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January, 2012

Message from Nelson & Company, P.S., CPAs

Tax Season is Here - How do things look?

Every year (going on the last 30 years), I have written a newsletter or article trying to highlight what tax and accounting issues to expect in the upcoming year. This year's message is just about the most difficult I've ever had to write.

Not since the oil bust of 1990-1991 have things looked so grim from an economic standpoint. I believe the coming year will see many people continue to struggle financially no matter their income level or walk of life. There are signs the U.S. economy is starting to come out of the recession, but here in Pierce County, I believe it will be several more years.

Clients tell us they are foregoing spending money on discretionary items, instead, they are concentrating on paying off as much debt as possible. We believe this should be the first priority of all families, no matter their economic situation. If you are one of the few that have little or no debt, we strongly recommend you concentrate on building up your savings.

The majority of baby boomers, now reaching retirement, have savings nowhere near the amount needed to retire comfortably. Even with Social Security and pensions, many people can't retire because of debt or other factors. We anticipate many baby boomers will be working well into their 70s.

As to the coming 2012 tax year, it will be one of the few years where we have very few major tax-law changes. Of course, we have the normal changes in rates, exemption amounts, etc. However, there are a number of subtle changes from Congress, the IRS, and courts that have created some serious traps for the unwary. For example, anyone who has foreign assets that exceed $50,000 (such as real estate or securities accounts) must now file a new form with their individual income tax return informing the IRS of their exact holdings. The penalty for failing to do so is $10,000.

2012 may also be the last year for the 15% capital gains rate and the 15% tax rate on qualified dividends. It is likely that whoever controls Congress and the White House will have to raise taxes, and the prime target will likely be the 15% tax rate. For this reason and planning purposes, you may want to consider selling any winners you have during 2012 to take advantage of this tax break.

Expect an increase in enforcement action from the IRS. The local IRS office has added a number of new auditors and we've seen a distinct increase in audit and collection activities. The number of audits has increased sharply and ranges from letters from the IRS service centers asking taxpayers to document or verify deductions, to full-blown visits to businesses by Internal Revenue Agents.

Expanded 1099 reporting has already begun, and we expect there will be a great deal more third-party reporting in the future. Fortunately for this tax year, the IRS has delayed the requirement for the major credit card companies, Visa, MasterCard, Discover and American Express to report transactions, for retailers or any business that accept credit cards. We can, however, expect this information to be sent to the IRS for 2012.

What does all this mean to the average taxpayer or business owner? It means maintaining good records that prove expenses and deductions. Be able to show how revenue is generated is more critical now than ever before. It could be your only means to a no-change audit. Remember: Our firm has a number of resources most CPA firms don't offer in the area of planning and projections. We will be open to schedule conferences to discuss tax and financial planning in the months of May and June.

David S. Nelson, CPA, CTRS
Certified Public Accountants

IRS Times & Inquirer

Michigan Lawyer Receives 24 Months for Diverting Money and Not Paying Income Taxes

A lawyer in Port Huron, Michigan, was sentenced to 24 months in prison for tax evasion.

David Douglas Black, 49, owner of Black, Black and Black law firm also was sentenced to two years of supervised release and ordered to pay a special assessment of $100.

According to court records, during the 2004 tax year, Black diverted income from his law firm by using checks made out to him, his wife or other businesses to pay for his personal expenses.

Black also took business cash payments and diverted it for his personal gain. Black failed to deliver all the records of these diversions to his accountant, which would have enabled the accountant to prepare a complete and accurate personal tax return.

On his 2004 tax return, Black claimed gross income of only $319,866, when in reality the gross income amount was over $1 million, causing a tax loss of over $270,000 to the IRS.

The case was investigated by special agents of the IRS Criminal Investigation.



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Nelson & Company, P.S., CPAs Since 1979

Circular 230 Disclosure:
To ensure compliance with requirements imposed by the IRS, we inform you that (i) any tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used for the purpose of avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.