Got a CP2000 Notice from the IRS?

Posted on November 29, 2011 by taxb4272

A letter from the Internal Revenue Service is bound to raise your anxiety level. This government agency has a significant amount of power and notices from it should not be ignored.
I am constantly amazed by the number of people who refuse to pick up certified letters from the IRS, or who leave the Notice from the IRS envelope unopened, or open it then ignore it’s contents. These responses do not solve any problems, they just make them worse.

Here are a couple of things to keep in mind if you are the recipient of an IRS Notice.
First and foremost — the IRS is not always correct!

You have rights to dispute IRS proposed changes to your tax return.

The type of notice you will receive for proposed changes is called a CP2000 (CP is the acronym for Computer Paragraph). This type of notice is issued by a computer in the IRS Automated Under Reporter Unit when the IRS has income information about you that you didn’t include on your tax return.

The IRS recalculates your tax after adding the unreported income. The proposed tax may not be correct.

The second thing to do is to consult with a qualified tax professional who has experience with CP2000 Notices. These Notices can be very confusing to the lay person. They are usually around 10 pages in length with multiple sections and mathematical calculations on at least one page. If you don’t know tax law and don’t know your way in and around a tax return, you will likely short change yourself and overpay the government for a number of reasons.

One of the proposed changes that has recently cropped up in a CP2000 is a disallowance of the American Opportunity Credit for college educational expenses. There is only one small paragraph buried in the middle of the Notice that explains why the IRS is proposing the disallowance of the credit. You have to prove to the IRS that you qualified to claim the credit. If you don’t, the IRS will assume you didn’t qualify and ask you to pay/repay the amount of the credit you claimed.

An Enrolled Agent has the expertise to help taxpayers with all kinds of IRS Notices. Look for one of us in your area or give me a call at 479-273-3434.

Posted in IRS Notices | Tagged , , , , | Leave a comment

What’s My Tax Bracket?

Posted on July 18, 2011 by taxb4272

Ever wonder what tax bracket you were in?

Your tax bracket is the result of a mathematical formula calculated on your tax return.   The number calculated is then compared to a tax rate chart to find your tax rate.

Here’s the formula:

Income – Adjustments to Income - Standard or Itemized Deductions – Exemptions = Taxable Income.

You then take Taxable Income, your tax filing status, and then find your number on the tax rate chart. An example of a tax rate chart showing the tax brackets from 1945 to 2011 can be found at The Tax Policy Center.

Now this chart can be confusing. Let’s say that you are in the 25% tax bracket. It would be easy to assume that all your income is going to be taxed at 25%.  Not so.  The tax is calcuated on a graduated scale which means that taxable income, not total income, is taxed at increasing levels.

For 2011, the first tax bracket is 10%, then 15%, then 25%, then 28%, then 33%, and finally the highest current tax rate of 35%.

It is important to know what tax bracket you are in to help you plan for your current year tax return.  Here are a couple of examples:

You have been offered a promotion and want to know how much of your salary increase will go to income tax.  You already know that you are in the 15% tax bracket and are within $1,500 of crossing the threshold into the 25% tax bracket.  If your raise is over that amount, you will be paying taxes of approximately 15% of the first $1,500 raise and 25% of the remaining amount. Provided, of course, that your raise isn’t huge enough to get you into the 33% or 35% tax brackets.  You can use the same process to analyze the tax impact of your spouse going to work.

The value of an adjustment to income or a deduction is calculated using your marginal tax rate.  You’d just take the amount of the deduction, let’s say you are itemizing deductions and want to know if making a $1,000 charitable contribution is going to save you any money.  Just take $1,000 and multiply it by your marginal tax rate to get your tax savings.  If you are in the 25% tax bracket, you will be paying $750 to the charity and you will be re-directing $250 from the IRS to your charity of choice.  It doesn’t save you money because you pay it anyway.

It’s a different story if you take advantage of a tax credit.  More about how these work in future posts.

On a final note, when you’re looking at that tax rate chart from the Tax Policy Center, take a look at the historical tax rates.  See how wars affected the tax rates?

Posted in Tax Brackets | Tagged , , , | Leave a comment

A Common Misconception about Recordkeeping for Vehicle Expenses

Posted on July 15, 2011 by taxb4272

If you think you are keeping the right records to deduct mileage, you may be in for an unpleasant surprise in an audit.  Many taxpayers believe that all they have to do is to write down beginning/ending mileage at or close to the end of the year and then claim a percentage of the mileage for personal and the rest for business use.

“Hey, it’s obvious that I have to use the vehicle for work isn’t it?  Just look at the money I earned.  That didn’t happen without me driving somewhere. The IRS knows that don’t they?”

Sure, they understand, but it’s your job to prove how many miles you used the vehicle for business.  By the way, commuting mileage is NOT business mileage.

So how do you prove the miles you drove your vehicle for business purposes?  Here are couple of ways:

  • Log book showing the date, the beginning mileage and the ending mileage for every business trip along with the places you went and why you went there.  If you use more than one vehicle, note which vehicle you are using on the trip.
  • Appoinment book or calendar showing your schedule for the day with mileage jotted down for business trips that day and which vehicle you used.

These are great records if you do it consistently.  You may be thinking that’s all you have to do, right?  Wrong!

The IRS says, “Good, you have a mileage log.  Now we just have to verify a few things.  Show us repair records, Department of Motor Vehicle records, purchase records, anything you have showing the odometer reading on the vehicle you used for business.  We have to do our own calculations to verify some of the mileage entries you’ve made.”

It’s the old “trust but verify” adage.  The IRS examiners don’t do it to be mean or unreasonable. There are tax laws they must follow in allowing a deduction for vehicle expenses.  The examiners are just doing the job.

So, save those repair receipts and make sure the odometer reading at the time of repair is written on the receipts.  Snap a picture of your odometer reading on certain dates each year and make sure the photo has the true time stamp on it. Other records ripe for odometer readings: insurance cards, registration renewals, tires, oil changes, purchase, trade-in, sales records.  Got the idea?

Oh, if you want to deduct the actual costs of the vehicle you use for business, save 100% of the receipts for fuel purchases, repairs, car washes, etc.  noting on each receipt the vehicle the cost is for.  AND keep your mileage log.  The IRS will only allow a percentage of your costs based upon the business-use percentage of the vehicle. This percentage is calculated from — you got it — the business miles driven divided by the total miles your vehicle was driven in the tax year.

The only circumstances under which you might not have to keep all these mileage records is when the vehicle is very obviously not suitable for personal driving. Examples: a dump truck, a flatbed truck with big sprayer tanks…  But then, you still have to write down the mileage on receipts and at the beginning/end of the year — you’ve got to have some records to prove the mileage driven during the year.

Don’t guess. Don’t estimate. Don’t think you won’t get caught. Don’t take a standard percentage for business and a percentage for personal  – there is not a standard amount you can deduct each year.

There IS a standard mileage rate you might be able to use for the proven and verifiable business miles driven or you may be able to deduct a business-use percentage of actual expenses for your vehicle.  Whichever method you can use depends upon what method you used for the first year you started deducting the business-use expenses for the vehicle on your tax return.

One last tip: If a receipt is on the type of paper that fades with age or exposure to sunlight, tape the receipt (before it is faded of course) to a sheet of paper, make a copy of the receipt and then staple the actual receipt to the copy.  The IRS will not allow a deduction for something it cannot read.

“Your mileage log cannot be found on my ceiling tiles.”

Posted in Vehicle Expenses | Tagged , , | 1 Comment