IRS Audit Rates Continue Downward Spiral

For years, IRS audit rates have been declining as Congress has cut the IRS budget and its workforce has shrunk. The agency has reported the sixth consecutive year that audit rates have gone down.  Low IRS audit rates are bad news for law-abiding taxpayers. The IRS estimates that the “tax gap”—the difference between taxes owed and taxes paid on time—is a whopping $458 billion. We all have to pay higher taxes because so much goes uncollected.

Small Business Employers: Are Your Workers Classified Correctly?

McFARLANE LAW-A Tax Law Firm provides step-by-step guidance to ensure employees are classified correctly and that your employer clients are prepared with the proper documentation should the IRS select them for an audit.

“Get it correct or pay the penalties" seems to be the message when it comes to classifying the workforce as either an independent contractor or a full-time employee. The Department of Labor (DOL) and the Internal Revenue Service (IRS) are both stepping up their enforcement efforts with random audits. They levy significant financial penalties when they find that a worker has been classified incorrectly. In Arizona, the Department of Revenue (ADOR) and the Department of Economic Security (AzDES) have also stepped up their enforcement and audits of employers in classifying their workers.

Perhaps the first step in "getting it correct" is a self-audit of your workforce. The IRS, ADOR, and AzDES uses a 20-point list employers should consider when classifying workers. The DOL also has its independent contractor requirements. Also of note is that the DOL recently withdrew its Administrator's Interpretation on misclassification, which may impact how the agency enforces the law. Based on all of this, there is no question that employers need a better understanding of how to apply these factors to help them determine if their employees are truly independent contractors or are actually employees.

Contact us at McFARLANE LAW to discuss your worker classification issues.

McFARLANE LAW – A Tax Law Firm
14500 N. Northsight Blvd., Ste. 217
Scottsdale, AZ 85260
T.480.991.0032 / [email protected] / www.taxlawaz.com

IRS declares that 2018 Property Taxes Must Be Assessed and Paid in 2017 to Claim a Full Deduction

The IRS issued IR-2017-210 saying property taxes must be assessed and paid before 2018 in order to claim the deduction in 2017. “[W]hether a taxpayer is allowed a deduction for the prepayment of state or local real property taxes in 2017 depends on whether the taxpayer makes the payment in 2017 and the real property taxes are assessed prior to 2018,” the IRS said. “A prepayment of anticipated real property taxes that have not been assessed prior to 2018 are not deductible in 2017.” The IRS announcement comes as homeowners in high-tax states are lining up to prepay their 2018 property taxes before the deduction is capped at $10,000 starting in 2018. The change was included in the new tax law signed by President Trump on Dec. 22.

State or local law determines whether and when a property tax is assessed, which is generally when the taxpayer becomes liable for the property tax imposed. The IRS included examples of assessment, i.e. in the first example, County assesses property tax on July 1, 2017, for the period of July 1, 2017 through June 30, 2018. On July 31, 2017, County sends out notices to residents notifying them of the assessment and billing the property tax in two installments with the first installment due September 30, 2017 and the second installment due January 31, 2018. The IRS stated that assuming the taxpayer has paid the first installment in 2017, the taxpayer may choose to pay the second installment on December 31, 2017, and may claim a deduction for this prepayment on the taxpayer's 2017 return.

The new tax law allows taxpayers to deduct up to $10,000 of property taxes, and state and local income or sales taxes. The law previously placed no limit on the amount of state and local taxes that could be deducted. While the benefits for Arizonans is nominal, the change really hits taxpayers in states with high property taxes, such as New York and New Jersey.

Get Ready for Taxes

Taxpayers should work now to ensure the timely and complete preparation and processing of their 2017 tax returns. Here are three things a taxpayer should do now to get the project started:
1) Gather the needed documents. In order to file a complete and accurate tax return, taxpayers should make sure they have gathered all the needed documents before they begin to prepare the returns, including:

• Forms W-2 from employers.
• Forms 1099 from banks and other payers.
• Forms 1095-A from the Marketplace for those claiming the Premium Tax Credit.
• Bank statements and check registers from Dec 2016 through Jan 2018.
• Brokerage statements from Dec 2016 through Jan 2018.
• Charitable contribution receipts with full description of items and their value. The “IRS approved” value can be obtained from the Goodwill website.

Typically, the Forms W-2 and 1099 start arriving by mail in January. Be sure to check these forms over carefully. If any of the information stated is wrong, be sure to contact the payer right away for a correction or explanation.

2) Make summary sheets from the documents that your have gathered. This task will simplify your return preparation, whether you do it yourself, use a software program, or hire a return preparer to do the input for you. Make sure you review each check written during the year (from your register) to ensure you catch all the charitable contribution and other tax deductible expenses.

3) Check to see if you have an expiring ITIN. Some people with an Individual Taxpayer Identification Number (ITIN) need to renew it before the end of the year to avoid a refund delay and possible loss of key tax benefits. For example, your ITIN may expire as of Dec. 31, 2017, if:

• You have not used your ITIN on a tax return in the past three years; or
• Your ITIN has the middle digits of 70, 71, 72 or 80.

Anyone who needs to renew an ITIN should submit a completed Form W-7, Application for IRS Individual Taxpayer Identification Number. They should mail the Form W-7, along with original identification documents or copies certified by the issuing agency. Once an individual files a completed form, it typically takes about seven weeks to receive an ITIN assignment letter from the IRS, so do it now to avoid a delay in the processing of your returns.

4) Choose e-file and direct deposit for a faster refund. Whether you do it yourself or hire someone to do it for you, electronically filing a tax return is the most accurate way to prepare and file. Error in processing returns delay refunds and the easiest way to avoid paper processing errors is to e-file. Combining direct deposit with electronic filing is the fastest way for a taxpayer to get their refund. With direct deposit, a refund goes directly into a taxpayer’s bank account.

Five Things to Remember about Hobby Income and Expenses

Many taxpayers enjoy hobbies that are also a source of income. A taxpayer must report taxable income on their tax returns even if it is generated from a hobby. I have handled many hobby versus business issues, both when I was an IRS litigation attorney and on the private practice side of the proceedings. They are fact intensive cases and require a seasoned tax professional who is familiar with internal procedure as much as the law. This blog touches on reporting tips to keep you out of trouble.

The Hobby Rules for how to report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions taxpayers can claim for hobbies. Here are five things to consider:

1. Determine if the activity is a business or a hobby. If someone has a business, they operate the business to make a profit. In contrast, people engage in a hobby for sport or recreation, not to make a profit. There is a nine factor checklist that should be addressed when determining whether an activity is a “business” or a “hobby.” Again, the facts of the activity determines the character. The government will argue form over substance when a taxpayer attempts to mask a hobby activity in “business clothing.”
2. Allowable hobby deductions. Taxpayers can usually deduct ordinary and necessary hobby expenses within certain limits: a. Ordinary expense is common and accepted for the activity. b. Necessary expense is appropriate for the activity.
3. Limits on hobby expenses. Taxpayers can generally only deduct hobby expenses up to the amount of hobby income. If hobby expenses are more than its income, taxpayers have a loss from the activity. However, a hobby loss can’t be deducted from other income.
4. How to deduct hobby expenses. Taxpayers must itemize deductions on their tax return to deduct hobby expenses. Expenses may fall into three types of deductions, and special rules apply to each type. You claim hobby expenses on Schedule A, Itemized Deductions.
5. Call your tax attorney! The Hobby Rules are complex and hazardous unless you clearly understand them. When in doubt, it’s better to call than risk an audit, and the IRS loves to argue about hobby vs. business activities.

Call Attorney Stephen J. McFarlane at:
McFARLANE LAW – A Tax Law Firm.
14500 N. Northsight Blvd., Ste. 217, Scottsdale, AZ 85260
(SW corner of Raintree and Northsight)
T: 480.991.0032 / email: stephen @taxlawaz.com / web: www.taxlawaz.com

Transaction Privilege Tax License Renewals Due January 1, 2018

Every business licensed with ADOR is required to renew their Arizona Transaction Privilege Tax (TPT) license by the end of the year. Currently, Arizona Department of Revenue (ADOR) is sending renewal letters to businesses this week. Do not neglect this notice.
The due date to renew a TPT license is January 1, 2018. TPT licenses are valid for one calendar year, from January 1 through December 31. Licenses renewed within the calendar year must still be renewed at the start of the following calendar year.
Businesses can register and file online via the AZTaxes.gov website for easier renewals and faster processing. State law requires taxpayers with multiple business locations to renew their TPT license electronically. Visit www.AZTaxes.gov.
AZTaxes.gov can also be used to update business account information once the account is registered. The account must have up-to-date information before the license Arizona does not charge a state “renewal” fee.
For a new TPT license issued by ADOR, the cost is $12 plus applicable city fees of up to $50 per jurisdiction.is renewed. The fees should be paid to “ADOR” using the TPT license number issued by the department. The renewal fee is due at the time of renewal and can be paid via AZTaxes.gov with e-check or ACH Debit if that option is already set up on the account.