start-up costs are amortized as a group on the business' tax return (or your own return on Schedule C, if you are a sole proprietor) over a period of no less than 60 months. The amortization period would begin in the month that your business began operations. In order to be able to claim the deduction for amortization related to start-up costs, a statement must be filed with the return for the first tax year you are in business by the due date for that return (plus extensions). However, both early (pre-opening) and late (not more than 6 months) submissions of the statement will be accepted by the IRS. Organizational Costs Organizational costs are those costs incurred associated with the organization of a corporation or partnership. If a cost is incurred before the commencement of business that is related to the creation of the entity, is chargeable to a capital account, and could be amortized over the life of the entity (if the entity had a fixed life), it would qualify as an organizational cost. Examples of organizational costs include attorney's fees, state incorporation fees, and accounting fees. Organizational costs are amortized using the same method as start-up costs (see above), although it is not necessary to use the same amortization period for both. A similar statement must be completed and filed with the company's business tax return for the business' first tax year. Before you decide which, if any, pre-opening expenditures related to your new business you'd like to treat as start-up or organizational costs, please contact the office for additional guidance |