In the first week of January the IRS mailed letters
Published 12:00 am Sunday, January 24, 2010
In the first week of January the IRS mailed letters to 10,000 preparers across the country advising them of common problems and errors found in individual income tax returns.
The intent of the letter was to heighten awareness of these problems and to advise preparers of their responsibilities in an effort to improve overall tax compliance.
The protracted economic crisis across the country has emptied both federal and state coffers. Federal, state and local governments continue to wrestle with deficits and mounting debt. Faced with declining tax revenues, these entities are rapidly expanding tax compliance and enforcement efforts. Reportedly, 11 new IRS agents have been added in Mississippi for audits and collections.
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With this in mind, I thought it timely that I share with you some of the problem areas identified by the IRS. Taxpayers should expect stepped-up exams and enforcement and should be diligent in compliance and recordkeeping. Broadly, the areas identified were:
Business Income and Expense – Schedule C
Itemized Deductions – Schedule A
The Earned Income Credit
The First-Time Homebuyers Credit
With regard to the reporting for a business, the IRS warned of underreporting of gross receipts and substantiation of business expenses as well as the actual legitimacy of the business activity. Business expenses should be “ordinary and necessary” as to the type of business and be properly documented. Taxpayers claiming deductions for vehicles, including the standard mileage allowance, must be able to show documentation for the business miles claimed. Travel, meals and entertainment deductions were identified as an area of abuse. The IRS warned of the requirement for substantiating deductions by receipts as well as for the business purpose for travel, meals and entertainment.
Taxpayers itemizing deductions on Schedule A should be diligent with regard to expenses claimed on form 2106 for Unreimbursed Employee Expense. Specifically identified were, again, documentation of business mileage, travel, meals, and entertainment. Itemizers claiming charitable contributions are reminded of the necessity for receipts for all cash contributions and the proper documentation for non-cash contributions.
The Earned Income Credit has been an area of abuse. Generally, the issues are eligibility issues that include:
Claiming a child that is not qualified
Married taxpayers filing incorrectly as single or head of household
Inaccurate reporting of income
Using incorrect Social Security numbers or last names
While the First-Time Homebuyers Credit is a huge benefit to some taxpayers, it is a new IRS target. Numerous refunds are being held up as the IRS is vigilantly requiring documentation to substantiate qualification.
The most common errors include:
Claiming the credit prior to closing or taking occupancy of the home
Filing an incomplete or incorrect Form 5405 claiming the credit
Claiming more than 10 percent of the purchase price of the house
Failing to meet the prior home ownership rules
Both spouses incorrectly claiming the credit when their filing status is married-filing separate.
Married taxpayers that claim the credit when one spouse was a prior homeowner.
With the tax return filing season upon us keep these points in mind as you assemble your information or prepare your return.
Chuck Caldwell is a CPA/PFS and managing partner at Silas Simmons, LLP in Natchez. He can be reached at 601-442-7411.