Author: Alexis Long

The IRS recently released its audit statistics for the 2022 fiscal year and fewer taxpayers had their returns examined as compared with prior years. But even though a small percentage of returns are being chosen for audits these days, that will be little consolation if yours is one of them. 

Recent statistics 

Overall, just 0.49% of individual tax returns were audited in 2022. However, as in the past, those with higher incomes were audited at higher rates. For example, 8.5% of returns of taxpayers with adjusted gross incomes (AGIs) of $10 million or more were audited as of the end of FY 2022. However, audits are expected to be on the rise in coming months because the Biden administration has made it a priority to go after high-income taxpayers who don’t pay what they legally owe. In any event, the IRS will examine thousands of returns this year. With proper planning, you may fare well even if you’re one of the unfortunate ones. 

Be ready 

The easiest way to survive an IRS examination is to prepare in advance. On a regular basis, you should systematically maintain documentation — invoices, bills, canceled checks, receipts, or other proof — for all items reported on your tax returns. Keep in mind that if you’re chosen, it’s possible you didn’t do anything wrong. Just because a return is selected for audit doesn’t mean that an error was made. Some returns are randomly selected based on statistical formulas. For example, IRS computers compare income and deductions on returns with what other taxpayers report. If an individual deducts a charitable contribution that’s significantly higher than what others with similar incomes report, the IRS may want to know why. Returns can also be selected if they involve issues or transactions with other taxpayers who were previously selected for audit, such as business partners or investors. The government generally has three years from when a tax return is filed to conduct an audit, and often the exam won’t begin until a year or more after you file a return. 

Tax return complexity 

The scope of an audit generally depends on whether it’s simple or complex. A return reflecting business or real estate income and expenses will obviously take longer to examine than a return with only salary income. In FY 2022, most examinations (78.6%) were “correspondence audits” conducted by mail. The rest were face-to-face audits conducted at an IRS office or “field audits” at the taxpayers’ homes, businesses, or accountants’ offices. 

Important: Even if you’re chosen, an IRS examination may be nothing to lose sleep over. In many cases, the IRS asks for proof of certain items and routinely “closes” the audit after the documentation is presented. 

Get professional help 

It’s prudent to have a tax professional represent you at an audit. A tax pro knows the issues that the IRS is likely to scrutinize and can prepare accordingly. In addition, a professional knows that in many instances IRS auditors will take a position (for example, to disallow certain deductions) even though courts and other guidance have expressed contrary opinions on the issues. Because pros can point to the proper authority, the IRS may be forced to concede on certain issues.

Contact us if you receive an IRS audit letter or simply want to improve your recordkeeping. © 2023

June brides (and grooms) take note: Marriage alters your tax status and adds a few more to-dos to what’s probably a long list.

If one or both of you change your names, notify the Social Security Administration because their records must match those on your tax returns. You’ll be able to choose whether to file your income tax return jointly or separately each year. Joint filing typically is more beneficial, but not always.

If you both work, you may be pushed into a higher tax bracket or become subject to the 0.9% additional Medicare tax. So look into whether you should increase your withholding by submitting new W-4 forms to your employers. Contact us for help.

Two years ago, the National Collegiate Athletic Association adopted the interim name, image, and likeness (NIL) Policy. It enables student-athletes to personally be compensated for their sports ability and fame. 

In a new legal Advice Memorandum (2023-004), the IRS addressed whether developing NIL opportunities for college student-athletes serves a tax-exempt purpose.

NIL “collectives” have been set up by boosters and fans of college athletic programs to pay their schools’ athletes. The IRS guidance states that in many cases, such groups are “serving the private interests” of the students and are “operating for a substantial nonexempt purpose.”

Contact us if you have any questions about tax planning.

Recently, the critically acclaimed television show “Succession” aired its final episode. If the series accomplished anything, it was depicting the chaos and uncertainty that can take place if a long-time business owner fails to establish a clearly written and communicated succession plan. 

While there are many aspects to succession planning, one way to put some clear steps in writing — particularly if your company has multiple owners — is to draft a buy-sell agreement. 

Avoiding conflicts 

A “buy-sell,” as it’s often called for short, is essentially a contract that lays out the terms and conditions under which the owners of a business, or the business itself, can buy out an owner’s interest if a “triggering event” occurs. Such events typically include an owner dying, becoming disabled, getting divorced, or deciding to leave the company. If an owner dies, for example, a buy-sell can help prevent conflicts — and even litigation — between surviving owners and a deceased owner’s heirs. In addition, it helps ensure that surviving owners don’t become unwitting co-owners with a deceased owner’s spouse who may have little knowledge of the business or interest in participating in it. 

A buy-sell also spells out how ownership interests are valued. For instance, the agreement may set a predetermined share price or include a formula for valuing the company that’s used upon a triggering event, such as an owner’s death or disability. Or it may call for the remaining owners to engage a business valuation specialist to estimate fair market value. By facilitating the orderly transition of a deceased, disabled, or otherwise departing owner’s interest, a buy-sell helps ensure a smooth transfer of control to the remaining owners or an outside buyer. This minimizes uncertainty for all parties involved. Remaining owners can rest assured that they’ll retain ownership control without outside interference. The departing owner, or in some cases that person’s spouse and heirs know they’ll be fairly compensated for the ownership interest in question. And employees will feel better about the company’s long-term stability, which may boost morale and retention. 

Funding the agreement 

There are several ways to fund a buy-sell. The simplest approach is to create a “sinking fund” into which owners make contributions that can be used to buy a departing owner’s shares. Or remaining owners can simply borrow money to purchase ownership shares. However, there are potential complications with both options. That’s why many companies turn to life insurance and disability buyout insurance as a funding mechanism. Upon a triggering event, such a policy will provide cash that can be used to buy the deceased owner’s interest. 

There are two main types of buy-sells funded by life insurance: 

1. Cross-purchase agreements. Here, each owner buys life insurance on the others. The proceeds are used to purchase the departing owner’s interest. 

2. Entity-purchase agreements. In this case, the business buys life insurance policies on each owner. Policy proceeds are then used to purchase an owner’s interest following a triggering event. With fewer ownership interests outstanding, the remaining owners effectively own a higher percentage of the company. A cross-purchase agreement tends to work better for businesses with only two or three owners. Conversely, an entity-purchase agreement is often a good choice when there are more than three owners because of the cost and complexity of owners having to buy so many different life insurance policies. 

Getting expert guidance 

Creating, administering, and executing a buy-sell agreement calls for expert assistance. ATA Capital and ATA Employment Solutions can help you identify, gather and organize the relevant financial information involved.

Contact us to get started.  © 2023

Tax relief may be available for student loan debtors, but only if they meet income requirements.

Individuals with qualified student loans can deduct on their federal income tax return up to $2,500 of interest annually if their modified adjusted gross income is $75,000 or less ($155,000 for married couples filing jointly). If they earn more, the deduction gradually phases out at $90,000 ($185,000 for married filing jointly).

Eligible loans are incurred to pay qualified education expenses. If debtors pay more than $600 in student loan interest in a calendar year, they should receive from their lenders Form 1098-E reporting the amount of interest.

Contact one of our experts with questions about possible tax relief.

Download our services below. For more information on ATA’s advisory services, please contact us.

The American Institute of CPAs (AICPA) has requested guidance from the IRS on several provisions of the SECURE 2.0 Act. One provision noted in an AICPA letter to the IRS involves matching contributions on student loan payments.

SECURE 2.0 aims to help employees who miss out on their employers’ matching retirement contributions because their student loan payments prevent them from making retirement contributions. The law allows them to receive matching contributions to retirement plans based on their qualified student loan payments. The AICPA asked whether the term “qualified student loan payment” includes loans paid for spouses and dependents.

Click the “Download” button below to read the AICPA letter.

Once you file your 2022 tax return, you may wonder what personal tax papers you can throw away and how long you should retain certain records. You may have to produce those records if the IRS audits your return or seeks to assess tax. It’s a good idea to keep the actual returns indefinitely. But what about supporting records such as receipts and canceled checks? In general, except in cases of fraud or substantial understatement of income, the IRS can only assess tax within three years after the return for that year was filed (or three years after the return was due). For example, if you filed your 2019 tax return by its original due date of April 15, 2020, the IRS has until April 15, 2023, to assess a tax deficiency against you. If you file late, the IRS generally has three years from the date you filed. However, the assessment period is extended to six years if more than 25% of gross income is omitted from a return. In addition, if no return is filed, the IRS can assess tax any time. If the IRS claims you never filed a return for a particular year, a copy of the return will help prove you did. 

Property-related records 

The tax consequences of a transaction that occurs this year may depend on events that happened years ago. For example, suppose you bought your home in 2007, made capital improvements in 2014 and sold it this year. 

To determine the tax consequences of the sale, you must know your basis in the home — your original cost, plus later capital improvements. If you’re audited, you may have to produce records related to the purchase in 2007 and the capital improvements in 2014 to prove what your basis is. Therefore, those records should be kept until at least six years after filing your return for the year of sale. Retain all records related to home purchases and improvements even if you expect your gain to be covered by the home-sale exclusion, which can be up to $500,000 for joint return filers. You’ll still need to prove the amount of your basis if the IRS inquires. Plus, there’s no telling what the home will be worth when it’s sold, and there’s no guarantee the home-sale exclusion will still be available in the future. Other considerations apply to property that’s likely to be bought and sold — for example, stock or shares in a mutual fund. Remember that if you reinvest dividends to buy additional shares, each reinvestment is a separate purchase. 

Marital breakup 

If you separate or divorce, be sure you have access to tax records affecting you that are kept by your spouse. Or better yet, make copies of the records since access to them may be difficult. Copies of all joint returns filed and supporting records are important, since both spouses are liable for tax on a joint return and a deficiency may be asserted against either spouse. Other important records include agreements or decrees over custody of children and any agreement about who is entitled to claim them as dependents.

Loss or destruction of records 

To safeguard records against theft, fire, or other disaster, consider keeping important papers in a safe deposit box or other safe place outside your home. In addition, consider keeping copies in a single, easily accessible location so that you can grab them if you must leave your home in an emergency. 

Contact us if you have any questions about record retention.

© 2023

Small business owners: The Inflation Reduction Act contains provisions that may help you reduce taxes and energy costs. For example, small businesses usually are eligible to claim a tax credit worth 30% of the cost of switching to solar power. In addition to this tax break, switching to solar can lower a company’s operating costs and protect against energy price swings. Building owners may be able to claim a tax credit up to $5 per square foot to support energy-efficient improvements. And businesses that use trucks and vans generally can claim the Commercial Clean Vehicle Credit for up to 30% of the purchase prices of certain clean commercial vehicles. Contact us to learn more.