Major Tax Deadlines
August 15 - Due date for filing 2000 individual income tax returns that
received an automatic extension of the April filing
deadline. If a second extension is required, Form 2688 must be filed with the IRS explaining why additional time is needed.
Note: Businesses are required to make federal tax deposits on dates
determined by various factors that differ from business to
business. For information on the tax deadlines that apply to your business, contact our office.
What's New in Taxes
Tax rebate is confusing and expensive
Congress recently approved $116 million in supplemental funding for
the postage, paper, and other costs related to mailing the
IRS notices and tax rebate checks authorized by the 2001 tax law.
The IRS began mailing the first of 91 million rebate checks on July
20, and they will continue the process through September.
It's estimated that as many as 17 million taxpayers will be receiving less than the full rebate amount, and approximately 34
million taxpayers won't be getting refund checks at all. (The rebate is an advance refund for 2001, but eligibility to receive a
rebate check is based on your 2000 tax return information.)
On the other hand, analysts estimate that somewhere between 950,000
and five million people will receive undeserved rebate
checks. For example, they paid tax in 2000, but won't have to file a return in 2001. These taxpayers won't have to return the
checks. That could cost the government between $285 million and $1.5 billion dollars.
Over 500,000 taxpayers received an IRS notice saying they'd be getting
a larger rebate than they are actually entitled to
receive. The IRS sent out corrected notices on July 23. But in some cases, taxpayers received their rebate checks before they
received the corrected notice.
Due to another computer glitch, approximately seven million taxpayers
could experience up to a ten-week delay in receiving
notices and rebate checks. These taxpayers were left out of the initial computer database used to compile rebate information.
Finally, the IRS recently alerted the public to a new tax scam. Taxpayers
in several states have received postcards resembling
IRS notices. An organization is charging up to $17.95 offering to tell taxpayers how large their tax rebate will be. The IRS
provides this information for free.
What you should know about IRS audits
If you're like most people, an IRS audit is one of your worst nightmares.
Understanding the types of audits and how returns are
selected for audit may help ease your mind.
The IRS conducts three types of civil audits:
*Correspondence audits are handled entirely by mail. They consist of
written questions about apparent errors, such as filing
status discrepancies or wages reported on Form W-2 that do not appear on the wage earner's tax return. Unclear or evasive
answers can generate an assessment or escalate the case to an office audit.
*Office audits begin when a taxpayer is summoned to the local IRS office
to meet with an agent. The notification letter specifies
the items to be examined and asks the taxpayer to bring certain records to the meeting. Although office audits generally are
limited to the specific items requested, the agent can expand the scope if the taxpayer's explanations raise additional questions.
*Field audits may be conducted at the taxpayer's business or at an accountant's
office. All pertinent records must be available at
the chosen site. The examination will cover all tax-related activities for the years under audit.
Various factors determine which returns are audited, including:
*Matching program. Information returns (such as Forms W-2 and 1099)
are matched to tax returns, using social security and
other identifying numbers. Discrepancies usually generate correspondence audits.
*Statistical analysis. The IRS selection program analyzes hundreds of
variables to arrive at ratings (called DIF scores) for tax
returns. The program compares actual returns filed to "typical" taxpayer profiles. Unusual features, such as higher than average
deductions, result in higher DIF scores which increase the likelihood of audit.
*Occupation. According to the IRS, returns filed by certain taxpayers,
such as self-employed individuals and farmers,
understate taxable income at a higher than average rate. Therefore, higher percentages of these returns are audited.
*Income level. Higher-income taxpayers are audited more often. Generally,
an individual with income over $100,000 is three
times more likely to be audited than a person with income between $25,000 and $50,000.
Always call us when you receive a letter from the IRS. We will advise
you, respond on your behalf, and represent you if you so
Retirement plans must be amended by year-end
By the end of their 2001 plan year, businesses must amend their qualified
retirement plans to comply with various tax law
changes that have taken place since 1994. This includes 401(k)s, pension plans, and profit-sharing plans.
Many small businesses have qualified retirement plans that have been
set up by banks, brokers, mutual fund companies, or other
financial institutions. If you haven't received documents to amend your plan, contact the company that administers your plan.
If your plan's language doesn't comply with the law by the deadline,
the IRS could disqualify your plan. This could result in the
taxation of plan earnings, a retroactive loss of deductions for your plan contributions, and the loss of tax-favored benefits for
If your business sponsors a retirement plan for your employees, take action now. For more details, give us a call.
Who should own your business real estate?
If your business is incorporated, it is often a good idea to personally own the real estate used by your corporation.
If appreciated real estate is sold by a regular corporation, the gain will be subject to double taxation if the corporation
distributes the money to you. However, if you own the real estate personally, there is no double taxation. Though the double
taxation generally does not apply to S corporations, there can be tax problems when an S corporation sells its operating
business and its real estate.
The general advice is for you to own the property and lease it to the
corporation. Because of the depreciation, you may well
generate a tax loss on your personal tax return.
You might consider having another family member own the real estate; then the property will not be part of your estate. That
could save estate taxes.
There are advantages to personal ownership of the real estate not related to taxes. As the value of the property increases, you
may be able to generate cash by refinancing. Also, if the corporation does not own the real estate, you can readily sell the
business and keep the property.
The advantages of personal ownership of business real estate are significant.
In reviewing the benefits in your particular situation,
you must give due consideration to the passive loss rules and other complexities of the tax law. See us before you buy business
real estate or change the form of ownership on real estate you already have.
Check out tax-advantaged investments
Tax-advantaged investments can help diversify your portfolio and reduce your taxes. They come in several varieties.
*Tax-free investments escape federal, state, or local taxes. Examples
include municipal bonds or U.S. Treasury bonds, and
certain private activity bonds.
*Tax-deferred investments usually will be taxed at some time in the
future, either when they are sold or when the accumulated
funds are withdrawn. Examples include U.S. savings bonds, retirement accounts, and annuities.
*Tax-credit investments provide tax incentives to promote specific social
causes identified by Congress. Tax credits generated
from these investments reduce your tax bill dollar-for-dollar. Examples include investments in low-income housing or
low-income community development.
*Tax-efficient investments minimize capital gain distributions in part
by keeping investment turnover low. They include
tax-managed funds, closed-end funds, and unit investment trusts.
When comparing investments, you should measure their after-tax return
— the amount of earnings you keep after paying taxes.
Let's compare a 6% tax-exempt municipal bond with a taxable corporate bond. To receive the same amount from a corporate
bond, it would have to yield 7.1% for taxpayers in the 15% income tax bracket, 8.3% for those in the 27.5% tax bracket, 8.6%
for those in the 30.5% tax bracket, 9.3% for those in the 35.5% tax bracket, and 9.9% for those in the 39.1% tax bracket.
The tax treatment of an investment isn't always what it seems. For example,
tax-exempt interest can trigger both tax on your
social security benefits and the alternative minimum tax. The result is that your investment isn't tax-free after all.
Understanding your tax-advantaged investment choices and their tax ramifications
will help you build a well-diversified
investment portfolio. If you have questions, please call us.
What's New in Financial Strategies
Treasury offers new T-bill
On July 31, the U.S. Treasury began auctioning its newest Treasury bill (T-bill), one with a 4-week maturity.
The Treasury issues debt securities with short-, mid-, and long-term
maturities. Treasury bonds have 30-year terms. Treasury
notes are available in 2-year, 5-year, and 10-year terms. Treasury bills are available in 13-week, 26-week, 52-week, and now
As with all Treasury securities, the new T-bill requires a minimum investment
of $1,000. These 4-week bills are available to all
investors, but they are not available through the government's Treasury Direct Program. This program lets investors bypass
banks and brokerage firms to purchase Treasury securities.
The government projects that the 4-week bill will yield approximately
the same interest rate as its 13-week bill. The interest
earned on Treasury securities is subject to federal income tax, but it is exempt from state and local taxes.
If you have any questions about Treasuries or other investment choices,
give us a call.
Chuckle of the Month
Stretching your dollar
More Americans than ever before are in debt. As one comic explained:
"No matter how much money you make, you always
need an extra $40 a week. I'm sure it was Einstein who first said, 'Expense equals salary plus forty bucks.'"