Symbolic but meaningful.
The Internal Revenue Service's position on digital currency such as Bitcoin continues to evolve. As we discussed previously, the IRS issued a decision in March to categorize Bitcoin as taxable property and not official currency. While Bitcoin essentially functions as money, no nation recognizes digital currency as legal tender, though the IRS decision means that federal income taxes and payroll taxes will apply to wages paid in Bitcoin.
When we were talking about IRS audits a few weeks ago, we mentioned that audits are no longer random. The IRS has filters in place that flag tax returns that fall outside of the norm or include information that requires a closer look. One example was a return that reported $60,000 in income with $30,000 in charitable deductions. It just does not look right, so the return is flagged for review.
We are back to discussing what the average taxpayer should do if the mails brings an audit notice from the IRS. In our May 16 post, we talked about the odds of being audited -- very slim for someone with an average paycheck -- and the types of things on a tax return that could trigger an audit. For the most part, the IRS is not interested in casting a wide net to scoop up as many taxpayers as possible. The agency is more interested in the people whose returns show anomalies, and the more anomalies, the more likely an audit.
As we said in our May 2 post, the average American taxpayer has a 1 percent chance of being audited by the IRS. The chance increases to 3.26 percent, though, for taxpayers earning $200,000 in 2013. If you earned more than $1 million -- not unheard of in the Bay Area -- your chances increase to almost 11 percent.
An individual is planning on selling their rental home that they have kept as an investment for ten years. They paid $400,000 on the property and have sold it for $500,000. They have also made no capital improvements upon it and are not paying for closing costs or sales commissions. They would then like to pay the $100,000 net profit towards their principal residence.
Although most Americans have already filed their 2013 taxes and are waiting to hear back from the IRS, there are still some who have yet to submit their returns. One of the thoughts on many taxpayers’ minds after submitting their tax return is, “I hope everything was correct.” This is a natural though, and most of us have heard stories about the IRS auditing individuals and businesses for potential tax fraud or evasion.
In our last post we discussed some different possibilities for how the Internal Revenue Service might tax the virtual currency known as bitcoin. The new type of currency has generated a lot of controversy and exists in a legal grey area because people are trading it for goods and services, holding it as an investment, and producing it as a business, but it is not recognized as a currency by any sovereign nation.
At this point in the year California taxpayers are getting serious about submitting their income tax returns. This means carefully combing through one’s finances and making sure that all income and deductions are properly accounted for and that the details are all correct on the forms being submitted to the IRS. For California residents who are holders of the virtual currency bitcoin, there are some important decisions to make about how to report bitcoins on a tax return.
The Internal Revenue Service is not particularly friendly toward small businesses. Year after year, the IRS accuses small business of cheating their way out of millions of dollars in taxes. Small business owners in California, however, know how complicated it is to file a tax return, and the IRS is unforgiving when mistakes are made. Now, tax collectors are utilizing new resources to make things even more difficult for business owners.