IRS

$175 Billion of Unreported Income Targeted by IRS Wealth Squad

June 7, 2022 by Frank

Top 1% of wealthy taxpayers failed to report 20% of their income

IRS Creates Wealth Squad

IRS Commissioner Charles Rettig has requested that Congress increase the IRS’s budget. Rettig has stated that for every 1% improvement in voluntary compliance, annual revenue could be expected to increase by approximately $30 billion per year. An April 2021 press release by Treasury quoted a recent study that found that the top 1% of taxpayers failed to report 20% of their income and failed to pay nearly $175 billion in taxes owed annually.

The IRS’s “Wealth Squad” (officially named the Global High Wealth Industry Group program) targets both high-net worth non-filers and high-net worth filers who have implemented sophisticated and complex structures or abusive tax transactions.

These wealthy individuals often use foreign financial assets or bank accounts to conceal their income from U.S. taxation. The United States is the only major nation that taxes its citizens (and green card holders) regardless of where they live. The wealthy have been found to have the means to use their vast financial resources to avoid U.S. taxation. So long as you hold a U.S. passport or green card, the Internal Revenue Service wants its cut of your profits and capital gains.

IRS Global High Wealth Industry Group – Its History

While it sounds encouraging that the IRS will “go after” these individuals to have them pay their fair share, the Global High Wealth Industry Group is not a new IRS program. It was formed in 2009 (thirteen years ago). The Internal Revenue Manual added Section 4.52.1, Global High Wealth Program Processes and Procedures, in 2013 (four years after the implementation of the program) and explains that this group “was formed to take a holistic approach in addressing the high wealth taxpayer population; to look at the complete financial picture of high wealth individuals and the enterprises they control”. Not sure what the IRS means by “taking a holistic approach”. Generally such an approach means looking at the bigger picture and thinking outside the box.

Per the AICPA’s Tax Advisor publication, the goal of the program is “[t]o ensure GHW uses its limited resources to identify and examine high wealth taxpayers with the highest compliance risk in a consistent and efficient manner”. Per the Tax Foundation, an organization that monitors the tax policies of various taxing agencies, including the IRS, in 2017 the IRS collected $618 million in individual income taxes from the 1% wealthiest taxpayers. Simple math: $175 billion in uncollected taxes over $618 billion in collected taxes equates to 28%. Why are there limited resources one could ask when so much in revenues is at stake? To be fair to the IRS, the strategies used in international tax planning are very sophisticated and likely only a few agents, with many years of training and experience, are qualified to identify these schemes. The IRS may also need the cooperation of foreign governments who posture themselves as tax havens for the rich.

IRS Global High Wealth Industry Group – Its Future

Whereas the IRS had traditionally focused on auditing the tax returns of high net-worth individuals, it now plans to focus more on high net-worth nonfilers. The IRS’s case inventory can come from many sources. These include referrals from other IRS groups, whistleblower claims, campaigns in which a taxpayer is identified as having a particular issue that the IRS identifies as having a high rate of occurrence in this population, and the discriminant function (DIF) scoring method. In DIF scoring, computers select returns for examination on the basis of their potential for change, based on IRS experience with similar returns.

The AICPA article goes on to state “Citing the complexity involved in the cases, coupled with the amount of potentially underreported income, Rettig announced that the IRS has prioritized these cases and that IRS examination personnel are auditing these taxpayers at a rate far higher than any other category of individual filers. Moreover, the IRS is expanding its efforts to recruit and retain experienced, sophisticated, and specialized examiners to conduct the examinations (emphasis added). Technology, including the use of data analytics and risk assessments, is another important area in which efforts are being focused.”

Unlike a typical audit of Form 1040, the examination team needs to have the expertise to deal with related income tax returns in which the taxpayer has a controlling interest and for which significant compliance risk is deemed to exist, such as interests in partnerships, trusts, S corporations, C corporations, foreign entities, etc. Thus, the examination team will use other IRS resources such as cross-border and financial products experts, engineers, and appraisers. Depending upon the initial findings of the Wealth Squad, IRS Counsel and personnel from the Office of Fraud Enforcement, the Office of Promoter Investigations, and the Criminal Investigation Division may be involved.

If a wealthy taxpayer is contacted by the IRS and has not reported all of their income or has not filed tax returns, be assured that the IRS has already performed a significant amount of due diligence in building its case file against that person.

Tax Tip #1

For those taxpayers who have been playing the “audit lottery game,” keep in mind that the failure to report income, particularly income from foreign sources, can result in VERY significant penalties. Accordingly, it is generally prudent to get into compliance voluntarily, before the IRS contacts you. If there is potential criminal exposure due to fraud, the IRS voluntary disclosure program may be the best option. It is advisable to speak with an experienced tax attorney to discuss the best course of corrective action. If your tax professional is not an attorney, be sure to discuss the use of a Kovel letter to protect your privileged communications.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Steps to Take Upon Receipt of an IRS Notice

May 31, 2022 by Frank

If you receive a notice from the IRS, do NOT ignore it. Far too many taxpayers do not open IRS mailings thinking the worse

Reasons IRS Sends Notices to Taxpayers

The IRS mails letters or notices to taxpayers for a variety of reasons and not all of them are “bad”. Some “good” reasons relate to refunds you are waiting to receive or a simple question the IRS has about your return. Examples include:

• You have a balance due.
• You are due a larger or smaller refund than that reflected in your return.
• The IRS needs additional information or has a question about your tax return it needs answered to continue to process your return.
• The IRS need to verify your identity. This is a precautionary step the IRS often takes before processing refunds.
• The IRS changed your tax return and is asking for your to confirm those changes.

Steps to Take if an IRS Notice is Received

• Do not ignore it – read it immediately. Most IRS letters and notices are about federal tax returns or tax accounts. The notice or letter will explain the reason for the contact and gives instructions on what to do. Not sure what you should do? Provide a copy of the notice to your tax professional and ask for guidance. Some actions required by a taxpayer are time sensitive – shoving the notice in a desk drawer and missing an IRS deadline will only make matters worse.

• Do not panic. The IRS generally contacts taxpayers by mail. Most of the time, all the taxpayer needs to do is read the letter carefully and take the appropriate action.

• Read the notice carefully and completely. If the IRS changed your tax return, the taxpayer should compare the information provided in the notice or letter with the information in their original return or ask their tax professional for guidance. The IRS does make mistakes. If the information the IRS is showing is incorrect, you need to advise the IRS by sending supporting documentation. In general, there is no need to contact the IRS if the taxpayer agrees with the notice.

• Respond timely. If the notice or letter requires a response by a specific date, taxpayers should reply in a timely manner to:

* avoid delays in processing their tax return
* minimize additional interest and penalty charges
* preserve their appeal rights if they don’t agree

• Pay amount due. Taxpayers should pay as much as they can, even if they can’t pay the full amount. You can pay online or apply online for a payment agreement, including installment agreements. If the amount owed the IRS is significant and you don’t see how you will be able to make payment, consult with an experienced tax resolution specialist.

• Keep a copy of the notice or letter. It’s important that taxpayers keep a copy of all notices or letters with other tax records. You may need these documents later.

• Remember there is usually no need to call the IRS. If a taxpayer must contact the IRS by phone, they should use the number in the upper right-hand corner of the notice. The taxpayer should have a copy of their tax return in question and letter when calling as the IRS agent will likely request you to verify the information on your return.

Typically, taxpayers only need to contact the agency if they don’t agree with the information, if the IRS requests additional information, or if the taxpayer has a balance due. Taxpayers can also write to the agency at the address on the notice or letter. Taxpayer replies are worked on a first-come, first-served basis and will be processed based the date the IRS receives it.

Tax Tip #1

If calling the IRS, the IRS representative usually will say their name and ID badge number very quickly. Be sure to note the name of the IRS representative and his/her ID number and the date of your call. Ask the representative to spell their surname. Repeat the surname and ID number back to the representative and ask them to confirm that you have correctly noted with whom you are speaking.

Tax Tip #2

When sending supporting documentation to the IRS, do NOT send originals. Make copies and send the copies to the IRS and you should retain the original documents. Whatever you send to the IRS, be sure to maintain a copy of EVERYTHING you send.

Tax Tip #3

Carefully note mailing addresses. Many IRS notices reflect one address for written correspondence and another address for remitting payments.

Tax Tip #4

Caution: If you decide to deal directly with the IRS rather than obtaining representation, be aware that when a taxpayer speaks or writes to the IRS, what they share with the IRS is placed into the taxpayer’s files. In such situations, it would be in your best interests to first read IRS Publication #1 – Your Rights As A Taxpayer.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Do You Have a Business or a Hobby?

May 25, 2022 by Frank

The IRS operates with a different set of rules when auditing a return to determine if the losses claimed on Schedule C are those of a business or a hobby.

Intentions Matter

A hobby is any activity that a person pursues because they enjoy it and with no intention of making a profit. People operate a business with the intention of making a profit. While intentions do matter, they are not by themselves determinative as to whether an individual has a business for profit or are pursuing their lifetime dream in the form of a hobby.

Complicating matters are that some individuals engage in hobby activities that create a source of income for them. When does that hobby become a business? Others may start a business and have a history of losses – when does that business become a hobby in the eyes of the IRS?

IRS Audit Bells

Tax practitioners often view the IRS’s hobby loss rules as an audit program to limit individual taxpayers using hobby losses as a tax shelter to offset other sources of income. Although the IRS is very secretive about what factors it uses to audit taxpayers, it is reasonable to assume that the following scenario would be one example of when the IRS would select a return for a hobby loss audit.

Scenario: An individual has a Schedule C that has reported more than incidental losses for multiple years and such losses were used to offset other sources of income. The reported losses do not decrease, or perhaps increase each year. The listed activity of the business is one that the IRS could associate as being a hobby – such as horse racing, a winery, sailboat charters, and collecting and selling antiques. Such a list could almost be endless. If the annual losses are a few hundred dollars, the likelihood of an IRS audit is probably remote. However, if the losses are in the thousands of dollars, the odds of an audit exam would undoubtedly increase. The taxpayer’s listed occupation on the Form 1040 could also come into play. If an IT W-2 technician is reporting significant losses from a horse farm, the IRS would likely question if that individual has the background and experience to have a profitable business.

IRS Factors

The IRS has established factors taxpayers must consider when determining whether their activity is a business or hobby. Tax preparers are also advised to consider these factors if a taxpayer wishes to claim a loss on their Schedule C.

These factors are whether:

The taxpayer carries out activity in a businesslike manner and maintains complete and accurate books and records.
The taxpayer puts time and effort into the activity to show they intend to make it profitable.
The taxpayer depends on income from the activity for their livelihood.
The taxpayer has personal motives for carrying out the activity such as general enjoyment or relaxation.
The taxpayer has enough income from other sources to fund the activity.
Losses are due to circumstances beyond the taxpayer’s control or are normal for the startup phase of their type of business.
There is a change to methods of operation to improve profitability.
Taxpayer and their advisor have the knowledge needed to carry out the activity as a successful business.
The taxpayer was successful in making a profit in similar activities in the past.
Activity makes a profit in some years and how much profit it makes.
The taxpayer can expect to make a future profit from the appreciation of the assets used in the activity.

All factors, facts, and circumstances with respect to the activity must be considered. No one factor is more important than another.

Looking at the IRS factors, taxpayers with continued losses would be wise to have a business plan that shows the eventual reporting of profits, document the activities of the taxpayer to adapt to actual business results to make the loss activity become profitable, maintain time logs to show how much time the taxpayer is spending on the activity, and consultations with business advisors on how to make the business profitable among other action steps.

If a taxpayer receives income from an activity that is carried on with no intention of making a profit, they must report the income they receive on Schedule 1, Form 1040, line 8.

IRS Audit Guide

The IRS issued Publication 5558 Activities Not Engaged in for Profit Audit Technique Guide Internal Revenue Code Section 183 on September 7, 2021. This is a must read for anyone planning for a potential hobby loss audit or actually being audited. When the IRS issues an audit guide, it is because it considers the issue of importance to the IRS and its ability to collect tax revenues.

The guide encourages agents to talk directly with taxpayers in person at their place of business. Many taxpayers make the mistake of speaking directly with the IRS agent rather than seeking representation. The IRS agent will be armed with this audit guide and its lead sheets with pointed questions to better enable the agent to prove, using the taxpayer’s own admissions, that the activity is a hobby. Armed with the taxpayer’s testimony, the IRS will generally prevail in its audit findings.

Taxpayers need be familiar with Code Section 183(d) presumption. The presumption is that unless there is profit in three out of five consecutive tax years or two out of seven in the case of horses, the activity is a hobby (and those reported losses are permanently lost) and not a business. In our years of representing taxpayers in hobby loss audits, those who did not meet this presumptive test can overcome it by citing applicable case law supporting the audited taxpayer’s activities. This may require that the taxpayer go to IRS Appeals.

The Guide states that if the taxpayer qualifies for the presumption, the IRS can rebut that presumption. But the burden of proving that the activity is not engaged in for profit shifts to the IRS. Thus, the agent rebutting the presumption is unlikely, unless the agent believes the taxpayer manipulated income and/or expenses for the sole purpose of satisfying the presumption rule.

Tax Tip #1

Section 183 is one of the few areas the final outcome is often based on case law. The law is clear that a realistic expectation of profit is not required to sustain a loss. What is required is an honest objective to make a profit and the taxpayer’s ability to demonstrate that objective by behaving in a businesslike manner.

Tax Tip #2

If you start a business where losses are anticipated due to the start-up time it takes to make the business mature and profitable, or you have an existing business with a history of losses that the IRS has notified you that your are being audited, you should consider with an experienced tax professional who is familiar with IRS audits and the hobby loss rules.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Self-Employed Who Need Not Remit Estimated Taxes

May 17, 2022 by Frank

Why a few self-employed or gig economy individuals need not pay estimated income taxes.

General Rule

Independent contractors, typically referred to as self-employed individuals or gig workers, are generally required to file quarterly estimated income taxes using IRS Form 1040-ES. These payments are due April 15, June 15, and September 15 of the current year, and the last quarterly payment is due January 15 of the succeeding year.

If a taxpayer wishes to make more frequent estimated tax payments, or make payments on other dates, there is no prohibition of doing so. For example, we often advise realtors who get paid a commission when a house is sold to make an estimated payment when the commission is earned. By doing so, they are assured that they have the funds to make those estimated payments. Far too many realtors wait until the next quarterly due date, only to find that they expended all of the commission money earned and have nothing left to pay the IRS. If several sales are closed in the same month and multiple payments are made to the IRS in that month, the IRS is most willing to accept those payments.

Exceptions to General Rule

Self-employed people and gig workers who also receive salaries and wages from an employer can generally avoid having to pay estimated tax by asking their employer to withhold more tax from their paycheck. This usually requires the filing of a new Form W-4, Employee’s Withholding Certificate, with the employer. A special line on Form W-4 allows a taxpayer to enter an additional amount to be withheld.

Taxpayers receiving a paycheck can check the Tax Withholding Estimator on IRS.gov to determine if the right amount of tax is being withheld from their paycheck.

Also, individuals don’t have to pay estimated tax for the current year if they meet all three of the following conditions:

No tax liability for the prior year,
U.S. citizen or resident for the whole year and
The prior tax year covered a 12-month period.

Tax Tip #1

Just because you are not required to make an estimated tax payment, or are only required to make a minimum payment to avoid the underpayment penalty, that does not necessarily mean that is the best strategy. Comes April 15 of the succeeding year, you will be required to pay the full balance due or be subject to failure to pay penalties. If you are self-disciplined, an alternative strategy could be to pay the minimum, but set aside the funds that will be needed to pay the full liability come April 15.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Final Tax Return Considerations

May 10, 2022 by Frank

As a survivor, executor or administrator of an estate, you are obligated to file an income tax return reporting all the deceased’s income up to his or her date of death.

IRS Tax Forms Needed

Form 1040 is used to file the decedent’s final tax return. If there is a surviving spouse, s/he can file a joint return in the year of death regardless of the date of death. If there is no surviving spouse, then IRS Form 56, Notice Concerning Fiduciary Relationship, needs to be attached to the Form 1040 letting the IRS know who the responsible person is for filing the final income tax return of the deceased.

The person responsible for preparing the final tax return will need to obtain the normal tax return documents, such as W-2s and 1099s ( to report such items as dividends, interest, pensions, IRA distributions, social security benefits, etc.). A good starting point is to review the prior year’s tax return to see what sources of income were reported.

Armed with IRS Form 2848, the preparer should also obtain wage and income transcripts from the IRS to ascertain what sources of income the IRS is showing in its records. Unfortunately, it can take a few months after the calendar year end before the IRS’s computers will have this information available. Accordingly, the person responsible for preparing the returns should file IRS Form 4868 requesting an automatic six-month extension to file the return.

In addition to obtaining the wage and income transcript from the IRS for the year of death, the responsible party should obtain the IRS transcripts for the preceding six years. If you, as a responsible party, find that the deceased hadn’t filed in previous years, you are responsible for taking care of those returns as well.

If the final tax return shows a refund due the taxpayer, the overpayment of taxes may be claimed by using IRS Form 1310, Statement of a Person Claiming Refund Due a Deceased Taxpayer.

Other Forms Possibly Needed

It is generally a good practice to ask for multiple copies of the death certificate. In addition, multiple copies of the short certificate may be needed. Under Pennsylvania law, a “short certificate” is a Court document demonstrating that you have been appointed by the Probate Court (issued by Register of Wills) to administer a deceased individual’s affairs. A short certificate may be needed for a fiduciary to transfer the deceased’s assets to the administrator of the estate.

If Payment is Due with the Form 1040 Filing

If tax is due, submit payment with the return. You may want to use the “Make a Payment” option on the IRS website for such other payment options as a debit card, credit card or electronic funds transfer. If you are unable to pay the amount due immediately, you may qualify for a payment plan or installment agreement.

Keep in mind that if an extension of time to file (Form 4868) is made, it does not extend the time to remit payment. That due date is normally April 15. Accordingly, it is best to estimate the tax that is due and remit that payment on or before the April 15 due date. If additional monies are due to pay the tax liability, request those funds from the estate of the deceased.

IRS Form 1041

IRS Form 1041, U.S. Income Tax Return for Estates and Trusts, is used to report income earned by the deceased after the date of death. Forms 1099 showing interest and dividend income, gross proceeds from sale of stock, etc., are issued on a calendar year basis. When reporting this income on Form 1040, only the amounts earned by the deceased between January 1 and the date of death get reported on Form 1040. Any income earned after the date of death gets reported on Form 1041. Thus, the responsible person preparing the final Form 1040 needs to identify and report the income earned before date of death on Form 1040, and the income earned after the date of death on Form 1041.

Tip #1

Read IRS Publication 559, “Survivors, Executors and Administrators,” for more information about requirements.

Tip #2

Consider engaging an estate tax attorney regarding probate and executor responsibilities and a tax professional to bring closure to the IRS filing requirements of the deceased individual.

Tip #3

Short certificates demonstrate that you have opened an estate for an individual who has died–and opening an estate comes with obligations. Often, a bank or third party creditor will tell a potential executor they should go down to the courthouse and sign up for one without any concern about the obligations such a certificate places on the executor. Once you swear in to probate an estate, you are obligated to administer the estate according to law, to ensure that the law is followed to the letter, and that debts are paid in the appropriate order. This is a good example of why consulting with an estate attorney is important.

Tip #4

While this post focused exclusively on the federal issues related to a deceased individual, there are usually state forms that also need to be filed and need to be addressed.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

Documents that a Homeowner Should Maintain

May 3, 2022 by Frank

Individuals who purchase real estate should maintain a binder to organize their important papers and documents.

Paper or Electronic Files?

There is no doubt that paper files can be very voluminous and require much storage space. However, unless proper precautions are taken, electronic files can be lost because how the file was cataloged on the cloud has been forgotten or contaminated. Rather than deciding between paper or electronic files, consider maintaining both. Electronic files are great when you need to send them to a lender when refinancing or to your tax professional come tax time. If you cannot find your electronic files, you have the paper files as your backup.

When storing documents, think of security. Paper documents can be stored in a bank safety deposit box or in a fire-proof safe in your home. Electronic files can easily be copied, therefore consider making multiple copies. You don’t want your hard drive to crash and lose your files. Flash drives and portable storage discs are great backup options, as are online backup and cloud services.

Purchasing a Property

If you are working with a realtor, ask them for a listing of important documents that you need to maintain as a homeowner. Other good sources are your real estate attorney and your tax professional. Along with your realtor agent’s contract, think loan application and the supporting documents you provide to the lender, real estate appraiser, closing documents executed at settlement, loans, mortgages, deeds of trust, title insurance, home inspection report, etc.

File Form 8822 with the IRS to inform the IRS of your change of address and be sure to notify your insurance company of your new acquisition to ensure it is properly and fully insured.

If you use a tax professional, you will be asked to provide, at a minimum, the settlement HUD sheet, especially if you are purchasing the property for investment or rental purposes.

Capital Improvements

You will want to keep receipts for capital improvements made to your property; examples include kitchen or bath remodels, new roof, and major built-in appliances purchased. You don’t need to maintain regular maintenance or repair receipts. Your tax professional will ask for a summary of these capital improvement receipts when you sell your property and the IRS could demand to see the receipts if you are selected for an audit examination.

You may also want to keep copies of all renovation permits you requested to avoid legal problems with your buyer. If your contract of sale states that all permits were obtained for renovations to your home, and you failed to obtain those permits, your buyer, if held liable retroactively for non-permitted work that was found during a later home inspection or when the county visits the home to reassess its value, may seek damages against you. This is just one example as to why an experienced real estate attorney should be used when purchasing and selling real estate.

Selling the Property

The listing real estate agent may request a copy of the documents when you purchased the home. Along with your selling realtor agent’s contract, you will definitely want to maintain proof of any loans, mortgages and deeds in your name that have been paid off. If these debt instruments were recorded in the state or county records where you live, be sure that those records have been updated. Likewise, check your credit reports to make sure that they reflect that you satisfied you debt obligation on the sold property.

For tax reporting purposes, you will likely receive IRS Form 1099-S that will reflect the gross proceeds from the sale. These sales proceeds will be reported to the IRS so that it can match that information return against the income reported on Form 1040.

If you have purchased home warranties for major appliances that will remain with the home after the home (think built-in appliances, HVAC systems, whole house generators), and those warranties are assignable, the purchaser of your property will be pleased to know that those appliances have been insured.

File Form 8822 with the IRS to inform the IRS of your change of address and again notify your insurance agent of the home sale. A change of address may also affect your vehicle insurance.

When selling a personal residence, or an investment or rental property, you may have income taxes to pay. Tax liabilities can become more complicated when a personal residence is converted to a rental property, or vice-versa, or the property is unoccupied as your principal residence. Thus, it is most important to keep track of the dates such properties were used as a personal residence to take advantage of the two out of the most recent five years special tax exclusion on the sale of a personal residence.

An experienced tax professional will ask to see your HUD settlement sheets when you purchased and sold the property and a listing of your capital improvements to compute whether taxes are due. For tax purposes, the cost (basis) of your home is the sum of your original purchase price plus the cost of capital improvements you made. The difference between the sales price and the basis in your home is what the potential gain (or loss) on the sale of your home which would determine if the transaction is taxable.

Tax Tip #1

Many tax professionals recommend that taxpayers maintain their tax records for seven years. The IRS has three years to audit a return if it suspects any good-faith errors on your part, and six years if it thinks you under-reported your income by at least 25%. (Note: You can be audited at any point if the IRS suspects fraud.)

Tax Tip #2

With respect to maintaining receipts and other documents, keep in mind that some paper documents, particularly those printed on thermal paper, fade over time. Making an electronic copy of these receipts would be the best option.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.