Gregory Porcaro, a certified public accountant with the Warwick firm Otrando, Porcaro & Associates Ltd. since 1987, was recently named one of the top 50 IRS practitioners in the country by CPA Magazine. He has written numerous articles in tax professional journals and lectured extensively on tax and business valuation issues.
With the tax year coming to a close and everyone’s thoughts turning to filing a tax return, Porcaro answered five questions on tax law and tax preparation.
PBN: What would your advice be for a business owner – or an individual, for that matter – who receives an audit notice from the IRS? Should an individual handle it differently from a company?
PORCARO: In general there are three types of audits: correspondence, office and field. Correspondence audits are the most common type of audit and are generally caused by items of income or deduction that are reported on a tax return but do not match the data the IRS has on file. Office audits are conducted at the local IRS office and are generally for individual returns for a self-employed person or someone who has rental property. Field audits are conducted at the taxpayer’s place of business or their CPA’s office.
Regardless of what type of audit you may be dealing with, do not panic.
Contact your CPA or other tax preparer as soon as possible. Do not ignore the letter. Even if you prepare your own tax return, I recommend that you engage the services of a CPA that has experience in handling IRS audits to represent you. A CPA, enrolled agent or other tax preparer can represent you even if they did not prepare your return. You will have to execute a power of attorney (Form 2848), which will allow the IRS to communicate with your representative. This form should include the tax year being audited and the year before and after just in case some issues effect multiple years. Criminal cases are not that common, but if you are facing this type of problem then you should hire a tax attorney.
You should review your return and related documentation with your representative well before any scheduled meeting with an IRS agent to allow enough time to determine if all the documentation is available. If you have been audited in the past, be sure to let the representative know that. I do not recommend that the taxpayer meet with the agent or conduct the audit at the place of business unless absolutely necessary. In most situations it is not. Representing a taxpayer in an audit can be expensive so be sure to request an engagement letter that outlines each party’s responsibilities and the fee structure. This approach will work for business or individual audits.
PBN: Does the IRS attitude on audits change in times like these, when the federal government is expending lots of money to rescue various industries?
PORCARO: We may be in a very turbulent economic times right now, but I am not aware of the IRS “releasing the hounds” due to economic conditions. The fact of the matter is the IRS has been steadily increasing the number of returns audited each year since 2002. … In my opinion, the IRS has done an excellent job in improving taxpayer confidence in the tax system by improving its enforcement actions. Enforcement is the foundation for compliance, which benefits all the taxpayers that comply with our country’s tax system.
PBN: There have a lot of changes in the last year in regard to federal tax laws. Can you outline a few of the changes that have the most impact?
PORCARO: Since late December 2007, there have been seven different pieces of tax legislation. I sometime have a little trouble keeping up, but I have selected some items that I think can be important for your readers to be aware of.
Home foreclosures are unfortunately more common these days and can cause troubling income tax consequences. The Mortgage Relief Act of 2007 provided that income from the discharge (due to nonpayment) of qualified personal residence debt, up to $2 million, is excluded from income. This provision has recently been extended through Dec. 31, 2012.
For business owners, the Economic Stimulus Act of 2008 has increased the amount of a qualified equipment purchase in 2008 that can be deducted in the year of purchase to $250,000, if total equipment purchased is less the $800,000. In addition, for certain assets purchased in 2008, taxpayers can deduct 50 percent of the cost in the year of purchase.
For first-time home buyers, the Housing Assistance Tax Act of 2008, provides a refundable tax credit of up to $7,500 for taxpayers who purchased their principal residence between April 8, 2008 and July 1, 2009. You cannot have owned a personal residence within the three years preceding the date of purchase to be treated as a first-time home owner, and to be eligible for the credit your adjusted gross income must be less than $150,000 if filing a joint return ($75,000 if single).
For an increasing number of taxpayers that are subject to alternative minimum tax (AMT), the 2008 Extenders Act increased the AMT exemption amounts, extends the use of several tax credits against AMT and provides for a refund of prior years AMT credits. This is a complex issue and should be discussed a CPA or other tax professional.
PBN: Some taxpayers may find that, although they are reporting a sizable income for 2008, they may not be able to easily pay the taxes they owe on that income now because of the declining economy. How does someone address that problem?
PORCARO: This situation can easily exist in the economic environment we are in today. First off, do not wait until April 15 to find out you may have income taxes due and be a little short on cash and no access to credit. I recommend that you try to project your 2008 tax liability before Dec. 31. This step may provide some opportunity for tax planning and give you advance indication of just how much money you may need on April 15. If you do find yourself with a tax due, remember that filing an extension only provides additional time to file your return, the tax payment is still due on April 15. In short, file on time (with or without an extension) even if you cannot pay the balance due. In most situations, you can use Form 9465 to request an agreement to pay your federal income taxes in monthly installments. The larger the amount due, the more financial information will be requested, (such as Forms 433-A, B, D and F). For amounts over $5,000, the IRS will file a tax lien against real estate. In general, as long as you adhere to the agreement, the IRS will not continue their collection activities.
PBN: Can you give an outlook on how the election of Barack Obama will have on federal tax matters in the coming years?
PORCARO: In my opinion, due to the current state of the economy, President-elect Obama will not increase the income tax rate too quickly, but I do expect to see some increase in 2009. I do anticipate that tax professionals will have their hands full in 2009 adapting to tax law changes that are intended to provided economic stimulus, change the tax consequences of capital gains and investment income, deal with health care issues, and hopefully not increase the county’s deficit.
