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Tag: IRS

  • Your tax refund may actually land on time this year. Thank the IRS.

    Your tax refund may actually land on time this year. Thank the IRS.

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    As Americans turn the page on another tax season, the Internal Revenue Service may finally be turning the corner after a mountainous backlog of tax returns, delayed refunds and poor customer service gave people even more reason to loathe the federal agency they love to hate.

    Over the past year, the IRS has rebuilt its ranks, answered more than 80% of calls and worked its heap of unprocessed returns down from over 12 million to roughly 2 million, the U.S. Treasury Deported reported this week. Getting help is easier, too. Taxpayers now face an average wait time of four minutes to get an IRS employee on the phone, down from a patience-sapping 28 minutes last year.

    “Tax filing season this year has gone much more smoothly than 2020 and 2021,” Howard Gleckman, a senior fellow in the Urban-Brookings Tax Policy Center, told CBS MoneyWatch. “They did get extra money and were able to hire more people to answer the phone. They dug through a pile of paper returns, which was an unimaginable mess. So even with a small amount of money, things are better.”

    Tax pros concur — aside from smaller-refund frustration, the filing process this year has been without disasters.

    “We’re returning to the way taxes really worked, mostly, before COVID,” said Eric Bronnenkant, head of tax at Betterment.

    What went right?

    The IRS was able to hire 5,000 customer service agents and install new online systems thanks to additional funding last year as part of the Inflation Reduction Act. Some pundits have touted these results, pointing to the IRS’ improvement as an example of government performing “when you let it work,” as Steven Rattner, a former member of the Obama administration and now CEO of investment firm Willett Advisors said this week on Twitter.

    Last year’s budget increase was just a small fraction of the $80 billion injection of funding the IRS expects to receive over the next decade as part of the Inflation Reduction Act. In addition to refilling its depleted ranks, the agency also plans to update some telephone systems to allow callers to leave messages and get a call back —a feature that banks, utilities and airlines have used for a number of years.

    “For years and years you couldn’t leave a message, but now you can,” Gleckman said. He also noted that, while there’s a lot of partisan argument today about the exact portion of phone calls that the IRS is answering — one camp puts it at 87%, while another puts it in the high seventies — “there’s not much debate that they’re better.”

    Critically, the IRS has been processing paper returns more quickly by scanning them rather than, as was its practice for decades, having staff manually type in people’s information. It’s on track to scan “millions” of returns this year, the agency said, which means faster tax refunds.

    Congress also helped this year by refraining from its habit in recent years of changing the tax law only weeks before, or even during, tax season.


    What the IRS is actually looking for that could trigger a tax audit

    04:16

    “Late legislation, a relatively new phenomenon 10 years ago, has taken on a life of its own. But this year we didn’t have any of that, said Mark Steber, chief tax information officer at Jackson Hewitt. “It’s been a very smooth tax season. No glitches, no IRS shutdowns, no computer problems for most people.”

    The IRS’ improved performance is only an initial step in a multi-year modernization plan the agency released earlier this month. However, even with the most modern technology and better staffing, there’s a limit to how good the tax-filing experience can get, Gleckman noted.

    “They’re not going to make the tax code any simpler. The IRS can’t do that — that’s Congress’ problem,” he said.

    The National Taxpayer Advocate recently ranked the complexity of the tax code No. 2 on its list of the 10 most serious problems at the IRS, noting that the average individual spends 13 hours — one and a half working days — filing a single annual return, while the average small business spends upward of 80 hours and nearly $3,000 on the effort.

    “One of the things I fear is people are still going to be mad,” Gleckman said. “They’ll say [of taxes], it’s too complicated! And it’s not the IRS’s problem — that’s Congress.”

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  • Worried the IRS is going to audit your tax return? If you earn less than $400,000, you can probably relax.

    Worried the IRS is going to audit your tax return? If you earn less than $400,000, you can probably relax.

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    Some clarity is emerging regarding statements from Biden administration officials that no one making less than $400,000 will see higher audit rates by the Internal Revenue Service, which is about to step up its scrutiny of wealthy taxpayers.

    The Inflation Reduction Act — the tax and climate package enacted last summer — earmarked $80 billion for the IRS over the next decade and a half. The money is intended in part to facilitate more audits of corporations and wealthier individuals.

    Ahead of the bill’s passage, Treasury Secretary Janet Yellen pledged that there would be no increase in the audit rate for households and small businesses with annual incomes below $400,000 “relative to historical levels.”

    But Republican critics and other observers have asked what “historical levels” might actually mean.

    The audit rate on returns for tax year 2018 is the reference point to keep in mind, IRS Commissioner Danny Werfel told senators on Wednesday. He emphasized that “there’s no surge coming for workers, retirees and others.”

    The IRS audited fewer than 1% of 2018 returns with total positive incomes — the sum of all positive amounts shown for various sources of income reported on an individual income-tax return, which excludes losses — of between $1 and $500,000, according to statistics that the tax agency released last week.

    The agency has three years to start an audit from the time it receives a return.

    Also read: The IRS wants more people working in tax enforcement. Now it has to find them.

    The numbers show that 0.4% of returns for taxpayers earning up to $25,000 were audited. That figure was 0.3% for returns between $200,000 and $500,000 and more than 9% for returns over $10 million, the IRS data show. Six years earlier, more than 13% of returns over $10 million were scrutinized, according to the IRS.

    “Help us with understanding what the words ‘historic level’ means,” Sen. James Lankford, a Republican from Oklahoma, asked Werfel during a Wednesday budget hearing.

    “We will take the most recent final audit rate, and it’s historically low … and we allow that to be the marker for least several years, and then we’re revisit it,” Werfel said. The 2018 audit rates were the newest final rates, he added.

    “So the 2018 number is what it’s going to be?” Lankford asked.

    “Yes,” Werfel replied.

    “Werfel’s explanation that 2018 audit levels will be the reference point is the most detail I’ve heard so far,” Erica York, s senior economist at the Tax Foundation, told MarketWatch. “He did seem to leave open the possibility of revisiting the reference year for ‘historical’ in the future,” she added.

    Another open question has been how the $400,000 income threshold will be determined. Months after the Inflation Reduction Act passed, IRS and Treasury officials still hadn’t finalized what counted as $400,000 in income, according to a January Treasury Department watchdog report.

    “How are you arriving at this number?” asked Sen. Marsha Blackburn, a Republican from Tennessee. Blackburn’s state has many self-employed entrepreneurs who might appear richer on paper than they actually are, she said. “While they may have a higher gross, their net is very low,” she added.

    “We’re going to look at total positive income as our metric,” Werfel said. He later added that “there would be no increased likelihood of an audit if they have less than $400,000 in total positive income.”

    The IRS description of total positive income as “the sum of all positive amounts shown for the various sources of income reported on an individual income tax return and, thus, excludes losses” represents, effectively, a tally of income before taxpayers subtract their losses.

    Total positive income is a metric the IRS usually applies to categorize audits, the Tax Foundation’s York noted. But one challenge of strict thresholds for more audits, she said, “is that it creates incentives for underreporting income” to stay under the line.

    Compared with recent years, there are now more specifics about how the IRS will implement additional audits of higher-income taxpayers, said Janet Holtzblatt, a senior fellow at the Tax Policy Center.

    “But still there are questions,” she noted, about how the agency will treat situations when taxpayers don’t provide full picture of their income.

    Read on: Make sure the tax breaks you’re taking now won’t hammer you in retirement

    Also: ‘This was a test’: IRS has handled more than 100 million returns already — Tax Day by the numbers

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  • What happens if you don’t file your taxes? The penalties are “huge.”

    What happens if you don’t file your taxes? The penalties are “huge.”

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    Each year, about 5% of taxpayers fail to file their taxes, with the top two reasons being that they are overwhelmed by the tax prep’s complexity or simply objecting to paying income taxes, according to David Ragland, a certified financial planner and CEO of IRC Wealth.

    But choosing not to do your taxes is a bad idea because the IRS receives copies of tax forms such as W2s, 1099s and other forms that the agency will use to determine whether a taxpayer failed to file their annual return. 

    “It does catch up to you, and the penalties and interest are huge,” Ragland told CBS News. “If you don’t file your return, any unpaid taxes you’re going to have to pay interest on.”

    The penalty rate for failing to file is 5% of unpaid taxes for each month that a filing is late, with the penalty capped at 25% of unpaid taxes. For instance, a taxpayer who owes $10,000 would owe $500 each month, up to a max of $2,500. 

    There’s also the chance that the IRS will file your taxes on your behalf, Ragland said. The agency would also be conservative, relying on your W2 and other tax forms, but likely failing to take deductions that you yourself might have used on your tax return, he noted. 

    “Just because you don’t file the return doesn’t mean you can escape the IRS long term,” Ragland said. 

    How to ask for a tax extension

    If you’re overwhelmed or simply not ready to file your taxes, it’s easy to ask the IRS for an extension. 

    To do that, fill out Form 4868, a one-page document that asks for basic information such as your name, address and Social Security number. It also asks you to estimate how much you owe in taxes, because an extension to file doesn’t mean an extension on paying the IRS what you owe. 

    You can also use the IRS’s Free File program, typically only available to people who earn less than $73,000 annually, to file for an extension. Anyone, no matter their income, can use the program to file for an extension electronically. 

    If you are worried about paying the IRS, Ragland noted that the agency will set up a payment plan for you to pay off your IOU to the agency. 

    “They are going to go through you income and assets to determine what a reasonable payment is,” he said. “They aren’t going to take every single dollar.”

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  • Taxes 2023: Here’s how to ask the IRS for a tax extension

    Taxes 2023: Here’s how to ask the IRS for a tax extension

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    Tax Day is fast approaching, with Americans facing an April 18 deadline to file their 2022 tax returns with the IRS. But if you aren’t ready, there is a pressure valve that can provide some relief: Asking for more time to file. 

    As of March 31, about 90 million taxpayers have filed their returns, according to the most recent data available from the IRS. But the agency expects about 168 million returns to be filed this year, which means about 78 million taxpayers are waiting until the last few weeks of the tax season to send their returns to the tax agency. 

    There is good news for procrastinators: For those who need more time, asking the IRS for an extension is quick and simple. And it will give you until October 16, 2023, to send your tax return to the tax agency. 

    “Tax Day this year is April 18th and if you aren’t ready to file all of your paperwork yet, you can go ahead and file an extension before that April 18th deadline and buy yourself some more time,” Stefanie O’Connell Rodriguez, host of Real Simple magazine’s “Money Confidential” podcast, told CBS News.

    No extension for payments

    However, receiving more time to file your tax return doesn’t mean you’ll get a break on sending any overdue taxes to the tax agency. As the IRS noted last month, “an extension to file is not an extension to pay taxes.” If you owe the IRS, you’ll still have to pay by April 18.

    What is the 2023 filing deadline?

    Typically, tax day falls on April 15, but this year taxpayers have a few extra days, with the deadline falling on April 18. 

    That’s because April 15 falls on Saturday, while the following weekday — April 17 — is Emancipation Day, a holiday that is observed in Washington, D.C. The IRS notes that Washington D.C.’s holidays impact tax deadlines for all taxpayers, just like federal holidays. 

    Taxpayers who get an extension have until October 16 to file their taxes. Typically, the extension gives people until October 15 to file, but this year that date falls on a Sunday, which means the extension deadline has been pushed until the following weekday, October 16.

    How do I get a tax extension?

    To get an automatic extension, fill out Form 4868. This one-page document asks for basic information such as your name, address and Social Security number. It also asks you to estimate how much you owe in taxes. 

    “You can also use IRS Free File to file for an extension electronically,” noted O’Connell Rodriguez. 

    Typically, the IRS Free File program is only available to people who earn less than $73,000 annually, but the IRS says that anyone, regardless of income, can use the program to file for an extension. 

    You’ll have to request an extension by April 18 or you could be hit with a “failure to file” penalty. The good news is that the IRS provides an automatic extension to everyone who asks, but you’ll still need to file some paperwork with the IRS. 

    Do people living in FEMA disaster areas get more time to file?

    Yes, the IRS says it may provide an “automatic extension” to people who live in areas designed by FEMA as hit by disasters, such as flooding or tornadoes. 

    If you live in one of these areas, you don’t have to file extension paperwork or call the IRS to ask for extended time to file, the agency says.

    To check if your area is included, look at the IRS’ Tax Relief in Disaster Situations. 

    Wait, I still need to pay the IRS?

    Yes, even if you get an extension, you still need to pay the IRS if you underpaid your federal taxes last year. 

    The IRS expects people to make an effort to pay what they owe, tax experts say. To be sure, it may be difficult to precisely determine what you owe, but it’s best to make a good-faith estimate. 

    If you can’t pay what you owe by April 18, you can also set up a payment plan with the IRS, O’Connell Rodriguez said.

    “It’s better to be proactive than reactive,” she noted.

    What if I’m due a tax refund?

    The bad news is you’ll have to wait until after the IRS processes your tax return to receive your tax refund. That means if you wait until October 16 to file, you won’t get that tax refund until later that month — with the IRS estimating that most taxpayers get their refund within 21 days. 

    What are the penalties for failing to file?

    The failure-to-file penalty is stiff, which is why it’s best to ask for an extension if you aren’t going to be ready to file by April 18. 

    The penalty rate is 5% of unpaid taxes for each month that a filing is late, with the penalty capped at 25% of unpaid taxes. Take a taxpayer who owes $10,000 and neglects to file for an extension — if they file two months late, they would owe $500 each month for a total of $1,000 in penalties. 

    The largest fine they could incur would be $2,500, on top of the $10,000 they owe.

    What are the penalties if I don’t pay enough?

    The IRS charges 0.5% of the unpaid taxes for each month, with a cap of 25% of the unpaid taxes. 

    For instance, someone who gets an extension and pays an estimated tax of $10,000 by April 18 could owe a small penalty if they owe more. A bill of $11,000 would add a 0.5% charge on the unpaid $1,000 they still owe the IRS. If they file in June, two months after the tax deadline, they would owe an extra $10.

    That’s much less punitive than the failure-to-file penalty, which is why tax experts urge people to file for an extension and make a good-faith estimate.

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  • Small businesses brace for new tax reporting rule

    Small businesses brace for new tax reporting rule

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    Small businesses brace for new tax reporting rule – CBS News


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    Starting next year, a new IRS rule will require anyone earning over $600 through payment apps such as Venmo and PayPal in 2023 to file a 1099-K form. Scott MacFarlane looks into how this could affect small businesses for the “Tax Time” series.

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  • New tax rule on apps like Venmo, PayPal could spell confusion for small businesses

    New tax rule on apps like Venmo, PayPal could spell confusion for small businesses

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    Alexandria, Virginia — Monica Colburn helps run a Virginia hair salon. But like a growing number of Americans, she uses her flexible schedule to earn extra money.

    “I have all of these extra side jobs,” Colburn told CBS News.

    She works weddings and promotes musicians. “I think last year, I had eight 1099s,” she said.  

    In the process, she collects most of her income for that work through payment apps like Venmo.

    “If I didn’t have multiple ways that somebody could pay me, I feel like I would lose business,” Colburn said.

    While the apps are easy to use, starting next year, filing taxes for millions of people could become trickier. A new IRS rule will require anyone who earned over $600 on payment apps in 2023 to file a 1099-K form. The previous threshold was $20,000 on over 200 transactions.

    Confusion over the changes led the IRS this past December to delay its implementation.

    “This is not a tax law change,” explained Lisa Greene-Lewis with TurboTax. “This is just a reporting requirement for those third parties like Venmo, PayPal and the credit card companies.”

    According to the IRS, money exchanged between friends on those apps should not be taxed. As added protection, experts warn users to classify their transactions to family and friends as personal, not goods or services.

    “If you’re not, you know, in a business, you would not get one of these forms,” Greene-Lewis said.

    The IRS expects to receive about four million 1099-K forms next year, which the agency claims it will be able to handle.

    However, some small businesses, such as that of Maryland furniture maker Dennis Turbeville, are concerned that the extra paperwork from this change could lead to mistakes and prompt costly penalties.

    “Small businesses don’t have the resources to understand how to do things properly,” Turbeville said. “A $2,500 penalty for a business that’s doing $2 million a year, not a big deal. For somebody like me, that’s a big deal.”

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  • Americans facing smaller tax refunds amid high inflation

    Americans facing smaller tax refunds amid high inflation

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    Americans facing smaller tax refunds amid high inflation – CBS News


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    Tax refunds are about 10% smaller this year compared to the year before. Many Americans are feeling the effects as inflation remains high and pandemic-era relief winds down. Mark Strassmann takes a look for the “Tax Time” series.

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  • Taxes 2023: Here’s how to get a tax extension from the IRS

    Taxes 2023: Here’s how to get a tax extension from the IRS

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    Tax Day is fast approaching, with Americans facing an April 18 deadline to file their 2022 tax returns with the IRS. But if you aren’t ready, there is a pressure valve that can provide some relief: Asking for an extension to file. 

    As of March 31, about 90 million taxpayers have filed their returns, the most recent data available from the IRS. But the agency expects about 168 million returns to be filed this year, which means about 78 million taxpayers are waiting until the last few weeks of the tax season to send their returns to the tax agency. 

    There is good news for procrastinators: For those who need more time, filing for an extension is quick and simple. And it will give you until October 16, 2023, to send your tax return to the IRS. 

    “Tax Day this year is April 18th and if you aren’t ready to file all of your paperwork yet, you can go ahead and file an extension before that April 18th deadline and buy yourself some more time,” Stefanie O’Connell Rodriguez, host of Real Simple Magazine’s “Money Confidential” podcast, told CBS News.

    However, receiving more time to file your tax return doesn’t mean you’ll get a break on sending any overdue taxes to the tax agency. As the IRS noted last month, “an extension to file is not an extension to pay taxes.” If you owe the IRS, you’ll still have to pay by April 18.

    What is the 2023 filing deadline?

    Typically, tax day falls on April 15, but this year, taxpayers have a few extra days, with the deadline falling on April 18. 

    That’s because April 15 falls on Saturday, while the following weekday — April 17 — is Emancipation Day, a holiday that is observed in Washington, D.C. The IRS notes that Washington D.C.’s holidays impact tax deadlines for all taxpayers, just like federal holidays. 

    Taxpayers who get an extension have until October 16 to file their taxes. Typically, the extension gives people until October 15 to file, but this year that date falls on a Sunday, which means the extension deadline has been pushed until the following weekday, October 16.

    How do I get a tax extension?

    You’ll have to request an extension by April 18 or you could be hit with a “failure to file” penalty. The good news is that the IRS provides an automatic extension to everyone who asks, but you’ll still need to file some paperwork with the IRS. 

    To get an automatic extension, fill out Form 4868. This one-page document asks for basic information such as your name, address and Social Security number. It also asks you to estimate how much you owe in taxes. 

    “You can also use IRS Free File to file for an extension electronically,” noted O’Connell Rodriguez. 

    Typically, the IRS Free File program is only available to people who earn less than $73,000 annually, but the IRS says that anyone, regardless of income, can use the program to file for an extension. 

    Do people living in FEMA disaster areas get more time to file?

    Yes, the IRS says it may provide an “automatic extension” to people who live in areas designed by FEMA as hit by disasters, such as flooding or tornadoes. 

    If you live in one of these areas, you don’t have to file extension paperwork or call the IRS to ask for extended time to file, the agency says.

    To check if your area is included, look at the IRS’ Tax Relief in Disaster Situations. 

    Wait, I still need to pay the IRS?

    Yes, even if you get an extension, you still need to pay the IRS if you underpaid your federal taxes last year. 

    The IRS expects people to make an effort to pay what they owe, tax experts say. To be sure, it may be difficult to precisely determine what you owe, but it’s best to make a good-faith estimate. 

    If you can’t pay what you owe by April 18, you can also set up a payment plan with the IRS, O’Connell Rodriguez said.

    “It’s better to be proactive than reactive,” she noted.

    What if I’m due a tax refund?

    The bad news is you’ll have to wait until after the IRS processes your tax return to receive your tax refund. That means if you wait until October 16 to file, you won’t get that tax refund until later that month — with the IRS estimating that most taxpayers get their refund within 21 days. 

    What are the penalties for failing to file?

    The failure-to-file penalty is stiff, which is why it’s best to ask for an extension if you aren’t going to be ready to file by April 18. 

    The penalty rate is 5% of unpaid taxes for each month that a filing is late, with the penalty capped at 25% of unpaid taxes. Take a taxpayer who owes $10,000 and neglects to file for an extension — if they file two months late, they would owe $500 each month for a total of $1,000 in penalties. 

    The largest fine they could incur would be $2,500, on top of the $10,000 they owe.

    What are the penalties if I don’t pay enough?

    The IRS charges 0.5% of the unpaid taxes for each month, with a cap of 25% of the unpaid taxes. 

    For instance, someone who gets an extension and pays an estimated tax of $10,000 by April 18 could owe a small penalty if they owe more. A bill of $11,000 would add a 0.5% charge on the extra $1,000 they owe the IRS. If they file in June, two months after the tax deadline, they would owe $10.

    That’s much less punitive than the failure to file penalty, which is why tax experts urge people to file for an extension and make a good-faith estimate.

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  • Want to track down your tax refund? Follow these dos and don’ts

    Want to track down your tax refund? Follow these dos and don’ts

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    After you’ve filed your taxes, waiting for weeks or months on end for your refund to show up in your bank account can be frustrating. But the IRS is warning of some “myths” in circulation that might sound appealing, but in fact won’t help figure out when your refund is landing. 

    There’s a good reason why many workers are anxious to get their hands on their refunds — the payment typically represents the biggest check most Americans will receive all year. And although refunds are 11% lower so far this tax season compared with a year earlier, it’s still a big chunk of change, averaging $2,972, according to the latest IRS data. 

    To be sure, there are some steps you can take to ensure your tax return doesn’t get held up with processing. For one. tax experts say to file your return electronically because paper returns need to be processed by IRS employees, rather than scanned by a computer — that can add weeks or months to getting your refund. Second, check your return for errors before you file, because simple math problems can get your return jammed up, too.

    But once your return is filed, don’t fall for the following myths about how you can get a “more accurate” date for your refund, the IRS warns. 

    Myth: Calling the IRS will get you better info about your refund

    Some people think talking with an IRS customer service agent or a tax prep company will give them more accurate information about when their refund will land. Not so.

    Instead, the IRS said it’s best to check the “Where’s My Refund?” website or the IRS2Go app. You can also call the automated refund hotline at (800) 829-1954, but it simply provides the same info that you can get on the website.

    The agency recommends against phoning up the agency unless the “Where’s My Refund?” website says you should make a call, 

    Myth: There’s no deposit date at “Where’s My Refund?” so it’s wrong

    Some people think the “Where’s My Refund” site is wrong if there’s no deposit date yet for their refund check, the IRS said. But the site and the IRS2Go mobile app are only updated once a day, and that usually happens overnight.

    Sometimes returns need more time to be processed, and a refund could take longer, which could mean that the “Where’s My Refund” site has no date yet for your refund. Most refunds are issued within 21 calendar days after a return is filed.

    Myth: “Where’s My Refund?” is wrong because the refund amount is less than expected

    Sometimes people’s refunds are lower than they expected because the IRS has made adjustments on the return. The IRS will mail a letter to explain what changed.

    “Some taxpayers may also receive a letter from the Department of Treasury’s Bureau of the Fiscal Service if their refund was reduced to offset certain financial obligations,” the agency said. 

    The IRS said that taxpayers should check the “Where’s My Refund?” site or wait to receive a letter from the agency before calling.

    Myth: I got a refund, so I’ll get one next year 

    Actually, you might have to change your withholding this year even if you received a refund, according to the IRS. Events like getting married or having a child can change your tax situation, while other issues can also have an impact, like getting a raise or earning gig income. 

    The IRS recommends that people check its Tax Withholding Estimator” tool to see if they should change their withholding.  

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  • 10 Important Tax Numbers Every Business Owner Should Know to Save | Entrepreneur

    10 Important Tax Numbers Every Business Owner Should Know to Save | Entrepreneur

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    Opinions expressed by Entrepreneur contributors are their own.

    I’m a certified public accountant but my firm doesn’t prepare tax returns. However, I’m also a business owner. This means, like my best clients, I pay close attention to my taxes. Why? Because for a business owner, taxes are usually one of our biggest expenses. If you’re running a business, these are 10 federal tax numbers that are very important for all of us in 2023.

    $160,200

    This is the maximum amount of wages that can be taxed for social security (FICA) benefits at 6.2% (the 1.45% Medicare tax has no limit). Any wages paid over this amount are not subject to the FICA tax — employee or employer. This is important because if you raise an employee’s compensation above this amount, they’re receiving an added tax benefit which should be part of your salary considerations this year.

    Related: These Are the Top Tax Filing Mistakes Made by Small Business Owners (and How to Avoid Them)

    $6,500

    This is the amount you can contribute to an individual Roth IRA account. Roth IRAs often get ignored by my clients but they’re a fantastic way to put after-tax money away and watch it grow tax-free with no penalties or additional taxes on withdrawal. Because the stock market is down, I have a number of older clients taking distributions from their 401(k)s, paying the tax on a lower capital gain, and then transitioning those amounts to a Roth where the amounts are never taxed again. Everyone should be putting money into a Roth IRA.

    $7,500

    This is an added “catch-up” contribution that can be made to your 401(k) account if you’re over the age of 50 — which means that more than half of business owners in the U.S. are probably eligible. There’s also a $1,000 catch-up for individual IRAs for people in this age group. Thanks to the recently passed Secure 2.0, the 401(k) catch-up amount is going to rise to as much as $10,000 annually for those between the ages of 60 and 63 starting in 2025 and will then be adjusted for inflation each year.

    $66,000

    That’s the amount that can be contributed to a 401(k) plan this year which includes both employer and employee contributions and does not include any “catch-up” contributions. This amount is limited to your income and discrimination tests (see below).

    $150,000

    That’s the amount of compensation that defines a “highly compensated employee.” This is important because the number of people you have in your 401(k) retirement plan that earns over this amount will figure into your plan’s year-end discrimination testing and that may limit the amount you — and they — can save. The takeaway: The more employees —particularly non-highly compensated employees — that contribute to your 401(k) plan, the more you can contribute.

    Related: 3 Ways to Save Money on Taxes That Most Entrepreneurs Miss

    $0.655

    That’s the IRS-reimbursable mileage rate for 2023 and it changes every year based on the fluctuating costs of operating a vehicle. This is important because you can reimburse your employee for any miles traveled above the commute to your office (for example to a customer) and you’ll get a tax deduction — and the amount won’t be taxable to them. This is potentially a great added benefit to provide for your staff, particularly in these times of high gas costs.

    $300

    This is the amount you can pay your employees each month to reimburse for their commuting expenses. You’ll get a deduction and they won’t be taxed. If an employee drives to work, you can also pay them $300 to reimburse for their parking expenses with the same tax treatment. It’s another benefit to consider and could be a helpful enticement to get your people back into the office more often.

    $1,160,000

    That’s the maximum Section 179 deduction you can take this year for the acquisition of capital assets. This applies to both new and used assets like capital equipment, machinery, furniture and most computer software. There are “bonus” depreciation deductions that your business can take in addition to the Section 179 amounts. You can even finance these purchases and get these deductions — just make sure they’re “in service” by year-end.

    $12,920,000

    That’s the individual federal estate lifetime tax exemption which means that a married couple can leave more than $25 million of their assets upon their deaths tax-free to the beneficiaries. After that, most transfers of assets will be taxed at 40%. This exemption gets reduced to $7,000,000 individually in 2026.

    $17,000

    This is the amount you can gift this year and the recipient won’t be taxed. This is in addition to the lifetime addition above and applies to anyone, not just family members.

    You know what’s coming next, right? It’s the usual caveat where I write that your situation may be unique and you should always consult your tax professional before making any decisions based on the above numbers.

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  • IRS changed its tax brackets for 2023. Here’s what it means for your taxes.

    IRS changed its tax brackets for 2023. Here’s what it means for your taxes.

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    Americans could save on taxes this year because of historically large inflation adjustments set by the IRS.

    The agency adjusted many of its 2023 tax rules to help taxpayers avoid “bracket creep.” That’s when workers get pushed into higher tax brackets due to the impact of cost-of-living adjustments to offset inflation, despite their standard of living not having changed. On average, the IRS pushed up each provision by about 7% for 2023.

    The changes could mean tax savings for some taxpayers, providing some relief at a time when Americans are still struggling with high inflation that’s eating away at their purchasing power. For instance, some taxpayers could fall into lower tax brackets as a result of the changes, while those who use the standard deduction — relied on by 86% of taxpayers — will be able to deduct more of their income from taxation.

    For instance, a married couple earning $200,000 in both 2022 and 2023 would save $900 in taxes this year because more of their income would be taxed at a lower rate, according to Tim Steffen, director of tax planning with Baird.

    That could be a welcome change given that this year’s tax returns (for the 2022 tax year) are expected to deliver a “tax refund shock” to many Americans due to the expiration of pandemic tax credits. As a result, refunds could be significantly smaller in 2023 compared with a year earlier.

    Still, the tax bracket changes may not save money for everyone, especially those who saw their incomes rise by 7% or more, noted the Tax Policy Center, a think tank that focuses on taxes. 

    “It’s just keeping them from facing higher taxes if their inflation-adjusted incomes (also known as real incomes) rise by 7%,” senior fellow Robert McClelland wrote in a blog post.

    Taxpayers will file their 2023 tax returns in early 2024. 

    Standard deduction

    The standard deduction is used by people who don’t itemize their taxes, and it reduces the amount of income you must pay taxes on. 

    • For married couples filing jointly, the standard deduction is $27,700 for 2023, up from $25,900 in the 2022 tax year. That’s an increase of $1,800, or a 7% bump. 
    • For single taxpayers and married individuals filing separately, the standard deduction is set at $13,850 in 2023, compared with $12,950 last year. That’s an increase of about 6.9%.
    • Heads of households’ standard deduction in 2023 jumps to $20,800 from $19,400 in 2022. That’s an increase of 7.2%. 

    “The flip side of this, though, is that it’s going to be harder to itemize your deductions in 2023,” Steffen said. “That means your tax payments, mortgage interest and charitable contributions are less likely to provide you a tax benefit next year.”

    Most taxpayers take the standard deduction, especially after the 2017 Tax Cuts and Jobs Act enacted a more generous deduction. Only about 14% of taxpayers itemized their taxes after the passage of the tax overhaul, or a 17 percentage-point drop compared with prior to the law, according to the Tax Foundation.

    Tax brackets

    The IRS boosted tax brackets by about 7% for each type of tax filer for 2023, such as those filing separately or as married couples. The top marginal rate, or the highest tax rate based on income, remains 37% for individual single taxpayers with incomes above $578,125 or for married couples with income higher than $693,750. 

    The lowest rate remains 10%, which impacts individuals with incomes of $11,000 or less and married couples earning $22,000 or less. Below are charts with the new tax brackets.

    Tax brackets show the percentage you’ll pay in taxes on each portion of your income. A common misconception is that the highest rate is what you’ll pay on all of your income, but that is incorrect. 

    Take a single taxpayer who earns $110,000. In 2023, she will take a standard deduction of $13,850, reducing her taxable income to $96,150. This year, she’ll pay:

    • 10% tax on her first $11,000 of income, or $1,100 in taxes
    • 12% tax on income from $11,000 to $44,735, or $4,048
    • 22% tax on the portion of income from $44,735 up to $95,375, or $11,140
    • 24% tax on the portion of her income from $95,374 to her limit of taxable income, $96,150, or $775

    Together, she’ll pay the IRS $17,063 in taxes, which amounts to an effective tax rate of 17.7% on her taxable income. 

    Earned Income Tax Credit

    The maximum amount for households who claim the Earned Income Tax Credit will be $7,430 for those who have at least three children, compared with $6,935 in the current tax year, the IRS said.

    Capital gains tax brackets

    Capital gains — the profit from investments or other assets — are taxed using different brackets and rates than earned income. The income thresholds for capital gains taxes were also adjusted due to inflation for 2023.

    For instance, in 2022 single taxpayers who earned below $41,675 were not required to pay capital gains taxes on their investments. In 2023, that threshold is rising by about 7% to $44,625. Single taxpayers who earn above that amount are subject to a 15% capital gains tax, while those who earn above $492,300 in 2023 will be subject to the top capital gains rate of 20%.

    Bigger gift exclusion

    People can also give up to $17,000 in gifts in 2023 without paying taxes on the money, up from $16,000 in the prior year.

    Estate tax limit

    The estates of wealthy Americans will also get a bigger break in 2023. The IRS will exempt up to $12.92 million from the estate tax in the current tax year, up from $12.06 million for people who died in 2022 — an increase of 7.1%.

    Flexible spending accounts

    Flexible spending accounts allow workers to put money, up to the limit allowed by the IRS, in an account that can be used to pay for medical expenses. Because the funds are taken from their accounts on a pre-tax basis, it offers tax savings for many workers. 

    The new IRS limit for FSA contributions for 2023 is $3,050, an increase of about 7% from the current tax year’s threshold of $2,850. 

    However, most employees set their FSA limits in the fall, which means that workers would have had to set the higher amount late last year to take advantage of the higher 2023 limit.

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  • The Saturday Six: Super Bowl ad previews, Celia Cruz to be featured on U.S. quarters and more

    The Saturday Six: Super Bowl ad previews, Celia Cruz to be featured on U.S. quarters and more

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    Super Bowl ads released ahead of the game


    Super Bowl ads released ahead of the big game

    04:32

    The weekend is finally here.

    During a busy news week, President Biden delivered his State of the Union address, the death toll rose to more than 20,000 after the earthquakes in Turkey and Syria and New Zealand police found three tons of cocaine floating in the Pacific Ocean. 

    Meanwhile, actor Michael B. Jordan talked to Gayle King about his career and his directorial debut of “Creed III,” and the world said goodbye to legendary composer Burt Bacharach, who died at the age of 94.

    rtx1i1zj.jpg
    Burt Bacharach performs on the Pyramid stage at Worthy Farm in Somerset during the Glastonbury Festival in Britain, June 27, 2015.

    Dylan MartinezReuters


    Also, Dell joined a parade of technology companies announcing layoffs that included companies like Yahoo, while Disney slashed jobs, too.

    But that’s not nearly all. 

    Below is our weekly Saturday Six, a recap of half a dozen news stories — in no particular order — ranging from the heartfelt to the weird to the tragic, and everything in between. 

    • CBS News previewed some of the Super Bowl ads you’ll see during Sunday’s game between the Kansas City Chiefs and the Philadelphia Eagles. From the story: Most of the spots will come from automakers, booze vendors and tech companies, while the usual celebrity cameos will include Adam Driver, Will Ferrell, John Travolta, Alicia Silverstone, Serena Williams, Tony Romo and Kevin Garnett. Watch the video above.
    • LeBron James broke the NBA’s all-time scoring record. From the story: In front of cheering fans at L.A.’s Crypto.com Arena, the Los Angeles Lakers star secured his place in the record books during the third quarter of Tuesday’s game against the Oklahoma City Thunder. James set the record with a fadeaway jumper with 10.9 seconds left in the third quarter.
    • Americans are expected to spend $26 billion on Valentine’s Day. From the story: Even as inflation over the past year puts a burden on consumers and businesses across the country, people are putting money and effort toward those they care about most. More than half of consumers are planning to celebrate in some way and will spend on average about $192.80. That’s up from $175.41 last year, and is the second-highest figure since the National Retail Federation began Valentine’s Day tracking in 2004.
    • Salsa music icon Celia Cruz will be featured on U.S. quarters in 2024. From the story: She is believed to be the first Afro Latina to be on the coin. The “Queen of Salsa” was a Cuban American singer and one of the most popular Latin artists of the last century. 
    • An 18-year-old who played the lottery for the first time won $48 million. From the story: Ontario Lottery and Gaming Corporation presented Juliette Lamour with her massive check, calling her the youngest Canadian to ever win such a big jackpot through the lottery. Lamour said it was her grandfather who suggested she buy a lotto ticket. “I had just turned 18 and my grandfather suggested I buy a lottery ticket for fun,” Lamour said at a media conference on Friday, according to OLG.
    • The IRS is telling millions of Americans to hold off on filing their taxes. From the story: The agency said it is seeking to clarify whether those tax rebates and special refunds are considered taxable income. “We expect to provide additional clarity for as many states and taxpayers as possible next week,” the IRS said on February 3. 

    See you next week. Until then, follow CBS News on Twitter, YouTube and Facebook.


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  • 2/8: CBS News Prime Time

    2/8: CBS News Prime Time

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    2/8: CBS News Prime Time – CBS News


    Watch CBS News



    John Dickerson reports on the ongoing relief efforts in Turkey and Syria after the earthquakes, China’s vast surveillance program after its spy balloon was shot down off the South Carolina coast, and why the IRS is telling millions to hold off on filing tax returns.

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    Get browser notifications for breaking news, live events, and exclusive reporting.


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  • State relief payments and rebates complicate tax season

    State relief payments and rebates complicate tax season

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    State relief payments and rebates complicate tax season – CBS News


    Watch CBS News



    Every year, the IRS asks Americans to file their taxes early. This year, however, the agency is telling millions of Americans who received special refunds from their state to hold off for now in order to determine if those refunds are taxable or not. Jacob Bogage, a business reporter for the Washington Post, joined CBS News to break down what this means.

    Be the first to know

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  • IRS tells taxpayers in some states to delay filing returns

    IRS tells taxpayers in some states to delay filing returns

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    IRS tells taxpayers in some states to delay filing returns – CBS News


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    The IRS is urging millions of Americans to hold off on filing their tax returns. The agency said it needs to figure out whether special payments sent to taxpayers in multiple states last year, including California, will be subject to federal taxes.

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  • Tesla’s Model Y and other EVs will now qualify for $7,500 tax credit, IRS says

    Tesla’s Model Y and other EVs will now qualify for $7,500 tax credit, IRS says

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    Tesla’s Model Y model and other electric vehicles from auto manufacturers including Ford, General Motors and Volkswagen will now qualify for a federal tax credit of $7,500, the IRS said Friday. 

    The change comes after the U.S. Treasury Department revised its vehicle classifications in a way that broadens the definition of what qualifies as an SUV, which has a higher price threshold to qualify for the tax credit. Previously, the five-seat Tesla Model Y was classified as a sedan, which meant it didn’t qualify for the EV tax credit because it cost more than $55,000 price cap for sedans stipulated under the government’s rules.

    The issue had drawn the ire of Tesla CEO Elon Musk, who had complained that the earlier classification was “messed up,” according to The Verge. The tax credits stem from the Biden administration’s Inflation Reduction Act, which provides billions in rebates for EVs and home upgrades geared toward shifting consumers away from fossil fuels.

    Expanding the number of SUVs that qualify for the full $7,500 tax credit could spur consumer demand for EVs, given that the crossover SUV vehicle is one of the fastest growing auto segments, noted Albert Gore, executive director of the Zero Emission Transportation Association.

    “Congressional intent with the IRA and clean vehicle tax credit was to rapidly accelerate deployment of qualified EVs, and today’s decision is a big step toward that goal,” Gore said in a statement. “We have long advocated for the IRA’s tax credits to be as widely accessible as possible.”


    General Motors president discusses new fully electric Corvette and future of electric vehicles

    09:07

    General Motors had also pushed back against the prior limits, with the automaker asking the Treasury earlier this month to reconsider classifying its electric Cadillac Lyriq so that it would meet the threshold for the credits, Reuters reported. The Lyriq costs about $62,000.

    GM said it was “excited” that customers who qualify for the tax credit will be able to use it to buy the Lyriq SUV. “Tax credits are a proven accelerator of electric vehicle adoption,” the company said in a statement sent to CBS News. 

    The tax credits will be retroactive for the newly qualified vehicles for purchases on or after January 1, when the new rebates went into effect.

    Last year, Teslas weren’t eligible for a tax break under a previous federal credit program because the company had reached a limit of 200,000 vehicles sold. But the tax credits through the IRA don’t have such a limit, which means more buyers may be able to lower the purchase price of a Tesla this year through the tax credit. 

    Ford and Tesla earlier this month cut the price of some of their EV models so they would qualify for the tax credit and as more motorists move to go electric. 

    Some of the electric vehicles that qualify for the $7,500 are listed below by price range.

    EVs that qualify with an MRSP of $55,000 or less

    • BMW 330e, model years 2021-2023
    • Chevrolet Bolt, model years 2022 & 2023
    • Chevy Bolt EUV, 2022 & 2023
    • Nissan Leaf S, 2021-2023
    • Nissan Leaf S Plus, 2021-2022
    • Nissan Leaf SL Plus, 2021-2022
    • Nissan Leaf SV, 2021-2022
    • Nissan Leaf SV Plus, 2021-2023
    • Tesla Model 3 Real Wheel Drive, 2022-23
    • Tesla Model 3 Long Range, 2022-23
    • Tesla Model 3 Performance: 2022-23
    • Volvo S60: 2022
    • Volvo S60 Extended Range: 2022
    • Volvo S60 T8 Recharge: 2023

    EVs that qualify with an MRSP of $80,000 or less

    • Audi Q5 TFSI e Quattro (PHEV) : 2023
    • BMW X5 xDrive45e: 2021-2023
    • Cadillac Lyriq: 2022-2023
    • Chrysler Pacifica PHEV: 2022-2023
    • Ford Escape Plug-In Hybrid: 2022-2023
    • Ford E-Transit: 2022-2023
    • Ford F-150 Lightning: 2022-2023
    • Ford Mustang Mach-E: 2022-2023
    • Jeep Wrangler 4xe: 2022-2023
    • Jeep Grand Cherokee 4xe, 2022-2023
    • Lincoln Aviator Grand Touring: 2022-2023
    • Lincoln Corsair Grand Touring: 2022-2023
    • Rivian R1S: 2022-2023
    • Rivian R1T: 2022-2023
    • Tesla Model Y All-Wheel Drive: 2022-2023
    • Tesla Model Y Long Range: 2022-2023
    • Tesla Model Y Performance: 2022-2023
    • Volkswagen ID.4 Pro: 2023
    • Volkswagen ID.4 Pro S: 2023
    • Volkwagen ID.4 S: 2023
    • Volkwagen ID.4 AWD Pro: 2023
    • Volkwagen ID.4 AWD Pro S: 2023

    —With reporting from CBS News’ Willie James Inman. 

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  • Study: IRS Audits Black Americans The Most

    Study: IRS Audits Black Americans The Most

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    A study worked on by academics at several major institutions in collaboration with the U.S. Department of the Treasury found that Black Americans are anywhere from 2.9 to 4.7 times more likely to be audited by the IRS.

    The working paper was published January 31 by the Stanford Institute for Economic Policy Research.

    “The disparity is unlikely to be intentional on the part of IRS staff,” according to a summary fo the study.

    “Rather, as the team’s research demonstrated, the racial disparity in audit selection is driven by a set of internal IRS algorithms that Goldin likens to the recipe for Coca-Cola. That is: It’s completely secret,” it added.

    However, despite the fact that the IRS keeps many details under wraps about how exactly its algorithms select people to audit, the research team was able to identify the disparity (in tax returns from 2014, Black Americans were 2.9 to 4.7 times more likely to be audited than other groups) and suggest possibilities for what could be behind it.

    The study found that the IRS was more likely to flag Black Americans through its “Dependent Database,” which uses risk scores and other factors to create a database of taxpayers who might have not-reported income, then generates an automatic letter audit.

    The study was not able to say why, but it did show that “the bulk of the observed racial disparity” was related to by-mail, lower-effort audits (rather than ones that take place in person).

    One reason for the disparity is the increased auditing of people who claim the Earned Income Tax Credit, (EITC) which gives a tax break to families of low or moderate income. That disproportionately affects Black taxpayers.

    However, the largest racial disparity actually occurs because, within the group of people who claim EITC, the IRS is also much more likely to select Black Americans.

    Black Americans faced 45% of audits among those who claim EITC — but were only 21% of the total group.

    “The racial disparity in audit rates persists regardless of whether EITC claimants are male or female, married or unmarried, raising children or childless,” per the summary.

    The study proposed a few other explanations, borne out by its data analysis, from the possibility that the racial bias is introduced by a potential focus on the number of instances of unreported tax income (versus how much actual income is not reported — i.e., attempting to find the largest number of reported income).

    Another was the fact that the IRS audits people who report income from a business less often because those audits are more expensive, and that also disproportionately results in Black taxpayers facing audits.

    The business income situation feeds into a larger trend of the IRS lacking the funds to audit high-income taxpayers, and thus focusing on lower-cost audits, which “have a racially disparate impact.”

    The study used U.S. Census data to predict the likelihood a taxpayer identifies as Black, as the IRS does not collect data on race.

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  • Black Americans more likely to be audited by the IRS than any other race

    Black Americans more likely to be audited by the IRS than any other race

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    Black Americans are up to five times more likely to have their federal tax returns audited than taxpayers of other races, according to a new study released this week. 

    With the IRS now accepting tax returns, the study provides evidence that some Americans have a greater risk of seeing an audit, a process that often delays refund checks. 

    The higher audit rate for Black taxpayers is due to a flawed AI algorithm relied on by the IRS to decide who gets audited, the study’s authors said. The study, which taps data from more than 148 million anonymous returns and 780,000 audits, offers suggestions for how the IRS might fix the disparity, including focusing on auditing filers with complicated returns. 

    “The IRS should drill down to understand and modify its existing audit selection methods to mitigate the disparity we’ve documented,” said Stanford University law professor Daniel Ho, who co-wrote the study. “And we’ve shown they can do that without necessarily sacrificing tax revenue.”


    Tips for taxpayers as filing season begins

    05:25

    “Equitable enforcement of our tax laws is a top priority for the Administration, and resources provided by the Inflation Reduction Act will enable the IRS to upgrade technology and hire top talent to go after wealthy tax evaders,” a U.S. Treasury Department spokesperson said in an email to CBS MoneyWatch.

    The IRS, a bureau of the Treasury, didn’t immediately respond to a request for comment.

    “Small dollar” audit cases

    The study, published Tuesday, comes from Ho and a team of other researchers including University of Michigan economist Evelyn Smith. 

    Even though many of the factors the IRS’ algorithm relies on are secret, the researchers said the program prioritizes “small-dollar, high certainty” audit cases and places less emphasis on how much a filer is claiming in income, Smith told NPR on Wednesday. 

    Black taxpayers tend to make the types of mistakes that the IRS historically has focused on,” Smith told NPR. “So an example would be claiming dependents. The IRS focuses very heavily on ensuring that dependents that are claimed for the purposes of EITC meet the eligibility criteria.”


    IRS says tax refunds may be smaller this year

    04:02

    The study represents the first time the IRS has given an outside research team so much access to tax returns and completed audits, Ho and the others said. The returns, which were filed between 2010 and 2018, don’t reveal the filer’s race, so researchers used a special method (cross-referencing names, geography and Census tract data) to loosely predict which returns were filed by Black taxpayers.

    The researchers said there’s no evidence that IRS agents — who don’t see the race of a tax filer — are purposely discriminating against Black Americans. However, the IRS could eliminate the disparity by auditing people with complex tax returns and people who underreport their income, they said. 

    The IRS’ audit rates have drawn criticism from other researchers as well as lawmakers, with a 2022 report finding that low-income households are five times as likely to be audited as higher-income taxpayers. That is due to higher audit rates linked to the Earned Income Tax Credit, a tax benefit for low-income workers that often leads to errors on tax returns. 

    The Stanford study also found a link between Black taxpayers claiming the EITC and being audited. Black people accounted for 21% of EITC claims in 2014 but they were 43% of EITC audits.

    Khristopher J. Brooks

    Khristopher J. Brooks is a reporter for CBS MoneyWatch covering business, consumer and financial stories that range from economic inequality and housing issues to bankruptcies and the business of sports.

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  • Money-Saving Tips Entrepreneurs Often Miss in Tax Filing Season

    Money-Saving Tips Entrepreneurs Often Miss in Tax Filing Season

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    Opinions expressed by Entrepreneur contributors are their own.

    There is one time a year that requires a detailed level of attention for a business owner, no matter the size of your business.

    When tax season comes around, entrepreneurs initiate survival mode sometime between January and April 15 and look for every way to get a few more deductions.

    Bookkeeping, tax filing, audits and deductions will assist in keeping a good relationship with the IRS, as well as supporting good habits for your business; however, because getting everything just right can be overwhelming, it is easy to miss important things and leave money on the table that would be better suited in your pocket.

    Tax season reaches beyond the immediate tax return and can have a lasting impact five or even 10 years down the road. While you can make certain deductions one year that will benefit you, as your business grows, having a different strategy is in your best interest.

    This requires experience, a little patience and a willingness to learn from the mistakes you made.

    There are three very important things every business owner should be paying attention to when you file your yearly taxes to ensure you are getting the most out of your return. These examples can also create strong business habits that will help you create a long-term operation.

    Related: 75 Items You May Be Able to Deduct from Your Taxes

    The home office deduction

    While it may be more convenient to work from home, as well as being fiscally cheaper, it may make you a target for audits.

    Since you can deduct items like the square footage of your home office or short trips to the office supply store, it is crucial that you have the documentation to verify everything you list as a deduction.

    With less obvious options like the Augusta Rule — in which you can rent your home out to business events and summit meetings — you have more options for write-offs and every purchase adds up. Nearly every purchase that you make for your business is considered tax-deductible as it relates to your business.

    Although not every person who works from home will be audited, if you were to go through a formal audit and you do not have proper documentation for your deduction claims, you can have those deductions revoked.

    If your business is growing quickly and producing high capital, you may want to consider moving your business into an office lease to keep your home and business separate.

    This will be to your advantage when you are looking for clear defining factors in listing deductions, but if that’s not your cup of tea as an entrepreneur and you like the home office as a center for operations, make sure you keep proper documentation of your home office to ensure your write-off isn’t arguable in the case of an audit.

    Related: These 6 Tax Tips Will Help Make Tax Season Easy for Your Business

    Utilize deductions in the ways that benefit you the most

    Being honest with your deductions is a good practice to have, making sure that you are not putting forth false information to save a few bucks.

    One thing that many people do not consider is overusing deductions that are available. It can be quite easy to get into a rhythm of using the same tactics every year, but this can cost you in the long run.

    Let’s say you were to buy a new vehicle every year or two for your business. It could be a worthwhile plan for the first couple of filings that will help ease some of the financial pressure on a young business.

    However, this can turn into abuse — not from a legal standpoint, but in the metric that vehicles depreciating over time will cost you more than the deduction would save.

    Working with a professional accountant to have a good roadmap to how your deductions will affect you not only this year, but in future filings, is a good thing to consider. This will help with the guidance of what you should be used as a deduction and what would be better to leave behind.

    Map your deductions out accordingly because they can save you a lot of headaches and money 10 years from now.

    Related: The IRS Hates Telling Entrepreneurs Anything About Taxes. Here’s How You Can Find Out What They’re Thinking.

    Categorize your business properly

    It is a necessary task to “list” your business regardless of where you operate. That being said, there are four options upfront as to how you list your business by definition and how your business is classified can save you or cost you money.

    The four business classifications are:

    • LLC: A limited liability company.

    • S corp: S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.

    • C corp: A C corporation is a legal structure for a corporation in which the owners, or shareholders, are taxed separately from the entity.

    • Sole proprietor: A person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses.

    With all of these options, it is imperative to either know what you are doing or work with someone who does to register your business accordingly in the state you own a business.

    Related: 14 Tax Deductions Your Small Business Might Be Overlooking

    It can be misleading as to which definition will be the best to suit your needs; however, if you do it correctly, it can create a good foundation that will benefit you.

    There can be many options to choose from when you are looking for deductions within your business, whether you are working from home or in an office space, under an LLC, sole proprietor or S corp. If you are unfamiliar with how to navigate this information, it is best to hire an accountant/bookkeeper to help guide you through.

    While there are many “deductions” you can apply to your business, being aware of the things that will benefit you now and in the long run can relieve stress when you need it most.

    Utilize every deduction you can to bring the cost of running your business down like materials, office supplies, office space, vehicles, advertising, etc., then consider what you will still be able to use in the big picture by measuring your growth against what you are saving this year.

    Documentation is one of the most important things you can do, so if you don’t have the time to be on top of it, hire a competent bookkeeper.

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  • What Small Businesses Can Do If the IRS Comes Knocking

    What Small Businesses Can Do If the IRS Comes Knocking

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    Opinions expressed by Entrepreneur contributors are their own.

    Disclaimer: This article is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other financial professional to determine what may be best for your individual needs.

    Although most small business returns filed every year don’t get audited, the IRS is certainly becoming more active. For instance, in November 2020, the IRS announced it would ramp up audits of small businesses by 50% in 2021. Then, in August 2022, Congress passed the Inflation Reduction Act, including $80 billion in IRS funding, with approximately $45 billion going toward enforcement — conducted by at least some of those 87,000 new agents the IRS is reportedly hiring.

    So how can you stay out of the IRS’s crosshairs? To an extent, there’s nothing you can do, as some audits are totally random. However, in most cases, audits result from actions or omissions by the taxpayer — certain of which are more likely to trigger some unwelcome mail from the IRS announcing an audit.

    Here are five of the most common small business tax audit triggers.

    Related: These Are the Top Tax Filing Mistakes Made by Small Business Owners (and How to Avoid Them)

    1. Failing to report income

    Whether it’s intentional or simply due to an oversight, failing to report income is a common trigger for an IRS audit.

    The IRS receives copies of 1099 forms sent to your business, so in many cases, it’s easy to spot a discrepancy between reported income on a tax return and the information included in tax reporting forms. If there is a discrepancy, the IRS will flag it on your return and, most likely, initiate an audit.

    In addition, as more individuals turn to side hustles and gig work to make money, the IRS is taking steps to ensure that it’s keeping tabs on what people are earning. While it has delayed implementation for tax year 2022, the IRS will soon be requiring third-party settlement organizations such as PayPal and Venmo to issue 1099-K forms to individuals being paid $600 or more via these platforms.

    Fail to report income? There’s a good chance the IRS will notice.

    2. Large deductions and excessive expenses

    Small businesses should claim all justifiable business deductions. That’s their right under our tax laws.

    However, there are no bright-line rules that define what’s “justifiable” — only a somewhat fuzzy standard that a business expense must be both ordinary and necessary.

    Because there’s ambiguity in these terms, some taxpayers take it too far and claim unreasonably large deductions and excessive expenses, leading to audits. The odds that a deduction will trigger an audit increase if such deductions or expenses are either out of line with IRS standards for similarly situated businesses and/or significantly larger than the prior year.

    It’s also important to note that certain deductions tend to draw more scrutiny than others, including the home office deduction, travel costs and vehicle use, to name a few.

    Related: Top Tax Write-Offs That Could Get You in Trouble With the IRS

    3. Large amounts of cash transactions

    If you run a “cash business,” such as a restaurant or barber shop, that fact alone makes it more likely that you’ll be audited. When a business relies mostly on cash transactions, they face an increased audit risk because the IRS may be concerned that the business is underreporting income.

    If your small business has a large number of cash transactions, there may not be much you can do to prevent an audit — but if you keep good records and disclose your income, the risks stemming from an audit will be greatly reduced.

    4. Claiming business losses year after year

    Are you running a business or trying to write off expenses for a hobby? IRS guidelines say that if you have earned a profit in at least three of five consecutive years, the presumption is that the business is being run to generate a profit. If not, it could trigger an audit, because having multiple years of losses can lead to the IRS questioning if you have a legitimate business.

    If your business is not, in fact, a hobby but continues to generate losses, make sure to keep accurate and extensive records to help prevent the reclassification of your business as a hobby.

    5. S Corp shareholder-employees earning low or no salaries

    It’s common for small business owners to establish an S Corp instead of an LLC to avoid paying self-employment tax on distributions. However, to take advantage of these tax benefits, the S Corp shareholder-employee must be paid what the IRS deems a “reasonable salary” — a paycheck comparable to what other employers would pay for similar services.

    If there’s additional profit in the business beyond the salary, those can be paid as distributions.

    The IRS is on the lookout for S Corps paying shareholder-employees unreasonably low salaries — or in some cases, no salaries at all. When compensation is misaligned relative to a similar position in a similar industry, it may trigger an audit.

    Related: What I Learned From a Two-Year IRS Audit

    What to do if you get audited by the IRS

    The idea of an audit strikes fear in most people because they immediately conjure up a vision of IRS agents forcefully knocking on the front door of their home or business, ready to rifle through their records.

    That’s not how things work, at least for most people who are subject to audits. Remember, audits are rare. And when they do happen, most are done by mail. While it’s not common, some audits take place at an IRS office (a “desk audit”) or at a home or business (a “field audit”). Regardless, if you find out you’re getting audited, don’t panic and contact an experienced tax audit lawyer, especially if there’s significant money at stake. Do this right away, because the IRS requires a timely response.

    In many instances, resolving an audit will involve providing documentation to the IRS to substantiate the figures on your return. That may end the matter, or there may be some adjustment to the amount you owe, as well as penalties and interest, that you may agree to pay.

    However, you may disagree with the conclusion reached by the IRS, in which case you’ll have 30 days to appeal the IRS’ findings. Disputes proceed with an appeal with the IRS Office of Appeals, followed by a petition to the U.S. Tax Court in the event your appeal is unsuccessful.

    While it’s important to know what to do in the event of an audit, the best way to avoid negative repercussions from an audit is to avoid one in the first place. Be aware of the most common audit triggers. Avoid them if possible. Keep good records. And if the IRS comes calling anyway, contact an experienced audit defense attorney to help you through the process.

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    Jason Carr

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