You’re Fired! The story of an IRS auditor!!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little “self help.” So now let’s look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other write-offs, and the case wound up in Tax Court.

You’d think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let’s look at those charitable contributions first:

“Petitioner proffered ‘receipts’ purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization’s records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500.”

That doesn’t sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

“Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been ‘doctored.’ Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor’s last name differently (‘Ajigohotafe,’ ‘Ajibotafe’ and ‘Ajigbotafe’). One ‘statement’ was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another ‘statement’ was contradicted by a letter purportedly from the doctor’s staff.”

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn’t show her a lot of sympathy — they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to “reasonable cause” and not “willful neglect”). Since Quinn’s own “excuse” is on a par with the dog eating her homework, she’s likely to lose her job as well.

It’s certainly entertaining to read about cases like Jacynthia Quinn’s. It’s satisfying to see a cheater get her comeuppance. And it’s great to see the IRS enforcing the same rules for its own employees as it does for us. But there’s a valuable lesson here, even for the majority of us who don’t cheat. Dotting the “i’s” and crossing the “t’s” is important for everyone. That’s why we don’t just outline strategies and concepts to help you pay less tax. We work with you toimplement those strategies and document them to survive scrutiny. And remember, we’re here for your family, friends, and colleagues too, so give us a call: 773-728-1500.

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The Cost of Reform – Medicare Tax

By now, of course, you’ve heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as “Obamacare.” The Court ruled that the controversial individual mandate is constitutional under the government’s power to tax, rather than its power to regulate commerce.

We’re not here to debate the merits of the Court’s decision. If that’s what you want, turn on any cable news network and you’ll find various assorted bloviators from both sides, bloviatingright now. (Try it. It’s fun!)

What we are here to discuss is how the Court’s decision affects your tax bill. That’s because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes — in addition to the “tax” or “penalty” imposed by the individual mandate — that will now go into effect as already scheduled:

  • On January 1, 2013, the Medicare tax on earned income, currently set at 2.9%, jumps to 3.8% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
  • Also on January 1, there’s a new “Unearned Income Medicare Contribution” of 3.8% on investment income of those earning more than $200,000 for individuals or joint filers earning more than $250,000. (Doesn’t that sound better than “tax”?)
  • Beginning January 1, 2014, there’s a $2,500 cap on tax-free contributions to flexible spending accounts.
  • Also beginning January 1, 2014, employers with more than 50 employees face a penalty of $2,000 per employee for not offering health insurance to full-time employees.
  • Finally, the threshold for deducting medical and dental expenses rises from 7.5% of your adjusted gross income to 10%. You probably don’t get to deduct your out-of-pocket medical expenses anyway — but the new, higher threshold will just make it that much harder.

These new taxes raise new planning questions. How can we structure your investment portfolio to avoid the new “Unearned Income Medicare Contribution”? (Doesn’t that sound better than “tax”?) What role should flexible spending accounts play in your finances? Should we look at a Health Savings Account or Medical Expense Reimbursement Plan to write off newly-disallowed medical expenses?

And the new healthcare taxes aren’t the only challenge we face this Independence Day. We’re six months away from what some wags are calling “Taxmageddon.” On January 1, the Bush tax cuts are scheduled to expire. And the 2% payroll tax “holiday” expires as well. These mean higher taxes for everyone, not just “the 1%.” But with Washington geared up for elections, there’s little hope for quick or easy resolution.

Together, these new developments make for some real planning challenges. But when the going gets tough . . . the tough get going. So count on us to get going on today’s most pressing planning questions. And remember, we’re here for everyone just give us a call at: 773-728-1500.

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A BIG Auch!!

The English novelist and playwright Henry Fielding once wrote that “a rich man without charity is a rogue; and perhaps it would be no difficult matter to prove that he is also a fool.” But sometimes you can be rich, charitable, and foolish, all at the same time. And that can make for some really expensive mistakes.

Joseph Mohamed is a California real estate broker and appraiser who has made a fortune buying, selling, and developing real estate. In 1998, he and his wife Shirley set up a charitable remainder trust for the benefit of the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services, and the Pacific Legal Foundation. Then, in 2003 and 2004, he donated six California properties to the trust: four adjacent street corners in Rio Linda, a 40-acre subdivided parcel south of Sacramento, and a shopping center in Elk Grove.

Mohamed prepared his own taxes for those two years—definitely not standard operating procedure for someone in his shoes. When it came time to fill out Form 8283, “Noncash Charitable Contributions”, he skipped the instructions because “it seemed so clear that he didn’t think he needed to.” The form said the description of the donated property could be“completed by the taxpayer and/or appraiser”. And Mohamed was an appraiser, right? Of course he knew what his own properties were worth. How hard could it really be? He attached statements to his returns explaining how he valued the two biggest parcels. Then he deducted $18.5 million for the gift, satisfied that he had done all he needed to substantiate his write off.

It turns out, though, that the IRS wants a teensy bit more than just your say-so before handing out eighteen million in benefits. In fact, they have some pretty specific rules for deducting anygift of property worth more than $5,000. You need a “qualified” appraisal, made no sooner than 60 days before the gift and no later than the due date of the return reporting the gift itself. It has to be signed by a certified appraiser — not the donor or the taxpayer claiming the deduction. And the appraisal has to include specific information about the property itself, your basis in the property, and how you acquired it in the first place.

The IRS started auditing Mohamed’s 2003 return in April, 2005. You can probably imagine how charitably inclined they were toward his self-appraisal. So Mohamed went out and gotindependent appraisals showing the properties were worth over $20 million — two million morethan he deducted. And the trust actually sold the 40 acres south of Sacramento for $23 million. You would think that would be enough. But you would be wrong. The IRS held firm, and the case wound up in Tax Court.

Last month, the Court issued their 26-page opinion in Mohamed v. Commissioner. They ruled that none of Mohamed’s appraisals were “qualified” under Section 1.170A-13(c)(3)(i) and shot down his entire deduction. The Court confessed that

“We recognize that this result is harsh — complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions — all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions […] the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.”

So, ouch. Big, big ouch. Eighteen million bucks worth of deductions, lost because someone didn’t dot the i’s and cross the t’s. Six million in actual tax savings, down the proverbial drain.

We realize it sounds self-serving to tell you to come to us before you make a big financial move. But Joseph Mohamed’s case emphasizes how important this really is. You may not have millions riding on doing it right. But are you really willing to risk tax benefits you truly deserve by doing it yourself?

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Photo from Nouhailler on flickr.com

Income Tax Tip: Save money by deducting mileage expenses

Don’t miss out on tax savings this year by forgetting about tax deductible travel expenses. There are four cases in which you may deduct your travel expenses. In each case, if you drove, you may deduct a standard rate per mile. If you took another form of transportation, the actual fare for a taxi, bus, or train may be deducted.

  • BUSINESS: Business miles are those driven for business, other than your daily commute. If you are travelling out of town, or even nearby for a meeting, conference, or seminar, you may deduct these miles. If your principle place of business is a home office, you may deduct miles driven to and from other work locations.
  • MEDICAL:  Qualifying miles are those driven to medical or dental appointments occurring in order to prevent or alleviate a physical or mental defect or illness. This includes miles driven to and from doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and more.
  • MOVING: Moving expenses may be deducted if the move is for business purposes. For moving to qualify, the new residence must be located fifty miles or more closer to the new place of business than the old residence.
  • CHARITY:   Travel expenses that necessarily arise while performing services for a charitable organization–such as through volunteer work or as an appointed representative of a religious institution–are considered charitable and thereby deductible. This applies whether you pay the expenses directly or indirectly (by contributing to the organization) as long as the trip is not significantly for recreation or vacation.

Using the most up-to-date mileage rates will help you get the biggest deductible possible from your 2011 tax return. Standard mileage rates are used to calculate the deductible costs of driving a vehicle for business purposes, charitable purposes, medical purposes, or for moving over 50 miles for business purposes.

For cars, vans, and pick-up trucks, the mileage is:

55.5 cents per mile for business miles

23 cents per mile for medical or moving

14 cents per mile for charitable organizations

These mileage rates were given on July 1st, 2011 by the IRS for the mid-year adjustment. The IRS recently came out with the mileage rates effective January 1st, 2012, and they are the same as the current rates.

These tips come from your favorite Chicago accountants at TaxCutters, Inc.  Feel free to call us at (773) 728-1500 or email info@taxcutters.com for more information or tax help.

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