The IRS audits only a small percentage of business and personal tax returns annually, because they lack the manpower to do extensive audits. However, there are “Red Flags” the tax return scanning system picks up that could target your corporate or personal return.

If your return is selected for review, you have nothing to worry about if you haven’t mis-stated the numbers on your return, and you have receipts to back you up.

Even though the odds of you getting audited may seem low, those odds increase dramatically based on your income and the types and amounts of deductions you claim. The higher your income the more likely your return will be selected, math errors make you more suspect, and taking larger than normal amounts of deductions in certain categories can trigger an audit. (more…)

The IRS with little official fanfare and no real advance warning began a “national research project” to study (1) payroll taxes, (2) fringe benefits, (3) independent contractor, (4) expense reimbursements and (5) other related “payroll” issues.

Use of the phrase “National Research Project” seems fairly innocuous and is easily confused with the IRS’ more benign National Research Program. The goal of the latter is to design a strategy to collect data that will be used to measure filing and reporting compliance with the guiding principle “to minimize taxpayer burden as data are [sic] collected.”

Confusion of the National Research Project with the National Research Program may be the IRS’ intent, because there have been few public statements that actually describe what is in reality a massive audit initiative.

As the rumored audits have begun, the IRS finally published “Headliner Volume 280″ describing in only the vaguest terms the audits being unleashed over the next three years. The National Research Program only created ripples in the vast sea of issues that taxpayers must address and many advisors have drawn the same conclusion with respect to the current initiative since the programs have similar names. (more…)

You can apply for income tax relief for up to $2 million (or $1 million if married and filing separately) in debt that is cancelled, or forgiven, by your mortgage lender on your primary residence. The law has been extended through 2012 under the Emergency Economic Stabilization Act.

If you have lost your home through foreclosure or have restructured your mortgage loan, you may qualify for this tax relief under the extended tax law called the Mortgage Forgiveness Debt Relief Act of 2007. The claim can be made by using IRS Form 982.

There are two qualifying factors that must be met on the mortgage debt exclusion: 1) it must be your primary home, and 2) the debt must have been used to buy, build, or make substantial improvements to the residence to which the mortgage applies. Certain business or farm property may also qualify for tax-free treatment, so check with your accountant or tax attorney in this situation.

When a lender forgives debt, it is typically a taxable event. You would receive a 1099-C (Cancellation of Debt) and the income would be claimed on Line 21 on your personal 1040 income tax Form. (IRS Publication 525)

While mortgages for second homes and rental properties do not qualify for the exclusion, some or all of this debt might qualify for other exclusions if you are insolvent at the time the debt was settled.

Canceled credit debt does not have to be included in income if it was a gift, or if the individual is insolvent, or in a bankruptcy case. The exclusion for insolvency is particularly important in this case, because it will likely apply to borrowers with home equity loans or mortgages on second homes and rental properties, and will be helpful in this situation. This is an important point for borrowers whose property has dropped in value below what is owed on the mortgage.

According to the IRS, “A debtor is insolvent when, and to the extent, the debtor’s liabilities exceed the FMV (fair market value) of the assets. Determine the debtor’s liabilities and the FMV (fair market value) of the assets immediately before the cancellation of the debtor’s debt to determine whether or not the debtor is insolvent and the amount by which the debtor is insolvent.”  (IRS Publication 908)

The value of all of your assets and all of the liabilities you owe have to be calculated to figure out if you are insolvent, and by what amount, so as always, check with your professional accountant to see how you can best take advantage of these tax relief measures for exclusions of cancelled or settled credit  and mortgage debts.

REMINDER:

Corporate tax returns are due March 15th and extension deadline filing is September 15th

Personal tax returns are due April 15th and extension deadline filing is October 15th

If government really wanted to help stimulate the U.S. economy to the highest degree possible, they would change the tax system entirely. The Founding Fathers had it right when they prohibited taxes on income.

Here is a way to get rid of the IRS and never have to file another income tax return, or corporate return for that matter! Every dime you earn would be in your paycheck; no taxes would be withheld. It’s within your power to make it happen!

There is a tax bill before Congress right now that would abolish the IRS and get rid of income taxes, corporate taxes, death taxes, estate taxes, etc. It is called the FairTax Act, and I am here to tell you it is not only fair, it would solve our country’s economic problems overnight. Here’s a snapshot of how it works.

First I do want to say that The FairTax is resisted by a vocal minority precisely because it will do what it claims in eliminating the IRS, the more than $300 billion in tax return filing costs, and the corruption of the current system. Make no mistake, that adjustment will be hard for tax lawyers, special interest groups, lobbyists who make millions from our current tax system and those in Congress who see the current tax code as a way to get your campaign contributions to buy your votes.

What is the FairTax?

The FairTax is a retail consumption tax that is charged when you buy something new. It is a transparent tax. That means that the tax will be on your receipt in plain English so you can see it.

Right now you are paying those taxes when you buy something, but they are hidden in the cost of the item by all of the goods and services that go into making that item from raw materials to packaged product. Those are called embedded taxes because they are hidden from your view. Under the FairTax Act, you would be paying the same price for a loaf of bread but the loaf would have a lower shelf price and the tax would be added at the cash register and printed on your receipt.

Is the FairTax actually fair?

Yes, the FairTax is fair. In fact, it is really much fairer than the current income tax. You can control how much tax you pay simply by deciding what items you are going to buy.

Wealthy people spend more money on more expensive items than other individuals. The FairTax taxes them on these purchases. Tourists and illegal aliens, who pay no taxes now, would be paying their fair share every time they buy something. Someone who deals in cash and never reports it on an income tax return would now pay taxes on their income when they spend it at the cash register.

And yes, the government would still get as much tax revenue as they do now, but it would cost us a lot less to run the government. In addition, your Congressional Representatives who spend millions of your tax dollars to buy the votes of special interest groups by voting for insane programs, like studying the mating habits of wooly wingas, would stop. (A wooly winga is a made up name for an animal in case you were wondering.)

The FairTax would have a positive effect on the U.S. economy.

With the penalty for working harder and producing more removed, American businesses will experience a new era of economic growth and business expansion. Hidden taxes are history, Americans are able to save more, and businesses invest more. The FairTax, as proposed, would bring U.S. companies back home as it would no longer be an advantage to have U.S. companies in foreign countries hiring workers for low wages to do jobs that Americans should be doing here at home for a fair wage. In addition, other international investors will want to invest here to avoid taxes on income in their own countries, which would further spur the growth of our own economy.

The FairTax would have a positive effect on wages and prices.

Americans who produce goods and earn wages are currently required to pay significant tax and compliance costs under the current federal income tax. These taxes and costs both reduce after-tax wages and profits and are then passed on to the consumers of those goods and services in the form of price increases.

When the FairTax removes income, capital gains, payroll, and estate and gift taxes, the pre-FairTax prices of these goods and services will fall. The removal of these hidden taxes may also allow wages to rise. Exactly how much prices will fall and wages will rise depends on market forces. For example, in a profession with many jobs and too few to fill them, wages will likely increase more than in fields where there are too many employees and not enough jobs.

Workers would bring home what they earn.

It would put more money in the pockets of every U.S citizen by eliminating the income tax. There would be no deductions from what you earn to pay federal taxes, Social Security or Medicare. If you earned $100 you would get paid $100. Business would no longer be burdened with paying additional taxes on employee wages for Social Security/Medicare.

The FairTax has a positive effect on Social Security/Medicare.

Under the FairTax Act there would be plenty of money available for both these programs. Like all federal spending programs, Social Security would operate exactly as it does today, except that its funds come from a broad, progressive sales tax, rather than a narrow, regressive payroll tax.

Employers would continue to report the wages they pay to each employee to the Social Security Administration simply for the determination of benefits. The move to a reformed Social Security system is eased while ensuring there is sufficient funding to continue promised benefits.

In the meantime, Social Security/Medicare funds are no longer triple-taxed like they are under the current tax system: 1) when payroll taxes are initially withheld; 2) when those withheld payroll taxes are counted as part of the taxable base for income tax purposes; and 3) when the promised benefits are finally received.

The FairTax protects low-income and lower-middle-income families and individuals.

Under the FairTax Plan, poor people pay no net FairTax at all up to the poverty level! Every household receives a monthly prebate check that is equal to the FairTax paid on essential goods and services [groceries and medicine], and all wage earners are no longer subject to the most burdensome tax of all, the payroll tax.

The FairTax protects senior citizens.

Seniors do very well under the FairTax. Low-income seniors are much better off under the FairTax than under the current income tax system. Some people incorrectly believe that people who live exclusively on Social Security pay no taxes. They may not know it, but they are paying hidden corporate income taxes and employer payroll taxes whenever they buy anything. Under the FairTax, seniors pay $0.23 out of every dollar they choose to spend on new goods and services. Plus, seniors, like everyone else, receive the monthly prebate check, in advance of purchases, for taxes paid on the cost of necessities.

Yes, The FairTax CAN really be passed into law!

Do you have the right to vote in this country? Passing the original 16th Amendment and the income tax wasn’t easy, and repealing the income tax and the 16th Amendment won’t be easy either. That is why the FairTax has undertaken to build a grassroots movement and grassroots alliances to support the effort. But this will only happen when the American people rally behind the effort, throw off the yoke, and demand that their congressional representatives correct 90 years of wrongs done by the income tax.

What you can do RIGHT NOW to make sure this bill gets passed.

First, go to the website http://www.FairTax.org and sign the petition to let Congress and the President know that you want this bill passed into law.

Second, while you are on the website, look at the congressional scorecard to see whether your state congressional representatives support this bill. If they don’t, write them a letter and tell them that you think they should vote for it and that you will be watching this scorecard to see how they stand come election time.

Third, buy The FairTax Book: Saying Goodbye to the Income Tax and the IRS by Neal Boortz and Congressman John Linder. Read it so you understand what this bill actually says. The book is easy to understand. Then give it to a friend to read and ask them to pass it on.

Fourth, if you hear anyone, especially a politician, saying that the FairTax Bill will hurt the poor, or help the rich, or hurt senior citizens, then politely tell them that they either (A) have not read the FairTax Bill and understood it, or (B) they are intentionally misleading the public, so they must have a personal vested financial interest in keeping the current tax code in place.

Fifth, pass this article on to everyone you know and encourage them to join the grassroots movement to get this bill passed into law. Remember, our politicians serve us, we don’t serve them.

Sandra Simmons, President of Money Management Solutions, specializes in helping business owners and individuals manage their money to acheive financial freedom. Claim your FREE Debt Reduction Solutions Guide