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 to the US government and the actual amount of tax revenues
the IRS collected in a timely manner. For 2006, the Tax Gap is estimated to be
According to the IRS, "The
voluntary compliance rate — the percentage of total tax revenues paid on a
timely basis — for tax year 2006 is estimated to be 83.1 percent. The voluntary
compliance rate for 2006 is statistically unchanged from the most recent prior
estimate of 83.7 percent calculated for tax year 2001." What this
means is that a whopping 17% of all federal taxes are initially going uncollected.
IRS' Tax Gap Map, the IRS estimates that the Tax Gap is comprised of these
Underreporting of taxes - $376
Underpayment of taxes - $46
Non-filing of returns - $28
The IRS believes that through
"enforced and other late payments of tax", $65 billion out of the $450 billion tax
gap will eventually be collected. Even so, that still leaves a Net Tax Gap of $385
billion, or 14.5% of the total potential federal tax liability of $2.66
Trust But Verify
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.
For anyone who fears being audited,
you'll be happy to learn that 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.
In the past, however, a big challenge for the government is to find a source of third party
verification that covers small businesses and self-employed individuals.
Well, effective for 2012, the IRS has introduced a new form called the
to provide income verification for this group of taxpayers.
According to the instructions to
this form, "You have received this form because you have accepted merchant cards
for payments, or because you
received payments through a third party network that (1) exceeded $20,000 in
gross total reportable payment transactions and (2) the total number of those
transactions exceeded 200 for the calendar year."
With fewer people purchasing goods
and a higher percent of all transactions being completed with debit or credit cards,
the IRS will use this third party verification of merchant card payments as a
tool to get a better sense of the revenue that many small businesses receive each
year. Take a look at Line 1a of the
Schedule C, Profit or Loss From Business, and you'll see that you'll be
required to separately report all of the income reflected on the Form 1099-K's
Currently, the IRS is auditing the
following groups of taxpayers each year:
with income greater than $1 million
with income greater than $200k but less than $1 million
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. It will be interesting to see what happens with the
Tax Gap once merchant card activity reported on 1099-K's is implemented starting in 2012.
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Speak at the 2012 AudiologyNow National Conference
Network is also pleased to announce that Andrew Schwartz CPA will be
speaking at the 2012
AudiologyNow Conference being held in Boston from March 28th - March
31st. Here is the course description:
Making Sense of the Numbers (and Saving Some Taxes) - For
Tracks: Business Practices, Professional Issues
You’ve invested countless hours first to earn your Doctorate
Degree and then to enhance your clinical skills. However, you
probably haven’t had many opportunities to take courses or spend
much time learning about the business side of being an
audiologist. This session will help you decipher the numbers
needed to effectively run a practice, compare owning your own
practice versus working as an Associate, and take steps to
minimize your tax burden.
Presenter(s): Andrew Schwartz, CPA, Schwartz and Schwartz, PC
Contributor(s): Annette Burton, AuD, Easter Seals Center for
Learner Outcomes - You will be able to:
Read and comprehend a basic set of financial reports needed
to run an audiology practice.
Understand the tax aspects of working as an Associate at a
practice owned by another Audiologist or ENT physician
Save taxes by deducting professional expenses and minimize
taxes by taking advantage of various tax-advantaged
having us speak at one of your events? If so, info is available at:
http://www.schwartzaccountants.com/speakers.html. This page
includes a sample of the presentations we have already put together, but we
will gladly customize a presentation to fit the needs of your meeting or
what I observed upon reviewing his returns:
reported gross income of just about $21 million for each of these two years.
A little more than 50% of this income was from long-term capital gains and
qualified dividends, which are taxed at the maximum rate of 15% for the regular tax calculation.
respect to his self-employment income, Mitt Romney did not appear to be very concerned about minimizing his tax burden.
Take a look at the Schedule C each year, and while he did not claim any
expenses against his Author/Speaking Fees income of $110,500 in 2011, he did claim his agent commission of $39,756 and advertising
expenses of $9,000, for a total of $48,756, against his gross
self-employment income of $528,871in 2010. Apparently, he decided not to
claim any other expenses, including the home office or automobile mileage,
that many self-employed individuals claim on their Schedule C each year.
Mitt Romney also did not contribute to a retirement plan either year based
on his net self-employment income, which would have reduced his taxable
look at line 45 of his tax return for both year, you'll see that he paid a
ton of Alternative Minimum Taxes each year. Based on these returns,
his AMT was $224,425 in 2011 and $232,989 in 2010. While most
taxpayers with income greater than $1 million pay no AMT, people with
substantial long-term capital gains and qualified dividends end up paying
this tax due to how this tax calculation works.
total 2011 tax liability reflected on this tax return is $3,226,623 - or just over
15% of his gross income of $20,908,880. This might seem quite low, but he claimed
a substantial deduction of $4,020,572 for donations to charities.
Without his charitable donations, his total federal tax liability would have
been approximately $4.6 million, or 22% of his gross income.
total 2010 tax liability reflected on this tax return is $3,009,766 - or
just under 14% of his gross income of $21,646,507. This might also
seem very low, but he claimed substantial donations to charities of $2,983,974.
He also saved taxes by taking a $129,697 credit for Foreign Taxes paid
during the year. Without these two tax breaks, his total federal tax
liability would have been approximately $4.2 million, or 19.5% of his gross
Romneys claimed itemized deductions of $5,688,179 on their 2011 Schedule A
and $4,519,140 on their 2010 Schedule A. For 2011, their itemized
charitable donations, $46,033 in investment interest expense, $226,356 in
real estate taxes, and $1,323,094 in state income taxes. They also
claimed $490,000 in Miscellaneous Itemized Deductions that were passed
through to him by one of his investment trusts or partnerships, of which only $71,978
was deductible since Miscellaneous Itemized Deductions are only allowable to
the extent they exceed 2% of your income.
Finally (and surprisingly), Mitt Romney had a sizeable capital loss carryover reported on
2010 Schedule D. Take a look at line 14 of that year's Schedule D and you'll see
that he went into 2010 with a capital loss carryover of $4,844,089. His
returns don't indicate when or how those losses arose.
returns are anything but straightforward. In my office, we don't prepare
any returns nearly as involved as Mitt Romney's 2011 and 2010 returns. I
can only imagine how many hours the staff of PriceWaterhouseCoopers spent on
preparing and reviewing these tax returns.
For 2011, the standard deduction for a single individual is $5,800 and
for a married couple is $11,600. A person will benefit by itemizing once
allowable deductions exceed the applicable standard deduction. Itemized
deductions include state and local income taxes (or sales taxes), real estate
taxes, mortgage interest, charitable contributions, and unreimbursed employee
For 2011, the personal exemption is $3,700.
Individuals will claim a personal deduction for themselves, their spouse, and
The maximum earnings subject tosocial security taxes is $110,100
for 2012, up from $106,800 for 2011.
The standard mileage rateis $.555 per business mile as of
July 1, 2011, up from $.51 per mile for the first six months of 2011.
The maximum annual salary deferral into a 401(k) plan or a
403(b) plan is $17,000 in 2012, up from $16,500 in 2011. And if you'll be 50 or
older by December 31st, you can contribute an extra $5,500 into your 401(k) or
403(b) account that year.
The maximum annual contribution to your IRA is $5,000 for 2011
and 2012. And if you turn 50 by December 31st, you can contribute an extra
$1,000 that year. You have until April 15, 2012 to make your 2011 IRA
In a shocking development, the
IRS recently announced that they will be honoring the FICA tax refunds
submitted by residency programs and individual doctors. The catch is
that only FICA taxes paid prior to 4/1/05 qualify.