Three Tax Takeaways for Friday, July 06, 2018

First: consider that taxes are levied in three general categories; taxes on wages, taxes on spending, and taxes on income. All of your taxes touch one or two of these categories.

Second: the TCJA eliminates the alimony deduction for divorces that are finalized after December 31, 2018. This can be a sizable adjustment to income for those paying out large alimonies. On the other hand, alimony received is no longer included in the income of the recipient.

Third: an individual owner of an S Corporation was found to be liable for the Tax Preparer penalty. The owner prepared and signed their own S Corporation tax returns and as the result of an audit, they were found guilty of Tax Preparer infractions, in addition to the other penalties. The court noted that, “Congress intended the definition of tax return preparer to encompass those contributing to the material decisions regarding tax returns.” They were guilty of disregarding reasonable and appropriate review procedures through willfulness, recklessness, and gross indifference.

Don’t make the mistake of thinking S Corporations have special insulation from being audited by the IRS. The pass-through nature of the S Corporation ties it to where it is passing through to: the shareholder’s form 1040. The IRS algorithms follow the trail from the S Corporation right onto the personal tax returns of the shareholders. The last two S Corporation audits I worked examined both the S Corporation tax returns as well as the associated personal tax returns; for two consecutive years.

Separation of duties should compel any informed business person to seek out an independent and licensed tax return preparer to review your books and prepare the tax return.

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