Tag Archives: linkedin lottery Michael Blitstein CJBS

IRS Increases Audit Examinations

by Michael W. Blitstein, CPA 

The Internal Revenue Service has stepped up its examinations in the past year of taxpayers with high adjusted gross income.

The IRS released its 2012 IRS Data Book on March 25th, providing a snapshot of agency activities for the fiscal year. The report describes activities conducted by the IRS between October 1, 2011 and September 30, 2012, and includes information about returns filed, taxes collected, enforcement, taxpayer assistance and the IRS budget and workforce, among others.

The IRS said it examined just under 1 percent of all tax returns filed and about 1 percent of all individual income tax returns during fiscal year 2012.  Overall, in fiscal year 2012, individual income tax returns in higher adjusted gross income (“AGI”) classes were more likely to be examined than returns in lower AGI classes.

The IRS examined about 12.1 percent of the 337,477 tax returns reporting income of $1 million or more, compared to 2.8 percent of those reporting at least $200,000 and under $1 million, and 0.4 percent of those reporting income under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106, and 1.1 percent of those with income under $200,000 and filing Schedule E or Form 2106. Of the 1.5 million individual tax returns examined, nearly 54,000 resulted in additional refunds. In addition, the IRS examined 1.6 percent of corporation income tax returns, excluding S corporation returns, in fiscal 2012.

During fiscal year 2012, the IRS collected almost $2.5 trillion in Federal revenue and processed 237 million returns, of which almost 145 million were filed electronically. Out of the 146 million individual income tax returns filed, almost 81 percent were e-filed. More than 120 million individual income tax return filers received a tax refund, which totaled almost $322.7 billion.

IRS acknowledged that one of the biggest challenges confronting the IRS today is tax refund fraud caused by identity theft. The IRS has more than doubled the number of staff dedicated to preventing refund fraud and assisting taxpayers victimized by identity theft, with more than 3,000 employees working in this area. As a result of these increased efforts, the IRS during fiscal year 2012 was able to prevent the issuance of more than 3 million fraudulent refunds worth more than $20 billion. Despite these efforts, much more work remains on identity theft as well as on overall refund fraud.

The IRS made significant progress last year on international enforcement, specifically in its efforts to combat the practice of illegally hiding assets and income in offshore accounts. They have continued a two-pronged approach: offering a voluntary disclosure program for those who want to come in and get right with the government, while at the same time pursuing tax evaders and the promoters and banks assisting them.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

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Winning The Lottery Is Just The Beginning…

by Michael W. Blitstein, CPA 

Many individuals play the lottery every week with the fantasy of having that winning ticket. Oh, all the things the prize would provide if we just had the lucky numbers.  However, most do not think of the necessary tax planning that surrounds acquiring the wealth.

A recent Tax Court case summarizes the experience of one family. The taxpayer learned she held a winning lottery ticket. The taxpayer’s father contacted an attorney who prepared incorporation papers for an S corporation. The taxpayer and several family members were the stockholders. The taxpayer subsequently transferred the ticket to the S corporation.

Before the taxpayer could claim her winnings, she had to defend her prize against a competing claim by her co-workers. A state trial court sided with the co-workers but the state highest court reversed that decision.

The IRS determined that the taxpayer had made a gift as a result of her transfer of the ticket to the S corporation. The IRS issued a deficiency notice for $771,000 for gift tax owed (income tax liability was not a part of this case). The taxpayer appealed to the Tax Court for relief.

The court first found that the Code generally imposes a tax irrespective of whether the gift is direct or indirect. Under regulations, a transfer of property to a corporation for less than adequate consideration represents gifts to the other individual stockholders of the corporation to the extent of their proportionate interests.

The court rejected the taxpayer’s argument that there was no gift because a family contract required transfer of the ticket. The court found that there was no pooling of money. There were no predetermined sharing percentages. At most, the family had an unenforceable “agreement to agree.”

The court further found that no partnership existed among the taxpayer and her family members. All of the decisions about the ticket were made by the taxpayer’s father; not jointly by all the family members as had been argued. The court concluded that the transfer was a gift, discounted only to account for the competing claims by co-workers at the time of the gift.

So… what’s the moral of this story? As you daydream about what winning the lottery can mean to you, you may want to include getting some real tax advice before you cash in the ticket as part of your fantasy.

CJBS, LLC is a Chicago based firm that assists its clients with a wide range of accounting and financial issues, protecting and expanding the value of mid-size companies. E-mail me at michael@cjbs.com if you have any questions about this posting or if I may be of assistance in any way.

www.cjbs.com