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DEALING WITH THE IRS

As much as we try to avoid dealing with the IRS, it may not always be possible. This section gives us a better idea of what the IRS is looking for and tells you how to avoid being on their radar. You will also find tips on what to do if you receive a letter from them. If you have been contacted by the IRS and require further assistance, please call our office for an appointment.

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Refund Status Available From IRS Website: By using the “Where’s My Refund” tool on the IRS website, Taxpayers can check on the status of their federal income tax refunds seven days after they e-filed their return. If they file a paper return, they can check four to six weeks after mailing their return.
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What to Do If You Receive an IRS Notice: It’s a moment many taxpayers dread. A letter arrives from the IRS and it’s not a refund check. But don’t panic; many of these letters can be dealt with simply and painlessly.
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Chances for Being Audited: The Internal Revenue Service (IRS) recently released its 2006 Data Book which describes activities conducted by the IRS from October 1, 2005, through September 30, 2006, and includes information about returns filed and taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce.
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Penalties for Early Distributions from Retirement Plans: Payments that you receive from your IRA or qualified retirement plan before you reach age 59½ are normally called ‘early’ or ‘premature’ distributions. These funds are subject to an additional 10 percent tax and must be reported to the IRS.
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When to Amend Your Return: As hard as you and your tax return preparer may try to file a complete and accurate tax return by the due date, circumstances such as the following may work against your efforts.
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When to Throw Out Tax Records: Are you doing your spring cleaning and wondering if you can throw out some of those old tax records? If you are like most taxpayers, you have records from years ago that you are afraid to throw away. It would be helpful to understand why you keep the records in the first place.
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Reading the CP-2000 Notice: To make sure the notice is a CP-2000, look on page one on the upper right-hand corner. It will be identified with the symbol CP-2000. If it is some other type of notice, a different type of action will be required.
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Keep a Low Audit Profile: The IRS may be auditing fewer returns but they are getting smarter about choosing those they do audit. Their goal, of course, is to focus scrutiny on the most "audit worthy" returns-those with potential for big adjustments. As taxpayers, all of us would like to avoid an audit. But how does one avoid being "chosen"? While there's no sure way, experts do offer advice on what to look for to help cut audit risk.
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Avoiding Tax Audits: An IRS tax audit can come in a number of forms. The most demanding are the face-to-face audits, which require sitting down with an auditor and reconciling income and deductions. Others are the less demanding correspondence audits where the IRS has reason to believe that the taxpayer failed to include reported income or has overstated deductions.
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IRS Has Your Numbers!: Correspondence from the IRS has a tendency to escalate a taxpayer’s pulse rate. However, most of the communication received is not the feared “come on down” letter that requests an appearance for a face-to-face audit, but instead may only require a written explanation.
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Liens and Levies: A levy is a legal seizure of your property to satisfy a tax debt. Levies are different from liens. A lien is a claim used as security for the tax debt, while a levy actually takes the property to satisfy the tax debt.
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Are You a Non-Filer?: What is a non-filer? “Non-filer” is the term used in the tax industry for someone who has failed to file the required tax returns for one or more years. Whether you are simply a procrastinator, owe money and can’t pay, have marital problems or for whatever reason did not file, it is important for you to know that there are ways to remedy the situation.
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Offer-in-Compromise: The U.S. tax system is built on the premise that all taxpayers are expected to report their tax liabilities accurately and pay them on time. However, the Internal Revenue Code gives the IRS the authority to “compromise” (i.e., settle based on a taxpayer’s adverse economic circumstances) a tax liability for less than its stated amount.
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Innocent Spouse Relief: When married taxpayers file jointly, they become “jointly and individually” responsible (often referred to as “jointly and severally liable”) for the tax and interest or penalty due on their returns. This is true even if they later separate or divorce.
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Installment Agreement: So what happens if you can’t pay your tax liability? For taxpayers who cannot pay all their taxes at once, there is the installment agreement option. IRS Form 9465 is used to request a monthly installment plan. Generally, you can have up to 60 months to pay off the liability. Depending upon how much you owe, the IRS may investigate your ability to pay before granting an installment agreement.
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Vacation Home Rental: There are special tax consequences when you rent out your vacation home for part of the year. The tax treatment depends on how many days it is rented and your level of personal use. Personal use includes vacation use by your relatives (even if you charge them market rate rent) and use by non-relatives if a market rate rent is not charged.
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Tax-Deferred Exchange: A tax-deferred exchange (otherwise known as a “1031 exchange” referring to the tax code section pertaining to exchanges of property or “tax-free exchange” and a misleading title since the tax is actually deferred and not free“) can be used as a means of avoiding immediate taxation on the gain from a rental property by deferring the gain into a replacement property.
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Separating Improvements from Land: Not all of the cost of acquiring real estate is depreciable. Specifically, the cost of the land is not depreciable and must be separated from the improvements. Thus, you should identify and document at the time that you acquire real estate, the part of...
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Repairs vs. Improvements: When you figure your profit or loss from operating the rental property each year, you can deduct the cost of repairs to the rental property. However, any improvements that were made must be depreciated over the improvement’s useful life. How do you distinguish a repair from an improvement?
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Renting to a Relative: Special rules may apply when renting a home or apartment to a relative. If you rent a home to a relative who: (1) uses it as his or her principal residence (that is, not just as a second or vacation home) for the year, and (2) it is rented at a fair rental...
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Renting Part of Property: If you rent part of your property, such as a room or a portion of the house, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest and real estate taxes, as rental expenses. You can also deduct as a rental expense a part of other expenses that normally are nondeductible personal expenses, such as utilities and home repairs (such as painting the outside of your house). You do not have to divide the expenses that belong only to the rental part of your property.
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Real Estate Professional: If you qualify as a “real estate professional” (which requires the performance of substantial services in real property trades or businesses), your rental real estate activities are not automatically treated as passive, and so losses from...
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Outright Sale: When a rental property is sold outright, the entire gain will be taxable in the year of sale. Let’s assume (without considering property improvements or buying or selling costs) that you purchase a rental for $50,000 and then several years later...
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Operating Expenses: For tax purposes, you will figure your profit or loss each year from operating the rental property. Generally, you can virtually deduct all expenses incurred to operate the rental.
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First, Last and Security Deposits: Generally, landlords require a new tenant to pay the first and last month’s rent in advance along with a security deposit. A frequent question is whether to treat these payments as current-year income or income to a future year. The IRS says that...
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Depreciating Rental Property: “Depreciation” is an accounting term for writing off the wear and tear on an asset that has a useful life of more than one year and costs over $100. Generally, rental real estate improvements must be depreciated over a period of 39 years....
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Active Participation: If you “actively participate” in the residential rental activity, you may be able to deduct a loss of up to $25,000 ($12,500 if you’re married, file separately, and live apart from your spouse for the entire year—but if you’re married, file separately and don’t live apart from your spouse for the entire year, you’re not eligible for this break at all) against ordinary (nonpassive) income such as your wages or investment income.
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RENTAL REAL ESTATE AS AN INVESTMENT: A popular form of long-term investment is real estate rentals. Rentals can fall into several varieties, of which real estate rentals is the most common. This material will explain some of the tax ramifications of renting real estate, both residential and commercial. Specifically excluded from this discussion are transient rentals, where the tenants rent for an average of seven days or less, such as motels and equipment (machinery) rentals. Both are considered self-employment businesses for tax purposes and thus subject to self-employment taxes.
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