THE IRS IS COMING, THE IRS IS COMING - NOT!

 
Sadly true to form, because the $80 Billion in additional funding for the Internal Revenue Service (from the Inflation Reduction Act of 2022) was in a bill introduced and supported by President Biden and the Democratic Party, the Republicans are saying the additional funding means an army of IRS auditors will soon be coming after average middle class taxpayers.
 
Clearly, like, also sadly, just about everything else said by the today’s Republican Party and Republicans in Congress, this is a lie.  

The increased IRS funding is a good thing.
 
Here is the story (fellow tax pros, correct me if I am wrong) –
 
The $80 Billion in additional funding is spread over ten (10) years – through 2031 – and the use of this money is specifically identified in the Act.
 
* $45+ Billion is for “tax enforcement activities” such as hiring and training enforcement agents, purchasing equipment for enforcement agents and investing in investigative technology.
 
* About $25 Billion is for “operations support” such as rent and facility payments, printing, postage and other office supplies and costs, security of IRS facilities, IRS-wide administration, research, and enhancement and development of information technology.  This money will help the Service address the ongoing backlog generated by the COVID-related shut-down.
 
* Almost 5 Billion is for “business system modernization” to update outdated technology and systems, cybersecurity, and to improve customer service.
 
* $3+ Billion is for “enhancement of IRS services” such as pre-filing assistance and education, filing and account services, and taxpayer advocacy.
 
* $500+ Million to oversee the administration of the additional funding provided by the Inflation Reduction Act.
 
* $500+ Million for the Treasury Inspector General for Tax Administration and the Office of Tax Policy.
 
The Act also provides $15 Billion through September 30, 2023 for the IRS to investigate and provide a report to Congress on the options and costs of creating and administering a free direct electronic filing tax return system.  This is a system that would allow, I would expect, all taxpayers, and presumably their tax professionals, to compile and submit their federal income tax returns – Form 1040 and Form 1040-SR - directly to the IRS free or charge at the irs.gov or another IRS maintained website.
 
The IRS currently has a limited online FreeFile system for low income taxpayers (which we have been told is used by only 3% of those who qualify) – but this system is not a direct submission of returns to the IRS.  The actual compilation and submission of the returns is done by commercial tax preparation and tax preparation software companies and requires taxpayers to share personal financial information with these third-party for-profit companies.  As I understand it, the new system the IRS will investigate will be completely created and administered by the Service and will not involve any third-party commercial “partners”. 
 
What would be ideal is a system similar to the New Jersey Division of Taxation’s current program which allows all taxpayers, or their tax professionals, to submit NJ-1040 returns directly to the Division free of charge online using Division created and maintained software.  I would suggest that the IRS study the NJ system.
 
Clearly the greater the amount of gross income, and the more involved the return, the more likely an audit will find purposeful or inadvertent/unintended errors on the return and generate additional tax dollars.  There are not great sums of money to be found by auditing average middle class taxpayers.  Whatever you may think of the IRS, the Service is not stupid and it knows this.  In addition, Treasury Secretary Yellen has issued a directive that the IRS should not increase examinations of taxpayers making less than $400,000.  The increase in IRS audits that results from the additional funding will correctly be on high-income taxpayers.
 
The IRS has been underfunded for years.  And, despite reduced funding, each year Congress gives the Service more work to do - such as having it administer the recent stimulus payments and to administer the continued and expanding erroneous distribution of government social welfare and other benefit programs via the Tax Code.  This additional funding for the Internal Revenue Service is truly a good thing for everyone, except perhaps tax cheats.
 
Whenever I discuss IRS administration nowadays, I always add this commentary:
 
Trump never does anything, including appoint what he considers “underlings”, without some kind of required quid pro quo and pledge of loyalty.  So, I was understandably skeptical when Trump appointed a new IRS Commissioner.  However, hearing Commissioner Rettig speak at the National Association of Tax Professionals national conference in Washington DC shortly after his appointment I was not unimpressed and decided to give him the benefit of the slim doubt. 
 
However, the proven erroneous decision to very literally lock down the IRS for over 6 months in reaction to COVID and the problems and issues it generated has made me wonder if this was a conscious decision to attempt to at least hinder IRS audits and enforcement – similar to the way Trump’s Postmaster General appointee DeJoy purposefully tried to destroy the Post Office to invalidate 2020 mail-in ballots, which were expected to be mostly for Biden – and was Rettig’s “quid pro quo”.
 
I will not be completely comfortable that the IRS is being properly administered at the top until a new Commissioner is appointed.
 
TTFN

READ MY LIPS!

I often see blog posts and online articles that identify IRS “red flags”, more frequently during the tax filing season.  These posts tell you that if you claim a certain deduction or credit your tax return will have a greater likelihood of being chosen for audit by the IRS.

I don’t like these “red flag” posts and articles.

Read my lips –

Do not fail to claim a legitimate, documented tax deduction or credit on your federal or state income tax return just because you read somewhere that it is an IRS “red flag” and that claiming it will automatically result in an IRS audit.

(1) If your deduction is legitimate and you have sufficient documentation to prove its authenticity in an audit then what is the problem? An audit is not something that must be avoided at all costs – it is merely an inconvenience.

(2) Just because the IRS pays closer attention to tax returns that contain certain deductions or credits does not mean if you return contains this deduction of credit you will “automatically” be audited. The IRS only audits a small percentage of 1040s (less each year as Congress continues to underfund the IRS) – and several factors are involved in determining which returns are selected for audit.

(3) If you fail to claim a legitimate deduction or credit you have, in effect, audited your own return and disallowed the deduction – neither of which the IRS may actually do.

(4) Just because you read somewhere that an item is an IRS “red flag” does not mean that the item is really an IRS “red flag”.

I must add that if the alleged “red flag” deduction or credit is legitimate and documented, but another item on your return is not, an IRS audit might turn up the “questionable” item. The answer is obviously to claim only items that are legitimate on your tax return, and be sure to have sufficient documentation for all deductions and credits you claim. 

FYI - in my 45+ years in “the business” I expect I have prepared over 10,000 sets of tax returns.  I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with over the years – none of which have been in the past 20+.  And many of the 10,000+ returns have included deductions and credits which are thought to be “red flag” items. 

TTFN

HOW THE IRS DECIDES TO AUDIT

While enjoying a leisurely breakfast at Shirley’s Family Restaurant for the first time in months this past April 15^th my eyes were drawn to the title of a front page item from the Associated Press in The Times Tribune titled “How IRS Decides to Audit”.

The sub-headline read – “Study finds clusters of likely cheats”.

The item reported –

“A new study by the National Taxpayer Advocate used confidential IRS data to show large clusters of potential tax cheats in {the wealthy suburbs of Los Angeles, and communities near San Francisco, Houston, Atlanta, or Washington DC}.  The IRS uses the information to target taxpayers for audit.”

And –

“The study also looked at tax compliance in different industries, and found that people who own construction companies or real estate rental firms may be more likely to fudge their taxes than business owners in other fields.”

Contractors cheat on their taxes?  Duh!!!

The article eventually goes into detail about “how the IRS decides to audit”, which has not changed for decades –

“Each tax return is assigned a score.  The higher your score, the more likely you are to get audited because, according to the IRS, the more likely you are cheating on your taxes.

The score is called the Discriminant Inventory Function, or DIF.  A high DIF score does not guarantee you are a tax cheat, but the IRS claims it’s reliable.”

The article quotes a Turbo Tax representative to explain how one would get a high DIF score –

“If you’re reporting $8,000 of charitable contributions when you only making $50,000, that’s a red flag.”

What does this tell us?  If your report income of $50,000 on your Form 1040, and you actually did donate $8,000 to a qualified church or charity, you should not deduct this $8,000 on your Schedule A?  If you ask me – definitely no.

You should never NOT claim a legitimate and documented tax deduction simply because you think it will result in an IRS audit!  You are entitled to the deduction by law – so you should take it.

John Q Taxpayer earns $50,000 per year.  In 2013 he received a large inheritance from an uncle.  This inheritance was not taxable, and was not required to be reported on his 2012 Form 1040.  JQ is a volunteer at his local pet shelter, and knows that the shelter is trying to raise money to purchase a larger property.  JQ donates $8,000 from his inheritance to the shelter, a legitimate 501(c)3 tax-exempt charity.  The charity gives JQ a letter of thanks and acknowledgement, which includes the statement that no goods or services were provided in exchange for the donation.  Why shouldn’t JQ be able to claim a tax deduction for his gift?

He should!  What all this talk about DIF scores means to JQ is that he should make sure to keep the letter of acknowledgement from the shelter in a safe place.  Perhaps he should attach a copy of the letter, and a copy of his cancelled check, to his 2013 Form 1040.

As I have said in previous posts –

·      If your deduction is legitimate and you have sufficient documentation to prove its authenticity in an audit then what is the problem? While nobody wants to be audited by the IRS, an audit is not something that must be avoided at all costs – it is merely an inconvenience.

·      If you fail to claim a legitimate deduction or credit you have, in effect, audited your own return and disallowed the deduction – neither of which the IRS may actually do.

You should not be afraid to deduct an item because it appears to be too big.  You should be sure that you have all the proper documentation for the item and keep it in a safe place.

A high DIF score, or individual item, does not guarantee an audit.  Over the past 40+ years I have often had a client claim a legitimate deductions that I was certain the IRS would question, based on the % of the deduction to the client’s income. But they never did.

Click here to download recent IRS audit and enforcement statistics.

The article concludes by telling us –

“DIF scores can vary across industry, according to the study by the Taxpayer Advocate.  For example, people who owned construction companies were more likely to have high scores.  Lawyers, accountants and architects, and people who provided other professional services were more likely to have low scores.”

Are lawyers, accountants and other professionals more honest than contractors?  Not really - they just know how to cheat more effectively {just kidding}.

TTFN

FALL INTO THE GAP!

The Internal Revenue Service has released a new set of tax gap estimates for tax year 2006.  The $300 Billion number for net uncollected tax that we had been using now looks like closer to $400 Billion.  

“The new tax gap estimate represents the first full update of the report in five years, and it shows the nation’s compliance rate is essentially unchanged from the last review covering tax year 2001.

The voluntary compliance rate — the percentage of total tax revenues paid on a timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary compliance rate for 2006 is statistically unchanged from the most recent prior estimate of 83.7 percent calculated for tax year 2001.”

The IRS suggests taxpayers did not pay $450 Billion on time in 2006. The tax agency eventually collects around $65 Billion was collected via audits and late payments.  The result is a net tax gap for 2006 of $385 Billion, $95 Billion higher than the $290 Billion previously estimated for 2001.

The increased gap is largely due to “the growth in total tax liabilities. In addition, some growth in the tax gap estimate is attributed to better data and improved estimation methods.”

According to the Service -

"As was the case in 2001, the underreporting of income remained the biggest contributing factor to the tax gap in 2006."   

The complete breakout:

 •Under-reporting accounted for an estimated $376 Billion of the gross tax gap in 2006, up from $285 Billion in 2001.

•Tax non-filing accounted for $28 Billion in 2006, up from $27 Billion in 2001.

•Underpayment of tax increased to $46 Billion, up from $33 Billion in the previous study.

The IRS found -

“Overall, compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only 1 percent of wage and salary income was misreported. But amounts subject to little or no information reporting had a 56 percent net misreporting rate in 2006.”

So increased 1099 reporting is to be expected, which has already begun with the new Form 1099-K.

The biggest single component, representing 27% of the $450 Billion estimate, is “business income” for individuals (on the Form 1040), which accounted for $122 Billion of the under-reporting amount – and area where there is minimal third-party reporting.  “Small corporations” (assets less than $10 Million) under-reporting was only $19 Billion.  I expect most of this is from under-reporting on Schedule C.

There is no doubt from these findings that Schedule Cs will be an audit target, especially those with consistent losses. 

However – I still believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate.

As I have said in the past –

“The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration. In a majority of cases it is not financially beneficial, either in the short or long term, to incorporate.

While incorporating will certainly reduce one's 1040 audit risk, it is very often not the best idea for the average sole proprietorship. Incorporation can generate much more paperwork, recordkeeping, federal and state tax filings, costs, and general all-round "agita" than it is worth.

The advice that one should incorporate solely for the purpose of avoiding an audit seems to me to be saying, ‘If you want to cheat on your taxes you can incorporate and the IRS will not audit you’. It is not good tax or financial advice.

An IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less tax (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited. 

If you are reporting all of your income, deducting only legitimate and documented expenses, and keeping good records then any audit should result in “no change”.

Besides, as I previously reported – less than ½ of 1% of 1040s are actually chosen for a “sit down” audit.

PS - Click here to see a larger version of the above map.

TTFN

WHAT ARE YOUR CHANCES OF BEING AUDITED?

The IRS has just released its FISCAL YEAR 2011 ENFORCEMENT AND SERVICE RESULTS.

The total “examination” results are as follows –

Income Under $200,000 = 1.02%

Income $200,000 and higher = 3.93%

Income $1 Million and higher = 12.48%

The number of examinations for those with income under $200,000 is down from the previous fiscal year, but the other two categories are up.

However the number of examinations, or audits, is made up of two components – field audits and correspondence audits.  While the report does not offer any introductory comments or explanation, I assume that the correspondence audit component represents the CP 2000 and similar notices, which are handled my mail or a phone call, while the field audits are the actual office audits.

Looking at the individual components, just under .0023 (less than ¼ of 1%) of taxpayers with income under $200,000 were subject to field audits, and only 1.76% of those with income of $200,000 and higher.

The report did show an increase in field audits in all categories – approximately 29,000 more for under $200,000, 20,000 more for $200,000+, and 4,000 more for $1 Million and over.

I was surprised to learn that correspondence audits were down in the under $200,000 category.  It had seemed to me I was dealing with more CP-2000s than in past years.

So the chances of most of my clients being called for a “sit down” audit at the IRS office is less than ¼ of 1%, as it has been for a while now.

In practice, of the over 10,000 returns I have prepared over the years I can count the number of actual sit down audits I have had to deal with on the fingers of my two hands – so my audit rate is less than 1/10 of 1%.

I would be curious to see the numbers for taxpayers with incomes under $100,000.

Does anyone know if the “income” referred to in the study is gross income, AGI, or net taxable income?

TTFN

READ MY LIPS!

Read my lips -

Do not fail to claim a legitimate, documented tax deduction on your 2010 Form 1040 just because you read somewhere that it is an IRS “red flag” and that claiming it will automatically result in an IRS audit.

(1) If your deduction is legitimate and you have sufficient documentation to prove its authenticity in an audit then what is the problem? An audit is not something that must be avoided at all costs – it is merely an inconvenience.

(2) Just because the IRS pays closer attention to tax returns that contain certain deductions or credits does not mean if you return contains this deduction of credit you will “automatically” be audited. The IRS only audits a small percentage of 1040s – and several factors are involved in determining which returns are selected for audit.

(3) If you fail to claim a legitimate deduction or credit you have, in effect, audited your own return and disallowed the deduction – neither of which the IRS may actually do.

(4) Just because you read somewhere that an item is an IRS “red flag” does not mean that the item is really an IRS “red flag”.

I must add that if the alleged “red flag” deduction or credit is legitimate and documented, but another item on your return is not, an IRS audit might turn up the “questionable” item. The answer is obviously to claim only items that are legitimate on your tax return, and be sure to have sufficient documentation for all deductions and credits you claim.

In addition to being an inconvenience an audit will also cost you some money – especially if you bring your tax pro with you or send him/her to the audit as your legal representative under a Power of Attorney. You will need to pay for the tax pro’s time. If you are selected for an audit you should determine if the amount of additional tax, interest, and penalty charges you may be assessed for the item(s) in question is more than your potential costs at the various levels of the audit process.

If you are selected for an audit by the IRS or state tax authority, or receive any correspondence from these guys, the first thing you should do is immediately send the notice or correspondence to your tax preparer.

TTFN

A TRUE STORY

Here is an issue that recently came up in an IRS CP-2000 notice sent to one of my clients.

The client in this situation is a married couple. The wife is employed full-time, earning a substantial salary, and is an active participant in her employer's pension plan. The husband is a camera operator in the motion picture industry and a member of the appropriate union. He has many employers in the course of a year; most treat him as a W-2 employee, but a few pay him as an independent contractor and issue a Form 1099-MISC. Yet employee vs contractor is not the issue here.

For the year in question, which was 2008, the husband had made a small contribution, less than the maximum, to a traditional IRA account for himself, and claimed a tax deduction for the full amount of the contribution on the couple’s joint Form 1040.

The IRS CP-2000 notice indicated that the husband could not deduct the IRA contribution because of the limitations that result from coverage by an employer retirement plan during the year. The AGI reported on the couple’s 2008 Form 1040 was well over the income threshold for an “active participant” employee. The IRS removed the deduction and recalculated the tax liability accordingly, adding penalty and interest.

However, while the wife was, the husband was not an active participant in an “employer” plan (note the important word here is employer) at any time during 2008. This is true even though when he retires the husband will be able to collect on a pension.

As a union member the husband pays dues to the union. The union is not his employer. The various movie production companies that hire him during the year, generally for short-term projects, are his employers. These various employers make contributions based on earnings to the Motion Picture Industry retirement plan. But they do not make contributions for the husband to any plans that they themselves maintain for their employees.

The husband is not permitted to make any contributions to his union retirement plan.

The union retirement plan is not an “employer plan”. Therefore the husband is not an active participant in an employer plan, even though employer contributions are credited to his “account” during the year.

For tax year 2008, if only one spouse is an active participant in an “employer plan”, the other spouse, whether working or nonworking, can deduct the entire contribution to his/her IRA up to the statutory maximum if the couple’s combined modified Adjusted Gross Income is $159,000 or less. The MAGI on the joint 2008 Form 1040 for my clients was less than $140,000.

The husband is entitled to a full deduction for his IRA contribution.

We looked back at the W-2s issued to the husband for 2008 and found that one of the employees had checked the box to give the impression that the husband was a participant in that employer’s retirement plan. This is apparently what triggered the IRS CP-2000 notice. This was wrong.

Perhaps the employer, or his bookkeeper or accountant, thought that because the employer made contributions to the union retirement plan the husband was an “active participant”. But whoever so thought was wrong.

So if you are a union member in a situation similar to that of my client, and one or more of your 2010 W-2s have the Retirement Plan box checked, contact the employer(s) immediately and have him issue to you, and the Social Security Administration, a corrected Form W-2!

Have any of my fellow tax pros out there come across a similar situation, or disagree with me on this issue? I welcome your comments.

TTFN

SUMMER RERUN - IN THE COURTS

This summer reruns first appeared on June 3, 2008 - rdf.

I came across an interesting Tax Court case in the June issue of NATP’s TAXPRO Monthly.

The case is David and Gail Vigil v. Commissioner (TC Summary Opinion 2008-6).

Vigil had deducted $3,463 for meals and entertainment, $12,347 for travel expenses, $7,862 for supplies, and $17,199 for car and truck expenses. In audit the IRS disallowed all of these deductions because Virgil failed to provide any substantiation.

You are allowed to deduct “all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business” under Internal Revenue Code Section 162(a). However taxpayers are also required under IRC Section 274(d) to maintain and substantiate records for such deductions claimed.

In this situation Vigil claimed that he kept a record of the various locations where he conducted his business and also of the mileage driven. He used credit cards for business expenses and kept the receipts. However he gave the original receipts and documentation to his tax preparer, a CPA, but did not keep any copies. The CPA developed a drug problem and later died. The CPA’s wife, who took over the business, also developed a drug problem. Even with the help of the local sheriff Mr. Vigil was unable to get any of his documentation back from her.

In a situation where receipts and documentation are not available you can “estimate” deductible expenses if you can produce sufficient evidence and establish a rational basis on which the estimate can be made under the famous “Cohan Rule” (Cohan v. Commissioner, 50 TC 823, 827-828). In addition you can substantiate deductions through reconstruction of expenditures through other credible evidence if your records are lost or destroyed through circumstances beyond your control (Smith v. Commissioner, TC Memo 1998-33).

The Tax Court decided for the IRS because Virgil was not able to adequately reconstruct his records and he did not provide sufficient evidence for the court to estimate the amount of his expenses.

There are two morals to this story –

(1) Make sure you have receipts and documentation (i.e. a travel diary) for all business expenses.

(2) If you give original receipts to your tax professional make sure you get them all back with the completed return. You may want to make copies just in case before handing the receipts over to your preparer.

A possible third moral – beware if your tax preparer has traces of a white powder around his nose!

Whatever you do also never give or send original receipts or documents to the IRS. Give the IRS, or state tax auditor, photocopies of your receipts and documentation - always keep the originals for yourself in a safe and secure place. You can show the IRS or state auditor originals, but do not let him/her keep them.

As an aside, in this case Virgil deducted both actual auto expenses and the standard mileage allowance. You can’t do both – it is one or the other. And there are special rules as to which you can deduct.

TTFN

MY COUPLE OF CENTS

I believe there is nothing wrong or unethical with a tax preparer telling a client that becoming an S-corporation will reduce one’s chance of an audit.

Saying to a client, “A business organized as a sub-chapter S corporation is less likely to be audited than one organized as a regular C corporation or a sole proprietorship” is apparently merely making a statement of fact, the proof of which is readily available to the public in published IRS statistics.

I do, however, believe that tax decisions should be made based on tax law and not on potential audit risk, that organizing one’s small business as a sub-chapter S corporation is not the best option in many if not most cases, and that advising a client to organize one’s business as a sub-chapter S corporation for no other reason than to avoid an audit is terrible tax advice.

If a tax preparer is going to tell a client that a sub-S corporation has less of a chance of being audited he/she also has the obligation to tell the client that becoming a sub-S corporation, or a regular C corporation, involves substantially much more paperwork, filing requirements, expense and agita then becoming an LLC taxed as the default entity, and can have the potential for substantial additional tax at termination or, in the case of a sub-S, reclassification to a C corporation.

A good tax professional will review all the entity options available to the client, and apply the pros and cons of each option to the specific business operation and tax situation of the client. While audit potential may be a consideration in the overall decision, it is an extremely minor one.

I have always said that “an IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less tax (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited. If your return is prepared correctly, and you document all items of income and deduction properly upfront, then an audit is nothing more than an inconvenience.”

I have also said -

“I believe it is bad advice to tell ALL taxpayers who have a Schedule C business to incorporate. There is no tax advice that applies to all businesses in all situations (except don’t cheat). The decision to incorporate a business requires careful review of all the specific facts and circumstances of the individual situation. And taxes are not the only consideration.”

TTFN

I'M A YANKEE DOODLE TAX PRO!

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As promised in last Saturday’s BUZZ here is the story on the famous “Cohan Rule”.

George M Cohan was a playwright, composer, lyricist, actor, singer, dancer and producer who started out Vaudeville with the family act known as “The Four Cohans”. According to Wikepedia he was "Known as 'the man who owned Broadway' in the decade before World War I, he is considered the father of American musical comedy”.

Appropriately his life was made into the Broadway musical GEORGE M!, which was Joel Grey’s follow-up to CABARET. GEORGE M! also starred a young Bernadette Peters as Cohan’s sister.

His life story had previously been brought to the big screen in the classic YANKEE DOODLE DANDY with James Cagney. This movie is usually shown each year on July 4th on TCM or elsewhere. BTW, Cagney reprised the role of GMC for a guest appearance in THE 7 LITTLE FOYS, with Bob Hope as Eddie Foy. And, correct me if I am wrong, but I do believe that Eddie Foy himself appeared briefly as himself in YANKEE DOODLE DANDY.

GMC was famous for the line “My mother thanks you. My father thanks you. My sister thanks you. And I thank you”, which was addressed to the audience at the end of the family’s Vaudeville act.

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Among the many songs written by GMC are "Give My Regards to Broadway", “The Yankee Doodle Boy” (“I’m A Yankee Doodle Dandy”), “You're a Grand Old Flag", "Forty-five Minutes from Broadway", "Mary Is a Grand Old Name" and “Over There". He also taught us how to spell H-A-RR-I-G-A-N.

George M is still represented on Broadway in the form of a statue in the middle of Times Square.

FYI, while he always said he was “born on the 4th of July”, according to his Wikepedia profile a baptismal certificate indicates that he was actually born on July 3, 1878.

The “Cohan Rule” refers to the decision in the federal court case Cohan vs. Commissioner, 39 F. 2d 540 (2d Cir. 1930). This case resulted from one of the first IRS audits. The IRS disallowed Cohan’s deductions for business travel citing Internal Revenue Code Section 162. Under IRC 162 a taxpayer must establish that an expense was (1) paid or incurred for (2) business or profit-oriented purposes and (3) the amount spent.

Fred W. Daily explains the situation in his copyrighted article “Getting Audited? Can't Find All Of Your Records? No Problem”.

“The IRS took the position with Mr. Cohan that even if he could convince an auditor that the business expense qualified for a deduction (satisfy number 1 and 2), that he also must be able to fully document the amount spent (number 3). George replied that he was always on the run, and had little time to document many of his expenses. George challenged the IRS stringent record keeping requirements in court. His lawyers argued that the IRS was wrong because even though records were missing, George had presented other credible evidence of the amount of the expenses on which approximations of the true amounts could be made.

George had explained the necessity of the (undocumented) expenses and offered his recollections and approximations of the amounts incurred. The items ran from cab rides and tips to large hotel and restaurant expenses for George and his entourage. The Federal Appeals Court, in an opinion by the aptly named Judge Learned Hand, held that the sums were allowable business expenses. It was unreasonable of the IRS not to allow, at least some of his earnings, not to be based on Cohan's approximations.”

Another FYI – Judge Learned Hand is the author of the famous quote –

“Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one's taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes any public duty to pay more than the law demands."

What the Cohan ruling says is that since GMC travelled the country to produce and appear in theatrical productions, which was public knowledge via programs and newspaper accounts, it is reasonable and appropriate to assume that he must have incurred certain deductible expenses.

Under the Cohan rule if there is no documentation, but other evidence clearly indicates that some deduction should be allowed, the court may come up with its own estimate. As the Fifth Circuit held, “if a qualified expense occurred, . . . the court should estimate the expenses associated with those activities”.

Over the years Congress has, by statute, required more detailed documentation for certain types of expenses in order for a deduction to be allowed – such as business travel and entertainment, business gifts, listed property (autos, computers, cell phones, and certain entertainment property), and, most recently, charitable contributions.

Is the Cohan Rule still a credible “defense” today? It appears so, as per the item from last Saturday’s BUZZ where it was applied not to business expenses but to charitable contributions.

In an August 2008 blog post from RUBIN ON TAX titled “Is There Life Left In the Cohan Rule” author Charles Rubin refers to the article “Cohen Rule Still Secures Some Deductions Despite Statutory Limits” by Paul G. Schloemer from Practical Tax Strategies. Schloemer conducted a survey of tax cases where the Cohan Rule was invoked to see if the rule still had viability. Rubin tells us, “Happily, he reports that the rule is alive and well”.

Rubin pointed out that –

“Mr. Schloemer notes that there are two key variables that courts will look for in allowing a taxpayer to rely on the Cohan Rule. The first is that SOME documentation will be needed - oral testimony alone probably will not cut it. The second variable is the veracity of the taxpayer's testimony, since the court will need to have some level of trust in the taxpayer's assertions before it will allow deductions under the rule.”

Despite the fact that this “out” exists, you should not use it as an excuse not to keep good contemporaneous records and maintain detailed documentation of all your business expenses.

TTFN

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OOPS! THE REFERENCE TO THE COHAN RULE APPEARS IN TOMORROW'S (WEDNESDAY EDITION) BUZZ - IT WAS NOT IN SATURDAY'S BUZZ EDITION. MY BAD

A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA

* A recent taxpayer-friendly Chief Counsel Advice memo (CCA 200940030) tells us that the IRS Chief Counsel has determined that in the case of a taxpayer’s mortgage loan of more than $1,000,000, which was used to buy a personal residence, interest on $1,100,000 was deductible; the deduction was not limited to interest on the $1 Million “acquisition debt” maximum. The additional $100,000 of borrowings qualified as equity indebtedness. This is contrary to the decisions of court cases from 1997 and 2000.

* Great news for my clients who frequent Atlantic City. I mentioned this item briefly in a previous BUZZ posting, but it bears repeating and expanding. The Tax Court, in TC Memo 2009-226 (Ann L Laplante v Commissioner of Internal Revenue) has agreed that a gambler’s aggregate winnings for the day per casino are includible in income rather than individual winnings on a slot machine.

This is very important because “gross” gambling winnings are reported in full on Page 1 of the 1040, but losses are deductible, to the extent of winnings, only if you itemize. Gross winnings increase your AGI, and can reduce a multitude of tax benefits, increase taxable Social Security or Railroad Retirement, and make you victim of the dreaded AMT.

Russ Fox of TAXABLE TALK discusses this case in detail in “An Interesting Gambling Case”.

As Russ points out, Ms Laplante’s savvy tax professional, who happened to be an attorney, “realized that much of her winnings were illusory; that her true winnings were not the total of her W-2Gs but she walked out of the casino with—the net win or loss for the trip. The attorney felt that $4,000 was the correct number to report on the return” instead of the $56,200 she received in W-2Gs. So she entered $4,000 on Line 21 of her Form 1040 instead of $56,200.

The Court actually agreed with the tax pro’s reasoning. Russ quotes from the Court’s decision –

“Respondent nonetheless agrees with petitioner’s theory of recognizing slot machine play on the basis of net wins or losses per visit to the casino. Specifically, respondent states the following:

[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).”

However Russ does state the following caveat – “I do need to point out that the Tax Court did not pass judgment on this issue, so it is possible they would disagree at some future date”.

What is important for gamblers who wish to use this method to report gambling winnings to remember is the following quote from the decision –

“No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”.

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00
– Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion.

It is also a good idea to join the various “clubs” of the casino’s you frequent so that you can get a membership card to use to track daily gains and losses as additional documentation. But using the card should be in addition to and not instead of keeping a daily gambling diary.

* Did you know that beginning with 2009 tax returns filed in 2010, you will be able to check a box on your return to use all or part of any refund to purchase Series I U.S. savings bond, available in denominations of $50, $100, $200, $500, and $1,000, which will be mailed directly to you? You do now!

* This is not a tax item – but it is certainly worth discussing –

By pure luck I happened upon a great item on this past Sunday’s CBS Sunday Morning program. It discussed the issues brought up in the book “Life Without Lawyers: Liberating Americans from Too Much Law” by lawyer Philip K. Howard.

Here is a quote from the book, taken from a review from the New York Times –

“‘Sometimes I wonder how it came to this,’ a teacher in Wyoming told me, ‘where teachers no longer have authority to run the classroom and parents are afraid to go on field trips for fear of being sued’.. Thomas Jefferson might have the same question. How did the land of freedom become a legal minefield? Americans tiptoe through law all day long, avoiding any acts that might offend someone or erupt into a legal claim. Legal fears constantly divert us from doing what we think is right.”

The press release for the book further identifies the absurdities of current life brought about by lawyers –

“Americans are losing the freedom to make sense of daily choices – teachers can’t maintain order in the classroom, managers are trained to avoid candor, schools ban the game of tag, and companies plaster inane warnings on everything: ‘Remove Baby Before Folding Stroller’”

With apologies to Kelly Erb, Jim Maule, Paul Caron, Tom Cooke and Jim Grisi, I have always felt that the average ambulance-chasing lawyer (not tax or labor lawyers) was the scum of the earth, and that 500 lawyers on the bottom of the ocean was a good start.

I obviously agree that there are certainly times when you do need a lawyer, and that there have been lawyers who have done much good, it is my firm belief that in the grand scheme of things, similar to my opinion on organized religion, lawyers have historically done more bad than good.

The book’s press release is absolutely correct when it says –

“Today we are flooded with rules and legal threats that prevent us from taking responsibility and using our common sense.”

Of course lawyers are not totally to blame. They started the mess by filing ridiculous lawsuits and are exploiting the situation – but it is the juries that have perpetuated the folly. Remember the jury that awarded the cafone who spilt hot coffee from a fast food chain on her (?) lap millions of dollars. What complete idiots!

I have been on a jury panel twice over the years. One occasion involved a civil suit. An elderly women, as I recall at least in her 70s, was suing a non-profit hospital because she fell in the hall when visiting a patient. It seems something had spilled the floor and was not immediately cleaned up, although all normal procedures for hospital maintenance were properly in place. The bottom line of the plaintiff’s case, if memory serves me, was that as a result of the accident the woman’s legs hurt when she was on her knees scrubbing the floor at home.

Luckily, for the plaintiff that is, I was chosen as the “alternate juror” and was not involved in the final deliberations and decision. My fellow jurors ended up awarding the woman $75,000 in damages for her “pain and suffering”.

Gott In Himmel! I would expect that the legs of any 70-80 year old would hurt after scrubbing the floor on their knees.

I plan on ordering Howard’s book. I suggest you do so as well.

* Just a reminder - if you traded in a junk vehicle under the Cash for Clunkers program you do not have to pay tax on the credit you received. As a tax preparer I do not even need to know about it, unless you used your old or new car for business. And even in such a situation you won’t pay tax on the credit.

* Before I close I want to pass along an email I got from a new website – www.TaxQueries.com.

“The basic idea behind the site is that you ask questions and then receive answers from other tax professionals who might know. It's entirely peer driven. There is no single "authority" who has all of the answers. Everyone pools their knowledge into answering questions. We feel that the design we've put together and the way we've organized the information (in many cases) can much more straightforward than browsing forums or wading through database sites to get an answer.”

I have not had a chance to check it out – but I will once I “come up for air”.

TTFN

DID THE MONEY GROW ON TREES?

I realize that I am late in discussing this topic, but better late than never. As pointed out earlier this month in a Wall Street Journal, “IRS to Mine Payment Data on Mortgages”.

The article reports that - “the Internal Revenue Service will expand a program designed to catch tax cheats that searches for inconsistencies between mortgage payments and income”.

It also tell us – “The data could also be used to target for audits individuals who don't file tax returns, or who report less income than they paid in mortgage interest, according to a letter released Monday by the Treasury inspector general for tax administration”.

A recent TIGTA report found that, “tens of thousands of homeowners who paid more than $20,000 in mortgage interest in 2005 either didn't file a tax return or reported income that appears insufficient to cover their mortgage interest and basic living expenses”.

This is something that first occurred to me over 20 years ago. I had seen several returns where the combination of the mortgage interest, real estate tax and personal exemption deductions was more than the total income reported on the 1040, which generally consisted of a W-2 and some interest. I remember one return in particular for a full-time waiter at a Chinese restaurant who was married with children.

If I thought this odd I wondered why the IRS did not also. Yet in 37 years I have never come across an IRS audit in such a situation.

During an audit of a doctor client many, many years ago I asked the IRS auditor why the return was selected for review. I was told that it was the policy of that IRS office to audit returns of self-employed professionals with high income. Hey, I thought at the time (and still do), you should actually be auditing the returns of self-employed professionals with low incomes! I do believe the audit of my doctor client resulted in “no change”.

The IRS uses income reported on 1099s and W-2s to catch non-filers, so why not also use deductions reported on 1098s.

I realize that there could be several scenarios where the mortgage interest reported on a Form 1098 could be more than the taxable income reported on the 1040. One is income from tax-exempt investments (i.e. muni bonds or muni bond funds). But this income, while not taxed, is still reported on the Form 1040 on Line 8b. The sale of an investment or other asset for substantial gross proceeds (which are not reinvested) could produce a reported capital loss or minor capital gain. The gross proceed information would, however, be reported on Schedule D.

The article suggests another scenario – “Highly paid former employees of investment banks who lost their jobs in the financial crisis but who, thanks to their savings, are still making their mortgage payments”. And, then. the mortgagees could also be getting help from parents or other relatives.

Obviously claiming mortgage and real estate tax deductions in excess of taxable income does not automatically mean that there is unreported income. Perhaps the first contact from the IRS in such a situation could be a letter of inquiry, requesting that the taxpayer explain and document the source of funds used to make the mortgage payments. Those who do not respond, or who do not provide sufficient documentation, could then be subject to a full-blown office audit.

TTFN

WHO'S AFRAID OF THE BIG BAD AUDIT?

A tax audit is indeed an inconvenience, and has a great potential for agita and aggravation, but it is not something “evil” that must be avoided at all costs. As I have blogged in the past, if your deductions are legitimate and properly documented you should have nothing to worry about.

While my office audit experience over the past 38 tax seasons has been minimal, considering the volume of returns I have prepared during the 38 seasons, I have found the IRS auditors with whom I have had dealings, while of varying degrees of competence and tax knowledge, to be, for the most part, pleasant and cooperative. I have, thank my lucky stars, never had to deal with a real male sex organ.

My audits have usually ended in “no change” or a minimal mutually agreed on small balance due. I do recall that on one occasion it was determined that the IRS owed my client about $20.00 – but we said we would rather have a “no change” determination than get a check for such a small amount.

In my “wanderings” on the internet I have come across a tax professional who, a while back, appeared, or so it seemed to me, to be advising clients and readers alike not to claim legitimate deductions on a 1040 simply because they fall into an assumed or proven IRS “red flag” category and might increase the chances of an audit.

According to this tax pro it is more important to avoid an audit than to file a correct and accurate return, and it is more important to avoid an audit than to pay the absolute least amount of income tax possible.

I firmly believe in this quote from former IRS Commissioner Donald Alexander (as usual, the highlight is mine)–

"As a citizen, you have an obligation to the country's tax system, but you also have an obligation to yourself to know your rights under the law and possible tax deductions -- and to claim every one of them."

If you actually spent the money for the item and the item is a legitimate tax deduction, and you can prove with physical documentation that you actually spent the money and that it is a legitimate tax deduction, claim it!

If you do not claim the deduction you are automatically auditing your own return and voluntarily overpaying the IRS, and probably also your state tax authority as well.

The same tax professional recently reported, and rightfully so, that IRS statistics indicate that Schedule C businesses are audited much more frequently than corporations. The professional went on to advise clients and readers, “This reason alone is sufficient to justify the additional costs and paperwork associated with forming a separate legal entity and filing its annual report and tax return”.

Again the tax pro says avoiding an audit is the most important factor to be considered.

I do agree that a business enterprise filing as a Schedule C “sole proprietor”, whether registered as an LLC or not, is more likely to be audited than one filing as a corporation. In my recent 2-part post on the advantages and disadvantages of incorporating I explained that –

“The reason for this is a corporation with gross receipts that if reported on a Schedule C may be considered to be 'large' in relation to other Schedule C businesses will be relatively 'small' when compared to the total population of corporations. And it appears that the IRS will be specifically targeting certain Schedule C businesses for audit in the near future as part of its war on the Tax Gap.”

But the only taxpayer for whom this benefit should be the only reason for incorporating is the crook who wants to commit tax fraud, either on his/her own or with the assistance of an unethical tax preparer, by not reporting all income and/or overstating deductions and claiming personal items as business expenses.

The honest taxpayer/businessperson who will be properly reporting all income and claiming only legitimate deductions, and who keeps good receipts and records, should consider this tax advantage of incorporating as “icing on the cake” if, and only if, an extensive cost benefit analysis indicates that incorporating is justified. Or perhaps the deciding factor if it is a very close call.

Other tax bloggers have given more appropriate advice about incorporating in their postings -

• As I quoted in the above referenced 2-part post, TAX GIRL Kelly Phillips Erb, a tax attorney, has said, “In most cases, a C corporation is ‘overkill’ for a freelancer with no immediate plans for expansion, hiring of employees, etc.”

• Joe Kristan, in his post “Corporations: Yea or Nay?” at the ROTH AND COMPANY TAX UPDATE BLOG, says, “Which entity is best? That's a discussion to have with your tax advisor. If you don't know what to do, start with the partnership or proprietor formats; if nothing else, they are the easiest formats to change. C corporations are the only ones that can cause your income to be taxed twice -- when earned and when distributed -- so make sure you really know what you're doing before you go that way.” Joe’s post also includes a quote from another party that best describes the situation – “Decisions to embrace the corporate form of organization should be carefully considered, since a corporation is like a lobster pot: easy to enter, difficult to live in, and painful to get out of."

• John Sheeley, an Enrolled Agent and business advisor, writes a blog at www.johnsheeley.com that I recently discovered when he chose to “follow” me on Twitter. In his post “Choosing the Correct Business Entity Type” from earlier in the year he advises – “Always meet with your accountant or attorney BEFORE committing to the formation of a company. Make sure you form the right type of entity, in the correct jurisdiction. One size (or entity type) does not fit all.”

In my aforementioned 2-parter I revise John’s advice to say – “the first person you consult about such a decision is a tax professional, and not an attorney”.

The bottom line - You shouldn’t be so afraid of an audit of your return by the IRS that it causes you to pay extra income taxes by not claiming legitimate documented deductions, or causes you make a foolish move (incorporating) that will end up costing you a lot more money in the long run and result in unnecessary additional paperwork, filings, and agita, if you are an honest and ethical taxpayer.

Now if you are a crook that is another matter.

TTFN

RED FLAGS?

Peter Pappas has written a post at THE TAX LAWYER'S BLOG identifying what he considers to be "5 Slam Dunk IRS Audit Red Flags". The 5 items he says IRS examiners are trained to look for as they "indicate a high probability of error or fraud" are -

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* Home Office

* Employee Business Expenses

* Rental Losses

* Schedule C Losses

* Charitable Contributions

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I think Pete is somewhat misleading in his post. When he refers to these items as "red flags" I do not think that it is true that anyone who claims one of these items on their Form 1040 will automatically be audited - or even that their existence on a tax return will substantially increase the chance of an audit (with a possible exception discussed below).

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The mere fact that you claim a deduction for employee business expenses will not increase your chance of being audited.

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Pete correctly describes the method used by the IRS to select returns for audit - "The IRS assigns a numeric value to each tax return known as a DIF score. Returns with a DIF score higher than a pre-specified number are flagged and sent to the IRS regional examiners for further review and analysis."

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Information from your tax return is entered into a computer. The "DIF score" is based on IRS internal parameters for individual items of income and expense build into the analysis software.

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While excessive deductions claimed in any of Pete's 5 alleged red flags may increase your DIF score such that it is passed along for further review, the mere existence of these items on a return does not, I believe, increase the score (with, again, a possible exception discussed below).

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I, and I am sure Pete also, certainly would not want to scare you from claiming any legitimate deduction because it may cause your return to be audited. If you spent the money for a genuine business purpose, or made the contribution to a qualified charity (and have the required documentation), you should by all means claim a deduction.

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I do believe that these five areas are indeed "tax return items that indicate a high probability of error or fraud" and have been so identified by the IRS. And I do believe that if a return is "kicked out" by the DIF scoring process and any of these individual items show a substantial variance from IRS-considered "norms" they are looked at ore closely.

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I also agree with Pete's "common threads running through the five items" -

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"First, each of these items requires a subjective judgement to determine whether and to what extent a deduction is permitted. The more subjectivity involved, the greater the likelihood of mistake or outright abuse.

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Second, at least with respect with the first 4 items, these deductions tempt taxpayers and unscrupulous tax preparers to try to convert personal, non-deductible living expenses into deductible expenses."

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And, if I may add a third based on my own personal experience and that of other ethical tax pros, with all items these are the deductions that unscrupulous tax preparers have in the past often "inflated" or just plain "made up" to reduce a balance due or increase a refund.

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As I pointed out in my appropriately-titled post "Audits" -

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"In my 35+ years in 'the business' I expect I have prepared at least 10,000 sets of tax returns. During these 35+ years I can count on the fingers of my two hands the number of traditional IRS office audits I have had to deal with - none of which have been in the past 10 or so years."

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Over the years returns that I thought would be audited because of excessive deductions, attested to be legitimate by my clients, were never chosen for review. I have never had an audit of a return claiming rental losses, a home office, or a Schedule C loss, although employee business expenses and charitable contributions have been questioned.

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After Congress came out with its strict new documentation rules for claiming a deduction for charitable contributions tax pros, myself included, anticipated a substantial increase in the number of audits of this deduction, and expected that many clients, chosen at random, would receive "correspondence audit" notices from "Sam" requesting documentation of contributions deducted on Schedule A. This did not happen.

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However, if a return is selected for audit and the return claims more than nominal charitable contributions I would expect that documentation would be requested.

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One area where I do believe that the existence of the item may be, or possibly will be, a true "red flag" is Schedule C losses.

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As far back as December of 2006 then IRS Commissioner Mark Everson said that the IRS plans to conduct more audits on individuals with sole proprietorships. The IRS strongly believes, and frankly so do I, that a sizable portion of the "Tax Gap" (the difference between the taxes the government actually collects and what it thinks it should collect) is attributable to unreported income by self-employed persons.

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When Everson introduced his plans Schedule C returns were already being audited more frequently than "non-Schedule C" returns. As budget deficits continue to soar Congress and the IRS will be taking more action to reduce the Tax Gap and generate more federal income - and Schedule C returns with consistent losses is one area where the IRS will be concentrating its efforts.

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The post correctly observes that - "The mere reporting of business operations on Schedule C rather than a separate corporate tax return increases a taxpayer's chances of being audited 50 fold." Regardless of Tax Gap considerations, one of the reasons has always been to do with level of income. The greater one's "gross income", from whatever source, the greater the choice of an audit. A gross income, before expenses, of $250,000 reported on Schedule C is high when compared to the total 1040 "population", but minuscule when compared to the 1120 (corporate income tax return) population.

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Pete says, "Because there is so much abuse in the Schedule C loss area, we have adamantly recommended that taxpayers who are conducting a legitimate, for-profit business incorporate that business or form an LLC."

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While incorporating will certainly reduce one's 1040 audit risk, it is more often than not not the best idea for the average sold proprietorship. Incorporation can generate much more paperwork, recordkeeping, federal and state tax filings, costs, and general all-round "agita" than it is worth.

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Like a marriage - it may be relatively cheap to "get into" a corporation, but it can be highly expensive to "get out". A Schedule C filer who is considering incorporation should review very carefully all the consequences of such an action and do a detailed cost benefit analysis.

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I also recommend that all Schedule C businesses become an "LLC" - but it has nothing to do with taxes. Doing so adds an extra degree of liability protection.

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If you have a legitimate ongoing Schedule C business you probably should consult an accountant (not necessarily a CPA) instead of just a basic tax return preparer on a year-round basis. Some tax professionals are also available to provide excellent accounting services for small businesses throughout the year, while others, as I currently do, limit their practice to 1040 preparation. You can use the accountant for year-round accounting, bookkeeping, and payroll services and still have a separate tax pro prepare your 1040. The accountant can provide a "profit and loss" statement for use by the tax pro in completing the Schedule C.

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Pete provides the following "final thoughts" for those with potential "red flags" -

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"If you do decide to take one or more of the above deductions, there are several things you can do to dilute their red flag status.

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1. Timely file our return;

2. Use a recognized software program to prepare and print your return;

3. File the return electronically;

4. Have a respected CPA, tax lawyer or IRS Enrolled Agent sign your return as tax preparer; and

5. Attach explanatory statements to your return where necessary."

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I do not agree with most of these thoughts.

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1. The only one with which I concur. You should always, whenever possible, timely file your return. It is an "urban tax myth" that extending your return will reduce your chances of audit.

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2. You should never use a "box" to prepare your return unless you know what you are doing. It is more cost effective in the long run to use a competent tax professional.

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3. I do not think this makes any difference.

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4. In my 37 years in "the business" I have never come across anything that would lead me to believe that the "designation" of a tax preparer is a factor in audit selection. Returns prepared by CPAs, lawyers, and EAs are audited just as often as those of "unenrolled" preparers. And the IRS knows full well that there are incompetent and unethical CPAs, lawyers, and EAs, just as there are incompetent and unethical "unenrolled" preparers. The IRS does not say, "If the return was prepared by a CPA it must be accurate". That is utterly ridiculous. The IRS does have a list of "red-flagged" preparers, of all "designations", who are suspected of unethical practices, and the returns of these preparers are reviewed more closely than those of the average preparer.

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5. There are two schools of thought on this issue. Some tax pros feel that the more explanatory documentation you attach to a return the less likely the chance of any questions. Others feel that "less is more" - only attach to the tax return items that are absolutely necessary and do not clutter the form with unrequested or unnecessary schedules and attachments. I tend to lean more in the "less is more" direction, although I do believe that you should attach explanatory statements when appropriate. For example, in most cases if I claim more than $5,000 for cash contributions I will attach a statement listing the various charities by amounts (i.e. St. Mary's Church $2,500, Columbia University $1,000, Hurricane Victims Fund $1,000, United Way $650, Other Church and Charity $150). I do not, however, attach copies of receipts, acknowledgements, or documentation for the actual contributions.

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My bottom line - if you have a genuine home office that meets all the requirements in the Tax Code, or have legitimately incurred out of pocket "ordinary and necessary" expenses in connection with your job or profession, or have made contributions to church and charity, etc. do not hesitate to claim these deductions on your Form 1040. Do not omit them because you think they will cause your return to be audited. However, as with any business or personal deduction, make sure you have adequate documentation to substantiate the deduction.

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TTFN