Short Sales Can Have Tax Consequences

When the outstanding debt against a property is more than the amount it is worth (often referred to as a "short sale" in the real estate industry), there can be tax consequences.

If the property is sold and a lender agrees to cancel the remaining debt, the amount forgiven is generally taxable income.

Related Links:

Publication 544, Sales and Other Dispositions of Assets
Form 4797, Sale of Business Property
Sale or Trade of Business Property
Real Estate

Reporting Capital Gains

In order to educate taxpayers about their filing obligations, the IRS has published several fact sheets. Fact Sheet, FS-2007-19, May 2007, provides information with regard to capital gains reporting. Incorrect reporting of capital gains accounts for part of an estimated $345 billion per year in unpaid taxes, according to Internal Revenue Service estimates.

Almost everything you own and use for personal purposes, pleasure, business or investment is a capital asset, including:

• Your home

• Household furnishings

• Stocks or bonds

• Coin or stamp collections

• Gems and jewelry

• Gold, silver or any other metal, and

• Business property

Read more...FS-2007-19, May 2007

Shredding Your Household Receipts

Here's a quick look at what to keep and what to toss:

Federal and state tax returns: Keep your tax returns forever. The IRS can do an audit on your return up to 3 years after the filing date, and up to 6 years, if they suspect fraud (as opposed to an error).

Investment information: For tax purposes, it’s important to know when you bought or sold an investment so you can calculate your profit or loss. You should keep info on the purchase of an investment until you’ve sold it, and then you may need to attach the receipts to your tax return. If you receive a year-end statement from your investment company, you may be able to use that as evidence of your profit or loss. After six years, you can shred all of the other documents.

Bank statements: If you’re audited by the IRS, you may need to prove what money went into and out of your checking and savings accounts. Bank statements and checks that have cleared (or photocopies of checks, if your bank sends you a sheet with miniature versions of your checks paid) should be kept for at least 7 years. Then, shred everything.

Retirement account statements: Keep your active retirement account statements in a file or three-ring binder. You’ll want to hold onto these for as long as you own the account. Three years after you close the account (either by liquidating it or transferring the cash to a self-directed IRA), you can shred the documents.

Mortgage/Home equity loan monthly statements: Keep your monthly statements for a year after you’ve paid them. Once you receive you annual statement, you can shred your monthly statements for the prior year. And, make sure you keep the annual statements. You’ll need them for your tax return.

Property tax statement: Keep this. You’ll need it to complete your tax return.

Home purchase/sale records: Keep these for at least seven years after you’ve sold your current home.

Insurance policies: Keep all of your insurance policy paperwork for at least three years after cancellation of the policy. After three years, shred all documents that contain your personal information, such as your name, address, phone number and social security number. The other documents can be tossed.

Medical records: Keep your medical records for one year after the insurance adjustments have cleared and the bills have been paid. If you have extraordinarily high medical bills, and will be claiming a deduction on your federal and state tax return, keep the medical bills for 7 years after you file the tax return. Then, shred everything that has personal financial information on it.

Credit card receipt: Toss after making sure your receipts match your credit card statement. Shred any receipts that contain your full credit card number.

Credit Card Statements: Make sure all the information is correct, and then shred. If you sign up online with your credit card company, you can access your statements electronically for up to 6 months after the payment is due.

Household receipts: Toss after paying the bills. If you enter receipts into an electronic financial software program, toss after you log your payments.

Utility bills: Shred after payment.

ATM receipts: Shred after you make sure the amount you withdrew or deposited matches the amount shown on your monthly bank statement.

Student loan statements: Shred after you’ve paid your monthly bills. Keep the annual statements (that tell you how much principal and interest you’ve paid during the previous year) until you’ve paid off the loan.

Airline boarding passes: Toss after you confirm you got the miles for the trip.
Extra checks from closed bank accounts - If you have extra checks lying around from bank accounts you’ve previously held be sure to shred them.

Shredding is an excellent way to protect your identity from being stolen. Another good way is to start having your bills sent to you through email rather than snail mail. With email, there’s little chance someone can rifle through your mailbox and steal a credit card statement. (Make sure you choose an email password that would be difficult, if not impossible, for someone to guess.)

Scams and Identity Theft

The Central Arizona Chapter of Enrolled Agents (CACEA) and the Internal Revenue Service has issued several consumer warnings on the fraudulent use of the IRS name or logo by scammers trying to gain access to consumers’ financial data in order to steal their assets. Fraudsters may use the IRS name because most consumers recognize it, have had prior communication with or from the IRS (such as receiving annual tax form and instruction packages) and have previously provided the IRS some financial data (such as that contained on tax returns).

As a general rule, the IRS does not send out unsolicited e-mails or ask for detailed personal information. Additionally, the IRS does not ask people for the PIN numbers, passwords or similar secret access information for their credit card, bank or other financial accounts.

Tricking consumers into disclosing their personal and financial data, such as secret access data or credit card or bank account numbers, is identity theft. Such schemes perpetrated through the Internet are called “phishing” for information.

The information fraudulently obtained is then used to steal the taxpayer’s identity and financial assets. Typically, identity thieves use someone’s personal data to steal his or her financial accounts, run up charges on the victim’s existing credit cards, apply for new loans, credit cards, services or benefits in the victim’s name and even file fraudulent tax returns.

Identity theft usually causes immediate financial losses for the victims, who may also encounter lingering credit and other problems as a result of the identity theft.
Identity theft schemes take numerous forms. Identity theft may be conducted by e-mail (phishing), standard mail, telephone or fax. Thieves may also go through trash looking for discarded tax returns, bank records, credit card receipts or other records that contain personal and financial information.

When the IRS learns about schemes involving use of the IRS name, it tries to alert consumers as well as authorities that can shut down the scheme, if possible.
The following are examples of recent schemes:

E-Mails claiming to come from tax-refunds@irs.gov, admin@irs.gov or other variations on the irs.gov theme told the recipients that they were eligible to receive a tax refund for a given amount. It directed recipients to claim the refund by using a link contained in the e-mail which sent the recipient to a Web site. The site, a clone of the IRS Web site, displayed an interactive page similar to a genuine IRS one; however, it had been modified to ask for personal and financial information that the genuine IRS interactive page does not require.

The Treasury Inspector General for Tax Administration (TIGTA) has reported that it found 12 separate Web sites in 18 different countries hosting variations on this scheme.

A bogus IRS letter and Form W-8BEN (Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding) asked non-residents to provide personal information such as account numbers, PINs, mother’s maiden name and passport number. The legitimate IRS Form W-8BEN, which is used by financial institutions to establish appropriate tax withholding for foreign individuals, does not ask for any of this information.

The CACEA wants to remind taxpayers that Enrolled Agents are held to U.S. Treasury Regulation and Federal and State laws as the security of personal and private information.

Scam - Soliciting Donations for Veterans

(Phoenix, Ariz. - May 18, 2007) Attorney General Terry Goddard today warned consumers to be wary of callers claiming to be from Arizona Veterans Hospital or Veterans Services asking for donations over the telephone.

The Attorney General’s Office has received information that individuals claiming to be associated with the hospital or veterans group are soliciting donations over the telephone to make food baskets for veterans.

This is a scam! The Carl T. Hayden VA Medical Center Hospital and the Arizona State Veterans Home do not solicit over the telephone and are not collecting money for food baskets. Goddard offered the following tips to consumers when donating to charitable organizations:

• Ask questions about the organization soliciting funds. A legitimate charity will be happy to provide information about its work.

• Be careful of charities with names that sound impressive or resemble those of other organizations. Some scam artists use names similar to reputable, well-known organizations to confuse donors.

• Do not make cash contributions. Always contribute by check. Make your check payable to the charity, never to the individual soliciting the donation.

• Remember to ask for a receipt and a statement that the contribution is tax deductible.

• Be very skeptical of anyone asking for an immediate donation by requesting your credit card number or bank account information over the telephone.

• Find out how the charity will use your donation. Ask for information about its programs and for a copy of its financial report. Ask what percentage of the funds will be used for the program and how much will be spent on administrative costs. Reputable charities will provide this information.

• Be wary of calls soliciting funds that coincide with highly publicized tragedies, such as devastating fires, floods or other dramatic events. Fraudulent fund raisers will try to exploit sympathy for those who suffered.

• If you have any doubts about a charity, check with the Secretary of State to ensure it is registered as a non-profit.

If you believe you have been a victim of fraud, please contact the Attorney General's Office in Phoenix at 602.542.5763; in Tucson at 520.628.6504; or outside the Phoenix and Tucson metro areas at 1.800.352.8431. To file a complaint in person, the Attorney General’s Office has 31 satellite offices throughout the state with volunteers available to help. Locations and hours of operation are posted on the Attorney G eneral’s Web site at www.azag.gov. Consumers can also file complaints on line by visiting the site.

76 Million E-files Sets Record

The recently completed 2007 tax filing season set a number of electronic records, highlighted by over 76 million electronically-filed individual tax returns and more than 140 million visits to IRS.gov, the Internal Revenue Service said today.

Read more...

Hiring a Tax Professional

It’s important for taxpayers to find qualified tax professionals if they need help preparing and filing their tax returns. Unqualified tax preparers may overlook legitimate deductions or credits that could cause clients to pay more tax than they should. Unqualified preparers may also make costly mistakes causing their clients to incur assessed deficiencies, penalties, and interest. Here are some suggestions to consider when hiring a tax professional:

• A paid preparer must sign the return as required by law.

• Avoid preparers who claim they can obtain larger refunds than other preparers. If your returns are prepared correctly, every preparer should derive substantially similar numbers.

• Beware of a preparer who guarantees results or who bases fees on a percentage of the amount of the refund. A practitioner may not charge a contingent fee (percentage of your refund) for preparing an original tax return.

• Understand that the most reputable preparers will request to see your receipts and will ask you multiple questions to determine your qualifications for expenses, deductions and other items. By doing so they have your best interest in mind and are trying to help you avoid penalties, interest or additional taxes that could result from an IRS examination.

• Choose a preparer you will be able to contact and one who will be responsive to your needs. Ask who will actually prepare the return before engaging services. Avoid firms where your work may be delegated down to someone with less training or some unknown worker. You should know exactly who works with your tax matters at all times and how to contact him or her; after all, you are paying for it. Determine if the preparer is exporting your return to a foreign country for preparation. Foreign countries do not have the same security and privacy laws as the United States nor is there any recourse should your information be compromised as a result of lax or nonexistent privacy procedures.

• Investigate whether the preparer has any questionable history with the Better Business Bureau, the state’s board of accountancy for CPAs, the state’s bar association for attorneys or the IRS Office of Professional Responsibility (OPR) for enrolled agents.

• Determine if the preparer’s credentials meet your needs. Is he or she an Enrolled Agent, Certified Public Accountant (CPA) or Tax Attorney? Only attorneys, CPAs and enrolled agents can represent taxpayers before the IRS in all matters including audits, collection actions and appeals. Other return preparers may represent taxpayers only in audits regarding a return that they signed as a preparer.

• Find out if the preparer is affiliated with a professional organization that provides or requires its members to pursue continuing education and holds them accountable to a code of ethics.

• Check IRS.gov for information regarding abusive shelters and other tax schemes and scams. Remember, if it sounds too good to be true, chances are it is.

• The IRS can help many taxpayers prepare their own returns without the assistance of a paid preparer. Before seeking a paid preparer, taxpayers might consider how much information is available directly from the IRS through the IRS Web site.

Unfortunately, unscrupulous tax return preparers do exist and can cause considerable financial and legal problems for their clients. Examples of improper actions by unscrupulous preparers include the preparation and filing of false paper or electronic income tax returns that claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions.

Tax evasion is both risky and a crime, punishable by up to five years imprisonment and a $250,000 fine. Remember, no matter who prepares a tax return, the taxpayer is legally responsible for all of the information on that tax return.

Report suspected tax fraud and abusive return preparers by completing Form 3949-A and mailing it or a letter with similar information to:

Internal Revenue Service
Fresno, CA 93888

Purchasing a Tax Deductible Boat or RV

Summer is here and for many families it’s time to head to the beach to enjoy some sun, surf, and sand, or to the mountains for a breath of fresh air. Have you been dreaming of owning your own boat or recreational vehicle (RV)? By meeting the criteria set by the IRS, you may be able to stop dreaming and actually buy that boat or RV and increase your itemized tax deductions, too.

Despite the many changes to the tax code, the rules have not changed for boats or RVs used as a "second home." To take a mortgage interest deduction, the debt must be secured by a qualified home. A qualified home can be your main home or a second home. A home includes a house, condo, mobile home, boat, or similar property that has sleeping, cooking, and toilet facilities—like an RV. “Secured” means that the lending institution holds the boat or motor home as collateral and could foreclose for nonpayment, i.e., a mortgage. Generally, the IRS allows homeowners to take a mortgage interest deduction as long as the loan is used to buy, build, or improve their main or second home, and their total mortgage debt is $1 million or less. A line of credit does not qualify as a secured loan.

Another financing option is to buy your boat or RV using a home-equity loan. According to IRS Publication 936, taxpayers can usually deduct the interest on a home equity loan, no matter how they use the proceeds, if the total home equity debt on their primary and second homes does not exceed $100,000.
 
Besides the mortgage interest, you can also deduct the personal property tax that you pay on boats and RVs. The personal property tax is the ad valorem portion—the portion of the fee based on the value of the property—of the license fee.

“Many taxpayers can increase their itemized deductions by purchasing a boat or motor home,” says Chuck Plake, EA. “Not only do you have the enjoyment of ownership, but you may also have the tax advantage. Although interest rates are still low, taxpayers should shop around for the best rate and loan terms.”

Contact Chuck Plake, Enrolled Agent, for advice on how you can arrange for tax-deductible financing on your boat or RV. Enrolled Agents are federally authorized tax practitioners who have technical expertise in the field of taxation and are empowered to represent taxpayers before all administrative levels of the IRS for audits, collections, and appeals. EAs provide tax preparation, tax advice, and tax-planning services in addition to helping taxpayers resolve problems with the IRS.

Tips for Choosing a Tax Preparer

The 2007 tax season may be months away, but if you are looking for a tax preparer to do your taxes, choose that preparer wisely. You are legally responsible for what’s on your own tax return - even if prepared by someone else.

If you pay someone to prepare your tax return, choose that preparer wisely. Taxpayers are legally responsible for what’s on their own tax returns even if prepared by someone else. So, it is important to choose carefully when hiring an individual or firm to prepare personal returns. Most return preparers are professional, honest and provide excellent service to their clients. Here are a few points to keep in mind when someone else prepares your return:

• A Paid Preparer is required by law to sign the return and fill in the preparer areas of the form. The preparer should also include their appropriate identifying number on the return. Although the Preparer signs the return, you are responsible for the accuracy of every item on your return. In addition, the preparer must give you a copy of the return.

• Review the completed return to ensure all tax information, your name, address and Social Security number(s) are correct. Make sure that none of these spaces is left blank.

• Review and ensure you understand the entries and are comfortable with the accuracy of the return before you sign.

• Never sign a blank return, and never sign in pencil.

• If you have provided specific authorization in a power of attorney filed with the IRS, you may have copies of notices or refund checks mailed to your preparer or representative; but only you can sign and cash your refund check. For further information on Powers of Attorney, refer to Topic 311.

• A Third Party Authorization Check Box on Form 1040 allows you to designate your Paid Preparer to speak to the IRS concerning how your return was prepared, payment and refund issues and mathematical errors.

Estimated Taxes

Estimated tax is the method used to pay tax on income that is not subject to withholding. Similar to taxes withheld from wages, it is held in trust on your behalf by the government until you file your return.

If you are self-employed, a sole proprietor, partner, or S corporation shareholder, you may have to pay estimated tax. Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return.

If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty.

IRS.gov has additional information on:

Who Must Pay Estimated Tax
Who Does Not Have To Pay Estimated Tax
How to Figure Estimated Tax
When to Pay Estimated Taxes
Whatever your circumstances, using EFTPS is the easiest way to pay your federal taxes.

Related Links:

Publication 505, Tax Withholding and Estimated Tax
Form 1040-ES

Credit for Contributions to School Tuition Organization

Arizona law provides a credit for contributions made to a school tuition organization that provides scholarships or grants to qualified schools.

The credit is equal to the amount contributed. However, for single taxpayers or heads of household, the credit cannot exceed $500. For married taxpayers that file a joint return, the credit cannot exceed $1,000. If married taxpayers file separate returns, each spouse may claim only ½ of the credit that would have been allowed on a joint return.

If the allowable tax credit is more than your tax or if you have no tax, you may carry the unused credit forward for up t o the next 5 years.

This credit is available only to individuals. Corporations may not claim this credit. A partnership may not pass the credit through to its partners. An S corporation may not pass the credit through to its shareholders.

Arizona Form 323

Business Plans

A business plan is an excellent tool to assess your business, whether it’s a start-up or a growing, existing business. The following is a general outline for writing a business plan:

Part 1: Tell About Your Company – A business plan tells a story about your background, history and who will run the company.
• Description of Your Company
• Describe Your Products or Services
• Tell About the Management Team

Part 2: Gather Information – Your plan must include information about the market your business will be located in about your customers and the industry.
• Tell About Your Business
• Tell About Your Market

Part 3: Forecast Sales and Expenses – In a start-up business, this will be difficult but with a good computer program, you will be able to make adjustments.
• Forecast Your Sales
• Tell About Your Target Market
• Budget Expenses

Part 4: Analyze Your Financial Statements – If you have a good computer program to direct you, analyzing your financial statements are not as difficult as you might think.
• Analyze Sales
• Analyze Your Cash Flow
• Are You Making a Profit?
• Other Financial Information, e.g. assets, receivables, inventory, etc.

Part 5: Strategize – Focus on you strategies. Implement tactics to strategize. Pick milestones to evaluate your progress.
• What is Your Strategy?
• Is it reality?
• How will you implement it?

Part 6: Follow up – The business plane is the beginning. Now you must carry out your plan and its strategies. Publish your plan for your management team and financiers. Use it as a tool to measure the growth of your business.
• Publish Your Business Plan
• Use Your Plan to Obtain Financing.

Before You Start Your Business

Owning your own business has many benefits, but it also has a number of unexpected expenses and taxes. Before starting a business, each new proprietor should utilize the online classroom provided by the IRS.

This extensive workshop is designed to help new and existing small business owners understand and meet their federal tax obligations.

Online Classroom…

Working With Your Spouse

One of the advantages of operating your own business is hiring family members. However, the employment tax requirements for family employees may vary from those that apply to other employees.

IRS.gov offers some issues to consider when spouses operate a business together.

Employees - Other Employment Scenarios Husband and Wife Business

Recommended Reading for Small Businesses

The IRS has a number of publications for small businesses, and this comprehensive list is a great resource.

Most are available to browse online. All may be downloaded in Adobe PDF format and printed.

Recommended Reading for Small Businesses

Tax Deductions for Home-based Entrepreneurs

Q: My business is home-based—operating out of my home. Am I entitled to any business tax deductions as a result of that?

A: Yes. That is the short answer Chuck Plake, EA explains. You are entitled to the normal business tax deductions wherever you operate your business. In fact, because your business is home-based, you may be entitled to take a special home-office deduction, but even if you don't qualify to take this deduction, you may still deduct the "ordinary and necessary" expenses that apply to the operation of your business.

How the owner takes a home-office deduction is to some degree a function of the business's legal form of business organization. There are three ways a small-business owner can consider qualifying for a home-office deduction: (1) If the business is operating as a either a sole proprietorship or a one-member Limited Liability Company (LLC); (2) if the business is operating either as a partnership or a multimember LLC, electing to be taxed as a partnership; or (3) when the owner of the business is also considered an employee of the business—as in the case of C and S corporations or an LLC, electing to be taxed as a corporation.

The next consideration in qualifying to take a home-office deduction is that you must be using a portion of your home for your business, and be doing so on both a regular and exclusive basis. "Regular" means that you use a specific area continuously, as opposed to occasionally or incidentally. "Exclusive" means that either you do not use this specific space for personal use, or if you do, that you pro-rate between personal and business use.

The third element in qualifying is that this home office is your principal place of business—used regularly and exclusively for business, and that you have no other fixed location where you conduct substantial administrative and management activities of your business.

If you qualify to take a home-office deduction, you will be entitled to the following deductions, pro-rated between personal and business use: depreciation on the house, home mortgage interest and real estate taxes (or rent), home insurance, utilities, wages for domestic help and local phone service (excluding your basic service).

Whether or not you qualify to take a home-office deduction, you are entitled to take the following "ordinary and necessary" business tax deductions: professional services (such as accounting, attorney and consulting services), logistical support (alarm systems, cleaning, long-distance phone service, office supplies, postage, shipping, printing, repairs and maintenance), the cost of financial services (such as bank service charges), your car, your office equipment, furniture and fixtures, travel, entertainment, retirement, hiring your family, tax-free owner benefits (such as health insurance coverage), wages and salaries, marketing, insurance, payroll taxes and other non-income taxes.

You cannot, however, take home-office deductions that create a loss during a current tax year. After the business's taxable income has been reduced to zero (by taking all allowable business tax deductions), any remaining unused business tax deductions (referred to as a net operating loss, or NOL) can be carried back, to reduce the previous year's business income, and forward, to reduce the future year's taxable business income. This process can continue until the entire NOL has been used up. Note: This limitation does not apply to the "ordinary and necessary" business tax deductions, meaning that after these deductions reduce your taxable business income to zero, they can be applied as reductions of your other (personal) taxable income.

For More information about home-office deductions and they apply to you contact Chuck Plake, Enrolled Agent at cplake@plakenet.com. Enrolled Agents are the only professionals that are enrolled by the IRS to represent taxpayers.


Online Classroom, Lesson 2 - How to set up and run your business so paying taxes isn't a hassle

Online Classroom, Lesson 4 - What you need to know when you run your business out of your home