Audits

Choosing the Right Business Structure

 Out of all the choices you make when starting a business, one of the most important is the type of legal structure you select for your company. Careful consideration of which structure is right for you is crucial because it will have implications for how the IRS taxes your business profits. It’ll also determine whether your personal property is protected when others demand money from your business. Other considerations, including the management of the new business and your long-term plans for it, come into play as well.

It’s not a decision to be entered into lightly, either, or one that should be made without sound counsel from business experts. Mark Kalish, co-owner and vice president of EnviroTech Coating Systems Inc. in Eau Claire, Wisconsin says it’s important for business owners to seek expert advice from business professionals when considering the pros and cons of various business entities. Usually a business owner chooses either a sole proprietorship, a partnership, a limited liability company (LLC), or a corporation. While some businesses choose to operate as cooperatives. There’s no right or wrong choice that fits everyone. Your job is to understand how each legal structure works and then pick the one that best meets your needs. The best choice isn’t always obvious. You may, after reading this section, decide to seek some guidance from a lawyer or an accountant.

For many small businesses, the best initial choice is either a sole proprietorship or, if more than one owner is involved, a partnership. Either of these structures makes good sense in a business where personal liability isn’t a big worry – for example, a small service business in which you are unlikely to be sued and for which you won’t be borrowing much money.

Cooperation Types

 A corporate structure is more complex than other business structures. It requires complying with more regulations and tax requirements. It may require more tax preparation services than the sole proprietorship or the partnership. Corporations are formed under the laws of each state and are subject to corporate income tax at the federal and generally at the state level. In addition, any earnings distributed to shareholders in the form of dividends are taxed at individual tax rates on their personal tax returns.

C Corporation

A corporation is a separate legal entity set up under state law that protects owner (shareholder) assets from creditor claims. Incorporating your business automatically makes you a regular, or “C” corporation. A C corporation (or C corp) is a separate taxpayer, with income and expenses taxed to the corporation and not owners. If corporate profits are then distributed to owners as dividends, owners must pay personal income tax on the distribution, creating “double taxation” (profits are taxed first at the corporate level and again at the personal level as dividends). Many small businesses do not opt for C corporations because of this tax feature.

A C Corporation has the widest range of deductions and expenses allowed by the IRS, especially in the area of employee fringe benefits. A C Corporation can set up medical reimbursement and other employee benefits, and deduct the costs of running these programs, including all premiums paid. The employees, including you as the owner/shareholder, will also not pay taxes on the value of those benefits.

 S corporation

Once you’ve incorporated, you can elect S corporation status by filing a form with the IRS and with your state, if applicable, so that profits, losses and other tax items pass through the corporation to you and are reported on your personal tax return (the S corporation does not pay tax).

The “S” also refers to an IRS code section. This type of taxation, the S election, allows the shareholders to be taxed only at the individual level instead of at both the corporate and individual level, thus avoiding the double taxation like the C Corporation. There is no federal income tax levied at the corporate level, unlike C Corporations which are taxed at both the corporate level and the individual level, thus earning the description “double taxation.” S Corps are favored by many business owners for their single taxation (as opposed to the double taxation of a C Corp) is limited liability protection – especially with a Nevada corporation with charging order protection extended to corporate shares – make the S Corp an attractive entity choice.

 Non-profit Corporation

A Nonprofit corporation is a special type of corporation that has been organized to meet specific tax-exempt purposes. A business organization that serves some public purpose and therefore enjoys special treatment under the law – nonprofit corporations, contrary to their name, can make a profit but can’t be designed primarily for profit-making.  To qualify for Nonprofit status, your corporation must be formed to benefit: (1) the public, (2) a specific group of individuals, or (3) the membership of the Nonprofit.

Unlike a for-profit business, a nonprofit may be eligible for certain benefits, such as sales, property, and income tax exemptions at the state level. The IRS points out that while most federal tax-exempt organizations are nonprofit organizations, organizing as a nonprofit at the state level doesn’t automatically grant you an exemption from federal income tax.

Another major difference between a profit and nonprofit business deals with the treatment of the profits. With a for-profit business, the owners and shareholders generally receive the profits. With a nonprofit, any money that’s left after the organization has paid its bills is put back into the organization. Some types of nonprofits can receive contributions that are tax deductible to the individual who contributes to the organization. Keep in mind that nonprofits are organized to provide some benefit to the public.

Examples of Nonprofits include religious organizations, charitable organizations, political organizations, credit unions and membership clubs such as the Elk’s Club or a country clubs.

Other Business Structure Options

 Sole Proprietorship

This is by far the most common and popular form of business in the United States – mostly because it’s easy to start and manage. Simply put, a sole proprietorship is an unincorporated business where there is no legal distinction between the company and the individual who owns it and runs it. This is the business model most eCommerce merchants are using.

This business type is especially good for new eCommerce companies that have a low risk of liability. The sole proprietorship can evolve into another business type later but is the fastest and easiest way to start.

One of the primary disadvantages of a sole proprietorship is the self-employment (SE) tax of 15.3 percent on the ordinary net income generated by your business. Ordinary income includes items such as sales of products or services, commissions, or short-term income in real estate if you are a real estate professional. SE tax doesn’t apply to passive income, such as rent, dividends, interest, or capital gain. When evaluating the possible tax ramifications and planning options of your sole prop, it’s critical to distinguish between ordinary income and passive income.

As every business structure, taxes do need to be filed under the individual owning the sole proprietorship. The risk here is that because there is no difference between the individual and the company, the individual is personally liable for everything the company does. The sole proprietorship is the owner’s personal responsibility for the liabilities of the business. If you have exposure to risks, you may want to consider setting up an entity even if it’s unnecessary for tax purposes or any other reason. Thus, the individual’s personal assets are on the line. Also, once the business grows to more than one person, it can no longer be a sole proprietorship.

 Partnership

Partnerships are single businesses that have two or more owners. Each of these owners or partners contributes to the business either with funding, property, labor, skill, or similar. A general partnership assumes that the business is evenly divided or that specific percentages of ownership are documented if there is a partnership agreement. A limited partnership can limit both control and liability for specified partners. Because partnerships entail more than one person in the decision-making process, it’s important to discuss a wide variety of issues up front and develop a legal partnership agreement. This agreement should document how future business decisions will be made, including how the partners will divide profits, resolve disputes, change ownership (bring in new partners or buy out current partners) and how to dissolve the partnership. Although partnership agreements are not legally required, they are strongly recommended and it is considered extremely risky to operate without one.

Partnerships will require registration but are still relatively easy to set up. Partners share responsibility and profits. Each state will have slightly different requirements for forming a partnership, but in many, if not most cases, it is a matter of filling out a form and paying a small fee.

 Cooperative

It would be somewhat unusual to find an eCommerce store merchant organized as a cooperative, but it’s not impossible. Cooperatives are businesses created to service and benefit the owners. Typically, an elected board of directors and officers run the cooperative while regular members have voting power to control the direction of the cooperative. Members can become part of the cooperative by purchasing shares, though the amount of shares they hold does not affect the weight of their vote. Put another way, its customers are its owners.

It is important to note that in some states, cooperatives are treated as a type of nonprofit corporation since a cooperative’s primary orientation is to benefit members by providing goods or services at cost. However, this type of nonprofit business is different from organizations incorporated under general nonprofit statutes, which legally have no owners, and must retain any net earnings within the organization. Nonprofit cooperative business statutes provide for member patron ownership, member voting rights for boards of directors, profit distributions to members, and member rights to assets sold if the cooperative should dissolve. Cooperatives are common in the healthcare, retail, agriculture, art galleries, and restaurant industries.

LLC Limited Liability Company

A lot of people don’t know what an LLC is, or how to get an LLC. Now it’s important to note that LLCs can differ from one state to another, but generally speaking, they are a hybrid business structure, combining the ease of a partnership with the liability protection found in corporations. Owners, frequently called members, pay taxes on the LLCs profits directly and the LLC itself does not file taxes as a separate legal entity.

LLCs require a lot less record keeping than corporations do, provide some protection for the member’s personal property, and are burdened with fewer profit sharing requirements than corporations. Conversely, LLC members will have to file additional forms for both federal and state taxes depending on the number of members, local laws, or even the LLC’s articles of organization. Often the members of an LLC pay payroll tax too.

The “owners” of an LLC are referred to as “members.” Depending on the state, the members can consist of a single individual (one owner), two or more individuals, corporations or other LLCs. Unlike shareholders in a corporation, LLCs are not taxed as a separate business entity. Instead, all profits and losses are “passed through” the business to each member of the LLC. LLC members report profits and losses on their personal federal tax returns, just like the owners of a partnership would.

Depending on the state, LLCs may also have a limited lifetime. In some jurisdictions when a member leaves the LLC, that LLC is dissolved. Starting an LLC requires significantly more effort than forming a partnership and a business will probably want to employ a lawyer or at least consult a certified public accountant.

 Conclusion

 Your initial choice of a business structure isn’t set in stone. You can start out as sole proprietorship or partnership and later if your business grows or the risk of personal liability increases, you can convert your business to an LLC or a corporation.

After learning the basics of each business structure and considering your options, you may still find that you need help deciding which structure is best for your business. A good small business or tax lawyer can help you choose the right one, given your tax picture and the possible risks of your particular situation.

FBAR: Who Should File?

Under the American tax law, if you are a U.S. citizen who has either signature authority over or a financial interest in any foreign financial account, you are required to report your account annually to the Department of Treasury via electronic filing.

May your foreign financial account be a bank account, trust, or mutual fund, you have the obligation to file both the Financial Crimes Enforcement Network (FInCEN) 114 and Report of Foreign Bank and Financial Accounts (FBAR).

Unfortunately, many U.S. citizens are not very familiar with the FBAR so before they know it, the U.S. government is already there to go after them and their penalties have already piled up.

Cases of U.S. citizens residing outside the U.S. being up the creek for not filing their FBARs are rampant these days, thanks to these people’s ignorance of the law. But since ignorance of the law excuses no one, you can’t just say no one told you about this FBAR thing and expect to be absolved at the end of the day.

Case in Point

Recently, a U.S.-Canadian citizen was in trouble for failure to file his Report of Foreign Bank and Financial Accounts (FBAR).

Jeffrey Pomerantz, a dual citizen who currently resides in Vancouver, Canada, is now being sued by the U.S. Justice Department for failing to file to the U.S. government his FBAR. The department filed the case in the U.S. District Court in Seattle and is now seeking civil and late payment penalties amounting to $860,300.

While Pomerantz filed his income tax returns to both the Canada Revenue Agency (CRA) and Internal Revenue Service (IRS) in 2007, 2008 and 2009 he failed to file the other form known as the FBAR.

According to Toronto-based lawyer Hari Nesathurai, the past couple of years have seen an increase in cases of Canadian residents being chased by the U.S. government for failure to file their FBAR reports. The lawyer said FBAR is a problem for many Canadian residents who are subject to U.S. tax laws, because they do not realize that even a Registered Retirement Savings Plan (RRSP) calls for a disclosure.

“Many people don’t realize that and it’s troubling because it’s a penalty which applies on a non-disclosure even though there may be no tax payable,” he said, adding that the FBAR is particularly a major concern among Americans and U.S. citizens or green card holders who do not fully understand their reporting obligations.

Going back to Pomerantz’s case, the lawsuit against him filed in May 2016 indicates that the events that led to the U.S. government chasing him for his failure to file his FBAR seem to have begun in 2010 with an audit, which is now before a different court.

The lawsuit reveals that even before the income tax examination commenced, Pomerantz had already failed to file a Treasury Form TD F 90-22.1 (FBAR) for the three years in question to offer a disclosure of his existing foreign accounts. However, the U.S. Justice Department said Pomerantz opened at least two personal checking accounts at the Canadian Imperial Bank of Commerce prior to Jan. 1, 2001, and both accounts were active from 2007 to 2009.

The Justice Department also said in 2003, Pomerantz established a corporation in the Turks and Caicos Islands named Chafford Ltd., which held his personal investments. That same year, he also opened three bank accounts in Sal Oppenheim JR & Cie in Switzerland, and in 2007, he opened two more accounts in the same country and the same bank.

The lawsuit also reveals that during each of the three years, he incurred balances not only in the CIBC bank accounts but also in different Swiss accounts over $10,000.

Although the complaint of the U.S. Justice Department says that Pomerantz resided in the United States from 2007 to 2009, the documents presented by his camp claim that he and his wife, also a dual citizen of Canada and Norway, had only resided in California for part of 2008 and 2009 before they moved back to Canada.

The documents prepared by the department read, “The petitioners were residents of Canada during the tax years in question and cannot be liable to double taxation and are entitled to relief under the U.S.” Contrary to that, those prepared by Pomerantz’s side pointed out that the Justice Department’s documents contained several mistakes, both on the IRS’s information and the calculations made in relation to his bank accounts.

In the midst of the controversy, Pomerantz’s camp maintains that whatever mistake or omission was found in his IRS filings was purely unintentional and would not count as fraud, since he filed everything he knew he had to file to the best of his abilities.

On March 3, the U.S. Justice Department issued the last entry in the court file in Pomerantz’s FBAR case by seeking an order to the serve the complaint on Pomerantz and his lawyer.

Meanwhile, a controversial agreement has reportedly caused the CRA to transfer to the IRS information about Canadian bank accounts. This transfer has been an issue for many Canada-based U.S. citizens under the American tax law, as this could result in the U.S. government pursuing more Canadian residents for failure to file their FBAR reports.

 Should You File an FBAR?

 Pomerantz’s FBAR woes stemmed from his failure to know that considering his status, he was actually required to file an FBAR.

Like Pomerantz, there are many others out there who do not know what an FBAR is, what it is for and who should file it. If you are not sure whether to file it or not, here’s the rule. As per the American tax law, you are required to file an FBAR if you are any of the following:

  • You are a U.S. person who had a signature authority over or financial interest in at least one financial account outside the U.S.
  • At any time during the calendar year, you had foreign financial accounts whose aggregate value exceeded $10,000.

But how do you know if you are a “U.S. person?”

 U.S. Person

 According to the law, you are considered a U.S. person if you are a U.S. citizen, U.S. resident, an entity such as a corporation, partnership, or limited companies created and organized in the U.S. or under U.S. laws, and trusts or estates created under U.S. laws.

The IRS rule also specifies certain exceptions to the FBAR reporting requirements, such as the following:

  • Certain foreign financial accounts jointly owned by spouses
  • S. persons included in a consolidated FBAR
  • Correspondent/Nostro accounts
  • Government-owned foreign financial accounts
  • International financial institution-owned foreign financial accounts
  • S. IRAs owners and beneficiaries
  • Tax-qualified retirement plans beneficiaries and participants
  • Certain individuals with no financial interest in but have signature authority over a foreign financial account
  • Trust beneficiaries who are U.S. persons reporting the financial account on an FBAR filed on behalf of the trust
  • Foreign financial accounts maintained in a U.S. military banking facility

In Pomerantz’s case, he is a U.S.-Canadian citizen who owns a foreign financial account so he is required to file an FBAR.

 How to Report and File Your FBAR

Reporting and filing your FBAR is required regardless of the taxability of your income. The law states that if you hold a foreign financial account, you are obliged to report even when your account produces no taxable income. You meet your reporting obligation by answering questions about tax returns in foreign accounts and by filing an FBAR.

Since the FBAR is considered a calendar year report, you need to do the filing on or before April 15 of the year following the year in question. You need to file electronically through the e-filing system of FinCEN.

Filing FBAR with a Federal Tax Return

In any case, you should not file the FBAR with a federal tax return. Even when the IRS extends the filing period for the income tax return, that does not mean that the period for filing an FBAR is extended as well. The good news though is that the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 has already been passed, granting taxpayers a maximum six-month extension to file their FBARs. So, should you fail to meet the April 15 deadline for FBAR filing, you have until Oct. 15 of each year to file.

 Why You Need to File a Complete and Accurate FBAR

If you want to save yourself from possible civil monetary penalties, make sure that you file your FBAR properly by ensuring its correctness and completeness. FBAR-related penalties depend on whether the violations are willful or non-willful.

For the penalties assessed by the IRS after Aug. 1, 2016 for violations committed after Nov. 2, 2015, the IRS assesses an inflation-adjusted penalty so that it won’t exceed $12,459 per violation for non-willful violations. On the other hand, the inflation-adjusted penalty for willful violations may go above $124,588 per violation.

For violations that occurred on or before Nov. 2, 2015, civil penalties usually do not exceed $10,000 per violation for non-willful violations and greater than $100,000 for willful violations.

 When You Are a U.S. Taxpayer Who Holds Foreign Financial Assets

If you are a taxpayer who has foreign financial assets exceeding certain thresholds, you need to file another form in addition to the FBAR—the Statement of Specified Foreign Financial Assets (Form 8938). You file this form with an income tax return.

 When You Have Offshore Financial Accounts

Today, the Offshore Voluntary Disclosure Program of the IRS allows those who have unreported taxable income from their foreign assets or other offshore financial accounts the chance to fulfill their reporting obligations, and that includes the FBAR. While this program does not have a particular closing date, you need to do your reporting obligations the soonest time possible as the IRS has all the mandate to close this program anytime.

When You are a Non-Resident U.S. Taxpayer Who Failed To File Required U.S. Income Tax Returns

For U.S. taxpayers who don’t reside in the U.S. and have failed to file the required U.S. income tax returns, the IRS implements certain streamlined filing compliance procedures. These procedures are exclusive to non-resident U.S. taxpayers, whose submissions are reviewed on varying degrees, depending on the response of the taxpayer to a risk questionnaire and on the amount of tax due.

In 2014, the IRS expanded these streamlined procedures to certain taxpayers residing in the U.S. The new procedure stipulates that penalties of eligible U.S. taxpayers who are non-residents should be waived, while penalties of eligible U.S. taxpayers who are U.S. residents will include a miscellaneous offshore penalty. This penalty is equivalent to five percent of the foreign financial assets of the taxpayer in question that caused the tax compliance issue.

 When You Failed to File FBAR and Are not Under a Civil/Criminal Investigation by the IRS

If there are streamlined filing compliance procedures in FBAR filing for U.S. taxpayers who are non-residents, there are also procedures that are exclusive to taxpayers who did not file the required FBAR and are not under any criminal investigation by the IRS. If the IRS has not contacted you about a delinquent FBAR, then you need to file any delinquent FBAR through FinCEN’s BSA E-Filing System.

When you enter the system, you need to choose a valid reason for your late filing and enter an explanation using the “Other” option. If your income from your foreign financial accounts are properly reported and you paid your taxes on your U.S. tax return, rest assured that the IRS will not impose any penalty for your failure to file the delinquent FBAR.

For the last handful of years, U.S. taxpayers, residents and non-residents alike, have been grappling with various changes on the IRS’ reporting requirements. Despite these changes, the need for U.S. taxpayers to disclose their foreign assets remains. Criminal and civil penalties as a result of not filing an FBAR have been alarmingly high in the last years and the U.S. government is now more stringent than ever in going after those who fail in this part of the IRS law. So if you don’t want to be in dire straits with the IRS, report when and what you should.

Ten Recordkeeping Rules and Five Bonus Tips in Claiming Travel Expense

Good recordkeeping may not be in the list of business secrets of successful entrepreneurs. But for the company’s accountant or bookkeeper, it is very important.  It can significantly reduce the amount of profit that a business will pay tax on. Keeping accurate and organized records make it easier for companies to track their cash flow, save time and trouble in filing their tax returns, and perhaps more important, ensure that they are tax-efficient.

Good recordkeeping is particularly vital for business owners and contractors who go on a business trip.  The Internal Revenue Service (IRS) allows business owners to claim tax deductions for travel-related expenses such as:

  • Lodging
  • 50 percent of the costs of meals
  • Baggage charges
  • Air, rail, and bus fare
  • Cleaning and laundry
  • Taxi fare and car rental
  • Computer rental
  • Public stenographer fees
  • Telephone or fax expenses
  • Tips on qualified expenses

If you are a business owner,  you should understand how good record keeping is vital. Keeping accurate records will back up your tax deduction claims. And it can spell the difference between winning an audit and the IRS possibly digging up your other tax returns.

The following are some of the recordkeeping rules you should keep in mind when you are to claim on a business trip:

  1. You can’t claim tax exemptions for estimated or approximated expenses.

The IRS doesn’t allow businesses to deduct amounts based on approximate or estimate. You cannot guess the amount you spent for your gas or toll fees,  neither for the cost of your meals during the business trip.

It is thus recommended for entrepreneurs or their bookkeepers to keep adequate records proving their business trip -related expenses.

You should be accurate on the amount to be written off. The IRS recommends keeping documentary evidence to prove your expenses, such as receipts, bills, and checks.

 However, documentary evidence isn’t required when the travel related expense is lower than $75.  You don’t also have to present receipt for meals and lodging expenses if you are to claim per diem, or you took public transportation for which a receipt isn’t readily available.

 You should keep timely records.

 The IRS also recommends keeping records of a business travel during or near the time of the trip. It should also be supported with sufficient documentary evidence. This can make the record more believable than a statement prepared at a later date.

 Let’s cite an example. A business owner wrote off more than $20,000 in his tax return, citing that the amount represented the gas expenses he had when he went out of town during several occasions in 2013 to meet several prospective clients.

 Two years after the trip, the IRS decided that it had enough grounds to audit his tax returns. In order to substantiate his claim, he presented a 2013 calendar as well as printouts of driving directions generated by an online web mapping service. The directions also specified the distance supposedly traveled by the business owner from his place to the offices of his clients.

 Despite those documents presented , the IRS will still disallow the claims of the business owner.  For one, the documents presented were prepared two years after the business trip. Therefore, there is a lack of truthful recall on the part of the entrepreneur to justify the said claim even though an online mapping service was used.

 This illustrates the importance of keeping timely records of your business trip. While you don’t have to record information as soon as you get home, you don’t have to wait for months to do so, either.

  1. You must state the business purpose of an expense.

The IRS encourages business owners and employees who are claiming a business travel exemption to provide a written statement indicating the purpose of an expense. You can indicate that a conference you attended is for networking and meeting potential clients.  You can back up your claim by showing the conference program or invitation from the organizer.

However, this may not be needed if the purpose of an expense is obvious given the surrounding circumstances.

The easiest example of this would be a sales representative. Given the job description of the worker, it is understood that he or she is constantly travelling.  Thus there is no need to submit a written statement detailing the business purpose of each and every trip. The sales representative would only have to record the date of each trip, total miles covered, and back up his or her claims with documentary evidence like receipt or record of delivery.

You can also withhold confidential information in stating the purpose of a business travel expense.  You don’t have to be explicit in stating the purpose of a business meeting like mentioning the amount of deals you booked over dinner.

  1. You can’t use credit card statements to claim an expense.

One of the more common mistakes that business owners make when writing off a business trip expense is using their credit card statements. The IRS, though, won’t accept this as documentary evidence.

A credit card statement can be likened to a canceled check. It only shows the costs but not any further evidence to prove that the expenses were for a legitimate and necessary business purpose.

You should present a receipt alongside the credit card statement to substantiate the travel expenditure.

  1. You should provide direct and supporting evidence in case you have incomplete records of an expense.

If you cannot provide complete records to support a tax deduction, you can still write off an expense by furnishing direct evidence in the form of a written or oral statement and supporting evidence. The written or oral statement details the cost, time, place, and date of a business trip expense like meals or transportation. It may be a written statement from you, your associates, and guests. Documentary evidence, on the other hand, may be receipts or paid bills.

In the absence of documentary evidence, you can present adequate evidence to prove the character of the expense. In the case of lodging expense, a hotel receipt can be presented to and admitted by the IRS if it provides essential information such as the name and location of the hotel, the dates of the stay, and separate amounts for lodging, meals, and communication expenses.

 Another example of adequate evidence would be a restaurant receipt. It can be presented to the IRS for meal expenses as long as it indicates the name and location of the restaurant, the number of people who were served, and the date and amount of the expense.

6. You should record expenses separately.

The IRS says that each payment is considered a separate expense.

Let’s say that you took a taxi to go to a restaurant where you met a client. The dinner expense and the taxi fare are two separate expenses. You should, thus, record them separately in your records.

It is also common for businessmen to treat their clients to sports events. If you bought season or series tickets, and then used these for business purposes, then each ticket in the series should be treated as a separate item.

You can divide the total cost of the season tickets by the number of games in the series to get the cost of each ticket.

 7. You can combine items if the expenses are of a similar nature.

You can combine expenses of a similar nature, and record them as a single expense. These expenses should have happened during the course of a single event.

For instance, you don’t have to record each and every drink during a cocktail party as separate expenses. You can record the total expenses for the refreshments as a single expense.

 8. You can record all vehicle/transport expenses and then divide them into business and personal expenses at the end of the fiscal year.

You can claim gas expenses if you used your car during a business trip. It is also possible to record all your expenses during the year, and then divide them into business trip and personal expenses at the end of the year.  However, you should keep an accurate mileage log if you are to claim a tax deduction for your business trip related expenses.

The mileage log should indicate the starting mileage on the odometer at the beginning of the year, as well as its ending mileage at the end of the year. Every time you use your vehicle for a business trip, you should record details such as the date of your travel, your starting point, and destination. You must also write the purpose of your trip, the starting and ending mileage of the vehicle, and other trip-related expenses such as tolls and parking fees. It is important to keep your mileage log updated regularly, so that your records will be precise.

 9. You can claim deductions using your actual expenses, or by using the standard mileage rate.

There are two ways of claiming transportation related expenses during a business trip. You can deduct your actual expenses, or use the standard mileage rate set by the IRS.

The latter is easier to follow, which makes it the more popular option among employees and entrepreneurs. For 2017, the mileage rage is 53.5 cents for every mile. You simply have to multiply the miles that your vehicle has accumulated for business-related expenses.

For example, your car drove 20,000 miles for business trips in 2017. You will then multiple 20,000 by 53.5, giving you a total of $10,700. This is the amount that you can write off in your next tax return.

You may opt to deduct your actual expenses instead of using the standard mileage set by the IRS. However, you should have a thorough record of your gas, parking, and toll expenses. You can also deduct other expenses like repair and maintenance, tires, car washing, car repair, and gas and oil replacement. While this method requires a lot of record keeping, it can save you a lot of money because it usually results in a larger tax deduction.

  1. Keep records and receipts as long as you can.

You may wonder how long should you keep those receipts related to a business trip that you had two years ago. The IRS recommends keeping records as long as you can, as there will always be a possibility that your tax return is audited up to three years from the date that you filed it.

Bonus Tips

While entrepreneurs are entitled to many tax deductions when they go on a business trip, they won’t be able to write off expenses if these are not properly recorded. The last thing you want to have is the IRS auditing your tax returns for making unsubstantiated claims. Here are some tips to keep in mind so that you will have an easier time in recording your expenses while on a business trip:

  1. Scribble down notes on receipts. This is particularly helpful if you are to claim meal expenses. You should list down the names of those who you dined with, and the business purpose of the meeting.
  1. Scan receipts. If you’re the type of person who keeps on losing receipts, you can simply scan or take photos of these essential documentary evidences.
  1. Keep track of your expenses in a daily business journal. You can download a good daily business journal that you can use to record all your expenses during a business trip.
  1. Use debit and credit cards as much as possible. Using cash can be disadvantageous for anyone on a business trip. It is easy to spend but hard to keep track of.  Instead of using cash, simply your debit and credit cards, then reconcile them with your receipts.
  1. Use an app. There are many apps that you can use to track your business travel expenses. These apps can make it a lot easier for you to document your expenses and make an accurate tax claim.

How to Get Reimbursed for Tips and Other Incidental Expenses During a Business Trip

Traveling for business has a lot of perks. It may mean spending some time away from the office and dealing with a lot of tasks as a result, but for the most part,  it can be very rewarding.

You do not have to be a boss to understand how rewarding business trips can be. Business owners and executives, for one, can meet prospective clients and suppliers.  They can seal deals by wining and dining their associates. Or they can strengthen their relationships with current partners.

Employees, meanwhile, can improve on their skills, update their knowledge, and network with peers when they attend conventions and business conferences. Plus, the time away from the office can re-energize them and make them more productive and inspired when they return to their respective work stations.

Claiming tax deductions

What’s more encouraging is that most business-related expenses can be claimed as tax deductible. Anything related to the business trip can be written off, from airfare, taxi fare, lodging, communication charges, and supplies.

Even incidental expenses can be claimed as tax deductible. These are small costs incurred during a business travel. It may cover for tips or fees that an employee or business owner gives to porters, baggage carrier, maids, and stewards.

In short, incidental expenses are gratuities given to staff of restaurants, hotels, cruise ships, and similar establishments.

Tipping Standards

Tipping is a customary practice in the United States. It should be noted that the federal minimum wage of $8 an hour, so tips can help make up for the low pay of servers.

Thus, business travelers will normally have to spend for gratuities extended to waiters, bell boys, porters, and other servers that they will encounter during their trip.

While there’s no standard rate as far as tips in the US are concerned, the following is a guide on how much business travelers tip for people who serve them:

  • Taxi/limousine driver—at least 15 percent of the total fare
  • Porter- $1 per bag
  • Valet parking attendant– $1-2 for every car retrieved
  • Restaurant waiter/waitress- at least 15 percent of the total bill less tax
  • Bell staff- $1 for every bag delivered to a room
  • Buffet service– $1 to $2
  • Bartender/cocktail—at least 10 percent of the total bill

Tipping, however, is not practiced in other countries.  In fact, outside the United States, the practice is not customary.

For instance, tipping in Australia is practically non-existent. This can be attributed to the fact that the minimum wage in Australia is $16 per hour, or around $622 a week.

It’s also not a practice in other countries such as Japan, Argentina, and Estonia. In most countries in Europe, such as France, United Kingdom, the Netherlands and Finland, tips are already included in the bill.

What’s Not Included in Incidental Expenses?

The IRS, however, does not consider the following as incidental expenses:

  • Costs incurred in cleaning and pressing of clothes
  • Long distance telephone calls
  • Local calls
  • Internet connection
  • Fax services
  • Gas for rental vehicles
  • Parking fees

These costs incurred, after all, are reimbursable as other expenses.  For example, costs of cleaning and ironing of clothes can be written off as cleaning expenses. Local and long distance calls, as well as fax and Internet services, may be claimed as communication expenses. Gas for rental vehicles and parking fees, meanwhile, are considered as transportation expenses.

Incidental Expenses-Only

Because incidental expenses are small, it is very common for business owners and employees usually pay out in cash.  The minimal amounts involved in a tip, and the fact that there’s no need to issue a receipt for such expense, has prompted the IRS to set a rule when it comes to claiming incidental expenses during a business trip.

According to the IRS, a business owner or employee who was on a business travel can opt for the incidental-expenses only method in claiming a deduction. In this method, the taxpayer can write off incidental expense of $5 a day.

This method spares taxpayers from the hassle of keeping tabs of the costs they incurred for the tips given during the course of a business trip. Since tips are very small, it can be difficult for business travelers to keep track of the expenses they have incurred.

This method, however, can only be used when the taxpayer did not incur any meal expense.

Thus, a taxpayer cannot claim incidental expenses if he or she had and claimed meal expenses during the business travel.

Let’s cite an example.  Victoria was sent by his boss to a three day business trip to New York.  She incurred meal expenses during that trip.  She could have claimed half of the total amount of those meals under tax rules, but because she could not present the actual costs of the meals,  she just opted to claim a standard meal allowance.

Standard Meal Allowance

For 2016, the federal standard meal allowance is $51 a day.

Thus, Victoria can write off $153 for her meals during that trip. However, because she had claimed meal expenses as tax deductions, then she won’t be allowed to deduct $15 as incidental expenses.

If Victoria didn’t claim any meal expenses, then she can write off the $15 incidental expenses that she incurred during the trip.

By using the standard meal allowance, Victoria has practically claimed both meal and incidental expenses.

Victoria can receive this allowance if her employer does any of the following:

  1. Provides her with lodging, or furnishes it in kind.
  2. Reimburses her for the actual cost of lodging basing on the receipts presented
  3. Pays for the lodging
  4. Expresses reservations about Victoria incurring lodging expenses. This may be due to her having friends or relatives in New York, where she can stay with.
  5. Devise an allowance based on a formula similar to computing Victoria’s compensation like number of hours worked or number of miles traveled.

As mentioned earlier, the M&IE allowance of $51 applies to most small localities in the United States. However, a higher allowance applies to bigger cities like San Francisco, and yes, New York. As of 2017, the M&IE allowance for New York is $74.

There’s also a special standard meal allowance for those working in the transportation industry.  The IRS defines workers in the transportation industry as those who are directly involved in moving goods and people by various modes of transportation such as airplane, bus, barge, ship, or train.

Workers who are regularly required to travel away from their residence, and have to travel to different areas that are qualified for standard meal allowance rates, are also considered to be transportation workers by the IRS.

Those who are in the transportation industry get a standard meal allowance of $64 a day.

Claiming Per Diem

There are instances, though, when claiming the standard meal allowance or using the incidental expenses only method won’t suffice to cover the expenses incurred by a business owner or employee.

For example, what if Victoria had to shell out more than $30 in tips alone during her three-day trip?  She might have brought a lot of bags so that meant she had to give tips to the bellboy and porter. She could have even given the taxi driver a tip for helping her carry her baggage.

One way that Victoria can reimburse those expenses is to claim per diem or per day. Per diem is a daily allowance for expenses that companies give to employees on a daily basis to cover expenses when on a business travel.

Per diem rates cover the costs of lodging, meals, and incidental expenses incurred by an employee during a business trip. If Victoria opts to use this method instead of the incidental expenses only method and the meal and incidental expenses allowance, then she can get reimbursed not just for the tips that she gave but also for her meals and lodging expenses.

Claiming per diem also has one distinct advantage—it spares employees from preparing documentation required to support business travel expenses.  If Victoria opts for this method, then she no longer has to collect every receipt she gets during the trip. There’s also no need for her to note the time, place and purpose of each business meeting she attends. Moreover, she no longer has to hold on to those receipts and other documentation for two to three years, just in case the IRS calls in and questions her business travel deductions.

It can also mean faster reimbursement of expenses on the part of the employee, as there is no need to review and approve monthly expenses reports. It can also prevent processing delays caused by incomplete documentation, or when a supervisor inquires on the reasonableness of a claim.

Simply put, claiming per diem rate simplifies life for employees like Victoria.

However per diem rates aren’t paid to individuals who own more than 10 percent of the business. Thus, business owners cannot opt for this method in claiming tax deductions.

The IRS uses the high-low method in determining the per diem in certain areas in the United States.  Simply put, employees who work in areas like San Francisco, Boston, and Washinton D.C. have a higher per diem rate than those working in areas in the ‘low cost’ list.

For the fiscal year 2017, the IRS has set the per diem rate for high costs areas at $282. The breakdown is $214 for lodging, and $68 for meals and incidental expenses. This applies to all high cost areas within the continental United States.

Some of the high cost areas for 2017 are Los Angeles, San Francisco, Santa Monica, Santa Barbara, and San Jose in California; Denver and Aspen in Colorado, and Sedona in Arizona.

Chicago, Maine, Maryland, and Seaside in Oregon are other high cost areas as defined by the IRS. In Florida, cities like Miami and Fort Lauderdale are classified as high cost areas.

Other areas where the per diem rate is $282 for 2017 are Hershey and Philadalphia in Pennsylvania, Park City in Utah, Seattle in Washington, Jamestown, Middletown, and Newport in Rhode Island, and Virginia Beach and Wallops Island in Virginia.

For all other areas, the per diem rate is $189 with lodging at $132 and meals and incidental expenses at $57.

Compared to the previous year, the rates have gone up by $7 for high cost areas and $4 for the low cost areas.

Employers should take note that lodging and meal and incidental expenses are separated from each other. Thus under certain circumstances, they can only reimburse for the meals and incidental expenses of their employers. For instance, if Victoria’s company paid for her hotel or lodging then she is only entitled to a per diem reimbursement of her meals and incidental expenses.

In such case, she can only receive a reimbursement of $68 for M&EI as the lodging costs have been shouldered by her employer.

Exclusions

It should be noted that transportation costs and mailing costs aren’t included in incidental expenses. These include transportation between places of business and lodging, as well as mailing expenses incurred for filing travel vouchers.

The IRS states that the high-low method must be used by companies in reimbursing their employees’ travel expenses within the continental United States for the fiscal year. However, it is up to them to use permissible method when it comes to reimbursing their employee expenses for business travel outside of the United States.

Employers are also required to continue using this method for an employee in the last three months of the fiscal year.  This means that the same method utilized in the first nine months of the year should also be used for the final three months.

Conclusion

While tips extended to waiters, bellboys, and other servers are not as costly as meals and transportation expenses, the amount can quickly accumulate during a business trip. Fortunately for most employees, the IRS allows these expenses to be reimbursed either through the incidental expenses-only method, per diem, or the meal and incidental expenses method.

A Guide on Business Conventions: Why Professionals Should Take Part in One

In the age of social media where everyone can share information in a few clicks, some professionals may think they no longer have to attend an industry conference or seminar.

While social media channels, LinkedIn in particular, may have become popular platforms for information sharing and networking, the truth is that it is still a must for professionals to attend conferences, seminars, and meetings.

These events are usually short, typically 2 to 3 days. During that short amount of time, professionals like you can learn from several industry experts. Moreover, you can network with other people in your industry.

There are many reasons why you should attend an industry event, such as:

  1. Learn how industry trends are being implemented. In a typical business convention, top notch speakers and resource persons share the latest trends and how these are being used in your industry. They can enhance your knowledge base, and teach you something valuable that you can apply when you go back to your office.
  1. Meet new suppliers. Most professionals tend to shy away from business conventions because of the salespeople that introduce various industry products and services. But in truth, business conventions and conferences can introduce you to innovative products and services that you or your company may find necessary to stay competitive.
  1. Network with peers. Industry events provide the best platform for professionals to grow their network. They can learn best practices and referrals from competitors, especially those from other regions or countries.
  1. Free travel. For many professionals, their participation in industry events can give them the opportunity to get some much needed rest and relaxation. They can claim travel expenses related to their participation in a business conference or convention, from lodging to transportation to incidental expenses.

There is no shortage of business conventions that professionals can participate in. The following is a discussion of particular fields and some of the more notable meetings, conferences, and exhibits that professionals can join in.

Information Technology

The I.T. Industry is constantly evolving, so it is understandable why there are lots of business conventions held for people and organizations in this field. There are lots of technology conferences held all year round. The good news is that most of these events offer live streaming options, which augurs well for IT professionals who are too busy or those who have exhausted their travel budget.

The Google Cloud Next conference is one of the most highly anticipated events among I.T. professionals. This will take place in San Francisco from March 8-10 this year.  Google Cloud developers will benefit greatly from taking part in this event, what with Google CEO Sundar Pichai and Alphabet chairman Eric Schmidt expected to talk about Google’s initiatives this year.  The conference is expected to draw thousands of participants, who will see what the future of cloud development will be like.

Another highly anticipated business convention in the I.T. industry is the Bluetooth World 2017. This yearly, two-day conference is expected to draw more than 1,000 thought leaders to Santa Clara, California. It will showcase how Bluetooth technology is changing the world, and how the Internet of Things is making life easier for everyone.

Accounting

There are also lots of business conventions that accountants can take part in.  Perhaps the most prestigious of these is the MNCPA Tax Conference held yearly in Minnesota.  This is also one of the longest-running tax conventions in the United States, with its first staging held more than 60 years ago.   CPAs, CPOs, tax practitioners, and financial professionals looking to expand their knowledge of tax-related developments are encouraged to participate in this convention.

The American Institute of CPAs (AICPA) offers more than 60 conferences all year round. These events cover almost every topic there is in the accounting field. Some events are held simultaneously in multiple cities and most conferences can earn continuing professional education (CPE) credits for its participants.

One of the biggest events that the AICPA is holding is its CFO Conference. It will be held in Phoenix, Arizona this year, with hundreds of CFOs, CEOs, investment bankers, attorneys, chief audit executives, and academics expected to join.  The conference will tackle issues such as cybersecurity, strategic planning, risk management, and the current political, tax, and economic landscape in the U.S.

Engineering

Engineers also have tons of options when it comes to business conventions.  Engineering associations are usually at the forefront of these events, providing engineers with the opportunity to hone their skills, earn more certification, and be updated with the latest advancements.

Electrical engineers, for instance, can attend the International Solid-State Circuits Conference organized by the Institute of Electrical and Electronics Engineer. This year’s event held in San Francisco, California tackled developments in the Internet of Everything.

For mechanical engineers, the Mechanical Engineering Congress and Exposition is a prestigious event to take part in.  This is reputed to be the biggest interdisciplinary mechanical engineering convention in the world.  It has been going on for more than a century now, with the first meeting in New York held in 1880. For some historical perspective, this is also the same convention when Willis Carrier presented his concepts on air conditioning back in 1911.

This year’s Mechanical Engineering Congress and Exposition will be held in Tampa, Florida.

Academe

Conferences and education events for members of the academe are designed to provide educators with tried and tested strategies in connecting with students, connect with peers, and bolster their practice.

One of the biggest gatherings of educators in the United States is the International Society for Technology in Education (ISTE) Conference. In 2016, the conference had more than 18,000 participants composed of educators, school leaders, policy makers, tech coordinators, school administrators, and library media specialists. This year, the organizers hope that the event will have more attendees. The event is scheduled to be held in San Antonio, Texas.

The ASCD, meanwhile, organizes its annual conference called Empower. It is designed not just for teachers but also principals, school superintendents, instructional coaches, and central office staffer. This year’s conference scheduled in Anaheim, California has more than 200 sessions on deck.

There are also certain conferences held onboard cruise ships. The International Interdisciplinary Business-Economics Advancement Conference, for example, will be held at the Navigator of the Sea, a five star luxury cruise ship. The cruise will depart from Miami, Florida and stop at the Bahamas and Mexico before returning to Miami.

The conference is expected to attract scholar students, scientists, and researchers who will share their insights on business and economics.

Sales & Marketing

With the Internet changing the way people buy products and avail of services, it is not surprising that many business conventions geared towards professionals in the sales and marketing field are focused on e-commerce.

One event, Brand Innovators Summit, is conducted in multiple cities across the US throughout the year. These summits teach sales and marketing professionals and entrepreneurs how the best brands are using digital media to promote their products and services. Topics range from content marketing, monetization, and enhancing customer experience.

Mozcon Local is similar to the said event as it teaches sales and marketing executives how to use digital media, particularly local marketing and search engine optimization.  Participants will learn tips and tricks for optimizing their websites and make them rank higher on Google.

Adobe, a popular creative product, also holds its own conference. The Adobe Summit is scheduled in March, with participants converging in Las Vegas to learn how to create engaging content viewable across various devices.

Another event that sales and marketing professionals should consider joining is the Social Media Marketing World set sometime this March in San Diego. The event promises to impart some distinctive social media marketing techniques from industry leaders.

Finally, Ragan’s Social Media conference to be held at Disney World will teach attendees when and how to implement various social media techniques. This event will also impart knowledge like building a social media following, strengthening online communities, and tapping key audiences.

 

Healthcare

One of the fastest growing industries in the world, the healthcare sector has hundreds of trade shows and conventions held in various parts of the globe. These conventions are attended by medical professionals, researchers, medical technology suppliers, among others.

Arab Health is one of these events. It is considered to be the biggest healthcare exhibition and medical congress in the Middle East, and the second biggest in the world.

This event attracts more than 4,400 companies that proudly display their latest innovations.  The event aims to promote and improve healthcare services in UAE and nearby territories.

Another event that attracts many healthcare professionals around the world is the Digital Health Summit.  This event, which was most recently held in Las Vegas, tackles the substantial role that technology has in advancing medicine.

The Government Health IT Conference and Exhibition, organized by the Healthcare Information and Management Systems Society (HIMSS), is another big event that attracts thousands of healthcare workers. The event particularly is geared at healthcare IT workers, with the most recent staging focusing on how the new administration will impact the healthcare sector.

Business Leaders and Entrepreneurs

Business leaders and entrepreneurs also have lots of choices as far as business conferences and conventions are concerned.

One of the biggest and most prestigious is the CEO Space Forum, which its organizers have dubbed as a business growth accelerator event.  Participants can learn many things from the event’s resource speakers like traditional funding, strategic planning, leadership, business finance, among others. This year’s gathering will happen in Orlando, Florida and run for five days.

Young professionals, or those who belong to the Millennial generation, are the target participants of the Next Gen Summit.  This event is relatively young, with its first meeting held in 2015. It is backed by partners such as Uber and Verizon.

What’s impressive with this business convention is that it has grown exponentially in the past two years. In 2016, there were more than 500 attendees. More than 10 venture capitals were supported by $1.6 billion in capital.  This year, the organizers hope to bring in a minimum of $3 billion in capital funds.

Aspiring entrepreneurs as well as bosses of start-up businesses should also check out the Start Up Conference 2017.  This is one of the biggest entrepreneur events in Silicon Valley, attracting more than 2,000 businessmen.

As the name suggests, this conference caters mainly to entrepreneurs looking to jumpstart their startup enterprises.  Topics include pitching venture capitals, finding co-founders, promoting a product, and reaching influencers, among others.

Media and Creatives

With social media taking over the world, media practitioners will learn a lot from business conventions. Events like the Print and ePublishing Conference slated this June in Chicago, for example, will teach them how to deliver the best content that’s accessible across all platforms. The BlogHer conference, meanwhile, attracts women bloggers and promotes economic empowerment and education. This conference is open to all bloggers, and provides a good platform for networking.

A similar event is Blogcademy held in multiple cities. This two-day blogging conference and worship teaches participants how to improve their content, so they can earn more from their blogs or websites. It can also teach them how to secure book deals and other publishing agreement.

Web designers, art directors and those in the creative field may also get into courses like Future of Web Design workshop. Scheduled this April in London, said workshop is expected to be participated in by engineers, web developers, and designers.

 

There is no denying that there are a lot of business conferences, seminars, workshops, and similar events that professionals can participate in. These events are all geared towards updating the skills and knowledge of participants, provide a venue for networking, and in some instances, allow attendees to earn continuing education credits.

Professionals should be wise enough to attend these events, as this won’t only help in advancing their career. They can get the chance to travel for free, as they can claim their expenses as deductible in their next tax returns.

Filing Your Indian Tax Return When You Are Residing in the U.S.

It has often been a question for many Indian citizens living in the U.S. whether they should file their Indian Income Tax Return or not. Actually, taxability in India is predominantly based on your residence, not on your citizenship. Hence, you have to identify your residential status first before you determine if you are liable to file your Indian ITR.

So how do you determine your residential status?

Basically, your residential status depends on the length of time of your physical stay in India within a given financial year. It helps if you check your passport and take note of the immigration stamp dates, including the dates of departure and arrival.

If you meet any of these two criteria, then you are considered an Indian resident for a financial year:

  • You reside in India for at least six (6) months, or 182 days, during the financial year
  • You have stayed in India for at least 60 days or 2 months in the previous financial year

If you do not meet any of the above-mentioned criteria, then you are considered an NRI (non-resident Indian). As such, your Indian income tax largely depends on the income that you earn in India for the entire financial year. On the other hand, if your status is “resident,” then your global income is taxable in India.

If I am living in the U.S., do I still need to file my Indian income tax return?

Yes, but on certain conditions.

Just because you are an NRI does not necessarily mean that your obligation to file your tax returns in India is no longer there. In fact, as July 31st of every year–which is the deadline for filing returns–looms, you must already be gearing up to file your returns if your income in India goes above the basic exemption limit.

Any salary you receive or earn in India, including income from a residential property located in India, income coming from fixed deposits or interest on savings bank account, as well as capital earnings on the transfer of properties in India, are just some of the many examples of income accrued within India. Such incomes are taxable for an NRI. It follows then that any income earned outside the bounds of India is not taxable in India.

It is also important to note that any interest you earn on an NRE account and FCNR account is free of tax, while interest on an NRO account is taxable for an NRI. Simply put, if you are an NRI and you have performed your job in India, your salary income will be taxable in India, regardless of where your salary is credited to your account. On the other hand, if you have worked abroad but have received your salary in India, then your salary will be included in your taxable income in India.

 When does filing my Indian income tax return become mandatory?

The question of whether you should file your Indian income tax return or not is irrespective of your being an NRI or not. If you have lived in the U.S. long enough to be considered an NRI but still have income coming from India, you are required to file your Indian income tax return when your income exceeds the basic exemption limit. As an NRI, filing your income tax return in India is mandatory in the following cases:

  • The total of your taxable income from all sources goes above the basic exemption limit of Rs 2.5 lakh.
  • You have either long term capital gain (LTCG) or short term capital gain (STCG) from selling your investments or assets in India, even if your income goes below the exemption limit.
  • You wish to claim a tax refund, in cases when TDS has already been deducted.

Are there tax deductions available to NRIs?

NRIs are also entitled to tax deductions, just like ordinary Indian residents. Most of the common deductions under the Chapter VIA of the Income Tax Act of India are available whether you are a resident or not, except for those that have to do with maintenance, treatment of disabled dependent, medical treatment of certain diseases for both self and dependents, as well as specified investments like five-year post office deposit, senior citizen savings scheme and investment in Rajiv Gandhi Equity Savings Scheme.

If I am in the U.S., can I also enjoy the benefits of the Double Tax Avoidance Agreement (DTAA)?

 Currently, India has a DTAA with around 90 countries around the world, and one of them is the U.S. As an NRI, one of the first things that you need to determine is whether your income is taxable in India. Then, if you are living in the U.S., you must furnish a tax residency certificate (TRC) issued by the tax authorities in the U.S. Aside from that, you may also have to provide a self-declaration by filling out Form 10F.

Getting relieved under DTAA depends on your type of income. In fact, under the DTAA, certain incomes may be entirely exempted or may be taxed at a lower rate. If under this agreement your income is taxable, then you are required to pay your tax in India and claim credit for your paid tax in the U.S. against the tax liability in your home country.

For you to claim a lower tax rate under the agreement, being an NRI, you must have provided your PAN number earlier on to avoid being charged with higher withholding tax  of 20 percent, as stipulated in Section 206AA. Under rule 37BC issued by the Central Board of Direct Taxes (CBDT), NRIs like you are allowed to furnish alternative information or documents instead of PAN so as to avoid high withholding tax. These include your name, email, address, contact number, TIN and TRC.

But how do I file my Indian income tax return if I reside here in the U.S.?

 If based on the abovementioned standards you have figured that it is mandatory for you to file your Indian income tax return, then make sure to do it in advance to avoid penalties. Just because you reside in the U.S. does not mean you have to go back to India to file your Indian income tax return. Today, there exists a process of electronically filing your returns, allowing you to do your job without having to physically go to India.

Now, take a look at the following tax filing process for NRIs like you.

 Step 1: Choose your method.

NRIs have different methods to choose from when filing tax returns. You may do it yourself online, avail of assisted services, or follow the traditional route of chartered accountant.

Do it online (E-filing)

Today, filing tax returns online is the easiest and most convenient method for NRIs. In fact, the Indian Income Tax office is now making strides towards making this method the most viable option for Indians filing their returns from anywhere around the globe.

You have certain options when it comes to e-filing. First, log on to the income tax website and file your returns there. While this option is free, the whole process may be cumbersome for you and really need to have some technical know-how to go about the process. Under this option, you need to download a certain software to get hold of the appropriate form, fill it out and upload an XML file on the website. If you have a digital signature, affix it on the form and that’s it. Your return is filed. In case, however, that you do not have a digital signature, then you will have to send a signed copy of your ITR-V.

Here are the steps:

  1. Log on to IncomeTaxIndiaeFiling.gov.in and register.
  2. Your user ID is your PAN.
  3. View your Form 26AS. This is your tax credit statement.
  4. Select the financial year.
  5. Download the ITR form that applies to you.
  6. Open the excel utility and fill out Form 16.
  7. Click the “Calculate Tax” tab and check your tax payable amount.
  8. Fill in the details and pay your tax.
  9. Click the “Validate” tab to confirm all the information you have provided.
  10. Generate an XML file and save it to your computer.
  11. Upload the same XML file by clicking on “Upload Return” on the panel.
  12. Sign the file digitally by selecting “Yes” on the pop-up.
  13. Download the acknowledgment form or ITR-V that will be generated by the site. Print it and sign it in blue ink.
  14. Send the form either by ordinary or speed post to the Income Tax Department office in Bangalore, 560 100, Karnataka, India within 120 days of your e-filing.

Your other option for e-filing is logging on to tax-filing service websites. The web is teeming with sites that offer tax filing services, the most popular of which include taxspanner.com and elagaan.com. Compared with the income tax website, such online tax filing service providers offer a more user-friendly experience to NRIs like you, though you have to pay a certain amount of fee for their services. Some of them even have support offices in certain countries.

Tax filing service websites offer various packages, and the one you should choose should depend on the complexity of your Indian income tax return. The first thing to do is to register on the website and follow the process of filing, which is pretty much like the process for Indian residents. For overseas filers like you, you can send your payment via your international credit card. Usually, the regular packages of these sites range between Rs 250 and Rs 750.

Assisted Return Preparation

If you do not want the do-it-yourself method in filing your tax returns online, you may opt for certain websites that offer a mix of offline and online filing services. If you want this method, you can search for websites that offer such services, choose one, and call the nearest office of the service provider of your choice. Once you decide to avail of their services, they will do the entire tax filing process through email. All you have to do is just send them scanned copies of all the required documents and they will do the filing for you. They will also send you a copy of the ITR-V, which you need to sign and send back to their office. They will then be the one to forward the document to the income tax office in Bangalore. Rates of such service providers depend on the complexity of your tax returns.

The best thing about this option is that you have the benefit of getting professional advice from tax consultants. However, not all service providers of this kind offer complete online assistance, so you really have to be careful in choosing your provider. As a rule, the one you should choose must heavily depend on your needs.

Talk to a Tax Consultant in India

Of the three options you have, this one is the most traditional one. If you take this route, you depend on your chartered accountant or tax advisor in India to file your tax return on your behalf. The advantage of choosing this method is that since you already share a long-term tax advisor-client relationship with each other, he has all your necessary tax information and will certainly be able to guide you through the entire process. The only problem you may have if you choose this method is that you have to make sure that the tax advisor of your choice is accessible and tech savvy enough to be relied on.

Step 2: File your tax returns.

To file your tax returns, make sure that you are able to complete the entire process of filing. Should you wish to do it online, choose a website that offers e-filing services and fill in the details on that website. If you opt for assisted services, send your documents to the service provider who will then complete the filing process on your behalf.

Step 3: Sign your returns.

When it comes to this, you have two options. First, you may purchase a digital signature, although that is not a popular option since it is cumbersome for both the filer and the Indian Government. The other potion is to print out the ITR-V, also known as the acknowledgment, sign it and send it to India’s income tax office in Bangalore. Take note, however, that this acknowledgment document can only be sent via regular or speed post. So if you are sending it from the U.S., then it is best to avail of the regular postal service or courier it to anyone you know in India who can send it via post to the tax office.

Deducting Your Trip To India – Detailed Business Expense Guide

Suppose that you have just arrived from a two week trip to Europe, where you were able to close some deals while visiting some old friends. You’re so happy not only because you were able to snag more business, but you were able to bring home some souvenirs for your family and friends. And of course, you were able to squeeze in some time for relaxation and got to see top sights like the Big Ben and the Eiffel Tower.

But did you know that you can even reduce your next tax bill by declaring your recent trip abroad? Indeed, jet setting can save you a significant amount of money, but only if expenses satisfy certain conditions.

Business Related Travel Expenses are Tax Deductible

According to the Internal Revenue Service (IRS), you can deduct ordinary and necessary expenses for travel away from home or business as long as these are connected with your business or job. This applies to both domestic and international travel.

What are ‘ordinary’ expenses? The IRS defines this as a common or accepted expense in your trade or business. For instance, you can consider the costs associated with distributing promotional literature like newsletters and holiday cards as ordinary expenses.

On the other hand, a necessary expense is defined as something helpful and appropriate for your business or work.  Your business trip, which allowed you to close new deals, can be considered as one.

The IRS says that for travel to be considered deductible, it should be ‘away from home.’ This stipulation is almost always  satisfied for international travel. The IRS will consider  you to be away from home if you are on travel outside your tax home (where you live or work)  for a time longer than a typical day’s work.

Keep in mind, though, that eligible deductions for business travel are only for temporary work on the road. If you spent more than a year on the road for a business travel, then it is considered an indefinite assignment and thus doesn’t qualify you for a tax liability. Even short assignments to the same place during a fiscal year may be considered by the tax authorities as an indefinite assignment.

Eligible Business Travel Tax Deductibles

Now you may ask—what are the travel related costs that you can normally deduct on your tax bill?

Among the travel related costs that you can deduct on your next tax bill are:

  1. It doesn’t matter whether you travel by plain or car; you can normally reduce the expenses related to getting to and from a business destination as long as it is not close to your tax home.

For example, you took a cab to get from the airport to the hotel where you met your client. You can deduct the cab fare as a work-related transportation cost. You can also declare car rentals, and even costs incurred when you took your own car (gasoline expenses, parking and toll fees, for example.) You can even claim the expenses of operating and maintaining a vehicle such as repairs, washing, oil change,  and tire replacement as tax deductibles.

What if your client provided you with a free ticket? Or a friend in London gave you a ride? Obviously, you can’t declare these as deductibles.

But what if you took an ocean liner on your way to London? Can you also deduce the costs on your next tax bill?

The IRS has special rules when it comes to luxury water travel. There is a daily limit on the amount that you can deduct. The amount varies depending on the time of the year. It is typically 200% of the highest federal per diem rate allowable during the time of your travel.

For instance, the highest federal per diem for the period January 1 to March 31 is $428. The daily limit on luxury water travel is double that amount, which is $856.

So let’s say that your total bill for a five-day cruise to London from New York for a business travel conducted in February is $5,000. You can only claim $4,280 as your deductible because you exceeded the daily limit of $856 per day.

  1. Shipping and Baggage. You can also deduct expenses that you incurred for shipping almost anything you need for your business or job while on travel. For instance, the $100 bill that you incurred for sending props or other materials required for a presentation.
  1. You can also deduct the full cost of the hotel room or other accommodations if your trip is overnight. Thus, you can reduce a $7000 per night stay at The Savoy on your next tax bill.
  1. You can deduce up to half of the cost of your meals if you are traveling for business. However, the meals should not be lavish or extravagant. There’s no clear-cut definition for a lavish or extravagant meal, but you can expect to get audited if you claimed a meal consisting of lobster and champagne as a deductible.
  1. You can also deduct any communication-related expenses like phone calls and faxes while you are traveling for business. This also includes international calls.
  1. Cleaning – this includes expenses for washing and ironing your clothes during the trip. Because you have to be presentable during your meetings with clients, right?
  2. Tips— you can also deduct the tips that you handed out to waiters, bellboys, and other workers.

Travel Considered Entirely for Business

The IRS maintains that only foreign travel which is spent solely for business is fully deductible. This means that if you spent your entire stay abroad on business-related activities, then you can claim all your travel expenses as tax deductible.

Since you did go spend time visiting friends and sightseeing during your trip, then you’ll have to allocate between tax deductible business expenses and the non-deductible personal ones.

But let’s face it–you do want to deduct the entire cost of transportation during your entire trip abroad, right?  You can deduce your travel expenses even if you didn’t spend the entire trip on business-related activities if you meet any of these conditions:

  1. You don’t have substantial control. According to the IRS, you don’t have substantial control over your trip if you are not a managing executive, or you are not related to your employer. The IRS defines a managing executive as an employee who has the authority and responsibility to decide on the necessity for business travel.

You also don’t have substantial control if you are merely an employee who was ordered by your boss to go to say, Paris, for a business trip.

But if you’re self-employed, then you might not satisfy this condition at all.  The IRS maintains that self-employed individuals and business owners have substantial control over arranging their business trips.

  1. You were outside the US for less than a week. The IRS will consider your travel entirely for business if you were out of the country for a week or less. However, you will have to count the day you return to the US, and not the day that you left.

This can get a bit confusing if you were traveling to different parts of the US before you left for London. For instance, say your home is in Denver. You left for New York on Tuesday, stayed there for a few days for a series of meeting, before flying to London on Saturday morning.

You had several business meetings in London on Sunday and Monday, then spent the next two days sightseeing. You went back to the US on Thursday before going back to Denver on a Saturday.

Although you were away from your home for more than a week, you were out of the US for less than a week. Remember that the IRS won’t count the day you left your home.

So, you may be able to claim the costs of your stay in London from Saturday and Sunday, but you won’t be able to do so for Tuesday and Wednesday.

  1. You spent less than a quarter of your travel on personal activities. But what if you spent more than a week outside the US? Does this mean that you can’t claim that as business related, and thus make you unqualified for tax deductibles?

You can, as long as you spent less than a quarter of your trip on personal activities.

So let’s say that you spent 14 days in London, and only got to see the sights and visit your friends in 1 to 2 days. You deduct the cost of the round trip plane fare, cost of meals, lodging, and other related expenses as mentioned earlier.

  1. Vacation was not a major consideration in arranging the trip. You can claim deductions on your tax bill if you can prove that a vacation was not a major consideration in arranging the trip.

Tips in Filing Business Travel Expenses

Now that you have an idea which business-related travel expenses you can claim as a tax deductible, here are some tips that you should remember so that you will be able to maximize your savings the next time you file your tax returns:

  1. Keep track of all your receipts and records. You can save a lot of time in looking for receipts when you keep every slip that you get during the course of your travel. You should also write on the back of each slip the location and date, the name of the person that you met, as well as the reason of the expense. This way, you won’t have to scavenge for slips when it is time to file your tax returns.
  1. Document everything. If you’re taking a client to a fancy dinner, you can claim that as a deductible. But you should be able to justify to the IRS that the nature of the meeting warranted such a fancy dinner. Thus it is recommended that you document the business you discussed so that you can justify the claim or pass an audit.

If you attended conferences or meetings while on travel, it would be a good idea to keep the programs or brochures you received. You can also keep the emails sent to you by people whom you met during the business meetings as proof to back up your claim.

Make it a habit to write down the names and business relationship of all the people you met during your travel. Write down their names as well as the business discussed.

You should also know that the IRS does not require receipts for travel expenses less than $75. So if you checked in a hotel for an overnight stay at a discounted price of $70, you’re not obligated to show the actual receipt.

  1. Try apps. If you have too many documents to keep track of, you might want to download and use apps for travel expenses. There are apps such as Tax Tracker that can help you in documenting business and travel expenses.

Mobile apps can monitor your travel expenses, time spent on the road, and miles traveled so you can file taxes and claim deductions quick, easy, and accurately.

  1. Be honest. The best way to avoid a date with the IRS is to be honest about declaring your tax returns. Deduct only the expenses that you are entitled to. Keep all supporting documents just in case you are called for audit. Remember, you not only end up losing deduction but also pay additional tax, interest, and penalties if the tax authorities find out that you make unsubstantiated claims.

Worse, the IRS may subject your tax return to further scrutiny. And you don’t want them to start digging.

The bottom-line is that you can make a lot of exemptions when you travel abroad for business purposes. Now that you know which travel expenses you can deduct, start saving those receipts and recording every expense. You’ll be surprised at the amount that you can save during the tax season.

Understanding the Complexities of Capital Gains Tax in India

A few years ago, Aarav inherited a parcel of land from his parents.  Since he lives in the city and has no plans of going back to his hometown, he decides to sell the land. He then uses the money to buy an apartment right in the heart of the city.  It took almost three years for Aarav to buy the apartment after selling his inherited property. He falsely assumes that there is no tax liability in his reinvestment. After some time, he finds out from a tax consultant or worse, from the tax authorities, that he will have to pay tax on the capital gained from the sale of his inherited property.

It may have occurred to Aarav that the property he received is not subject to tax. This is true. In India, any asset that is received as an inheritance is fully exempt from gift tax. So he’s not obligated to pay any tax upon receipt of the parcel of land from his folks.

But the sale of the asset is not exempted from tax. This is taxable under capital gains.

In India, it is not uncommon for taxpaying individuals like Aarav to inherit properties such as land or house from their families.  And just like what Aarav did, these individuals would sell the property and invest in another property at some point in time.

However, it is also common for many people in India to be unaware of tax laws regarding inherited properties like land and house, as well as the tax stemming from the sale of those properties. They would only know of the tax liabilities they have when notified by the tax authorities, or as in the case of Aarav, when informed by his tax consultant or a chartered accountant.

It is thus very important for individual taxpayers in India to know of these laws especially if they are to inherit a property from their families.

What is Capital Gains?

In the case of Aarav, he failed to realize that he had to pay the capital gains tax from the sale of the parcel of land that he disposed of.  By definition, capital gains is the profit that Aarav got when he sold the capital asset (in his case, the parcel of land) for a price higher that the purchase price.

Capital assets are property held in any kind by the taxpayer. It may be a parcel of land, a building, a house, or a vehicle. Leasehold rights, trademarks, patents and even jewellery may be considered as capital assets as well.  In certain cases, capital assets may include rights of management to any Indian company.

Thus, capital gains tax not only applies to the sale of an inherited house or parcel of land. It can also apply to the sale of a vehicle, patent, and jewellery.

Capital assets are classified into two – short-term capital asset and long term capital asset.

In Aarav’s case, the sale of the inherited land took him 35 months after the date of the transfer into his name. As such, it is considered short-term capital asset.

If he had disposed the property a month or so longer, it would have been treated as long-term capital asset.

Under the Indian tax laws, the following aren’t considered capital assets:

  • Stock in trade
  • Consumable stores or raw materials
  • Personal effects
  • 5 percent gold bonds
  • Gold deposit bonds
  • Special Bearer Bonds 1991
  • Agricultural land in a rural area. As of AY 2014-15, rural area is defined as any area outside the jurisdiction of a municipality having a population of 10,000 or more.

Calculating Capital Gains

Short-term capital gains and long-term capital gains are computed differently.

Long term capital gain is computed as the full value of consideration fewer expenditures incurred wholly in connection with the transfer of the capital asset. This includes brokerage, commission, and advertisement expenses, among others.  Indexed cost of acquisition and indexed cost of the improvement, if any, may also be deducted.

Full value consideration pertains to the amount that the seller agrees to get in exchange for his or her capital assets. It should be noted that capital gains is chargeable to tax in the year of the transfer.

t of acquisition pertains to the amount for which the capital asset was acquired by the seller. Cost of improvement, on the other hand, pertains to the expenses incurred to make improvements to the capital asset. However, all, improvements made before April 1, 1981 won’t be taken into consideration.

 

On the other hand,  short term capital gains is computed as the sales value of the asset less expenses incurred related to the transfer of the capital asset.  Cost of acquisition, or the purchase price of the capital asset, as well as cost of improvement, may also be deducted from the sales value of the asset.

 

Cost of acquisition pertains to the amount that any of the previous owners has paid to acquire for the property. Going back to Aarav’s case, let’s say that his grandfather was the original owner of the parcel of land. He had purchased it for Rs 20,000. This will be the cost of acquisition that Aarav can deduct to arrive at the short-term capital gains tax.

 

It can be said that calculation of long term and short term capital gains is basically the same. The only difference is that in calculating long-term capital gains, the cost of acquisition and improvement is indexed, or adjusted for inflation.

Short term capital gains on the sale of a property are taxable per slabs rates as applicable to the individual taxpayer. This means that the capital gains tax is payable at the same rate as the income tax of the tax payer.   In Aarav’s case, the capital gains would have been taxed at a rate of 25 per cent if he falls under the 25 per cent bracket.

On the other hand, long-term capital gains are taxable at a uniform rate of 20% plus surcharge and education cess.

Exemptions Under Income Tax Act

However there are exemptions on capital gains that can be applied as specified under certain sections of the Income Tax Act of 1961.

Going back to Aarav’s case, if he had used the proceeds arising from the sale of his inherited property, then he could have been exempt from paying capital gains tax.

Section 54, for instance, exempts sale of house property on the purchase of another house property. In this case, the capital gains arising from the sale of a house property is used in buying another house property.

The new property should have been purchased a year before the sale of the inherited property or two years after the sale of the property.

Going back to Aarav’s case, if he had bought the property he now has in the city within two years after he sold his inherited land, then he would have been able to apply for this exemption. Or, if he had bought the house a year before he was able to dispose of the parcel of land he inherited from his family.

Also, he could have been exempt from capital gains if he used the gains in the construction of the property that was completed within three years from the date of the sale of the inherited property.

It should be noted that under this section, only one house property can be bought or constructed using the capital gains to claim the exemption. The exemption can be nullified if the new property is sold within three years of its purchase or construction.

Investing in Bonds

Under Section 54EC, exemption is available when the capital gains from the sale of the first property are reinvested into specific bonds. These bonds are issued by the Rural Electrification Corporation and the National Highway Authority of India. Investment in these bonds should be up to Rs.50 lakhs.

The money that Aarav invested in bonds should be redeemed after three years. However it cannot be sold before the lapse of three years from the date of sale. Aarav should have invested the money he gained from the sale of his inherited land within six months after the sale of the property to have been able to claim this exemption.

The tax exemption is equal to the capital gain or to the investment, whichever is lower.  Transferring the bonds or taking a loan against them within three years is forbidden, though. It can result to the capital gain becoming taxable.

Investing in these bonds would yield a return of 5.5 per cent interest in a year.

Capital Gains Account

Aarav could have also invested the money that he had gained from the sale of his inherited property in a Capital Gains Account. This is specified under the Capital Gains Account Scheme. Aarav could have deposited the money in any public sector bank. The deposit can then be claimed by Aarav as exempted from capital gains. Moreover, he won’t have to pay any tax on it.

However, Aarav should have done this before the deadline for filing tax returns which usually is on July 1. The money deposited in the account should only be used in buying or constructing a residential house within the prescribed period.

There are two kinds of capital gains deposits in the market. One is a savings type account while the other is terms deposit. Any individual taxpayer can transfer money from one account to another by paying fixed penalties or charges in a bid to exempt his or her capital gains against tax.

In the savings deposit type of capital gains deposit, the money can be withdrawn as long as there is a declaration that the money will be for the construction or purchase of a house. The money will have to be used for the declared purposes within 60 days. Any unutilized amount will have to be re-deposited into the capital gains account as well.

As far as interest rates are concerned, capital gains deposit will have the same rates as those on regular savings and term deposits. There’s also tax for the interest earned. Proof of deposit has to be attached with the taxpayer’s income tax return.

In the event that the deposited amount is not fully used to buy and construct a new house at the end of the three-year period from the sale of the asset, the money in the account will be treated as capital gains.

Opting to open a capital gains account should be considered only as a stop-gap measure.  The individual taxpayer will eventually have to use the money to buy or build a house within a specified period.

Other Exemptions

There’s also an exemption specified under Section 54B of the 1961 Act. This specifies that short term or long term capital gains are tax exempt when the proceeds are used to purchase new agricultural land. The purchase should have been consummated within two years after the sale of the inherited property. Also, the agricultural land should not be sold within 3 years from the date of its acquisition.

Under Section 54G, exemption is also allowed if the gain is reinvested in acquiring a building or machinery in a rural area. There’s also exemption allowed if the gain is used in acquiring land, building, or machine in a Special Economic Zone as specified under Section 54GA.

Conclusion

The truth is that computing capital gains tax on the sale of a property, whether it is inherited or not, can be very tricky.  It is thus highly recommended that tax payers who acquire a property and then sell it later on consult a tax expert or chartered accountant.

As shown in the case of Aarav, he would not have been caught surprised and unaware of his tax obligations had he consulted a tax expert or accountant before he sold his property and bought a new house. This only underscores the need to get professional advice especially when dealing with real estate.

tax audits

Dealing with IRS and other Tax Audits

It’s one of those fears that bog the minds of rich people and even ordinary taxpayers—getting audited by the IRS. But what are the chances that you’ll be audited by the government for your tax returns?

The chances of a tax audit are very low these days. Taxpayers with moderate income levels have a 1 percent chance; while those earning $1 million and up were audited at a 7.5 percent clip.

For companies, the rates are also low. Firms with total assets of less than $10 have a 1 percent chance. Those with assets between $1 and $5 million have a 1.2 percent rate, while firms with asset size of between $5 and $10 million have a 1.9 percent chance of being audited. Even the middle-sized firms or those with assets between $10 and $50 million had a low 6.2 percent chance of being audited.

Sure, the chances of getting a visit from the IRS have shrunk to all-time lows. But that should not be enough reason for you to be complacent. It still pays to know what to do just in case someone from the IRS knocks at your door or you get a letter from the said agency.

Individual Tax Audit

You may not be a millionaire but there are conditions that can increase your risks of being visited by the IRS:

• Being self-employed. There are lots of write-offs that self-employed taxpayers can claim, unlike most employees. These range from a home office to the use of a car, and the IRS may have queries about these claims.
• You have itemized deductions that are a lot higher than those of taxpayers with comparable incomes. The tax department will likely flag your return when it notices that there’s a big difference between your write-offs and averages.

Should you get a notification that you are to be audited, don’t panic. Keep in mind that the audit will be done in a professional manner. And if you can give the IRS people the right paperwork then you will be off the hook, so to speak.

You must not also think of ignoring the IRS. Your problem won’t go away. Worse, your interest and penalties will continue to accrue. So the earlier you deal with it, the better.

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Types of Audit

There are three types of audit. The more common is correspondence audit, which is handled by a way. According to the Transactional Records Access Clearinghouse, 76 percent of individual audits were of this kind.

These computer-generated correspondences may tell you that there was a mathematical error on your return, or that your return wasn’t the same as the 1099 statements that the IRS received from your bank or broker. In these cases, you simply send the money that you owe.

The letter may also dispute a tax break that you claimed. If you can’t prove that you were correct, then you will have to pay additional taxes.

But what if you’re right? You’ll have to collate the right paperwork then send it back to the IRS through certified days within 30 days of receipt of the letter. You’ll also have to prepare a letter that includes a copy of the correspondence audit plus your reference number.

In some cases, you imply have to go back and get receipts. But there are cases when you can’t do that. Instead, you may have to get a written acknowledgment from the charity that you gave to in order to claim a charitable contribution.

This is a task that you can handle yourself, especially if the issue is simple enough to reply to. You may ask a tax pro to help you out, but you’ll obviously have to pay him or her for the service

If you feel you are deserving of the tax break but you want a stronger case or reply to the IRS, a tax professional can be of significant help. He or he can prepare your return respond to the agency, and give you a better shot at defending your case.

The second type is field audit, which is conducted in person at your home or at IRS offices. However, the chances of an IRS guy dropping by your home are very low these days. The agency is no longer conducting a lot of field audits because these often mean additional expenses.

This type of audit is conducted when the IRS has lots of questions about your return. The agency may also resort to this type of audit when there is a certain write-off that is difficult to handle by mail.

The field audit in an IRS office shouldn’t last more than four hours. However there will likely be a follow-up visit, or the agency would require you to pass additional paperwork.

The last type is the ‘random’ audit. Among the three types of audit, this is the least likely that the IRS will conduct. You have a very slim chance of being selected for this audit.

But then again, it pays to be prepared.

The random audit is perhaps the most detail-oriented and intrusive of the three types of audit. IRS agents may even ask for your birth certificate and marriage license just to check your filing status.

This is also the type of audit where a professional expert can help you. There’s a good chance that something will happen at the audit that can cause the agency to demand you to pay more. With the help of a pro, you’ll be ready just in case the proverbial can of worms is opened.

Attitude During the Audit

Whether you are going to the IRS office or accompanied by a tax pro, you need to behave professionally during the audit. Don’t become argumentative, and treat the agents with respect.

Be honest and truthful with your answers. But you should also answer straight to the point. Avoid talking too much because the more you talk, the more questions that the agency will have.

You should also come to the office prepared and organized. You don’t want to upset the agent with your messy folder and jumbled receipts.

If you are unable to provide the document the agent is looking for, politely ask if there’s any other documentation that you may provide in lieu of the document. For example, you claimed the business use of a vehicle but couldn’t show receipts for gas. Maybe a calendar of your business meetings may be accepted as a substitute.

You can go through the appeals process if you disagree with the contention of the agent. This is where a tax pro can help you as he or she would be able to handle this step.

So what happens if you have to pay the IRS more money but you don’t have cash? You have three choices—one is to pay with a credit card, although you will have to pay a convenience fee of around 2.35 percent. You can also for an installment agreement or request for a compromise.

Business IRS Audits

Again, the chances of a business getting audited by the IRS have gone down in the past few years. But this still should not give your company a false sense of security.

What are the possible issues that the IRS will look into your company’s tax returns? Here are some of the red flags that should make the IRS agents knock on your door:

1. Net loss in more than two of the past five years.
2. Excessive deductions for travel, business meals, and entertainment
3. High salaries paid to shareholders
4. Shifting income to tax-exempt organizations in a bid to avoid payment of taxes
5. Claiming 100 percent business use of a vehicle

Like in individual tax audits, it is important for a business to be prepared if it has been picked for an audit. There’s a silver lining to being audited, as if the agency’s findings show that there is no change to the tax liability then the business won’t be audited on the same issue for the next year.

Hiring a tax professional is the first step that you need to undertake if your business has been pinpointed by the IRS for auditing. Don’t be anxious in thinking that this will indicate that your business is guilty, after all, the IRS is very much used to this practice. A tax professional can help you through the audit.

You can even sign a power-of-attorney agreement to give your tax professional the legal authority to deal with the IRS directly. This is ideal if you are unsure of what to say and what not to say during the audit. This basically takes you out of the loop and puts your tax professional in.

But there are three things that you, as the business owner, should remember when your business is faced with the prospect of being audited by the IRS:

1. Review the audit letter carefully.

An IRS agent won’t just barge into your door and announce an audit. The agency will send an audit letter to your office informing you that your firm has been picked for the audit.

Be cautious with scammers who will masquerade as the IRS by sending you email messages or leaving phone messages. Those guys will attempt to hack your personal data. The real IRS doesn’t communicate through email or phone.

Once you receive the letter, open it promptly. Read and understand what the IRS needs from you.

If your company doesn’t have a financial adviser, you can hire an accountant or tax professional to help you review the review letter. He or she will also identify the issues that the agency has flagged.

Don’t ignore the letter because the IRS will not go away. Worse, the auditor may become more suspicious and even antagonistic.

2. Organize your records.

The next step is to organize your records. Gather and organize all your business records from the previous tax year even before you meet with the tax professional and IRS auditor.

These records range from receipts and invoices from income and expenses, accounting books and ledgers, bank statements, leases or titles for properties and hard copies of tax-prep data. You should also make sure that you have the specific documents requested by the IRS for review.

3. Answer the questions honestly.

During the audit, the IRS agent will ask you a lot of questions about the information reported on your business tax return. Simply answer the questions of the auditor—no more, no less. Giving any information that you are not required to give may put you in more hot water.

Similar to dealing with individual tax audits, providing unasked-for information may give the auditor more questions to ask. The last thing that you want to happen is for the auditor to uncover more issues about your tax returns. IRS auditors won’t forgive tax debt or mistakes, so any admission that you may have will be used against you.

Be straightforward in replying to the questions. However, don’t manufacture excuses. IRS agents would know if you’re making any.

Also, don’t be antagonistic with the auditor. It would only make things worse for you and your business.

In order to avoid future audits, you should track bank transfers and other financial records aside from receipts. Anything that you cannot explain on the standard IRS form must be explained on paper. Of course, double-check all your calculations before filing your returns.

Aside from keeping proper documentation, you can avoid getting picked for an audit by deducting ordinary and necessary business expenses as allowed by the IRS. So even if your company is chosen for an audit, you have nothing to be afraid of.

Indeed, getting a letter from the IRS informing that you are to be audited can be very worrisome. But if you know how to deal with tax audits, then you don’t have anything to be afraid of. It also helps to have a tax professional guiding you to be assured that you can respond to whatever audit findings the IRS guys have with you or your business.

What Are The IRS Audit Penalties?

If your tax return was selected to be reviewed by an audit, it does not mean that you will have higher tax liabilities or IRS penalties. Unfortunately, however, approximately 75% of those people audited have to pay more taxes. If something is discovered to be wrong on your tax return, the burden of proof will be yours for most provisions for penalties except fraud.

An adverse decision could incur a wide variety of penalties. You could also have to pay more taxes if the report shows that your taxes were understated. Below are some penalty possibilities.

Penalty Related To Accuracy

If your return is found to be inaccurate, you might be subject to a 20% penalty on the tax that was understated. Some tax inaccuracies could trigger a penalty of 40%.

Penalty For Civil Fraud.

If you have an adverse audit that resulted in a civil fraud, the penalty is 75% of the tax that wasn’t paid and that attributed to the fraud. Some parts of the underpayment may be attributed to an accuracy related issue and therefore would have a lower penalty on it. Any underpayments that are attributed to civil fraud can’t be stacked with penalties for accuracy related issues.

Failing To File Your Tax Return Fraudulently

This is extremely rare; however, if an IRS audit can prove that you purposefully filed your taxes late and did not have an extension to avoid paying taxes, you will be subject to 15% each month for a total of 75% after being late five months. The normal penalty for being late is only 5% per month.

Criminal Penalties

There are various criminal IRS charges that can be both felonies and misdemeanors. These criminal charges include, evading taxes, filing a false tax return, willfully not paying estimated taxes or keeping proper records, or not filing a tax return at all. Civil penalties for fraud are much more likely than criminal penalties.
Interest On Penalties

When you are audited, you can receive penalties for accuracy related issues, not filing your return on time or a penalty related to civil fraud. Interest will start accruing from the day that the tax return was due until all of the penalties are paid in full. With all other IRS penalties, the interest does not start accruing unless the penalties have not been paid within 21 days from when the Internal Revenue Service actually requested payment as long as the total penalty is under $100,000. If the total penalties are over $100,000, you have only 10 days to make the payment in full before the interest starts accruing.