Tax Tips

No complaints about new lodging rules

Previously, lodging expenses were deductible only if incurred when traveling away from home. But the IRS has announced a change in its policy and plans to amend its regulations accordingly. Under interim guidance published last year, local lodging expenses are deductible and not included in employee income if:

1. The lodging is on a temporary basis,
2. The lodging is necessary for the employee to participate in or be available for a bona fide business meeting or function of the employer, and
3. The expenses are otherwise deductible by the employee as a business expense, or would be deductible if paid by the employee. •

What’s the use?

There’s a common misperception that when you buy products from an out-of-state vendor, either on the Internet or by mail order, the purchase is tax free. Sellers aren’t required to collect sales tax unless they have a physical presence in your state. But that doesn’t mean you’re off the hook.

If a seller isn’t required to collect sales tax, you’re required to file a use tax return and pay the tax — sales and use taxes are usually imposed at the same rate. As the name suggests, use tax applies when you buy a tax-free item out of state for use in your state. Some states allow you to make a small amount of tax-free purchases each year.

Collection actions against individuals and businesses are becoming more prevalent, so you should exercise caution, especially if you make a significant amount of purchases each year without paying sales or use taxes or buy items outside the United States. •

Random thoughts

The IRS is reviving its random audit program, and the number of taxpayers expected to be audited represents a tiny fraction of total filers. Unfortunately, if you’re one of the few who are audited, you may have to pay hundreds or even thousands of dollars to defend yourself. The best way to protect yourself is to maintain thorough, well-organized supporting documentation for your returns. •

Don’t be afraid to ask

If you receive a letter from the IRS or a state taxing authority informing you of a discrepancy or mistake in your tax return that increases your tax liability, don’t assume the government is right. Before you make a payment, talk to your tax advisor. There have been a number of recent cases in which IRS notices contained errors, particularly when complex areas of the tax code, such as the alternative minimum tax, are involved.

Other mistakes include assessing late-filing penalties against taxpayers who received automatic extensions and assessing estimated tax underpayment penalties against taxpayers who met the requirements for one of the safe harbors.

Some taxpayers receive notices that information reported on their W-2s or 1099s do not match the information on their returns. But often that’s because income items were reported on a different part of the return — not because they were omitted — or there was a data-entry error. •