The IRS has established various tax examination techniques, and also published
IRS Audit Manuals covering business activities. The topics discussed in these manuals are helpful guides for clients and tax preparers.

Some of the selected areas include:

1. Fringe benefits, especially personal use of company cars.

2. High income and/or high wealth taxpayers. These include taxpayers with an income of more than $1 million, and who file as self employed individuals.

3. Abusive transactions, especially international transactions, and taxpayers who do not report overseas bank accounts, where required.

4. S corporations, with an emphasis on losses in excess of invested capital, reasonable compensation paid to officers for services, and underreporting of Social Security and Medicare income.

5. Proper worker classification. The IRS claims that it costs about 30% less to classify workers as independent contractors instead of as employees. With the new tax laws regarding the types of income subject to Medicare taxes, this issue assumes greater significance.

As individual taxpayers prepare for filing their 2012 tax returns, they use various income documents which they have received from banks, investment management organizations, real estate lawyers, state governments, and various other entities.

Many of these forms are called ‘Form 1099’ and are submitted to the Internal Revenue Service electronically as well as being sent to the taxpayer. The first part of the IRS auditing process is to match for each taxpayer, the income reported on the Form 1040 with the details supplied by the organization which created the particular Form 1099.

As the Emperor sang in the Gilbert and Sullivan 19th century musical, “I’ve got a little list”. So does the IRS.

If you have barter income, you may have a Form 1099-B, if your debt has been canceled you may have a Form 1099-C, If you have dividends, you will have a Form 1099-DIV, interest income Form 1099-INT, miscellaneous non salary earned income, Form 1099-MISC, taxable retirement income, Form 1099-R, and you have sold your house Form 1099-S, and other Forms 1099.

If the amounts reported on your 2012 tax return based on Forms-1099 differ from the IRS totals, you are likely to receive an IRS notice stating that there is a difference, and that you need to correspond with that agency to reconcile the difference, and possibly pay more taxes.

For the above reasons, tax preparers ask their clients to include copies of ANY Forms 1099 when they meet with and/or send their 2012 tax data.

There are many forms that are sent to taxpayers by employers, banks, customers, retirement fund administrators, and others with whom the taxpayer had a buy or sell transaction with.

These forms are often labeled W-2, 1098 or 1099, and are sent to the taxpayer at the end of every tax year. For example a 1099-INT is a reporting of bank interest.

As part of its document matching process, the IRS compares the detailed reporting of various income and expense forms from its own database of information on an individual tax return to its own database. At present, the IRS uses the “look back” approach to matching.

A taxpayer files his or her return and then the IRS may audit that return up to three years after the tax return is filed. In many cases a taxpayer may be assessed additional taxes, interest and penalties based on a tax return error that was not intentional, but simply a mistake.

In its annual 2012 report, the IRS Oversight Board suggests that in the future, the IRS would employ “real time” matching procedures. The document matching would take place at the time a tax return is filed and would not be processed until the matching is complete.

At present, more than 99 percent of US individual tax returns are processed electronically. Although the ‘real time’ concept is clear, we conclude that there are still many hurdles to overcome, with no current plan for implementation.

After World War II, the US birth rate increased dramatically, and the new arrivals were called “Baby Boomers”. As the Boomers approach and reach retirement, many are feeling family-related financial strains. If you supported one or both of your parents financially last year, you may be able to get some tax benefits based on support costs paid by you.

There are various options: You might be able to claim your parent as a dependent, or take a dependency care tax credit. Another way is to write off your mom or dad’s medical expenses.

The Internal Revenue Service’s common rule is that if you provided more than half of your parent’s annual income and met a few other requirements, you can claim your mom or dad as a dependent on your federal return. Each dependent lessens your taxable income by $3,800.

To claim the dependency exemption you have to meet a few IRS ‘tests’. First, you cannot be claimed as a dependent on someone else’s 2012 tax return. Also, your parent’s gross income in 2012 must have been less than $3,800. Next, you must have provided more than half of your parent’s financial assistance (or more than 10 percent if you split the support with your siblings and none of you provided more than 50 percent). Lastly, your parents can’t file a joint 2012 tax return. The one exception to this is if the joint return is only a claim for a refund and neither parent would owe tax on a separate return.

If you and your siblings shared the financial costs of supporting your parents last year and you’ll be able to claim the exemption, there needs to be some detailed IRS schedules included in the tax returns of each party who is taking a dependency exemption.

If you’re able to claim your parent as a dependent and you paid for his or her medical expenses, you may be able to deduct these costs. You can deduct any expense you pay for the prevention, diagnosis or medical treatment of physical or mental illness, and any amounts you pay to treat or modify any part or function of the body for health—but not for cosmetic purposes. You can also deduct the cost of transportation to the locations where you can receive this kind of medical care, your health insurance premiums, and your costs for prescription drugs and insulin. But, you can only write off medical expenses — yours, your parent’s or a combination of yours and your parent’s — that exceeded 7.5 percent of your adjusted gross income last year.

Here is an example:
Joe’s Adjusted Gross Income was $100,000, and she spent $8,000 on medical expenses. Because his expenses exceed 7.5 percent of her AGI, he can take the deduction for the amount above $7,500. His deduction is $500.

If there is no Congressional agreement on a budget for 2014, many government agencies will have to cut expenses by 3 to 8 percent. Does this mean that IRS employees will have furlough days (time off without pay) between now and April 15? Apparently not.

In a memo to IRS employees, IRS Acting Commissioner Steven Miller said that ‘furlough days off’ would begin this summer. “If sequestration occurs, we will continue to operate under a hiring freeze, reduce funding for grants and other expenditures, and cut costs in areas such as travel, training, facilities and supplies,” IRS Acting Commissioner Steven Miller wrote employees Thursday. “In addition, we will need to review contract spending to ensure only the most critical and mandatory requirements are fully funded.”

Miller’s announcement contradicts the statement that Treasury Department Deputy Secretary Neal Wolin told Congress on Feb. 7. He said that “the cuts to operating expenses and expected furloughs would prevent millions of taxpayers from getting answers from IRS call centers and taxpayer assistance centers and would delay IRS responses to taxpayer letters.” No one seems to know exactly how the legislated reduction in government expenses is going to be implemented.

Beginning in 2013, taxpayers will notice several changes depending on their financial situation.  The act’s main tax features are outlined below:

 Individual tax rates

All the individual marginal tax rates under EGTRRA and JGTRRA are retained (10%, 15%, 25%, 28%, 33%, and 35%). A new top rate of 39.6% is imposed on taxable income over $400,000 for single filers, $425,000 for head-of-household filers and $450,000 for married taxpayers filing jointly ($225,000 for each married spouse filing separately).

 Phaseout of itemized deductions and personal exemptions

The personal exemptions and itemized deductions phaseout is reinstated at a higher threshold of $250,000 for single taxpayers, $275,000 for heads of household, and $300,000 for married taxpayers filing jointly.

 Capital gains and dividends

A 20% rate applies to capital gains and dividends for individuals above the top income tax bracket threshold; the 15% rate is retained for taxpayers in the middle brackets. The zero rate is retained for taxpayers in the 10% and 15% brackets.

 Alternative minimum tax

The exemption amount for the AMT on individuals is permanently indexed for inflation. For 2012, the exemption amounts are $78,750 for married taxpayers filing jointly and $50,600 for single filers. Relief from AMT for nonrefundable credits is retained.

 Estate and gift tax

The estate and gift tax exclusion amount is retained at $5 million indexed for inflation ($5.12 million in 2012), but the top tax rate increases from 35% to 40% effective Jan. 1, 2013. The estate tax “portability” election, under which, if an election is made, the surviving spouse’s exemption amount is increased by the deceased spouse’s unused exemption amount, was made permanent by the act.

 Permanent extensions

Various temporary tax provisions enacted as part of EGTRRA were made permanent. These include:

• Marriage penalty relief
• The liberalized child and dependent care credit rules

In addition to modifications in tax law, there are several new taxes that took effect January 1^st as a result of the health care reform.

 Additional hospital insurance tax on high-income taxpayers.

The employee portion of the hospital insurance tax part of FICA, normally 1.45% of covered wages, is increased by 0.9% on wages that exceed a threshold amount. The additional tax is imposed on the combined wages of both the taxpayer and the taxpayer’s spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case

 Medicare tax on investment income.

Starting Jan. 1, Sec. 1411 imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified adjusted gross income (AGI) exceeds a threshold amount. For estates and trusts, the tax equals 3.8% of the lesser of undistributed net investment income or AGI over the dollar amount at which the highest trust and estate tax bracket begins.

 Medical care itemized deduction threshold.

The threshold for the itemized deduction for unreimbursed medical expenses has increased from 7.5% of AGI to 10% of AGI for regular income tax purposes. This is effective for all individuals, except, in the years 2013–2016, if either the taxpayer or the taxpayer’s spouse has turned 65 before the end of the tax year, the increased threshold does not apply and the threshold remains at 7.5% of AGI.

Flexible spending arrangement.

Effective for cafeteria plan years beginning after Dec. 31, 2012, the maximum amount of salary reduction contributions that an employee may elect to have made to a flexible spending arrangement for any plan year is $2,500.

At Tyler Lynch, PC we understand that several of these previsions can be difficult to understand and may need further explanation.  You can view our website at www.TylerLynchPC.com, or call our office at 617-354-3814.

In 2010, the first baby boomers became 64 years old. Millions more will reach this age in the next few years. Therefore, many financial planning clients are asking  “When should I start my Social Security benefits?”

One can begin to receive Social Security benefits as early as age 62.  Before your full retirement age (FRA), you will receive reduced benefits for the rest of your life.  If your full retirement age is 66, as it is for people born from 1943 to 1954 (age 59 to 70 this year), by starting your Social Security benefits at 62, you will receive 75% of your FRA benefit.

Here is an example:

Mike Boyd has a work history that entitles him to $3,000 a month from Social Security at 66, his FRA.  Instead Mike starts his benefits at age 62.  Mike will only get $2,250 (75% of $3,000) for the rest of his life, plus any cost of living adjustments (COLAs).

Here is an example if Mike decides to wait:

If Mike decides to wait until age 66, his FRA, he will get his basic $3,000 a month for the rest of his life, plus COLAs.  Thus, by waiting 4 years, Mike increases his monthly benefit by $750 – a 33.3% increase from the first example, which is about 8% a year for the 4 years he waited.

We recognize that it isn’t simple, and that things come up in life.  A question that one might ask him/herself is: Do I need the money?  If Social Security benefits are necessary to maintain your lifestyle in retirement, you should probably consider taking them.  Another question is regarding health.  The shorter your life expectancy is, the more likely you and your loved ones will be well served by taking the benefits while you can.

Tis’ the season to be jolly!The Nation Retail Federation (NRF) recently completed its annual survey on Christmas consumer expectations. Within the survey, NRF asked respondents if they would make changes in shopping behavior given economic difficulties and, if so, how they planned on cutting back on their spending. Here is a list of steps that can be helpful

Before we go down the list, we should comment that the word “SALE” itself can be misleading. Merchants often

advertise that an item is “on sale”, but the bottom line is that regular prices have been  increased so that the new price appears to be a reduction, when it is the same old price.

1st Place: Shopping for Sales.  A popular method of saving this season is sale shopping. For  many merchants, the busiest time of the year is the days  between Halloween and Christmas. The survey indicated that those with a head start snag the best deals. Roughly 66 percent of Christmas shoppers start their bargain hunting before December, with half starting before November.

2nd Place: Coupons. Technology has revolutionized couponing in only a matter of years. Today, you can walk into a store, find what you want to buy, and find coupons on your smart phone. The best part is you don’t even need to print most of them. Just pull up the image on your phone and give to the cashier to scan. The process is nearly instantaneous and results in zero paper cuts. Of course this assumes that you  have migrated from the traditional phone connected  to a wire to a compute in your palm, which we call a cell phone.

3rd Place: Comparing Prices On the Internet.  It can take hours to scout numerous stores and compare prices to arrive at the best deal. Going door to door means spending time and money traveling. Even if you are able to browse several retailers, there is still a good chance you’ll miss the best price.

Many of the largest retailers now advertise their prices online. In a matter of moments, you can compare a half-dozen websites. Online shopping and price comparison makes the list at number three of the most popular ways to save on Christmas spending.

4th Place: Buying More Practical Gifts.  While a big budget certainly seems to provide  more choices in potential gifts, it doesn’t guarantee satisfaction. By gifting practically, you can replace big-ticket gifts with more reasonably priced items, which may mean more to the person who receives your gift.

Final Thoughts. You’ll notice the most popular ways to save  involve  smarter shopping. Retailers are looking to move large volumes of sales for the holiday, and you can use this to your advantage. If you can capitalize on the deals that are out there, you’ll greatly reduce your budget while buying the same gifts.

Reference from US News

Unless the lame duck Congress extends the Bush era tax provisions, they will expire at December 31, 2012. This reflects the “Sunset” aspects of the tax laws, or to put it another way, these tax reductions had a limited life. These tax rate reductions were originally passed in 2001 and 2003

Higher Tax Rates

Not only the top two brackets will be higher. The existing 10% bracket will go away, and the lowest “new” bracket will be 15%. The current 25% bracket will be replaced by a 28% bracket; the existing 28% bracket will be replaced by a 31% bracket; the existing 33% bracket will be replaced by a 36% bracket; and the current  35% bracket will be replaced by the 39.6% bracket.

Higher Capital Gains and Dividends Taxes

In 2012  the federal rate on long-term capital gains and dividends is 15%.  Beginning in 2013, the maximum rate on long-term gains will increase to 20% (or 18% on gains from assets acquired after Dec. 31, 2000, and held for over five years), and the maximum rate on dividends will increase to 39.6% (dividends will be taxed at one’s ordinary income rate) .

Harsher Marriage Penalty

The ‘marriage penalty’ may cause a married couple filing jointly to pay more in taxes than when they were single. The Bush tax cuts included several provisions to ease the so-called marriage penalty.

At present, the lowest two tax brackets for married joint-filing couples are exactly twice as wide as for single filers. This  keeps the marriage penalty from affecting the tax liability of lower and middle-income couples. In 2013, the joint-filer tax brackets will contract, causing higher tax bills for many folks.

Currently, the “standard deduction” for married joint-filing couples is double the amount for singles. Starting next year, the joint-filer standard deduction will fall back to about 167% of the amount for singles.

Return of Phase-Out Rule for Itemized Deductions

Before the Bush tax cuts, a phase-out rule could take away up to 80% of a higher-income individual’s itemized deductions for mortgage interest, state and local taxes, and charitable donations. This restriction  was eliminated in 2010.  In 2013, however, the phase-out will be back when the Bush cuts expire.

Return of Phase-Out Rule for Personal Exemptions

Before the Bush tax cuts, another phase-out rule could eliminate some or all of a higher-income individual’s personal exemption deductions (for 2012, personal exemption deductions are $3,800 each). The restriction was also eliminated in 2010. When the Bush cuts expire, it will be back next year.

What May Happen in the Remainder of the Year 2012.

The increase in the Federal capital gains rate from 15% to 20%, effectively a 33% increase, should encourage taxpayers and their advisors to make an inventory of highly appreciated securities, and consider selling many of their security positions. Even if you believe that a particular stock is worth holding for the long run, it may be practical to sell it for a capital gain in 2012 at the lower tax rate, and reinvest part of your proceeds in the same security.

There is significant pressure by shareholders of companies with cash balances greater than current working capital needs to pay extra dividends this year. Higher bracket taxpayers may face an increase in their dividend tax rate from 15% to 39%, more than a 100 increase !

Thank you for reading this  blog at Tyler Lynch, PC.  Stay tuned for more financial information!

The goal of tax planning is to arrange your financial affairs so as to minimize your taxes. There are three basic ways to reduce your taxes, and each basic method might have several variations – Tyler Lynch, PC is here to tell you how.

The first is reducing income:

Adjusted Gross Income (AGI) is a key element in determining your taxes. Lots of other things depend on your AGI (or modifications to your AGI)– such as your tax rate and various tax credits. AGI even impacts your financial life outside of taxes: banks, mortgage lenders, and college financial aid programs all routinely ask for your adjusted gross income. This is a key measure of your finances.

The definition of AGI is your taxable income from all sources minus any adjustments to your income.

You can also reduce your Adjusted Gross Income through various adjustments to income. Adjustments include contributions to a traditional IRA, student loan interest paid, alimony paid, and classroom related expenses. Two of the most popular ways to reduce your taxes is to save for retirement, either through a 401(k) at work or through a traditional IRA plan. Contributions to these retirement plans will lower your taxable income, and lower your taxes.

The second is increasing your itemized tax deductions

Taxable income is a key element in your overall tax situation. Gross income reduced by AGI adjustments and itemized deductions is the amount on which your tax is based. Tax payers may choose to take a standard deduction or itemized deductions depending upon which choice is most beneficial.

Itemized deductions include expenses for health care, state and local taxes, personal property taxes (such as car excise taxes), mortgage interest, gifts to charity, job-related expenses, tax preparation fees, and investment-related expenses. You can keep track of your expenses by using a personal accounting program such as Quicken, or another accounting program.

Next take advantage of tax credits

Now you are ready to focus your attention on various tax credits. Tax credits reduce your tax. There are tax credits for college expenses, for saving for retirement, and for adopting children.

The best tax credits are for adoption and college expenses. Everyone could take some college classes. There are two education-related tax credits. The Hope Credit is for students in their first two years of college. The Lifetime Learning Credit is for anyone taking college classes. The classes do not have to be related to your career.