Tax Guru – Ker$tetter Letter

IRS E-File Not for Everyone

It looks like I’m not the only tax pro who recognizes the limitations to the the IRS e-filing program and refuses to use it for clients.

1099 Recipient Misconceptions

During this time of year, as people are receiving their 1099 and W-2 forms and preparing to give everything to their tax preparers, it’s a good time for a refresher on some of the most common mistakes made regarding these documents.

First is the perception many people have, that if they do not receive a 1099 or W-2 from payers, the income is tax free. With the legal requirement for 1099-MISC forms to be filed when annual payments exceed $600, the common belief is that any income below $600 is tax free. Not true. All income received for services is taxable, whether or not a 1099 is received.

In the unlikely event that you are selected for an IRS audit, the auditor will come prepared with a listing of 1099s that have been received reporting income that you were paid. The auditor will also demand to see all of your bank statements for the year under review, plus the statements for the previous December and subsequent January. The auditor will total up all of the deposits shown on the bank statements for the year under audit. S/he will then try to match up the total deposits to the gross income you reported on the various schedules of your 1040. While some kinds of deposits are not technically taxable or reportable income, such as transfers from other accounts, loan proceeds or gifts, the burden of proving their tax free source is on you. That is why I have always advised making photo-copies of each and every deposit you make. If you can’t prove that a deposit is from a tax free source, IRS will consider it unreported taxable income. Trying to defend not reporting compensation with the argument that there was no 1099 received will get you nothing more than a laugh from the auditor.

Accuracy: Believe it or not, information on 1099s and W-2s is often wrong. The burden of verifying their accuracy is also on you. You should never accept the amounts as gospel before you have gone through your records and matched up the totals. This is another reason why it is crucial to have all of your personal accounts set up on QuickBooks. If the amount is wrong, notify the payer ASAP to correct it. If you do this before the payer has sent the IRS its copy (which isn’t due until February 28), it will save everyone a lot of grief later on. If the change is made after the original forms have been sent to IRS, there will probably be a mis-match with IRS computers now having two 1099s, even though one may have the tiny “CORRECTED” box checked.

Attaching: I constantly hear people complain that they can’t finish their tax returns because they haven’t yet received all of their 1099s. This is a bogus excuse for a couple of reasons. First, the amount of income you received and will be reporting on your 1040 is not dependent on what shows up on the 1099. Your records (ideally QuickBooks) will have those amounts. Second, 1099s are not required to be attached to 1040s. W-2s are required to be attached to 1040s if there has been any Federal income tax withheld. Same thing with the States. They will not give you credit for those withholdings without the W-2s attached.

KMK

Speedy Net

I set my dad up with cable Internet service yesterday and am still in awe as to how fast it was. It was the easiest network setup and the fastest web surfing I have ever seen. Why anyone who has access to cable service would tolerate dial-up speeds is beyond me. I may sound like a shill for Cox, but what is even more amazing is the price. The cable modem only cost $75 and the service is $40 a month. I paid about $900 to have a satellite dish installed outside of my office a little over a year ago and I have been paying Earthlink $70 per month for service that is half the speed of my dad’s. It is one of the few downsides to living in the boonies that we will never have cable or DSL service where we are. If we ever move, there will definitely have to be cable Internet service wherever we relocate to.

With the speed of cable or satellite, there is no more efficient browser for surfing the web than NetCaptor, which I have been hooked on for the past six months. It allows me to be on 75 to 100 websites simultaneously. Keeping up on the wide variety of news on the web is so much easier this way. When I shut down NetCaptor, it remembers the sites I had open and opens all of them the next time I start it up, making it easy to pick up right where I left off. It also has a built in popup blocker that is very efficient at preventing those pesky annoyances from reaching my screen.

KMK

Tax Cuts – How they really work

Explained in a way that hopefully more people will understand.

Voters Deciding

Oregon voters said no to tax hikes. Wouldn’t it be great if we could all vote on any tax increase rather then leave it up to our rulers to decide how much of our income we may keep?

There are far too many people who believe that what we earn is not ours to decide what to do with. Under their belief system (which sounds eerily like Karl Marx), all income and property belongs to the State and the little people may only keep what the elite leaders allow. How is the concept of all of the fruits of our labors and investments belonging to the State any different from slavery?

KMK

What Washington giveth, the States taketh away.

Financialphobia

How is it that they have an officially recognized disease in England for fear of finances? I always thought we here in the USA lead the world in stupid made up disorders. Who are the ambulance chasing lawyers going to sue on behalf of these sufferers?

KMK

Not A Slam Dunk

According to Bruce Bartlett, a change in the membership of Bush’s economic advisory team may make it more difficult to keep up the push for eliminating the double taxes on corporate profits in the face of the left’s class warfare. It will be a very tough sell to a country with almost no understanding of how a capitalist economy is supposed to function.

A caller to the Limbaugh show the other day was whining at how unfair it would be if his neighbor’s dividend income were tax free while he had to pay taxes on his carpentry income. The caller was completely oblivious to the fact that such dividends represent income that has already been taxed at the corporate level and forcing the shareholder to pay a second tax would be the truly unfair thing. I have a hunch that such ignorance is more widespread than is healthy. So; don’t start counting on tax free dividends just yet.

KMK

9-Digit ‘Social’ Overused as ID

It’s good that they are finally realizing how dangerous it is to use SSNs for too many thing. However, for most people, it will be like putting toothpaste back in the tube in regard to getting control over their private SSNs. In spite of the claim on the SS card that it is “Not For Identification,” it has become the de facto personal ID for almost everything. Filing Form SS-4 and obtaining a new IRS ID number may be the only way anyone can have any serious level of control over who has access to their personal ID.