Audits

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New Audit Risk

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When it comes to audits, our friends at the IRS are interested in examining returns as accurately as possible. (No, they're not just interested in squeezing out more tax, and some audits actually result in refunds.) So the folks in the Small Business/Self-Employed area have compiled a series of Audit Technique Guides to help examiners with insight into issues and accounting methods unique to specific industries. As the IRS explains, "ATGs explain industry-specific examination techniques and include common, as well as unique, industry issues, business practices and terminology. Guidance is also provided on the examination of income, interview techniques and evaluation of evidence."

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Tax Strategies for Asteroid Impacts

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On February 22, 2012, a telescope in Spain discovered an asteroid, 150 feet across, in an orbit that would bring it uncomfortably close to earth. Astronomers reassured us that we would be safe — this time — but that it was "a wakeup call for the importance of defending the Earth from future asteroid impacts." Last month, that asteroid, named 2012 DA14, passed within 17,200 miles of earth at a speed of nearly 17,500 miles per hour. That's a hair’s breadth in cosmological terms — it actually flew under the ring of communications satellites orbiting earth before it headed safely back out into space.

Earth isn't always so lucky. Ironically, on the same day that 2012 DA14 flew by, a meteorite struck outside the remote Russian town of Chelyabinsk with the power of 30 atomic bombs. Amazingly, no one was killed. A century ago, a meteor broke up with similar force over Russia's Tunguska forest, flattening an estimated 80 million trees.

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New Issues for Splitting Community Property

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As usual, we would be foolish to expect our laws and regulations to always make sense or to keep up with the times.

Over the years there have been significant technical challenges to all traditionally married couples in community property states that want to file separate income tax returns. What is often overlooked though is that  registered domestic partners and same-sex married couples face those same reporting challenges plus additional crazy hurdles for proper tax reporting.

The IRS requires registered domestic partners and same-sex married couples to split their community income between their tax returns, even though they require you to file as single taxpayers (remember, we can't apply logic or common sense to any of these rules).

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Biggest. Crybabies. Ever.

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Here in America, we're used to people running to court every time life throws a curveball. Spill hot coffee in your lap? Sue McDonald's! Get drunk, drive your car into a bay, and drown because you can't open your seat belt underwater? Mom and Dad can still sue Honda and win $65 million! Electrocute yourself trying to rob a bar? There's a lawyer for that!

Earlier this month, though, we saw some satisfying comeuppance in one of those cases that makes us roll our eyes in amazement.

First, a little history. UBS is Switzerland's biggest bank — and, like most Swiss banks, it used strict Swiss secrecy laws to attract depositors. They solicited Americans to open accounts, knowing full well that many of them were using those accounts to cheat the IRS — and in some cases, even advising them how to do it. In 2007, a disgruntled employee blew the whistle (and earned a record $104 million reward in the process). Two years later, UBS paid $780 million

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Her Majesty, the Snoop

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Getting audited by the IRS is rarely anyone's spot of tea — unless, of course, you're the auditor. But at least our IRS "plays fair" and uses your actual return to decide whether to audit you. Not so for the folks at Her Majesty's Revenue and Customs Service across the pond!

Here in the former colonies, the IRS uses statistical analysis to find most of their audit targets. Every return gets a super-secret score called a Discriminant Information Function, or "DIF." The higher your DIF, the more potential the IRS sees for bringing in additional taxes in an audit. So, with limited resources available for auditing returns, the IRS naturally strives to audit the higher-scoring returns first. (It's like why Willie Sutton robbed banks — because that's where the money was!) Generally, small businesses organized as sole proprietorships face the greatest chance of audit — as high as 4% or more — because they have the greatest opportunity to under-report income and overstate deductions.

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More Than Meets the Eye

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We usually try and keep these dispatches light and entertaining. We know you'd rather read about "Tax Strategies for Somali Pirates" than, say, the latest regulations governing domestic international sales corporations. But every so often it's time to put on our serious face, and this is one of those times.

By now, of course, we all know that Congress spent their New Year's crafting a last-minute deal to avoid a "fiscal cliff" disaster. The "American Taxpayer Relief Act of 2012" extended the Bush tax cuts, permanently, for incomes up to $400,000 for single filers and $450,000 for joint filers. Ordinary income above those thresholds will be taxed at 39.6%; corporate dividends and long-term capital gains will be taxed at 20%. The Alternative Minimum Tax is "patched" for good, and the estate tax is eliminated for estates under $5 million.

If your income isn't quite that high, you may think you've just dodged a bullet. But the sad reality is, you're probably already paying more tax, even if your income is nowhere near $400,000: