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Top Five IRS Audit Triggers

An IRS audit is one of the most dreaded events on the planet. It fills the heart with dread knowing the potential penalties for even an innocent misreporting or mistake. Each tax return is rated by a computer scoring system called the Discriminant Function System (DIF) System. It rates each return on the potential for change, compared with similar returns.

Income

Failure to report all income from W-2s and 1099s will trigger an audit. Employers must supply workers with a W-2 and they’re also required to provide a copy to the IRS. The same is true for independent contractors that receive a 1099. The IRS knows from employer records that an individual has received the income and failure to report it will result in an audit.

Earned Income Tax Credit

A surprising number of low-income earners are audited each year that claim the Earned Income Tax Credit (EITC). The program has a long history of fraud since taxpayers can receive money back when they claim it. The EITC is designed to help qualifying low- and moderate-income families reduce their tax liability and, in some instances, increase their refund.

Self-Employed

Independent contractors, sole proprietors, and those engaged in the gig economy are a collective group that are highly scrutinized and even the smallest anomaly will trigger the DIF System. It especially looks at income compared to business expenses that are claimed. Individuals are entitled by law to claim allowable work-related expenses, but should be sure they’re actually work related.

Hobby vs Business

The IRS has very clear rules about what qualifies as a hobby and what’s considered a legitimate business. Claiming a hobby as a business allows individuals to claim business expenses, but it doesn’t quality as a business according to the IRS if a net profit hasn’t been reported in the prior 5 years.

High Income

The more money an individual makes, the more loopholes there are in which to hide assets and income. Those with incomes of $1 million are more likely to be audited than other income brackets. If a business suddenly starts posting a significant amount of income or losses, the owners can expect to be audited.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Why E-Filing is the Best Way to Get Your Refund

When you’re entitled to a refund at tax time, it’s understandable that you want to receive it as quickly as possible. E-filing your tax return is efficient, reduces errors, and it’s the quickest way to get your refund.

Speedy Refunds

By e-filing your tax returns, you can typically expect your refund within 3 weeks or less and choosing direct deposit further facilitates the process.

Quick Confirmation

When you e-file your returns, you’ll receive a text within 24-48 hours that your state and/or federal return has been accepted. Conversely, if for some reason an error has occurred, you’ll have the opportunity to go back and fix the problem before resubmitting via e-file.

Fewer Mistakes

According to the IRS, there’s only a 1 percent error rate on returns that are filed electronically, compared to a 20 percent error rate with paper returns. There are numerous online options for completing tax returns that will walk individuals through every step of the filing process and check for mistakes that can be rectified before sending the return.

Direct Deposit

Choosing the direct deposit option ensures your refund is deposited directly into your bank account. You won’t have to worry about having a refund check lost or stolen from your mailbox. It’s a common problem around tax time and once a paper check is gone, there’s no way to retrieve it. If you use one of the many cash apps available, you can also have your refund deposited into your cash app account.

Money and Deadlines

Depending on the taxpayer, some individuals can complete and e-file their taxes for free. Shop around to find the best option. Many companies advertise low-cost tax preparation and e-filing, but individuals only find out upon completion that they owe nearly as much as if they’d taken their taxes to a tax professional.

If you’re among the millions of people that procrastinate on their taxes, e-filing is an excellent way to ensure you beat filing deadlines and avoid penalties. You’ll still be able to receive your tax refund in 3 weeks or less.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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What’s the Difference Between 1099 and W-2?

The U.S. tax system is complicated, complex, and the IRS has hundreds of forms to account for different reporting needs. One of the biggest confusions for individuals is the difference between Form 1099 and the W-2. Both are important, absolutely required, but serve very different purposes.

Form 1099

There are multiple types of Form 1099. The most common is used to report various types of payments that are made by a business or individual that’s not an individual’s regular employer. The person that made the payments completes the appropriate details and sends a copy to the payee and the IRS at tax time.

A Form 1099-MISC is used by the government to report income such as Medicare earnings. It’s also used to report prizes and awards, fishing boat proceeds, medical and healthcare payments, and crop insurance proceeds. Form 1099-MISC is also utilized to report earnings from direct sales of at least $5,000.

W-2

In comparison, individuals complete a W-2 when they start a new job. It tells the employer how much money to withhold in federal, state and Social Security (FICA) taxes from each paycheck. The IRS utilizes that information to track each person’s earnings and income every year from employment. IRS rules state that employers must provide individuals with their W-2 by Jan. 31st of each year.

The form is used each year when an individual files their annual income tax returns. The W-2 shows the amount of any benefits that may have been paid by the employer on an employee’s behalf that encompasses items ranging from health savings accounts (HSA) and number of dependents to insurance benefits.

If there are any errors such as name misspellings, incorrect Social Security number, or an incorrect amount, individuals should contact their employer for a corrected copy of their W-2. Independent contractors should receive a 1099-NEC instead of a W-2.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Understanding Tax Relief

For those that don’t have the money to pay their tax bills in full, the IRS offers tax relief programs. The initiatives help taxpayers settle tax-related debts for less than the total amount, thereby preventing liens from being placed on their assets. They typically utilize a monthly repayment plan.

Tax relief programs won’t eliminate the money owed to the IRS, but it will help make it easier to repay. The IRS will charge interest on any unpaid taxes, along with a setup fee for its programs. To qualify for a long-term repayment plan of more than 120 days, individuals must owe $50,000 or more in taxes, penalties and interest.

Individuals that have been affected by natural disasters have access to tax relief initiatives. People should consult a tax specialist that’s knowledgeable in the regulations and forms required to take advantage of specific programs.

The IRS is currently offering tax relief programs to victims of wildfires, straight line winds, landslides and mudslides, flooding, tornadoes and hurricanes in certain areas. The tax relief initiatives provide extra time for taxpayers to file their federal return, pay their taxes, and file any required forms.

Another initiative of the IRS is penalty relief/interest abatement. Under the program, the IRS may forgive any penalties charged to the person’s tax bill, providing they meet certain criteria. Individuals will still owe their taxes, but eliminating penalties can save a substantial amount of money.

There are also companies that negotiate with the IRS on behalf of a client. Their fees can run into thousands of dollars and there’s no guarantee that they’ll be successful. Individuals should be wary of upfront fees, undesirable refund policies, and default billing if they decide to cancel.

The best option for those seeking tax relief is to engage the services of a qualified tax professional that has the authority to represent individuals with the IRS. Those include a CPA, attorney, or federally authorized tax practitioner.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Adjusting Your W-4

There are some very good reasons to adjust your withholdings on your W-4. The form tells your employer how much money to keep out of your check for federal income tax. It will have an effect on your tax liability and prevent you from receiving an unexpected tax bill when filing your federal return.

Your W-4 is also critical for preventing a penalty for underpayment. Some people choose to claim every possible withholding, essentially living on less throughout the year to obtain a large refund at tax time. The IRS wants you to reduce your tax bill and have a refund that’s as close to zero as possible.

Life Events

Any time that your life circumstances change, you should complete a new W-4 with your employer. That includes a marriage, divorce or the birth or adoption of a child. Major life events also include buying a house, getting a raise, and contributing to educational funds. Some of those changes will make you eligible for credits on your federal tax return.

Part-Time Employment

If you normally work all year, but get laid off or experience downtime, you’ll need to adjust your withholding to account for those changing circumstances.

Second Job

It doesn’t matter whether you get a part-time job, work the gig economy, run a side hustle, or have a home business, you’ll need to adjust your withholding. There are a great many types of income producing ventures that are viewed as self-employment by the IRS, which makes you liable for income tax on the amount, along with the self-employment tax, Social Security and Medicare.

Spousal Employment

If your spouse gets a new job or changes jobs, they’ll also have to complete a W-4. Any change in income – an increase or a decrease – will have an impact on your income and amount of taxes you owe. Couples need to use both incomes and approximate as closely as possible what they need to claim on their W-4.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Biggest Tax Credits You May Qualify For

Everyone is looking for ways to reduce their tax liability. There are dozens of ways business owners can reduce their taxes, but not necessarily for the average person. The following are 5 big tax credits that you may qualify for without even knowing it.

Earned Income Tax Credit (EITC)

The EITC is one of the best-known credits. It can range from a few hundred to several thousand, depending on the number of children you have and your filing status. The credit will factor in your adjusted gross income, investment income and earned income. You won’t qualify if you can be claimed as a dependent on someone else’s taxes, lived outside the U.S. for 6 months or more, or earned more than $10,000 in investment income. You may be able to claim children up to 24 years of age if certain criteria are met.

American Opportunity Tax Credit (AOTC)

Formerly known as the Hope Credit, the AOTC helps if you’re paying for college expenses that includes tuition and course materials. The allowable amount is determined according to your modified adjusted gross income. Students must be enrolled at least half time and the credit is available on a per-student basis.

Lifetime Learning Credit (LLC)

You can claim this to help offset the costs of post-secondary education, even if you’re not pursuing a degree. It’s available to those within specific income brackets.

Child and Dependent Care Credit (CDCC)

The credit is available to help mitigate the costs of child care services for children under age 13 so parents can work. The credit also encompasses caring for a spouse, parents, or other individual that’s mentally or physically incapable of caring for themselves.

Savers Tax Credit (STC)

Previously known as the Retirement Savings Contributions Credit, it provides a credit if you contribute to retirement plans encompassing a 401(k), investment retirement accounts, and some other types of retirement plans. Age, along with dependent and student status will be factored in.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Can You Use Tax Credits and Tax Deductions?

You can definitely use tax credits and tax deductions to lower the amount of federal income tax you pay. Tax credits directly reduce your tax. Deductions reduce the amount of your taxable income, the taxes you pay and may increase the amount of your refund if you have one coming. However, taking some deductions and credits will depend on which tax bracket you fall within and your personal situation.

Tax Credits and Tax Deductions

Federal income taxes can be complex, even for low-income filers. The Advance Child Tax Credit payments that began in the summer of 2021 is an example. You may have been receiving them, but the amount is half of what the total would be. You can claim the other half when you file your federal income tax return. Corona Virus Impact payments and stimulus payments will also have to be considered.

Tax Credits

There are credits for Earned Income, dependent care, adoption, and the elderly or disabled. There’s a foreign tax credit, those for undistributed capital gains, excess Social Security and RRTA withholdings and retirement savings contributions. You may have a credit if you’re a homeowner or have costs from healthcare and education. Some have limits on the amount that can be claimed.

Deductions

Work deductions are one of the most common types of deductions, enabling you to deduct expenses such as union dues and uniforms, or the use of your car and a portion of your home space if you’re working from home. If you’re part of the gig economy or use an employment app for per-day jobs, you can still take those deductions.

If you use those apps or are part of the gig economy, you should be aware that you’ll be classified as self-employed by the federal government and that means you’ll be paying higher taxes. You’ll be liable for self-employment taxes, Social Security and Medicare taxes. The good news is that you can typically claim your earnings on your regular income tax form under “Other Income.”

Tax Preparation

There are a number of good online tax preparation software programs for those that have fairly straightforward tax forms. If your taxes are more complicated, you should definitely seek the services of a professional tax preparer or CPA.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Best Ways to Reduce Taxable Income

There are a number of ways that even the average taxpayer can utilize to reduce their taxable income, thereby mitigating their tax burden. Those methods are also available to lower income earners of less than $100,000 per year. The following are just a few of the ways that people can use to lower their taxable income.

Charitable Donations

Taxpayers will need to itemize deductions to take advantage of the credit if they contribute more than $300 in cash or goods. Those with cash donations of $300 or less can also claim the deduction.

Earned Income Credit

Even individuals that aren’t required to pay taxes may qualify for the earned income tax credit (EITC) worth a maximum of $6,660, providing they meet income limits and other criteria. It’s available for single people with no children and married couples with 3 or more children.

Education

Higher education costs can net individuals a $2,500 per person tax credit. Adults that return to school or training can receive a $2,000 credit per year.

Health Care

A flexible spending account (FSA) or health savings account (HSA) sets aside a portion of earnings for out-of-pocket health care expenses and the money is untaxable. FSA contributions are limited to $2,750 per year and HSA contributions are capped at $3,600 per individual.

Home Business

Anyone operating a business from their home can claim a deduction for a portion of their home used as their office, equipment and supplies. The deduction can also be beneficial for individuals that have a side-hustle or are working in the gig economy.’

Military

Active military and military reserve personnel can deduct moving costs associated with a change of duty station.

Mortgage Insurance

Premiums to private mortgage insurance companies can be deducted if deductions are itemized.

Retirement Savings

Employer-sponsored retirement plans such as 401(k) and 403(b) can contribute up to $19,500 and people over 50 can make catch-up contributions. The contributions are made before taxes and don’t count toward taxable income. An IRA serves the same purpose for those that are self-employed, though the contribution amounts are different.

Self-Employment

People that are self-employed can deduct 50 percent of the amount paid from income taxes to compensate them for paying the full amount for Social Security and Medicare taxes. Itemizing deductions isn’t required.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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Deducting Medical Expenses

Everyone wants to lower their tax burden by getting every possible deduction to which they’re entitled and medical expenses is one way to accomplish that. However, individuals must itemize to claim the deduction and much will depend on an individual’s income. Claiming medical expense deductions is beneficial if the amount of the deductions exceeds the standard deduction on income taxes.

What can be Deducted?

The IRS enables taxpayers to deduct unreimbursed medical, dental, vision, and mental health expenses for themselves, a spouse and dependents, up to 7.5 percent of their adjusted gross income. Those expenses can include diagnostics, mitigation, treatment and cures, along with preventative measures. Individuals can also deduct travel expenses.

The COVID-19 pandemic has left many individuals with astronomical medical bills. Some private insurance companies have pledged to cover all COVID-19 expenses, while others have not. Taxpayers that rely on Medicaid and Medicare for medical care may have co-pays and spend-downs that they can claim.

There are a great many expenses that taxpayers can deduct if they’re itemizing deductions, up to 7.5 percent of their adjusted gross income. They include fees to a wide range of medical and mental health professionals, including surgeons, dentists, chiropractors, psychiatrists and psychologists, and non-traditional medical practitioners.

Wide Range of Deductions

Other expenses include oral and injectable prescription medications, weight loss programs prescribed by a doctor, and in-patient costs for drug, alcohol and nicotine addiction. Nursing home costs, insurance premiums, and medical aids such as crutches, wheelchairs, dentures and even service dogs are all allowable expenses.

The range of medical-related expenses that can be deducted is extensive, but there are also restrictions on what can be claimed. For taxpayers with substantial costs, it can be beneficial to claim those deductions. The best solution for those intending to claim medical expense deductions is engaging the services of a tax professional or certified public accountant (CPA) that has the experience, knowledge and resources to help them get every deduction to which they’re qualified.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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5 Reasons a Tax Professional is Better than Online Filing Services

Millions of people across the nation file their taxes each year using popular online software. It’s easy, convenient, and fairly inexpensive. The IRS recommends that individuals use e-file options for their taxes. However, the best solution can be a tax professional. The more complex the tax filing, the more a tax professional makes sense and they can also e-file for clients.

  1. Year-Round Help

Online tax software is only available for a limited time each year and it can’t provide advice on potential tax issues that may arise during the coming year. A tax professional is available to answer questions and concerns at anytime during the year, not just at tax time.

  1. Best Software

Tax professionals have access to better and more sophisticated software than that offered online. An individual’s information can be scanned, entered, and organized quickly and efficiently. The process eliminates manual data entry, significantly reducing the potential for human error.

  1. On Time

Online software depends on individuals buckling down, collecting their information and beginning the task of filing taxes. Fear of a mistake is common among self-filers and it’s exacerbated when the individual happens to be a procrastinator. Provided that individuals get the information to their tax professional in a timely manner, taxes will always be filed on time, thereby eliminating late fees and running afoul of the IRS. Filing via a tax professional may also reduce the potential of an audit.

  1. Business Needs

Complying with new tax laws for operating a business and investments becomes more complicated every year. A tax professional is one of the first to have access to upcoming changes that affect clients’ taxes and livelihood. They have a thorough understanding of tax laws in multiple areas and can guide individuals. Even those with straightforward tax returns will fare better.

  1. Stress

Tax time generates a considerable amount of stress each year and it’s compounded when people try to do their own taxes – even with online software. The changes in tax laws and the COVID-19 pandemic are further confusing requirements. An ordinary tax return can take up to two hours to complete online. A tax professional saves clients time, effort and stress.

At Peavy and Associates PC our mission is to assist you with all your tax preparations, payroll and accounting needs.  We provide our clients with professional, personalized accounting services and guidance in a wide range of financial and business needs. Give us a call today and discover why our clients return to Peavy and Associates, PC year after year!

 

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