Category: IRS

Red Flags for Tax Auditors

July 25, 2019
Taxes

No one wants to see an Internal Revenue Service (IRS) tax auditor show up at their door. In 2018, the IRS budget is roughly $1 billion less than it was 8 years ago, down from $12.1 billion in 2010 to $11.2 billion. And even though the number of audits has dropped 40 percent from 2010 to 2017, an IRS tax audit remains a fear for many individuals.[i]

The IRS can’t audit every American’s federal tax return, so it relies on guidelines to select the ones most deserving of its attention. Here are six flags that could make your tax return ripe for an IRS audit.

The chance of an audit rises with income. According to the IRS, less than 1% of all individual taxpayer returns are audited. However, the percent of audits rises to over 1.5% for those with incomes between $200,000 and $1 million who attach Schedule C and is over 4% for those making more than $1 million annually.[ii]

If this year’s 1040 deviates greatly from last year’s, that could raise a red flag. The IRS has a scoring system called the Discriminant Information Function (DIF) that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The agency does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return data is within the range of other taxpayers with similar incomes.[iii]

If your business passes for a hobby, you could be scrutinized. Taxpayers who repeatedly report yearly business losses on Schedule C increase their audit risk. In order for the IRS not to consider your business as a hobby, it typically needs to have earned a profit in three of the last five years.²

Not fully reporting your income boosts the chances of an audit. The IRS receives copies of all of your 1099 and W-2 forms. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.²

Alimony discrepancies between exes can raise eyebrows. When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return, but alimony income goes unreported on the other party’s return.² Keep in mind that The Tax Cuts and Jobs Act repealed the alimony deduction after December 31, 2018.

If you claim rental losses, you had better be a real estate professional. Passive loss rules prevent deductions of losses on rental real estate, except in the event you are actively participating in a property’s management as a developer, broker, or landlord (the deduction is limited to $25,000 and begins to phase out when adjusted gross income exceeds $100,000) or you are devoting more than 50% of your working hours to this activity. This is a deduction to which the IRS pays keen attention.²

To learn more about CapSouth and the services we provide, call our office at 800.929.1001 or visit our website at www.capsouthwm.com

CapSouth Wealth Management – Dothan, AL, Atlanta, GA, McDonough, GA, Charlotte, NC

The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Investment advisory services are offered through CapSouth Partners, Inc., dba CapSouth Wealth Management, an independent registered Investment Advisory firm. Information provided by sources deemed to be reliable. CapSouth does not guarantee the accuracy or completeness of the information. This material has been prepared for planning purposes only and is not intended as specific tax or legal advice. Tax and legal laws are often complex and frequently change. Please consult your tax or legal advisor to discuss your specific situation before making any decisions that may have tax or legal consequences.

This article contains external links to third party content (content hosted on sites unaffiliated with CapSouth Partners). The policies and procedures governing these third-party sites may differ from those effective on the CapSouth company website, as outlined in these Disclaimers. As such, CapSouth makes no representations whatsoever regarding any third-party content/sites that may be accessible directly or indirectly from the CapSouth website. Linking to these third-party sites in no way implies an endorsement or affiliation of any kind between CapSouth and any third party, including legal authorization to use any trademark, trade name, logo, or copyrighted materials belonging to either entity.

[i] https://www.washingtonpost.com/business/economy/your-chances-of-an-irs-audit-are-way-down-but-keep-it-on-the-up-and-up/2018/04/06/cb6c5794-3779-11e8-9c0a-85d477d9a226_story.html?utm_term=.77485a954004

[ii] https://www.kiplinger.com/slideshow/taxes/T056-S001-red-flags-for-irs-auditors/index.html

[iii] https://www.cpapracticeadvisor.com/news/12418908/how-to-prepare-your-clients-for-an-irs-tax-audit

IRA Withdrawals that Escape the 10% Penalty

March 26, 2019
Guidance, IRA, IRS

An IRA, or Individual Retirement Account, is a tax-advantaged account that is subject to special rules regarding contributions and withdrawals. One of the central rules of IRAs is that withdrawals prior to age 59½ are generally subject to a tax penalty.

Yet, policymakers acknowledged that extenuating circumstances might require access to these savings. In appreciation of this, the list of exceptions for waiving this penalty has grown over the years.

Penalty-Free Withdrawals

Outlined below are the circumstances under which individuals may qualify to withdraw from an IRA prior to age 59½, without a tax penalty. Ordinary income tax, however, is generally due on such distributions.[i]

Death – If you die prior to age 59½, the beneficiary(ies) of your IRA may withdraw the assets without penalty. However, if your beneficiary decides to roll it over into their IRA, they will forfeit this exception.[ii]

Disability – Disability is defined as being unable to engage in any gainful employment because of a mental or physical disability, as determined by a physician.[iii]

Substantially Equal Periodic Payments – You are permitted to take a series of substantially equal periodic payments and avoid the tax penalty, provided they continue until you turn 59½ or for five years, whichever is later. The calculation of such payments is complicated, and individuals should consider speaking with a qualified tax professional.[iv]

Home Purchase – You may withdraw up to $10,000 toward the purchase of your first home ($20,000 for a married couple). You cannot have owned a home within the last two years.³

Unreimbursed Medical Expenses – This exception covers medical expenses in excess of 10% of your adjusted gross income.³

Health Insurance – After a job loss, there are rules in place that allow the purchasing of health insurance, without penalty.³

Higher-Education Expenses – Funds may be used to cover higher-education expenses, such as tuition, student fees, textbooks, supplies, and equipment. Only certain institutions and associated expenses are permitted.³

Active Duty Call-Up – Reservists who make an IRA withdrawal during a period of active duty of 180 days or longer do not have to pay a 10% early withdrawal penalty.³

As always, be sure to speak with a tax professional about your specific situation. Contact www.capsouthwm for more information.

[i] https://www.marketwatch.com/story/gearing-up-for-retirement-make-sure-you-understand-your-tax-obligations-2018-06-14

[ii] https://www.investopedia.com/articles/personal-finance/102815/rules-rmds-ira-beneficiaries.asp

[iii] https://money.usnews.com/money/retirement/slideshows/ways-to-avoid-the-ira-early-withdrawal-penalty

[iv] https://www.investopedia.com/articles/retirement/02/112602.asp

Social Security: By the Numbers

February 27, 2019
Retirement Planning, Social Security, Taxes

Social Security has been a pillar of retirement life for several decades, but how much do you really know about it? Here are a handful of facts that might surprise you:

The Social Security trust fund exceeds the gross domestic product of every country in the world except: China, the United States, India, Japan, Germany, Russia, Indonesia, and Brazil.[i]

For 61% of retirees, Social Security is a major source of income.¹

Benefits are subject to federal income taxes, but it wasn’t always so. Amendments to the Social Security Act made benefits potentially taxable beginning in 1984.¹

Benefits are determined by your average earnings during a lifetime of work, based on your 35 highest-earning years.¹

If you receive Social Security, you no doubt welcome cost-of-living-adjustments (COLAs) to your benefits. Did you know that Social Security COLAs once required an act of Congress? That was the case before 1975, when they were finally pegged to advances in the Consumer Price Index.¹

In the middle of 2018, more than 1 in 6 Americans were collecting Social Security benefits. Older Americans constitute about 80% of Social Security recipients, and their average monthly benefit in June 2018 was $1,413.[ii]

When should you begin taking Social Security? That may depend on several factors, but many people choose to claim benefits as soon as they are eligible. You can receive benefits beginning at age 62, but if you take them before reaching Social Security’s Full Retirement Age (67 for those born in 1960 or later), your monthly benefit will be fractionally reduced. You can wait until age 70 to claim your maximum potential benefit.

There are many factors to consider when determining the age at which you should begin taking benefits. We believe this decision should be made in conjunction with your overall financial planning process.

We would welcome the opportunity to discuss this further or to begin a conversation regarding your financial plan and how Social Security benefits fit into the plan. Contact CapSouth at 800.929.1001.

To read more about financial and retirement planning visit http://capsouthwm.com/services/financial-estate-planning/

[i] https://www.waddell.com/explore-insights/market-news-and-guidance/planning/9-facts-about-social-security

[ii] https://www.cbpp.org/research/social-security/policy-basics-top-ten-facts-about-social-security

Category: IRS

Red Flags for Tax Auditors

IRA Withdrawals that Escape the 10% Penalty

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