12 Audit Triggers

Coutesy kiplinger.com

Education is NOT filling a Basket but LIGHTING the Fire

Here are 12 hot spots on your return that can raise the chances of scrutiny by the IRS.
Ever wonder why some tax returns are audited by the IRS while most are ignored? Well, there's a whole host of reasons to this age-old question. The IRS audits only about 1% of all individual tax returns annually. The agency doesn't have enough personnel and resources to examine each and every tax return filed during a year. So the odds are pretty low that your return will be picked for an audit. And of course, the only reason filers should worry about an audit is if they are cheating on their taxes.

However, the chances of you being audited or otherwise hearing from the IRS can increase depending upon various factors, including whether you omitted income, the types of deductions or losses claimed, certain credits taken, foreign asset holdings and math errors, just to name a few. Although there's no sure way to avoid an IRS audit, you should be aware of red flags that could increase your chance of drawing some unwanted attention from the IRS. Here are the 12 most important ones:
1. Failure to report all taxable income. The IRS receives copies of all 1099s and W-2s that you receive during a year, so make sure that you report all required income on your tax return. The IRS computers are pretty good at matching these forms received with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a 1099 for income that isn't yours or the income listed is incorrect, get the issuer to file a corrected form with the IRS.
2. Returns claiming the home-buyer credit. First-time homebuyers and longtime homeowners who claimed the homebuyer credit should be prepared for IRS scrutiny. Make sure you submit proper documentation when taking this credit. First-time homebuyers have to attach a copy of their settlement statement to the return, and longtime homeowners should also attach documents showing prior ownership of a home, including records of property tax and insurance coverage. All claims for this credit are being screened. As of May 2010, more than 260,000 returns had been selected for correspondence audits (examinations done by mail rather than face-to-face) because filers did not attach the necessary documents to their tax returns. And those numbers will continue to grow.
Also, the IRS has ways of policing the recapture of the homebuyer credit. Generally, the credit is required to be recaptured if the home is sold within three years for homes bought in 2009 or 2010 and within 15 years for homes bought before 2009. The IRS is checking public real estate databases for sales of homes in which the credit was taken.

3. Claiming large charitable deductions. This comes up again and again because the IRS has found abuse on audit, especially with those taking larger deductions. We all know that charitable contributions are a great write-off and help you to feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared to your income, it raises a red flag. That's because the IRS can tell what the average charitable donation is for a person in your tax bracket. Also, if you don't get an appraisal for donations of valuable property or if you fail to file Form 8283 for donations over $500, the chances of audit increase. Be sure you keep all your supporting documents, including receipts for cash and property contributions made during the year, and abide by the documentation rules. And attach Form 8283 if required.
4. Home office deduction. The IRS is always very interested in this deduction, primarily because it has a pretty high adjustment rate on audit. This is because history has shown that many people who claim a home office don't meet all the requirements for properly taking the deduction, and others may overstate the benefit. If you qualify, you can deduct a percentage of your rent, real estate taxes, utilities, phone bills, insurance, and other costs that are properly allocated to the home office. That's a great deal. However, in order to take this write-off, the space must be used exclusively and on a regular basis as your principal place of business. That makes it difficult to claim a guest bedroom or children's playroom as a home office, even if you also use the space to conduct your work. Exclusive use means a specific area of the home is used only for trade or business, not also where the family watches TV at night. Don't be afraid to take the home-office deduction if you're otherwise entitled to it. Risk of audit should not keep you from taking legitimate deductions. If you have it and can prove it, then use it.
5. Business meals, travel and entertainment. Schedule C is a treasure trove of tax deductions for self-employed. But it's also a gold mine for IRS agents, who know from past experience that self-employed tend to claim excessive deductions. Most under-reporting of income and overstating of deductions are done by those who are self-employed. And the IRS looks at both higher-grossing sole proprietorships as well as smaller ones.
Big deductions for meals, travel and entertainment are always ripe for audit. A large write-off here will set off alarm bells, especially if the amount seems too large for the business. Agents know that many filers slip in personal meals here or fail to satisfy the strict substantiation rules for these expenses. To qualify for meals or entertainment deductions, you must keep detailed records generally documenting the following for each expense: amount, place, persons attending, business purpose and nature of discussion or meeting. Also, receipts are required for expenditures over $75 or any expense for lodging while traveling away from home. Without proper documentation, your deduction is toast.

6. Claiming 100% business use of vehicle. Another area that is ripe for IRS review is use of a business vehicle. When you depreciate a car, you have to list on Form 4562 what percentage of its use during the year was for business. Claiming 100% business use for an automobile on Schedule C is red meat for IRS agents. They know that it's extremely rare that an individual actually uses a vehicle 100% of the time for business, especially if no other vehicle is available for personal use. IRS agents are trained to focus on this issue and will closely scrutinize your records. Make sure you keep very detailed mileage logs and precise calendar entries for the purpose of every road trip. Sloppy recordkeeping makes it easy for the revenue agent to disallow your deduction. As a reminder, even if you use the IRS' standard mileage rate to deduct your business vehicle costs, ensure that you are not also claiming actual expenses for maintenance, insurance and other out-of-pocket costs. The IRS has found filer noncompliance in this area as well and will look for this.
7. Claiming a loss for a hobby activity. Your chances of "winning" the audit lottery increase if you have wage income and file a Schedule C with large losses. And, if your Schedule C loss-generating activity sounds like a hobby -- horse breeding, car racing and such -- the IRS pays even more attention. It's issued guidelines to its agents on how to sniff out those who improperly deduct hobby losses. Large Schedule C losses are audit bait, but reporting losses from activities in which it looks like you might be having a good time is just asking for IRS scrutiny.
Tax laws don't allow you to deduct hobby losses on Schedule C. However, you do have to report any income earned from your hobbies. In order to claim a hobby loss, your activity must be entered into and conducted with the reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes you're in business to make a profit, unless the IRS establishes to the contrary. If audited, the IRS is going to make you prove you have a legitimate business and not a hobby. So, make sure you run your activity in a business-like manner and can provide supporting documents for all expenses.

8. Cash businesses. Small business owners, especially those in cash-intensive businesses -- taxi drivers, car washes, bars, hair salons, restaurants and the like -- are an easy target for IRS auditors. The agency is well aware that those who primarily receive cash in their business are less likely to accurately report all of their taxable income. The IRS wants to narrow the tax gap, and history has shown that cash-based businesses are a good source of audit adjustments. It has a new guide for agents to use when auditing cash intensive businesses, telling how to interview owners and noting various indicators of unreported income.
9. Failure to report a foreign bank account. The IRS is intensely interested in people with offshore accounts, especially those in tax havens. U.S. tax authorities have had some recent success in trying to get foreign banks (such as UBS in Switzerland) to disclose information on U.S. account holders. Also, the IRS had a voluntary compliance program where people came in and reported their foreign bank accounts and foreign assets in exchange for lesser penalties than they would have otherwise been subject to. The IRS has learned a lot from these probes.
Failure to report a foreign bank account can lead to pretty severe penalties, and the IRS has made this issue a top priority. Make sure that if you have any such accounts, you properly report them when you file your return. Keep in mind, though, that if you have never previously reported the foreign bank account on your return, and you decide to do so for the first time in 2010, that might also look suspicious to the IRS.
10. Engaging in currency transactions. The IRS gets many reports of cash transactions in excess of $10,000 involving banks, casinos, car dealers and other businesses, plus suspicious activity reports from banks and disclosures of foreign accounts. A recent report by Treasury inspectors concluded that these currency transaction reports are a valuable source of audit leads for sniffing out unreported income. The IRS agreed and it will make greater use of these forms in its audit process. So if you are a person who makes large cash purchases or deposits, be prepared for IRS scrutiny. Also, beware that banks and other institutions file reports on suspicious activities that appear to avoid the currency transaction rules (such as persons depositing $9,500 cash one day and an additional $9,500 cash two days later).
11. Math errors. One of the biggest reasons that people receive a letter from the IRS is because of mathematical mistakes they make on their tax returns. If you make an error in your favor, you are going to hear from the tax man, and there is a greater risk of the IRS pulling the whole return for audit. So take time to ensure all your calculations are correct. Even though math errors may not lead to a full-blown audit, it's always best to remain under the radar of IRS computers.
12. Taking higher-than-average deductions. If deductions on your return are disproportionately large compared to your income, the IRS audit formulas take this into account when selecting returns for examination. Screeners then pull the most questionable returns for review. But if you've got the proper documentation for your deduction, don't be scared to claim it. There's no reason to ever pay the IRS more tax than you actually owe.


Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.

LIFE INSURANCE

LIFE INSURANCE- Education is NOT filling a Basket but LIGHTING the Fire.

Some basic facts you need to know about Life Insurance.

-It is generally recommended that you should have Life Insurance worth at least 10 times your Gross Pay.

-Life Insurance can be used to solve Liquidity issues at your death, maintain the life style of your loved ones or provide income for your loved ones.

-Women and the young will pay premiums that are less than their male or older counterparts.

-If you misstate your Age and Gender on your application, death benefits will be paid based on what the correct payments would have been given the correct information.

-A Suicide Clause in a Life Insurance states that if you commit suicide in the first two years of inception of an Insurance policy, the death benefits will NOT be paid. Instead, your premiums will be returned.

-If your insurance lapses during the grace period usually 30 to 60 days period and death occurs, the Insurance will still pay death benefits but minus the premiums that would have been paid during that time.

-Life Insurance proceeds are usually NOT Taxable with few exceptions

-It is always a good idea NOT to own your Life Insurance policy. Owning it will include its death benefit into your Gross Estate hence incurring Estate Taxes on the benefits except it qualifies for Unlimited Marital deductions.

-First To Die-Provides Death benefits when the first insured dies

-Second To Die-Provides Death benefits when the second or last insured dies

-Your Cash Value Balance with your Insurance Company is protected should the Insurance Company go Bankrupt

A)   Term Life

-Protection ceases when the term ends unless it is renewed

-The premium you pay may be Level or increasing on an annual or set period basis

-Generally, there is no cash, savings or investment options

-Its face amount may be Level or decreasing

-You can have the option of converting a term policy without proof of insurability

    Who is Term Life Insurance Good For?

    -A young person

   -People with some amount of money and are willing to spare or budget towards Life Insurance

  -People with temporal needs

       B) Whole Life

           -It provides permanent lifetime protection for as long as premiums are paid

          -They have a Savings and Investments options. The Savings and Investments do earn interest too

         -The cash value which may be used as loans usually has a minimum guaranteed rate of interest

    Recommend Whole Life for?

   -People who are willing to accept investment risk

  -People who think they can earn a higher than normal return on investment

 -People who have a permanent need

-People who are concerned about Estate Taxes

Types of Whole Life

-Ordinary Life-Pay premiums until the age of 100

-Limited Pay Life-Pay premiums to a certain age—Premiums are higher than Ordinary Life

-Variable Life-You are willing to accept Investment Risk

UNIVERSAL LIFE INSURANCE

-Insured may want to adjust Premiums, Face Value and Cash Value

-Insured does not direct the investment portion and may use the cash value to pay premiums

*Universal A—Death Benefit is EITHER Cash Value or Face Value

*Universal B—Death Benefit is BOTH Cash and Face Values

VARIABLE UNIVERSAL LIFE

-Has investment options but no minimum guaranteed rate of return or interest

-The Cash Value is invested in a separate account from the insurer’s general account

-While the cash value is not guaranteed, it is not counted as the asset of the insurance company should the company fail.

WHO SHOULD GET UNIVERSAL LIFE INSURANCE?

-Someone who wants flexibility as to how and when premiums are paid for example a seasonal or commissioned based salesperson

-Someone who does not want to bear the investment risk.

Disclaimer: This information may be general in nature and my advice is for you to consult your Financial Adviser, your Accountant or your Attorney for your specific situation. Also laws may vary from state to state.

Feedback

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Bankruptcy

Chapter 7

You get debt relief through liquidation (Loan forgiveness) or Loan discharged.

             1) But the following debts cannot be forgiven or discharged

                      - Student Loans (unless undue hardship)

                      - 3 Years of Back Taxes

                      - Alimony and Child Support

             2) The following Assets will be protected

                      - IRA-exempt up to $1 million

                      - Alimony and Child Support

                      - Pensions, Life Insurance and Annuities

Chapter 13

You get relief through adjusting your debts. This can be costly and time consuming as each loan servicer will be out to protect her interest.

Chapter 20

You get debt relief through a combination of both chapter 7 and 13.The Judge determines that. Your debt servicers play a huge role too in determining payment or re-structuring plan.

While Debts that were received through Fraud will not be discharged, those received through Negligence can be discharged. For example, if you took a loan for investment purpose and the business venture failed because you did not do your due diligence, such debt will be discharged.

BONDS

1)     Agency bonds (FNMA Fannie Mae, FHLMC Freddie Mae, SLMA Sallie Mae, FFCB, FICB, FHLB), are MORAL OBLIGATIONS of the US government and are NOT backed by the full faith and credit of the US government with one exception GNMA Ginnie Mae bonds which are backed by the Full Faith and Credit of the US government.

2)     There are three types of Municipal Bonds ("munis") namely

 

       A) General Obligation bonds are backed by the full faith, credit and taxing authority of the municipality that issued them

       B) Revenue bonds are issued for specific projects. They are backed by the revenue of the specific projects (not backed by the full faith, credit and taxing authority of the entity that issued them)

       C) Private Activity bonds are issued to finance projects like the construction of stadiums

 

3)    Municipal bonds can be against Default and the two INS companies that insure municipal bonds are AMBAC and MBIA.

Wills-- I Love You aka Sweetheart Wills

WILL

A will is a legal document that provides the maker aka the testator the opportunity to control the distribution of his or her property at death thereby avoiding the harsh realities of the state’s intestacy laws. A will is one of the many documents needed for Estate Planning.

A Sweetheart aka I Love You Wills are wills drawn up by two individuals based on mutual understandings which leave all assets to each other upon death of the other. It is reciprocal in nature.

Types of Wills will include

A)     Holographic Wills—Handwritten by the maker

B)      Nuncupative Wills—Oral, dying declarations that are made before a sufficient number of witnesses

C)      Statutory Wills—Drawn up by an attorney with compliance the state laws in which the maker resides.

A Will is said to be Valid when the

1)      Maker is of legal age or age of maturity

2)      Maker has legal testamentary capacity

3)      Maker recognizes and recollects the property being disposed of AND

4)      Maker recognizes the relationships of those loved ones that have claims in the will

Common Clauses in a Will

1)      Introductory clause

2)      Declaration Clause

3)      Bequest Clause

4)      Residuary clause

5)      Guardianship clause

6)      Attestation clause

7)      Self proving clause

8)      Simultaneous clause

9)      Survivorship clause

10)   Disclaimer clause

11)   Contingent Legatee Clause

12)   No Contest clause

Dying Intestate means dying without a proper a will or dying with a will which fails to dispose of all your properties. Dying testate means dying with a properly drawn up will.

Loans Amongst Family Members

1) Intra-Family Loans (aka Loans amongst Family Members)  

If a family member loans money to another family member money and charges no interest or a rate below the applicable federal rate, the lender will be deemed to have made a "gift Loan". The lender will have to report the forgone as well as the actual interest for each year the loan is outstanding as ordinary Income. However, no part of the interest actually paid or imputed is deductible by the borrower if the loan is not business related. Reportable amount will be as follows                               

LOAN AMOUNT	REPORTABLE AMOUNT
$0 to $10000	$0
>$10000 to $100000	The Lesser of *Net Investment Income or *Int. calculated using AFR Applicable Fed Rate Minus Int. calculated using stated rate of the loan
>$100000	Int. calculated using AFR Applicable Fed Rate Minus Int. calculated using stated rate of the loan

FINANCIAL AID For Education

FINANCIAL AID: All students should always complete the Free Application For Federal Student Aid FAFSA. Information on the FAFSA is used to calculate the Expected Family Contribution.

A)    Students who are independent may be eligible for more aid than children who are considered dependents. Independent students are; over age 23, married, working on Masters of PhD, have legal dependents other than a spouse, orphan or ward of the court until age 18 or veteran of the U.S armed forces

B)     You should keep as much as possible out of the student as student assets are deemed to be available for education more than the parent’s assets. Custodial accounts are the only accounts whose assets are deemed to belong to the student.

C)    Financial AID programs will include; Pell Grant, Stafford Loan, Plus Loan, Federal Perkins Loans, Federal Work Study, Federal Supplemental Education Opportunity Grant.

D)    Tax Advantaged Plans for education will include Qualified State Tuition (Prepaid Tuition and Savings Account—529 plans), Coverdell, Roth IRA, Series EE bond, UGMAs, Lifetime Learning Credits and American Opportunity Tax Credits

How Long It Will Take To Become a Billionaire

As posted on Yahoo Finance, Thanks to Michael Deane & Pr

COBRA--Consolidated Omnibus Budget Reconciliation Act

1)       COBRA became Law in 1986

2)      COBRA gives you the option to choose to keep your Group Health Insurance benefit after

A)     Losing your job

B)      Reduction in your working hours

C)      Quitting your job

3)      COBRA must be offered by ALL employers that employ 20 or more.

4)      The length of time that you can keep COBRA depends on the qualifying event as listed below;

A)     18 months for reduction in hours or normal termination

B)      36 months for death

C)      36 months for Divorce

D)     36 months for Medicare Eligibility

E)      36 months for Loss of dependency by children of employee

F)      Up to 29 months if employee meets Social Security definition of Disability

5)      The employee or qualified dependents have 60 days after they get the election notice to choose health insurance coverage for themselves under COBRA.

6)      The premium for COBRA coverage is equal to the full cost of your group health coverage plus up to 2% more for administrative costs making a total of 102%

Lost or Stolen Credit and/ or Debit Card

A consumer’s liability for a lost or stolen Credit or Debit card is limited to

A)     $50 OR

B)      The actual amount charged on the card

Whichever is less.

The consumer must notify the credit card company within a reasonable time frame after the card is noticed missing and/ or stolen.

FDIC-Federal Deposit InsuranceCorporation

1)     The Federal Deposit Insurance Corporation (FDIC) Promotes and Preserves public confidence in the U.S. financial system.

This is done by

-Insuring deposits in banks for at least $250,000 per depositor, per insured bank, for each account ownership category;  

-Identifying, monitoring and addressing risks to the deposit insurance funds; and

-Limiting the effect on the economy and the financial system when a bank fails.

      2)  There are three types of Account Ownership Namely

                         A) Individual Account

B)    Joint Account

C)    Testamentary Account

3)     Each depositor of a Joint Account is said to own 50% of total deposit in that account.

Emergency Fund & Debt Ratios

1)      Emergency Fund: You need to maintain or set aside in liquid form at least 3 months (Dual Wage Earner family) or 6 months (single wage earner family) worth of money to cover your Nondiscretionary expenses. Nondiscretionary expenses include only those expenses that do not go away if you lose your job for example debt, utilities, food

2)      Your Housing Debt sometimes referred to as Front End Ratio should be less than or equal to 28% of your GROSS income. Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance

3)     Your Housing Debt plus other Recurring Debt should be less than or equal to 36% of your GROSS income.  Other Recurring debt include Auto, Student Loans, Credit card and all other type of monthly debt while Housing Debt will include Mortgage Payment (Principal and Interest), Property Taxes and Homeowners Insurance.

4)     Your expected time to stay in a house should determine whether or not you should Buy or Lease all other things (finances) being equal. If you intend to stay in a house for a short period (1 to 3 years) your better option is to lease but if you plan on staying there more than three years, Buying will be the better option. Also if your main goal is to “Build Equity”, then buying a house is the better option.

5)    Your monthly Consumer debt payments should be less than or equal to 20% of your NET Income.