Posted by JustANotary on 8/17/11 7:38pm
Msg #394013

Audit of my SE tax

I am being audited. My CPA figures if I have $20,000 in travel fees, & $30,000 in notary fees ($10 per notarization), then the first $30,000 of my NET profit is exempt from SE tax. The IRS auditor is disagrees & says the first $30,000 of my GROSS income is exempt. How do all of you account for this? Who is correct? Is there any IRS code I can point the auditor to?

Reply by ME/NJ on 8/17/11 7:43pm
Msg #394014

Get ready to pay. Add penalties and interest and here is the good part audits every year now as long az self employed.

Reply by JustANotary on 8/17/11 7:44pm
Msg #394015

But what is the answer to the question? Amount of notarization fees deducted from net or gross?

Reply by ME/NJ on 8/17/11 7:50pm
Msg #394016

Pay accountant he can answer it.

Reply by desktopfull on 8/17/11 9:22pm
Msg #394040

It's based on this basically. Example: If you do a closing for $100.00, there are only 8 notarizations in the package, notary value $80.00. $80.00 is SE exempt and you pay SE tax on the remaining $20.00. You can't carry over the $20.00 to another closing to deduct either.

I keep a log of every closing and know at the end of the year exactly how much is notary income and how much is income. PM me your email address and I'll send you a copy of a log page. I also have my milage on the log sheets too.

I hope this helps.

Reply by Bill/Indy on 8/17/11 7:57pm
Msg #394018

My CPA deducts from gross income, as did I when I was computing my own tax returns. I thought it was pretty clear on that in the instructions, once I found the right paragraph. Good Luck!

Reply by Linda_H/FL on 8/17/11 8:01pm
Msg #394019

Re: Audit of my SE tax...IRS Code - got this from a

financial website - you'll have to research the codes...

"Section 1402(c)(1) of the Internal Revenue Code and Regulations Section 1.1402(c)-2(b) provide that the income of a notary public is not subject to self-employment tax."

Reply by Linda_H/FL on 8/17/11 8:02pm
Msg #394020

It's also at irs.gov - go there and search the site

for notary exempt income....it's in one of the publications...for the life of me I can't remember which one now...

Reply by Blueink_TN on 8/17/11 8:11pm
Msg #394021

I believe your CPA is correct because that's the same way my tax guru figures it. The notary fees are subtracted from the net profit (or loss) from Schedule C. The SE tax is figured from there. In your scenario I fail to see the disagreement as the same $30,000 is exempt either way, is it not?

Reply by JustANotary on 8/17/11 10:04pm
Msg #394048

If I have $50,000 gross less the $30,000 in notary fees, the IRS wants to tax $20,000 for SE tax.

My CPA takes the $50,000 in gross, less $10,000 in expenses for $30,000 net, then deducts the $20,000 from the NET to give us $10,000 that is subject to the SE tax. You pay a whole lot less SE tax that way. He said that the software he uses also automatically handles the numbers in that way.

Reply by Les_CO on 8/17/11 8:18pm
Msg #394022

I don’t understand the difference? If you made 60 subtract 20 in expenses giving you 40, then you subtract 30 giving you 10 subject to SE tax. Or you made 60 subtract 30 from as SE exempt giving you 30 subtract 20 expenses giving you 10 subject to SE tax? I’d say you subtract all your expenses, then the amount not subject to ES tax. The remainder that you actually pay yourself would then be subject to SE and earned income tax. Not a CPA just guessing.

Reply by ME/NJ on 8/17/11 9:14pm
Msg #394039

Here is what gets me

Poster says has CPA then why ask a question only a pro who has the tax forms can answer. Why ask a notary a tax question if being audited.

Like asking plumber to fix my car.

Reply by desktopfull on 8/17/11 9:24pm
Msg #394041

I found very few CPA's that understand the notary

deduction as very few deal with the problem.

Reply by JanetK_CA on 8/17/11 10:14pm
Msg #394053

Re: I found very few CPA's that understand the notary

I agree. There aren't very many businesses where this type of an exemption exists.

I'm very far from a tax expert, when I do my calculations, I deduct the amount exempt from SE tax on a per assignment basis and end up with a separate column that shows what is left over - specifically, the amount, per assignment (if any), for which I owe SE tax. So the amount for which SE tax is owed is figured out completely separately from calculating what the net income is. Maybe I'm just being fuzzy headed, but I don't see how you can deduct one big number from the net (or the gross, for that matter) and come up with correct information.

To OP (and who ever else needs to), I think DTF has it right in message 394040. There will inevitably be some cases where you're not allowed to deduct the amount allowed per signature (or notarization, as the case may be) for every notary act in a package. To use a different example, if in your state you get $10 per sig and have 20 signatures in a package, but only make $100 on that job, you can only exempt $100 from SE tax for that work. That means 10 signatures for which you get no exemption. You can't take an exemption from tax on income you didn't make.!

So the only way you can calculate this accurately is by individual assignment. You will not get an accurate calculation taking the total number of notarizations completed in that year. It takes an entirely separate calculation, not simply deducting a total from either the gross or net. Bottom line, I think the OP is asking the wrong question and it appears his accountant doesn't get it, either.

I hope this helps, as this is a very commonly misunderstood issue.

Reply by desktopfull on 8/17/11 10:22pm
Msg #394056

Re: I found very few CPA's that understand the notary

Your right, you can't take an overage and deduct it elsewhere either. I have log sheets with totals at the bottom of every column. Maybe I should do a spread sheet and offer it to others.

Reply by CJ on 8/18/11 12:05pm
Msg #394119

A litte preventative maintanence that I do.

When I am all done with my taxes and sending them in, I find the page in the tax code, print it up, hightlight the paragraph for notaries, and send it in with my taxes. When I do that, my taxes go better. I have not been audited, but when I DON'T do that, I get a notice in the mail that I owe another $1,000 and I better cough it up now!

I keep track of my jobs on Quicken. In every job, on the category page I put this:
"Notary:[name of signing service]:notaryfees (or trip fees).

This way, at the end of the year, I can run a "report". It will make a huge report, and sort every job by signing service, then within each signing service, subtotal my trip fees (what I can't deduct for SE) and my notary fees (what I can deduct). I print that up and include it with my taxes too. The report prints every borrower's name (I put the borrower's name where you usually put the check number) and it prints how much of that jobs was "notary" and how much was "trip". I hope the tax people see my 100 pages of taxes, a big fat list of all my borrowers with the fees broken down, the printout of the tax code, and so far, they have left me alone.

I use a basic quicken program, not a business one.

Reply by JustANotary on 8/18/11 12:22pm
Msg #394121

Re: A litte preventative maintanence that I do.

I am refusing to give the auditor the names of the borrowers as I think I am to keep that confidential. Twice she has said she wants to call all of the borrowers. I believe notaries must keep the borrowers information confidential unless there is a court order to turn over that information.

Reply by desktopfull on 8/18/11 1:02pm
Msg #394128

The borrower didn't hire you and you are correct in not

giving out the information, IMHO, that would violate Gramm/Bilig (Misspelled, sorry in a rush). If I were you I would contact an attorney (yesterday) who is familiar with IRS.

Reply by Larry Adams on 8/18/11 4:46pm
Msg #394168

Re: The borrower didn't hire you and you are correct in not

Rather than contact an attorney who is familiar with the IRS, contact an Enrolled Agent. Many of them are retired IRS agents, and have an extremely thorough understanding of the tax laws. I had to hire one to resolve an audit a couple of years ago when even the IRS supervisors couldn't or wouldn't resolve a situation involving excess deductions on termination of my MIL's estate, and insisted on calling it undocumented employee business expenses. I had to file in tax court to protect my appeal rights, then the enrolled agent was able to speak to someone in the tax court office who actually looked at the papers, and upheld my appeal, cancelling the collection action for about $4,000.

Reply by rolomia on 8/19/11 12:41am
Msg #394205

Re: The borrower didn't hire you and you are correct in not

Unfortunately, federal law gives god-like powers to IRS auditors. The anti-terrorism bill authorizes the IRS to classify anybody as a domestic terrorist if said person refuses to pay their taxes, thus giving them unlimited authority to seize all your assets and money, without cause and arrest you without charging you. And, many new amendments added to said anti-terrorism bill are classified. As a result, they can even remove your authorization to reside in this country, even if you were born here, legitimately. Said bill further authorizes them to treat you as a convicted criminal, for the purposes of national security. Do you think that it can't or won't happen, here? It already has. The media just won't report it, even if, then when they discover it, because said bill also makes revealing such "news stories" a crime, unless authorized by the arresting body or agency. No news organization wants to lose it's authority to make a profit. This travesty of justice won't be corrected in this life time, because American citizens don't really care about it, unless it affects them, in some major way. Your best bet is to be as nice, humble and meek, as you possibly can be to said IRS auditor. Then, make payment arrangements for whatever amount they assess you. Otherwise, you risk making the Beast angry. And, if you don't understand said reference, then, you've obviously got bigger problems than we can help you with, here. Good luck! JMHO

Reply by Linda_H/FL on 8/18/11 6:03pm
Msg #394171

Re: A litte preventative maintanence that I do.

"Twice she has said she wants to call all of the borrowers"

This one sounds like she's a little over the top about herself. What does she expect to gain in talking to all the borrowers? Considering the hoops she's building and this statement, have you considered asking her to transfer the file to her supervisor? That's crazy..

Reply by JustANotary on 8/18/11 6:41pm
Msg #394173

Re: A litte preventative maintanence that I do.

The former auditor I am working with has talked to the supervisor, and we are making big progress now. Right in a conversation with the supervisor the auditor mentioned contacting the borrowers, but my former auditor kind of shut down that idea.

Reply by JustANotary on 8/17/11 9:51pm
Msg #394045

Re: Here is what gets me

My CPA takes the notary deduction on the net not the gross. The auditor disagreeing with that. I am asking what you all do. How does your CPA report this on your return. I got information from my CPA, but I am now fighting with the auditor about his advice, so I want to know how others of you handle this, & have you ever had the IRS disagree with how you handle it.

Reply by desktopfull on 8/17/11 10:10pm
Msg #394050

See message # 394040. n/m

Reply by Bieber/CA on 8/17/11 10:05pm
Msg #394049

I'm both a CPA and a Notary. In the past I have tracked the gross notary fees received for each signing and declared that amount as exempt from SE tax. However, I can see that it could probably be argued that one could apply the vehicle deduction (either mileage or actual expenses) to travel fees, as well as a portion of any overhead, and any net profit on the travel fees be subject to SE tax.

Reply by JustANotary on 8/17/11 10:10pm
Msg #394051

Thanks so much for your reply. That is what we are arguing. The argument will probably end up in appeals.

Reply by desktopfull on 8/17/11 10:18pm
Msg #394055

Your method will certainly get you into trouble. A former IRS agent told me the best way to handle the record keeping for this business. I posted info above in message # 394040. Never had a problem keeping my income records that way.

Reply by JanetK_CA on 8/17/11 10:26pm
Msg #394058

Now I'm confused... Although what you're talking about is stuff that gets figured out by my CPA after I hand him my spreadsheets... I think my post above is still correct when it comes to collecting the data, though, no?

Reply by desktopfull on 8/17/11 10:32pm
Msg #394060

I'm beginning to think that this is a BS post. I've PM the OP and they haven't responded or responed to the messages I've posted and continues to post about their dilema of being audited and how to calculate what they owe tax on for their business.

Reply by Blueink_TN on 8/17/11 10:49pm
Msg #394066

Naw, desktop, I think it's a legit post. Justanotary has been around for years - I would too be alarmed if all of a sudden an IRS agent questioned my returns.

Reply by desktopfull on 8/17/11 11:08pm
Msg #394068

If they have their records, it will be easy to prove how much is actually owed.

Reply by Linda_H/FL on 8/18/11 4:54am
Msg #394086

If you search and look back - this issue with this Op

was discussed before. This is the one who, through their CPA, took a meal deduction. I'm thinking that, after that revelation, the IRS auditor isn't going to let one little penny go by without intense scrutiny.

Reply by JanetK_CA on 8/18/11 2:50am
Msg #394083

And it could be that JustANotary is busy working on tax audit stuff.

Reply by Blueink_TN on 8/17/11 10:24pm
Msg #394057

Will your CPA handle the audit on your behalf?

Reply by JustANotary on 8/17/11 11:13pm
Msg #394069

My CPA has worked hard on this with me. I also am consulting with a CPA who used to be an auditor and she has been very very helpful.

I think we have finally agreed on all of the issues except for the SE tax. We had disagreements on lots of items until I got the former auditor involved, she quickly set them straight on many things.

They are auditing to make sure that you were fair, but it seems to me that they will push you into paying stuff you should not be paying if you do not fight, or have someone to fight for you. But there is an appeals process, so you do have some rights.

Reply by Colleen Heaton on 8/28/11 2:19pm
Msg #395362

IRS "CORRECTED" MY MATH ERROR ON THE SE FORM

I have been reading this string of conversations because I have been notified that the IRS corrected my math error on my SE Form for 2010 and of course I owe self employment tax and interest. At first I called and talked to a gentleman in the self employed area of the IRS and he looked up the reference. He told me to write a letter and explain just as I had explained it to him, and he granted a 120 day extention to get it resolved. I wrote the letter and have a reply which clearly indicates she did not read my letter. She thanks me for agreeing to pay, explains how interest and penalties accrue, and instructs me how to pay. I am now trying to figure out what to do next. I had to give up my CPA two years ago, because he was charging me $1,000 a year to do my taxes.

Reply by Doris_CO on 8/17/11 11:21pm
Msg #394070

See IRS Publication http://www.irs.gov/pub/irs-pdf/i1040sse.pdf, go to page 4, middle column #2, under "Income and Losses Not Included In Net Earnings From Self-Employment".

Reply by John Tennant on 8/17/11 11:36pm
Msg #394071

Is this the audit from July 2010??? n/m

Reply by John Tennant on 8/17/11 11:40pm
Msg #394072

Re: Is this the audit from July 2010???

If so, this is a BS post. I am an IRS Enrolled Agent. The IRS would never take this long to conclude this simple disagreement. DTF has it right. $ allowed per state regulation, per signing, are deducted from the gross of each signing. Those $ are exempt.

Reply by JustANotary on 8/17/11 11:46pm
Msg #394076

Re: Is this the audit from July 2010???

This started in July of 2010. They started with my 2008 return. I had to pay a very small amount of tax, no penalties. But whenever they collect anything on one year, they expand to the next year, so now we are working on 2009. The fun goes on.

Reply by JustANotary on 8/17/11 11:42pm
Msg #394073

Thank you for that link! That is helpful. From looking at that, it looks like you first remove the notary fees, then are subject to SE tax on only the NET profit. It looks to me like my CPA is right, is that how you read this? So it would be, $50,000 gross income, less $30,000 notary fees, less expenses. I have a business major, but I know very little about taxes.

Reply by Doris_CO on 8/18/11 12:15am
Msg #394077

I think you have it a bit mixed up. You complete the Schedule C first, deducting the expenses from the gross amount. The net profit from line 31 on Schedule C is carried over to Schedule SE. You deduct the notary fees from the net profit and that's what is shown on line 56 on Schedule SE. So, gross amount minus expenses = net profit, which is subject to Federal Income Tax. Net profit minus notary fees = what your self employment tax is computed on.

You only deduct the notary fees for Self Employment tax. You pay Federal Income Tax on the net profit from Schedule C, which includes the notary fees.

Reply by JustANotary on 8/18/11 12:26am
Msg #394081

Yes, I know the notary fee exemption is only for the SE tax, not Federal. But the auditor is figuring my SE tax with gross - notary fees. It looks like it is as my CPA has figured it, NET - notary fees. Once again, thanks to the link to the Instructions for Schedule SE. This should help us a lot.

Reply by DaveCA/CA on 8/18/11 10:56am
Msg #394105

How to survive an audit

Someone told that what they did on the day they had an audit...They had a birthday party for a 3 years old child. They invited a bunch of other kids. Needless to say, the audit went really quick and there were no issues. I think it was back when they did home visits.

Reply by GOLDGIRL/CA on 8/18/11 11:16am
Msg #394109

Re: How to survive an audit Part II

Apparently they still do. I just had a loan signing with a couple who told me an IRS auditor camped out in their (very nice) dining room for hours and hours on two separate occasions and tortured them with demands for endless documentation on the most triffling stuff. They had to search through the attic, dash to their office, go through every paper they had saved over the last 10 years. It sounded horrible. And at this point, they've still "lost." (Why doesn't the IRS go after GE like this?

Anyway, I think I would have sneaked out and turned off the circuit breakers, cutting power. Then there would have been no A/C, ice water, etc., anything to get rid of him. Though the 3-year-old birthday party sounds like a good, idea, too.