Each year the IRS mails millions of notices and letters to taxpayers. If you receive a notice from the IRS, here is what you should do:

Don’t Ignore It. You can respond to most IRS notices quickly and easily. It is important that you reply right away.
Focus on the Issue. IRS notices usually deal with a specific issue about your tax return or tax account. Understanding the reason for your notice is important before you can comply.
Follow Instructions. Read the notice carefully. It will tell you if you need to take any action to resolve the matter. You should follow the instructions.
Correction Notice. If it says that the IRS corrected your tax return, you should review the information provided and compare it to your tax return.
If you agree, you don’t need to reply unless a payment is due.

If you don’t agree, it’s important that you respond to the IRS. Write a letter that explains why you don’t agree. Make sure to include information and any documents you want the IRS to consider. Include the bottom tear-off portion of the notice with your letter. Mail your reply to the IRS at the address shown in the lower left part of the notice. Allow at least 30 days for a response from the IRS.
Premium Tax Credit. The IRS may send you a letter asking you to clarify or verify your premium tax credit information. The letter may ask for a copy of your Form 1095-A, Health Insurance Marketplace Statement. You should follow the instructions on the letter that you receive. This will help the IRS verify information and issue the appropriate refund.
No Need to Visit IRS. You can handle most notices without calling or visiting the IRS. If you do have questions, call the phone number in the upper right corner of the notice. You should have a copy of your tax return and the notice with you when you call.
Keep the Notice. Keep a copy of the notice you get from the IRS with your tax records.
Watch Out for Scams. Don’t fall for phone and phishing email scams that use the IRS as a lure. The IRS first contacts people about unpaid taxes by mail – not by phone. The IRS does not initiate contact with taxpayers by email, text or social media.
The Right to Retain Representation. The Taxpayer Bill of Rights, or TBOR, takes many of your rights in our tax laws and groups them into 10 broad categories. For instance, you have the right to retain an authorized representative to represent you in your dealings with the IRS. You also have the right to seek assistance from a Low Income Taxpayer Clinic if you can’t afford representation. For more, visit IRS.gov and type TBOR in the search box.

IRS Summertime Tax Tip 2015-05, July 13, 2015

Millions of people enjoy hobbies. They can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income is different than how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

Business versus Hobby. A key feature of a business is that you do the activity to make a profit. This differs from a hobby that you may do for sport or recreation. There are nine factors to consider when you determine if you do the activity to make a profit. Make sure you base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses to learn more. You can also visit IRS.gov and type “not-for-profit” in the search box.
Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
Use IRS Free File. Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through IRS.gov.

IRS Summertime Tax Tip 2015-08, July 20, 2015

IRS Tax Tip 2015-05, January 26, 2015

Nearly everyone can claim an exemption on their tax return. It usually lowers your taxable income. In most cases, that reduces the amount of tax you owe for the year. Here are the top 10 tax facts about exemptions to help you file your tax return.

E-file your tax return. Filing electronically is the easiest way to file a complete and accurate tax return. The software that you use to e-file will help you determine the number of exemptions that you can claim. E-file options include free Volunteer Assistance, IRS Free File, commercial software and professional assistance.
Exemptions cut income. There are two types of exemptions. The first type is a personal exemption. The second type is an exemption for a dependent. You can usually deduct $3,950 for each exemption you claim on your 2014 tax return.
Personal exemptions. You can usually claim an exemption for yourself. If you’re married and file a joint return, you can claim one for your spouse, too. If you file a separate return, you can claim an exemption for your spouse only if your spouse:
- Had no gross income,
- Is not filing a tax return, and
- Was not the dependent of another taxpayer.
Exemptions for dependents. You can usually claim an exemption for each of your dependents. A dependent is either your child or a relative who meets a set of tests. You can’t claim your spouse as a dependent. You must list the Social Security number of each dependent you claim on your tax return. For more on these rules, see IRS Publication 501, Exemptions, Standard Deduction, and Filing Information. You can get Publication 501 on IRS.gov. Just click on the “Forms & Pubs” tab on the home page.
Report health care coverage. The health care law requires you to report certain health insurance information for you and your family. The individual shared responsibility provision requires you and each member of your family to either:
- Have qualifying health insurance, called minimum essential coverage, or
- Have an exemption from this coverage requirement, or
- Make a shared responsibility payment when you file your 2014 tax return.
Some people don’t qualify. You normally may not claim married persons as dependents if they file a joint return with their spouse. There are some exceptions to this rule.
Dependents may have to file. A person who you can claim as your dependent may have to file their own tax return. This depends on certain factors, like the amount of their income, whether they are married and if they owe certain taxes.
No exemption on dependent’s return. If you can claim a person as a dependent, that person can’t claim a personal exemption on his or her own tax return. This is true even if you don’t actually claim that person on your tax return. This rule applies because you can claim that person is your dependent.
Exemption phase-out. The $3,950 per exemption is subject to income limits. This rule may reduce or eliminate the amount you can claim based on the amount of your income. See Publication 501 for details.
Try the IRS online tool. Use the Interactive Tax Assistant tool on IRS.gov to see if a person qualifies as your dependent.

IRS Tax Tip 2015-03, January 22, 2015

Most people file their tax return because they have to, but even if you don’t, there are times when you should. You may be eligible for a tax refund and not know it. This year, there are a few new rules for some who must file. Here are six tax tips to help you find out if you should file a tax return:

General Filing Rules. Whether you need to file a tax return depends on a few factors. In most cases, the amount of your income, your filing status and your age determine if you must file a tax return. For example, if you’re single and 28 years old you must file if your income was at least $10,150. Other rules may apply if you’re self-employed or if you’re a dependent of another person. There are also other cases when you must file. Go to IRS.gov/filing to find out if you need to file.
New for 2014: Premium Tax Credit. If you bought health insurance through the Health Insurance Marketplace in 2014, you may be eligible for the new Premium Tax Credit. You will need to file a return to claim the credit. If you purchased coverage from the Marketplace in 2014 and chose to have advance payments of the premium tax credit sent directly to your insurer during the year you must file a federal tax return. You will reconcile any advance payments with the allowable Premium Tax Credit. You should receive Form 1095-A, Health Insurance Marketplace Statement, by early February. The new form will have information that will help you file your tax return.
Tax Withheld or Paid. Did your employer withhold federal income tax from your pay? Did you make estimated tax payments? Did you overpay last year and have it applied to this year’s tax? If you answered “yes” to any of these questions, you could be due a refund. But you have to file a tax return to get it.
Earned Income Tax Credit. Did you work and earn less than $52,427 last year? You could receive EITC as a tax refund if you qualify with or without a qualifying child. You may be eligible for up to $6,143. Use the 2014 EITC Assistant tool on IRS.gov to find out if you qualify. If you do, file a tax return to claim it.
Additional Child Tax Credit. Do you have at least one child that qualifies for the Child Tax Credit? If you don’t get the full credit amount, you may qualify for the Additional Child Tax Credit.
American Opportunity Credit. The AOTC is available for four years of post secondary education and can be up to $2,500 per eligible student. You or your dependent must have been a student enrolled at least half time for at least one academic period. Even if you don’t owe any taxes, you still may qualify. However, you must complete Form 8863, Education Credits, and file a return to claim the credit. Use the Interactive Tax Assistant tool on IRS.gov to see if you can claim the credit. Learn more by visiting the IRS’ Education Credits Web page.

By: Isaac M O’Bannon, Managing Editor CPA Practice Advisor

While millions of American taxpayers wait for their W-2, 1099 and other important tax documents to arrive in the mail, their thoughts turn to the often-dreaded prospect of filing their 2014 tax returns.

With all the annual changes to the tax rules and its complexity, it’s not surprising that millions of Americans hire a paid preparer. After all, asking questions or searching the Web for answers often leads to more confusion and misconceptions, because when it comes to taxes, one standard answer usually does not fit all.

The National Association of Enrolled Agents, an organization of federally licensed tax professionals, has pointed out six frequently-encountered tax myths.

Myth 1: “I’m filing an extension this year, so I don’t need to pay anything yet.”

Fact: Tax extensions only extend the time you have left to file, and do not change the date on which you have to pay taxes owed. If you owe taxes and file an extension, you still have to pay the taxes owed by April 15, regardless of the extended deadline date. Otherwise, interest and penalties begin to stack up.

Myth 2: “I had a really big loss in the stock market this year, so I won’t owe any income taxes.”

Fact: Deduction of capital losses against ordinary income is limited to $3,000 per year. Also, whether you reinvest or receive dividends, they are income and are taxed as such.

Myth 3: “They paid me in cash, so I don’t have to report it.”

Fact: If it’s income, you must report it. You must always report income, regardless of whether it’s cash, tips, bonuses or dividends.

Myth 4: “I’m too young to have to pay taxes.”

Fact: Even dependents working part-time while in high school must file a tax return if they earned more than $6,200 in 2014, if they want to receive their refund or if their unearned income is more than $1,000. There are numerous other situations that may lead to a dependent having to file a tax return. To be safe, consider consulting a licensed tax professional.

Myth 5: “Income earned outside the U.S. is not taxable.”

Fact: The operative word is “income,” which means it’s taxable. The IRS requires taxpayers to report all earned income, even if it’s earned abroad.

Myth 6: “Tax preparers only fill out forms that you can do yourself.”

Fact: Licensed preparers know the intricate (and constantly changing) tax laws, regulations and codes, and how they can be applied for your benefit to save you money. Enrolled agents receive IRS-approved annual continuing education, ensuring that they have the most up-to-date strategies to make sure you pay only what you owe and get any refunds you are due. Enrolled agents, CPAs and tax attorneys are also the only tax professionals who can represent taxpayers before the IRS.

At long last, Congress granted a reprieve for most of the expired tax provisions that had remained in limbo this year, but the late-breaking tax relief is only temporary.

The new legislation – the Tax Increase Prevention Act of 2014 – restores these tax breaks retroactive to January 1, 2014. However the provisions expire again on December 31, 2014, so Congress will likely take up these measures again after the holidays. The president is expected to sign the approved bill into law.

The tax extenders cover a wide range of tax breaks both large and small for individuals and businesses. Here are ten of the most popular items for your clients.

1.State and local tax deductions: In lieu of deducting state and local income taxes, a taxpayer may elect to deduct states sales taxes. Deductions are based on actual receipts or a state-by-state table (plus sales tax paid for certain big-ticket items).

2.Section 179 deductions: A business can currently deduct, or “expense,” up to $500,000 of qualified assets placed in service in 2014, subject to a phaseout threshold of $2 million. Prior to the latest extension, the maximum allowance was just $25,000 with a $200,000 phaseout threshold.

3.Bonus depreciation: A separate provision allows a business to claim 50% “bonus depreciation” for qualified assets placed in service in 2014. Note that bonus depreciation may be combined with the Section 179 deduction in some cases.

4.Charitable IRA rollover: If you’re over age 70½, you can roll over up to $100,000 of IRA proceeds to a charity without paying tax on the distribution. This technique is often used to satisfy the rules for required minimum distributions (RMDs).

5.Research credits: This popular tax credit, which has been extended numerous times in the past, provides a tax credit equal to 20% of qualified expenses exceeding a base amount. Alternatively, a business can elect to use a simplified 14% credit.

6.Tuition-and-fees deduction: Taxpayers may deduct tuition and fees paid to a college in lieu of claiming one of the higher education tax credits. However, the maximum deduction of $4,000 is phased out based on modified adjusted gross income (MAGI).

7.Hiring credits: The Work Opportunity Tax Credit (WOTC) is available to employers hiring workers from one of several disadvantaged groups. Generally, the maximum credit is $2,400 per worker, although it can be high as $9,600 for certain veterans.

8.Mortgage loan forgiveness: This provision authorizes a tax exclusion for mortgage loan forgiveness on debts up to $2 million. The exclusion is available only on debt forgiveness for a principal residence.

9.Home energy credits: The residential energy credit has existed in various forms for years. For 2014, a maximum $500 credit may be claimed for 10% of qualified energy-saving expenditures like new heating and air conditioning systems.

10.Teacher classroom expenses: Teachers and certain other educators are able to deduct up to $250 of their out-of-pocket classroom expenses. This deduction is claimed above-the-line.

More than half of taxpayers hire a professional when it’s time to file a tax return. Even if you don’t prepare your own Form 1040, you’re still legally responsible for what is on it.

A tax return preparer is trusted with your most personal information. They know about your marriage, your income, your children and your Social Security numbers – all of the sensitive details of your financial life. If you pay someone to prepare your federal income tax return, the IRS urges you to choose that person wisely. To do that, take some time to understand a few essentials.

Most tax return preparers provide outstanding service. However, each year, some taxpayers are hurt financially because they choose the wrong tax return preparer. Well-intentioned taxpayers can be misled by preparers who don’t understand taxes or who mislead people into taking credits or deductions they aren’t entitled to in order to increase their fee. Every year, these types of tax preparers face everything from penalties to even jail time for defrauding their clients.

Here are a few tips to keep in mind when choosing a tax preparer:

Check to be sure the preparer has an IRS Preparer Tax Identification Number (PTIN). Anyone with a valid 2015 PTIN is authorized to prepare federal tax returns. Tax return preparers, however, have differing levels of skills, education and expertise. An important difference in the types of practitioners is “representation rights”. You can learn more about the several different types of return preparers on IRS.gov/chooseataxpro.
Ask the tax preparer if they have a professional credential (enrolled agent, certified public accountant, or attorney), belong to a professional organization or attend continuing education classes. A number of tax law changes, including the Affordable Care Act provisions, can be complex. A competent tax professional needs to be up-to-date in these matters. Tax return preparers aren’t required to have a professional credential, but make sure you understand the qualifications of the preparer you select.
Check on the service fees upfront. Avoid preparers who base their fee on a percentage of your refund or those who say they can get larger refunds than others can.
Always make sure any refund due is sent to you or deposited into your bank account. Taxpayers should not deposit their refund into a preparer’s bank account.
Make sure your preparer offers IRS e-file and ask that your return be submitted to the IRS electronically. Any tax professional who gets paid to prepare and file more than 10 returns generally must file the returns electronically. It’s the safest and most accurate way to file a return, whether you do it alone or pay someone to prepare and file for you.
Make sure the preparer will be available. Make sure you’ll be able to contact the tax preparer after you file your return – even after the April 15 due date. This may be helpful in the event questions come up about your tax return.
Provide records and receipts. Good preparers will ask to see your records and receipts. They’ll ask you questions to determine your total income, deductions, tax credits and other items. Do not rely on a preparer who is willing to e-file your return using your last pay stub instead of your Form W-2. This is against IRS e-file rules.
Never sign a blank return. Don’t use a tax preparer that asks you to sign an incomplete or blank tax form.
Review your return before signing. Before you sign your tax return, review it and ask questions if something is not clear. Make sure you’re comfortable with the accuracy of the return before you sign it.
Ensure the preparer signs and includes their PTIN. Paid preparers must sign returns and include their PTIN as required by law. The preparer must also give you a copy of the return.
Report abusive tax preparers to the IRS. You can report abusive tax return preparers and suspected tax fraud to the IRS. Use Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or changed the return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. You can get these forms on IRS.gov.

IRS FS-2014-11, December 2014

With the complications associated with the Affordable Care Act (Obamacare) it is very important for you to get assistance with filing your tax return this season. Please give us a call with any questions concerning your return preparation. We have PROFESSIONALS on staff that know the answers!

Tax Season 2014 has come and gone and now it’s time to think about tax planning for tax year 2014. Items which could impact your 2014 taxes include certain life events and expired tax provisions.

Certain Life Events

Have you recently had a birth, adoption or death in your family? Have you gotten married, divorced, retired, or changed jobs this year? If any of these life events occur in 2014, we need to discuss the potential impact on your 2014 taxes. For example:

For Qualifying Children under the age of 17, a tax credit up to $1,000 per qualifying child may be allowed (which may be refundable.)
If you have retired (or are planning on retiring), we need to analyze how your change in income resulting from receiving IRA or pension distributions, and/or Social Security benefits will impact your tax liability.

A divorce or marriage could impact your tax situation in multiple ways (for example, alimony paid or received, deductions for mortgage interest and real estate taxes on your home, QDROs (qualified domestic relations orders) and potential changes in the standard deduction and personal exemptions allowed.)Given the current political climate, it is not known if or when an agreement on extending the Expiring Tax Provisions (“extenders”) may be reached. These extenders have made tax planning a challenge for both taxpayers and tax professionals. Therefore, if any of these provisions impact you, it is important that you contact me so that we may discuss the possible tax consequences:

Expiring Tax Provisions

Sales Tax Deduction: Prior to 01/01/2014, taxpayers may have been eligible to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A. This included the sales tax paid on the purchase of a vehicle. This deduction is no longer available to individuals.
Mortgage Insurance Premiums: Prior to 01/01/2014, taxpayers may have been eligible to deduct the amounts paid for qualified mortgage insurance premiums along with their mortgage interest (subject to adjusted gross income limitations). Effective 01/01/2014, no deduction is allowed for these premiums paid or accrued after this date.

Tax-free Distributions from Individual Retirement Plans for Charitable Purposes: Prior to 01/01/2014, taxpayers over 70 ½ may have been eligible to exclude from their gross income distributions up to $100,000 from their IRA to a qualified charitable organization. This permitted taxpayers to satisfy their Required Minimum Distribution (RMD) and not include the amount in their income. As this reduced their Adjusted Gross Income (AGI), which favorably impacted the taxable amount of Social Security benefits received, this was a large tax advantage for taxpayers. This special distribution provision is not available for distributions after 2013.

Qualified Principal Residence Debt Exclusion: Prior to 01/01/2014, the discharge of principal residence debt (qualified mortgage on a taxpayer’s main home incurred to buy, build or substantially improve his or her main home) was generally excluded from gross income. As many taxpayers are still experiencing financial difficulties resulting in foreclosures, short sales or debt forgiveness on their primary residence, the tax ramifications for 2014 will have major tax consequences.

Other Steps to Consider Before the End of the Year

You should thoroughly review your situation before year end to determine the best tax strategies for 2014 and the impact on 2015 as well. Accelerating income/deferring deductions into 2014 or deferring income/accelerating deductions to 2015 are just a couple of approaches that could benefit you.

If you have any foreign assets, be aware that there are reporting and filing requirements for those assets. Noncompliance carries stiff penalties.

Please call me at your convenience to set up an appointment to estimate your tax liability for the year and discuss any questions you may have.

Millions of people enjoy hobbies that are also a source of income. Some examples include stamp and coin collecting, craft making, and horsemanship.

You must report on your tax return the income you earn from a hobby. The rules for how you report the income and expenses depend on whether the activity is a hobby or a business. There are special rules and limits for deductions you can claim for a hobby. Here are five tax tips you should know about hobbies:

Is it a Business or a Hobby? A key feature of a business is that you do it to make a profit. You often engage in a hobby for sport or recreation, not to make a profit. You should consider nine factors when you determine whether your activity is a hobby. Make sure to base your determination on all the facts and circumstances of your situation. For more about ‘not-for-profit’ rules see Publication 535, Business Expenses.
Allowable Hobby Deductions. Within certain limits, you can usually deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is appropriate for the activity.
Limits on Hobby Expenses. Generally, you can only deduct your hobby expenses up to the amount of hobby income. If your hobby expenses are more than your hobby income, you have a loss from the activity. You can’t deduct the loss from your other income.
How to Deduct Hobby Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your expenses may fall into three types of deductions, and special rules apply to each type. See of Publication 535 for the rules about how you claim them on Schedule A, Itemized Deductions.

IRS Summertime Tax Tip 2014-15, August 6, 2014

If you rent a home to others, you usually must report the rental income on your tax return. But you may not have to report the income if the rental period is short and you also use the property as your home. In most cases, you can deduct the costs of renting your property. However, your deduction may be limited if you also use the property as your home. Here is some basic tax information that you should know if you rent out a vacation home:

Vacation Home. A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
Schedule E. You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
Used as a Home. If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
Divide Expenses. If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
Personal Use. Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
Schedule A. Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
Rented Less than 15 Days. If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income.

IRS Summertime Tax Tip 2014-13, August 1, 2014