4 types of IRS Audits and how to Prepare

Let's talk about the 4 types of IRS Audits, and some things you can do to prepare for being Audited by the IRS. By Alan Orlowsky

As a Certified Public Accountant and former IRS agent, I understand getting a notice that you're being audited by the IRS can strike fear in the hearts of the bravest of taxpayers. Let's talk about educating yourself about the different types of  IRS Audits and how to follow a few simple rules that can make the process much less painful should the IRS should choose you for an audit.

There are 4 main types of Audits, and the truth is you will prepare different for each one so it is important to understand the difference.

• Corresponding Audit - This is the least severe type of audit and involves the IRS sending a letter in the mail requesting more information about part of a tax return. Typically the IRS asks for a straightforward answer on less complicated issue, such as proof of dedications, and you mail back the answer. If your tax return is legitimate and you have the data to back up any claims on your return you can normally handle the situation on your own. If you don't have the receipts or information, then you may want a professional dealing with the IRS because you could face additionally fines, penalties and interest if you end up owing money.

• Office Audits - If the IRS has additional questions regarding your return you will typically receive a letter in the mail inviting you into an IRS office for the audit. This type of Audit is often more serious, so it is important your records are in place, and all receipts are accounted for. You are allowed to have your tax prepare, accountant or tax attorney accompany you to the Office Audit. These Audits typically are resolved during this Office visit and if you are missing information you will be granted more time to provide any documentation you do not have during the meeting.

• Field Audits - This is the most serious type of audit and it involves the IRS visiting you at your home. While there are much fewer field Audits compared to the other types, these types of Audits involve the IRS looking for something and the agent will request access to other things or documents that should be commonly found in your home. I would not recommend to any of my clients to go into a Field Audit without proper representation.

• Random Audits - In this type of audit the IRS is not looking for anything in particular when they send out random tax payers to review their return, but they will review the entire return. The IRS conducts these Audits to determine what areas are most likely to produce additional taxes. In most cases you do not need legal representation, but this is the most comprehensive type of audit and again the IRS will be looking at everything on the return. 

While the seriousness of the audits varies, it is my professional recommendation that the best way to prepare is to always organize all your receipts with your accompanying tax return and store them some place secure since it is likely you won't get an audit notification until 12 to 24 months after your return has been filed.

It has become so much harder to get the documents together if a year has past. When you file your return you are better off building a file and organizing them in anticipation of an audit then reacting to an IRS Audit. 

Some commonly asked questions I have received include:

• I received a notice from the IRS, what do I do?
• I lost some of my receipts for items I claimed as deductions. Can I use a bank statements to prove I purchased the items in question?
• What information do I have to give the IRS field agent?

If you have received a notice from the IRS or have questions related to any Tax issue please contact Alan Orlowsky by calling 847-325-5559. You can also visit our website at http://www.orlowskywilson.com

What you should know about Writing a Will

Let's talk about what you should know about writing a Will. By: Alan Orlowsky

Writing a Will is not the most pleasant of tasks. After all, by doing so you're not only acknowledging your own inevitable demise but actively planning for it. That might explain why so many adults avoid this cornerstone of estate planning. According to an AARP survey, 41% of boomers (born 1946 - 1964) and 71% of people under the age of 34 do not have a will in place. Procrastination (34%) was cited as the largest reason, followed by feelings it is unnecessary (21%) or too expensive (21%).

The truth is creating a Will is one of the most critical things you can do for your loved ones. Putting your wishes on paper helps your heirs avoid unnecessary hassles, and gain the peace of mind knowing that a life's worth of possessions will end up in the right hands. A Will is an important way to stay in control over who gets what of your property and by planning in advance you can also save your family time and money.

So What should you know about Writing a Will? Well let's talk about it.

What is a will?

A will is a simply a legal document in which you, the Testator, declare who will manage your estate after your death. Your Estate can consist of everything from bigger items such as property, to smaller sentimental valued items such as family photographs. The person named in the will to manage your estate is called the Executor, because he or she executes your stated wishes. A will can also serve to declare who you wish to become the guardian for any minor children or dependents. Within a will, you can specify everything from Sister Liz will be responsible for the children and the house, or Aunt Sally gets the silver, Cousin Megan the china, and so on. Someone designated to receive any of your property is called a "Beneficiary."

You should know that some types of property, including certain insurance policies and retirement accounts, generally aren't covered by wills. You should always list beneficiaries when you open these accounts. Check to make sure these are up to date, since what you have on file when you die should dictate who receives those assets.

What Happens if I die without a will?

If you were to die without a valid will, you'll become what's called Intestate. This means your estate will be settled based on the laws of your state that outline who inherits what. Probate, is the legal process of transferring the property of a deceased person to the rightful heirs. If no executor has been names, a judge appoints an administrator to serve in that capacity. This can also happen is a Will is deemed invalid. All wills must meet certain standards, such as being witnessed, to be legally valid. Again, requirements vary from state to state. What you should know is if a will is not in place, the administrator will most likely be a stranger to you and your family, and that person will be bound by the Probate laws of your state. As such, an administrator may make decisions that wouldn't necessarily agree with your wishes or those of your heirs.

Do I need an attorney to prepare my will?

You should always have an attorney assist you with any legal document. In most cases you are not required to hire a Lawyer to prepare your will, but the biggest reason you should is an experienced Attorney can prove valuable advice on your estate planning strategy such as Living Trusts. 
Do-it-yourself kits are widely available, or if you write your own will on the back of a napkin as long as you meet the legal requirement of your state it will be valid. If you don't know your state laws, it is important you seek an attorney for additional knowledge. A good tip is while you are working on your will, you should think about preparing other essential estate planning documents to ensure your wished are carried out while you're still alive.

Should my spouse and I have a joint will or separate wills?

Estate planner almost universally advise against joint wills, and some states do not even recognize joint wills. Odds are you and your spouse won't die at the same time, and there can be property that's not jointly held. Separate Wills make more sense, even though your will and your spouse's will might end up looking remarkably similar. In particular, separate wills allow for each spouse to address issues such as ex-spouses and children from previous relationships. Ditto for property that was obtained during a previous marriage. Be very clear about who gets what. Probate laws generally favor the current spouse.

In summary, it is important a will is in place, and more importantly it is critical it is done correctly, and abides by the state laws.

If you or a loved one needs any help writing a will or have questions, please feel free to contact Alan Orlowsky by calling 847-325-5559. Or visit our website at http://www.orlowskywilson.com.

The Potential Disadvantages of a Qualified Personal Residence Trust

Lets talk about The Potential Disadvantages of a Qualified Personal Residence Trust By: Alan Orlowsky Lincolnshire IL

A Qualified Personal Residence Trust (QPRT) allows you to remove the value of your residence or home from your Taxable estate with little or no gift taxation. If you are still living at the end of your term, your children (or trusts for their benefit) are now the owners of the house.

Even better, however, you do not have to mover out. To assure that you have a place to live, the terms of the QPRT can permit you to enter the remainder beneficiaries when the trust ends. The terms of the lease must be at fair market value. An additional benefit is that each payment of rent to the remainder beneficiaries will effectively transfer additional funds to them, free of gift or estate tax. The QPRT can also be written so that after the initial term of the trust, if you are survived by a spouse, your spouse can be permitted to occupy the residence rent-free for his or her life.

So what are the disadvantages of a Qualified Personal Residence Trust? 

One disadvantage of a QPRT is if you and your spouse do not live until the end of the trust term, the house will be still be included in your taxable estate. The good news is you are in no worse position, the house is simply treated as though you never placed it in the QPRT.

The second disadvantage of a QPRT is you are passing the house to your children with your original income tax basis. For example, assume that you bought your house for $50,000 and lived in it for 30 years without putting any more money into it. After 30 years, you decide to sell it, and you are paid $350,000 at today's market price. For income purposes, the IRS would say that you had a "basis" in the house $50,000 and a taxable gain tax on that $300,000 of "profit." At 15% for example, the tax would be $45,000 - leaving $305,000 for the children. However, if the house is your primary residence, under current law you can avoid taxation on all gain up to $250,000, or $500,000 for a married couple.

Let's say you never sell the house, but rather live in it until your death, and then leave it to your children as part of their inheritance. In that case, the house gets a "step-up" in basis to the date-of-death fair market value. The date of the death value is the fair market value of the asset valued on the decedent's actual date of death. If the fair market value on the day of your death is $250,000, the "basis" is adjusted to that level. Then, if your children sell the house a month later for $350,000 there is no capital gains tax due. They were able to get the full value of the $350,000 inheritance. When you gift your house to a QPRT, the remainder beneficiaries do not get a step-up in basis to your date of death value. The likely result is payment of capital gains tax when the children eventually sell the house.

As a "Grantor Trust," you are treated as the owner of the property for federal income tax purposes. Therefore, all income, deductions and credits associated with the property pass through the trust to you. For the same reason, if your primary residence is the property of a QPRT, then you will qualify for the $250,000 ($500,000 for married couples) capital gain exclusion.

You, as the grantor, pay for all repairs to the house, utilities, lawn care and other basic maintenance, homeowner's insurance premiums, and real estate taxes. Such payments are for the benefit of you, the grantor, as the tenant during the trust term, and do not constitute taxable gifts.

If you would like to learn more about QPRT's, or have questions about your estate and how to plan for the future, or if you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559, or visit our website today.

Contested Estates

Let's Talk about Contested Estates.......
By Alan Orlowsky

A Will Contest, in the law of property is a formal objection raised against the validity of a will, based on the contention that the will does not reflect the actual intent of the testator (the part who made the will). This can include things like the home, the personal belongings, checking and savings account, and other remaining assets. Unfortunately, Family disputed sometimes occur, but a will can always be challenged in court.
Additionally, contested estates are often a a lengthy process to overturn and in the wrong hands the process can be very expensive.

Michael Green's mother died in February of 2012, he was shocked to discover she had left her $600,000 home, all the contents within the house, the checking and savings account, and overall 80% of the total assets to his sister Beth. Michael's own grown daughter was completely left out of the will. "This came totally out of the blue, and we still don't know the motivation behind the slight," says Fran Green, Michael's wife of 25 years. "Michael feels completely helpless and we just don't know why."

But is he?

The answer is No! I regularly take calls from people who feel dissatisfied about a departed loved one's will and want to know about filling a challenge. With the aging Baby Boomer population more and more wills are being contested because they are not current, or done incorrectly.

The four most common grounds for contesting a will or trust are the following:

1) Under Influence. One child exerts under influence on a parent in order to take a bigger share of the estate For example, a son threatens to put his mother in a nursing home unless she leaves a bigger share of the estate to him.

2) Incompetence. The person making the will or trust was not of sound mine, or did not understand the meaning of the document, then its validity is questionable. This was the reason why Michael and Fran had a case. It was later determined Michael's Mother was not of sounds mind when the will was modified leaving the majority of the assets to his sister. The Estate was successfully contested, and divided up accordingly.

3) Fraud. If a person makes a will or trust based on lies or deceptions, the document is invalid. For

example, a daughter falsely tells her parent that her brother is engaging in criminal activity.

4) Ambiguous language. The meaning of a provision is unclear, or it can be interpreted in different ways.


Orlowsky & Wilson, Ltd. Provides representation if you believe a will or trust should be contested because of one of these factors. We also provide guidance to help you prepare a Will or Trust that is protected by use of No-Contest Provisions. Contact us today or visit out website to learn more.

If you have questions about this post or about a particular legal situation, please contact Alan Orlowsky by calling 847-325-5559.