Tax Business, Russian Style

Tax Business, Russian Style

Working in the tax business is usually a pretty safe gig. You really just need an office, a computer with an internet connection, and a fast laser printer for all those piles of paper. There's not much heavy lifting -- and even less intrigue or danger. But sometimes the tax business is a different story. Just ask Pavel Petrovich Ivlev, who works (now) in suburban New Jersey.

Pavel was born in 1970 just outside Moscow. He earned a law degree from Moscow State University in 1993, studied more in Amsterdam and London, then joined an international law firm. At that point, he appeared set to become another one of a new breed of Russian lawyers, helping newly-privatized companies negotiate the awkward transition to "real" capitalism.

Pavel's clients included Yukos Oil, and its charismatic chairman, Mikhail Khodorkovsky. Khodorkovsky had started out collecting dues for the Communist Youth League. But as the Soviet Union collapsed, he rejected his old Leninist ideology. Taking advantage of glasnost and his party connections, he became an entrepreneur, published his own capitalist manifesto called The Man with the Ruble, and traded his way up to controlling 20% of Russia's lucrative oil production. For one brief shining moment, Khodorkovsky's $16 billion fortune made him the richest man in Russia and the 16th-richest man on earth.

In 1999, Vladimir Putin succeeded to Russia's Presidency. Putin had started his career in the KGB -- working counterintelligence, no less -- and he was no stranger to blunt force. (Google "Putin+thug" and you get 2,190,000 hits. 'Nuff said.) Putin quickly moved to tighten his grip on power, clamping down on elected officials and billionaire oligarchs alike. Khodorkovsky naturally pushed back, and at one point in 2003, embarrassed Putin in a nationally televised meeting of business leaders. Unfortunately, such resistance amounted to bringing the proverbial knife to a gunfight.

Eight months later, Putin had Khodorkovsky arrested, and slapped everyone else associated with Yukos with tax and fraud charges. And that's where our tax attorney friend Pavel comes back into the picture. Here's how he describes his own interrogation by government investigators. Clearly, they felt no need to screw around with the usual "good cop-bad cop" shtick -- or maybe the good cop was just off grabbing a ponchiki (Russian doughnut):

"On November 16, the lead detective in the case said to me 'Now I am going to interrogate you.'
I said, 'You can't do that, it's against the law.'
'I guess we are going to have to break the law then. Tell me all.'
'What do you want me to say?'
'You are the lawyer -- you know the penal code. Whatever you say, we'll use.'
'You want me to describe how we took sacks of cash out of Yukos and delivered them to Khodorkovsky personally?'
'Yes.'
'But nothing like that ever happened.'
That's when he threatened to arrest me."

Pavel's momma didn't raise any dummies. He caught the next plane out of Moscow and didn't even call his wife till he landed. But he remains under indictment in his homeland for stealing $2.4 billion, laundering $810 million, and evading tax on the gain. At least he's better off than his former client -- Khodorkovsky has spent the last seven years in a series of former Soviet prisons.

Look, there's nothing fun about the IRS. And we've all met someone who went through an "audit from hell." But few people actually flee abroad to shake off the tax man! So while we gripe about how much we pay, we can at least appreciate the IRS playing on a level field. Let Pavel's story help you feel fortunate that we won't be chased out of this country for paying less tax!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

England's Tax Subsidized Style

England's Tax-Subsidized Style

England's creative class is known throughout the world for the richness and variety of its work. Some is good (think Savile Row tailoring and the architecture of Sir Christopher Wren). Some is not (Princess Eugenie's royal wedding hat). And some is just sublime (the 1961 Jaguar E-type). But there's one art form the English are better at than anyone else, and that's highbrow television.

It all started with Upstairs Downstairs. Next came 1981's lavish Brideshead Revisited. And now there's yet another snooty television "programme" invading American hearts and minds -- Downton Abbey, a period drama centered on the aristocratic Crawley family and their servants, during the reign of King George V.

Yes, it's a soap opera. But oh, what a soap opera it is. You have your standard-issue improbable plot complications and ill-advised romances, naturally. But it's set against a backdrop of class, manners, and humanity that seem long lost a century later. And where else will you find a soap with Oscar- and Tony-winning actors, much less a pheasant hunt? Add in Edwardian sensibilities, amusing antique technology, and impossibly dry British wit, and you have an irresistibly compelling package.

Programs like Downton Abbey showcase British culture to the world and boost the nation's economy, too. So Her Majesty's Treasury began offering film tax credits for movies roughly 10 years ago. For 2010, they gave about £100 million in credits to support more than 200 productions -- including, of course, both Harry Potter sequels. But now, as part of their 2013 budget, officials are extending the incentives to high-end television, too. To qualify, dramas must cost more than £1 million (roughly $1.58 million), and must pass a "cultural test."

We have tax credits for movies and television here in the United States, of course. There's nothing at the federal level, but state and local governments eagerly compete for filmmakers' dollars with a vast variety of tax incentives. While Hollywood is the obvious center of the film universe, you might be surprised to learn that the next most attractive location for film production, based in part on generous tax incentives, is Louisiana. In fact, Louisiana was the first state to adopt tax incentives for filmmakers, and sparked a trend across the country. Producers get a 30% transferable tax credit on total in-state expenditures, plus a 5% labor-tax credit on payroll of employed residents.

Here in the US, you wouldn't think we'd worry too much about the quality of the productions we encourage. That, after all, is part of our uniquely American charm. But at least one state official has imposed his own informal "cultural test" in an apparent attempt to class up the joint. Last year, the New Jersey legislature approved $420,000 in credits for the producers responsible for MTV's raucous Jersey Shore -- then watched in dismay as Governor Chris Christie vetoed the bill, declaring "as chief executive I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the state and its citizens." His Lordship the Earl of Grantham would heartily approve.

If you run your own business -- or even if you're just thinking about starting a business -- you may not qualify for film credits. But you will qualify for more tax breaks than you realize. So make sure you take some time to sit down with us to plan how best to take advantage of those breaks. And let your friends, family, and colleagues know we're here to help them, too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

2012 Tax Outlook

2012 Tax Outlook: "Campaign Heats Up"

The 2012 presidential election already seems like it's been on for years.  President Obama has proposed to raise taxes on those earning above $200,000 ($250,000 for joint filers), including a new surtax on incomes over a million.  Republicans have pledged to cut taxes in hopes of stimulating the economy.  And regardless of who wins in November, the Bush tax cuts are scheduled to automatically expire at the end of this year.

Since taking office, Obama has offered a variety of cuts for lower- and middle-income Americans.  These include new credits for working individuals, expanded breaks for higher education, extended breaks for homebuyers, and even a temporary sales-tax deduction for new car purchases.  While these changes have made taxes more complicated, they've done nothing to stall future tax hikes for higher incomes. 

The new healthcare reform law actually makes it harder to deduct healthcare costs, and imposes significant new taxes on investment income.  With the federal budget deficit topping $1 trillion per year, many observers see the new healthcare taxes as the tip of a looming iceberg. 

 This report summarizes some of the future tax hikes we can expect and offers suggestions for avoiding them where possible.  We look forward to discussing these threats and helping craft the appropriate response! 

 Tax Brackets Stable - For Now!

 Washington has extended the Bush tax cuts, effective for two years through 2012, and Congress shows little appetite for raising rates on middle-income earners. This means that tax on ordinary income is currently capped at 33% and 35% for taxpayers in the highest brackets, and taxes on capital gains and qualified corporate dividends remain capped at 15%.  However, budget deficits continue to balloon out of control, and if Congress can't agree to extend cuts, rates will rise automatically in 2013.

Do you expect your 2013 income to be significantly different than in 2012 (as may be the case if you retire, buy or sell a business, or sell significant investments)?  If so, consider timing income and deductions for maximum tax advantage.

If you expect to earn LESS in 2013, consider delaying some of this year's income (to subject it to tax next year, when you'll be in a lower bracket).  And pay deductible expenses this year, as much as you can.

Or, if you expect to earn MORE in 2013, consider accelerating income from commissions, bonuses, and qualified plan withdrawals into this year (to subject it to tax now, before you move up into a higher bracket next year).  You might also delay paying deductible expenses until next year, to the extent possible.

Itemized Deductions Going Down?

President Obama has proposed limiting the value of itemized deductions to just 28%, even for taxpayers in higher brackets.  This would amount to a "stealth" tax increase and cut the value of deductions for medical expenses, state and local taxes, mortgage interest, and even charitable gifts.

Tax Strategies for Healthcare Costs

Paying for medical care becomes harder every year.  The recent healthcare reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Under current law, you can deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor rises to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.  

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.  

If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP.  These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax.

Audit Odds Still Low

IRS audit odds are increasing, from 1 in 200 returns for 2000 to 1 in 100 for 2009. But your chance of getting audited is still minimal. Don't take low audit rates as an invitation to cheat! But don't let fear of an audit stop you from taking every legitimate deduction you're entitled to.

New Roth IRA Conversion Opportunity

New rules now let you convert your traditional IRA to a Roth IRA, regardless of your current income.  This is actually one of the bright spots of the of the current tax picture. 

Traditional tax planning holds that it makes sense to defer income into retirement accounts now, when you're in your peak earning years (and highest tax bracket) - then withdraw it later during retirement, when your income and tax bracket will presumably be lower.  However, tax rates are currently at historic lows, and it's entirely possible they will be higher when you're retired.  This suggests the smarter strategy may be to pay tax on retirement funds now in order to withdraw them tax-free when rates are higher.

New Tax on Interest Income

The healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8%, beginning on January 1, 2013, on interest income, for taxpayers reporting more than $200,000 ($250,000 for joint filers).  This tax may make municipal bonds and money market funds more attractive relative to fully taxable vehicles.  However, the recession has jeopardized state and local tax revenues, so there may be credit quality issues to consider.  You might also consider deferred annuities and permanent life insurance for fixed-income portions of your portfolio.

New Tax on Dividend Income

Tax on "qualified corporate dividends" is currently capped at 15%, even for taxpayers in the highest brackets.  However, beginning in 2013, the healthcare reform act imposes a new "unearned income Medicare contribution" of 3.8% on dividend income for individuals earning over $200,000 ($250,000 for joint filers).  Consider favoring stocks that pay little or no dividend in taxable accounts and holding stocks paying higher dividends in tax-deferred accounts.

Permanent Life Insurance for Tax-Free Income

As mentioned earlier, the healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8%, beginning on January 1, 2013, on "investment income" (broadly defined to include interest, dividends, capital gains, rents, royalties, and annuity distributions) for individuals making over $200,000 ($250,000 for joint filers).  Permanent life insurance offers a variety of investment options for accumulating cash values, along with tax-free withdrawals and loans so long as you keep the policy in force.

New Tax on Real Estate Income

The healthcare reform act imposes an "unearned income Medicare contribution" of 3.8%, effective starting in 2013, on income from real estate investments and taxable gains from the sale of your primary residence, for individuals making over $200,000 ($250,000 for joint filers).  There are several strategies you can use to minimize taxable real estate income, including favoring tax-deductible "repairs" over depreciable "improvements" and cost segregation strategies to maximize depreciation deductions.

Higher Tax on Capital Gains

Tax on long-term capital gains (from property you hold more than 12 months) is currently capped at 15%, even if your regular tax rate is higher.  However, the recent healthcare reform act also imposes a new "unearned income medicare contribution", beginning in 2013, of 3.8% on capital gains for individuals earning over $200,000 ($250,000 for joint filers).  If you have appreciated assets such as securities, real estate, or a business you'd like to sell, consider doing so before new rates become effective.  Check with us first, to discuss if you can use tax-free exchanges, installment sales, charitable trusts, or similar strategies to minimize or even eliminate tax on those sales.

Uncertainty on Estate Tax

The estate tax actually "died" for 2010.  Washington brought it back to life, with a 35% tax applying on estates over $5.12 million per person.  However, the new system applies only for 2011-2012.  If Washington doesn't act to extend it, the tax reverts to 55% on estates over $1.0 million, beginning January 1, 2013.  This means that smart, flexible estate planning will still be part of most affluent families' plans.

Next Steps

We're sure you appreciate this brief outline of upcoming tax threats.  While smart intelligence is crucial, intelligence alone is useless without the right action.  If the threats we've discussed so far have you worried about your financial future, you owe it to yourself to take a more comprehensive look at your taxes and finances, so that we can determine exactly which concepts and strategies will work from here. 

Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Failed Tax Strategies

#1 Delay in Getting Started
Most tax strategies fail because they are delayed in getting started - which often leads to them never getting started.

The time most people think about a tax strategy is usually at the same time they are starting a new business or investment activity.

This is a time when there are a lot of things going on to get the business or investments started.  And, at the same time, cash is usually tight.  The tax strategy gets put on hold temporarily but the temporary status grows into a permanent status.

There are key parts of a tax strategy that have to be planned out before the business or investing activity starts.  When the tax strategy is delayed in getting started, some of the tax saving opportunity could be gone forever.

I hate it when I have to tell a prospective client that we could have reduced their taxes even more had they just started with us sooner.

#2 No Check Up
Most people go to the doctor annually, even if they feel great, to get a check up.  This is usually part of a long term strategy for a long and healthy life.

The same needs to happen with a tax strategy.

Many people set up their tax strategy, work diligently with their CPA for the first year or perhaps even first two years, and then let things slide a little bit.

While it's true that some tax strategies can run themselves to some extent over time, it's never a substitute for checking in with your CPA to determine if there is anything that has changed or can be done differently.

After all, even if nothing has changed in your world, the tax world changes on a regular basis.

#3 The Cost v. Benefit
A successful tax strategy is one that creates tax savings that outweigh the costs of creating the tax savings.

Pretty straightforward concept, but sometimes the facts can be deceiving and that causes many tax strategies to fail.

For example, which is better:
- A tax return that costs $750 to have prepared, or
- A tax return that costs $2,500 to have prepared

If both tax returns produce the exact same tax results, then the lower cost tax return is a great deal.

But, what if that $750 tax return calculated a tax liability that is $5,000 more than had it been prepared elsewhere?  This is where I see many tax strategies fail.  

Have you ever seen the media studies where they take the same tax information to several tax return preparers?  The idea is to see if the results are the same.  The results are never the same!  But, that doesn't necessarily mean any of the tax returns are technically inaccurate.

It's not unusual to have options on how income and deductions can be reported on a tax return and have each option be technically accurate.

This is what is so great about the tax law.  Whether it's the U.S. tax law or elsewhere, there can be many options with how items are reported and with the right tax preparer, it can result in maximizing your tax savings.

How do you know if your tax preparer is maximizing your tax savings?
One way to assess your tax preparer is based on how much information your tax preparer wants to know about you and your activities.

Your tax preparer should ask you tons of questions that help you reveal specific details about your situation that impact your taxes.

Asking questions about your situation is not the same as asking you for your tax information (like your W-2 and financials).  Every tax preparer will ask you for your tax information.

If your tax preparer isn't probing to better understand your situation, then it is very difficult to uncover the different options available for reporting your income and deductions.  The fewer options there are, the more difficult it is to minimize your taxes.

If your tax preparer isn't asking you questions, then that is a strong indicator that they aren't leveraging the options available within the tax law to minimize your taxes.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Deduct Nursing Home Medical Expenses

You can deduct as medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for you, your spouse or dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is for medical care. If the reason for being in the home is personal, you can't include the cost of meals and lodging, but you can deduct the part of the cost that is for medical or nursing care.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

IL-eagle Assests?

Our estate tax system is quite different from our income tax system. The income tax, as its name implies, focuses on how much money individuals, trusts, and business entities make. The estate tax system, in contrast, focuses on how much assets are worth. Most assets aren't hard to value. Stocks, bonds, mutual funds, and similar assets are valued at their publicly-traded fair market value (FMV) as of the date of death (or the executor can choose an "alternate valuation date" six months later). But some assets are a little harder. Real estate, for example, is also valued at its FMV -- but who's to say what a unique or expensive property is really "worth," especially in today's volatile market? Closely-held businesses can be even harder to appraise. And high-end collectibles, like the kind of art and antiques that usually sell at auction, can be hardest of all.

These issues make estate-tax enforcement a different challenge from income-tax enforcement. For fiscal year 2010, the IRS received 42,366 estate tax returns, and audited 4,288, or 10.1%. But just as income tax audits go up as your income rises, estate-tax audits go up as yourassets go up. For that same year, the IRS received 3,013 estate tax returns reporting assets of $10 million or more -- and audited 928 of them, or 30.8%!

Occasionally, the IRS finds assets that are especially tricky to value. For instance, how do you value an asset that would be illegal to sell? That was the challenge the IRS faced with the estate of art dealer Ileana Sonnabend. Sonnenbend died at age 92 after amassing one of the country's most important collections of contemporary art, including works by Jeff Koons, Roy Lichtenstein, Andy Warhol, and Cy Twombly. Her heirs valued her estate at $875 million, and sold several works to pay taxes of $331 million to Uncle Sam and $140 million to New York state.

But Sonnabend's collection also included a 1959 work called "Canyon" by Robert Rauschenberg, best-known for his "combine-paintings" incorporating nontraditional materials and objects. And there's a problem with that piece -- it includes a stuffed bald eagle. Bald eagles aren't just a symbol of America, they're an endangered species. Selling any part of an eagle, even a single feather, is, well, il-eagle -- punishable by a fine of up to $100,000 and a year in prison. (Yes, they will make a federal case out of it.) In fact, back in 1981, the Department of Fish and Wildlife notified Sonnabend that ownership of the piece was restricted by federal law. Sonnabend got permission to retain the piece and lend it to museums, but understood that she could never sell it or export it for sale.

Sonnabend's executors obviously took that constraint into consideration, and valued the piece for estate tax purposes at zero. The IRS, not surprisingly, cried fowl. They valued "Canyon" at $65 million -- assessed $29 million in tax -- and threw in an $11.7 "gross valuation misstatement" penalty for good measure! (The technical term for that is "holy smokes"!) The executors have filed suit, of course, but the IRS has a history of valuing illicit assets, like native American artifacts and stolen art and antiquities, at their "black market" value.

Smart planning could have avoided this whole mess. Sonnabend could have donated "Canyon" to a U.S. museum before her death. That would have avoided the absurd result of owing tax on an asset, but facing jail time for selling it to pay the tax! The good news in all this is that, at least from now through the end of the year, there's no tax due unless your taxable estate tops $10 million. The bad news is that if you do leave enough to owe tax, you can almost count on being audited. So if your house is stuffed with contraband, the time to get rid of it is now! Other tax planning questions? Call us!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

And the Oscar Goes To . . .

Sunday night, the Academy of Motion Picture Arts and Sciences put "Oscar" on a diet, cutting out live performances for "Best Original Song" nominees and trimming the traditionally bloated and self-indulgent awards program to just over three hours. Movies about movies were the big winners. "Hugo," Martin Scorsese's homage to French director Georges Melies, took five awards early in the evening. And "The Artist," a black-and-white silent film celebrating Hollywood history, took home five more, including the coveted "Best Picture."

Host Billy Crystal managed to sneak in a joke about about taxes during the broadcast -- he remarked that the "Harry Potter" movies had grossed over seven billion dollars in worldwide receipts but paid just 14% in taxes! (Apparently that "taxium minimoso" spell is a real winner! It also helps if you can keep your bank records in disappearing ink.) But while the tax man rarely gets a star turn on stage, he still manages to clean up at awards time.

For starters, you know how nominees walk away with fat "swag bags" filled with goodies and bling? Those bags are taxable, of course. This year's bag is valued at $62,023.26 (down a bit from last year's $75,000). It includes little "party favors" like a $135 bottle of Purell hand sanitizer (bagged in a gold and crystal studded carrying case), $120 worth of "earthpawz" environmentally-friendly pet accessories (Dirty Dog Floor Cleaner & Mud Remover, Doggie Slobber Window & Glass Cleaner, Doggie Grime All Purpose Cleaner, Smelly Dog Odor Eliminator and Eco-Tabs Stain & Odor Remover), and a $178.99 "thermarobe" wireless heated robe.

The swag bag also includes bigger-ticket gifts like a $15,580 four-night safari -- on elephant back, no less -- in Botswana, a $15,000 cocktail party for up to 100 guests sponsored by liqueur maker DiSaronno, and a $3,350 stay in an oceanview suite in Punta de Mita on the Mexican Riviera. Some nominees actually refuse the bags to avoid the tax hit, while others -- including A-lister George Clooney -- have donated the contents to be auctioned for charity.

Oscar nominations and Oscar victories give films a famed "Oscar bounce" -- and that means taxable income for everyone involved. "Best Picture" nominees earn an average of $17.7 million after their nomination and another $4 million after the show. Best Picture winners earn $27.5 million after their nomination and $15.4 million after the show. (In fact, some Hollywood insiders watch box-office receipts between the nomination and the show, to divine who will take home the statuette.) Those millions ripple throughout the film economy: theatres pay tax on ticket sales and concessions; studios pay tax on their own receipts; writers, directors, actors and others with "points" pay tax on back-end profits; and even the kids who serve popcorn and soda pay tax on their meager paychecks.

Oscar nods also boost performers' future paychecks. That means serious tax planning if the lucky winners don't want 35% of the difference winding up in Uncle Sam's pocket. Of course, you don't have to be a movie star to cut your taxes. It just means you need a plan of your own -- one that takes advantage of every legal deduction, credit, loophole, and strategy. We're here to help you star in that plan!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Convert Residence To Rental

If you start renting out your former residence, your basis for depreciation purposes is the lower of your adjusted basis at the time of the change or the fair market value (FMV) of the property at that time.

When you sell the property, your basis for figuring a gain is your adjusted basis in the property. On the other hand, the starting basis for computing a loss is the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use and then adjusted for depreciation, capital improvements, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Vehicle Expense Documentation is Critical

 In Scott P. Lysford et ux. (T.C. Memo. 2012-41) the taxpayer claimed a deduction for his single engine aircraft he flew between his home and a business office some 200 miles distant.

The Court found the taxpayer's records of the trips in his spiral notebooks wholly inadequate. They merely listed the date and destination of airplane and automobile trips. No business purpose for the trips, no names of clients visited, and no description of business scheduled, conducted, or attempted is provided. A list of dates representing the taxpayer's airplane and automobile trips with no identification of the people visited, the locations visited, the nature or purpose of the trips, or the business actually conducted falls well short of the substantiation required by Section 274(d).

For 2006 the taxpayers failed to show that their business use of the airplane exceeded 50%, and the Court sustained the IRS's determination that the $72,210 in airplane overhaul expenses deducted for 2005 under Section 179 relating to the airplane was subject to recapture. For the same reason, the Court sustained the IRS's disallowance of the taxpayer's $39,000 claimed Section 179 current expenses for 2006 relating to the airplane.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form. 

Without Adequate Records - IRS Can Reconstruct Income

If you don't have adequate books and records, the IRS can reconstruct your income using any of several methods.

In the case of Bradley M. Cohen and Kathy A. Cohen (T.C. Memo. 2003-42) the Court said that when a taxpayer fails to maintain these records, the IRS may determine income under the bank deposits method.

A bank deposit is prima facie evidence of income. The bank deposits method of reconstruction assumes that all money deposited into a taxpayer's account is taxable income, unless the taxpayer can show a nontaxable source for the income. The taxpayer could not produce evidence of a nontaxable source for the deposits made to an S corporation's bank.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.