The IRS is busy playing detective! But are they building cases, clue by meticulous clue, like the supersleuths of television’s CSI? Or are they falling on their faces like the bumbling Inspector Clouseau?

Last month, a federal judge gave the IRS permission to serve a “John Doe” summons on the California Board of Equalization, demanding names of residents who transferred real estate to children or grandchildren for little or no consideration. The IRS sought the names as part of a nationwide effort to find taxpayers who transfer property to relatives without filing gift tax returns. (The IRS had already rounded up information from Connecticut, Florida, Hawaii, Nebraska, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Tennessee, Texas, Virginia, Washington state and Wisconsin — but California officials objected that state law prohibited them from ratting out residents without court approval.)

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!

Last Thursday, cellphone carrier Verizon Wireless announced a new $2 fee for one-time payments made online or over the phone. On Friday, the Federal Communications Commission immediately announced they were “concerned about Verizon’s actions” and planned to look into the matter. At the same time, over 158,000 visitors signed an online petition demanding that Verizon drop the fee. In fact, the website hosting the petition expressed shock that “while you are instituting this new fee, Verizon paid zero federal income tax from 2008-2010, and actually got almost a billion dollars in rebates from taxpayers.” Verizon immediately beat a hasty retreat and dropped the proposed fee.

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!

Last year’s federal budget deficit topped $1.48 billion. With money so tight, you’d expect government to focus its efforts on those who really need the help. But that’s far from the case, according to Oklahoma Senator Tom Coburn. Last month, he released a 37-page report entitled Subsidies of the Rich and Famous, outlining “sheer Washington stupidity” that he claims costs taxpayers billions of dollars every year.

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.”

What sort of tax breaks have Senator Coburn so upset? Here are three:

• “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?

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!

Donna Bordeaux is a Certified Public Accountant and Personal Financial Specialist with Bordeaux & Bordeaux, CPAs, PA in Lake Wylie, SC (a suburb of Charlotte, NC). For further information about Donna or her firm, please visit her website at Charlotte CPA or by phone at 704.752.9845.