Tax Update - Fall 2007

IRS On the Warpath

$300 - BILLION Dollars - a – Year….

$300 - BILLION Dollars - a – Year…. that’s the amount of the Tax Gap (the difference between the amount income taxes that the IRS computes is owed and the actual taxes collected). Why the difference? It’s called “noncompliance”, the two primary areas of noncompliance are the under reporting of income and the over reporting of expenses and deductions. So, just what does the IRS have in mind?

As recommended by the GAO (Government Accountability Office) it’s not more audits it’s smarter audits that’s going to have the greatest impact… targeting specific areas where misreporting is tends to be most common.
That means that their focus will be on returns containing Schedules C, E and F, and in more cases than you want to know about Schedule A.

Those that will be receiving more scrutiny:

• Sole Proprietors…. who may low-ball income and inflate write-offs.
• Farming Activities…. especially the part time or hobby farmers, who’s primary income is not from farming and frequently use losses from farming to offset and reduce their other income.
• Gambling Income…. winnings are frequently underreported (compliance means reporting all winnings not just those that you receive a W2G for) and netting losses against reported winnings.
• Rental Real Estate…. real estate professional are exempt from the passive-loss rules if they spend over half their working hours AND at lease 750 hours per year “Materially” involved in real estate. IRS will be checking that the time tests are met. They say that THOUSANDS of returns have been pulled.
• Itemized Deductions on Schedule A…. Errors are most often found in medical, charitable contributions and job related expenses.

There are a number of other areas that they will be focusing on, however the above will most likely be the majority of what’s going to be coming down the line.

Remember when it comes to an IRS audit there are four mandatory rules.

1. Document
2. Document
3. Document
4. And the most important of all Never, Never, Never Ever Lie in an audit.
   If you can’t prove a point or if you are unsure or just don’t know say so. But, never Lie…

Remember Martha Stewart!!

You Can Call (510) 243-1535 or Click Today to schedule your Appointment