Tax & Financial Consulting Services
Tax News YOU NEED TO KNOW
Imhotep (Wisdom To You) G&G Readers,
To promote business investment and boost the economy, the House Committee on Small Business has proposed seven changes…
• Allow a standard deduction for home office expenses.
• Reduce record-keeping requirements for electronic equipment (such as cell phones and computers).
• Increase the amount of depreciation for business vehicles so that they can be completely depreciated over five years.
• Shorten depreciation schedules in line with technology and market realities.
• Allow health coverage for owners to be a deductible business expense (rather than a personal expense).
• Increase the deduction for business meals to 80% or 100% (up from 50%).
• Provide Incentives, such as tax deductions and credits, to those with capital who invest in small business.
The 2007 Audit Numbers Are in…Here are the Hottest Targets
Just released figures for 2007 show that the IRS audit rate is slowly rising overall, but remains very low by historical standards.
Moreover, audit rates often are very uneven. For instance, a home office is much less likely to be audited when a family business is organized as an S corporation than as a proprietorship.
Here’s information that can help you manage your audit risk…
TOP AUDIT TARGET:
The IRS’s top audit targets today are small businesses, since it considers the single biggest component of the “tax gap” (the amount by which taxes are underpaid) to be “business income on individual returns.” The IRS estimates this part of the tax gap to be $148 billion, or fully 43% of the total tax gap of $345 billion.
But small businesses organized in different ways have very different levels of audit risk.
Proprietorships, S corporations, and partnerships all report their income on their owners’ individual returns. Yet the audit rate for proprietorships is far higher than for the other forms of businesses.
In 2007, proprietorships, which report their income on Schedule C of their owners’ returns, had audit rates that varied with total gross receipts to these levels…
• Total gross receipts of less than $25,000----audit rate of 1.3%.
• $25,000 to less than $100,000----2%
• 100,000 to less than $200,000---6.2%
• $2000,000 or more----1.9%
In contrast, all S corporations were audited at only a 0.5% rate, and all partnerships at only a 0.4% rate----just a fraction of the lowest audit rate incurred by the smallest proprietorships. (The audit rates for S corporations and partnerships are based on assets and not on income level.)
Planning: Organizing a small business as an S corporation or limited liability company (LLC) partnership retains the advantages of reporting the firm’s income on your own tax return----such as avoiding extra corporate-level tax on profits and being able to deduct the business’s losses personally. However, it can also provide additional valuable legal and tax benefits.
• Personal protection against legal liability for claims of creditors of the business in provided by an S corporation or LLC that is taxed as a partnership. (An S corporation may have only one owner, as a proprietorship does.)
• Employment taxes may be reduced, since all income earned by a proprietorship is subject to employment tax (at a rate of 15.3% against up to $102,000 in 2008, and at 2.9%----for Medicare----on all income above that level). But only wages paid by an S corporation are subject to employment tax----corporate profits are not. Similarly, LLC members may avoid employment tax under certain circumstances (under complex tax rules).
• An S corporation or partnership can have other owners while the creator retains management control----generating the ability to shift income to lower-tax-bracket family members, reducing the family’s tax bill, and also to shift wealth to younger family members, reducing future estate taxes.
So there are sound business and tax reasons to convert a proprietorship to an S corporation, partnership, or LLC.
Sharply reducing audit risk is another one.
Other audit discrepancies
• Personal tax returns. The IRS audit rate for all individual tax returns rose to 1.03% in 2007----and the IRS is publicizing the fact that this is the highest rate in 10 years, and that this audit rate has more than doubled since the all-time low rate of 0.49% in 2000.00
Reality: The IRS has generated this higher number only by including mail
contacts with taxpayers in its audit total as “correspondence audits.”
But most people consider a “real” audit to consist of being called to meet face to face with an IRS tax examiner.
These face-to-face audits took place in 2007 at a very low 0.23% rate----just barely more than the 0.2% rate of 2000.
• Collection actions. IRS levies, liens, and property seizures collapsed to all-time lows in 1999 and 2000, but while the number of levies and liens has largely recovered, the IRS still has not resumed seizing property from taxpayers as it once did.
Ten years ago, in 1997, levies totaled 3,659,417, liens totaled 543,613, and property
seizures totaled 10,090.
But levies fell by 94% to 219,778 in 2000….liens fell by 69%to 167,867 in 1999…and property seizures became almost nonexistent, plunging by more than 99% to only 74 in 2000.
In 2007, levies had increased back to 3,757,190 and liens to 683,659____but the IRS executed only 676 property seizures, still down more than 94% from 10 years earlier.
Conclusion: Today’s IRS will conduct “easy” collection actions such as levying money in a bank account or placing a lien on property to protect its interest. But it still has not significantly resumed the more difficult action of actually seizing property.
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