Our Taxing Times

Begging Forgiveness

We've all heard the expression- "It's easier to beg forgiveness than to ask permission." How many people do you know live their lives with that expression as their mantra? In fact, I bet we have all followed that advice at one time or another. But behind that glib remark you have to understand that there will be consequences to your choice. If you choose not to follow the rules/procedures, what will the reaction and results be? Can you live with them? I am seeing too many people who expect their apology to be accepted and life to continue as usual.

There is a large tax gap in the US. That is the difference between the tax the IRS projects it should be collecting and the tax reported on the returns it receives. Income is under reported and expenses are over reported. Sometimes it is a mistake but too often the "mistake" was deliberately done to save the taxpayer money. The taxpayer/company weighed the risk to discovery and decided to go the "beg forgiveness" route. Sometimes it works, but increasingly, they are getting caught.

If the IRS "catches you", you need to understand that begging forgiveness with the IRS will get you more than a lecture. You will pay the tax you tried to avoid and you will be hit with interest and penalties on that tax. Those could easily double the tax you wanted to avoid. Most people understand the idea of interest and penalties but they don't realize there could be other consequences. You run the risk of other items on the return being questioned and possibly disallowed. It is then up to you to prove they were legitimate deductions. The IRS may decide to question other returns you have submitted. This could lead to audits of open year returns, other types of returns (payroll for example) or in the case of a business, the individual returns of the principles involved. (If you've cheated once, they will assume you could have cheated other times.) If the IRS finds a pattern of tax cheating, they could start talking criminal charges.

There are other consequence to playing the "beg forgiveness" card. You will be spending time and money to deal with the IRS. And if you used a tax preparer to prepare the return, you may have damaged your working relationship with them. I know that once I have found out that a client has given me false numbers or lied to me, I really don't want them as a client. Even if there was no fraud, they were just tying to play the system, I will be overly cautious and less trusting dealing with them in the future.

It's natural to hear the bragging of friends and co-workers and want to "fudge" your tax figures. It sound tempting to play the odds, cheat and then fix it if you get caught. But before you do, make sure you understand what could happen if you get caught. All of what could happen. Is it really worth it?

Are You In Good Standing?

This is a special year for non-profit organizations. It's been all over the general news not just tax blogs. The Pension Protection Act of 2006 mandates that all non-profits, except churches and church related organizations, must file an informational return annually. If they don't file for 3 years their tax exempt status is automatically revoked. Having worked with a non-profit to get their status back, this is not something you want to happen.

It also raises the question, if you are not compliant with the IRS are you compliant with your state? (I'll explain the process in KS, there might be differences in your state.) When a business in Kansas incorporates, they register with the KS Secretary of State. Partnerships and LLCs are also required to register. Once a year, they submit an Annual Report and filing fee to say that they are still in business. The list of registered business and their status is public information and available online. Helping a client this morning, I accessed a portion of the list and was surprised by the number of entities that were marked "Forfeited - A/R not filed." I am sure many of these are businesses that have closed and few were non-profits. But..

A non-profit that loses their tax-exempt status needs to be in good standing with their state or get in good standing quick. One of the requirements to get your tax-exempt status reinstated is an up-to-date certificate in good standing with their Secretary of State. A non-profit that has lost that through not filing the Annual Report has to apply for reinstatement. And that could cost some money to get since there is an annual filing fee that has to be made up for all years not filed. This makes a bad financial situation worse. While their tax-exempt status is suspended, the organizations can't take donations since those wouldn't be tax exempt to the donor*. If they aren't in good standing with the state, they will also have the expense of catch up their Annual Report filing fees. (Not to mention the preparer fees.)

For most tax-exempt organizations, the due date was May 17th. If you haven't filed your 990 this year, get it done now. The IRS is still accepting the 990N (electronic filing) and will take any returns you need to file. You don't want to lose that status. And check with your Secretary of State on your state status and get that up to date too. Even if you are fine with the IRS, check with your state to see if you are in good standing.

*Reinstatement is not a quick process. When I did it, there was a 5 year look back form that needed all the financial info for those years. And if 990s turnout to be required for any year, those need to be completed also. The IRS will also need processing time. Depending on the organization's recording keeping and time to preparer the returns/forms, reinstatement could take 4 or more months.

Can or May? Casualty Losses

When I was a kid, Mom or Dad was constantly correcting our use of can/may. "May" was to be used to ask permission and "can" was for questions of ability. I can sleep over at a friend's house because she and, more importantly, her Mom have invited me. Now that I have the ability, I have to get the permission- "May I sleep over?"

There are a lot of IRS Code sections where the taxpayer gets a surprise. They have the government's permission to make a specific deduction (may) but once the rules are applied to the issue, they can't deduct much or anything. For example, the Casualty and Theft Losses deduction. (This one comes to mind today because it is storm season in Kansas. Going home last night, the north end of town was a mess from debris from the afternoon storm. Most of the debris looked to be from someone's metal shed.)

May the shed owner deduct the loss of that shed on their tax return? Yes, IRC sub-section 165 gives them the permission to deduct a particular casualty loss. But can they - probably not. There are a lot of factors that come into play.

• Is this a personal or business loss? A business loss is treated differently and there is a better chance it will be deductible.
• Was there insurance reimbursement? Only what was not reimbursed by insurance is included in the casualty loss. By the way, if insurance paid more than it was worth, you have a gain and that is taxable.
• Lets assume it is a personal loss with no insurance. The taxpayer will start with the lower of the cost of the shed (or basis if it had been depreciated at any time) or fair market value(FMV) at the time of the storm. From this, they will subtract the FMV after the storm.
• Then they will subtract $100 (it was $500 in 2009) from all the losses from that storm.
• Next, all the losses for the year will be combined and 10% of the AGI will be subtracted from the combined total to get the casualty loss...
• ..that now has to go to the Schedule A where it is added the other Itemized Deductions.
• Now if the taxpayer can normally itemize deductions, they're good to go. The Casualty loss adds to taxes, mortgage and charity and it is subtracted from their income
• But if they normally can't itemize, there is a good chance the loss won't help them. It depends if the Casualty loss puts them over the standard deduction.

A Casualty/Theft loss may be deducted but it can't always help you on your taxes.

This was a quick overview, please talk to your tax professional about your specifics.