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Tuesday
Apr142015

Want to Audit Proof Your Tax Return? Tax Attorney Rob Wood Tells You How

April 15th is almost here. Tax attorney Rob Wood has some suggestions for how to file a tax return that will survive a tax audit. He explains it in this report, based on his Forbes article “Five Ways To Audit Proof Your Tax Return Against The IRS.”

 

Taxpayers are perhaps less at risk of being audited today because the IRS has had its budget cut. Wood says that the reduced budget may be a factor in reducing the likelihood that someone will be audited, but taxpayers should not let this cause them to “do all sorts of creative things on their taxes. . . . Audit rates have always been low.” Less than 5% of returns have traditionally been audited, so the reduced budget may not be a big factor.

Wood suggests that the tax code has become complex enough that many taxpayers should consult professionals to prepare their returns. However, another good option is the use of tax preparation software. Wood looks at many returns, and he believes that the software is a good solution for many taxpayers. Organization is a very important step in preparing a return, and software can help with that by walking a taxpayer through the preparation process. Even the IRS Commissioner has positive things to say about the software approach.

Wood also emphasizes that taxpayers should not disclose too much information in the return. “A tax return is meant to be for numbers.” It is not an essay exam. Wood says that there may be things that require explanation, such as a Form 1099 that shows a payment of twice the amount that was actually made—such as receiving a payment of $10,000 that shows up as $20,000 on a 1099. If you can’t get a new form from the payor, you need to explain the error on your return, but “do it succinctly.” Don’t attach a lot of photocopies to prove that the correct amount is $10,000.

Wood says that it is also important to deal properly with 1099 forms. A taxpayer should collect them, keep them safe, and account for them. However, a taxpayer should avoid asking for a 1099 that doesn’t arrive when the taxpayer knows about the income ($10,000, to use the previous figure). The taxpayer should simply list the income and go forward. The key is matching. You need to list all the 1099 income you have, and what you report should match the 1099s you have received. However, it is not a “mismatch” problem if you report more income than the forms disclose.

If you are interested in the subject, you may want to look at Wood’s follow-up article, “Five More Ways To Audit Proof Your Tax Return Against The IRS.”

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Tuesday
Apr072015

Tax Relief for Small Businesses May Be at Hand: Tax Attorney Rob Wood Explains

 

The House of Representatives has just passed HR 636, called America’s Small Business Tax Relief Act of 2015. Tax attorney Rob Wood explains the significance of the new legislation in this report.

 

Wood says that Congress has traditionally passed “extenders” to the Tax Code every year to let taxpayers know what provisions of the Code would be extended and which would not be. The system has become unmanageable. Businesses find themselves at the end of the year trying to decide what items to buy or not buy and whether the items can be capitalized or treated as expenses.

The uncertainty has put businesses at a real disadvantage. “Every year we have this drama” that businesses face at the end of the year about whether to buy and what to buy. If HR 636 is finally passed by both houses of Congress, it would make permanent a rule that a business could expense $500,000 each year without having to go through “the hassle of depreciation.” Wood opines that this would be a good thing for most businesses.

The process also is hard on tax accountants. And, opines Wood, it hampers all kinds of businesses that produce things other business might buy (or not buy) depending on what the tax rules might be in that particular year. “Small business is still a big driver of the economy,” so what those businesses will or won’t do for tax reasons is important.

Wood also notes that the IRS has made a change in Form 3115 relating to changes in accounting methods. The form in general relates to the same issue: What items a business may treat as expenses and what must be capitalized. For example, upkeep and maintenance may be treated as expenses. A new motor installed in a machine must be capitalized and depreciated over whatever the life of the machine might be. The change, says Wood, is that small businesses who meet certain tests would not have to file a Form 3115 as to certain items. However, says Wood, small business owners should talk to their tax accountants about this whole area.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Tuesday
Mar172015

Do One Percenters Pay Their Fair Share? A Congressional Report Suggests They Do

 

Many Americans believe that the top one percent of those who earn income in the U.S. don’t pay their fair share of taxes. A recent report from Congress’s Joint Committee on Taxation says that the top 1 % of taxpayers pay 49% of all taxes. Some members of the one percent, notably Warren Buffett, think that group should pay more taxes. The report and the issues it raises are discussed by tax attorney Rob Wood in this commentary on his Forbes article “Warren Buffett To Al Sharpton, The 1% Makes 19% Of All Income, Pays 49% Of All Taxes.”

Wood suggests that it is unusual to hear Warren Buffett and Al Sharpton mentioned in the same sentence. There are many strong views on taxes across the income spectrum. The only common view seems to be that everyone would like to pay less.

Overall amounts of tax paid are a different issue from percentage of income paid as taxes. The percentage of their income that the highest earners pay has gone down from about 30% of adjusted gross income in 1995 to about 17% in 2012. Wood says that the explanation is changes in the tax laws. One part of this is the tax rate on investment income, an area that provides Mr. Buffett with most of his income. Investment income is taxed at a lower rate than salaries and wages. Wood also notes that people discussing taxes often ignore payroll taxes, and omitting those figures will skew the results.

Mr. Buffett has commented that he pays about 14% on his income while his secretary pays about 35% and that this should be changed. Wood says that a change like this would be very possible and beneficial, as the current tax burden falls hardest on the middle class. In order to change the tax burden it would be necessary to make some drastic changes in the tax system, and that is a political issue that politicians have stayed away from.

On the subject of tax reform, Wood notes that Mark Everson, the IRS Commissioner during George W. Bush’s administration, has announced he is running for president. Everson has suggested that perhaps 160,000,000 people should come off the tax rolls and that the country should move to a consumption tax. That’s unlikely to happen, but it is one approach that is possible. Wood suggests that any fundamental tax reform probably needs the attention of economists to provide some suggestions on the very complex topic of rebuilding the tax code.

Wood compares the current tax system to a building that has been modified and added to over the years to the extent that the building is ugly and badly built. Wood says that it is time to start over with a new tax code.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Wednesday
Feb182015

$564 Million Powerball May Generate Tax Issues, Says Tax Attorney Rob Wood

 

The recent Powerball lottery drawing for $564 million produced winners in North Carolina, Texas, and Puerto Rico. The huge jackpot aroused a lot of interest, and it will generate tax revenue yet to be determined. Tax attorney Rob Wood discusses the tax issues in this report which was also the subject of his Forbes article “3 Winning Tickets In $564 Million Powerball, Less After Tax, Claims, Family.”

 

Wood points out that an individual’s total tax liability will depend on the individual’s state of residence. The IRS will, of course, collect federal income tax from the winners. Most states also tax lottery winnings, and the general rule is that every U.S. citizen is a resident of a state.

Most lottery winners take lump sum distributions. However, taking an annuity may well be a good—or even better—choice. Software like TurboTax permits a winner to examine the tax consequences of taking the lump sum as compared with taking a twenty-year annuity. Wood notes that the current low interest rates are not favorable to annuity earnings, but spreading the income out over a period of years means that a winner will actually get more money. Also, receiving the money over time builds in a certain savings factor and a protection from a winner’s improvident spending. It is also an insulation against relatives and friends who sometimes help a winner dissipate the winnings.

Wood says that anyone who wins a lottery becomes a target for all kinds of people and causes, all seeking a slice of the money. The publicity associated with winning a lottery does a lot to expose winners to being approached for money. Also, winners are sometimes approached by family members they didn’t know they had.

There can also be controversy over who is entitled to the proceeds. Co-workers may remember that a group of employees all agreed to go in on buying a ticket and may demand a share. Also, there can be gift tax consequences of giving part of your winnings to family members, as in Dickerson v. Commissioner. Wood urges any lottery winner to consult a tax expert before giving away money to friends, family, or charity.

As to the winner in Puerto Rico, Wood says the tax situation in Puerto Rico is both confusing and alluring. Puerto Rico is a protectorate, not a state. Federal taxes are not paid to the IRS. Again, Wood urges anyone considering a move to Puerto Rico to get some tax advice before making the move and to visit the island to be sure that it is a place you would want to live.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.

Thursday
Jan292015

Will Obama's SOTU Lead to Tax Change? Tax Attorney Rob Wood Is Doubtful

 

President Obama has delivered his State of the Union address for 2015. The question always arises, after a speech by the President, whether any new legislation will result from presidential suggestions. Tax attorney Rob Wood offers his opinion in this report based on his Forbes article “State Of The Taxing Union? Platitudes So General They Could Be Pitching Flat Tax.”

 

Wood says that there were some interesting suggestions but that they are more relevant to the next two years than to the immediate future. Given that Republicans control both the Senate and the House of Representatives, an increase on the capital gains tax rate to 28% “is not likely.” Some of the other matters discussed by the President were not new, including a bank tax proposal. But “most of it is just posturing for a presidential election,” in Wood’s opinion. It’s unlikely that there will be a major tax bill “in the next year or so.

Both political parties seem to be interested in reducing the corporate tax rate to 28%, and that might be are area where there could be agreement. America’s tax rate of 35% is high compared to tax rates in other countries. However, Wood suggests that many companies, large and small, are not actually paying the 35% rate. “They are finding a way with transfer pricing or other . . .  international strategies” to avoid the full tax rate. And that sort of revision takes time.

Wood believes that the IRS might actually collect more corporate taxes by having a lower corporate tax rate. The question is, how would such a reduction be implemented? Wood feels that it is unlikely that such a change could be brought about by a one-line change to the tax code; more likely, it would involve comprehensive revision of the code.

Wood hopes that the onset of campaigning for the presidential election in 2016 will bring about renewed interest in a flat tax. Wood supports the idea of the simplicity of a flat tax. However, he doubts that such a plan has a chance because it is viewed as regressive.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group.