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MONTHLY TAX NEWSLETTERJanuary 2007
I'm not a big TV person. That goes double for the reality shows. Even so, I found myself watching The Biggest Loser this fall along with my wife, who became a big fan of the show as the drama unfolded.
My wife Susan is a Certified Financial Planner and I'm a CPA. While watching the show, we would find ourselves commenting that the process of losing weight isn't very different from the basic financial planning process.
Let's look at the steps people take to lose weight:
Step 1, Set Attainable Goals
New Year's Day is a time to start anew. Take this opportunity to reset some of your short-term basic financial planning goals. Make sure that your goals are both challenging and attainable. But don't forget that these goals should fit into your long-term financial plan as well.
Start by looking back at the financial resolutions you made last year. If you reached all your goals, then consider pushing yourself a little harder. If you fell short, were last year's goals attainable or do you need to bring them in line with what you can reasonable expect to afford?
Here are a few suggested goals:
Step 2, Take Steps To Reach Your Goal
Like weight loss, financial planning is an ongoing process. While it's important to look at the big picture, it's also important to set annual goals as well.
To reach your retirement savings goals, January is the time to instruct your employer to reset your monthly contributions. This year, you can contribute up to $15,500 ($20,500 if 50 or older by December 31, 2007) into your 401k or 403b plan at work through salary deferrals.
If you're self-employed, you can contribute up to $45,000 into a SEP or Solo 401k ($50,000 into a Solo 401k if 50 or older), depending on your net self-employment income. Most people find it easier to reach their retirement savings goals by contributing a set amount on a monthly basis versus trying to come up with a lump sum at the end of the year.
To reach your other financial goals, take the time now to set up for automatic transfers from your checking account into your emergency savings, IRAs, 529 Plans, or ESAs. You can also instruct your bank to automatically pay a set monthly amount towards your credit cards, student loans, or mortgages.
Setting up for automatic transfers helps you reach your annual goals for a variety of reasons. Besides avoiding the hassle of mailing out a check each month, automatic transfers remove the temptation of remitting a smaller amount, or nothing at all, each month. Couple that with fact that most people are too lazy to turn off an automatic transfer once it's set up, and you see why this free service usually does the trick.
Step 3: Periodically Monitor Your Progress:
It's all about accountability, says the accountant. Every once and a while, take a look to see that you're on track to reach your 2007 goals.
Sounds tough, right? Not really, assuming you set up for monthly contributions into your retirement accounts, and monthly transfers from your checking account to meet your other 2007 financial goals.
All you need to do is open your mail and look at the monthly and quarterly statements you receive from your banks, financial institutions, and lenders to make sure your pre-set payments and contributions are being correctly applied to your accounts.
Invest Some Time
Sometimes it's just as valuable to invest your time as your money. During January, invest some time to set your 2007 financial goals, and then set up or adjust your automatic transfers to bring them in line with each of your goals. By doing so, you might end up being this year's "Biggest Winner".
The phrase "IRS Audit" is made up of eight letters. Few pairs of four-letter words pack the punch of finding out that you've been selected for an IRS audit.
In recent years, the IRS has increased the number of tax returns they are looking at. What are your chances of being audited in the near future?
The Tax Gap
In recent years, the IRS has become very concerned with the "tax gap", which is the difference between the total taxes that should have been remitted and the amount of tax revenues actually collected. The IRS most recently estimated the tax gap for 2001 and determined that tax revenues fell short by approximately $345 billion that year. Of that amount, 75% of the tax gap was due to small business owners and self-employed individuals.
The IRS has acknowledged that the Service can't "audit its way out of the tax gap." Even so, audits remain an important compliance tool.
To make the most of their available resources, the IRS has taken steps to streamline the audit process while trying to better select which returns to audit. Although a CPA representing a client is thrilled when an audit ends as a "no change", the IRS prefers that those tax returns never even get selected in the first place.
The IRS has acknowledged that they will bring in almost $50 billion in tax revenues next year on a $10 billion budget. Even with results like that, there are no plans in place to significantly expand the IRS' budget, so the Service needs to be very careful as to which returns are selected for audit.
Currently, the IRS is auditing the following groups of taxpayers each year:
Trust But Verify
One of the IRS's long-term goals is to move away from traditional audits to more of a "trust but verify" environment. The Service has observed that the tax gap is greatly reduced in areas where there is third party verification, such as W-2s to report wages, 1098's to report mortgage interest, or social security numbers for dependents. A big challenge for the government, however, is to find a source of third party verification that covers small businesses and self-employed individuals.
More Audits and Better Audits
Until the tax gap is brought under control, expect the IRS to rely on audits as a deterrent against non-compliance with the current tax laws.
copyright - 2007 - CPANiche, LLC
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