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What to Do if You Receive an IRS CP2000 Notice

Posted on July 29th, 2019

Marianne Kern, CPA
Owner, President
Kern & Associates CPA, P.A.

An IRS CP2000 notice is mailed to a taxpayer when income reported from third-party sources such as an employer, bank, or mortgage company does not match the income reported on the tax return.

It is not a tax bill or a formal audit notification; it merely informs you about the information the IRS has received and how it affects your tax. It is, however, important to pay attention to what your CP2000 notice states because interest accrues on your unpaid balance until you pay it in full.

If you receive a CP2000 notice in the mail complete the response form. If your notice doesn’t have a response form, then follow the notice instructions. Generally, you must respond within 30 days of the date printed on the notice. You may request additional time to respond, and if you cannot pay the full amount that you owe, you can set up a payment plan with the IRS.

If the information on the CP2000 notice is not correct, then check the notice response form for instructions on what to do next. You also may want to contact whoever reported the information and ask them to correct it.

If the information is wrong because someone else is using your name and social security number please contact the IRS and let them know. You can also use the link on the IRS Identity theft information web page to find out more about what you can do.

If you do not respond, the IRS will send another notice. If the IRS does not accept the information provided, it will send IRS Notice CP3219A, Statutory Notice of Deficiency, and information about how to challenge the decision in Tax Court.

Do I Need to Amend my Return?

If the information displayed in the CP2000 notice is correct, you don’t need to amend your return unless you have additional income, credits or expenses to report. If you agree with the IRS notice, follow the instructions to sign the response page and return it to the IRS in the envelope provided.

If you have additional income, credits or expenses to report, complete and submit a Form 1040-X, Amended U.S. Individual Income Tax Return. If you need assistance with this, please call the office.

How to Avoid Receiving an IRS CP2000 notice:

  • Keep accurate and detailed records.
  • Wait until you receive all of your income statements before filing your tax return.
  • Check the records you receive from your employer, mortgage company, bank, or other sources of income (W-2s, 1098s, 1099s, etc.) to make sure they are correct.
  • Include all your income on your tax return including that from a second job or fees derived from the sharing economy (e.g. renting a spare room out on Airbnb).
  • Follow the instructions on how to report income, expenses and deductions.
  • File an amended tax return for any information you receive after you’ve filed your return.
  • Use a professional tax preparer who will help you avoid mistakes and find credits and deductions you may qualify for.

If you have any questions about IRS notices, help is just a phone call away.

 


What Is My Shareholder Basis?

Posted on July 23rd, 2019

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

Recently I’ve had a couple of clients ask me how much money they can safely distribute to themselves without triggering additional taxes. In essence, the question they were asking me is “What Is My Shareholder Basis?” The longer answer to this question is contained in these two articles:  The Basis of S-Corporation Stock Basis,  and S-Corporation Stock and Debt Basis.  But at the risk of oversimplifying the matter, your shareholder basis is the (net) amount of money you’ve put into the business in the form of loans and/or equity capital, plus the profit you’ve accumulated over time (i.e., Retained Earnings).  These amounts are found on the balance sheet.  For example:

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On the balance sheet in the above financial statements, under the Projected 2019 column it shows the following amounts:

Due to Member / Stockholder:        $56,707

Total Capital:                                        60,875

Due From Member                           (10,000)

Shareholder Basis:                          $107,582

In this instance, Total Capital at Dec. 2019 consists only of the company’s Retained Earnings, and includes its 2018 Net Income of $18,704, plus its 2019 Net Income of $58,427, less “Dividends” (tax distributions) of $1,649 and $14,607 in 2018 and 2019 respectively, resulting in the ending Retained Earnings of $60,875.

However, note that in this business, the financial statements are prepared on an accrual basis, so the company’s 2019 balance sheet now includes the non-cash items of $41,096 in accounts receivable which is added to Net Income, and $25,149 in accounts payable which is subracted from Net Income. Assuming the company’s tax return is prepared on a cash basis, these amounts would be adjusted back out of Net Income (and therefore, out of Retained Earnings), resulting in a Shareholder Basis for tax purposes of $91,635 (page 4 of the above financial statements).

Thus, the maximum amount the owner can distribute to him or herself without incurring additional taxes (and ignoring the cash needed by the business to operate) is $91,635.  Why? The Due to Member amount, less the Due From Member amount, is the owner’s own money that he or she has lent to the business, and the Net Income has already been taxed (through the K-1 on the owner’s personal tax return which, in this case, are the above tax distributions of $1,649 and $14,607).

Again, the tax codes are more complicated than the above illustration. So if you think the amount you want to distribute would put you close to your maximum, seek advice from your CPA or tax preparer.

Related Articles:

Profit vs. Taxable Income

Analyzing the Components of Cash Flow

Whose Income is K-1 Income Anyway, Mine or My Business’?     


Deducting Business-Related Car Expenses

Posted on July 13th, 2019

Marianne Kern, CPA
Owner, President
Kern & Associates CPA, P.A.

If you’re self-employed and use your car for business, you can deduct certain business-related car expenses.

There are two options for claiming deductions:

Actual Expenses. To use the actual expense method, you need to figure out the actual costs of operating the car for business use. You are allowed to deduct the business-related portion of costs related to gas, oil, repairs, tires, insurance, registration fees, licenses, and depreciation (or lease payments).

Standard Mileage Rate. To use the standard mileage deduction, multiply 58 cents (in 2019) by the number of business miles traveled during the year.

Car expenses such as parking fees and tolls attributable to business use are deducted separately no matter which method you choose.

Which Method Is Better?

For some taxpayers, using the standard mileage rate produces a larger deduction. Others fare better tax-wise by deducting actual expenses. You may use either of these methods whether you own or lease your car.

To use the standard mileage rate for a car you own, you must choose to use it in the first year the car is available for use in your business. In subsequent years, you can choose to use the standard mileage rate or actual expenses. If you choose the standard mileage rate and lease a car for business use, you must use the standard mileage rate method for the entire lease period – including renewals.

Opting for the standard mileage rate method allows you to bypass certain limits and restrictions and is simpler; however, it’s often less advantageous in dollar terms. Generally, the standard mileage method benefits taxpayers who have less expensive cars or who travel a large number of business miles.

The standard mileage rate may understate your costs, especially if you use the car 100 percent (or close to it) for business.

Documentation

Tax law requires that you keep travel expense records and that you show business versus personal use on your tax return. Furthermore, if you don’t keep track of the number of miles driven and the total amount you spent on the car, your tax advisor won’t be able to determine which of the two options is more advantageous for you at tax time. It is essential to keep careful records of your travel expenses (if you use the actual expenses method you must keep receipts) and record your mileage.

You can use a mileage logbook or if you’re tech-savvy, an app on your phone or tablet. A number of phone applications (apps) are available to help you track your business expenses, including mileage and billable time. These apps also allow you to create formatted reports that are easy to share with your CPA, EA, or tax preparer.

To simplify your recordkeeping, consider using a separate credit card for business.

Related Articles:

Important 2019 Tax Changes for Individuals and Businesses

Taxable vs. Nontaxable Income