More recently, the game has been more competitive and more entertaining. The NFC champion New York Giants reached this year’s “big dance” by defeating the 49ers, 20-17, in a game that came down to the final play — in a Cinderella playoff run that followed a middling regular season. The AFC champion New England Patriots made it by beating the Baltimore Ravens, 23-20, in a game that came down to the final play. That set up Sunday’s contest, when the Giants defeated the Patriots, 21-17, in yet another game that came down to the final play.

Sunday’s game proved the truth of the old cliche that “offense sells tickets, but defense wins games.” Patriots coach Bill Belichick gambled by actually letting Giants running back Ahmad Bradshaw score in the final minute in hopes of keeping precious time on the clock. That gamble succeeded in giving quarterback Tom Brady 57 seconds to engineer a last-minute drive — but ultimately failed when Brady’s desperate final heave to tight end Rob Gronkowski fell harmlessly to the ground.

That same cliche about defense winning games applies to your finances as well — especially when it comes to tax planning. If you want to put real money in your pocket, you’ve got two choices:

•    Financial offense means making more money. (As Charlie Sheen would say, “duh.”) But that’s not always easy, especially in a tough economy like today’s. You can invest all sorts of time efforts into growing your business or your income, only to see them sail wide right like a missed field goal.
•    Financial defense means spending less money. That’s often easier than making more. And when it comes to spending less, it makes sense to focus on the big expenses. For most affluent Americans, that means taxes, rushing you like the Giants’ backfield. Maybe you can save 15% or more on car insurance by switching to GEICO. But in the long run, how much can that really do for you?

Financial defense is important enough that some financial moves which look like offense are actually defense in disguise. Wall Street is buzzing about Facebook’s upcoming initial public offering, wondering if the company can really be worth $100 billion. But the company is raising “only” $10 billion in cash. And Facebook doesn’t need the money. They’re “engineering a liquidity event,” in large part so founder Mark Zuckerberg can pay his own taxes! (We’ll talk more about this as we get closer to the actual offering.)

It’s easy to think of us as just “tax people” and focus on the forms we file for that April 15 deadline (April 17 this year, for you procrastinators).  But focusing on just compliance misses the value you get from proactive tax planning, and misses the total value we offer as your financial “defensive coordinator.” So call us when you’re ready to “call an audible” and play real financial defense. We promise not to let the IRS just walk the ball across the goal line!

Last week, Presidential candidate Mitt Romney made similar headlines when he released his taxes. The returns weighed in at 547 pages, and included some items, like “Form 8261: Return By a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund,” that most tax professionals never encounter in a lifetime. (Trust us when we tell you this stuff is every bit as exciting as it sounds.) Romney’s not quite in Buffett’s financial league — his 2010 taxable income was a “mere” $17.1 million. But Romney’s actual tax rate was a similarly low 17.6%.

We’re not here to take sides on Romney himself, his campaign, or the tax system that makes his 17% rate possible. But Romney’s return illustrates a crucial lesson about your taxes, too — namely, that when it comes to paying less, how you make your money is even more important than how much money you make.

Romney’s income is more than high enough to put him in the top 35% bracket. That 35% applies to “ordinary” income like wages and salaries, business income, and “passive” income from certain investments. But Mitt made “only” $6.3 million in ordinary income. Most of his income derives from other sources, taxed at lower rates:

• Long-Term Capital Gains: Tax on long-term capital gains is capped at 15%, no matter how much gain you report. For 2010, Romney drew over half his income from such gains. This included $7.4 million in “carried interest,” related to his work at Bain Capital, and taxed as long-term capital gain. If that income had been taxed at ordinary rates, he would have paid an extra $1.5 million. If it had been subject to employment tax, like salary, the government would have collected another $214,600.
• Qualified Dividends: Tax on qualified dividends is also capped at 15%, regardless of how much income you report. Romney reported $3.3 million in qualified dividends for 2010. It’s worth pointing out that the only dividends “qualifying” for this rate are those that have already been taxed at corporate rates ranging from 15-35%.
• Tax-Free Municipal Bonds: Muni bonds are a traditional tax shelter for taxpayers in Romney’s “1%” category. But Romney’s home state of Massachusetts imposes a flat 5.3% tax, which makes munis less attractive compared to taxable bonds, for those with stratospheric income. So Romney reported just $557 in muni bond income for 2010.

If Romney winds up carrying the GOP flag in 2012, his taxes will be a campaign issue. But it’s important to remember that, while some are criticizing him as the face of a system gone wrong, no one is actually accusing him of doing anything wrong under the law. In fact, Romney appears to have foregone some legitimate opportunities (like potential home office deductions for his speaking and director’s fee income) to pay even less.

Judge Learned Hand famously wrote that “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.” (And with a name like Learned Hand, well, you just have to believe him.) We’re here to help you arrange your affairs so that your taxes are as low as possible — and do so in a way to survive scrutiny even if you decide to run for office. And remember, we’re here for your friends, family, and running mates, too!

Clark may have been shy, but she was no miser. She spent most of her life in a 42-room coop at Fifth Avenue and 72nd Street, said to be the largest parkview apartment in the city, and worth an estimated $100 million. (She left in an ambulance in 1988 and never came back.) She owned a 21,666-square-foot mansion called “Bellosguardo,” or “lovely view,” on 23 acres overlooking the Pacific in Santa Barbara, CA. (She stopped visiting sometime in the 1950s, and reportedly turned down a $100 million offer to sell it to Beanie Baby founder Ty Warner.) And in 1952, she bought a 22-room mansion on 52 acres in New Canaan, CT. (She added a new wing to the house and hired caretakers to live on the grounds — but never spent a single night there herself.)

Huguette had so little contact with the world that some people wondered if she was actually still alive. It turns out she spent her last 22 years in a series of ordinary rooms at New York hospitals. She had few visitors during this time, and little contact with anyone outside these facilities. But her few contacts included her attorney, Wally Bock, and her accountant, Irving Kamsler. And that’s where Clark’s Gilded Age story begins to tarnish.

Clark was worth half a billion dollars at her death. She left the bulk of her fortune to charity, with smaller bequests to her longtime nurse ($30 million), her goddaughter ($12 million), and her attorney and accountant ($500,000 each). You would think she’d be able to pay her taxes, right? But property records show the IRS filed four liens for unpaid taxes — $1 million in 2006, $1.1 million and $41,000 in 2007, and $7,400 in 2008. Even worse, according to a Probate Court filing, the pair had let unpaid federal gift taxes and penalties accrue — to the tune of $90 million!

It turns out both the attorney Bock and accountant Kamsler have a history of questionable conduct. When Bock’s former law parter Donald Wallace died, after revising his will six times in the last few years of his life, Bock and Kamsler wound up inheriting $100,000 in cash each — plus Wallace’s Mercedes and his Upper East Side apartment. They even collected $368,000 in fees on the $4 million estate! And, just by the way, Kamsler is also a convicted felon and registered sex offender, who pled guilty in 2007 to attempting to disseminate indecent material to minors in an online “chat room.”

As Huguette Clark’s bizarre story reminds us, money really can’t buy happiness. Our job, of course, is to help you pay the minimum tax allowed by law. But before you ask us what we can do to help you pay less, ask yourself how those savings will improve your life. Are you working to put your children through college? Build security for your retirement? Or are you looking for life’s little “extras,” like traveling in style? Those are the real benefits we work to give you — not just numbers on your annual IRS “scorecard”!

• 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.

Most people don’t know much about gift tax, for the simple reason that most people won’t ever pay gift tax. Gift tax law lets you give up to $13,000 per year to as many people as you like. Once your gifts to any single person (other than your spouse) top $13,000 in a year, you’re required to file gift tax returns. Your cumulative lifetime gifts count against your estate tax “unified credit,” which is the amount you’re allowed to leave free of estate tax. And once your cumulative lifetime gifts top $5,012,000, you owe a 35% tax on the excess. If you’re gifting to a grandchild or some other person more than one generation removed, you might even owe an extra 35% “generation-skipping” tax.

How does that lead the IRS to combing state property records like a sleazy private investigator tracking down a cheating husband? Well, transferring property into an heir’s name is a common estate-planning move. Let’s say you own a beloved vacation home, or a stock portfolio, and you don’t want to see it burdened by probate. You can just add your child’s name to the deed or account as “joint tenant with right of survivorship,” and at your death, voila, the property automatically passes to your child. But there’s a catch — transferring property like that counts as a “complete gift.” If that property is worth $1,000,000, you’ve just made a $500,000 gift!

This particular IRS “project” is already yielding results. The IRS filed an affidavit in the California case stating that they had examined 658 taxpayers who transferred property to relatives — and concluded that 238 of them should have filed Form 709 to report the gift. Twenty of those 238 were assessed actual tax because the transfers pushed them over their lifetime exemption.

This isn’t the first time the IRS has used the “John Doe” summons to flush out members of suspect groups. Back in 2002, the IRS subpoenaed MasterCard and Visa to find taxpayers using debit cards tied to accounts in offshore tax havens. And in 2008, they used it to find taxpayers hiding Swiss bank accounts. The Internal Revenue Manual puts strict limits on this tool. But if today’s efforts succeed in finding lost revenue, we can probably expect to see more in the future.

There are a couple of lessons here. First, many financial moves — like transferring property into your kids’ names — have hidden tax consequences that are easy to miss. And second, the IRS has more ways than you realize to find those consequences. So don’t take chances, especially when they might land you on the wrong end of an IRS subpoena! You know how the utility company tells you to “call before you dig”? Well, call us before you dig, and we’ll help you avoid all sorts of nasty surprises!

Verizon is hardly the only corporate giant to float new fees, only to see them immediately fall back to earth. Back in September, Bank of America announced plans to charge a $5 monthly fee for customers making debit card purchases — then, after howls of customer protest, backed off just five weeks later. Other banks, which had tested similar debit card fees, killed their fees too in the wake of the protests.

There’s a pattern developing here. In today’s struggling economy, companies can’t impose the broad-based price hikes they really want. So they settle for nickel-and-diming us with junk fees. Unfortunately for them, consumers are pushing back — and at least with Verizon and the banks, the customers are winning.

There’s a similar pattern at work in today’s Washington. Candidates can talk ’till they’re blue in the face about bold sweeping change, like Rick Perry’s 20% flat tax and Herman Cain’s attention-grabbing “9-9-9″ plan. (If you close your eyes right now, I bet you can still hear Cain saying “9-9-9″ in your head.) But in today’s hyper-partisan Congress, the actual legislators in charge of implementing all those bright ideas can’t find the consensus to name a Post Office, let alone remake the tax code in any meaningful way. So they settle for nickel-and-diming the system — extending the payroll tax holiday for a miserly 60 days instead of a full year, and paying for it by levying fees on mortgages sold to Fannie Mae and Freddie Mac rather than by raising taxes on million-dollar earners.

Even when legislators extend new breaks, they tend to be for small amounts, like the $800 “Making Work Pay” credit or $1,500 for home energy improvements. New tax breaks also tend to be short-lived: the 2009 deduction for sales tax on new cars lasted 10½ months, and the much-ballyhooed “Cash for Clunkers” program lasted just 56 days.

The problem, of course, is that Washington’s version of nickel-and-diming us adds up fast. A couple of bucks for online bill payments here and $5 for monthly debit-card usage there? Maybe it cuts into your Starbucks budget. But closing tax breaks hurts. As former Senate Minority Leader Everett Dirksen famously said, “A billion here, a billion there, pretty soon you’re talking real money.” And IRS “customers” can’t threaten to take their “business” somewhere else like customers at the bank.

2012 is an election year, of course, which means we can expect even less in the way of substantive action — at least for the next 10 months. But that may all change after November 6, as the Bush tax cuts expire after December 31. If the upcoming election leaves Washington as divided as it is now, we can expect a repeat of last summer’s debt-ceiling battle. Our job is to keep on top of all the news to safeguard your nickels and dimes, regardless of what happens in November. And that means planning. Remember, being proactive, now, is the key to keeping your tax bill as low as possible in 2012 and beyond. So, if one of your New Year’s resolutions is to get out in front of the tax nickel-and-dimers, give us a call!

The first part of Coburn’s report focuses on direct payments like Social Security and Medicare benefits, unemployment benefits, and farm subsidies. (NBA star Scottie Pippen, rocker Bruce Springsteen, and billionaire broadcaster Ted Turner have all gotten federal farm subsidies.) But Coburn also heaps his scorn on specific tax breaks that he calls a “reverse Robin Hood style of wealth distribution.” He claims he’s not interested in raising rates on anyone. And he cautions against demonizing “those who are successful.” But he does want to means-test benefits, close loopholes, and limit deductions that pamper millionaires with “unnecessary welfare to create an appearance everyone is benefiting from federal programs.”

Oklahoma Senator Tom Coburn

• “Subsidizing Millionaires’ Mansions”: For 2009, 143,441 out of the 235,413 taxpayers reporting incomes over $1 million claimed mortgage interest deductions, averaging $30,995 each.

• Rental Expense Deduction: 69,074 of those million-dollar earners claimed a total of $12.5 billion in rental property expenses, including mortgage interest, cleaning and maintenance, and depreciation.

• Gambling Losses Deduction: Finally, 8,225 of the top earners reported a total of $4.2 billion in gambling losses.

Coburn’s points seem reasonable at first glance. Does Oprah Winfrey really “need” a tax break for her $50 million California mansion? Should Vegas high-rollers count on us to bail them out when the dice come up snake eyes? On closer look, however, his objections may not hold up. The mortgage interest deduction, for example, is already limited to interest on $1 million of “acquisition indebtedness” on a primary residence and one additional residence, plus $100,000 of home equity indebtedness. Coburn would ditch the deductions for second homes and home equity interest, and drop the overall cap to $500,000 of indebtedness. But critics respond that over 11% of American homes are valued over $500,000, and limiting the deduction would cut home prices off at the knees at a time when they need all the support they can get.

Coburn’s objections to deducting rental real estate expenses and even gambling losses seem to make less sense. Paying tax on gross rents and gambling winnings? Rental real estate losses are already limited by “passive activity” rules. If millionaires can’t deduct their rental real estate expenses, they won’t invest in real estate at all. That would drag prices down in the same way as limiting mortgage interest deductions. And gambling losses are deductible only to the extent of gambling winnings. Is it fair to tax anyone, millionaire or not, on gross winnings without letting them net out losses?

As the economy continues to struggle, Washington gridlock intensifies — just look at the bickering over the payroll tax cut extension, which both parties say they want. And the 2012 presidential election draws near, we can expect to hear more rhetoric like Coburn’s. What do you think? Do tax breaks for millionaires offend your sense of fairness? Or should millionaires get to take advantage of the same rules as the rest of us?

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!

First, get information on both scenarios to determine what the prices will be for both scenarios. Don’t forget to get the residual value on the lease. Then, you can determine the internal interest rate on the lease and determine which scenario is a better value for your dollar. You should also consider how many miles you will put on the vehicle. If you may go over the mileage allowance, you are probably better off purchasing the vehicle.

If you own a business and the business is the buyer or lessor of the vehicle, you will probably end up paying higher insurance rates for commercial vehicles and higher registration and property taxes. It usually works out better for the individual to purchase the vehicle and have the business reimburse the individual by the mile at the standard mileage rate. The only real exceptions to this is if you plan to purchase a Hummer or gas guzzling vehicle where actual expenses are preferable to the standard mileage rate. The rate for 2011 is 51 cents per mile.

If you still are not sure, we can perform a detailed analysis of lease vs. purchase based on the details of each deal that you provide to us. Let us know if we can help with this.

Our internal best practice has been filing this receipts in an accordion file by month. I don’t think It is necessary to spend too much time filing these receipts but just being able to locate them if asked by the IRS should be the goal. Another problem with our current technology has arisen though. Most receipts are now printed on thermal paper. If you have ever looked at one of these receipts a year or two later, they fade away and become a blank slip of paper. Therefore, I recommend that these receipts be periodically scanned to preserve the information. Otherwise, by the time the IRS gets around to asking for them, they may have turned into magical disappearing ink and the IRS may disallow the deduction.

I recommend all business owners invest in a sheet feed scanner and even consider going paperless to save time and have a reliable source of data for audit and record keeping. Fujitsu makes a great line of ScanSnap scanners and Neat Receipts has some great portable scanners also. Go ahead and bypass the flat bed scanners and move up to sheet feed scanners. You will thank me later!

We also have a new product for simplifying home and offices with paperless technology. Let us know if you would like more information on how we can protect your data in a paperless environment and help streamline your life!