Free Advice

Thinking of Doing It Yourself?

 

Memphis Tax LadyBy all means, if you feel comfortable preparing your own return, you can file for free using IRS.gov website (type in FREEFILE in the top right-hand box). If your total income falls below the IRS’s guidelines (approx $58K in 2010) you can have the IRS software do the work for you. If your income is higher, you can download the free forms and fill it out yourself, or use a software program like TurboTax, etc. Many places such as libraries also offer free tax preparation assistance to lower-income filers as well. Be prepared for long lines!
I often counsel my clients to do it themselves if they feel comfortable and want to do so. The clients I recommend this for have W-2’s only and their return is a basic return, or perhaps they have a child that needs to file.
Memphis Tax LadyThe clients I do NOT recommend this for is anyone with a business, rental income, or K-1’s. I have had people tell me the software does not provide help with K-1’s, and anyone who has any type of business or rental income needs a tax preparer, period. Why?? Many folks do not know of deductions such as mileage, auto interest based on business usage percentage of car, etc. Also, most folks I have amended (changed) their tax returns for left off a very important deduction: Depreciation.
Depreciation is the allowance you take every year on a large asset like a rental house, major improvements to the rental house, etc. You cannot depreciate land. You take this deduction every year until the asset is “used up”—in the case of a rental house-29 ½ years. This deduction after the first year is around 3.6% of the cost plus major improvements to the home. Now, maybe you think—well, that’s not very much—so what if I left it off?
The problem is—if you left it off, the IRS does not care. If you ever sell that house, you have to show the correct amount of depreciation as a subtraction from your basis. If you never took the depreciation-it doesn’t matter-you still have to take the subtraction. You’re now saying, “What?? But I didn’t take those depreciation deductions!” Sorry, but according to the IRS, it is allowed or ALLOWABLE deductions—you don’t get any credit or anything because you didn’t take the depreciation deductions, no matter what reason you may have.
Same scenario goes for any asset used in a business as well. Software programs are designed primarily for people with simple basic returns, they may have business-type deduction capabilities, but you have to know about them and know how to put them on the software—take my advice, seek a tax preparer (a good one like Memphis Tax Lady!)
Memphis Tax LadyMy basic fee for a person with rental income is $50.00 for the return itself, plus $50.00 per rent house. Software that does business returns will cost you about 99.95 plus tax (Turbotax Home and Business 2010 for example) and you still have to do the data entry. If I do the return for you at basically the same or just a bit higher than the software, WHAT IS YOUR TIME WORTH? If you are audited, you will probably have someone with you to help you—and CPA’s charge around $125-$175 per hour! If my clients are audited, I go to the local audit with you FREE OF CHARGE! Not to mention, I give you tips on other deductions you may not be aware of.
Again, if you have a basic simple return and want to do it yourself, go for it! However, self-employed persons or folks with rental income, please consult a tax preparer (like Memphis Tax Lady, of course)!



Attention – Delinquent Filers

Haven’t filed in years? First, take a deep breath and quit feeling like you’re the Lone Ranger. You’d be surprised how many folks are in the same boat as you.
If you were due a refund, the IRS will keep it if three (3) years have past from the original due date of the return. However, if you owe them, once they have finalized your tax liability, they have ten years to collect from you! Keep in mind this is AFTER they determine what you owe.
If you are not hearing from them and you haven’t filed, it could be that the IRS has been sending out notices to a prior address they have on you, or they just haven’t caught up to you yet. Copies of W-2’s and 1099’s are sent to the IRS every year from your employers or someone who has paid you over $600 in the course of the year for contract labor work. Unless all you have are W-2’s and there’s not enough wages on them to file, chances are very high you will hear from them sooner or later. My advice is to file your returns as soon as possible. If you wait until they catch up with you, the penalties and interest could eat your lunch, not to mention the tax you may owe. You may even be due a refund if you can file within the 3 year period mentioned above.
If you have heard from the IRS, you need to immediately call them at the phone number on the top right-hand side of your letter (usually 1-800-824-1040—best around 7-8 am to avoid long waiting times later in the day). The absolute worst thing you can do is to ignore them. You will be surprised how nice most of the agents are. Tell them you are taking your information right away to a tax professional (like MTL, of course), and will file as soon as possible. They will give you a deadline for filing your return, and it will only be a couple of weeks or so away. DO IT NOW. Don’t delay any longer. They do keep records of all statements and will expect you to keep your word.
Call me for an appointment, and we will “git-r-done”. Relax, you’re in good hands and I will do everything I can to help you legally find deductions and lower the bill. As I am aware they have given you a deadline, I drop what I am doing and get right on your returns. My clients are amazed at my speed, my thoroughness, and most of all, my low rates.
Don’t spend another sleepless night worrying about your taxes or causing your loved ones to worry. Call the Memphis Tax Lady today!



Owe Money to the IRS?

 

"I owe, I owe, it’s off to IRS.gov I go..."

DO NOT FALL FOR THE CENTS ON THE DOLLAR SCHEMES SOME TAX RESOLUTION SERVICES ARE OFFERING.

If your disputed tax is $10,000 or less... you can often negotiate a settlement yourself with the IRS. This action can save you time, reduce tax penalties and totally avoid the high cost of a tax resolution service.
I have heard several horror stories of companies promising to represent you and lower your tax bill, only to take your money and do little or nothing. One client told me he paid over $7,500, and they haven’t done anything for him. Do it yourself by following the steps outlined below and save yourself thousands of dollars in tax resolution fees.
What You Need To Do -
Step 1 - Prepare the return. Use a tax professional for this step who can possibly minimize the damage. If you have already filed, perhaps an amended return (changing your return) to add deductions previously missed would help. Try Memphis Tax Lady, you’ll be glad you did! If I can’t help you (the original return filed was absolutely correct with all available deductions taken) I don’t charge you. Many times an amended return saves my clients hundreds or even thousands of dollars. I ask thorough questions, and often a client tells me of forgotten deductions, or I am able to tell them of deductions they weren’t aware of that they could have legally taken. My amended returns usually cost from $75-$150 dollars, but save my clients much more than that!
Step 2 - Decide how much of the tax bill you can pay-pay as much as you possibly can. Even high credit card interest is usually cheaper in the long run than IRS penalties and interest. Perhaps you can get a loan from friends or relatives. About anything is cheaper and easier than owing the IRS. Interest accrues until the bill is paid off.
Step 3 - Now, you can:
(a) Send in the return with as much money as possible and wait for the IRS to send you a letter with the remaining amount due plus penalties and interest, using the time in between (usually a month or so) to gather the remaining funds,
OR
(b) Gather your bills together and determine the maximum amount you can pay monthly in order to get the bill paid within three years. Then submit an installment agreement by going to the IRS.gov website. Type in FORM 9465 on the top right-hand search box and download the form and instructions. Prepare the form and mail either along with your return or separately. You will receive paperwork detailing your interest and penalties if your application is approved. (If you owe more than you can possibly repay the IRS in three years, call them immediately at 1-800-829-1040. They will advise you on your next step or steps possibly an Offer in Compromise- see below).
Also, if you wish to start making payments immediately, type in ONLINE PAYMENT AGREEMENT in the search box. Either way you will only need to submit just a few answers to their questions. You will need both the recent tax return and the latest prior tax return you filed handy. One of the questions will ask you what the Adjusted Gross Income of your recent return was. This number is clearly labeled near the bottom of page one of the 1040 or 1040A returns. Also, you will be asked what the total tax owed was from the prior year as well as basic routine questions such as social security number and birthdates. If you need assistance, you can always call them at 1-800-829-1040.
Step 4 - Once you have submitted your Form 9465 or On-line Payment Agreement, and the IRS has approved it, STICK TO IT. Do not forget or be late! If you are late, call them immediately! DO NOT DELAY! They can (and often do) levy bank accounts, your house and other assets if you do not live up to your end of the deal. Make this bill your number one priority.
Step 5 - File any other returns as fast as possible. You may have refunds that will offset the monies owed, even on past-due returns. The IRS usually does not allow a refund on a past due return over 3 years old; however they have been known to make exceptions to this when a taxpayer is honestly trying to pay his/her current bill.
Above all - Communicate with them. The absolute worst thing you can do is ignore them. IRS agents are normally very nice and surprisingly easy to deal with.
Be aware that in some cases the IRS will agree to an Offer in Compromise, especially if you are unemployed or having major financial problems. Go to IRS.gov and type in OFFER IN COMPROMISE for links with further details. Be sure to read all applicable links listed for pertinent details.
It is amazing to me that so few people know that preparing your own installment agreement and/or dealing straight with the IRS is so easy. All it takes is time and a little effort. Most of these companies offering to do the same things for you start out by charging you $5000 or more! Isn’t a bit of time and effort worth saving that?
If you owe a lot more than $10,000 and/or you feel uncomfortable pursuing this avenue, then I would recommend that you consult with a local CPA or tax attorney for assistance.



Being Audited?

 

Memphis Tax LadyBeing audited?? If you are a MTL client, relax. Call me- fax me the letter. I will assist you in preparing your documents, and we'll go to the audit together, with no charge to you*. I defend my clients like a Tigress defending her cubs. The way I look at it, I am defending my work. You defend what you told me, I defend what I did on the return.
If you prepared the return yourself or the person who prepared it can’t or won’t go with you, call me. I will look over it to see if an amended (changed) return is beneficial for you. IRS regulations prevent me from defending you if you or someone else prepared the return, but I can defend my amended return. If your scheduled date is imminent, call them to request a postponement, telling them you are taking your return to a professional for review and a possible amendment. Normally, this is not an issue for them and they actually prefer you to do so. They will probably still audit you, but I can go with you and defend the amended return.
Above all-
(1) Do not go by yourself—it’s like going to court without a lawyer. If you plan on using your original return that you or someone else prepared, get a CPA to review it and go with you. I have known of IRS agents who try to talk clients into coming by themselves—do NOT do this. You need someone else that understands what they are asking and how to best answer their questions. Although the CPA can charge you anywhere between $100-$200 or so per hour, if you say the wrong thing at the wrong time at the audit, this action can cost you a lot more than even the CPA’s fee!
(2) Do not miss your scheduled appointment date and time. If you need to reschedule, do so as quickly as possible after receiving your letter. The IRS agent will work with you to reschedule your appointment. If you just decide not to show up, the IRS agent can determine the amount you owe with just the facts he/she has. This often results in hundreds or thousands of dollars being billed to you that could have been avoided. The IRS does not have proof of your deductions— you do. They are not required to allow your deductions without said proof.
Hey, don’t drive yourself crazy! Take your return to the Memphis Tax Lady. I will review it, and if I cannot help you, I won’t charge you.
Better still, use me as your tax lady in the first place … you won’t ever have to worry about going to the audit by yourself and/or paying for any audit representation charges. I look after my clients’ interests – and not just during tax-season either!
*Offer applies to Memphis area audits only.



Starting Up a Business Thinking of starting up a business? Don’t know what to do first? Perhaps these guidelines will help.

First... decide what type of business structure you want. Do you want to be a sole-proprietor, a partnership, or incorporate? Too often, my clients have failed to consider the tax consequences of a given business type … don’t assume that you should automatically incorporate your small business just because Walmart or FedEx did!

 

Notice: The information presented here is intended to provide guidance to the new business owner about some of the possible tax consequences of various forms of business structure and is not intended as legal advice; small business owners are advised to consult an attorney as to other issues that might be pertinent to their own situation.

Sole Proprietor
This is by far the easiest and cheapest way to go, in my opinion.
Advantages:

  • You are automatically a sole-proprietor if you do not file any papers to become a partnership or incorporate. Having your spouse working with you in the business does not keep you from being a sole-proprietor, assuming you are filing a joint return. You simply file a Schedule C and some related forms along with the rest of your return. This Schedule C details your income and expenses of the business. The net profit or loss is either added or subtracted from your other income such as W-2’s.
  • If you have shown your business deposits as income, and later wish to withdraw monies from your business account for personal reasons, you can do so. The money is yours to do as you see fit. You have complete control and flexibility.
  • If you decide to discontinue your business, then you simply stop doing business and either keep or sell any assets. No major paperwork involved. If you are selling your business, then a good tax preparer (like MTL, of course) knows how to show the sale of the assets and goodwill on an additional form that goes with your tax return. No big deal here, either.
  • Deductions are great for a sole-proprietor. You can deduct mileage (usually one of the largest deductions), you can pay your spouse or kids under 18 without their wages being subject to some employee-type taxes, such as unemployment. With partnerships and corporations, you lose these deductions.
  • A net loss is subtracted from other income, such as spouse’s W-2, etc, reducing your tax bill and/or increasing your refund.
  • Your tax preparation fee will be cheaper for you than a partnership or corporate return as you only have the Schedule C and related forms to be added to your personal return.


Disadvantages:

  • Sole-proprietorship income is subject to an additional tax called Social Security Tax. This tax is roughly 15 percent of the net income. If you have a loss, you won’t have this tax, of course.
  • This structure does not prevent your personal assets from lawsuits.

Partnerships
Advantages:

  • You have someone else to share the income, liabilities, etc.
  • Perhaps that person has the additional funds or level of expertise you need for your business and wants a share of your business in return.
  • A partnership files a form 1065. This is a totally separate return from the partner’s personal return. The partnership itself does not pay any tax. Each partner takes their individual share of the profit or loss onto their personal return. Therefore a loss will subtract off from other income just like a sole-proprietorship, however read about “guaranteed payments” below.


Disadvantages:

  • You no longer have complete control over your business. Someone else has a say in it and it can cost you a lot of money to buy them out if you don’t get along. There is an old saying-don’t go into business with family or friends. That is a very true statement, as most of the time people end up with hurt feelings and totally destroyed relationships.
  • Forming a partnership is more complicated, as you generally need an attorney to file a “partnership agreement” between you and your partner deciding things such as who gets your share of the partnership if you die, who gets what if the partnership dissolves, duties and responsibilities of each partner, etc.
  • Also, you have to file paperwork with the state you reside in (and the state you are doing business in, if different). Of course, the state(s) will charge you a fee for this.
  • When partners draw monies out of the partnership, they do not get W-2’s. They are usually considered “draws” or “guaranteed payments”. These guaranteed payments are deducted from the partnership income. However, along with the partnership income, the draws are subject to income as well as social security tax on the partner’s personal return. This can result in some pretty stiff tax bills as usually the partners aren’t really keeping up with their payments and thinking of the tax consequences. There are usually no deductions, as the partnership has deducted most of the expenses involved. Both guaranteed payments and the share of the partnership income/loss is reported to the government and to each partner on a form called K-1.
  • As you may have guessed, partnership returns are more expensive for the taxpayer. We tax preparers have to spend more time calculating and filling out additional forms such as balance sheets that a sole-proprietor does not have to have. As stated above, it is a return onto itself, even though it is a “flow-through” return with no tax.

Corporations

Well, all I can say about these structures are if you have to, you have to. Otherwise DON’T. I personally feel the disadvantages and expenses far outweigh the advantages for most small businesses, but I’ll try to be fair.

 

Advantages:

  • Protection for personal assets
  • Some banks insist on your being incorporated in order to obtain funds.
  • It may sound more professional having an “Inc” after your business name.


Disadvantages:

  • More complications, more expense, and less control. Even a one-person corporation does not have flexibility.
  • Corporations are treated as a separate entity, which means that while they do afford some asset protection, you have to consider a corporation that you own as a “separate person”. Taking out funds (even after they’re taxed) can cause you to have to report those funds as dividends and get to pay tax again! Using the corporate bank account as your own personal account can destroy the asset protection, as in a lawsuit against you, a good attorney for the opposing side can “pierce the corporate veil” if you have been using your corporate account personally, i.e. paying house payments, groceries, etc. You have to be very diligent and careful not to co-mingle funds, pay personal expenses, etc.
  • If you want to be paid out of the corporation, it should be as a W-2 employee—as you are an “EMPLOYEE” of the corporation (remember it is a separate entity, even if you are the sole owner). This opens up a whole new keg of worms if you don’t have any other employees—now you have to do the payroll taxes and forms on yourself. Some corporation owners pay themselves as contract labor. This is frowned upon by the IRS, and they are cracking down and auditing companies that do so.
  • As in partnerships, you have to file papers with the state or states involved. You may not need an attorney if it is just you, but you will pay a fee to incorporate and you will also have to pay an annual fee to the state every year, regardless of any profit or loss. Fees are different for each type of corporation. An LLC will pay anywhere between $300-$3,000 per year annually in Tennessee.
  • You have to now file at least three returns: A corporate return for the federal, a franchise/excise tax return for Tennessee, and then your personal return. One exception is a LLC sole proprietorship discussed later which only eliminates the federal return. Hmm…reckon how much the preparation of all those returns is going to cost you? They can require balance sheets and lots of other forms… and that Tennessee return is very complex…getting my drift? If you are a Tennessee resident and doing business in another state, you have to file a state return for that state, also! Better yet—you can have a loss on your federal return, but have to pay on the state---because Tennessee makes you take whatever you pay in rent (as in a storefront to a landlord) multiply the annual amount by 8, then makes you pay tax on that amount-.25 per $100 with a minimum of $100, regardless of loss. If you have profits, this is an additional tax. Are we having fun yet???

 

Okay—so now we’ll talk about the 3 different types of corporations (if you must be one):

  • C Corp-this is the oldest one of the bunch. You are automatically a C Corp if you incorporate and don’t elect otherwise. No particular advantages or disadvantages except those listed above. A C Corporation pays its own tax on its own return.
  • S-Corp-this is the best one, I think. The profit/loss flows from it to your personal return much like a partnership, and the income is not subject to the Social Security Tax. You incorporate just like a C Corp, then you file an election which switches you from a C to an S Corp. You have about 3 months after date of incorporation to do the election. Otherwise, still the same advantages and disadvantages as listed above.
  • Limited Liability Corporation (LLC)-The newest kid on the block, it allows for the corporate protection without as much formality as the others. The IRS DOES NOT recognize LLC’s, period! You either file as a sole-proprietor, a partnership, or a corporation for your federal return. For example, if you are a sole-proprietor LLC, you will file a Schedule C (and be subject to the Social Security Tax as well) just as you would if you were just a sole-proprietor. However, most states DO recognize LLC’s, and you still have to file the separate state returns. Some attorneys disagree on whether the LLC has as much asset protection as the other two business structures; you should consult with your attorney on that. Otherwise, same advantages and disadvantages apply.


Okay, now that you have decided on what type of business structure to adopt, you have other issues to consider:

  • If you will have employees, become a partnership, or incorporate--you will need to obtain a Federal Employer Identification Number (or FEIN). You can get this by simply going to the IRS.gov website. On the left side of the page they give the link you click to start the process. You simply fill out the requested information, press send, and within five minutes or so, they respond back with your own unique EIN number. It’s that easy, and it’s free. No need to pay anyone to do this for you!
  • You will also need to get a city business license, and the following from the state if applicable: Sales tax license, unemployment, and state withholding. In most cases, the application forms are on-line, easy, and free of charge.

These resources are great references for small business owners:

If you are feeling a bit overwhelmed, you can always contact the Memphis Tax Lady. Consultations are free, and I’ll be happy to help you anyway I can. Call me anytime.