The Potts Report

The IRS and Your Odds

Your odds are great!  The odds are strongly in your favor that you will not have to be subjected to a IRS audit anytime soon.

The IRS conducts two types of audits of individual tax returns: correspondence audits and field audits.  As implied by their names, correspondence audits are by mail and field audits are face to face.

An example of a correspondence audit is when the IRS sends you a letter to notify you that differences were found between what you reported on your income tax return and what was reported by other parties such as banks, brokers, or customers.  It may be as simple as you failing to report $300 interest income on your income tax return.  The field audit generally takes place at your place of business or the local IRS office.  These audits are more extensive, expensive, time consuming, aggravating and intrusive.  Field audits are what most people visualize when they talk about an IRS audit.

In 2007, there were 134,421,400 individual income tax returns filed (reporting 2006 income and expenses).  A total of 1,384,563 returns were audited (field and correspondence audits).  That is 1 return for each 100 returns filed.  What about field audits alone? 1 return for each 432 returns filed.

It is a fact that the higher your income, the more likely you will be audited by the IRS.  Let's look at your chance of a field audit as you make more income.

• Income of $100,000 and higher; your odds are 1 chance in 130.
• Income of $200,000 and higher; your odds are 1 chance in 90
• Income of $1,000,000 and higher; your odds are 1 chance in 28 (well maybe your odds aren't so great)

Business returns are usually field audits.  The percentage of businesses subjected to audits is low. In 2007, 9,072,828 business returns were filed and 59,516 were audited: 1 for every 152 returns filed.  1 of every 108 small corporation (assets less than $10,000,000) income tax returns were audited. 1 of every 221 S corporations and 1 of every 240 partnership income tax returns were audited.

Fear the IRS?  It's not necessary.  The odds are in your favor that your income tax returns will NOT to be selected for an IRS examination anytime soon.  Deduct what's rightfully yours to deduct.  Its your money, not theirs.

[Source: Internal Revenue Service FY 2007 IRS Enforcement and Services Tables  at http://www.irs.gov/pub/irs-news/irs_enforcement_and_service_tables_fy_2007.pdf last accessed January 26, 2008]

The Enforcers

The Internal Revenue Service released Fiscal Year 2007 Enforcement and Services Results last week, a news release to tell you  "The IRS continues to make strong progress on a number of key enforcement areas".

IRS audits are up. Should you be afraid? The IRS wants  you to be afraid.  They don't come out and say "be afraid".  They say it more like this.

"Increased resources for the IRS' exam and collection programs yield direct measureable results. Once the new staff proposed in this request are trained and gain more experience, the enforcement revenue generated each year will be $699 million. However, this estimate excludes the likely larger revenue impact from the deterrence value of these and other IRS enforcement programs (e.g., criminal investigations)." [IRS Budget In Brief FY 2008, page 2]

The deterence value of "these" IRS exam programs is based on you being afraid of the IRS.  If you are afraid of the IRS, you might be more conservative in claiming tax deductions- even if they are valid. This means you will have a higher taxable income and pay more income tax.  Should you be afraid of the IRS?  No, not unless you are a crook with criminal intent when you prepare your income tax return.

What are you chances of being audited by the IRS?  Stay tuned!

Tempted to Wash Your Hands of the Stock Market?

The Dow Jones Industrial Average has fallen more than 11% in the last month.  But how far will it drop?  With the Federal Reserve dropping interest rates ¾% this morning, will the stock market rally? If you expect the market to rally, maybe you should sell stocks in which you have a loss to offset future gains you might have later this year? If you do sell any stocks to realize a loss for taxes, just don’t buy the same stock back for 31 days.

The Internal Revenue Code has a provision to deny a loss on the sale of securities if it is a wash sale.   A wash sale is when you sale a stock for a loss and you have bought substantially identical securities within 30 days prior or 30 days after of the sale of that stock.  If this happens, you cannot deduct the loss on the sale of your securities.

Revenue Ruling 2008-5 (published in Internal Revenue Bulletin 2008-3 and dated January 22, 2008) expands the wash sale rules to include stocks bought and sold in your IRA or Roth IRA.  Buying substantially identical stocks in your IRA within the 61 day period defined by the wash sale rules will result in a loss on sale of stock outside of your IRA being denied.

You won’t lose the loss forever, it’s just postponed.  The loss disallowed is added to the cost of the securities purchased.  This will reduce the gain or increase the loss on those securities when sold.

I hope none of you are taking a bath in this volatile market.

TAX SEASON 2008

Income tax return preparation is an annual event deeply ingrained into our culture. Stress and frustration increase. Papers pile up. What should I keep?  What can I throw away? Is it deductible?

I expect Tax Season 2008 to be an exceptional year for our clients.  I have a great team assembled to make your life better.  Beverly, Debbie, and Leacretia are ready to help you.

Income tax organizers for individuals will be mailed this week.  As soon as you are ready, call and make an appointment.  I'm looking forward to seeing you.

Introducing THE POTTS REPORT

The Potts Report is for the clients and friends of Potts & Company, Certified Public Accountants.  The Potts Report will deliver you news and information to help you manage your business, to lower your income taxes, and much more.  It will be worth your time to read.