Q:

Subject: Online Bill Payment and the IRS

Mr. Kerstetter-

Came across the following statement in an article in the NYT about online bill pay.

“As long as I see that I.R.S. wants a canceled check as proof of payment, I will recommend that people who want to deduct their personal or business expenses pay them by check,” advised Eva Rosenberg, publisher of TaxMama.com.

Your thoughts?

Keep fighting the good fight-

A:

I do agree that cancelled checks are the best way to document expenditures.  That is why I have long had battles and refused to work with banks that don’t return the actual checks.  I have explained to them that the little pictures of the check-fronts often aren’t good enough.  This is especially true when trying to track down how IRS applied a tax payment, a frequent problem.  The tiny tracking numbers are on the backs of the checks.

This is why I have gladly paid my bank (Regions) an extra two dollars each month so they will include my actual canceled checks along with my monthly bank statement.  Many other banks refuse to even make that available, claiming that it’s for the customers’ convenience, when we all know that it’s strictly for theirs.

You can use credit card statements to prove expenses, but you will also have to have a receipt showing the details behind it in order to prove to IRS auditors that it wasn’t a personal expenditure.  Eva had an excellent point in the article about not wanting to allow IRS examiners a peek at other things on the credit card statement.  Auditors are notorious for snooping around in things that have nothing to do with the actual examination in a fishing expedition for other items they can hassle the taxpayer about.

Thanks for passing that along.

Kerry Kerstetter

 

Q:

Subject: Penna Question

When as a recipient of a gift from the death of a friend, do we as the recipient pay tax on it?

Also is this added into our income?  (State or Federal or Local)

http://www.taxguru.org/estate/706.htm

I have read your site, but it talks to more of the donor than the receiver.

Thanks

A:

You first need to be clear about your terminology.  A gift is something you receive from another person while s/he is alive.  An inheritance is something received after the person passes away.

There are very few things that are not subject to income tax on the recipient.  Gifts and most kinds of inheritances are two of them.  The only potential tax, if the gifts or bequests are large enough, are on the former owner of the item being transferred.

The most common kind of inheritance that would cause income tax obligations for you as the recipient would be of something like a pre-tax retirement account.  If you were named beneficiary of someone’s IRA or other kind of tax deferred account, you will probably have to pick that up as taxable income.  In that case, you should definitely work with a professional tax advisor to see what can be done to limit your tax hit.

If what you received wasn’t from a retirement account, there should be no income or other tax for you to worry about.  You are not even required to report it on your income tax returns.  However, I often do disclose large gifts and inheritances on a statement with tax returns where it would explain why certain deductions, such as charitable donations, are much larger than would normally be expected for someone with a certain sized taxable income.

I hope this helps.  A tax pro can help work with your particular situation.

Kerry Kerstetter

 

Perhaps others are as confused as Mike Straka is in regard to why so many sales clerks hand out receipts:

Just keep the receipt, please.

I really don’t need it. I don’t need the coffee receipt. I don’t want the sandwich receipt. I don’t want a receipt unless I ask for it.

Why do some stores insist on giving you a receipt even when you don’t want it?

Many even go so far as to post signs reading: “If we don’t give you a receipt your purchase is free,” or “$5 if we don’t give you a receipt.” Wow, that’s great. But when I buy my $1.51 cup of coffee every morning (it’s NYC, after all), I don’t necessarily want the receipt.

I sent the following to Mr. Straka:

Mike:

As a former auditor who has helped set up internal controls at companies to reduce the risk of employee theft, I smile each time I see one of those signs promising something free if the clerk doesn’t  give us customers a receipt because I know exactly what it’s for.

As you may or may not know, businesses lose much more money from employee theft than from shop-lifters.  A popular technique of stealing is to pocket the customers’ payments and not ring them up on the cash register, which is checked and balanced with the money in the till and the bank deposits.  A store owner can’t be watching every sales transaction to see that all of the money makes it into the till, so they enlist the customers as their “deputies” to ride herd on the clerks. 

This is a similar trick to the request that you write the amount you are sending in with payment coupons for such things as credit cards.  This is meant as a way of preventing the employees who open the mail from changing the amount posted as having been received.

I hope this helps you understand the reasoning behind the requirement to give out receipts  If you ever open a little shop of your own and rely on minimum wage employees, you will be wanting that as a minimum in order to prevent them from augmenting their pay on their own.

Kerry Kerstetter
MBA~CPA~ATP~ATA
Osage, Arkansas