Over Reporting Your Income? IRS May Find Out And There Could Be Consequences.


Just read an interesting Tax Court opinion (Cadet, TC Summ. OP. 2015-39) about over reported income.  The taxpayer, who was called ‘a low income filer with very little count_moneywage income’, claimed a profit from a side-business of $17k from selling items at a flea market.  The taxpayer would have been paid $2,100 in self-employment tax, but the extra income would have resulted in about $8,000 total from the child tax credit plus an increased earned income credit.

Normally a tax return is first reviewed by the IRS computer system and, if needed, by reviewers.  In this case, the computers noted the ‘excessive’ income based on the taxpayer’s history and the computers froze the return.  During a review, the taxpayer couldn’t substantiate most of the profit (not enough deposits into bank accounts I’m guessing) so the IRS only allowed what was substantiated and only gave $700 in tax credits.

What’s interesting to me is I’ve  heard of the IRS computers looking for under reported income, but not over reported income.

alimony-iStock_with gavelSomething that wasn’t mentioned is if the IRS charged the taxpayer a civil penalty (usually $5,000) for filing a frivolous tax return – in my mind, it would have been warranted!  That’s the main penalty for filing a false return.

Kudos to the IRS for catching this.  We normally hear about cases of the IRS not catching false tax returns so good to hear a positive case.

 

Cheers!

Thomas C. Hodge, CPA
President

Hodge Group LLC
3943 N Austin Avenue

Chicago, IL  60634

773.237.6369

www.thehodgegroup.com

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Confused Setting Up A Chart Of Accounts? Here Are Some Pointers


If you’ve ever had trouble setting up a Chart of Accounts for your business, you’re not alone!  Although it is an extremely important part of your accounting system, there aren’t a lot of resources telling you what needs to be included.

Some software systems offer preselected Chart of Accounts (COA) depending upon your profession and these work OK but are very generic.  The issue I have with them is mostly the order – alphabetical isn’t normally how a business owner looks at the reports, especially the Profit & Loss.  Most owners I’ve worked with like to see the biggest expense items first, followed by the lesser expenses.  Others like to see certain items grouped together with sub-totals for big categories.  If I’m given the choice, I normally put things in the same order as their tax return for ease of comparison.

I’ve always worked with the people who use the accounting software & gotten feedback – they know their bills, purchases, etc. better than anyone so listening to their opinions is smart.  However, the final decision is up to the business owner (or whomever is appointed to lead the process) in case of disagreements.

Also realize that most COA can be modified (be sure to check your software!).  If the software requires a numbered COA, be sure to leave ‘spaces’ (unused numbers) so you can later put in anything you need to.  This can happen often, especially if you add a new revenue category, or new types of expenses (who remembers when ‘Web Hosting Fees’ wasn’t in a COA?).

Don’t forget the Balance Sheet items!  Be sure to include all bank/investment accounts (do you need one for PayPal?), and make sure you have enough asset categories (for fixed assets, I generally use Property, Equipment, and Vehicle categories, but some businesses may require more detail), and be sure to put in the Accumulated Depreciation.  For ‘Other Assets’, do you need Prepaid Insurance or Loans to Employees (or Prepaid Commissions)?  Something frequently overlooked is a Current Liability account for Accrued Payroll (used mostly at year-end when you’ve got a few days left in the calendar year but you haven’t paid the employees yet).  I used to use an Other Liability Account called ‘Holding’ for things like Child Support withheld from employee checks – when the monies were paid to the appropriate agencies, I then could look at that account and check it was at zero.  Just something I thought was easier…

If you’ve got any questions on COAs, don’t hesitate to ask!  Also, please send me any ideas you have or have used that you’d like to share!

Cheers!

Thomas C. Hodge, CPA
President

The Hodge Group
4118 N. Western Avenue
Chicago, IL 60618

773.237.6369

www.thehodgegroup.com

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