Tax Reporting - WHAT YOU NEED TO KNOW

Even though we do NOT prepare client's tax returns, there are a variety of tax reporting documents and items that your will receive which MUST be provided to your CPA (notice we did not say "enrolled agent") in order for your tax filing to be correct the FIRST time. In each of the areas below, we have seen MAJOR mistakes, oversights and other errors which have created undue cost and time expenditures on the part of our staff and other professional advisors.

Managed Accounts

If you have a managed account, whether it holds Stocks, Bonds, Mutual Funds, ETFs, etc., you will receive a 1099 DIV and a summary statement of gains and losses from the brokerage firm where these assets are custodied. On occasion, we have seen that this information is completely ignored, and when the return is filed, the information that the IRS receives (their copy of the 1099) only shows the sales of any positions. Thus, an account with $80,000 of asset sales, absent proper documentation being submitted, will be flagged by the IRS as having under-reported income by $80,000, resulting in unwelcome and disturbing notices from the IRS regarding the tax underpayment. While these situations have been rare, they do happen with enough frequency to provide fair warning and caution.

Alternative Investments

If you are invested in Direct Participation Programs such as REITs, Equipment Leasing Trust, Business Development Companies, Limited Partnerships, or Master Limited Partnerships, you will be receiving either a 1099 or a K-1 within the first few months of the year. In some instances, K-1s can be delayed by several months, due to different circumstances. For example, investments in developmental drilling programs usually do not generate a tax statement until after March 31st of the year following the initial investment.

The big question here is "Do you have them all?" If you miss even one, don't be surprised to get a deficiency notice from the IRS!!

Please contact our office BEFORE you go to see your CPA so that we can cross reference all accounts to be certain you have a complete record of all income to provide.

For more information on tax benefits of investing in Direct Participation Programs, please visit our E-Seminar "Guide to Direct Investments"

Energy Investments - Handling IDCs, Depletion Allowances, and Cost Depreciation

Investments in energy programs with non-IRA funds contain all manner of specific which demand the use of a qualified professional for the best tax outcome. It is possible that your CPA is not familiar with some of the elections that can be made.

For Royalty (Mineral Interest) programs, there is an election between the use of claiming a DEPLETION ALLOWANCE, and using COST DEPLETION. Typically the latter yields the best tax outcome.

For Developmental Drilling Programs, the Intangible Drilling Costs (IDCs) may be accelerated into the year of the investment or taken over five years. Most investors elect to accelerate the IDCs, and the continued availability of the acceleration of IDCs is one aspect of energy investments which remains a point of debate by Congress, the Executive Branch, and the Treasury Department. Making the proper election at the beginning assures the attainment of the desired outcome, while failing to make the election causes the IDCs to be spread over five years.

Also, there are Tangible Drilling Costs that are reported on the tax forms which must also be reflected in the return, to assure proper reporting.

Taxation of Income from these programs is reduced by available DEPLETION ALLOWANCES, as reported by the program sponsor. Typically 20% to 25% of the net income is thus tax preferenced.

For more information on tax benefits of investing in energy, please visit our E-Seminar "Guide to Investing in Oil & Gas"

Roth Conversions

If you have completed a Roth Conversion, with or without any ancillary strategies to minimize the resulting taxable income, it is important that you understand IRS Form 8606, where all Roth Conversion activity is reported. In many instances, we have had to instruct CPAs, but more often, non-CPA tax preparers, on the correct reporting of Roth Conversions as well as recharacterizations.

The rules pertaining to Roth IRAs and Roth 401Ks are anything but simple - for a better understanding, please visit our E-Seminar "Roth IRA Fundamentals. Advanced strategies, such as the use of a Fair Market Valuation estimate at the time of the conversion, and the creation of tax deductions or offsets to the income resulting from the Roth Conversion (e.g. energy investments or accelerated charitable deductions), require great care and professional assistance to get it right the first time.

The Bottom Line

As the reality TV shows like to say "Kid's, don't try this at home" - If you have any of the above situations, and you attempt to do your tax return yourself, BEWARE! Unless you are a currently practicing CPA and staying up on all rules and regulations, you should always "seek wise counsel" in respect of your tax preparation responsibilities.

We encourage our clients to meet with us as they are gathering their tax documentation to be certain they have ALL of the information they need. Further, we are happy to meet with your CPA to be certain these items are addressed before the tax return is filed. We are happy to review drafts of tax returns before they are filed, specific to the reporting of the above issues, to be certain they are properly reported. We will not review tax return drafts after April 1st - that is what extensions are for!