Another year has passed, and you need only skim the news to see how badly the government wants to collect more revenue. Please pay close attention to this newsletter, our website and our appointment instructions. We have put a lot of information into these areas to ensure you are able to withstand the governments "fund raising" objectives. We can promise you if you do not look at this information carefully it could cost you money.

Tim and Kevin

In this issue, you'll read:
OUR OFFICE IS STILL IN STOCKTON BUT WE WILL BE IN ROSEVILLE BETWEEN FEB 8TH AND THE 14TH
THE BASIC RATE FOR OUR SERVICES REMAINS UNCHANGED FOR THE THIRD CONSECUTIVE YEAR
BE PREPARED FOR DISAPOINTMENT THIS YEAR - WE ARE WARNING YOU NOW SO YOU ARE NOT SURPRISED!
THERE WILL BE A SUBSTANTIAL FEE FOR CERTAIN DEBT CANCELLATION SITUATIONS.
YOU MAY WANT TO CONSIDER OTHER ALTERNATIVES FOR TAX PREPARATION IN CERTAIN SITUATIONS
NEW TAX PREPARER PENALTIES REQUIRE US TO ASK FOR MORE DOCUMENTS THAN IN THE PAST
NON-CASH CHARITABLE CONTRIBUTIONS MUST BE DOCUMENTED, BUT ARE EASY TO PROVE IF YOU DO IT RIGHT
THE ROADBLOCK OF THE EMPLOYEE POLICY LETTER
HOW TO KEEP A MILEAGE LOG
SUGGESTIONS FOR KEEPING RECORDS IN THE DIGITAL AGE
JOB-RELATED EDUCATION EXPENSES ARE UNDER ATTACK BY THE IRS
THE ENERGY CREDITS ARE BACK BUT DO YOUR HOMEWORK FOR A TAX CREDIT

OUR OFFICE IS STILL IN STOCKTON BUT WE WILL BE IN ROSEVILLE BETWEEN FEB 8TH AND THE 14TH

Appointments are available online for phone appointments, Stockton office appointments and between February 8th and February 14th, in Roseville at the same location we have visited in past years, the Homewood Suites Hotel.

This year, in order to make an appointment, we require you to read our instructions and answer a few more questions than in past years. Seemingly innocent questions, such as whether a client has a foreign bank account, may have extremely severe, even criminal consequences in today's tax enforcement environment. We ask your patience in going through all the warnings and questions we are posing.

Kevin and I attend professional conferences throughout the year which are attended by the very top management of the IRS. They make no secret of their specific enforcement objectives and we have used this information to focus our tax practice in areas where our clients are most vulnerable. Aside from the extreme emphasis on international issues, the need for record keeping has never been so critical. It has become so much a measure of the effectiveness of our ability to represent our clients that we have written an article, found below, where were essentially say if you don't not want to keep records you should not waste your money by paying our fees. We can't help you if the IRS comes calling and you did not keep any records.

There is a great deal of information to absorb here, and we are warning you it is important to read all of it. We will warn you up front that if you are "surprised" by the fact your refund is very disappointing (see the article below) or that we had to charge you a large additional fee because you had a foreclosure (see the article below) or that we must see a letter from your church about your donations (see the article below) we are going to point out that the information is her and on the website.

In closing this summary, Kevin and I want to say that, despite all the warnings and the strict requirements we have imposed on our practice, we both feel we provide absolutely the highest degree of expertise and experience in the field of tax compliance. Having filed, negotiated and closed literally thousands of audits, appeals conferences and court cases we feel we have experience unmatched by anyone else you could routinely hire to complete your tax returns, and that given the value of this experience compared to the competition, we are very reasonably priced. To this success we credit without hesitation the extraordinary high quality of our clientele. We cherish our client relationships and the annual renewing of these bonds because of who you are and what you represent. We are so selective in taking on clients that we do not advertise and we do not have a listed telephone number. In this new age of IRS enforcement we will do our utmost to defend your ability to reduce your tax liability to the lowest level possible using our knowledge, even though doing so will require the acceptance of certain unpleasant realities such as record keeping on your part.

We look forward to another successful tax season.

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THE BASIC RATE FOR OUR SERVICES REMAINS UNCHANGED FOR THE THIRD CONSECUTIVE YEAR

We have again decided to absorb rising costs and keep our basic tax preparation fee at $350. This means that approximately 80% of our clients who choose to again use our services will see no increase in cost. In addition, we are not increasing our basic fees for rentals or small businesses.

Instead, we have made changes in our fee structure for other, more specialized areas. This includes additional fees for specialized services and forms, which either require a more intensive analysis or are the basis for higher professional liability, which is one of the more dramatically rising costs in the legal field.

If you have undergone a foreclosure of real property, transferred a deed in lieu to a lender, completed a short sale on your home, or had consumer debt, such as a credit card balance, forgiven, read the article below related to the possible additional fee involved in this situation.

We have also changed our policy with regard to litigation fees and costs. Because of the intensive IRS enforcement efforts we are now seeing, it is no longer practical to offer free legal services at the litigation level. There are two reasons for this. First, the IRS has taken many positions against taxpayers recently which are not consistent with the law. This gives our firm the opportunity to recover attorney fees from the IRS for having taken their erroneous position. These are attorney fees which our clients will then not have to pay out of pocket. The second reason is a new aggressiveness on the part of the government to get more of your money. We are seeing cases go to trial that until recently would have settled with little or no controversy.

Consequently, for tax returns we prepare from this point on, our free legal coverage will be for any administrative action prior to the issuance of a notice of deficiency by the IRS or the equivalent issuance by a state agency. This includes about 99% of all the representation we have to take with our clients and includes, for example, any and all audits.

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BE PREPARED FOR DISAPOINTMENT THIS YEAR - WE ARE WARNING YOU NOW SO YOU ARE NOT SURPRISED!

YOUR REFUND MAY BE LOWER THIS YEAR---WHY? PLEASE EXPECT SOME DISAPPOINTMENT BUT UNDERSTAND THIS IS THE GOVERNMENT'S DOING.

Congratulations! You are taking home more money in your paycheck every pay period courtesy of the federal government. That is the good news-the bad news is that you may have to pay that amount back to the federal government with your 2009 income tax return.

The "Making Work Pay Credit" as part of the American Recovery and Reinvestment Act (PL 111-5) signed into law in 2009 changed the withholding tables for taxpayers up to 6.2% of a taxpayer's earned income (to a maximum of $400 for individuals and $800 for joint filers (IRC 36a)). While this sounds good at initial glance, the devil is in the fine print.

The Making Work Pay Credit has a "phase-out" of 2% of the modified adjusted gross income (MAGI) above $75,000 for individuals and $150,000 for joint filers.

What does this mean in English? If you are a two-income family or a single wage earner making over $150,000, you may have had up to $800 less taken out of your paycheck for federal taxes WITHOUT YOUR KNOWLEDGE. And the federal government wants that money back!

Remember, the goal of the economic recovery was to get more money "into the economy". One way this was accomplished was by changing the withholding tables that your employer uses to withhold federal taxes from your paycheck based on your income. The federal government asked the employers to take out less from your check for federal income tax withholding. The "idea" was to offset this lesser withholding with a tax credit of up to $800 for joint filers-what wasn't accounted for, however, was the situation in which your adjusted gross income exceeded the limits of the credit. Essentially, this was a 'horse before the cart" credit that gave the taxpayer the benefit of the credit up front (without his/her knowledge), then if you did not qualify for the credit given, you pay it back by a lower refund or a high amount owed on your 2009 tax return.

This credit is just the opposite of the recent tax economic stimulus program which offered a stimulus credit on your tax return if you qualified and left you out if, due to your income, you did you not qualify. The Making Work Pay Credit assumes up front that you qualify, then asks for the money back if you do not qualify.

The state of California is doing a similar trick on three different fronts. They are modifying the withholding tables (you may have received a notice from your employer), they are reducing the credit for dependents from $309 down to $98 and they are raising the top tax rate from 9.3% to 9.55%. All this adds up to higher taxes for most of our clients. Many of our two earner clients, for example, pay the state every year a few hundred dollars. In all likelihood this few hundred dollars could increase twofold or more. Especially affected are clients with many dependents. For example, a couple with four children would see a substantial tax increase of $844 based only on the reduction in dependent credit alone.

What this means to our clientele is the following: you may not have as big of a refund next year because you are paying the feds back for their "advance" of funds made to you each paycheck in 2009 and are helping to shore up California's budget. We hope you understand what the source of this potential disappointment will be before you have your tax returns prepared by our firm. Otherwise, you may think there has been a mistake when in fact this the action of the state and federal governments.

The credit (and modified withholding tables) are supposed to expire at the end of 2010. What can you do to combat this "give with one hand and take with the other" mentality? Lower your state and federal withholding a few exemptions to ensure that you offset this lower withholding and preserve your refund at the end of the tax year.

There is still time to prevent this by increasing your withholding by claiming FEWER exemptions on your Form W-4 for the end of the year.

For example, changing your exemptions from Married to Single (there is a check box for "Married but withhold at higher single rate,") you will prevent at least part of the potential for a very disappointing tax season.

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THERE WILL BE A SUBSTANTIAL FEE FOR CERTAIN DEBT CANCELLATION SITUATIONS.

The most dramatic change for all tax returns completed on or after October 15, 2009 will be an additional fee of $350 for cancellation of recourse debt transactions involving either real property or personal property.By recourse debt we mean a debt where you as an individual are personally liable. In all practicality this description includes the cancellation of any debt through a foreclosure, short sale, deed in lieu, loan modification or the forgiveness of a consumer debt such as a credit card account. Essentially any cancellation or forgiveness of debt falls into this classification except that of a purchase money mortgage or bankruptcy. Also subject to the extra fee is forgiveness of debt on second, third or home equity debt not used to purchase the property.

This is due to a change in the law for next year regarding penalties levied against tax professionals who fail to fully document their reasons for taking certain positions of law.

We will not charge an additional fee for a purchase money mortgage or for debt discharged in bankruptcy. This is where you have a foreclosure, short sale or a deed in lieu on a mortgage or deed of trust which you purchased as a principle residence, and at the time of foreclosure, deed in lieu or short sale the only loans remaining unpaid were the very same original loans (either a first or second loan) used to buy the property when it was first acquired. In other words, you never refinanced any of the mortgages or deeds of trust used to purchase the property. Because in this narrow situation you will have no cancellation of debt and no tax liability, we will not charge an additional fee.

You should note that even if you have converted the property to a rental, the purchase money protection will generally apply. Converting a rental to a residence, however, will not afford this protection and will most likely be recourse debt.

If the cancellation of debt is from a property acquired and used as a rental, then the extra fee will apply to this analysis, as it is even more complex than where a residence is concerned.

Be careful about advice from so-called experts. It is common, for example to hear about the federal law called the mortgage Forgiveness Debt Relief Act of 2007. But what these "experts" usually fail to mention is two major problems. First, the state of California currently has no such law. They did have it but it expired December 31, 2008. So while your situation may be covered for federal tax, state tax is most definitely still a factor. And with the new, higher California income tax rates approaching ten percent for most of our clients, this will not be an insignificant amount. Second, on "acquisition debt" is covered. So if you "cashed out" any equity from your property and used it for anything except substantially improving that same property, the Mortgage Forgiveness Debt Relief Act of 2007 will not help you.

In addition, cancellation of any debt in bankruptcy cannot result in this type of income, although it must be reported on the tax return. There will be no additional fee for bankruptcy discharged debt cancellation.

Why this additional fee? Especially when clients in this situation are usually in dire financial straits?

We are restricted to a high degree by our role as attorneys. If we were ordinary tax preparers, or even CPA's we would not be bound by our status. As attorneys, you are entitled to rely on our opinions to a far greater extent than any other type of tax professional. An ordinary tax preparer can listen to your circumstances, ask you a few questions and decide you owe no additional tax because you were insolvent, or because you qualify for one of the other exceptions to the requirement to include this income. The consequences to them if they are wrong, or if they guessed, or if they are just trying to get you out the door so they can collect a fee from the next client, are minimal at best. The consequences to you, on the other hand, can be an unexpected tax liability which can easily run to tens of thousands of dollars.

In order to exclude cancellation of debt income from being taxable income, IRS Form 982 must be filed with a tax return. This is to report cancelled debt and the reason this debt cancellation is being excluded from income. We call it the "magic form," because so many tax preparers just fill it out and attach it, telling people that nothing further is needed. They do not do a thorough analysis of whether the use of this form is appropriate. To the extent the IRS never questions the substance behind the filing of this form, they are correct. The consequences of having to explain the use of the form two years later, can, however, be severe and will be expressed in additional tax liability, probably in the tens of thousands of dollars.

In situations which fall outside the exceptions for bankruptcy and non-recourse debt described above we will add $350, bringing the basic fee to $700. For this additional fee we will analyze your situation and render a legal opinion (which will appear in the form of an entry on your tax return and not on a separate document) as to your exposure to this additional income.We will further look at your personal balance sheet should it become necessary to show you are "insolvent" for purposes of this potential income, and we will further instruct you on exactly what documents to keep to support this. Finally, we will represent you in any administrative proceeding prior to the issuance of a notice of deficiency as long as you provide the documents necessary to do so and which we advised you had to be kept. As long as our instructions are followed and the information collected is accurate, you will be completely prepared to meet an IRS challenge. In recent professional events, the IRS has made no secret they see the auditing of the use of Form 982 as a potential source of substantial income.

In summary, as attorneys we have no middle ground, in for a penny, in for a pound. We can only handle this one way and that is to be thorough and issue a full blown legal opinion. Up until now, we have had no problem in analyzing these situations without a full legal opinion, but because of the IRS crackdown on written opinions, which stem from the abusive tax shelters sold to investors, we can no longer take any shortcuts whatsoever.

So if you choose to go elsewhere in 2010 or a later year because you have had one of these taxable events, and would rather avoid the extra fee, we understand, and we will welcome you back to our practice anytime.

CIRCUMSTANCES AND NATURE OF DEBT FORGIVENESS	EXPLANATION	ADDITIONAL FEE
Bankruptcy	The debt creating the income when cancelled is discharged in bankruptcy. No analysis is required. A bankruptcy eliminates any cancellation of indebtedness income as long as the debt is included in the discharge. If the debt is removed before the discharge, or if the bankruptcy is dismissed without a discharge, this exception does not apply.	NONE
Purchase Money (Mortgage or deed of trust) This includes a residence converted to a rental which was never refinanced.	The debt creating the income when cancelled is from the original loans used to purchase a property with 1-4 dwelling units, and which at the time of purchase was the principal residence of the buyer.	NONE
Refinanced debt where the refinanced debt never exceeded the balance of the debt refinanced. (no equity taken out or all equity taken out was used to substantially improve the property)	Federal law will act to exclude the income from tax, but because there is no state equivalent, an insolvency analysis will be required to exclude this income from California gross income. The federal exception will not apply to California income tax.	Additional fee of $350
Refinanced debt where the refinanced debt exceeded the balance of the debt refinanced. (equity was taken out and all equity taken out was not used to substantially improve the property)	Federal law will act, up a certain point to exclude the income from tax, but because there is no state equivalent, an insolvency analysis will be required to exclude income above this amount from federal tax. In addition an insolvency analysis will be required to exclude all cancelled debt from California gross income. The federal exception will not apply to California income tax at all.	Additional fee of $350
Debt on a property purchased as a rental, or on a residence converted to a rental and subsequently refinanced.	Both state and federal law will act, up a certain point to exclude the income from tax under a business real estate exception, but an insolvency analysis will be required to exclude income above this amount from state and federal tax.	Additional fee of $350

We know this all seems very complicated, and it is, and if you choose to allow us to do the analysis, you will see why we must take the extra time and be very cautious to provide you with an accurate legal opinion as to the tax consequences you will face. The extra time and the extra liability is the reason we have little choice but to charge the extra fee.

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YOU MAY WANT TO CONSIDER OTHER ALTERNATIVES FOR TAX PREPARATION IN CERTAIN SITUATIONS

While most firms that prepare taxes will do all they can to lure you into their business and collect your money, we have a somewhat different philosophy. Because of our offer of free legal services (now limited to all administrative proceedings which occur before the issuance of a notice of deficiency by the IRS or the issuance of a Notice of Proposed Assessment by the State of California) we actually have to "underwrite" our practice. When we provide these identical legal services to non-clients we charge a base rate of $350 per hour. This can quickly add up to thousands of dollars of legal fees. If we prepare your return you would pay no additional legal fees until the IRS issues a notice of deficiency or the state proposes an assessment. Even then, we will negotiate lower rates for our original clients.

There are thousands of tax preparers out there who will charge you much less than our basic rate of $350. Why pay us when you can just go to them and save up to a couple of hundred dollars? Or better yet, pay $60 and do it yourself with software. We are very serious when we say we do not want you to waste your money.

So if you fall into one of the following categories, we believe you would be best served by going elsewhere to have your tax returns prepared, as you will be paying more to us than you have to.

1. If you do not want to keep records, but want to just "guess" and estimate numbers, you are wasting your money with us. This is because in order to defend your tax return against the IRS we require (and the tax law requires) you keep accurate records. If the IRS comes calling and you have no records, you will simply have to pay the tax bill. Our legal services are useless in this situation because there a no records available with which to advocate on your behalf as attorneys.

2. If you want to "maximize" your refund without regard to what you might actually be entitled to, we can't help you. There are many tax preparers who compete vigorously with each other to get the "big refund" for their clients. We are extremely thorough, and we are completely unafraid of the IRS in applying every reasonable aspect of tax law to squeeze every dime out of the government. But we know we can defend the squeezing of these dimes on a reasonable basis. We will not make numbers up to increase a refund amount.

3. If you would rather live in the present and not worry about the future, then why pay us when for a fraction of the price you can buy do it yourself software and watch the number in the magic refund window go up and up? The IRS will send you the refund of your dreams for now. It's just that part about maybe having to give it back which is the problem.

Our message here is that if you want our legal services, our expertise and our unparalleled experience in administrative and judicial action against the Internal Revenue Service, then you must fit within our client profile, which is that:

1. You want an honest return and you want to sleep at night.
2. You want no stone left unturned to reduce your tax liability by every penny legally possible
3. You want to know, that in the event of a challenge by the IRS, you have expert legal representation.
4. You want thorough and expert information on exactly what records and documents to maintain in order to use this expert legal representation.
5. You are willing to follow our guidelines on keeping records.
6. You want to be able to contact your tax attorneys throughout the year with questions, and if those questions fall within the scope of the representation you have paid for, not to have to pay for any advice.

So please don't spend your hard earned money on us if you don't fall into this profile. There are few things more frustrating then being prepared as attorneys to strike back at the government only to be told by a client there is nothing to strike back with.

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NEW TAX PREPARER PENALTIES REQUIRE US TO ASK FOR MORE DOCUMENTS THAN IN THE PAST

In the paragraphs below you will find discussions on some of the record keeping requirements imposed on taxpayers by the tax code. You probably noticed that in the past we never insisted on seeing these kinds of records, but like so many other aspects of tax law, this has changed. Just Google "6694" and "IRS" and look at the extensive discussion of these penalties to get an idea of the large scale imposition of penalties involved.

Cash contributions

Unless you have a cancelled check, credit card receipt or a letter from the church or charity (which in itself has very strict requirements), forget about it. There is no such thing anymore as "cash in the collection basket." If you have church tithing, we want to see the letter you should receive. No, it's not that we don't trust you. it's that the IRS, in a case from July of 2008, held a couple to the strictest standards for documentation of tithing.

Many churches and a few charities do not keep up on the tax law. So they issue inadequate written acknowledgments. Here are the main requirements of these letters, which are required whenever any single contribution of money exceeds $250.

1. The letter must be dated prior to the date you file your tax return
2. Each individual contribution must be separately acknowledged by date and amount. In other words, a summary of your contributions for the year in a lump sum is unacceptable. This is unfortunately a common practice.
3. The acknowledgment must have what we call the "Magic Words," which state that no goods or services were provided in exchange or the contribution. Words to the effect only "intangible religious benefits" were received are also acceptable.

Raffle tickets/games of chance - The government and the courts saying you are buying a chance - not donating money, so don't bother to save all those tickets for taxes.

You cannot deductions made to a specific person or group of persons. We know it seems wrong a contribution to a fund set up for the family of a fallen officer is not deductible, but this is the law.

You cannot deduct contributions to a police association. A POA or DSA is a labor union not a charity. But be careful. Many associations have set up foundations for which donations are tax deductible. This is a separate entity from the labor union even though it may have a similar name and is a perfectly legal deduction if documented.

If you volunteer with a horse, bicycle, dog or airplane, you cannot deduct the cost of these items as a contribution. However, there is an interesting exception if you are a public official (usually the case if you have to take an oath of office) which allows you to treat these expenses a employee expenses even though you are not paid. So a reserve police officer could probably depreciate their horse, but an unsworn volunteer posse member cannot.

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NON-CASH CHARITABLE CONTRIBUTIONS MUST BE DOCUMENTED, BUT ARE EASY TO PROVE IF YOU DO IT RIGHT

A favorite target of IRS enforcement efforts are the donations property people routinely make. This is not so much of a case of fraud as the IRS playing on the lack of knowledge of the general public in this area. Recent changes to the tax law have made this a difficult area to win during an audit.

Your obligation to document non-cash contributions is significantly increased due to higher IRS scrutiny of this area. Our firm recommends the following for all non-cash contributions of property (typical "Goodwill" donations of clothing/toys/household goods):

1. Take photos of the overall deductions to show that the goods donated are in "good" condition at a minimum. Photos of individual items of clothing are not necessary, however, if there are large items donated (entertainment center/TV/dining room sets/bedroom furniture), we recommend multiple photos of those items to show their condition on the date of donation.

2. Thoroughly document and itemize EACH ITEM DONATED using a third party valuation guide such as those found on "goodwill.com" and "itsdeductible.com." This mean a description and value for each shirt/dress/suit donated. The days of the "3 bags of adult clothing" descriptions are over---YOU MUST ITEMIZE each article that you donate using a third party value table. Save the itemized list as well as the valuation table used to value the goods with your important tax papers.

3. A dated receipt from the qualified charity must accompany the itemized list. The receipt does not have to have the each item donated, but it should be attached to the itemized list of items immediately after donation. The receipt must state that no goods or services were received by the donor in exchange for the donation or similar works to that effect. The "big" charities (Goodwill/Salvation Army/St. Vincent de Paul) have this as standard language on their receipts, but others may not. Realize that the IRS love this "loophole" and will routinely disallow the donation receipt that does not contain the "magic language" and there is nothing we can do about that. The law is clear in this area---the language must be present!

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THE ROADBLOCK OF THE EMPLOYEE POLICY LETTER

One vital piece of paper necessary to survive an IRS audit unscathed is also one the law does not require you to keep. Yet without it all of your other record keeping will be for nothing. This is the employee reimbursement policy letter. This document will only come into play in an audit situation, which is why there is no requirement to obtain it at any earlier time.

We have met with varying degrees of success in obtaining employee letters from managers as a result of a client audit. Essentially, the employer letter is nothing more than a restatement of department/city/company policy on area of unreimbursed employee expenses including mileage reimbursement, equipment purchase reimbursement, yearly taxable uniform allowance, and incidental expenses such as cell phone use in the course of employment. Yet, managers are often reluctant to put this in writing on department letterhead and submit it to the IRS in support of your unreimbursed employee expenses.

Remember, the IRS knows almost nothing about law enforcement culture. These are auditors that deal primarily with private industry, where if you need a Blackberry or a piece of equipment to do your job, the company buys it for you. The IRS does not understand that in the era of ever-constricting budgets, if an officer wants an earpiece to more effectively do his/her job, he/she will pay for such equipment out of his/her own pocket and will never expect the city/county to pay for such an item. While this purchase is clearly within the scope of the taxpayer's ordinary and necessary business expense, the IRS is demanding a letter from the department stating that this purchase was "required" or is a "condition of employment". While we strongly disagree with the IRS's position on this matter based on US Supreme Court's interpretation of the terms "ordinary and necessary" in the context of employee business expense, nevertheless, the IRS continues to be unyielding in their demand of a letter from the employer stating the purchase was required.

What does this mean for you? If you purchase a handgun and get a department letter to waive the holding period to obtain the gun, make a copy of the letter and put it with your important tax papers. It also means keeping EXCELLENT records for each job-related purpose including receipts/uniform store itemized sales slip/VISA credit card slips, etc…And realize that if an audit comes down the road, you may need a letter from your department explaining the city/department policy related to purchases of uniforms/equipment/mileage to get past the auditors. If you are unable or unwilling to obtain such a letter from your employer, you should rethink your unreimbursed employee expense deduction as it may be more of a hassle than it is worth to you.

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HOW TO KEEP A MILEAGE LOG

An often overlooked deduction is business miles driven for which reimbursement is not available. This includes any job-related mileage EXCEPT commuting to and from the employee's permanent place of employment. Examples in the context of a law enforcement job are miles to court, dry cleaners, uniform stores, weapons ranges and off-site training locations. If you kept a calendar of any kind, this could be used to recreate a mileage log and this would be acceptable evidence for the IRS. Another alternative is to look at computerized subpoena databases to determine when you would have been subpoenaed to court. A print out from such a database would serve as evidence.

The very best method of tracking business miles is keeping a contemporaneous log in your vehicle. Go to Staples or Office Depot and buy a small record book that is specifically designed to track your deductible mileage. Keep the book in your glove box and be RELIGIOUS about keeping track of your mileage. Remember, the IRS wants the date, the business purpose of the trip and the roundtrip mileage of the trip. Keep track of your starting points and ending points of the trip---Google Maps is excellent 3rd party documentation for mileage. When the year is over, put your record book with your other important tax papers and you will have the documents necessary to fight off an audit challenge.

Be sure to write down the mileage at the beginning of the year for each vehicle you will use during the year and then write down the mileage at the end of the year for the same vehicles.

Once you have a mileage log you should also try to come up with proof your vehicles were driven a certain number of miles. This is best done with maintenance and oil change receipts (i.e. Jiffy Lube or mechanic invoices showing vehicle mileage).

THE MOST IMPORTANT THING TO REMEMBER IS THAT DURING AUDIT, YOU WILL BE REQUIRED TO SUPPLY YOUR DEPARTMENT'S MILEAGE REIMBURSEMENT POLICY. IF YOU CAN BE REIMBURSED BY YOUR EMPLOYER, YOU MUST TAKE THAT REIMBURSEMENT OR LOSE YOUR ABILITY TO TAKE IT. IN OTHER WORDS, IF YOU CAN BE REIMBURSED BY YOUR EMPLOYER, YOU MUST TAKE THAT REIMBURSEMENT---YOU DO NOT HAVE THE CHOICE OF TAKING THE TAX DEDUCTION. THE IRS WILL DISALLOW THE MILEAGE IF YOU COULD HAVE BEEN REIMBURSED, BUT CHOSE NOT TO SEEK REIMBURSEMENT FROM YOUR DEPARTMENT.

Unreimbursed mileage is a great deduction afforded to employees, but you MUST keep excellent records and stay consistent with your employer's mileage reimbursement policy---remember, if you can be reimbursed for mileage---PUT IN FOR IT or lose your ability to deduct that expense.

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SUGGESTIONS FOR KEEPING RECORDS IN THE DIGITAL AGE

Are those folders of old tax years stacking up? Are you uncomfortable having mounds of papers containing vital personal information sitting around? You would not be alone. In our experience the number one reason audited taxpayers have to write a check to the government is not that they did not keep records, they just cannot find them. But there are simple ways to preserve this important information in a highly secure way.

Unfortunately, you must have some very basic computer knowledge to do this. If you are the kind of person who actually takes pride in being "computer illiterate" and won't take the time to learn consumer level computer skills, then none of this will help you, and you will be at the mercy of fading paper documents.

Consider the purchase of a quality scanner. There is nothing like a well organized, easily readable, and easily retrievable organization of all important tax documents that are available to you with a few strokes of your computer keyboard.

By scanning ALL of your important tax documents, you are able to keep all your paperwork in a computer folder which does not clutter your file cabinet or result in sheer panic if you should be the unlucky recipient of an examination of your return. You will have everything organized and scanned in a clear and clean condition that will make your exam a breeze.

If you are really sophisticated, consider making a CD or DVD of your papers at the end of the tax year and put that CD/DVD in your tax folder with your tax return. This way, all documents are preserved in the same place for a long time without the headache of wondering if you have everything together.

If you do not wish to invest in a scanner, consider making a dedicated file for your tax paperwork in your cabinet. Think of your tax papers on the same importance level as your passport or your life insurance paperwork. Remember, while you can replace a lost passport, you may not be able to replace lost receipts or invoices which could subsequently cost you THOUSANDS OF DOLLARS in tax liability should you be the victim of an examination.

Small receipts on heat-sensitive paper have a very limited life span. The receipts fade along with your memory of what the receipt was for. Make a copy of the small receipt and write on the copy paper exactly what the receipt was for. I cannot tell you how many times we have clients that look at receipts 2-3 years later and say: "I don't remember why I saved this receipt." If you don't remember, the IRS will be happy to disallow the deduction and get more money out of you.

Periodically organize your file in a manner which makes sense to you (i.e. by month, by category of purchase, etc..). And, at the end of the year, use our checklist to record the "final numbers" that you add up in preparation for your tax appointment. Remember, the checklist is there to help you summarize your organized records; the checklist is not there to give you an opportunity to "guess" or "estimate" your expenses. Each entry on the checklist should be backed up with actual records and receipts which conform to the standards of substantiation as required by our firm and the IRS.

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JOB-RELATED EDUCATION EXPENSES ARE UNDER ATTACK BY THE IRS

A common, and potentially very substantial deduction, is for job-related education. The IRS has become extremely aggressive in this area because of the size of the deductions. Tuition to distance learning or intensive format educational programs can run tens of thousands of dollars, so the IRS is enforcing the very specific letter of the law in these areas. There are many "hoops" to jump through in order to successfully survive IRS scrutiny in this area.

First, in order to be job related, an educational expense must maintain or improve skills of your current job, not for a potential future job or promotion. In addition, even if the education does maintain or improve your job skills, the education cannot be the minimum required for a position, and cannot qualify you for a new trade or business, even if you have no intention of actually pursuing a new trade or business. Therefore taking criminal justice management courses when you are not yet a manager will be difficult to sell in an audit. Going to law school will be disallowed because now you can become an attorney. It does not matter that you have no intention of doing so. Obtaining a basic teaching credential or upgrading to registered nurse are educational expenses which will be disallowed because they are minimum requirements for their respective professions.

The connection to your present job must be clearly supported. Vague degree programs such as "leadership" are so ambiguous in their objectives that showing a direct connection to a specific occupation can be very difficult.

Another important point in deducting educational expenses is to account for, and subtract, any reimbursement received from your employer. As a routine part of any audit, the IRS will demand a copy of the employer's reimbursement policy in order to determine if reimbursement was available. It does not even matter if you elected to not take any reimbursement, if it was available. you will still be treated as if you did take it.

Finally, ensure you only deduct expenses actually paid during the year to the educational institution, rather than what was billed. For example, the 1098-T form which reports tuition and fee payments to the IRS has separate boxes for amounts paid and amounts billed. If you blindly use the amounts billed, you may discover in an audit the actual amount paid to the educational institution does not match because of the overlap of the educational year with multiple calendar years. The IRS will require an account statement from the school.

The potential large size of educational expenses will in itself increase the chance your tax return will be selected for examination. And if you fail to follow the law your adjustment (the disallowance of the deduction) will also be large.

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THE ENERGY CREDITS ARE BACK BUT DO YOUR HOMEWORK FOR A TAX CREDIT

Many very good tax credits for energy related improvements have returned, but not every energy saving device is going to qualify.

Here is one area where you as the client will have the responsibility to ensure you are eligible. This is because most all of the items have several different very technical requirements before they become eligible for the credit. So if you come in and tell us you installed a "low energy water heater," we are going to ask if you verified the technical requirements of the law have been met. Please don't tell us that you do not know because if you don't know then we certainly will not know either.

Here is a link to extensive information on what energy related purchases are eligible for the credit. This website is published by the US Government. This is a very good place to begin your research.

If you believe you are eligible for the credit, we will put it on your tax return but you must understand you bear the responsibility for this decision as you alone have the knowledge of the technical specifications of the energy related item.

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