Some Facts About Hilary’s 2015 Income Tax Return:

Hilary Clinton has made public her income tax returns. I’ve reviewed her 2015 income tax return which is filed jointly with her husband Bill Clinton. The Clinton’s derived most of their income from self-employment activities – speech making and book sales. Only a modest amount of income was earned from passive activities – interest. No dividends or capital gains. Therefore, they did not have the advantage of the capital gains rate. In fact, due to having to also pay the self-employment tax, their effective tax rate was 35.2%.

Income: Total income for the year is $28,336,212 and is comprised of:

  • $25,171 of interest income from six bank accounts held at JP Morgan Chase Bank as well as $464 interest earned from tax refunds.
  • $93 in W2 Wages for Bill from the Deb Talent Agency. I wonder what that was about.
  • $69,557 in state income tax refunds. Because state income taxes are deducted as an itemized deduction, any refunds must be included in income in the subsequent year. This is likely a declaration of their refund from 2014.
  • $28,020,811 net self-employment income earned from speaking engagements and sales of books. The expenses deducted looked in line with the type of business reporting. Bill Clinton paid wages as well as a benefit package to his employee(s). Their largest expense was commission payments to the Harry Walker Agency. Bill took a home office deduction. He is entitled to deduct a pro rata share of utilities, repairs and maintenance, property taxes, homeowner’s insurance, mortgage interest, etc. but instead he deducted only $945 in depreciation.
  • $3,000 capital loss carryforward from prior years. There were no capital gains transactions on the current year tax return; they did not play the stock market. However, their total capital loss carryforward was $702,540. At three grand a year that will take a long time to be absorbed. However, if they have future capital gains, the loss will be applied against those gains before any tax is levied.
  • $223,580 from pensions and other retirement vehicles; the main pension pay out was from GSA (Bill’s retirement pay from his presidency).


Deductions: The Clintons filed Schedule A with their income tax return claiming itemized deductions of $5,159,242, rather than taking the standard deduction. The deductions claimed were:

  • $2,819,599 paid in state income taxes
  • $104,303 paid in real estate taxes
  • $41,883 in mortgage interest on their principal residence
  • $3,022,700 in charitable contributions. $3,000,000 was donated to the Clinton Foundation, $2,500 was donated to St. Stephen’s Armenian Apostolic Church, $200 was donated to Hot Springs High School Class of ’64, and $20,000 to First United Methodist Church
  • No deductions were claimed for investment advice or tax preparation fees likely because the deductions would not exceed the 2% of AGI (adjusted gross income) ceiling. Also no deduction was claimed for vehicle registration fees. No deduction was claimed for medical expenses. Even if they incurred medical expenses, the ceiling is 7.5% of AGI for those aged 65 or older.

Please note: I am neither endorsing or denouncing any Presidential candidate. I am simply attempting to explain the implications of their promises about tax reform.



Donald Trump has sketched out a tax plan that he promises “will reduce taxes for everyone.” Individual rates will be trimmed to three brackets: 12%, 25%, and 33% replacing the seven current rates of 10%, 15%, 25%, 28%, 33%, and 39.6%. According to his plan, those in the lowest bracket will pay an additional 2 points or 20% while those in the highest bracket will enjoy a reduction of 6.6 points or a decrease of 18%. This is hardly a reduction “for everyone.” It appears the top one percent will benefit rather than those in the middle or lower income levels.

At the top of the list was the eye-catching promise to reduce corporate rates to 15%. Interesting. Only three points higher than the projected lowest rate for low income individuals. And the same basic rate (although thanks to Obama it could be at 20% depending on various factors) for capital gains. Capital gains tax is levied on stock and other asset profits, interest, and dividends, which is the main form of income for the wealthy. This is why Romney as well as many others in the top one percent enjoy an effective tax rate of only 13.6%.

Hardly seems fair does it?

Well, Trump believes a 15% corporate tax rate will stimulate the economy. Trickle down and all that. But historically, tax breaks for big business have only increased the gap between the top one percent and the lower income classes. Think about it; are you feeling the trickle down?

‘Stimulating investment’ by lowering taxes for the wealthy is the mantra of the wealthy. Does anyone really buy this? I’m no economist, just a lowly tax professional, but c’mon, common sense dictates that tax considerations are not the chief motivating factor in making investment decisions. The primary consideration is “Am I going to make money off this venture?” Tax implications come into play only when projecting net gain or loss. Let’s face it; the rich will always be investors. The tax rate is not the end-all for making that choice. What else are they going to do with their money? Sit on it? Only a few eccentrics will choose to hide their money in a mattress or stick it in a low paying bank account. The rest will play the stock market, develop real estate, buy bonds, become part of the Shark Tank, going for the bigger returns. If these investors make a hundred thousand dollar profit, they will pay taxes on it. Why should they enjoy paying a mere 15% on that profit while every other American making the same amount or less working for the man pays their taxes at a much higher rate?

Ultimately, it is Congress, not the President that determines changes to or creation of tax law.

Perhaps Congress should consider eliminating the capital gains tax rate and charge those profits according to the tax brackets for ordinary income. Perhaps they should leave corporate taxes at a max rate of 35% and get rid of corporate loopholes that allow larger corporations to pay zero. And maybe Congress should lower the tax rates for the middle class who seem to bear the brunt of the tax obligation. Maybe it should be our turn. Shall we call it the “trickle up” effect?




The Valley Fires in Middletown have wreaked havoc upon the landscape. We lost our home in Middletown and so did many of our friends.

The area has been declared a National Disaster area. According to a press release I received from FEMA, “the Regional Administrator for FEMA Region IX Office determined that the Valley Fire threatened such destruction as would constitute a major disaster. California’s request was therefore approved on September 12, 2015 at 21:30 PDT.  Fire Management Assistance Grants provide federal funding for up to 75% of eligible firefighting costs.”

And help is on the way from the Internal Revenue Service as well. The IRS has always gone to bat to help taxpayers affected by disasters. For one thing, filing deadlines are generally extended. I anticipate the October 15, 2015 deadline for filing 2014 individual income tax returns will be extended likely to January 15, 2016, though at this late date, nothing has come down yet.

Many who lost their paperwork to the fires will need time to reconstruct their data. If you find yourself in this situation, request a transcript of your tax documents from the Internal Revenue Service. Your W2s, 1099s, K-1s and other third party documents have been provided to the IRS and are available to you. You can make the request online at IRS Website – Get Transcript.

For data not provided to the IRS, such as payments you’ve made for property taxes, DMV fees, charitable contributions, medical expenses, and deductions, get copies of your bank statements to retrieve the amounts paid.

If you are self-employed, perhaps your data is being safely stored in the Cloud or in an on-line version of accounting software. If not, you will need to reconstruct your books to create a profit and loss statement suitable for reporting on your tax return.

There are specific guidelines in place to help those residing in the Middletown area or for anyone involved in a declared federal disaster. Refer to IRS Publication 547 to discover what you need to know with regard to your loss and your taxes.

Highlights from this publication specific to federally declared disasters:

Timing: Normally, you write off your losses in the year it occurred. “However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct that loss on your return or amended return for the tax year immediately preceding the tax year in which the disaster happened. If you make this choice, the loss is treated as having occurred in the preceding year.”

The reason the IRS allows this is because the loss will lower your tax liability for the previous tax year thus generating a refund which can be used to help rebuild.

Profit: If a reimbursement from your insurance company to repair or replace your main home results in a capital gain (ask your tax pro to crunch the numbers), you will be allowed to postpone the capital gain if you use the money to repair or replace that main home. Naturally, this break is fraught with rules so check out the section under “Gains Realized on Homes in Disaster Areas” in the Instructions for Form 4684.

Home made unsafe by disaster. According to Publication 547 “If your home is located in a federally declared disaster area, your state or local government may order you to tear it down or move it because it is no longer safe to live in because of the disaster. If this happens, treat the loss in value as a casualty loss from a disaster. Your state or local government must issue the order for you to tear down or move the home within 120 days after the area is declared a disaster area.” Here again, it is a good idea to ask your tax professional to crunch the numbers to accurately determine your loss. It will be reported on Form 4684.

My thoughts, and prayers go out to those who have lost everything.

Will it ever happen?

I’ve made taxation a career for more than thirty years. Over the years, my hopes have been raised by promises and proposals by Presidents and Congress of an end to the complicated maze of tax regulations that burden business and individuals. An end to complexity. The ushering in of simplification.

Milton Friedman introduced a flat tax in 1962. It didn’t take.

This concept was also proposed in 1994 when Congressman Dick Armey (R-TX) introduced a flat tax of 17% for individuals as well as businesses. Virtually all deductions, credits, exclusions, and exemptions would have been eliminated. Dividends, interest, and capital gains would have been excluded from taxable income in order to encourage savings, investments, and capital formation. The tax return would be the size of a post card. Businesses would be allowed to take deductions for certain expenses against income. Everyone was excited about it. But the legislation failed to pass.

Shortly after taking office President Obama organized an economic coalition to study tax reform and recommend a new tax system. Under discussion was the elimination of income tax deductions accompanied by a reduction across the board of income tax rates. What everyone had in mind was a flat tax. Did it happen? No, of course not.

In 2011, Paul Ryan (R-WI) was set to introduce remarkably similar legislation with a transition period in which taxpayers could choose the current system or his proposed system for the next ten years. Rather than an across-the-board 17% tax rate, Ryan proposed a rate of 10% for incomes up to $100,000 and 25% for incomes above that level. A generous standard deduction and personal exemption (totaling $39,000 for a family of four) would have replaced the deductions and tax credits formerly enjoyed. The alternative minimum tax and the death tax would be eliminated.

Ryan’s plan included reform for the corporate income tax, currently the second highest in the industrialized world. It would have been replaced with a border-adjustable business consumption tax of 8.5 percent. This new rate is roughly half that of the rest of the industrialized world.

Jim DeMint (R-SC) planned to introduce a flat tax in 2012 – pretty much the same principal – one rate and a postcard size tax return.

None of these proposals have received any serious consideration.

Let’s face it; the current system needs to be burned to the ground. We’ve got approximately 100,000 pages of confusing, unfair, and contradictory tax code mired in shades of gray with the word “generally” used way too many times. According to the IRS, 47% of Americans pay no income tax whatsoever. Many of these “non-taxpayers” claim the Earned Income Tax Credit (EITC) and receive refunds of upwards of $6,000 depending upon family size and income level. According to statistics gathered from 2009 income tax returns, more than 25 million people claimed more than $57 billion in EITC refunds. Are there really that many people entitled to what we call a “reverse-welfare system?”

We all recognize that behind tax legislation is a motivation for certain societal behaviors. For example, if the tax code allows a deduction for charitable contributions, then more Americans will donate to worthy causes. A deduction for property taxes and mortgage interest propel Americans into the American dream of home ownership. The IRA deduction encourages people to save for retirement.

Imagine what would happen if these deductions were suddenly removed. Many nonprofits would cease to exist for lack of funding. The housing market may experience another decline. Why not be a renter and let someone else repair the leaky roof and dripping faucets? And with society becoming more mobile – the necessity of moving for work, renting has become attractive. And if taxpayers did not make IRA contributions would they reach old age only to live in poverty, relying on Social Security and the generosity of family to survive?

And what has happened with the IRS over the years? Because of severe continuing budget cuts along with the added burden of administering Obamacare, customer service has become a joke. As a practitioner I had become accustomed to calling the practitioner hot line and getting an IRS agent on the second ring. Now there are layers of menus followed by hold times of usually more than one hour. And oftentimes after holding that long the IRS disconnects before I’m able to speak to anyone at all. And practitioners supposedly enjoy priority service. I feel bad for my fellow Americans who probably have to hold for even longer periods of time.

To effect change, please write your Congressman!

Redwood Writers Meeting 2:30-5 PM at the Flamingo Conference Resort & Spa, 2777 Fourth Street, Santa Rosa, CA 95405 • Phone: (707) 545-8530  Click here for map.
We ask for a small fee of $5 from members and $8 from non-members to cover costs.

Bonnie Lee

Bonnie Lee

Sunday, November 11th, 2012, 3-5 pm

“It’s All About the Benjamins: Taxes 101 for Writers”

Join Bonnie Lee as she brings comedy to the topic of taxes for writers. Taxes can be boring, yes…especially for artistic types who prefer to deal with word play rather than dollar signs. Do you want to keep more money in your pocket? Lee will teach you legitimate ways to do so. You will be informed and delighted by this entertaining presentation.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service.

Lee founded Taxpertise (formerly Symmetry Business Services) in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. For more than two decades, she has specialized in tax issues relating to entrepreneurs. Learn more at her website.

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31 of the Best Business Books for Solopreneurs and Micro Business Owners
Tuesday, July 6, 2010 at 7:00AM
Knowledge is power and this is especially true for small business owners; solopreneurs and micro business owners. Whether it’s staying ahead of the curve or operating your business with limited resources, you have to be able to make adjustments and decisions based on relevant and current information as it applies to you and your business.

We asked over 97 solopreneurs and micro business owners what business books have they read that not only have they read multiple times, but made such an impact on them or that they found it so profound, it changed the way they do business. Some of the books are well known and others are considered “best kept secrets.” One thing is for sure, these books can be powerful tools for you to build, develop and grow your business.

When you read business books, it important that you take action where necessary, delve deeper when needed and re-read for reminders.

Get the most from your business books:

Read one business book a month or quarter, implement one or two new practices and see where your business ends up after a year.

Create a business book club within your network. Each person reads a business book shares or reports back to the group key insights and tips or the most important aspects of the book.

Swap or trade business books with your network, colleagues and friends.

Many of the tips, tools and techniques found in the following books have been found to be useful, empowering and inspiring. Here are 31 of the best business books for solopreneurs and micro business owners:

1. 4-Hour Work Week by Tim Ferris – Provides a variety of tips and practices to achieve the 4-hour workweek the title refers to; however, it is NOT a get-rich-quick-scheme book. Submitted by R. Kaplan,

2. 9 Lies That Are Holding Your Business Back by Steve Chandler and Sam Beckford – Helps shed light on some of the biggest mistakes that entrepreneurs make and how to prevail. Submitted by T. Scarda,

3. 80/20 Principle by Richard Koch – A little-known must-read. I took it out of the library 4 times before I realized I had to buy it, have multiple copies, and distribute to everyone I know. Submitted by L. Enock,

4. 163 Ways to Pursue Excellence by Thomas J. Peters – Reference for business practices that produce immediate results. Great for those with short attention spans. Submitted by L. Baer,

5. Become Your Own Boss In 12 Months by Melinda Emerson – Step-by-step guide for stepping out on your own the SMART way, the PRACTICAL way… the ONLY way. Submitted by A.Michelle Blakeley,

6. Book Yourself Solid by Michael Port – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by M. Tremblay

7. Coherent Strategy and Execution: An eye-opening parable about leadership and management by Ravi Kathuria – Part fiction but based on real business, not just theory. Ultimately, the company is a success, but only because the CEO was willing to let down his guard, listen to a mentor and realize that he still had a lot to learn – a lesson many small business owners still need to learn. Submitted by B. Price,

8. Crush It by Gary Vaynerchuk – Teaches honesty and transparency above all else, as well as “getting into the trenches” through social media to effectively interact with customers, peers and the media. Submitted by B. MacGregor,

9. Dig Your Well Before You’re Thirsty: The only networking book you’ll ever need by Harvey Mackay – Details what it means to network and the types of people one should have in one’s network. Submitted by T. Lobell, Ph.D.,

10. E-Myth by Michael Gerber – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by H. Cohen,

11. Four Steps To The Epiphany by Steve Blank – A heavy focus on truly understanding customer needs before you determine the business model that is right for your business. Submitted by A. Rodnitzky,

12. Getting Real by 37 Signals – Learn how to limit your hours to 40 hours maximum every week to maintain steady, sustainable motivation. Submitted by D. Croak

13. Getting to Yes: Negotiating agreement without giving in by Roger Fisher and William Ury – Negotiate fees and terms that benefit you, your company and your clients. Submitted by S. Bender Phelps,

14. Go Givers by Bob Burg and John David Mann – This book gives new relevance to the old proverb, “Give and ye shall receive.” Submitted by C. Hasbrouck,

15. How to Become a Rainmaker by David Fox – Recommended reading for all my existing and new clients. Submitted by N. Anderson,

16. Interview Tactics: How to survive the media without getting clobbered by Gayl Murphy – Helpful guide to learning how to make the most of media interviews. Submitted by S. Levin,

17. Made to Stick by Chip and Dan Heath – Teaches one how to convey ideas in very powerful ways that “stick” in your listener’s brain. And what’s more important than that when you’re trying to sell an idea, a service or a product? Submitted by M. Lindenberger,

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson,

18. Making a Living Without a Job by Barbara Winters – A hand-holder for when you want to give up on the “solopreneur” thing. Submitted by K. Caterson,

19. Million Dollar Consulting: The Professional’s Guide to Growing a Practice by Alan Weiss – Recommended for anyone starting of any type of business. Worth re-reading at least once a year. Submitted by C. Smith,

20. Mommy Millionaire: How I turned my kitchen table idea into a million dollars and you can too! by Kim Lavine – Step by step guide. Unlike other books that are just motivational, Kim describes her personal experiences with buyers, how to get their numbers, how to determine pricing, how to manufacture your product, etc. Submitted by S. Krikelis,

21. Never Eat Alone by Keith Ferrazzi – A book full of strategies, advice and confidence builders for networking, connecting and building your brand. Submitted by B. Carnduff,

22. Off the Wall Marketing Ideas by Nancy Michaels and Debby J. Karpowicz – Full of fun success stories and anecdotes. The book never gets old; its lessons are just as applicable in everyday life as they are in business. Submitted by A. Fisher,

23. Permission Based Marketing by Seth Godin – Marketing in the modern environment. How to focus not just on selling your products but on gaining permission for further contact through newsletters, blog subscriptions, e-blasts, etc. Submitted by L. Sanders,

24. Predictably Irrational: The hidden forces that shape our decisions by Dan Ariely – This book makes behavioral economics fun, interesting and even laugh-out-loud funny while providing real world examples. It also saves you from making poor buying decisions because you’ll soon know why the human mind really wants things like that free gift with purchase–even when you know you don’t need it. Submitted by S. Karacostas

25. The Art of the Start by Guy Kawasaki – The phases a startup company should go through to be a successful company. Essential for creating a progressive company focused on excellence instead of marginal company. Submitted by Ellen Lytle, M.A., M.Des.

26. The Heart of Marketing: Love Your Customers and They Will Love You Back by Judith Sherven, Ph.D., and Jim Sniechowski, Ph.D. – It is the solopreneur’s guide to heart-based, client-oriented, soft-sell marketing. Submitted by S. Dayhoff, Ph.D,

27. The Long Tail: Why the future of business is selling less of more by Chris Anderson – Shows the power of the Internet to sell products and services that would never have been viable on the offline world. Submitted by B. Fuhrmann,

28. The Success Principles by Jack Canfield – Following along with the adage “how you do anything is how you do everything,” I’ve slowly incorporated many of the lessons in the book into my life and my business has flourished because of it. Submitted by A. Faiola,

29. The War of Art: Break through the blocks and win your inner creative battles by Steven Pressfield – Hits head-on so many of the excuses used in small business and how to change and adjust your mindset. Submitted by W. Riggens-Miller,

30. Think and Grow Rich by Napoleon Hill – (Received numerous amounts of submissions for this book) A must read for solopreneurs and micro business owners. Submitted first by R. Williams,

31. To the Rescue: The small business survival guide by Ray Silverstein – How to translate “tighten your belt,” “do more with less” and “think creatively” into specific actions. And what do you do if you are already in trouble. Submitted by J. Levine,


Make Today County by John C. Maxwell – Get your personal priorities in order and your business priorities will follow.

Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know by Bonnie Lee – In a conversational tone, tax issues for small business from what you can or cannot deduct to self-employment tax (the big hit that can put even low income entrepreneurs into a 50% tax bracket) to home office, to IRS problem resolution including the formula the IRS uses to determine an acceptable offer in compromise on delinquent tax liabilities (pay pennies on the dollar!) are addressed.

WANT TO RE-POST THIS ARTICLE ON YOUR BLOG OR USE THIS ARTICLE IN YOUR EZINE, E-NEWSLETTER OR WEB SITE? You may, as long as you include this complete blurb with it:

A.Michelle Blakeley is in the listening business. As a Micro Business Therapist, she provides an open-minded and non-judgmental ear to listen to the real issues and concerns that start-up, emerging and women entrepreneurs experience and negotiate solutions through comprehensive discussions and practical micro business plans. She is featured in and the Financial Post as one of 30 Women Entrepreneurs to Follow on Twitter, contributor for the San Francisco Examiner and Fearless Woman Magazine; the host of Simple Truths for Women Entrepreneurs on and author of the NEW e-book: “Get it Right and Move Along… a collection of practical tips, tools and techniques for small business owners.”

The economy is swimming madly back to the surface. Yet many folks, especially business owners, are still suffering. A lot of you have delinquent income tax liabilities. And if the amount owed is unmanageable, staggering, you might feel overwhelmed. Perhaps you believe that you will never be able to repay the debt. You fear liens and levies and knocks on the door.

Then one day you hear a radio commercial: Step right up! Pay pennies on the dollar to get rid of your tax liabilities! Sounds good, a miracle answer. A solution is at hand. But if you’re smart, you’re skeptical. Does the IRS really compromise with taxpayers? Will they really let you off the hook that easily? And can these firms who make this claim really help or are they scamming taxpayers out of their money?

The answer is: it depends. In the next several segments, I will educate you on this topic so that you will know whether your offer will fly before paying good money to a professional.

Five years ago, the IRS issued a warning (IR-2004-17) to taxpayers to check carefully before applying for Offers in Compromise. The IRS commissioner at the time, Mark W. Everson said, “This program serves an important purpose for a select group of taxpayers. But we are increasingly concerned about unscrupulous promoters charging excessive fees to taxpayers who have no chance of meeting the program’s requirements. We urge taxpayers to not be duped by high-priced promises.”

As of this writing, the IRS accepts only 24% of all presented offers. Here’s how to determine whether or not you meet the program’s requirements.

First of all, if you are looking to compromise payroll tax liabilities, forget about it! The payroll taxes you failed to pay are considered a “trust” fund. They are made up of the employee’s withholding taxes, which was never your money to begin with. For that reason, the IRS will not compromise. If you have a choice, always pay your payroll tax liabilities before you pay your income tax liabilities. And if you can only pay part of a payroll tax liability, add up the trust fund portion (the withholdings) and pay for those. Be sure to indicate “trust fund-employee withholdings” on the memo line of your check.

Secondly, you need to determine the reason for the compromise request. There are two categories the IRS looks at: 1) Doubt as to collectibility and 2) Doubt as to liability. The first category is obvious – you don’t have the money now nor will you have it by the time the statue of limitations runs. The second category regards innocent spouse issues (my flaky ex owes this, not me!). Or involves changes to your tax return creating a new liability that are the result of an audit or other adjustments. You disagree with the changes but the statute period to prove your case has run out. Most offers in compromise fall under the heading of doubt as to collectibility.

The IRS expects you to pursue other routes before trying for an offer in compromise. If you have room on a credit card, they expect you to use it up to pay them. They want you to tap into family members and friends for loans, or refinance the house (which is probably still swimming madly toward the surface as well). They want you to try for an installment agreement with the IRS. This involves completing IRS form 9465, Request for Installment Agreement, and form 433-A, Collection Information Statement for Wage Earner’s and Self-Employed Individuals. From the data collected here, the IRS will determine if you can comfortably make monthly payments toward your tax liability.

If they decide you cannot afford an installment agreement, they may deem you uncollectible. When that official designation comes down, you will be left alone for an entire year. No collection efforts, no garnishments, no liens, no levies; you enjoy a reprieve. Penalties and interest will continue to accrue, of course. But you won’t have to worry about Roscoe and Vinnie showing up at your door. Once the year is up, they will send you a threatening letter, designed to make you shudder and cry. But don’t be alarmed. It’s spit out from a computer and it’s just their way of getting your attention, of making you respond. Do so. Reevaluate your financial status and go for the installment agreement if you’re able, or get deemed uncollectible again or if it looks like your dire straits will continue unchecked forevermore, consider an offer in compromise.

Stay tuned. In the next segment I will discuss how to complete form 433-A. You might be surprised to find that the IRS has a different take on your finances than you do. If you’re hell bent on getting this information immediately, purchase my book Taxpertise, The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You to Know, available at

Whether your business is small or large, incorporating is a worthy consideration under Obama’s new administration. Many think of Obama’s administration as small business friendly, however, there is a new mandate to close the $400 billion tax gap and empower the IRS to get every penny it is entitled. Now, more than ever, small business owners need to consider the concept of adding, “Inc.” to their name.

I often advise clients to consider incorporating their business once profits reach a steady $100,000 plus per year. Beyond the tax consequences, the legal aspects of incorporating should be discussed with one’s attorney. The tax consequences, as well as the ability to function within a more restricted structure, should be discussed with one’s tax pro. Employee benefit packages and retirement plans should also be studied for comparison with existing strategies.

Income Splitting

When it comes to the income tax picture, income splitting is the primary reason to incorporate as a C Corporation. As a sole proprietor, you are the business. You declare your sales and subtract business expenses on Schedule C of your individual income tax return. Then you pay both income taxes and self-employment tax (15.3 percent) at the individual level.

By incorporating as a “Sub S Corporation,” no tax is paid at the corporate level and all income flows through to your personal income tax return. Since the self-employment tax does not apply to dividends, you will also enjoy some tax savings.

Incorporating gives birth to a legal entity which will exist at arm’s length from your personal finances. If structured as a C corporation, this entity files its own tax returns and pays its own taxes.

Americans enjoy–using the term loosely–a progressive tax system, in which the more you make, the higher your rate and the more you pay. So if your income is cut in half and allocated between your C Corporation and your individual income tax return, you are likely to save a lot of money. You pay taxes on this income at the individual level when you draw income from the corporation in the form of wages, dividends, rents, etc. There may be other non-taxable forms of income, such as employee benefits and expense account reimbursements.

For example, the net profit after paying yourself a reasonable wage, is $100,000. You take a qualified dividend of $50,000 which is subject to a tax rate of 15 percent through 2010. The C Corporation pays corporate tax on the remaining $50,000 at a rate of 15 percent and you have no self-employment tax to worry about. The overall tax rate is 15 percent.

Same scenario but the business is set up as a sole proprietorship: Your tax liability would be about 25 percent on a profit of $100,000 plus an additional 15.3 percent for self-employment tax to fund your social security. Ouch!

Since you are taking wages from the corporation, the 15.3 percent self-employment tax rate will be built in to your withholdings and the employer’s matching share, all classed as payroll taxes, which is a write off at the corporate level. When a sole proprietor pays the self-employment tax, she cannot write it off as a business deduction.

Obama’s tax plan and new tax rates on those making more than $250,000 per year will be affective in 2011. Using income-splitting techniques these higher tax rates can be minimized.

Protection from the IRS

If a C Corporation gets in income tax trouble, the IRS can only go after corporate assets. Like any litigator, they may attempt to pierce the corporate veil, and tap into your personal assets. So make sure you follow the rules.

“There is no personal liability for corporate income taxes unless there is a liquidating dividend or the shareholders fail to maintain clear delineation between corporate finances and personal finances,” says Robert McKenzie, tax attorney for Arnstein & Lehr LLP. He added that if the company is operated properly and not a single member LLC treated as a C Corporation for income tax purposes, there is no personal liability for corporate income taxes.

But look out! If the C Corporation has an unpaid payroll tax liability, the IRS can hold you personally liable.

Why is this so important? Because the “newer and friendlier IRS” has left the building. Obama sees the $400 billion tax gap–unpaid tax liabilities, projected lost tax revenue due to nonfilers, cheaters, and the underground economy–as a potential source of revenue. His mandate to IRS Commissioner Doug Shulman is to “Sic ‘em!” So the IRS is retraining their keypunch staff (don’t need all those clerk typists now that more than 70 percent of the nation is filing electronically) for enforcement positions. The IRS is also adding an additional 3,500 positions in all areas of enforcement from audit personnel to special agents.

With this rocky economy, it might be wise to have a suit of armor to protect your personal wealth.

Consider these factors along with all the issues that pertain to your individual situation. Then sit down with your tax pro and your attorney to determine if incorporating your business is a logical next step.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. She is also the author of Taxpertise: The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know, from Entrepreneur Press. Follow Bonnie Lee on Twitter @BLTaxpertise or email her at Live stream her radio show every Tuesday at 1:00 PST by going to and clicking on Listen Now.

This article has been excerpted from Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from

The IRS will never tell you why a particular tax return is under audit. However, there are certain factors that make it obvious why a tax return was selected.

What Triggers an Audit?

Following is a comprehensive list of things that can trigger an IRS audit:

Failure to include income that has been reported to the Internal Revenue Service

During the month of January, you receive tax documents in the mail declaring income and certain expenses that relate to your tax return. For example:

1099-INT declaring the amount of interest income you’ve received from various sources including banks and investment companies

1099-DIV declaring the amount of dividends you have been paid on your investments

1099-MISC for work as an independent contractor and for rental income from tenants of your commercial properties

W-2s and K-1s

The Internal Revenue Service receives this same information. When you file your tax return, the IRS plays a matching game to ensure that you have declared all of this income on your tax return. If you have not, the IRS will recalculate your tax liability and bill you accordingly. Also considered an audit, it’s basically a by-mail correction notice that is open to dispute.

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Severe departure from the national standards

The IRS has a construction of tables, available on its website at, that indicate by income level and if self-employed, by industry, an average of deductions taken in any given tax year. If your numbers are significantly different than the national averages, you may find your tax return up for scrutiny. Red flags include vehicle expense; charitable contributions, especially noncash ones; meals, entertainment, and travel; and excessively high cost of goods sold.

Dramatic change in income and expenses from one year to the next

You may experience a financial downturn that throws you into a loss situation. The IRS may audit just because it is interested in what happened and whether or not you are hiding income. Or if your income suddenly increases, the IRS may be suspicious that you cheated in the past and are now coming clean.


Lifestyle audits are supposedly a thing of the past. But come on, you know that lifestyle comes into play. I mean, if you are living in a Beverly Hills mansion, with mortgage interest of $200,000 per year, paying DMV fees on a Ferrari, and making charitable contributions of $50,000 each year, then your tax return had better show more than $36,000 of wages from Oil Changers, right? These incongruities will flag your tax return for audit.


Specific industry audits are a continuing IRS project. Every year the IRS selects a particular industry to audit. In recent history it has selected wage earners with a small Schedule C business (looking to blow hobby losses out of the water), attorneys incorporated as S corporations (looking at unreasonable compensation in order to add payroll tax liabilities), and trusts with offshore holdings (looking for tax fraud and unreported income).

Bonnie Lee is an Enrolled Agent (E.A.) admitted to practice at all levels within the IRS representing tax payers in all 50 states. She founded Symmetry Business Services to represent taxpayers in audits, offers in compromise, tax problem resolution and to help non-filers safely reenter the system. She has served as a champion to taxpayers for more than 25 years. She is the author of Taxpertise: The Complete Book of Dirty Little Secrets and Tax Deductions for Small Business the IRS Doesn’t Want You To Know, available from

When you’re self-employed filing a Schedule C with your tax return, your chances of being audited are greater than if you were a wage earner. Why? Because the IRS suspects that you will attempt to either hide income or write off personal expenses as business deductions. So when they select tax returns to audit, they cast the net wider and rake in 1.5% of self-employed folks versus 1% of W2 employees.

Here’s how you can keep them off your back:

Use a professional software accounting system. Your credibility increases in the eyes of an IRS agent if your tax return is based on professionally prepared financial statements, especially if maintained by an outside firm. You can use the same software to track your personal income and expenses as well.

Document sources of all income. If you are audited, the first thing the IRS agent will do is add up all of the deposits from your personal and business bank accounts. If more money went into the bank than was declared on your tax return, the IRS will want to know where the money came from and whether or not the income is taxable. If you use QuickBooks for your personal and business books, you will automatically tie out this income. But you still need proof. If the income you record is not taxable, e.g. gifts, inheritances, loans, transfers from personal funds, then keep a copy of the check or document that accompanies the income.

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Let a professional prepare your income tax return. Self-prepared returns are more likely to be audited because the IRS believes that a nonprofessional has limited knowledge. Besides, you may find that the fee charged by an Enrolled Agent or CPA might be wiped out by the added deductions they spot for you. Tax law is complex. There are more than 14,000 pages of tax code. And if you are self-employed, no matter how small your business, your tax return is now a complex creature.

Rethink your legal form. Corporations, LLCs, and partnerships are less likely to be audited. But that should not be the sole reason to incorporate. Discuss this option with a tax professional and your attorney before deciding.

Document red flags. You are allowed to deduct all ordinary and necessary business expenses. Would you make this purchase if you didn’t have this business? If the answer is no, you probably have a deductible business expense. But it’s important to know the rules and to have proper documentation to justify the deduction. Some expenses receive considerably more scrutiny than others.

Automobile expense is a favorite area the IRS explores. Taxpayers are required to keep a mileage log, however, I have met only one client who ever did. There are ways to substantiate mileage deductions without presenting an auditor with a mileage log. Be sure to record your beginning and ending odometer reading in your appointment book on Jan 1 and again on Dec 31. If you use an appointment book or calendar, a mileage log can be reconstructed from those pages and total mileage for the year can be extrapolated from odometer readings recorded on vehicle repair receipts.

Travel, meals and entertainment are close runners up to automobile expense when it comes to scrutiny. Go to and read publication 463 to determine what you can and can’t deduct. Then document the hell out of it.

Vacation destinations like Las Vegas or Hawaii should be documented with more than purchase receipts to prove business intent. Keep flyers advertising the trade show, the seminar or letters from prospective clients at that location on file to prove the validity of the deduction. If entertaining, make sure to make notes on receipts for meals and entertainment mark with name of the person entertained and a brief description of the business purpose.

More people telecommute and work from home offices than ever before. So while it has become the norm, the IRS still likes to pick this deduction apart. Take photographs of the house and the office area. This will serve two purposes: It will show the proportion of the business area versus the personal living area to substantiate the amount of space claimed and it will show that there is in fact a business area. The rule is that your home office must be your principal place of business, used exclusively and on a regular basis for business purposes.

Bonnie Lee is an Enrolled Agent admitted to practice and representing taxpayers in all fifty states at all levels within the Internal Revenue Service. Lee founded Symmetry Business Services in 1982 to represent taxpayers in audits, offers in compromise, tax problem resolution, tax preparation, tax planning, and to help non-filers safely re-enter the tax system. As an outgrowth of her work with her growing clientele and her dedication to demystifying taxes for real people everywhere, Lee launched the Taxpertise ™ seminar program, her Taxpertise ™ radio show on KSVY radio in Sonoma County, California and her upcoming (July, 2009) Entrepreneur Press book, Taxpertise, The Complete Book of Dirty Little Secrets and Hidden Deductions for Small Business that the IRS Doesn’t Want You to Know. Follow Bonnie Lee on Twitter @BLTaxpertise or email her at . Live stream her radio show every Tuesday at 1:00 PST by going to and clicking on Listen Now.

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