Taxable Talk

The "Tax Gap" is difference between the amount of tax that the IRS should collect if everyone followed the law and the amount that it actually collects. There are three components of the gap: nonfiling, under-reporting, and underpayment. Of course, the ridiculous complexity of the Tax Code is also a contributing factor.

Last February, the IRS estimated the Tax Gap at $290 billion. This morning's Wall Street Journal reports that the IRS is likely underestimating the problem. The report, from the Department of the Treasury's Inspector General for Tax Administration (TIGTA), concludes that:

"...the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and voluntary compliance. The IRS has significant challenges in both obtaining complete and timely data and developing the methods for interpreting the data...We concluded that, despite the significant efforts undertaken in conducting the individual taxpayer National Research Program (NRP) for under-reporting, the IRS still does not have sufficient information to completely and accurately assess the overall tax gap and the VCR."

The report is interesting and is available here. You can find the Wall Street Journal's article here (paid subscribers only).

Today is the deadline. You have until midnight tonight to file your taxes. The question were asked every year (usually around 9pm) is, "We just realized that we need to file our taxes...What do we do?"

The answer is to file an extension. If you are our client, we can file Form 4868 electronically for you. Otherwise, print the form up, and mail it, using certified mail, return receipt requested. Spend the extra $4.25. (For a story on what happens when you don't spend the money, see Joe Kristan's report on why you spend the money here.) Many post offices now have automated machines that can do certified mail; look for the "Automated Postal Center" (or similar verbiage).

Remember, an extension is an extension of time to file, not pay. So make an estimate of what you owe and send it with your extension. If you don't file an extension, you're subject to the failure to file penalty (5% a month up to 25%), so even if you don't pay anything with your extension it's well worth your time to file it.

Don't forget to file an extension for your state taxes, if your state requires it. California does not require an extension to be mailed (the extension is automatic); however, many states do require an extension to be filed.

This year, for both the IRS and California, an extension is for six months. You have until October 16th (the 15th falls on a Sunday) to file your taxes if you file an extension.

If you're out of the country working, you have an extra two months to file and pay your taxes to the IRS, until June 15th (not June 17th). You need to attach an explanation to your return stating that you were out of the country, and why (work).

Finally, if you call our office today wanting to schedule an appointment to do your taxes today, it's not going to happen. Like most tax preparers, we wouldn't be able to do an acceptable job on your return if we started it today.

The digital age has spawned numerous successful companies and industries. One industry that did not exist ten years ago is online auctions, such as those on eBay. A company that sprung up to facilitate payment transfers for eBay is PayPal. In fact, eBay bought PayPal a few years ago.

The benefits of using PayPal are obvious—buyers and sellers can easily transfer money to one another. The money flows readily. PayPal can also be used to transfer money from the US to anywhere. And the IRS wants to know about that.

The US has some very stringent money laundering laws. If you have a foreign bank account, and you have $10,000 or more in it at any time during the year, you must report it on Schedule B of Form 1040 and by filing Form TD F 90-22.1 with the Department of the Treasury. Now, do you really believe that all of the people who use PayPal to transfer money have been doing this?

I don't, and the IRS concurs. Indeed, the IRS announced last year that they were looking at PayPal payments. Yesterday, the IRS won approval in federal court to obtain information on Americans who sent money to bank accounts or credit cards in thirty foreign countries considered tax havens.

News Story: Silicon Valley.com

Tax Day is Monday, April 17th...except for some municipal taxes in Ohio that are still due on April 15th. So, at this late date, what can you do to lower your taxes?

1. Make a contribution to an IRA, if you're eligible. You're allowed to make a $4,000 contribution (up to the amount of your compensation); if you were 50 any time during 2005, you can make a $4,500 contribution. There are income restrictions to making an IRA contribution. For full details, see Publication 590. You have until April 17th (in most cases) to make a traditional IRA contribution.

2. Make a contribution to a SEP IRA, if you're eligible. SEP IRAs are for the self employed. You can contribute up to $42,000 or 25% of your compensation, whichever is less. However, there's an adjustment that must be made for the impact of self-employment tax. You can start a SEP (and contribute to a SEP) any time before you file your return, including extensions. (If you start a SEP after April 17th, you do need to have filed an extension. The final deadline is October 15th.) See Publication 560 for more information.

3. Consider the home office deduction. Many taxpayers have been scared to approach this deduction because of fear of IRS audits. Well, I strongly believe that if you're eligible for a deduction, you should take it. Now, there are some strict rules that you must meet in order to take the home office deduction:

"You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively:
- As your principal place of business for any trade or business;
- As a place to meet or deal with your patients, clients or customers in the normal course of your trade or business."

Still, many have avoided taking this deduction because of fear, and I don't think that's justified at all. You can find more information on this deduction in Publication 587.

4. Don't rush! Consider filing an extension. If you've just decided to use a professional tax preparer, and you're just now (one week before the deadline) going to him or her, he or she will most likely insist on an extension. (If not now, very, very, soon he'll insist.) Those who have been practicing for any length of time are extremely busy in the last week of tax season, and it's hard to squeeze a new client in before the deadline. It's not that we won't accept new clients; rather, we won't be able to do a professional quality job on your return if we took you on and agreed to finish your return before next Monday. We'll work with you to make an estimate of what you owe, generate the extension forms, and then prepare your return after the deadline.

5. Remember Your State and Local Tax Deadlines. These can differ. For example, municipalities in Ohio have deadlines of April 15th. Iowa has a deadline of April 30th. Massachusetts has a deadline of April 18th, because the 17th is a holiday. And if you send your IRS return to the Andover, MA service center, you have an extra day, too.

If you are one of the lucky few who have a scheduled appointment with your tax preparer this week, try and be organized. He'll appreciate it, because he's been swamped for several weeks. And it will help to get your return done quickly.

The Government Accountability Office (formerly known as the General Accounting Office) (GAO) released a study yesterday titled, "Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors." The study was also mentioned in today's Wall Street Journal (paid subscription required).

The study showed that 10 out of 19 sample returns, side income that the preparer was told about wasn't reported. Many preparers missed opportunities to save taxes on returns. None of the firms surveyed were named. Other errors found included unwarranted refunds (of over $1500), and unwarranted extra tax (of over $1500). Only two states, California and Oregon, require licensing of paid tax preparers.

The National Association of Enrolled Agents has been pushing for mandatory registration and licensing of all paid tax preparers. Legislation to accomplish that is inching its way through Congress.