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Understanding federal tax obligations during Chapter 13 bankruptcy

8/30/2022

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Bankruptcy is a last resort for taxpayers to get out of debts. For individuals, the most common type of bankruptcy is a Chapter 13. This section of the bankruptcy law allows individuals and small business owners in financial difficulty to repay their creditors. Chapter 13 bankruptcy is only available to wage earners, the self-employed and sole proprietor businesses.

Tax obligations while filing Chapter 13 bankruptcy:
  • Taxpayers must file all required tax returns for tax periods ending within four years of their bankruptcy filing.
  • During a bankruptcy taxpayers must continue to file, or get an extension of time to file, all required returns.
  • During a bankruptcy case taxpayers should pay all current taxes as they come due.
  • Failure to file returns and pay current taxes during a bankruptcy may result in a case being dismissed, converted to a liquidating bankruptcy chapter 7, or the chapter 13 plan may not be confirmed.
Other things to know:
  • If the IRS is listed as a creditor in their bankruptcy, the IRS will receive electronic notice about their case from the U.S. Bankruptcy Courts. People can check by calling the IRS’ Centralized Insolvency Operation at 800-973-0424 and giving them the bankruptcy case number.
  • If one of the reasons a taxpayer is filing bankruptcy is overdue federal tax debts, they may need to increase their withholding or their estimated tax payments. The Tax Withholding Estimator can help people determine the proper withholding. The IRS.gov Estimated Taxes page has more information on estimated taxes. 
  • People can receive tax refunds while in bankruptcy. However, refunds may be subject to delay or used to pay down their tax debts. Taxpayers can see if their refund has been delayed or offset against their tax debts by going to the Where’s My Refund tool or by contacting the Centralized Insolvency Operations Unit.

​Other types of bankruptcy

Partnerships and corporations file bankruptcy under Chapter 7 or Chapter 11 of the bankruptcy code. Individuals may also file under Chapter 7 or Chapter 11. Other types of bankruptcy include Chapters 9, 12 and 15. Cases under these chapters of the bankruptcy code involve municipalities, family farmers and fisherman, and international cases.


More information:
IRS' Declaring Bankruptcy webpage
Publication 908, Bankruptcy Tax Guide
Publication 5082, What You Should Know about Chapter 13 Bankruptcy and Delinquent Returns.
Share this tip on social media -- #IRSTaxTip: Understanding federal tax obligations during Chapter 13 bankruptcy. http://ow.ly/ZVpQ50Ktuoq


"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
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Understanding Tax Terms: Contemporaneous Records

8/30/2022

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Everyone needs to know what this means!

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If you have problems getting to sleep at night and you turn to the IRS tax code for help, you might find some vocabulary that is very foreign to you. One of the more uncommon words used by the IRS is the term "contemporaneous." So what does it mean and why should you care?
Contemporaneous defined
According to the IRS, it means that the records used to support a claim on your tax return are created and originated at the same time as your claimed deduction. In other words, if you realize that you forgot to get a receipt for something, you are out of luck if you try to get one at a later date.

Not fair!
Perhaps you know you had the expense, but you simply forgot to get a receipt. You can cry foul, but time and again the IRS has had tax courts uphold their elimination of a taxpayer's deduction for lack of contemporaneous documentation. Here are some areas where the term contemporaneous is especially important:
  • Charitable contributions
  • Business deductions for expenses and capital purchases
  • Mileage logs
  • Tip records
  • Gambling losses
  • Business travel expenses


The donation of vehicles, boats and planes is often the most cited area where lack of contemporaneous documentation is a problem because these types of donations have a high estimated market value that changes from month to month. But timely, written acknowledgement from the charitable organization is also required for any donation of $250 or more.

What you need to know
  • Always get a receipt. Before you leave a donated item, always ask for a receipt. In the case of a vehicle, make sure the charitable organization gives you a 1098-C that is fully filled out. In addition, make sure the organization uses your vehicle or is a qualified charitable group that allows you to take the full market value of your donation.
  • If you forget, call right away. As soon as you realize a confirmation or receipt is missing, call to get one sent to you. Request that the receipt be dated as of the date of the service or activity.
  • Think tax year. Understanding the definition of contemporaneous is important, because it is not always precisely defined. If the documentation is received in the same year as the donation or transaction, you are usually in good shape.
  • Keep a log. Many transactions require the correct documentation at the time the activity occurs. This is true with deductible mileage, gambling loses and tip income. So keep a log of your activities as they occur.
  • Wait to file. To meet the IRS definition of contemporaneous, the receipt or acknowledgement must be received the earlier of either when you file your tax return OR the due date (including extensions) of your tax return. This is particularly true with charitable contributions. So if you want to play it safe, do not file until all documentation is in hand.



"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
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IRS Audit Rates

8/24/2022

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Don't get complacent...resurgence is underway
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The IRS reported audit rates continue to be low...very low. But that is now changing with thousands of auditors being hired for a post-pandemic scale-up of their reviews.
So don’t get complacent. A closer look at the IRS data release reveals some audit pitfalls you should know about.
Audit Rate Statistics for Individuals
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Source: IRS Data Books with 2019 audit figures updated through May 26, 2022


Observations
  • Fewer audit examinations obscure the reality that you may still have to deal with issues caught by the IRS’s automated computer systems. While not as daunting as a full audit, you'll need to keep your records handy to address any problems.
  • Average rates are declining, but audit chances are still high on both ends of the income spectrum: no-income taxpayers and high-income taxpayers.
  • No-income taxpayers are targets for audits because the IRS is cracking down on fraud in refundable credits designed to help those with low income, such as the Earned Income Tax Credit (EITC). And while not on the charts, 87% of Earned Income tax returns that are audited had additional tax applied!
  • High-income taxpayers have long been a target for IRS audits. This group, however, saw a big decline in audit rates during the pandemic. Still, taxpayers with over $500,000 in income have more than double the chance of being audited than lower-income taxpayers. Not only do these taxpayers tend to have more complicated tax returns, but the vast majority of federal income tax revenue comes from them.
  • Complicated returns are more likely to be audited. Returns with large charitable deductions, withdrawals from retirement accounts or education savings plans, and small business expenses (using Schedule C) are more likely to be the target of an IRS audit.
Stay Prepared
Always retain your tax records and supporting documents for as long as you need them to substantiate claims on a return. The IRS normally has a window of three years from the filing date to audit a return, but this can be extended if the agency believes there’s any fraudulent activity.
If you receive an audit letter from the IRS, it’s best to reach out for assistance as soon as possible.



"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
0 Comments

You Can't Deduct that Loss

8/15/2022

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How to ensure your business is not deemed a hobby

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You’ve loved dogs all your life so you decide to breed them and start a dog training business. Is this a business in the eyes of the IRS or a hobby? Knowing what the IRS is looking for and properly positioning your small business can save taxes and headaches if you are ever questioned by the IRS.

Why you should care
If your activity is a business, your income can be reduced by all your qualified business expenses even if it results in a loss. If your activity is deemed a hobby, no losses are allowed on your tax return, and even worse, after 2018 you cannot deduct expenses against this revenue. So you're telling me if I knit three sweaters and sell them for $1,000 I cannot deduct the cost of the wool if it is a hobby? Technically, yes! Which is why you need to change how you think about these kinds of activities.

Tips to make it a clear business
Here are some tips to ensure full deductibility of your expenses against your business income.
  1. Profit motive. You must show that you intend to make a profit with your activity. The old rule of thumb was to show a profit at least three out of the past five consecutive years to safely qualify your activity as a small business. But this is no longer the case. Although more difficult to substantiate, you can show profit motive without ever showing a profit by your ongoing activities around the business.
  2. Active participation. You need to be actively involved in your pursuit for success. If you simply invest money in the dog business, but are never there to care for them or give lessons, you will have a hard time justifying the business nature of the activity.
  3. Be professional. Businesses have separate checkbooks, business cards and stationery. They have financial statements and show the same disciplines one would find in a “for profit” venture of the same type of activity you are pursuing. And they are organized as a business, ideally through a simple business structure like a single member LLC.
  4. Pleasure factor management. If your business has a large enjoyment factor, you will need to be even more cautious about having proper records. If you claim to be a golf pro giving lessons, but then spend all your time playing golf, you will have a hard time justifying the activity as a true business.
  5. Have multiple customers. If you only have one or two customers, who also happen to be relatives, your activity may be deemed a hobby. Having a number of customers, even without profits, can make all the difference in allowing for expense deductions.
  6. Showing profit motive without profits - Part II. How else can you show profit motive when no profit is to be found? Advertising is one way to do this. Keep copies of all ads trying to drum up business. Keep a daily diary of business activities, noting who you meet and for what purpose. Create and keep sample product, even if it is not yet sold.
  7. Understand your risk. There are certain business types that are under the IRS microscope when it comes to hobbies. Key among these are multi-level marketing businesses like Amway, Tupperware and Avon. It also includes the thousands of part-time sellers of goods on internet sites like e-bay. If you are in one of these business activities you will need to prove the business nature of your involvement and be prepared to be challenged.


Quick Checklist
Wondering if your business activity may be considered a hobby? Review this checklist. The more yes answers, the better your chances of defending your position.
  • Conducted activity in business-like manner?
  • Created a business entity?
  • Have expertise in your activity?
  • Put time and effort into the activity?
  • History of income/profits?
  • Have had prior success in a similar activity?
  • Is there a low element of pleasure/recreation involved?
  • Are there appreciating assets or an expectation that there will be?


Remember, having a business activity reclassified as a hobby can mean a big tax bite at tax time. But by keeping proper records and pro-actively knowing the pitfalls, you can avoid most problems.

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
0 Comments

Great Tax Reduction Ideas

8/2/2022

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The tax code is about 75,000 pages long, so it’s not surprising there are many overlooked money-saving deductions hidden within it. And with the much higher standard deduction amounts, those who do not itemize think there are no longer ways to reduce your taxes. Since mid-year is a good time to review great tax reduction ideas, here are some to consider:

1. Charitable contributions if you don't itemize
Even if you do not itemize deductions you can still take a deduction of $300 for your charitable contributions ($600 if married). Just ensure you get receipts to prove you made the donation. Too many make donations, but lack proof.

2. Maximizing HSA contributions
If you have qualified high deductible health insurance you can reduce your taxable income by contributing to a Health Savings Account (HSA). That way you not only reduce your taxable income, but you pay out-of-pocket qualified medical, dental and vision care with pre-tax dollars! And remember to contribute up to the annual limit ($3,650 for single or $7,300 for married in 2022 PLUS and additional $1,000 if you are age 55 or older).

3. Student loan interest
You can deduct up to $2,500 in interest paid on student loans from your tax return. This is true even if someone else helps you pay your loans. Parents who have co-signed student loans (creating legal obligation for the debt) often forget that they are also now eligible for the deduction on payments made by them.

4. Leveraging your itemized deductions
While many taxpayers do not have enough deductions to itemize, if you can bundle two or three years of deductions into one tax year you can maximize your deductions in all tax years. Here's an example: You budget and make deductions to your favorite charities and church every year. Don't change that practice, but prior to the end of the year, prepay all of next year's donations prior to December 31 if it helps exceed the itemized deduction threshold. The following year use the full standard deduction with lower-to-no charitable donations.

5. Donating appreciated assets (stocks, mutual funds and other investments)
If you itemize deductions, instead of donating cash, consider donating appreciated assets you have owned for more than one year. Your charity gets the same financial value, but you not only get a great charitable donation, you also avoid paying capital gains tax on the investment. This could be a great idea if you feel stuck in a down market, but don't want the tax exposure by selling a long-held investment.

6. Over-reporting state refunds
Remember if you use the standard deduction, your state refund does not add to your taxable income and should not be added to income. Even if you do itemize, your state refund may only apply if it provides a tax break. So couple a large state tax refund with your itemized versus standard deduction plan and save even more in taxes.

7. Taking full advantage of state tax deductions
Remember when you itemize, you can claim up to $10,000 in total taxes as an itemized deduction. But even if you do not have much in the way of state income taxes or property taxes, you can still deduct state sales tax. Even better, if you have a small business, many states now allow you to pay their tax at the entity level and avoid the $10,000 limit all together!

8. Leveraging retirement accounts to their fullest
There are numerous retirement tax plans that are great tools to help reduce your taxable income. They include 401(k), 403(b) and SIMPLE IRA plans offered through employers and numerous other versions of IRAs. The key is each has an annual contribution limit, and if you don't use that limit for the year, it is gone. So review your options and try to take full advantage of the tax benefits within each plan.
As with any part of the tax code, certain qualifications must be met and limits apply. Please feel free to ask for help if you think any of these ideas apply to you.


"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
0 Comments

Before calling the IRS, people should know what info they’ll need to verify their identity

8/2/2022

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When taxpayers have a question, their first stop should be IRS.gov. The Let Us Help You page is a great way to get answers to tax questions fast. People who call the IRS for additional help will need to have information available to verify their identity. This is part of the agency's ongoing efforts to keep taxpayer data secure from identity thieves.

IRS representative only discuss personal information with the taxpayer or someone the taxpayer authorizes to speak on their behalf. To ensure they don’t have to call back, taxpayers, should have the following information ready:
  • Social Security numbers and birth dates for those who were included on the tax return
  • An Individual Taxpayer Identification Number letter if the taxpayer has an ITIN instead of an SSN
  • Their filing status: single, head of household, married filing jointly, married filing separate, or qualifying widow or widower with a dependent child
  • The prior-year tax return. Phone representatives may need to verify taxpayer identity with information from the return before answering certain questions
  • A copy of the tax return in question
  • IRS letters or notices received by the taxpayer


By law, IRS representatives will only speak with the taxpayer or to the taxpayer's legally designated representative.

Anyone calling about someone else's account should be prepared to verify their identity and provide information about the person they are representing including:
  • Verbal or written authorization from the taxpayer to discuss their account
  • The ability to verify the taxpayer's name, SSN or ITIN, tax period, and tax forms filed
  • Preparer Tax Identification Numberor PIN if a third-party designee
  • One of these forms, which is current, completed and signed:
  • Form 8821, Tax Information Authorization
  • Form 2848, Power of Attorney and Declaration of Representative


Share this tip on social media -- #IRSTaxTip: Before calling the IRS, people should know what info they’ll need to verify their identity. http://ow.ly/UlKP50K2xCr

"Tax Tips" are published to provide current tax information, tax-cutting suggestions, and tax reminders. If you would like more information on anything in "Tax Tips," or if you'd like to be on our mailing list to receive other tax information from time to time, please contact our office.
 
The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
 
We are trusted CPA advisors servicing Burr Ridge, Hinsdale, Willowbrook, Darien, Naperville, and all Chicagoland area. 

Do you need assistance with your business and/or personal tax returns? Would you like to have a trusted source for your accounting, allowing you additional time to focus on increasing your business? Do you use QuickBooks, or plan to in the future, for your accounting? We include these in all our service packages, customized to fit your personal or business needs.  
 
We are currently accepting new clients. Your initial consultation is free, so you have nothing to lose and everything to gain. Our experienced staff is available to help you streamline your accounting, giving you more free time for yourself. Set up an appointment today by calling (630) 320-3720 or email us at info@monarchaccountinggroup.com. 
 
For more free resources, such as Tax Organizers, and Record Retention Schedules, access our website www.monarchaccountinggroup.com.

Mia Verc, CPA;  Janice Papais, CPA
0 Comments

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Phone: (630) 320-3720

Monarch Accounting Group Inc
145 Tower Drive, Suite 10
Burr Ridge, IL 60527-7836
Email: Info@MonarchAccountingGroup.com


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