Tax Implications Of A Divorce
Jun 24, 2016
Divorce can be stressful enough without discovering down the road the assets weren’t divided equitably even when spouses were in agreement about the division of their property. Failing to take taxes into account may be to blame when one spouse receives a smaller net share than expected.
Here are some issues to consider if divorce is on your horizon.
Taxable or Not Taxable?
Payments from one spouse to the other can have tax consequences for both spouses depending on how the payments are designated. Alimony generally is deductible by the spouse who pays it and is taxable to the recipient. Child support isn’t tax deductible by the person paying it nor is it taxable income to the recipient.
Who Claims the Exemptions?
The IRS has specific rules for determining which spouse is entitled to claim the dependency exemptions for the couple’s children. Who claims the exemption can also affect eligibility for certain tax credits, such as the child tax credit. Typically, the custodial parent claims the dependency exemption. However, parents can also choose to alternate claiming the exemption. And couples with more than one child may decide to split the exemptions.
The QDRO and Retirement Benefits
A qualified domestic relations order (QDRO) is a court order that specifies the property rights regarding qualified retirement plan assets of a spouse or dependent during a divorce. A QDRO allows the transfer of all or a portion of the assets in a qualified retirement plan from one spouse to the other without loss of the plan’s tax advantages. A QDRO should be carefully executed to avoid costly mistakes.
What’s Its Future Worth?
The value of assets that seem equal may no longer be equal once taxes come into play. Selling an asset in the future may create a tax liability. So spouses will need to consider more than current value when dividing investments and similar property.
Issues related to dividing assets during a divorce can be complex. Couples should seek professional advice.
Categories: Other Resources, Tax Compliance, Tax Planning
You Are Being Audited: Now What?
Jun 03, 2016
Here is the situation: you have received a letter from the IRS; they are reviewing a previous tax year and you must provide support for your tax position(s). Hence, you are being audited.
Don’t panic! Numerous taxpayers are audited on a yearly basis. You won’t be the first or the last. Since the IRS is such a large government institution, the process will be slow. The best thing you can do is remain calm and begin to make a plan.
Read the Audit Letter. Once you have taken the time to thoroughly examine the letter and its contents, determine what they looking for? Audits vary in length and scope. Pay attention to the time frame the IRS has provided for you to compile the requested documents.
Gather all information requested. Begin gathering the info requested. If you maintain good records, the process may be easier. If you are having difficulty locating certain documents, you may call and request an extension . If necessary, you may send the information piecemeal as some auditors appreciate some information rather than none. It is important to send only those items requested. Obviously, the IRS has the power to open additional audits of anything/anyone they feel is questionable or suspicious. So while you may think offering additional supporting information would be helpful, it may in the end cause additional issues. Rule of thumb is to stick to their list, The IRS will notify you if additional information is necessary.
Work with the auditor. Auditors are people too! More often than not, auditors are willing to work with you. Being upfront and honest can go a long way. If you are unable to locate a receipt, tell them. They may allow a credit card invoice or some other proof of payment as alternative substantiation.
Talk through the results and ask questions. Once the auditor has reviewed your paperwork, they will inform you of any issues. In some cases, you may be asked to provide more substantive evidence for expenses. In other cases, the auditor may try to assess penalties. In all of these instances, make sure you ask questions to understand why such circumstances are occurring. Many times, penalties are negotiable and occasionally even completely abatable. Make sure you take the time to understand what’s happening and go from there.
Pay the tax. Once you’ve gone through the process and settle on what you believe to be the final tax owed, make sure you pay it! This sounds straight-forward, taxpayers often think they can deal with the balance at a later time. The IRS will assess additional penalties and interest on any outstanding amounts due. If needed, payment plans are available.
If you are the subject of an audit and are unsure of the actions being taken, or have questions about the process, feel free to contact a William Vaughan Company audit representative.
Courtney Elgin, CPA
Categories: Audit & Accounting, Tax Compliance
Donating Excess Inventory to Charity
May 24, 2016
Getting rid of excess or obsolete inventory can provide much needed warehouse space. Some businesses may choose to donate excess inventory to charity. However, it is important to be aware of the tax regulations involved in this type of charitable giving.
A donation of inventory to a qualified organization is potentially tax deductible as a charitable contribution. The amount that is deductible is the smaller of the donated inventory’s fair market value on the day it is contributed or its basis.
The basis of contributed inventory is any cost incurred for the inventory in an earlier year the business would otherwise include in its opening inventory for the year of the contribution. The business must remove the amount of the charitable deduction from its opening inventory. It is not part of the cost of goods sold.
If the donated inventory’s cost is not included in opening inventory, the inventory’s basis is zero and the business may not claim a charitable contribution deduction. In this scenario, the business treats the inventory’s cost as it would ordinarily be treated under its method of accounting.
Under a special rule, a C corporation that donates inventory to a qualified charity that will use the donated items for the care of the ill, the needy, or infants may qualify for an enhanced (above-basis) deduction. Similarly, any trade or business that donates food inventory meeting certain standards may qualify for an enhanced deduction.
Categories: Non-Profit, Tax Compliance, Tax Planning
IRS Changes Call First Policy for Audits
May 19, 2016
Most taxpayers are familiar with the IRS’ promise of not calling first. The IRS offers this assurance in an effort to combat scammers making unsolicited calls claiming to be IRS officials. However, this pledge has not been entirely accurate and lends to an explanation.
T
he IRS made such declaration with regard to phone calls made for the collection of taxes or requests for personal information. However, until recently the Internal Revenue Manual suggested the preferable way to schedule in-person field examinations was to make initial contact through phone calls. The IRS felt it was clear their previous assurance of not calling first related only to collection calls while calls to schedule audits were a completely different function. Unfortunately, the distinction is not as obvious to a taxpayer receiving a cold call from someone claiming to be from the IRS. Distinguishing between the two scenarios may be difficult. In an effort to avoid confusion, the IRS is changing their policy and will now send a notification of audit through the U.S. mail and will follow-up with a subsequent call to schedule an appointment.
This change in policy is the result of various complaints from attendees of a public forum held by the Taxpayer Advocate Service on May 5, 2016. The complaints argued taxpayers has received phone calls from the IRS to schedule audits, which contradicted the IRS’ assurance of never calling first. In response to these complaints, the IRS issued a statement that “in an abundance of caution and in light of pervasive phone scams seeking to extort money from taxpayers, the IRS has decided to adjust this policy for in-person field exams.”
This change in policy means the IRS will no longer make initial contact through phone calls, but will instead only contact taxpayers via for follow-up communication. An IRS Consumer Alertreminds taxpayers that the IRS will never do any of the following over the phone:
- Demand immediate payment
- Request you to verify your identity or ask for personal and financial information
- Ask for credit or debit card numbers
- Require the use of a specific payment method for your taxes, such as prepaid debit card
- Threaten to immediately bring in local police or other law-enforcement groups to have you arrested for not paying
If you receive a phone call from someone claiming to be from the IRS that involves any of the above red flags, do not provide any information and hang up immediately. You can then call any of the professionals at William Vaughan Company and we will assist you in determining if you have any obligation to the IRS.
By: Mark Sawyer, CPA
Categories: Other Resources, Tax Compliance