Another installment in the changes coming about- or, why I am discussing taxes in August.
First- if you filed an extension, the clock is ticking- much louder now. 15 October is the absolute drop dead date for individuals (15 September for corporations). And, that is only for the filing. Your taxes IN FULL were due way back in April (or March for corporations). Filing an extension really only helps if you don’t owe money. If you do owe money, you can expect to pay penalties and interest, too. Someone is going to pay that deficit down.
There’s also been an increase in audit frequencies. No, not with the IRS coming to you, but a more detailed examination of your return. A letter from the IRS demanding substantiation of your facts. A letter demanding money because you did not report some income- for example, that bond that was recalled because the state did not want to pay such high interest. Your logic that it was for the same amount that you paid may be correct- but it still needed to be listed on Schedule D. If you didn’t, the IRS assumes (nay, invoices) you just made that $ 25,000 as profit, since you did not substantiate the bond purchase.
Also, these paper examinations serve another purpose. Even if they only get $ 100 from you, they are banking on the fact that you will tell your friends. Which will make sure they won’t consider the same “errors” you did, and they will also be more meticulous with the facts (since they know audits are on the rise). Voila. 20 friends yields $ 2000 or more in collections for the IRS.
But, don’t get too excited by this fact- there’s only been a 11% increase in audits, recently. The audit rate is now about 1.11%. If your income exceeds $200K, then your audit potential is 3.1%. But, if you are generating $ 1 million in taxable income, the audit rate is a whopping 8.1%; the $ 10 million income earners have an audit rate of 18%. But, the most likely target (by absolute numbers affected) are self-employed persons (those who file Schedule C); they can expect a fair amount of auditing. That audit rate is 4% (which, as you can tell, is a substantial portion of the overall audit rate)- because the IRS has estimated that Schedule C files are not reporting more than $ 65 billion in income on their returns.
Another new wrinkle for 2011. The IRS is now going to have your credit card statements. Which they will be checking against your 1040 returns. And, if you spent $ 100,000 on your credit card, while you reported $ 25,000 income, you will have more than a little explaining to do.
The IRS is now examining your mortgage debt. Many people have borrowed on their homes for living expenses or pay their children’s tuitions. Yes, it is legal to deduct interest payments for up to $ 1 million of mortgage principal and $ 100,000 of home equity debts- but only if those bills are for the home, not for your car, your boat, or living expenses.
Real property gifts
Now that our real estate has dropped in value, more and more people have been gifting real estate. So, the IRS is examining state property transfer records and comparing them to gift tax filings. Every taxpayer MUST file a gift tax return for gifts that exceed $ 13K in value- but taxes are due when you exceed $ 1 million. So, file the gift tax return and protect yourself.
Don’t forget to read my Taxes in June column- which was recently updated when the IRS adopted a more reasonable policy!
It’s probably a great time to evaluate your positions now and insure that you pay only the minimum required taxes. We’ll be glad to help…