Not all IRS audits are the same. Not all tax return issues involve the same complexity or require the same level of scrutiny.

The IRS, in its effort to enforce the income tax laws of the Unites States, has three different types of audit examinations in its arsenal:

1. Correspondence examinations
2. Office examinations
3. Field examinations

Correspondence examinations are conducted entirely through the mail. (The IRS NEVER uses e-mail to correspond with taxpayers.) Since this audit requires less involvement from IRS examiners it is being used more frequently by the budget strapped IRS. This method is considered the ‘work horse’ of the IRS’s tools.

Office examinations involve small businesses or individual income tax returns that predominantly include sole proprietorships. Office examinations generally take place at the IRS office located nearest to where the taxpayer maintains its financial records. Once the IRS has selected a tax return for office examination, the return is assigned to an examiner and scheduled. Office examinations are conducted primarily by interview. The taxpayer will provide certain records to support the items on the tax return. During this process, an examiner might ask a taxpayer to explain certain items such as insufficiently substantiated charitable contributions or itemized deductions which appear to be disproportionate to the taxpayers reported gross income.

Field examinations are initiated by sending a letter 2205 or 3572 which lays out the issues to be examined and lists a specific IRS agent as the point of contact. Sometimes the taxpayer will receive a telephone call from the field agent prior to receiving the letter. The taxpayer has 10 days to schedule an interview.

It is advisable to have your CPA represent you with any IRS interaction. This will ensure that the audit will be conducted in an efficient manner and that any adjustments are verified and agreed to by your CPA representative.

Things to remember: There is a 3 year statute of limitations on all tax returns filed with the IRS. (beginning with the date of filing)

 Feeling like you should save more?  According to Keith Chen in his fascinating TED Talk, the reason Americans may not save as much as people from other developed and prosperous countries is because of the language we speak. Because English forces its users to talk differently about time (the future is different from the present) than other languages where the future and the present is grammatically spoken about in the same way, English speakers may begin to act differently because savings for the future is removed from our behavior today. The savings behavior of “futured language speakers” versus “non-futured language speakers” is different.

Chen’s research is of more than academic interest. Saving is important; it fuels investment, which in turn fuels productivity. And it can enable people to live comfortably in retirement, a big issue in our aging country. Chen’s work thus might help countries that don’t save much–the United States and Britain especially–to get their citizens to improve their saving habits.  Well, we can hope.

If you are concerned about your savings level, you don’t have to learn a new language.  Maybe we can help….

Buy things online? If the seller did not collect a State of Minnesota sales tax, the state wants you to know you still owe a “Use Tax” for those items that are taxable. Use tax is described by the Department of Revenue as a “complement” to sales tax.  If you buy a taxable item for your own use without paying sales tax, you probably owe use tax. The use tax rate is the same as the sales tax rate (6.875%) and the same exemptions apply.

Phil Mickelson has apologized for saying that he was considering “drastic changes”  because of tax increases on the wealthy.

“Finances and taxes are a personal matter and I should not have made my opinions on them public,” he said in a statement . “I apologize to those I have upset or insulted and assure you I intend to not let it happen again.”

Mickelson, who lives in San Diego area, had hinted at changes that left people wondering whether he might move to Florida or, perhaps, even consider semi-retirement at 42. He’d promised further details Wednesday, before the Farmers Insurance Open at Torrey Pines. Although he issued the statement recently, it still figures to be a hot topic when he addresses the media. Here’s his full statement:

“I know I have my usual pre-tournament press conference scheduled this week but I felt I needed to address the comments I made following the Humana Challenge now.

“I absolutely love what I do. I love and appreciate the game of golf and the people who surround it. I’m as motivated as I’ve ever been to work on my game, to compete and to win championships.

“Right now, I’m like many Americans who are trying to understand the new tax laws. I’ve been learning a lot over the last few months and talking with people who are trying to help me make intelligent and informed decisions. I certainly don’t have a definitive plan at this time, but like everyone else I want to make decisions that are best for my future and my family.

“Finances and taxes are a personal matter and I should not have made my opinions on them public. I apologize to those I have upset or insulted and assure you I intend to not let it happen again.”

At Foreman & Airhart, we hear a lot of people with the same concerns as Phil.  Let’s face it – you work hard for your money and it is always hard to give it up in taxes to fund programs you may not always believe in.  And while it is hard to feel sorry for a guy who makes his living by golfing on the world’s most beautiful courses, at the heart of it, we would all like to pay as little taxes as we legally have to.  That’s where we come in.  No, we’re not Phil’s accounting firm.  But we do have world-class accountants who know how to find every possible incentive for you to limit your tax liability.  Why not call us – because when you spend less time on your taxes, you can spend more time on the links!

With our phones starting to ring with clients asking how they can reduce their tax liabilities, here is a light-hearted look at Strange BUT TRUE tax deductions.

1) Whaling ship repairs - Yes! you can deduct up to $10,000 for whaling ship repairs according to a 2004 law.  However, everyone except Native Americans are banned from whaling…and we live in Minnesota.

2) Pet Moving Expenses – While most taxpayers know that their moving expenses are deductible when moving for a job, they may not know that the cost of moving your pets can be included in the deduction.

3) Quit Smoking, Lose Weight! -Check with us – and your doctor! The money you spend to drop pounds or quit smoking may be deductible under certain situations. This may even extend to a backyard swimming pool!

4) Guard dogs – If you use a dog to secure your business property, you may be able to deduct the expenses for the dog each year.

5) Childcare – If you are a volunteer for an approved charity, you may be able to deduct childcare expenses while you are volunteering. You may get no pay for volunteering – but you can get a tax write off on your 1040!

We rarely employ these tax “loopholes.”  But don’t you want to work with an accountant that knows ALL of the rules?

With the economy sputtering back to life, Americans are returning to their nomadic ways.  Back in 1985, 20.5% of Americans moved according to the US Census Bureau.  But with the economy at a stand still only 11.6% moved in 2010-2011. Now, however, those numbers are creeping up along with new home sales and median home prices.

Americans move out of state primarily for employment, while they move within 50 miles primarily for new housing requirements (up sizing, downsizing and life transitions.)

If you are considering moving AND you have some choice over where your next abode will be, take a look at this simple to use Taxes by State page. It concisely provides an overview of each state’s sales tax, gas taxes, income tax, property tax, inheritance and estate taxes. Very handy – and useful for reviewing with parents or grandparents who are considering a move as well.

We try to keep up with the times and for most of our clients that means complete electronic banking. Debit cards instead of checks. Pdf bank statements instead of mail. Auto bill payments.

But the truth is we are seeing more clients hit with expensive bank fees when the balance goes negative before they check their accounts.  And it is happening more than ever before.  According to the website StatisticBrain.com, 69% of all people say they “NEVER” balance their checkbook.  Our clients tell us they don’t feel the need to update a paper check register when they can look at their accounts online and see the “up to the minute” balance.

But for people who rely on a constant flow of cash into their accounts to cover their auto-payments, just one hiccup along the way can lead to hundreds of dollars of fees.  With overdrafts regularly charged at $35 per day, it can sap an account quickly.

What to do?

1. Chart out the monthly inflow and outflow of cash from your account.  Know which day of the month deposits and withdrawals are made and by whom.  If you cannot know the exact amount because it varies (like utility bills) remember to budget high for withdrawals and budget low for deposits to stay safe.

2. Connect your checking account to a savings account or other asset (like a line of credit) within the bank to protect yourself from overdrafts.

3. Beware of bank HOLDS on deposits.  Bank policies can vary in holding checks from 1 to 5 business days before releasing funds depending on the kind and amount.

4.  (And I know 69% of you wont like to hear this) Balance your checkbook each month – not to prevent overdrafts, but to become intimately aware of where your money is going and review your spending habits.

We want all of our clients to practice smart money management.

A new study by Ameriprise and Harris Interactive found that men outpace women in planning for the financial aspects of retirement 77% to 72%.  However, women are more likely to have thought about what they would like to do during retirement.

Only 22% of Americans report confidence in reaching their retirement goals.  Men outpace women in that key measure 25% to 19%.  Men are more likely than women to report that they have determined the amount of money they need for retirement and a higher percentage are saving money through IRA’s and other investments.  Women have a more prominent role in planning for family, lifestyle and health after retirement.  More women than men make plans to stay healthy during retirement and have a higher incidence of planning for their leisure time and activities than men.

For our clients, balancing lifestyle after retirement with sound financial advice sits at the center of every planning session we have.  When you need assistance determining your financial needs after retirement, developing savings plans to meet your goals and a less stressful way to transition into retirement, call us.  We do more than taxes.

At Foreman & Airhart, we have learned through years of working closely with clients that everyone prioritizes their life differently.  Some people declare they want to work into their 90′s and others want to retire by 40.  For those who are truly dedicated to a plan for an early retirement, here are 5 sure-fire strategies that can accelerate your retirement plans.

1. Work a second job.  YIKES!  That may sound like the last desire of a person planning to retire early, but if your years of working are focused on the day you can stop working entirely, then a second job (even a part-time one that pays $10-15 per hour) can increase your retirement savings.  Let’s say you found a VERY part-time job at $12/hour.  WOrking two 3-hour shift on weeknights and one 4-hour shift on weekends would net a person roughly $100/week after taxes.  Start doing hat at age 40 and if you can grow that money at, say, 5% in a Roth IRA, you would accumulate $107,000 by age 55.  That money could see you through as a bridge until you qualify for Social Security.

2. Redefine Retirement.  If you could redefine retirement from working full time, to working part time, the same schedule above would yield $5000/year that could offset retirement savings that you would have to draw down if you did not work at all.  At 5%, that’s $100,000 in retirement savings that you would offset by working a part-time job.

3. Early Retirement Distributions. Some people can retire or separate from service at age 55 and are eligible to start drawing from their retirement plans at that time, without incurring an early withdrawal penalty. All qualified plans, including 401(k), 403(b) and 457 plans, permit this type of withdrawal, as long as the employee does not roll the plan over into an IRA. However, IRA owners can also begin taking early withdrawals from their IRAs, as a series of substantially equal periodic payments that are spread out over the life of the owner. Both types of withdrawals are permitted under Section 72(t) of theInternal Revenue Code. This option may be attractive for those who have seen their retirement portfolios grow substantially faster than they expected and have been fortunate enough to escape the volatility in the markets in recent years

4. Live a New Lifestyle.  People who make adjustments in their lifestyle early to accommodate their retirement plans can substantially reduce their retirement needs.  Making budget-wise choices about eating out, vacations, cars, clothes, entertainment and home ownership while shifting those dollars into a retirement fund can both ramp up retirement savings and scale down post-retirement budgets for a high standard of living.

5. Maximize retirement savings.  If you are not at the maximum level for retirement savings with your company plan, now is the time to make that change to take full advantage of employer matching contributions.

The bottom line:  Taking an early retirement is no easy feat, but for the dedicated person who makes it a priority, it is attainable.  For more information and retirement planning, contact Foreman & Airhart for a review and to develop a sustainable retirement plan.

If you believe that Minnesota is a good neighbor state with reciprocity to Wisconsin, Iowa or South Dakota – you are mistaken.  Minnesota only has reciprocity agreements with North Dakota and Michigan. (!)   That means if you are a resident of Wisconsin, Iowa or South Dakota and you earned a portion or all of your income in Minnesota, you may be liable for Minnesota state income taxes.

Employees who are employed outside their state of residence may be subject to income tax laws of two states—their resident state and the state in which they are employed. Except in situations of reciprocity which helps to prevent the same personal service income (wages, salaries, tips, commissions, bonuses) from being taxed by more than one state. Generally, only your home state will tax your personal service income earned while working in a reciprocity state.

To qualify for the reciprocity exemption in Minnesota, both of the following conditions must apply for the year:

• You are a resident of North Dakota or Michigan, or a Minnesota resident who works in North Dakota or Michigan, and you return to your state of residence at least once a month, and
• You had  income from wages, salaries, tips, commissions, bonuses in the reciprocity state.

So you would be eligible for reciprocity in the following situation:  You are a resident of Minnesota who commutes daily to your job in North Dakota. Because wage income qualifies under reciprocity, you do not have to file a North Dakota income tax return to report wages earned in North Dakota. You’ll report your wages earned in North Dakota on your Minnesota return and pay tax on those wages only to Minnesota—your home state.  

However, if you are in the SAME situation in Minnesota and Iowa (instead of North Dakota) you must submit a state income tax return to both states. (or Wisconsin or South Dakota.)

However, there are income sources that do not qualify for tax reciprocity.  These include capital gains from real estate sold in a second state, gambling winnings, income from goods sold, rent and other non-personal service income sources.

If you need more information or advice, contact Foreman & Airhart for more information on Minnesota State Tax laws.