The outlaw Willie Sutton stole an estimated $2 million over a 40-year career robbing banks — and scored the ultimate “success” in his business, living long enough to die of natural causes. Sutton always carried a pistol or Tommy gun with him on jobs, declaring “you can’t rob a bank on charm and personality.” But the gun was never loaded, because, as he said, someone might have gotten hurt! And he became legendary, ironically, for something he never actually said. According to the story, Sutton was asked why he robbed banks — and replied “because that’s where the money is.” But in his 1976 autobiography, Where the Money Was: The Memoirs of a Bank Robber, he confessed that credit for the line belongs to “some enterprising reporter who apparently felt a need to fill out his copy.”

What does a depression-era bank robber have to do with taxes? Well, the IRS estimates that outlaw taxpayers cost the Treasury $385 billion per year in uncollected taxes — roughly 15% of the amount they believe is due under current law. So they work hard to close that gap. In FY 2011, the IRS employed over 22,000 revenue officers, revenue agents, and special agents. They conducted 391,621 “field” audits and 1,173,069 less-intensive “correspondence” audits. They filed levies on 3.7 million taxpayers and filed over a million liens. But they can’t turn over every rock. So how do they case their targets?
Earlier this month, the IRS released their FY 2011 Enforcement and Service Results revealing how likely you are to be audited. And even Willie Sutton would have appreciated the IRS’s “M.O.”:

• If you make less than $200,000, your overall audit risk is only about one in a hundred. (Of course, that average encompasses a range of possibilities. If you run a sole proprietorship in a cash-heavy business like takeout pizza, your risk may be far higher.)
• If you make over $200,000, your overall audit risk rises to about one in twenty-five. Obviously, the IRS sees more opportunity in chasing higher income earners.
• If you pull down over $1 million, your audit risk rises again to one in eight. Welcome to the 1%!

The IRS likes targeting entertainers, athletes, and other celebrities, too. Sure, it sets a high-profile example for the rest of us. But it’s also (spoiler alert) where the money is. Take Hollywood trainwreck Lindsay Lohan, for example. Google her name, and you’ll usually find it followed by “failed another breathalyzer test” or “missed her court-appointed community service.” But last week, Lohan made a different kind of headline. That’s right, the IRS filed a lien against her home seeking $93,701.57 in unpaid taxes from 2009.

Where does that all leave us as we move into this year’s tax season? Our job is to help you pay the minimum tax allowed by law. But we know the IRS is out to challenge us. So we don’t cut corners. We give you good, solid planning. That way, even if you do lose the “audit lottery,” you’ll feel safe knowing your savings are court-tested and IRS-approved.

Whether you have a high school student who is still debating the merits of Clemson or South Carolina, or you have a child that is working eagerly for his or her degree at Winthrop or another university, the question of how to pay for these college expenses certainly on everyone’s mind. Luckily, there are a few tax credits that can be utilized to offset at least a portion of these expenses.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return:

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases. This means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.

3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).

4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

Our Charlotte CPA firm has recently announced the addition of the Coach4College planning service. We utilize your information to provide you with a personalized plan on how to take advantage of all funding sources, make the right tax decisions, and reduce the overall cost of education. If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give us a call.

In a brilliant attempt to “reduce burden” for taxpayers, the IRS now has a new tactic for auditing small businesses. They now have Quickbooks and Peachtree software and are requesting electronic versions of accounting records for their audits. They have released further details to remind that it is mandatory that you provide your accounting records in an electronic format if they are requested. So what does this mean for you if use one of the off the self software packages for your accounting records?

From an IRS audit prospective, this means that the door will be open to analyze data much further to determine where they may be able to effectively find compliance problems (aka get more money from you). If they have the electronic accounting file, they can review the audit trail to see if anything was changed after the transaction was originally entered. They can tell how often you update your records. They can also see all deleted transactions. The problem is that they can start asking a lot of questions that are really out of the scope of what may have originally selected your returns for audit.

Here is the Q&A from the IRS on requests for electronic software records. http://www.irs.gov/businesses/small/article/0,,id=238525,00.html

Check out Question #6 from the IRS:

Q6. How will the electronic data be used?
A: Most accounting software programs can generate a large number of pre-set reports. Each report can be modified to fit the examiner’s needs. When working with these reports, the examiner can “drill down” to the underlying data and documents to further investigate items, as appropriate. The software also allows the examiner to test the integrity and veracity of the accounting records in making a determination as to the reliability of the records for examination purposes. However, the examiner may still need to request other documents when such records are necessary to properly test a return item or issue.

Wow I really think this will help speed the audit along and I especially like the “further investigate items, as appropriate.” That sounds so fun!

How about Question #12 from the IRS:

Q12. The accounting software backup file can contain transactional data for several years that are outside the scope of the audit. What, if anything, will the IRS do with that information?
A: If IRS is given a backup file that includes data for years not under examination, IRS will not utilize that data during the examination of the current year. If based on the results from the current year examination a decision is made to expand the scope of the! examination to prior or subsequent years, the taxpayer will be notified. The records may be utilized after that notification.

So they probably won’t expand the scope of most audits, right (Sarcasm)?

For most clients that we see, their Quickbooks file does not contain all of the transactions necessary to complete their tax return until we clean the file and enter adjusting entries. Many Quickbooks files we see have significant problems like negative accounts receivables, large balances in their undeposited funds account, and negative accounts payable entries. If the IRS gets their claws into these types of files, I foresee that they will be digging much further and causing a lot more time and money to be spent because audits will last longer and require more documentation and research.

So what is a business owner to do to protect from this unnecessary evil? Here are a few items to consider:

1. Business owners should stop and think about their own skills. Are their books and records really something they would want to turn over to the IRS in their current condition?
2. Most business owners are trying to use Quickbooks to manage their check book or maybe their receivables. If so, let’s talk about other solutions that may even be more effective. There are receivables-only solutions that can help more effectively collect money and expedite the collections.
3. Is this really an effective use of the business owner’s time?

Our firm offers solutions to remove the burden of bookkeeping from the owner and allow them to concentrate on making money and growing their business. We use professional accounting software systems that are not compatible with the IRS electronic accounting systems. The records will be accurate from the start and good planning for taxes can occur all throughout the year. We generally can assist owners with this process and show them how they can save more money than it costs to have this service.

Let us show you how it can be a win-win situation for you and if you are the lucky recipient of an IRS audit notice, we can make the process much smoother and less costly than letting the IRS dig aimlessly!

If you operate business in Mecklenburg County, North Carolina, you are required to have a Privilege License (similar to a Business License). Anyone doing business in Charlotte/Mecklenburg, whether home-based or at another location; whether it is a sole proprietorship, partnership, LLC, or corporation; full-time or part-time; regardless of size, unless the business is exempted by the North Carolina Department of Revenue and/or Federal Law.

Privilege license fees range from $50 to $10,000 and the fees are based on revenue from the prior year and the classification of the business. The license runs from July 1 through June 30 each year. Renewals were sent to all license holders within the past two weeks. If you did not receive a renewal, you may wish to contact the City-County Tax Collectors office to find out why.

View or Print the License Application
View the Classification Codes for Privilege Licenses

For more information, please visit the Mecklenburg county website.