TAX ALERT: Rare Mid-Year Mileage Rate Increase

The last mid-year IRS adjustment was in 2011

With summer underway, rising temperatures along with high gas prices have many hot under-the-collar. To offer a small respite, the IRS has announced a special adjustment that will increase the standard business mileage rate for the remainder of 2022.

Effective July 1, the increase will bring us to 62.5 cents per mile for business travel. For travel from January 1 through June 30, 2022, taxpayers should use 58.5 cents per mile.

Simply put, when a vehicle is used to go between two different places of work, the mileage reimbursement is applicable. This would include travel to an off-site business meeting, post office, bank, office supply purchases, etc. Commuting to and from home to your work would not apply.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by many businesses to reimburse their employees for mileage.

Smith Dickson is here to assist you with all of your tax needs. Please contact Austin Ray, CPA, CFE , or any of our staff with your questions.

The last mid-year IRS adjustment was in 2011

With summer underway, rising temperatures along with high gas prices have many hot under-the-collar. To offer a small respite, the IRS has announced a special adjustment that will increase the standard business mileage rate for the remainder of 2022.

Effective July 1, the increase will bring us to 62.5 cents per mile for business travel. For travel from January 1 through June 30, 2022, taxpayers should use 58.5 cents per mile.

Simply put, when a vehicle is used to go between two different places of work, the mileage reimbursement is applicable. This would include travel to an off-site business meeting, post office, bank, office supply purchases, etc. Commuting to and from home to your work would not apply.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by many businesses to reimburse their employees for mileage.

Smith Dickson is here to assist you with all of your tax needs. Please contact Austin Ray, CPA, CFE , or any of our staff with your questions.

Fraud Investigations: Key Steps and Mistakes to Avoid

by Ryan Nguyen, CPA, CFE and Austin Ray, CPA, CFE

We live in a world where fraud and embezzlement are rather common; in fact, the Association of Certified Fraud Examiners reports that private companies and small businesses experience fraud more frequently than large corporations, with a frequency rate of 28%!

Knowing what steps to take to address suspected fraud is critical, as these set the course for criminal or civil actions, form a basis for termination proceedings, and provide evidence for insurance claims.

Hire a Team of Fraud Experts

Before launching an internal investigation, hire outside professionals to help guide your efforts. An attorney will help ensure that the proper legal steps are taken to protect your company and establish a case for potential prosecution against the perpetrator. A forensic CPA who is trained as a fraud examination specialist can investigate the fraud scheme, calculate damages, then act as an expert in legal proceedings.

Investigate and Preserve Evidence

At the outset, it is critical to obtain and preserve evidence. Avoid removal of key records by suspects through creating backups of all financial data and correspondence, ensuring that this information remains unaltered. As evidence is collected, always be sure to document the origins of the information and maintain the chain of custody. Again, work carefully with your fraud experts to guide this process.

Identify Suspects and Determine Course of Action

Remember, no one should be above suspicion. Consider collusion between multiple parties and minimize any disclosure of suspicions of fraud. Finally, create a hypothesis of what occurred based on the known facts. Your fraud experts will help you test this hypothesis by thoroughly analyzing all records, conducting interviews, and evaluating the next steps.

{Editor's note: Ryan Nguyen, CPA, CFE, Partner -- Forensics and Audit , and Austin Ray, CPA, CFE, Supervisor -- Forensics and Audit, recently published this article in the Orange County Business Journal. }

The Best Defense is a Good Offense: Trust Accounting

{Editor's note: Gina Lara, Senior Manager, Tax and Forensics, recently published an article in the Orange County Business Journal discussing key trust accounting items about which estate planning/probate attorneys and trustees need to be aware of. Below is an excerpt.}

Trustees who are not presently seeking court approval have flexibility in the format of their trust accounting, but they still must meet certain substance requirements. Accounting in the probate code format is the best way to ensure these requirements are met and adequate disclosure has been made to all beneficiaries …

The cost of an accounting prepared in probate code format is an administrative expense of the trust. It is immaterial in comparison to the cost of defending oneself in court for failure to adequately deliver timely accountings of trust money to beneficiaries. When it comes to trust accounting, the best defense is a good offense by filing proper fiduciary accountings each year.

Please read the article , then contact Smith Dickson if you have any questions.

Employee Retention Credit: Can You Qualify for Big Money?

The Employee Retention Tax Credit (ERTC) is a fully refundable tax credit for employers, recently extended through the end of 2021.

Richard Warner, tax partner, has prepared a brief summary highlighting key facts of the ERTC:

• Eligibility
• Employee threshold count
• Qualified wages plus insurance costs
• ERTC eligibility when PPP loans have been received
• How to claim the ERTC credit
• Necessary documentation

Please read the summary , then contact Smith Dickson if you have any questions.

Avoiding Tax Surprises on Settlements/Judgments and Forms 1099:

How Are Your Firm and Clients Impacted?

{Editor's note: Richard Warner, CPA and Deborah Dickson, CPA, CFF, MAFF recently published this article in "Orange County Lawyer" magazine, the official publication of the Orange County Bar Association," excerpt below.}



Scenario: You successfully negotiated a settlement for your individual plaintiff client in the amount of $1,000,000 due to claims of emotional distress from non-physical injuries at work. This total includes attorney fees of $400,000. You call it a "win" and are certain that your client will be happy with the $600,000 net result - until you receive a phone call from the client, complaining that her CPA has informed her that she has to pay taxes on the entire $1,000,000 of proceeds, including your $400,000 fees, so her net after tax result is only $200,000! Your client goes away unhappy and you wonder what went wrong.

The Role of the Forensic Accountant in Dispute Resolution

by Deborah Dickson, CPA, CFF, MAFF, Managing Partner, Smith Dickson,

Certified Public Accountants, LLP

For decades, plaintiffs and defendants alike have been motivated by having their day in court. This innate desire of human beings to prove themselves “right” has powered our justice system and made the legal profession one of the most demanding and rewarding. This has worked well until the Covid-19 pandemic hit and courtrooms across the nation began to close their doors. At first, many professionals in litigation support thought, “It’s only a few weeks.” Then, “It’s only a few months.” Now, along with attorneys, we must pivot and embark on a journey to the new normal.

As courts begin to re-open, many are backlogged, and matters are being re-prioritized to ensure what the court considers critical cases are addressed. Trial resolution for “non-critical” matters has become a daunting uncertainty. As a result, for many litigators the new normal involves a greater focus on other forms of dispute resolution. Those attorneys who are skilled in negotiation and mediation can benefit from understanding the powerful role a forensic CPA can play in the

resolution process.

The role of a forensic accountant is to transform complex financial data into

calculations and a narrative that non-accountants can understand. Unlike lawyers,

however, the rules governing the professional conduct of forensic CPAs forbid

advocacy. Financial damages experts provide independent objective analysis,

perform calculations, and report findings. This objectivity-based perspective allows

the forensic accounting expert to offer impartial findings which enable both parties to more effectively resolve their differences and arrive at a resolution, often avoiding litigation in a courtroom setting. It is this independence, and the ability to clearly communicate damage calculations, that can make the forensic accountant a key player in dispute resolution.

Deborah Dickson, CPA, CFF, MAFF, Managing Partner, Smith Dickson, Certified

Public Accountants, LLP (www.smithdickson.com) based in Irvine. The firm’s

Litigation Support Services include forensic accounting, expert testimony, intellectual property, fraud and embezzlement, real estate, trust and estate beneficiary disputes, employment law, and family law. Ph. (949) 553-1020.

Taxation Aspects of Stimulus Programs

{Editor's note: Debbie Dickson was featured in the recent Orange County Business Journal "Accounting Firms Special Report," excerpted from the article below.}

Three months ago, at the inception of the stay-at-home orders, we heard from clients who ceased operations overnight: international rock concert/sporting events producers; owners of a downtown Los Angeles parking tower management company; many lawyers due to court closures; and well-known touring rock bands. To help each of these businesses and many others to survive, we worked with them to secure PPP loans. The allure at the inception of these loans was eligibility for loan forgiveness if the proceeds were used on qualified business expenses, and the loan forgiveness amount was marketed as non-taxable.

A month after the PPP program was implemented, the IRS issued Notice 2020-32 which prohibited a tax deduction for expenses incurred and ultimately forgiven. The IRS ruling effectively made the forgivable part of the loan taxable which did not appear to be Congressional intent in the CARES Act. The American Institute of Certified Public Accountants immediately challenged the surprise ruling. Congress has not yet passed legislation to override this decision.

Subsequent to this IRS news, some positive changes were legislated. As of this date, to apply for loan forgiveness, 60 percent (down from 75 percent) of PPP proceeds must be used to cover payroll or specific benefits, including 401-K employer contributions and health insurance. The remainder of the business costs must include rent, mortgage interest, or utilities. These costs may be incurred any time within 24 weeks of the loan origination date. This is exciting news for many clients who are hoping to bring back their employees and jumpstart operations when the economy stabilizes.

In addition to PPP loans, there are many other ways to qualify for government funds or loans. These include the employee retention credit up to $5,000 per employee for companies that did not receive PPP funds. These are for wages paid between March 27 and December 31, 2020 if there is a significant decline of gross receipts of 50 percent or more due to adherence to government orders. Another example is the deferral of the employer portion of Social Security taxes at 50 percent to December 31, 2021 and 50 percent to December 31, 2022. Net operating loss carrybacks are now available for losses earned in tax years ending 2018, 2019, and 2020.

Regardless of the taxation aspects of these programs, many companies are grateful for government assistance received to carry them through these unprecedented times.

REMINDER: FORMS 1099 ARE DUE JANUARY 31ST!

1099 Forms are due at the end of the month. This due date pertains not only to the independent contractor copy but also to the IRS copy for any 1099 Forms issued related to non-employee compensation in Box 7.

Here are some general guidelines to follow:

Per IRS regulation, 1099s are due for each non-corporate vendor to whom you have paid during the year:

• At least $10 in royalties or broker payments in lieu of dividends or tax-exempt income
• At least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments
• Gross proceeds of $600 or more paid to an attorney (even if they are incorporated)

We are available to prepare your Forms 1099. For each independent contractor (individual, partnership, LLP, LLC, or attorney) to whom you paid $600 or more during the 2019 calendar year, please provide the following information:

1. Formal name/business name

2. Address

3. Social Security Number or Taxpayer ID Number

4. Amount paid in 2019

If you have any questions, please contact Karen Reed (karen.reed@smithdickson.com) or Elaine Kazzi (elaine.kazzi@smithdickson.com) and we will be happy to assist you. You can also reach us by phone at (949) 553-1020.

YEAR-END TAX PLANNING 2019 - HOW TO MINIMIZE TAXES NOW

Every year, as we approach year-end, Smith Dickson professionals receive many questions about year-end moves to minimize personal and business taxes. For 2019, there are several last-minute tax moves that you could consider.

Below are a few to evaluate – please note that these are very concise descriptions and do not apply to all situations, so contact Smith Dickson to discuss tailoring the application to your personal situation.

Individuals:

Postpone income until 2020 and accelerate deductions into 2019. This time-tested technique can still apply. Delaying income (such as a bonus paid by your employer) may be desirable for those taxpayers who anticipate being in a lower tax bracket next year.

• If you hold long-term, appreciated capital assets, consider selling enough of them to generate long-term capital gain sheltered by the 0% rate. Long-term capital gains (assets held for more than one year) are taxed at 0%, 15% or 20%, depending on the taxpayer's taxable income.
• Tax loss harvesting. If you are subject to capital gains income, you should consider selling any securities you own with an unrealized loss so the loss can offset the capital gains income.
• Maximize deductible HSA contributions. If you become eligible in December 2019 to make health savings account (HSA) contributions, you can then contribute a year's worth of deductible HSA contributions.
• Consider using a credit card to pay deductible expenses before year-end. Doing so may increase your 2019 deductions even if you do not pay your credit card bill until next year.
• Bunching of charitable giving. With an increase in the standard deduction, more taxpayers are finding that they don't have enough expenses to itemize. Some instances dictate that bunching charitable giving into one year, as opposed to over two years, can allow the taxpayer to itemize their deductions in the year of giving while receiving the stepped-up standard deduction in the other year.
• Make gifts sheltered by the annual gift tax exclusion before the end of the year, if doing so would save gift and estate taxes. The exclusion applies to gifts of up to $15,000 made in 2019 to each of an unlimited number of individuals. Unused exclusions cannot be carried over to future years.
• Convert all or part of your 401(k), traditional IRA to a Roth IRA. While such a conversion will increase your AGI for 2019, and possibly reduce tax breaks, your CPA can calculate if it will be a beneficial long-term strategy. Opportunities can exist where little to no tax can be incurred upon conversion while allowing future earnings to grow tax free.
• Consider making 2019 charitable donations thru qualified charitable distributions from your IRAs. Upon age 70 1/2, the amount of the contribution is neither included in your gross income nor deductible on Schedule A, Form 1040. The amount of the qualified charitable distribution reduces the amount of your RMD, which can result in tax savings.
• Avoid underpayment of estimated tax penalty by receiving an eligible rollover distribution from a qualified retirement plan. Take a distribution in the amount equal to what your estimated tax payments for the year would have been; this will be applied pro-rata over 2019 to reduce previous underpayments of estimated tax.

Businesses:

The Tax Cuts and Jobs Act (TCJA) included numerous business-related provisions, most of which took effect last year. The TCJA's complexities are requiring businesses to adjust their tax strategies accordingly.

Some of the changes that took place in 2018 included reducing the corporate tax rate to 21%, eliminating corporate AMT, limiting business interest deductions, new expensing and depreciation rules, and a special deduction for non-corporate taxpayers with qualified business income from pass-through entities. Year-end strategies for 2019 to consider include:

Postpone income until 2020 and accelerate deductions into 2019. This time-tested technique can still apply. Delaying income (such as a bonus paid by your employer) may be desirable for those taxpayers who anticipate being in a lower tax bracket next year.

• Consider Section 179 expenditures. For tax years beginning in 2019, the expensing limit is $1,020,000, and the phase-out starts at $2,550,000.
• 100% bonus first-year depreciation. This deduction is for property and equipment bought new or used (with some exceptions) if such purchases are placed in service this year. The 100% write-off is permitted without any proration based on the length of time that an asset is in service during the tax year. As a result, the 100% bonus first-year write-off is available even if qualifying assets are in service for only a few days in 2019.
• 199A Optimization. The 199A deduction is equal to 20% of net profits for passthrough entities and sole proprietorships. It is subject to limitations based on the taxpayer's income, type of business, amount of wages paid by the business, and cost of property placed in service. Proper planning before year-end can ensure that most, if not all, of these limitations can be avoided in order to optimize the 199A deduction.
• Set up and contribute to a retirement plan. Options can include 401k, SEP-IRA, and defined benefit plans. Each option can provide substantial tax savings now while saving for your future. It is imperative that you choose the plan that aligns with your overall goals and cash flow needs.
• Income Acceleration. Certain corporations (other than a large corporation) that anticipate a small net operating loss for 2019 and substantial net income in 2020 may find it worthwhile to accelerate 2020 income (or to defer just enough of its 2019 deductions) to create a small amount of net income for 2019. This allows the corporation to base its 2020 estimated tax installments on the relatively small amount of income shown on its 2019 return, rather than having to pay estimated taxes based on 100% of its much larger 2020 taxable income.
• Dispose of a passive activity in 2019, if doing so will allow you to deduct suspended passive activity losses (to reduce 2019 taxable income).

This is not an exhaustive list, but it is a good starting point for discussions with your tax accountant. Since tax planning strategies for businesses can be complex and application depends on numerous factors, it is essential to discuss your business tax planning with your CPA.

Tax Outlook:

Looking toward 2020, Senior Tax Manager, Richard Warner, CPA has updated his annual "Tax Outlook" – please take a look and let us know if you have any questions.

SPONSOR OF THE ANNUAL "GENERAL COUNSEL AWARDS"

EMBEZZLEMENT: THE ROLE OF CPAS IN FORENSIC INVESTIGATION

SPONSOR OF THE ANNUAL "GENERAL COUNSEL AWARDS"

CONGRATULATIONS TO AUSTIN RAY, CPA

FRAUD IN THE WORKPLACE

As printed in the Orange County Business Journal, "General Counsel Awards" special supplement, October 14, 2019.

Most employers never would expect that a trusted employee might commit fraud, yet every year numerous businesses are forced into bankruptcy due to fraud. Even when it isn't that extreme, the Association of Certified Fraud Examiners' (ACFE) 2018 Global Fraud Study revealed that the typical organization loses a median of 5% of revenues each year due to fraud.

The Fraud Triangle

Employers can utilize the "fraud triangle" to monitor and identify factors in the lives of key personnel that can lead to fraud. The fraud triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior: pressure, perceived opportunity and rationalization.

Pressure originates from a financial problem (personal or professional) that the individual is unable to solve through legitimate means, so he may consider stealing cash or falsifying a financial statement. Next comes opportunity, using a position of trust to solve the financial problem with a low risk of getting caught. It is worth noting that many white collar crimes are committed to maintain social status and pay for lavish lifestyles. The final step is rationalization — fraudsters typically do not see themselves as criminals, instead feeling that they are caught in a bad set of circumstances. They may even justify it by thinking that the employer underpaid them or is dishonest and deserved it.

Forensic Accounting Support

Forensic accounting engagements can be specifically tailored to discover fraud and sometimes even to prevent it. Attorneys engage forensic accountants to determine whether fraud occurred, estimate the extent of monetary loss, and uncover who committed the fraud. When litigation is selected as a means to recover losses, forensic accountants prepare reports on the damages and render expert testimony. At Smith Dickson, our forensic accounting specialists have logged thousands of hours of forensic accounting, deposition and trial experience, both as expert witnesses and consultants in matters ranging from economic damages to fraud and embezzlement. Smith Dickson's forensic accounting specialists will support your case with the highest level of expertise available.

Deborah Dickson, CPA, CFF, MAFF is President of Smith Dickson, An Accountancy Corporation (www.smithdickson.com) based in Irvine. The firm's Litigation Support Services include: damage calculations; lost profits; forensic accounting; expert testimony; intellectual property; fraud & embezzlement; real estate; trust & estate beneficiary disputes, tax controversy; business dissolution. Ph. 949.553.1020.

SPONSOR OF THE ANNUAL "GENERAL COUNSEL AWARDS"

HAPPY FATHER'S DAY!

THE VALUE OF LITIGATION SUPPORT IN INTELLECTUAL PROPERTY DISPUTES

OUR DEDICATION TO MOTHER'S DAY!

LITIGATION SUPPORT FOR REAL ESTATE DISPUTES

Editor's note: Debbie Dickson recently wrote an article in the Orange County Business Journal's "Real Estate Law" special supplement. The article is reprinted below, which we think will be of use to our clients and business contacts. Please let us know of your feedback!

Real estate disputes are more common that you think! Smith Dickson, CPAs has provided litigation support on real estate matters since 1995. These engagements are as diverse as they are complex. Here are a few recent examples:

Misappropriation of Funds / Fraud - Co-ownership of properties can often result in disputes. One of our clients had an ownership interest in multiple apartment LLCs which were managed by the other member - who also separately owned additional complexes. The managing party was accused of commingling all of his property and family expenses with the apartments owned jointly with our client. Smith Dickson was hired to provide forensic analysis of expenditures, disbursements, and supporting invoices, resulting in the identification of millions of dollars that were siphoned out over several decades. Another client who managed properties for overseas relatives was accused of over $3 million in misuse of funds; after our testimony, the jury reduced the damage award to $1 million.

Creditors' Rights - Loan defaults aren't always straightforward, especially when millions of dollars are at stake in commercial properties. When our bank client foreclosed on $15 million in loans for buildings, the borrower claimed that the loans were not technically in default due to the manner in which penalties and interest were applied. Our work involved damage calculations and expert testimony.

Probate/Trust Beneficiary Disputes - Those who inherit properties often contest use of trust money for personal gain and ownership percentages, such as our client who was involved in litigation over beachfront properties with siblings. Smith Dickson reconciled the beneficiary proceeds in this matter.

Development and Contractor Disputes - These matters involve all facets of development and construction. A recent case involved a multi-phase project in which multiple owners funded different phases. Ownership percentages and land boundaries were disputed, and contractors sued over payment. Our work in this complex case involved tracing of capital and debt transactions as well as construction disbursements.

Escrow and Title - Mistakes in these matters can involve millions of dollars in damages. A recent case involved title disputes on over 100 properties owned by an LLC with numerous members located in multiple states. The underwritten title company issued clear title reports when there were actually liens. Our damage calculations proved instrumental in educating the jury to provide a resolution in this Federal criminal case.

High-Stakes Marital Dissolution Matters - One of our largest matters involved multiple real estate brokerages and properties owned throughout southern California. Litigation between the ex-spouses ensued for many years. Our work involved asset tracing, valuations, and asset equalization.

About the author: Deborah Dickson, CPA, CFF, MAFF is President of Smith Dickson, An Accountancy Corporation (www.smithdickson.com) based in Irvine. Ph. 949.553.1020

Read Article

REMINDER: FORMS 1099 ARE DUE JANUARY 31ST!

1099 Forms are due at the end of the month. This due date pertains not only to the independent contractor copy but also to the IRS copy for any 1099 Forms issued related to non-employee compensation in Box 7.

The classification of your workers as "employees" or "independent contractors" remains a "hot topic" with both the IRS and the State of California. Please see the recent Orange County Business Journal article written by our Senior Tax Manager, Richard Warner (below).

Here are some general guidelines to follow:

• Per IRS regulation, 1099s are due for each non-corporate vendor to whom you have paid during the year:

          • At least $10 in royalties or broker payments in lieu of dividends or tax-exempt income

          • At least $600 in rents, services (including parts and materials), prizes and awards, other income payments, medical and health care payments

          • Gross proceeds of $600 or more paid to an attorney (even if they are incorporated)

We are available to prepare your Forms 1099. For each independent contractor (individual, partnership, LLP, LLC, or attorney) to whom you paid $600 or more during the 2018 calendar year, please provide the following information:

1. Formal name/business name

2. Address

3. Social Security Number or Taxpayer ID Number

4. Amount paid in 2018If you have any questions, please contact Karen Reed (karen.reed@smithdickson.com) or Elaine Kazzi (elaine.kazzi@smithdickson.com) and we will be happy to assist you. You can also reach us by phone at (949) 553-1020.

NEW RULING ON INDEPENDENT CONTRACTORS IMPACTS MANY EMPLOYERS

TAX CALENDAR

Reference the AICPA's Federal tax return due dates chart for use in complying with common federal tax return due dates for individuals, businesses (of all types), employers, and estates/fiduciaries.

Some of the important upcoming due dates:

• Jan. 31: Businesses — Forms 1099 — Provide annual information statements (Forms 1099) to recipients of certain payments you made during the previous year.

• Jan. 31: Employers — W2s & W3s — Provide employees their copies of Form W-2 for previous year.

• Jan. 31: Employers — Forms 940 and 941 — For Social Security, Medicare, and withheld income tax, file Form 941 for the fourth quarter of previous year. For federal unemployment tax, file Form 940 (or 940-EZ) for previous year.

Be sure to contact us to discuss your tax questions and needs.

YEAR-END TAX PLANNING AND THE TAX CUTS & JOBS ACT

As we approach year-end, Smith Dickson professionals are meeting with many of our clients to implement strategies to minimize taxation for 2018, as well as plan for 2019.

The Tax Cuts & Jobs Act (TCJA) has made a significant impact to federal and state tax planning. Senior tax manager Richard Warner, CPA prepared a short review of the TCJA last year as the law was enacted; now may be a good time for you to once again read our "Tax Outlook" and let us know if you have any questions.

SMITH DICKSON REPEATS AS CHAMPS AT 7TH ANNUAL BOCCE INVITATIONAL CHARITY EVENT

12 RED FLAGS THAT CAN TRIGGER AN IRS AUDIT

The number of tax returns examined by the IRS drops every year, to the point where the agency now audits just 0.5 percent of all returns - but that still amounts to over a million squirming taxpayers.

With that in mind, here are a round dozen red flags that will draw the IRS's attention to a return.

1. Misreporting or not reporting income: Making sure that the income from W-2s and 1099s matches the income reported on the return is critical. Among other things, it's easier than ever for the IRS to access and compare the amounts reported — making it harder and harder to get away with discrepancies, which then stand out like sore thumbs.
2. Earning more than $200,000: In Fiscal Year 2017 (the most recent year for which data is available), the IRS audited just 0.2 percent of most returns of taxpayers with under $200,000 in income — but it was four times as likely to audit those with between $200,000 and $1 million in income, looking at 0.8 percent of those returns. But the real red flag is earning of $1 million — the IRS audited 4.4 percent of those returns in 2017.
3. Big changes in income: Whether it's a scary drop or a significant increase, major changes in income catch the IRS's eye.
4. Unusually high charitable deductions:The IRS has been implementing stricter rules for documenting charitable giving for some time, as well as paying attention to claims for deductions than are higher than average for the taxpayer's income. The raising of the standard deduction in the Tax Cuts and Jobs Act is expected to significantly decrease the number of people who itemize their charitable deductions — which could have the unexpected side effect of making unusual claims stand out even more.
5. Unusually low salaries: The IRS takes a close look at S corporation compensation practices, particularly if the salary paid to a principal owner looks suspiciously low.
6. The wrong Social Security number: Between concerns about ID theft and underreporting of income, returns with inaccurate Social Security numbers or discrepancies between the numbers on source documents and the return itself, will often draw added scrutiny, and possible rejection.
7. Hobby losses: The IRS has some very specific rules and guidelines for what qualifies as a business and what's just a hobby that happens to cost a lot of money. Some of those hobbies, like horse racing and horse breeding, will often generate increased attention.
8. Inconsistent alimony reporting: Since those who aim to deduct alimony need to report the Social Security number of the ex-spouse to whom they're paying it, it's easy for the IRS to detect if the claim matches what was actually paid. Note that alimony for divorce settlements made after Dec. 31, 2018, will no longer be deductible.
9. Home offices: It's perfectly legitimate to claim a home office — but it has to meet the strictures of the Tax Code and the IRS's guidance. With too many taxpayers attempting to claim their living room because they sometimes answer work-related e-mails in it, this is a red flag for auditors.
10. Overly rounded numbers: A procession of suspiciously even figures draws the eye. A certain amount of rounding is acceptable, but experts generally suggest going for the nearest dollar, rather than the nearest ten or hundred — it stretches the imagination to suggest that all of a taxpayer's expenses are either $50 or $100. That said, in these days of electronic receipts and computers that do all the calculations, if an exact figure is available, that's the best bet.
11. Entertainment and meal expenses: The TCJA eliminated the deduction for expenses related to entertainment, amusement, or recreational activities. However, the ability to generally deduct 50% of business meals has been retained (note: See our February 2018 newsletter for more details).
    12 Owning a cash business: It's much easier for a business that deals in cash — think restaurants, bars, convenience stores and the like — to hide or misreport income, so the IRS is more likely to examine the return of an individual who owns one.

Source: "Accounting Today"

OCBJ ARTICLE: THE CRITICAL ROLE OF A CPA FIRM IN BANK FINANCING

FIRM NEWS -- A MUSICAL GEM

TAX CALENDAR

Smith Dickson is pleased to provide our year-round "Tax Calendar" available on our website. Reference it for key dates for individuals, businesses (of all types), employers, and estates/fiduciaries.

Some of the important upcoming due dates:

• May 15, June 15: Employers — Deposit withholding due for Social Security, Medicare, withheld income tax, and nonpayroll withholding
• June 15: Corporations — Tax installment due. Deposit the second installment of estimated tax for current year.
  Be sure to contact us to discuss your tax questions and needs.