Audit

Fair market value (FMV): What is it and how to defend it

Posted on Oct 6, 2017

So what is fair market value (FMV)? According to the IRS, it’s the price that property would sell for on the open market. This is the price that would be agreed on between a willing buyer and a willing seller. Neither would be required to act, and both would have reasonable knowledge of the relevant facts. This is the standard the IRS uses to determine if an item sold or donated by you is valued correctly for income tax purposes. It is also a definition that is so broad that it is wide open to interpretation. Understand when FMV is used Fair market value is used whenever an item is bought, sold or donated and has tax consequences. The most common examples are: Buying or selling your home, other real estate, personal property or business property Establishing values of other business assets like inventory Valuing charitable donations of personal goods and property like automobiles Valuing bartering of services, business ownership transfers or assets in an estate of a deceased taxpayer Know how to defend your FMV determination If the IRS decides your FMV opinion is wrong, you are not only subject to more tax, but also penalties. Here are a few tips to help defend your FMV in case of an audit. Properly document donations. Fair market value of non-cash charitable donations is an area that can easily be challenged by the IRS. Ensure your donated items are in good or better condition. Properly document the items donated and keep copies of published valuations from charities like the Salvation Army. Don’t forget to ask for a receipt confirming your donations. Get an appraisal. If you sell a major asset such as a small business, collections, art or capital asset, make sure you get an independent appraisal of the property first. While still open to interpretation by the IRS, this appraisal can be a solid basis for defending any differences between your valuation and the IRS. Keep pricing proof for similar items and transactions. This is especially important if you barter goods and services. If you have a copy of an advertisement for a similar item to the one you sold, it can readily support your FMV claim. Take photos and keep detailed records. The condition of an item is often a key consideration in establishing FMV. It is fair to assume an item has wear and tear when you sell or donate it. Visual documentation can be used to support your claimed amount. And keeping copies of invoices for major purchases is also a good idea. With proper planning, establishing FMV of an item can be done in a reasonably defendable way if ever challenged. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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Your receipts are important: save them

Posted on Oct 2, 2017

When it comes to taking qualified deductions on your federal tax return, three things must happen: Recognize that an expense might be deductible on your tax return. Keep a record of the expense in an organized fashion. Obtain the proper (and timely) documentation to support your deduction. This might be obvious to most people, but here are some typical areas where taxpayers often fall short. In the long run, these items could end up costing you plenty during tax filing season, and trigger IRS audits. Cash donations to charity. To deduct and support your deduction to a qualified charity you must have valid support. Donations of cash are no longer deductible if they are not supported by a canceled check or written acknowledgement from the charity. A donation deduction of $250 or more needs to be supported by documentation created at the time of the donation. A canceled check and bank statement are not sufficient. If you get audited, having the charity issue documentation after the fact may not be enough. Non-cash contributions. You need documentation for these donations as well. This includes a detailed list of items donated, the condition of the items and their estimated fair market values. While this level of detail is not required for small donations, keeping good records and taking photos is a good practice. Investment purchases and sales. If you bought or sold an investment you will need to know your cost basis. Today’s regulations require brokers to report to the IRS the cost basis of investment sales. Review your broker accounts and correct any errors. It’s very difficult to defend yourself in an audit when records reported to the IRS are in error. Copies of divorce decrees, alimony and child support agreements. There are often conflicts between two taxpayers taking the same child as a deduction. Do you have the necessary proof to defend your position? The same is true with alimony and child support. Keep these documents in a safe place and be ready to use them if necessary. Copies of financial transactions. Keep copies of documents from any major financial transaction. This includes real estate settlement statements, refinancing documents and any records of major purchases. These documents are necessary to ensure your cost basis in the property is properly recorded. The documents will also help identify any tax-related items like mortgage insurance, property taxes and possible sales tax paid. Mileage logs. Lack of tracking deductible miles is probably one of the most commonly overlooked documentation requirements. Properly recording charitable, medical and business miles can really add up to a large deduction. If the record is not available, the IRS is quick to disallow your deduction. If you are not sure whether a document is needed, retain it. Then you can always retrieve it if needed. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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KEEP YOUR AUDIT FEARS IN CHECK

Posted on Jun 16, 2017

Your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals some interesting and reassuring facts about the risk of an IRS audit. Audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been declining steeply over the last five years, which the IRS commissioner said was due in part to declining budgets and a smaller workforce. Audits target the rich. It’s a fact: IRS audits happen most often to the super-rich. The statistical chance of being audited increases dramatically for people of higher income levels. Missing data gets you audited. High income isn’t the only thing that gets you audited. Any missing data on your return can also trigger an audit, since the IRS usually receives a copy of the same tax forms you get every year. Standing out gets you audited. The IRS takes a close look at business expenses, charitable donations, and high-value itemized deductions. They have statistical data on what amounts are typical for various professions and income levels. If your return stands out from what is “normal,” it may be flagged for review by the agency’s computer system. More audits are done by mail. If you face an audit, it’s most likely that it will be done by mail. Only about one in four IRS audits are field audits conducted in person by an IRS agent. The most common issues, such as math errors or missing data, are done through mail correspondence. Most audits end up costing you. You can fight the tax law, but the tax law usually wins. Most people audited by the IRS end up owing additional tax. Only 11 percent of correspondence audits and 8 percent of field audits concluded with a “no change” finding in favor of the taxpayer. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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Two facts about your chances of being audited

Posted on Jun 13, 2017

Your chances of being audited are probably lower than you think. A look at the latest IRS statistics for 2016 reveals two interesting and reassuring facts about the risk of an IRS audit. One of these facts is that audits are becoming less common. The number of individual tax returns the IRS audited fell to a 12-year low last year, to just above 1 million. Audits have been declining steeply over the last five years, which the IRS commissioner said was due in part to declining budgets and a smaller workforce. Another fact is that IRS audits happen most often to the super-rich. The statistical chance of being audited increases dramatically for people of higher income levels. For example, filers that made near the average U.S. income only had a 0.4 percent chance of being audited. That frequency doubled once annual incomes reached $200,000, and doubled again at incomes greater than $500,000. By the time a person reports $10 million in income, they have a one-in-five chance of being audited, according to IRS statistics. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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Audit proof your deductions

Posted on Mar 2, 2017

Tax audits still remain relatively rare, but should you face one, be prepared for questions. Tax authorities tend to deny everything and then make you prove that your deductions are valid. Here are some suggestions. To prove your deduction, most auditors are looking for two required documents. Receipts. The receipt should clearly show the company or entity, the date, the value of the activity, and a clear description of the activity. In the case of donations, the receipt should also have a statement that confirms you received no benefit in return for your donation. It should also state that you are not retaining part ownership of the donation. Proof of payment. You will need a canceled check, a bank statement, or a credit card receipt and related statement. Other proof. In addition to the above, there are certain deductions that require additional documentation. Here are the most common: Contemporaneous. Any proof of payment and receipts should generally match the date of the activity. The IRS and state agencies are quick to dismiss receipts that are obtained after the fact. A good rule of thumb is to ensure receipts and proof of payment are received at the time of the activity. If not, at least make sure you have receipts and payment proof within the tax year the deduction is taken. Mileage logs. You will need to show properly maintained mileage logs for business miles, charitable miles, and any medical mile deductions. Business records. You will need financial statements for any business-related activity with supporting documentation. Residency. If you live in multiple states or multiple countries, you may have to prove where you lived during the year. Keep records that show your physical presence to support your tax filings. Proof of non-reimbursement. If you claim any unreimbursed business expenses, many states are asking you to prove that you were not able to get these expenses reimbursed from your employer. The easiest ways to do this are to show a denied expense report or to get your employer to write a letter that confirms your expenses were not reimbursed. Those most impacted by this are musicians, barbers/hairstylists, construction workers, and anyone who uses their own tools to do their job for their employer. While you can never be completely sure you won’t face an audit in your lifetime, you now know which documents an auditor will want. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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