Thursday, March 26, 2015

Yes, Virginia, it IS taking longer to do your taxes this year:-)

Tax season is supposed to be over on April 15. But among certain groups—especially the wealthy—filing for an extension until Oct. 15 is now routine, according to Bloomberg Business and Neikirk, Mahoney & Smith CPAs.

In 2011, 11 million taxpayers filed for an extension; two years later, 13 million did, an increase of almost 20 percent. At the end of September 2014, more than 25 percent of those who had filed for an extension were still working on their filings. We're not just procrastinators. It has gotten harder to file on time. Here’s why:

1. You don't have the forms you need.

The more complicated your investments, the more likely it is that you won't have everything you need to file your taxes by April 15. Often, private equity, venture capital, and hedge funds are structured as partnerships, which means their earnings generate so-called “Schedule K-1” forms, which sometimes take until late summer to arrive.

Christine Freeland, a certified public accountant in Chandler, Ariz., says brokers are putting more of her clients in energy or real estate partnerships instead of (or in addition to) mutual funds, which means more K-1s. Some clients don't even know how many K-1s they'll be getting, she says, and they think their return is ready until they receive an additional K-1 in the mail. Sometimes the partnerships—which have to finish their own returns before they can issue K-1 forms—get extensions, although they must file by Sept. 15.

Simpler investments that generate 1099 forms can slow down the process, too. Brokerage statements have to be out by Feb. 15, but many note that the information may not be final. One of Freeland's clients once handed her a corrected brokerage statement that hadn't arrived until April 15.

2. You're waiting on other people.

The more middlemen standing between you and your tax forms, the greater the chances of delay. According to Bill Zatorski of accounting firm PwC, a common sticking point for wealthy taxpayers is data from funds of funds, hedge funds that invest in hedge funds. A fund of funds can’t send you a K-1 until it receives K-1s, or other needed forms, from all the various funds it holds.

Adding to the delay, says Kevin Meehan of Wealth Enhancement Group, is that investors rarely hold funds or other investments directly. Everything gets funneled through brokerages. You wait for your brokerage, which is waiting for your fund-of-funds, which is awaiting forms for all the funds it holds. An extension until Oct. 15 is only a partial solution for taxpayers with late tax forms: They still must pay an estimate of what they owe by April 15, even if the full return comes later.

3. The tax code is more complicated.

If all else fails, blame Congress. Taxpayers already must follow different rules for wages, capital gains, and two types of dividends—those that get taxed at a lower tax rate and those that don’t meet the “qualified” criteria. In 2013, yet another tax category was added, a 3.8 percent net investment income tax on married couples earning more than $250,000 per year.

Under a 2010 law, taxpayers also now must report all their overseas holdings—a process that sometimes requires the close reading of K-1 footnotes, Zatorski says. Finally, there’s the alternative minimum tax, or AMT, a parallel tax system designed to limit the deductions that wealthier Americans can take. Plenty of those affected aren’t particularly wealthy. About 4.2 million people were ensnared by the AMT in 2014, the Tax Policy Center estimates, up 8 percent from the year before. The AMT alone can almost double how long it takes to fill out a tax return, the National Taxpayer Advocate says.

Friday, March 20, 2015

Most Suspicious IRS Audit Triggers

According to Accounting Today, the Minnesota Society of CPAs has compiled a list of red flags that could trigger an audit from the IRS if they apply to your clients' tax returns.

1. Misreporting Your Income
Always make sure your income on your Form W-2 and Form 1099 matches the reported income on your return.

2. Unusually High Charitable Deductions
You may raise some eyebrows if your charitable donations are well above average for your income range.

3. Unusually Low Salaries
The IRS takes a close look at S corporation compensation practices, particularly if the salary paid to a principal owner looks suspiciously low.

4. Your Social Security Number Is Wrong
Make sure you clearly write or carefully type your Social Security number to avoid added scrutiny over your hand-filed return, or the rejection of your e-filed return.

5. Claiming Losses from “Hobby” Activities
Certain types of businesses showing losses, such as horse racing or horse breeding, will often generate increased attention.

6. Claiming a Different Amount for Your Alimony Deduction or Alimony Income than Your Ex-spouse Claimed for the Corresponding Item This is easy pickings. You must report the Social Security number of your ex-spouse when you report your alimony deduction.

7. A Large Amount for Meals and Entertainment Expenses
Sizable meals and entertainment expenses for your type of business are common targets.

Thursday, March 19, 2015

Retirees Face April 1 Deadline

Many Retirees Face April 1 Deadline to Take Required Retirement Plan Distributions
IR-2015-55, March 19, 2015 — The IRS today reminded taxpayers who turned 70½ during 2014 that in most cases they must start receiving required minimum distributions from Individual Retirement Accounts and workplace retirement plans by Wednesday, April 1, 2015.