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Table of Contents

• The "Name our Newsletter" contest results.
• Tax season is in full swing.
• Welcome to our interns.
• Our rates will soon increase.
• Thank you for your referrals.
• Dan Kennedy "alumni" conference is outstanding.
• Should you have a financial audit.
• Certified mail not required to prove timely filing.
• President Bush submits tax proposal to Congress.
• Rate reduction credit a reporting hassle for 2001 returns.
• Questions and Answers.

  Is this a wash sale?

  Can I still deduct my traditional IRA if I have a 401(k)?

• If you have employee stock options...
• PS Marché Aux Fleurs
• Visit our new articles.
• Subscribe/Unsubscribe from Michael Gray, CPA's Tax and Business Insight.

We have a name for our newsletter!

As you can see, the new name is "Tax and Business Insight". This name was inspired by the suggestions we received from our readers. Although we liked many of the suggested names, any of those we would have chosen had potential conflicts with other publishers. Since we are not awarding the $100 prize, we are sending $25 gift certificates to each person who suggested a name before the deadline date.

Our most prolific contributors were Bill Babcock with 50 names and variations, and Carl Brueckner with 14 names.

Thanks, again, for your interest and participation.

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Tax season is in full swing.

Thanks to all of our clients who have already given us the information to prepare their income tax returns. It really helps to smooth the way for a better tax season, and to give your income tax returns the attention they deserve. For those who haven't given us their information yet, remember that the earliest-submitted returns have the highest priority. We will soon be switching to extension mode. Please get your information to us as soon as possible.

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Welcome to our interns.

We have two accounting students from San Jose State University helping with tax return preparation this year. We are delighted to have Thi Nguyen return. She also worked with us last tax season. Nan Wang is a student in the accelerated masters of science in accounting program from mainland China. We know you will really enjoy meeting these bright, charming young women. They are real assets to our firm.

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Have your tax work done now. Our rates will soon increase.

Our rates will be increasing on May 1, so take advantage of our current rates and have your tax returns done by April 15.

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Thank you for your referrals.

Our CPA firm is now only accepting new clients on a referral basis. Attorney Neil Horton referred the Avakian Trusts. Attorney Jo Ann Gould referred the Zechmeister Trusts. Thank you for your confidence in us, and welcome to these new clients!

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Dan Kennedy "alumni" conference is outstanding.

Last week, I went to Phoenix, Arizona with my wife, Janet. Why would I go out of town during tax season? To have the opportunity to meet with some of the best marketing minds in the country. These opportunities only happen occasionally, so I made the time to go.

A theme of this "show and tell" conference was to develop multiple means of promotion. The outstanding example was menswear retailer Bill Glazer. Bill bombards his customers with email messages, greeting cards, and broadcast voicemail messages. He developed a mailing piece that looks like a handwritten note on a diner placemat. He has developed a "frequent buyer" continuity program. His store has its own credit cards, because he learned customers who have a store credit card will visit much more often and buy much more merchandise. Whew! This guy is awesome!

By the way, do you think Bill Glazer spends his time tailoring suits? Of course not! He is working on his business, developing his next promotional campaign. He also teaches other retailers how to grow their businesses.

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Should you have a financial audit?

With the Enron scandal, the value of a financial audit is in question. My position is the CPA profession has sold itself short about the value of this important service. There was a news story in the February 1, 2002 issue of the San Jose Mercury-News that police were seeking bookkeeper Hector Manuel Chacon on suspicion of embezzling nearly $400,000 from Orcal Management.

With the lack of internal controls in most small businesses magnified by the proliferation of internally-generated accounting records using computerized accounting software, many small businesses are highly vulnerable to employees stealing funds. The most popular small business accounting software, QuickBooks, is also the most vulnerable software because any transaction can be changed. Its greatest strength, ease of use and the ability to correct mistakes, is also its greatest weakness.

Employees believe they can steal at will because no one is looking! Although financial audits are not designed to detect fraud, they help protect businesses because employees know someone is looking.

Although financial audits are expensive, one avoided embezzlement will more than pay for them. Also, consider having employees who are handling cash and accounting functions bonded. The business owner should inspect cancelled checks from time to time with unopened bank statements.

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IRS loses! Certified mail not required to prove timely filing.

A taxpayer mailed his tax return at his local post office on or about March 3, 1998 in an envelope with correct postage. In September, 1998, he contacted the IRS to ask why he hadn't received his refund. The IRS said it had no record of receiving the income tax return. The taxpayer mailed another copy of the income tax return in October, 1998. The IRS assessed penalties for late filing.

The taxpayer sued for summary judgment in the US District Court in Colorado, and the court decided in the taxpayer's favor. Under the common law "mailbox rule", there is a rebuttable presumption of fact that mail properly addressed and deposited in the U.S. mail, with proper postage prepaid on it, was received by the addressee in the ordinary course of the mail.

The Second and Sixth Appeals Circuits have ruled that a taxpayer can't use evidence other than registered or certified mail to create a presumption of delivery. The Tax Court and the Eighth, Ninth and Tenth Circuits have held a taxpayer may rely on the common law rule.

We recommend that our clients habitually use certified mail when mailing important tax documents and keep the mailing receipts. There have been too many recent stories of tax returns being destroyed or lost by companies the IRS has hired to process the returns. You can avoid arguments and legal fees by having a good proof of mailing the IRS will readily accept.

Getting certified mail receipts is time-consuming and somewhat costly, but worth the effort.
(Rolly J. Sorrentino v. U.S., DC DO, 1/8/2002.)

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President Bush submits tax proposal to Congress.

President Bush's federal budget, submitted to Congress on February 4, includes $591 billion in tax incentives. $340 billion is proposed to make last year's record tax cut permanent.

Some interesting charitable incentives include allowing taxpayers who claim the standard deduction to also take deductions for donations. Effective for distributions after December 31, 2001, individuals who are at least age 59 1/2 would be able to have distributions from IRAs paid directly to charity excluded from gross income.

Taxpayers with children in "failing" public schools would receive a $2,500 tax credit to offset private school tuition.

An above the line deduction would be allowed for long-term care insurance.

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Rate reduction credit a reporting hassle for 2001 returns.

Most taxpayers will have no adjustment on their income tax returns for the rate reduction credit. They received the amount they were entitled to, and that's that. There are some taxpayers who need to complete an IRS worksheet to determine if they are entitled to claim a credit on their income tax returns. For example, dependents didn't receive the "rebate," but may claim the credit. Taxpayers who filed their income tax returns late also didn't receive the advance payment and should claim the credit on their income tax return.

This is an area that will trip up many tax return preparers as well as taxpayers who prepare their own income tax returns. Keep your eyes open and follow the instructions carefully.

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Questions and Answers

Question - Is this a wash sale? I bought 4,700 shares of ABC on 10/17/2001 for $7,338. I bought 5,000 shares of ABC on 11/17/2001 for $4,386. I sold all 9,700 shares of ABC on 11/30/2001 for $11,865.

Answer - Since you sold all of the shares and didn't replace them, there is no wash sale.

Question - I am enrolled in a 401(k) plan at work. Can I still deduct my traditional IRA?

Answer - Here are the limits applying to 2001 IRA deductions.

For single persons, the $2,000 traditional IRA deduction is phased out for the excess of modified adjusted gross income over $33,000. The phaseout formula is (modified AGI - $33,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $43,000.

For married persons filing a separate return, the phaseout formula is modified AGI / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $10,000. However, a husband and wife who live apart at all times during the tax year aren't treated as married for purposes of these limits, and use the limits that apply to a single taxpayer.

For married persons filing a joint return, if both individuals are covered by an employer's retirement plan, the phaseout formula is (modified AGI - $53,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $63,000. The same phaseout applies for an active participant spouse who files a joint return.

The phaseout for a married person who is not an active participant but whose spouse is would be (modified AGI - $150,000) / $10,000 = fraction of deduction disallowed. No deduction is allowed when modified AGI exceeds $160,000.

Modified AGI includes taxable social security and railroad retirement benefits and the disallowance of passive activity losses. The amounts excluded for educational U.S. Savings Bonds, employer paid adoption assistance, foreign earned income and housing must be added back. The deduction for student loan interest and the deduction for contributions to IRAs must be added back.

And you thought that was an easy question?

* * *

Michael Gray regrets he can no longer personally answer email questions. He will answer selected questions in this newsletter.

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If you have employee stock options, have you subscribed to the ESOAA Option Alert?

To subscribe, go to http://www.stockoptionadvisors.com. You can review past issues at http://www.stockoptionadvisors.com/optionalert/.

Advisors may write for an information package about joining the Employee Stock Option Advisors Association, LLC and training materials about tax planning for employee stock options by sending name, company name, address, email address, telephone number, and fax number to Dawn Gray at info@stockoptionadvisors.com.

Employee option holders may write for an information package about self-study materials relating to planning for employee stock options by sending name, company name, address, email address, telephone number, and fax number to Dawn Gray at info@stockoptionadvisors.com.

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P.S.

My daughter and her husband, Holly and Dan Baker, have opened a Southern French Restaurant at 23 Ross Common, Ross, California, about 15 minutes north of the Golden Gate Bridge. The name of the restaurant is Marché Aux Fleurs. For the best meal of your life, call 415-925-9200 for a reservation and give them a try soon! For directions, visit our website at http://www.taxtrimmers.com/directions.shtml.

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Visit our new articles!

• "Clarity - step one to success"

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P.P.S.

To receive the next issue of Michael Gray, CPA's Tax & Business Insight with more tax developments, another book review, and upcoming deadlines automatically via email, subscribe by filling out the form below.

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IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this communication was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.