2018 Tax Season Information

Daily Notes

The IRS is not accepting any personal returns until January 29, with the first deadline on April 17, 2018.

If you have your return prepared before that time, the return will sit at the tax firm, queued in their tax software, until the transmission of the returns on January 29.

Returns that have refunds from earned income credit and additional child tax credit will not have any refunds issued until after mid-February, with these refunds not being deposited until after February 27.

Direct deposit is still the safest and fastest way to receive your refund, with most refunds issued in less than 21 days.

Business codes and their implications.

Daily Notes

When you file personal (filing as a sole-proprietorship), corporate, or partnership income tax returns there are numerous ways that the IRS uses information to track your business. The social security number, federal employer identification number, date of business formation, and also your business activity code.  As I will explain the use of the wrong code can lead to examination by the Internal Revenue Service.

Suppose for this example that you operate a plumbing business, in any of the above mentioned entity choices.  The business activity for a plumber is 238220.  This six-digit code is based on the North American Industry Classification System (NAICS) and can be found on the IRS website at www.irs.gov.   The IRS will use this code as a reference for all of the plumbing companies that file income tax returns.  They have a set formula for a basis for the type of and amount of expenses that will be reported on these tax returns.  A plumber will have a different type of expenses than an electrician, a drywall installer, or a landscaper.  The ratio of certain expenses, such as cost of goods, labor, small tools, and travel will be different for a plumber than other business types.  If you as a plumber use a code for a drywall installer (code 238310) and have a lot more in sub-contractor or small tools expense than a plumber normally has it will cause the IRS program to take notice.  If you have more in supplies (as a percentage of overall expenses) than all the other plumbers using the correct code you will have another item to notice.

The IRS has a program that keeps score of these noticeable differences and when there are enough of them your return will be selected for a cursory review. (This is the DIF SCORE-Discriminate Income Function) Based on this review the IRS will either see the error in the code used and close the review, or see other items for consideration and send the return to the field for an agent to review.

Before you file in future years review your business code and be sure it represents your business. Review the IRS Publication for small businesses for other important information regarding your business and items the IRS will consider when reviewing your return.


Daily Notes

In a recent IRS audit I was talking to the auditor about different industries, and methods used when they are selected for examination.  Two different types of businesses that we discussed were Chinese Restaurants and Massage Parlors.  The methods used to calculate income for these industries shows the unique thinking of the Internal Revenue Service.

On the Chinese restaurants, since so many records are kept in Chinese and they are such a family run operation, they contacted the company that provided the fortune cookies to the restaurant.  They figured that each customer that went to the restaurant received a fortune cookie after they were done eating and presented with a bill.  The IRS figured what the average price of the meal was per person, multiplied by the number of fortune cookies purchased, and calculated the years gross income to the restaurant.

On the massage parlor, the IRS verified the receipts from the laundry that serviced the linens for the parlor.  Once the IRS determined the numbers of towels and sheets cleaned by the service during the year, and determined the average price for a massage. the yearly income was calculated.  This accounted for any customers that may have paid in cash and the business forgot to report.

These methods of reconstructing income are what is called indirect methods of proof, and have help up in court to be a sound method to arrive at gross receipts when adequate books and records are not available. Keep in mind also that if the records used to prepare your tax returns are of such poor quality that the returns prepared from them are not accurate, the IRS can attach up to a 40% penalty of additional tax for the inadequate records penalty.

Know your business, maintain accurate books and records, stay in tax compliance, use planning to lower any possible tax liability, and respond to any IRS notices you may receive.