Rebella Accountancy | 507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236

       

 

 

Monica Rebella, CPA/IAR - President

Rebella Accountancy

 

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Feature Articles

- Year-end tax planning amid legislative uncertainty
- First Medical Loss Ratio rebates received by 12.8 million Americans
- New “repair” regulations continue to demand action
- How do I? Claim a casualty loss deduction for storm or drought damage
- FAQ: How does IRS’ automated system for college financial aid work?
- September 2012 tax compliance calendar

 

 

 

What Happens When You Don't Use a CPA (to Save Money) To Do Your Taxes


Times are tough.  You're tempted to cut corners and save money anywhere you can.  But here's what happens when you try to skimp on something important in your business.

Here's a letter that another CPA I know received recently.  It starts...

My wife and I operate a small business as a proprietorship for which we receive 1099s each year. We decided to skip the fee for a CPA or enrolled agent to help us with our taxes.

Instead, we opted for one of the tax preparation software programs and purchased the business model. We also purchased an Audit Defense Package from the software firm where an audit defense team would represent us in the unfortunate case of an audit.

Well, we have now used the audit defense package as the IRS is in the process of auditing our 2010 and 2011 tax returns.
Today, we sit with a tax bill from the IRS for $31,000 and we are most unhappy about it.

Our audit defense failed, totally, really. We have the records, but our audit defense person went to all the meetings by herself. We never spoke with the IRS, only with the audit defense representative.

We have now engaged a CPA, and he thinks he will easily win more than half and perhaps all of our deductions. Please let us know what you think about our deductions as we describe them below
.

Three First Thoughts

Before getting to the deductions, I have three observations.

First. You should have used a professional tax preparer and not tax preparation software. The reasoning here is that once you are in business, your odds of getting your numbers in the right categories with tax software are slim. The fee you pay to a tax professional is well worth the money you spend. And better yet, your use of the tax professional likely reduces your chances of IRS audit.

Second. Your purchase of audit defense insurance gave you false hope. You trusted the audit-defense process so much that you put it in charge of your money. I believe your representative, which should have been an accountant, CPA or EA, should have been present during the audits, not the Audit Defense 'person'.

In an audit, you should NOT go to it personally but be represented and speak only with your representative (not the IRS agent) by giving power of attorney to your representative whom the IRS accepts (just about anyone will do for this purpose).

Side note. You mentioned that your audit defense representative was in another state and not a lawyer, CPA, or enrolled agent. That's a warning sign right there.

Third. Based on what you have said about your records, which I describe below, I think your CPA will win most, if not all, of your deductions. He's being cautious in setting your expectations at more than half until he gets further into the process.

Also, keep in mind that he's behind when he starts because he is dealing with a position the IRS has already taken against you. But as you describe below, you do have pretty good records.

Mileage Log

The logs. Our mileage logs show business miles only (we had not taken your tax course yet). It is a daily log. It does not list each individual stop. But the log does show the appointments we had, the activities performed at the appointments, and the odometer readings for the day.

Our personal miles are represented by gaps in the odometer readings. We also maintain a calendar/scheduler that lists appointments and activities and goes hand in hand with the mileage log.

The IRS granted us 11 percent of the miles as business miles. We think we should have gotten 100 percent, or at least a whole lot more.


What I think. Your mileage logs as you describe are in pretty good shape. Not showing the personal mileage and not showing the individual stops is not to our liking and was perhaps not to the liking of the IRS.

 

But what you describe should have produced far better than 11 percent.

Now that you have been in an audit, you will appreciate the answer to this question: "What Is the Unpardonable Sin in an IRS Audit?" The answer is the IRS's perception of your records, and that often begins with the mileage log.

Planning note for readers. If you have a discussion with the IRS about a mileage log that the IRS finds lacking, ask the IRS agent or auditor what he or she needs to grant you your full deductions. Then, tie that down with a statement like, "If I deliver what you ask, will you allow what I claimed?"

Receipts

Submitted. We submitted copies of all receipts and copies of canceled checks when checks were used. The receipts included our association membership, business license, continuing education courses, office supplies, signs, office expenses, desk fees--everything.

We did not give the audit defense person copies of our bank statements, which show that the payments correspond with the receipts as proof of payment.


What I think. Again, wow! There's something really wrong here. You delivered pretty perfect proof of your expense deductions, receipts showing what you spent the money for, and canceled checks to prove that you paid the money. There has to be some fly in the ointment.

Fly in the Ointment

The IRS auditor initially claimed that the reason he disallowed everything was that he did not believe we were in business because he Googled us and did not find us.

We Googled ourselves and found ourselves instantly. We then scanned our licenses and membership fee documents and sent them to the audit defense person along with a note about what we found at Google. The audit defense person then sent this information to the IRS.

With this new information, the IRS auditor now agreed that we were in business, but he took a new position claiming that we did not make enough money for the area where we live.

We know of the requirement to make a profit in three of the first five years, but the IRS is not giving us five years. We have been in this business for two-plus years only.

We don't see how the IRS can dispute our trying to make a profit. We work hard. We are building the business. We know full well that our income is low, way too low for us too. This whole thing seems patently unfair.


About the Fly

First, you don't need to make a profit in three of the last five years to have a business. If you do make a profit, then the activity is presumed to be a for-profit activity, unless the IRS establishes to the contrary.

You can lose money for many, many years and still be in business. It's more a question of effort than of results.

The bottom line here is that this IRS auditor simply does not believe your records. His failed Google search either confirmed or contributed to his disbelief of your records.

You either did a lousy job explaining your business to your audit defense lady or she did a lousy job of telling your business story and presenting your records.

In your case, the good mileage log I recommend could have told your story at the beginning.  A good mileage log shows vehicle use and time spent next to your appointments.

Now, let's go back to your new CPA.  He's going to be much better at putting your facts in a business light. But you need to pay attention here and make sure he understands your business. I continue to think that you should be present with your CPA at the IRS meetings (not as a participant necessarily, but certainly as a listener and a whisperer in your CPA's ear-when needed).
 


First Medical Loss Ratio Rebates Received by 12.8 Million Americans

Is your Medical Loss Ratio (MLR) rebate check taxable? The U.S. Department of Health and Human Services (HHS) estimates that nearly 12.8 million Americans received more than $1.1 billion in MLR rebates during August 2012 based on insurance company shortfalls in cutting overhead during 2011.

If you received a rebate, either as an individual policyholder or as an employer or employee, is it taxable?

(To read the rest of this article click here.)


New “Repair” Regulations Continue to Demand Action?

More than six months after the IRS issued temporary "repair" regulations (T.D. 9564), many complex questions remain about their interpretation and application. These regulations are sweeping in their impact.

They have been called game-changers for good reason, affecting all businesses in one way or another and carrying with them both mandatory and optional requirements. Many of these requirements also carry fairly short deadlines.

(To read the rest of this article click here.)


FAQ: How Does IRS’ Automated System For College Financial Aid Work?

The IRS has unveiled the IRS Data Retrieval Tool (DTR), a time-saving tool designed to minimize the time required for college-bound students and their parents to complete the Department of Education’s Free Application for Federal Student Aid (FAFSA).

The new IRS DTR is available through the website www.fafsa.gov.

   

click here to listen to this video update on:

click here to listen to this video update on:

   

I read an article in SmartMoney magazine recently that I wanted to pass along to you titled: 5 Little-Known Tax Deductions by Bill Bischoff where he talks about it being possible to write off some expenses that were paid for by someone else such as:

  1. Medicare Insurance and Long-Term Care Premiums
  2. Medical Expenses Paid by Someone Else
  3. Real Estate Taxes Paid by Someone Else
  4. Home Mortgage Points Paid by Someone Else
  5. Fees to Charge Taxes to Your Credit Card


      Click here to read the article online.

   

The FAFSA form is necessary for college-bound students and their parents who are applying for numerous federal government education programs or subsidies, such as the Pell Grant, low-interest federal student loans, and the Federal Work Study Program. Eligible taxpayers may use the tool for either the initial or the renewal FAFSA.

(To read the rest of this article click here.)

To read this & my other articles online go to www.MyDentalCPA.com or www.RebellaCPA.com and click on the Newsletter section.

 


 

As always you can call me at 714-619-0667 if you have any questions about investing, retirement or any other tax & accounting related issues. 

 

Regards, Monica Rebella, CPA/IAR

President, Rebella Accountancy

 
Disclaimer:  The opinions contained herein are not intended to be investment advice or a solicitation to buy or sell any securities. With any investment you should carefully consider the investment objectives, potential risks, management fees, and charges and expenses before investing.  Past performance is not a guarantee of future results. The investment return and principle value of any investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost.

To see more Business Owner Clients talk about Monica, click here!

 

 

Monica Rebella, CPA/IAR | President - Rebella Accountancy | Certified Public Accountants
507 E. First Street, Suite A | Tustin, CA 92780 | Phone: 714-619-0667 | Fax: 714-544-0236
Email: mrebella@rebellacpa.com | www.RebellaCPA.com | www.MyDentalCPA.com