Subscribe to our newsletter for monthly tax tips:

Blog

Schedule a Free Consultation Learn About Our Services

How Much Can I Take Out of My Business in Distributions?

Posted on July 13th, 2021

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

A client of ours who had been accumulating a lot of cash in their business account, recently asked me if they could start distributing some of that to themselves to put the money to better use.  This client like many small businesses, files their business tax return as an 1120-S, “S-Corporation,” wherein their business profit is taxed on their personal tax return. For tax purposes there are several advantages to filing taxes this way (which is a topic for another article). But it certainly does create much confusion for many small business owners.

To clarify, in an S-Corporation, your profit is treated as income to you on your personal tax return, regardless of whether you actually “distribute” cash to yourselves.  So your profit (or more accurately your taxable income), generally is the maximum you would want to distribute to yourself without the risk of increasing your tax liability.  Typically, we show the actual cash payments clients make to themselves during the year as “loans” from the company to the owner (i.e., “Due From Shareholder” asset account in the case of a corporation, or “Due From Member” account in the case of an LLC).  Then at the end of the year, we reclassify these as “distributions” based on the company’s year-end profit.

Some businesses which maintain large amounts of inventory and sell on credit terms, cannot afford to distribute their profit to the owners because it’s needed to finance sales growth (i.e., increased accounts receivable and inventory), pay back business loans, etc.  In other cases, some companies can obtain customer deposits up front to pay material costs, so they are essentially “cash-basis” businesses, and such cash requirements are not as much of a concern.  Again, there can be a difference between “business profit,” which you look at to evaluate the performance of your business, and what is considered “taxable income” to the IRS.  Care must be taken not to exceed your what’s called your “shareholder basis,” so if you aren’t sure, ask your CPA or other tax preparer for assistance.

Now, as to this particular client, they have been taking cash distributions all along, but which were not tied directly to the company’s profit.  So a large portion of cash that was accumulating in their business account was basically their own money upon they have already paid taxes through their personal tax return.  And, it was not all needed by the business to fund operations, as this business receives customer deposits up front (as described above).  So I did some calculations to determine how much their historical cash distributions have totaled, versus their accumulated profit to date (Retained Earnings).  The result was a substantial dollar amount they were further entitled to take out as distributions.

More simply stated, the undistributed Retained Earnings balance in the “Stockholder’s (or Member’s) Equity” on your balance sheet is a good place to start looking to see if there is more money you can safely distribute to yourself.  If your accountant adjusts out your cash distributions at the end of each year out of Retained Earnings (which we do), then the Retained Earnings balance itself is the number you are looking for.  Otherwise, if you see a negative balance in the Shareholder Distributions account, you must first subtract that number from whatever is showing in Retained Earnings.  (Again, check with your CPA or tax accountant first, as Shareholder Basis for tax purposes is a bit tricky.)

Then going forward, to determine how much you can distribute to yourself during the course of the year, keep an eye on your monthly Net Income (and CASH FLOW!)

Related Articles:

Profit vs. Taxable Income

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

What is My Shareholder Basis?

Analyzing the Components of Cash Flow

How Much Money Do I Need to Operate?

 

 


Taxable vs. Nontaxable Income

Posted on April 7th, 2021

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

Are you wondering if there’s a hard and fast rule about what income is taxable and what income is not taxable? The quick answer is that all income is taxable unless the law specifically excludes it. But as you might have guessed, there’s more to it than that.

Taxable income includes any money you receive, such as wages, tips, and unemployment compensation. It can also include noncash income from property or services. For example, both parties in a barter exchange must include the fair market value of goods or services received as income on their tax return.

Nontaxable Income

Here are some types of income that are usually not taxable:

  • Gifts and inheritances
  • Child support payments
  • Welfare benefits
  • Damage awards for physical injury or sickness
  • Cash rebates from a dealer or manufacturer for an item you buy
  • Reimbursements for qualified adoption expenses

In addition, some types of income are not taxable except under certain conditions, including:

  • Life insurance proceeds paid to you are usually not taxable. But if you redeem a life insurance policy for cash, any amount that is more than the cost of the policy is taxable.
  • Income from a qualified scholarship is normally not taxable; that is, amounts you use for certain costs, such as tuition and required books, are not taxable. However, amounts used for room and board are taxable.
  • If you received a state or local income tax refund, the amount might be taxable. You should have received a 2020 Form 1099-G from the agency that made the payment to you. If you didn’t get it by mail, the agency might have provided the form electronically. Contact them to find out how to get the form. Be sure to report any taxable refund you received even if you did not receive Form 1099-G.

Important Reminders about Tip Income

If you get tips from customers, that income is subject to taxes. Here’s what you should keep in mind:

1. Tips are taxable. You must pay federal income tax on any tips you receive. The value of noncash tips, such as tickets, passes or other items of value are also subject to income tax.

2. Include all tips on your income tax return. You must include the total of all tips you received during the year on your income tax return, such as tips received directly from customers, tips added to credit cards, and your share of tips received under a tip-splitting agreement with other employees.

3. Report tips to your employer. If you receive $20 or more in tips in any one month from any one job, you must report your tips for that month to your employer. The report should only include cash, check, debit, and credit card tips you receive. Your employer is required to withhold federal income, Social Security, and Medicare taxes on the reported tips. Do not report the value of any noncash tips to your employer.

4. Keep a daily log of tips. Use the Employee’s Daily Record of Tips and Report to Employer (IRS Publication 1244) to record your tips.

Bartering Income is Taxable

Bartering is the trading of one product or service for another. Small businesses sometimes barter to get products or services they need. For example, a plumber might trade plumbing work with a dentist for dental services. Typically, there is no exchange of cash.

If you barter, the value of products or services from bartering is taxable income. Here are four facts about bartering that you should be aware of:

1. Barter exchanges. A barter exchange is an organized marketplace where members barter products or services. Some exchanges operate out of an office and others over the Internet. All barter exchanges are required to issue Form 1099-B, Proceeds from Broker and Barter Exchange Transactions. The exchange must give a copy of the form to members who barter and file a copy with the IRS.

2. Bartering income. Barter and trade dollars are the same as real dollars for tax purposes and must be reported on a tax return. Both parties must report as income the fair market value of the product or service they get.

3. Tax implications. Bartering is taxable in the year it occurs. The tax rules may vary based on the type of bartering that takes place. Barterers may owe income taxes, self-employment taxes, employment taxes, or excise taxes on their bartering income.

4. Reporting rules. How you report bartering on a tax return varies. If you are in a trade or business, you normally report it on Form 1040, Schedule C, Profit or Loss from Business.

Related Articles:

Profit vs. Taxable Income

Which Type of Business Entity Should I Choose?

 


Avoiding an IRS Tax Audit

Posted on March 31st, 2021

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

Just 0.45 percent of taxpayers were audited in fiscal year 2019. Still, with taxes becoming more complicated every year, there is an even greater possibility of confusion turning into a tax mistake and an IRS audit. Avoiding “red flags” like the ones listed below could help.

Red Flags That Trigger IRS Audits

  • Claiming Business Losses Year After Year
    When you operate a business and file Schedule C, the IRS assumes you operate that business to make a profit. Claiming losses year after year without any profit raises a red flag with the IRS.
  • Failing to Report Form 1099 Income
    Resist the temptation to underreport your income if you are self-employed or have a second job. The IRS receives the same 1099 forms that you do, and even if you didn’t receive a Form 1099 when you think you should have, you can’t be sure the IRS didn’t either. If the IRS finds a mismatch, you are sure to hear about it.
  • Early Withdrawals From a Retirement Account
    In general, if you withdraw money from a retirement account before age 59 1/2, you will need to pay a 10 percent penalty. You will also owe income tax on the amount withdrawn unless you qualify for an exception. Sometimes – but not always – these types of early withdrawals trigger an audit, typically a correspondence audit where the IRS sends you a letter.
  • Excessive Business Expense Deductions
    Too many deductions for your income and type of business, claiming 100 percent use of a car for business, and inflating business meals, travel, and entertainment expenses are examples of excessive business expenses that could raise a red flag. Always save receipts and document your mileage and expenses.
  • Overestimating Charitable Deductions
    Taxpayers that don’t itemize can take an above-the-line deduction for charitable contributions made in tax year 2020 on their tax returns of up to $300 for qualified charitable cash donations that reduce taxable income. The maximum amount for 2020 tax returns is $300 (i.e., not $600), even if you are married filing jointly.

    For taxpayers that do itemize, taking disproportionately large deductions as compared to your income could raise a red flag. The IRS keeps records of average charitable donation at various income levels, and even if you inherited a large sum of money and want to donate it to charity, there’s a chance you could get audited.

  • Failing to Report Winnings or Claiming Big Losses
    Professional gamblers report winnings/losses on Schedule C, Profit or Loss from Business (Sole Proprietorship). They can also deduct costs related to their profession, such as lodging and meals, for example. Gambling winnings are reported on Form W-2G, which is sent to the IRS. As such, you must report this income. You may deduct gambling losses, but you must itemize your deductions on Schedule A (Form 1040) and keep a record of your winnings and losses. Ordinary taxpayers (recreational gamblers) report income/losses as “Other Income” on Schedule 1 of their Form 1040 tax return.

What To Do if You Are Audited

If you’ve received correspondence from the IRS in the U.S. mail that indicates that you are being audited, don’t try to handle it yourself. Instead, contact the office immediately for assistance.

Taxpayers who have been audited or otherwise interacted with the IRS should know that they have the right to know when the IRS has finished the audit. The right to finality is one of ten basic taxpayer rights – known collectively as the Taxpayer Bill of Rights. All taxpayers dealing with the IRS are entitled to these rights.

 

 


Small Business Tax Roundup

Posted on March 24th, 2021

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

Tax changes due to recent legislation such as the Tax Cuts and Jobs Act and the CARES Act affect both individual taxpayers and small businesses. In 2020, the IRS issued several guidance documents and final rules and regulations that clarified several tax provisions affecting businesses. Here are five of them:

PPP Expenses Now Deductible

Deductions for the payments of eligible expenses are now allowed when such payments would result (or be expected to result) in the forgiveness of a loan (covered loan) under the Paycheck Protection Program (PPP). Previous IRS guidance disallowed deductions for the payment of eligible expenses when the payments resulted (or could be expected to result) in forgiveness of a covered loan.

The COVID-related Tax Relief Act of 2020 amended the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to say that no deduction is denied and no tax attribute is reduced. Furthermore, no basis increase is denied because of the exclusion from gross income of the forgiveness of an eligible recipient’s covered loan. This change applies to taxable years ending after March 27, 2020.

Meals and Entertainment

The Tax Cuts and Jobs Act (TCJA) eliminated the deduction for any expenses related to activities generally considered entertainment, amusement, or recreation for tax years after 2017. While taxpayers may still deduct business expenses related to food and beverages as long as certain requirements are met, certain questions remained.

Recent IRS regulations provided clarification for several of these issues: disallowance of the deduction for expenditures related to entertainment, amusement, or recreation activities, and including the applicability of certain exceptions to this disallowance. The regulations also provide guidance to determine whether an activity is considered entertainment. The final regulations also address the limitation on the deduction of food and beverage expenses.

Like-kind Exchanges of Real Property

The 2017 Tax Cuts and Jobs Act (TCJA) limited like-kind exchange treatment to exchanges of real property. As such, effective January 1, 2018, exchanges of personal or intangible property such as vehicles, artwork, collectibles, patents, and other intellectual property generally do not qualify for nonrecognition of gain as like-kind exchanges.

Furthermore, like-kind exchange treatment applies only to exchanges of real property held for use in a trade or business or for investment. An exchange of real property held primarily for sale does not qualify as a like-kind exchange.

Under the IRS’s final regulations, real property includes land and generally anything permanently built on or attached to land. In general, it also includes property that is characterized as real property under applicable State or local law. Certain intangible property, such as leaseholds or easements, also qualify as real property under section 1031.

Property not eligible for like-kind exchange treatment prior to the enactment of the TCJA remains ineligible. Neither the TCJA nor the final regulations change whether the properties exchanged are of like kind.

Qualified Transportation Fringe and Commuting Expenses

The 2017 TCJA generally disallows deductions for qualified transportation fringe (QTF) expenses and does not allow deductions for certain expenses of transportation and commuting between an employee’s residence and place of employment.

Final regulations address the disallowance of the deduction for expenses related to QTFs provided to an employee of the taxpayer, including providing guidance and methodologies to determine the amount of QTF parking expenses that is nondeductible. The final regulations also address the disallowance of the deduction for expenses of transportation and commuting between an employee’s residence and place of employment.

Relief for Developers of Offshore Renewable Energy Projects

Renewable energy projects constructed offshore or on federal land are ordinarily subject to significant delays that can result in project completion times of up to twice as long as other renewable energy projects. These delays threaten taxpayers’ ability to satisfy requirements to claim the production tax credit and the investment tax credit.

To address this hurdle, the Treasury Department and the IRS have determined that it is necessary to extend the safe harbor period to up to 10 calendar years after the year in which construction of the project began.

The extension of the safe harbor for these projects provides flexibility for taxpayers constructing renewable energy projects offshore or on federal land to satisfy the beginning of construction requirements despite ordinary course delays that threaten their ability to claim tax credits.


How Does the “2017 Tax Cut and Jobs Act” Affect YOU in 2020?

Posted on October 30th, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

So first, how does the The 2017 “Tax Cut and Jobs Act” affect small businesses?  Let’s take a look.  Assume the following:

  • You and your spouse are 50% owners in your Sub-Chapter S (1120S) business.
  • Each of you takes a $25,000 annual salary
  • The Net Income of the business is $50,000, so each of you reports 50% of the business Net Income on your K-1 on your personal (1040) tax return.
  • You do not have enough deductions to itemize on your tax return, so can take only the standard deduction.

Based on the above assumptions, here is what your tax liability would have been in 2017:

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Based on your total gross income of $100,000 (salaries plus net income), and the standard deduction in 2017 of $12,700 and 2 exemptions of $4,050 (total of $20,800) for a married couple filing jointly, your taxable income becomes $79,200, resulting in taxes due of $11,278.

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Now, in 2020, not only were tax rates reduced in all tax brackets, but the standard deduction was increased to $24,800 for a married couple filing jointly, while the exemptions were eliminated.  Also, for small businesses, an additional credit is available based on of 20% of business net income.  In this case based on the above assumptions, this credit would amount to $10,000, resulting in Taxable Income of $65,200, and taxes due of $7,429, or a decrease in taxes of $3,849 from 2018.

But what if you don’t own a business, how would the tax cuts affect you?  Assume now that you each have an annual salary of $50,000, so total gross income of $100,000:

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Your taxable income is now $75,200, resulting in taxes due of $8,629, or a decrease of $2,649 from 2017 (that’s nearly $8,000 over 3 years, 2018 through 2020!).

Clearly, this tax cut act does benefit both small businesses and individuals, just something to consider as we approach the mid-term elections.  As to how tax cuts affect the economy, obviously, it depends on who you ask.  But below are some charts created from historical government statistical data.

Related Articles and Statistical Data:

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

The Effect of Business Taxes on Job Growth

The Effect of Taxes on Businesses and the Economy

 


The Effect of Business Taxes on Job Growth

Posted on October 19th, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

As most are aware, presidential candidate Joe Biden has proposed raising individual income tax back up from 37% to 39.6% for individuals with income above $400,000, plus increases in capital gains, and payroll taxes. He is also proposing increasing the corporate income tax rate from the 21% established under the 2017 Tax Cuts and Jobs Act, to 28%. For purposes of this article, I will focus on the income tax component only.

The question is, what effect do such tax increases have on businesses, and in turn, job growth? As I have discussed in numerous articles, profit is a component of cash flow which is required to support sales growth, fund capital expenditures for plant and equipment, repay debt, and many other “after-tax” expenditures. Thus, it is also a determinant of a company’s ability to raise capital and obtain bank and other types of loans.

So what happens to profit and cash flow as a result of paying income tax?  Let’s take a look.  Say a company, in this case a C-Corporation, has the ability increase sales by a whopping 153% in one year (it happens), and the business is taxed at the current 21% rate:

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

Note that its tax liability in the above example is around $246,000. Now assume that the corporate tax rate is increased to 28%:

Loader Loading...
EAD Logo Taking too long?

Reload Reload document
| Open Open in new tab

The company’s tax liability has now increased by $81,000 to around $327,000. To put this into perspective, now say it typically hires direct labor employees at an hourly rate of $15.00, times 40 hours a week, times 52 weeks = $31,200 per year. So (at the risk of over-simplification) that $81,000 is equivalent to approximately 3 employees who will either not be hired or may be laid off.

Of course, businesses will always have to pay taxes, the point of the above being that when the government is fooling around with corporate tax rates, it’s tampering with people’s jobs as well.  So it’s not “free” money just because a business is paying it rather than an individual.

Now with the respect to the tax increase to individuals, one major item that Biden’s tax plan does not really explain is whether that $400,000 also includes “pass-through” taxes on the net income from a small business owned by that individual. This is how most small businesses are taxed, at the personal income tax level of the owner.  Again, that money is needed by the business to operate and grow, so in most cases, the profit never even leaves the business. It’s just taxed on the individual’s 1040 tax return and included in his or her Adjusted Gross Income. If it is included in Biden’s tax plan, then these business profits would be taxed at the higher 39.6% rate (ignoring the effect of the 20% Qualified Business Deduction that was also part of the 2017 Tax Cut and Jobs Act).

To sum up, according to the The Tax Foundation’s article, Joe Biden – 2020 Tax Plan, “Biden’s tax plan would reduce the economy’s size by 1.47 percent in the long run. The plan would shrink the capital stock by just over 2.5 percent, and reduce the overall wage rate by a little over 1 percent, leading to about 518,000 fewer full-time equivalent jobs.”

Related Articles:

The Effect of Taxes on Businesses and the Economy

How Does the 2017 Tax Cut and Jobs Act Affect YOU?

Which Type of Business Entity Should I Choose? 

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


The Effect of Taxes on Businesses and the Economy

Posted on October 18th, 2020

Jack Kern
Owner, President
Outsourced Accounting Department, Inc.

Do tax cuts work?  Critics say no, it only increases the deficit.  Proponents say yes, lower taxes enable individuals and businesses to spend more money which, in turn, also increases tax revenues and, therefore, reduces, not increases, the deficit.  To find out who is (more or less) right, let’s take a look at some historical government statistics.

First to be clear, the tax rates I am referring to in this article are the individual tax rates charged on the 1040 tax return. This is because, as I have discussed in previous articles, most small businesses are set up as either an LLC (i.e., sole proprietorship or partnership) or S-Corporation for tax purposes, both of whose taxes are “passed through” to the owner’s personal tax return at individual tax rates. (I will discuss corporate (C-Corporation) tax rates in a subsequent article.)

Of course there are a multitude of factors that affect the economy and deficit. But in terms of the government’s role, there are two primary policies it has at its disposal to affect the rate of economic growth, and in turn, unemployment and inflation: Fiscal Policy which is controlled by Congress and the President, and deals with tax rates, government regulation, and government spending; and, Monetary Policy which is managed by the Federal Reserve, and deals with interest rates and the supply and demand for credit through the banking system.

The Kennedy Administration was one of the first to advocate tax cuts as a means of stimulating the economy (chart-Kennedy)). Later during the Carter Administration, the economy was plagued both double digit inflation and unemployment, which President Carter described as “the misery index” and blamed it on a “malaise” on the part of the American people (chart-Carter). Doubting this, the Reagan Administration subsequently used tax cuts again to stimulate the economy, this time significant cuts, as well as reduced government regulations, which became known as “Supply-Side Economics” (dubbed by critics as “Trickle Down Economics”) (chart-Reagan).

Note the pattern between lower taxes and the declining unemployment rate between these three charts. There certainly would appear to be a correlation between those two statistical trends.

But did the lower tax rates actually stimulate economic growth, or was the lower unemployment rate just a coincidence?  In other words, what was the effect on the Gross Domestic Product (or GDP, the measure of the U.S. economy)?  The next chart is a comparison of tax rates to the GDP during the Reagan Administration (chart-Reagan GDP). It indicates there does seem to be a direct relationship between the two, especially in 1984 when GDP jumped 7.9% shortly after the tax cuts, and averaged nearly 5% through the end of the Reagan term.

Now, let’s look at the Obama Administration. Ignoring where the unemployment rate started (which is the topic of a whole different discussion), the unemployment rate steadily declined over the eight-year period, and despite a tax increase in 2013 (chart-Obama).  But what about the GDP during the Obama Administration? A comparison of tax rates to GDP indicates that the GDP was barely increasing as compared to the Reagan era above, hovering around 2 percent throughout most of the eight-year period (chart-Obama GDP). So it would seem based on this chart that there is a strong correlation between tax rates and the GDP.

In contrast, the increase in tax revenues under the Reagan Administration (see again above chart) ranged from 4.8% to over 11%, averaging 6.8% following the earlier tax cuts. And this included another jump in tax revenues in 1987 after additional tax cuts were enacted, reducing the top tax rate from 50% to 38.5%. So this increase in tax revenues can only be explained by economic growth.  And sooner or later, this also has to produce jobs.

Related Articles:

Big Government or Free Markets – Which Works Best?

How Does the 2017 Tax Cut and Jobs Act Affect YOU?

Which Type of Business Entity Should I Choose? 

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

 


Some Banks Still Not Understanding Tax Returns

Posted on April 10th, 2020

Jack Kern
Owner/Pres.
Outsourced Accounting Department, Inc.

Marianne has been reading articles and comments by other CPA firms about what’s going on right now with these emergency SBA loan applications. One person said that the banker told their client “they should not have taken the 179 deduction because it reduced their income,” and there were other similar comments. This reminded me of several articles I wrote on this subject a while back about the difference between “book” and “tax” accounting, and the difference between “profit” and “taxable income:”

The Difference Between Your CPA and a Controller: M1

The Difference Between Your CPA and a Controller – Part 2

Profit vs. Taxable Income

The Risks of Misinterpreting Your Financial Statements 


Two New Tax Scams to Watch Out For

Posted on August 13th, 2019

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

Although the April filing deadline has come and gone, scam artists remain hard at work. As such, taxpayers should be on the lookout for scams that reference taxes or mention the IRS, especially during the summer and fall as tax bills and refunds arrive.

The two new variations of tax-related scams that are currently making the rounds are what the IRS has dubbed the “SSN Hustle” and the “Fake Tax Agency.” The first involves Social Security numbers (SSNs) related to tax issues and the second threatens people with a tax bill from a fictional government agency. Both display classic signs of being scams.

The SSN Hustle

The latest twist includes scammers claiming to be able to suspend or cancel the victim’s Social Security number. In this variation, the Social Security cancellation threat scam is similar to and often associated with the IRS impersonation scam. It is yet another attempt by con artists to frighten people into returning “robocall” voicemails. Scammers may mention overdue taxes in addition to threatening to cancel the person’s SSN.

Fake Tax Agency

This scheme involves the mailing of a letter threatening an IRS lien or levy. The lien or levy is based on bogus delinquent taxes owed to a non-existent agency, “Bureau of Tax Enforcement.” There is no such agency. The lien notification scam also likely references the IRS to confuse potential victims into thinking the letter is from a legitimate organization.

A Reminder about Phone and Email Phishing Scams

The IRS does not leave prerecorded, urgent or threatening messages. In many variations of the phone scam, victims are told if they do not call back, a warrant will be issued for their arrest. Other verbal threats include law-enforcement agency intervention, deportation or revocation of licenses.

Criminals can fake or “spoof” caller ID numbers to appear to be from anywhere in the country, including an IRS office. This prevents taxpayers from being able to verify the true caller ID number. Fraudsters also have spoofed local sheriff’s offices, state departments of motor vehicles, federal agencies, and others to convince taxpayers the call is legitimate.

The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS initiates most contacts through regular mail delivered by the United States Postal Service.

There are, however, special circumstances when the IRS will call or come to a home or business. Examples of when this might occur include times when a taxpayer has an overdue tax bill, a delinquent tax return or a delinquent employment tax payment, or the IRS needs to tour a business as part of a civil investigation (such as an audit or collection case) or during a criminal investigation.

If a taxpayer receives an unsolicited email that appears to be from either the IRS or a program closely linked to the IRS that is fraudulent, report it by sending it to phishing@irs.gov. The Report Phishing and Online Scams page provides additional details.

Taxpayers should also note that the IRS does not use text messages or social media to discuss personal tax issues, such as those involving bills or refunds.

Related Articles:

Indentity Theft and Your Taxes

Employers Beware: Identity Theft and W-2 Scam Alert

 

 


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.