The Taxpayer Times

"Clear tax guidance for everyday taxpayers"

recent posts

about

Tax questions rarely arise in isolation. They tend to surface unexpectedly, in the middle of real-life situations, and the answers are often harder to find than they should be. This blog aims to explain tax topics that are often misunderstood or overlooked. Many areas of tax law feel confusing not because they are inherently complex, but because they are not always explained in a clear, practical way. The purpose of The Taxpayer Times is to break those topics down so readers can understand what applies to them and feel informed rather than overwhelmed by the law.

  • Didn’t File Your Tax Return? Here’s How to Fix It (Step-by-Step)

    You Didn’t File — Now What?

    If you didn’t file your tax return, the situation can feel unclear.

    Do you wait for the IRS? Do you need to pay before filing? Has it already gotten worse?

    Most people are not avoiding the issue – they’re unsure where to begin. This is where a clear process matters.

    If you’re not sure what happens when a return is not filed, you can read the full explanation here: Didn’t File Your Tax Return? Here’s What Actually Happens

    Step 1 — Identify What Is Missing

    Start with the basics: Which years were not filed? Some people are missing one year. Others are missing several.

    Next: Was income reported to the IRS? Even if you do not have your documents, the IRS often does. W-2s and 1099s are usually already on file.

    At this stage, you are not trying to be perfect. You are trying to understand what needs to be fixed.

    Step 2 — File the Returns (Even If You Cannot Pay)

    This is the point where most people hesitate. “I’ll file when I can afford to pay.” In most cases, waiting makes things worse.

    Filing the return does three important things:

    • stops the failure-to-file penalty from continuing to grow
    • establishes the actual balance
    • opens the door to resolution options

    Not filing keeps everything uncertain – and uncertainty tends to make the situation worse over time.

    Step 3 — Determine What You Actually Owe

    The balance is often different from what people expect.

    In some cases:

    • withholding or credits reduce what is owed
    • IRS-prepared estimates are higher than reality

    Until the return is properly filed, the number is not final.

    This step replaces assumptions with something concrete.

    Step 4 — Look at Your Options

    Once the returns are filed, the situation becomes more manageable.

    Depending on the circumstances, options may include:

    • payment plans
    • temporary hardship status
    • settlement programs

    Not every option applies to every situation.

    The key is understanding what realistically fits – not reacting out of fear.

    Step 5 — Stay Current Going Forward

    Fixing the past is only part of the process.

    Going forward, the focus is simple:

    • file future returns on time
    • respond to IRS notices
    • keep records organized

    Most serious tax problems do not come from one missed return. They come from several years of inaction.

    A Practical Perspective

    Unfiled tax returns are more common than people think.

    In many cases, it starts with something temporary:

    • a job change
    • a financial setback
    • uncertainty about how to file

    Then time passes, and the situation becomes harder to approach.

    What matters now is not how it started. It is what happens next.

    Closing Thought

    Once the missing returns are identified and filed, the situation usually becomes clearer than expected. The IRS process follows a structure. When handled step by step, it is not unpredictable.

    If you haven’t read it yet, here’s what typically happens when a tax return is not filed: Didn’t File Your Tax Return? Here’s What Actually Happens

    If you’re unsure where to begin, identifying which years are missing is usually the first step.

    Disclaimer

    This article is for informational purposes only and is not intended as tax advice. Each situation should be evaluated based on its specific facts.

  • Real-World Tax Series: Small Trucking Businesses (Part 2)

    What Truckers Can Actually Deduct (And What Gets Them in Trouble)

    Where the Confusion Begins

    After the business is set up, the next question usually comes quickly:

    ” What can I deduct?”

    In the trucking industry, this question is often shaped by informal conversations – other drivers, dispatchers, or online discussions.

    Some of that information is helpful. Much of it is based on individual experiences.

    What works in one situation does not always apply in another – especially when it comes to taxes.

    The result is not usually intentional misreporting. It is a mix of assumptions, partial information, and inconsistent records.

    What a Deduction Actually Means

    A business deduction is not simply anything related to the truck or the work.

    In general terms, a deductible expense must be:

    • ordinary (common in the industry)
    • necessary (appropriate for the business)

    That sounds simple, but in practice, the difficulty is not understanding the rule – it is applying it consistently.

    Common Deductible Expenses (In Practice)

    For most small trucking businesses, the core expenses are straightforward:

    • fuel
    • repairs and maintenance
    • insurance
    • tolls and parking
    • licenses and permits

    These are typically not where problems begin.

    The issues usually arise in areas where:

    • personal and business use overlap
    • timing matters
    • or the treatment is not intuitive

    Truck Payments vs. Depreciation

    One of the most common misunderstandings is how truck costs are deducted.

    Many owner-operators assume:

    “If I’m making a truck payment, I can deduct the full amount.”

    That is not how it works.

    The cost of the truck is generally recovered through:

    • depreciation (over time or through accelerated methods)
    • interest expense (the financing portion of the payment)

    The principal portion of a loan payment is not a deductible expense.

    This is a common area where expectations and actual tax results do not align.

    Per Diem – Often Misunderstood

    Per diem is widely discussed in the trucking industry and often misunderstood.

    At a high level, it is intended to account for:

    • meals and incidental expenses while traveling away from home

    However:

    • not every driver qualifies
    • the calculation must follow specific rules
    • the treatment can differ depending on the business structure

    This is an area where informal advice frequently leads to incorrect assumptions.

    We will look at this in detail in a separate part of this series.

    Mixed Personal and Business Expenses

    Some expenses do not fall neatly into “business” or “personal.”

    Examples include:

    • cell phones
    • internet
    • vehicles used for both personal and business purposes

    In these cases:

    • only the business portion is deductible

    Without clear records, it becomes difficult to support how that percentage was determined.

    Recordkeeping – Where Problems Actually Begin

    Most deduction issues are not about the rule itself.

    They begin with recordkeeping.

    In many small trucking businesses:

    • receipts are incomplete
    • mileage is not consistently tracked
    • expenses are reconstructed at year-end

    When records are not maintained throughout the year:

    • deductions become estimates
    • consistency breaks down
    • the tax return no longer reflects actual activity

    This is where small issues begin to compound.

    When “Common Practice” Becomes a Problem

    In the trucking industry, it is not unusual to hear:

    “Everyone does it this way.”

    However, common practice is not the same as correct treatment.

    Tax reporting is based on:

    • documented activity
    • consistent application of rules
    • supportable records

    When those are missing, the position taken on a return becomes difficult to defend.

    How This Connects to Larger Issues

    Incorrect or unsupported deductions can lead to:

    • understated income
    • unexpected tax balances
    • notices or examinations

    In many cases, the issue is not a single large mistake.

    It is a series of small decisions made over time:

    • relying on informal guidance
    • inconsistent tracking
    • assumptions about what is deductible

    Looking Ahead

    Understanding deductions is not just about identifying expenses.

    It is about:

    • how those expenses are tracked
    • how they are calculated
    • and how they are reported over time

    One of the most frequently discussed – and misunderstood – areas in trucking is per diem.

    Next in the Series

    Part 3 – Per Diem for Owner-Operators: One of the Most Misunderstood Deductions

    Disclaimer

    This article is for informational purposes only and is not intended as tax advice. Every business situation is different, and tax treatment depends on specific facts and circumstances.

  • Real-World Tax Series: Small Trucking Businesses (Part 1)

    Owner-Operators, Family-Owned Trucking Companies, and What Actually Matters at Tax Time

    How Small Trucking Businesses Are Structured (And Why It Matters for Taxes)

    Where Most Small Trucking Businesses Start

    Many small trucking businesses begin the same way.

    One truck. One driver. Often a husband-and-wife operation, or a small family business built around a single income-producing asset – the truck itself.

    At the beginning, the focus is straightforward:

    • keep the truck running
    • secure loads
    • manage fuel and maintenance
    • generate consistent income

    Tax structure is usually not the priority. In many cases, the business starts as a sole proprietorship by default, without much discussion or planning.

    That, by itself, is not a problem.

    What becomes a problem is how the structure evolves – or doesn’t.

    The Common Turning Point

    At some point, many owner-operators hear the same advice:

    “You should open an S-corporation. It will save you taxes.”

    This advice often comes from:

    • other drivers
    • dispatchers
    • online forums
    • or everyday conversations within the industry

    In the trucking business, information is frequently shared this way. These conversations are part of how people learn and make decisions.

    However, they are usually based on individual experiences.

    What works in one situation does not always apply in another – especially when it comes to taxes.

    The issue is not whether an S-corporation can be beneficial, but what changes when that decision is made – and whether those changes are actually implemented.

    What Actually Changes (and What Does Not)

    When a small trucking business moves from a sole proprietorship to an S-corporation, the day-to-day work does not change.

    The truck still runs the same routes. Fuel costs do not change. Repairs and maintenance continue as before.

    However, the tax and reporting structure changes significantly.

    The most important difference is this:

    An S-corporation is not just a tax election – it is an operational shift.

    Reasonable Compensation and Payroll

    One of the most misunderstood aspects of an S-corporation is the requirement for reasonable compensation.

    The owner is no longer simply taking draws. They are expected to:

    • run payroll
    • pay themselves as an employee
    • report wages through payroll tax filings

    In practice, this is where many small trucking businesses fall out of alignment.

    Common situations include:

    • no payroll established
    • inconsistent or arbitrary payments
    • distributions taken without wages

    These gaps are not always intentional. They often result from applying the form of an S-corporation without putting the structure behind it.

    Bookkeeping Expectations Increase

    A sole proprietorship can operate – though not ideally – with minimal structure.

    An S-corporation cannot.

    With an S-corporation:

    • income and expenses must be clearly tracked
    • payroll must be recorded properly
    • distributions must be distinguished from wages
    • financial records must support the tax return

    Without this structure, the tax return becomes a reconstruction exercise at year-end, rather than a reflection of ongoing records.

    What Does Not Change (But People Assume It Does)

    A change in entity does not automatically:

    • reduce taxes
    • create new deductions
    • simplify recordkeeping

    In fact, in many cases, it introduces more complexity, not less.

    The benefit of an S-corporation depends on:

    • consistent profitability
    • proper payroll implementation
    • accurate and timely bookkeeping

    Without those, the expected benefits often do not materialize.

    Why This Matters in the Trucking Industry

    Small trucking businesses operate under constant operational pressure.

    Time is spent on the road, not in front of accounting software. Decisions are made quickly, often influenced by conversations with others in the industry.

    As a result, it is common to see:

    • entity structures that do not match the actual operation
    • incomplete payroll setups
    • records that are maintained only at year-end

    These are not isolated issues. They form patterns that affect everything that follows.

    How Structure Connects to Everything Else

    The way a trucking business is structured affects:

    • how income is reported
    • how taxes are calculated
    • what records need to be maintained
    • how issues arise over time

    It also determines how easily the business can:

    • track profitability
    • manage cash flow
    • respond to tax obligations

    In many cases, when problems appear later – large tax balances, notices, or inconsistencies – the root cause can be traced back to how the business was originally set up and maintained.

    Looking Ahead

    Understanding the structure is only the starting point.

    Once that foundation is in place, the next layer involves how income and expenses are actually reported in practice – what is deducted, what is not, and where misunderstandings tend to occur.

    That is where many small trucking businesses begin to encounter difficulty.

    Next in the Series

    Part 2 – What Truckers Can Actually Deduct (And What Gets Them in Trouble)

    Disclaimer

    This article is for informational purposes only and is not intended as tax advice. Every business situation is different, and tax treatment depends on specific facts and circumstances.

  • Real-World Tax Returns: Military Edition (Part 2)

    Multi-State Filing, Spouse Rules, and Common Errors

    How the Framework Applies in Practice

    Once residency is correctly identified, the rest of the return begins to take shape. The difficulty is not understanding individual rules in isolation, but applying them correctly when multiple factors are involved.

    Military tax returns often involve:

    • more than one state
    • different residency positions within the same household
    • income that is treated differently for federal and state purposes

    The following situations illustrate how these rules are applied.

    Scenario 1 – Stationed in Virginia, Domicile in Texas

    A service member maintains Texas as their legal residence and is stationed in Virginia.

    Texas does not impose a state income tax. Virginia does.

    In this situation, military income is not subject to Virginia income tax solely because the service member is stationed there. The duty station does not create Virginia residency.

    The result is straightforward in principle:

    • no Virginia resident return
    • no Virginia tax on military income

    However, confusion often arises when:

    • Virginia withholding appears on Form W-2
    • the taxpayer assumes a Virginia filing requirement

    The presence of withholding does not determine whether tax is owed. It must be evaluated based on the taxpayer’s legal residence.

    Scenario 2 – Service Member and Working Spouse

    A service member maintains a Texas domicile and is stationed in Virginia. The spouse works in Virginia.

    This introduces a separate issue: the spouse’s income.

    Under the Military Spouses Residency Relief Act, the spouse may be able to maintain the same state of residence as the service member, provided certain conditions are met.

    When properly applied:

    • the spouse may avoid Virginia taxation on earned income
    • both individuals are treated as residents of the same state

    However, this is not automatic. It depends on:

    • the spouse’s residency election
    • consistency in maintaining that position

    When this is misunderstood, the spouse is often taxed as a Virginia resident even when a different filing position was available.

    Scenario 3 – Multi-State Presence Without Multi-State Taxation

    A military household may:

    • live in one state
    • work in another
    • maintain legal residence in a third

    Despite this, it does not necessarily result in multiple state tax obligations.

    The key question is not where income is earned, but:

    which state has the authority to tax it.

    Without a clear understanding of residency rules, taxpayers often assume that multiple states must be paid. In many cases, the assumption is incorrect.

    Military Pay – What Matters for the Return

    Military compensation is often misunderstood because it includes both taxable and non-taxable components.

    In general:

    • base pay is taxable
    • certain allowances (such as housing and subsistence) are not
    • combat pay may be excluded from taxable income

    The reporting is usually reflected on Form W-2. The issue is not entering the income, but understanding how it is treated.

    One important consideration is that combat pay, while excluded from taxable income, can still affect eligibility for certain credits depending on how it is treated on the return.

    Combat Zone Considerations

    Service in a combat zone introduces additional rules that are often overlooked.

    These may include:

    • automatic extensions to file and pay
    • additional time to take certain tax-related actions

    These provisions are not elective in the same way as standard extensions. They apply based on the service member’s status and location.

    Failure to recognize this can lead to unnecessary concern about deadlines or, in some cases, missed opportunities.

    PCS Moves and Moving Expenses

    For most taxpayers, moving expenses are no longer deductible.

    Active-duty military personnel are an exception when the move is made under official orders as part of a permanent change of station (PCS).

    This allows certain moving expenses to be deducted, but only when the requirements are met.

    When the move does not qualify, the deduction is not available.

    State Withholding and Misleading Indicators

    One of the more confusing aspects of military tax returns is state withholding.

    A Form W-2 may show state tax withheld for a state that ultimately does not have taxing authority over the income.

    This creates a common situation:

    • tax is withheld
    • no tax is actually owed to that state

    In these cases, a return may still need to be filed to recover the withholding.

    The presence of withholding should not be used to determine residency or tax liability.

    Common Errors That Lead to Incorrect Returns

    Military tax return errors are consistent and predictable. They are not random.

    The most common issues include:

    • filing as a resident of the duty station state
    • failing to apply military spouse residency rules
    • assuming withholding determines tax liability
    • overlooking the impact of combat pay
    • treating the return as a standard W-2 filing

    Each of these errors stems from the same issue: applying the wrong framework.

    Bring It Together

    Military tax returns are not defined by complexity in forms. They are defined by how residency, income, and federal law interact across different states.

    When the framework is understood:

    • filing obligations become clearer
    • unnecessary tax can be avoided
    • the return reflects the taxpayer’s actual legal position

    When the framework is ignored, even a correctly calculated return can be fundamentally wrong.

    Final Thought

    Military tax rules are not difficult because they are technical. They are difficult because they are different. Once that difference is recognized and applied correctly, the rest of the return follows logically.

    Disclaimer

    This article is provided for informational purposes only and is intended to explain general tax concepts as they relate to military personnel.

    It does not constitute tax advice and should not be relied upon as a substitute for professional guidance. Military tax situations often involve multiple states and fact-specific determinations, including residency, spouse elections, and income treatment.

    Any filing position should be evaluated based on the taxpayer’s specific facts and circumstances before being applied.

  • Real-World Tax Returns: Military Edition (Part 1)

    The Framework Most People Get Wrong

    Military Tax Returns Are Not Routine Filings

    Military tax returns are often treated as routine filings. At a glance, that assumption seems reasonable. A Form W-2 is issued, income is reported, and the return appears no different from any other wage-based filing.

    In practice, that assumption is where many returns begin to go wrong.

    The most common misunderstanding is simple: taxes are assumed to follow where the taxpayer lives. For military personnel, that is often not the case.

    Residency Does Not Follow Duty Station

    A service member’s tax situation is not determined by where they are stationed, but by their legal residence – commonly referred to as domicile.

    A taxpayer may live in Virginia, be stationed in Virginia, and still not be a Virginia resident for tax purposes. While this may seem counterintuitive, it reflects how military residency rules are designed to function.

    The duty station is considered a temporary assignment, even if it lasts for several years. By itself, it does not establish tax residency.

    What Domicile Actually Means

    Domicile is a legal concept. It refers to the state a taxpayer considers their permanent home.

    For military personnel, this is often:

    • the state they entered the service from, or
    • the state they intend to return to after service

    Unlike civilian taxpayers, service members do not automatically change residency each time they relocate under orders. Their legal residence can remain unchanged across multiple assignments.

    This stability is intentional – but it is also where many tax returns are misunderstood.

    Why Residency Determines the Entire Return

    State income tax is based on residency. If residency is not identified correctly, the return can be structured incorrectly from the beginning.

    This can lead to:

    • filing in the wrong state
    • reporting income to a state that should not tax it
    • paying tax that was never owed

    These are not minor technical issues. They affect the foundation of the return.

    Why the Return Looks Normal – Even When It Isn’t

    One reason these errors are common is that the return itself does not appear unusual.

    On the surface, everything looks familiar:

    • a W-2 reporting wages
    • an address reflecting current residence
    • standard inputs in tax software

    However, several elements can be misleading if taken at face value:

    • The address on the return does not determine residency
    • The state listed on the W-2 does not control taxation
    • The duty station does not establish a filing obligation

    Because the form looks ordinary, the underlying issue is often overlooked.

    Most Errors Are Structural, Not Technical

    Errors in military tax returns are rarely about calculations.

    They result from applying the wrong framework.

    A common situation involves a service member stationed in Virginia whose return is prepared as a Virginia resident return. State tax is paid accordingly, even though the taxpayer may not have been a Virginia resident at all.

    This is not a calculation mistake. It is a misunderstanding of how residency works.

    Why These Mistakes Go Unnoticed

    These issues often go undetected because nothing appears wrong.

    The return is filed. The numbers calculate correctly. The tax is paid.

    Tax software does not always flag residency issues, and taxpayers generally assume the result is accurate. Without a clear understanding of the underlying rules, there is little reason to question the outcome.

    The One Question That Comes First

    Before considering deductions, credits, or tax-saving strategies, one question must be answered:

    What is the taxpayer’s legal residence?

    Everything else follows from that answer.

    If this question is answered incorrectly, the rest of the return – no matter how carefully prepared – will also be incorrect.

    What Comes Next

    Understanding residency is the starting point.

    In Part 2, the focus will shift to how these rules apply in practice, including:

    • multi-state filing situations
    • military spouse income
    • common errors that lead to unnecessary taxation

    Military tax returns are not complicated because of the forms involved. They are complicated because the underlying assumptions are different.

    Recognizing that difference is what allows the return to be prepared correctly.

    Disclaimer

    This article is provided for informational purposes only and is intended to explain general tax concepts as they relate to military personnel. It does not constitute tax advice and should not be relied upon as a substitute for professional guidance. Tax outcomes depend on specific facts and circumstances, including state residency, income sources, and filing positions. Readers should consult a qualified tax professional regarding their individual situation before taking any action based on the information presented.

  • Buying a Home with Cash in 2026? The New Federal Reporting Rule Every Buyer Should Know

    As of March 1, 2026, a new federal reporting rule officially took effect – and the phrase alone has unsettled many prospective homebuyers.

    If you are saving to purchase your dream home with cash, especially with mortgage rates still above 6% compared to the 2.5-3% rates many borrowers enjoyed during the pandemic, you may have heard something concerning:

    “Cash home purchases are now subject to federal reporting.”

    At first glance, those words can sound alarming.

    When I first reviewed this rule, I was surprised as well. As a tax professional, I wanted to understand immediately: Who does this actually apply to? Should ordinary buyers be concerned?

    After carefully reviewing the official guidance from the Financial Crimes Enforcement Network (FinCEN), it became clear that the rule is far narrower than it initially sounds.

    Here is what you need to know.

    Cash Home Purchases Are Common in Today’s Market

    Before examining the new reporting rule, it is important to understand the broader housing landscape.

    Recent national housing data shows that approximately 30% to 33% of U.S. home purchases in 2025 were completed entirely with cash – nearly one out of every three transactions.

    With mortgage interest rates significantly higher than pandemic-era lows, many buyers are choosing to:

    • Avoid long-term interest costs
    • Eliminate monthly mortgage obligations
    • Strengthen their negotiating position in competitive markets
    • Use accumulated savings or home equity

    Paying cash for a home is a deliberate financial decision that reflects current market conditions.

    What the New Federal Reporting Rule Actually Does

    The new rule, issued by FinCEN, requires certain real estate professionals to file a report when specific types of residential property transactions occur.

    The key detail is this:

    The reporting requirement generally applies when a residential property is purchased without financing by a legal entity or trust.

    The obligation to report falls on the closing or settlement professional – not automatically on the buyer.

    This rule does not create a new tax. It does not impose a new filing requirement on individual taxpayers. It does not automatically trigger IRS scrutiny.

    Its purpose is to increase transparency in transactions where ownership may be structured through entities.

    Who the Rule Applies To

    The reporting requirement may apply when:

    • An LLC, corporation, or partnership purchases residential property without a mortgage
    • A trust purchases residential property without financing
    • The transaction falls within the scope defined by FinCEN

    These situations typically involve structures where beneficial ownership could otherwise be less transparent.

    Who the Rule Does Not Target

    This is the most important section for everyday buyers.

    If you are:

    • Purchasing a home in your personal name.
    • Using your own savings.
    • Buying without a mortgage.
    • Not using a legal entity or trust.

    In most cases, this rule does not directly apply to you.

    An individual purchasing a primary residence with cash is not the focus of this reporting framework. The rule was designed to address specific anti-money laundering concerns involving certain entity-based transactions – not to scrutinize ordinary Americans buying homes for personal use.

    Why the Federal Government Enacted the Rule

    Mortgage lenders are already subject to extensive anti-money laundering requirements. When financing is involved, banks already have federal reporting and due diligence obligations.

    However, when a property is purchased entirely with cash through a legal entity, no lender is involved. This created a transparency gap in certain transactions.

    The new reporting rule is intended to address that gap by requiring reporting in defined scenarios involving entities and trusts.

    The objective is financial transparency – not regulation of individual homeownership.

    Should You Be Concerned?

    For most individual buyers, the answer is no.

    There is:

    • No new personal tax form to file
    • No automatic IRS audit triggered by paying cash
    • No blanket reporting requirement on individuals purchasing in their own names

    If a transaction falls within the reporting framework, the responsibility generally rests with the closing professional under specific conditions established by FinCEN.

    Understanding who the rule actually targets removes much of the initial anxiety.

    The Bottom Line

    Cash home purchases are a significant and growing part of today’s housing market.

    The new federal reporting rule that took effect on March 1, 2026, is targeted and limited in scope. It focuses primarily on certain non-financed transactions involving legal entities and trusts.

    For most individuals saving to buy a home with cash, this rule does not change their personal tax obligations.

    Clarity replaces fear when you understand the details.

    Below are answers to some common questions homebuyers may have about this new reporting rule.

    Frequently Asked Questions

    Does this new federal rule apply if I buy a home with cash in my own name?

    In most cases, no. The reporting requirement generally applies to certain transactions involving legal entities or trusts – not individuals purchasing property in their personal name.

    Will paying cash for a home trigger an IRS audit?

    No. Paying cash for a home does not automatically trigger an IRS audit or create a new tax filing requirement.

    Who is responsible for filing a report under the new rule?

    When the rule applies, the reporting obligation typically falls on the closing or settlement professional involved in the transaction – not the individual buyer.

    Why did the federal government create this rule?

    The rule was designed to address transparency gaps in certain non-financed real estate transactions involving entities and trusts. Its purpose is to ensure anti-money-laundering compliance, not to regulate ordinary homebuyers.

    Disclaimer

    This article is provided for general information purposes only and does not constitute legal, tax, or financial advice. Real estate transactions vary depending on structure and individual circumstances. Readers should consult their own professional advisors regarding their specific situation.

  • DCAA Audit Series – Part 5

    Why DCAA Audits Result in Findings (Even When No One Intended to Do Anything Wrong)

    In the earlier parts of this series, we examined what DCAA audits are, when they occur, what they review, and how different types of audits relate to one another. A natural question follows:

    If a contractor is not attempting to overcharge the government, why do audits result in findings?

    The answer is often less dramatic than assumed.

    Most DCAA audit findings do not arise from intentional misconduct. They develop gradually, often from small inconsistencies, informal habits, or structural gaps that were never tested under audit conditions.

    Understanding how findings develop provides important context for contractors operating in a regulated environment.

    Findings Develop Gradually

    Audit findings rarely originate from a single event. More often, they reflect patterns that have existed over time.

    A system may function adequately for internal reporting yet still lack the consistency or documentation required under government standards. Minor deviations, when repeated, create records that appear unreliable during formal review.

    Audits do not create deficiencies. They identify them.

    Inconsistent Cost Treatment

    One recurring source of findings involves inconsistent classification of direct and indirect costs.

    The issue is rarely the existence of a particular cost. Instead, the concern is whether similar costs are treated differently across contracts, time periods, or circumstances.

    Examples include:

    • Charging a cost directly in one instance and indirectly in another
    • Reclassifying expenses without supporting documentation
    • Applying different allocation methods depending on urgency or convenience

    Inconsistency introduces uncertainty. Over time, these variations can lead to questioned costs or recommendations for corrective action.

    Timekeeping Irregularities

    Timekeeping remains one of the most scrutinized areas in DCAA audits because labor often represents a significant portion of contract costs.

    Findings frequently stem from:

    • Delayed time entry
    • Informal corrections
    • Supervisor adjustments without documentation
    • Charging time based on recollection rather than daily recording

    These practices may develop gradually, particularly during periods of operational pressure. However, when time records cannot demonstrate reliability and traceability, audit concerns arise.

    Documentation Gaps

    Documentation is central to audit review.

    Costs must be supported by records that connect source documents to accounting entries and reported amounts. When documentation is incomplete, disorganized, or unavailable, costs may be questioned regardless of intent.

    Documentation gaps often result from:

    • Staff turnover
    • System transitions
    • Delayed reconciliations
    • Weak record retention practices

    Because some audits occur long after the period under review, reconstruction becomes difficult. Records, not explanations, determine outcomes.

    Policy and Practice Misalignment

    Written policies are frequently reviewed during audits. Findings may arise when documented procedures differ from actual operations.

    Examples include:

    • A policy requiring daily time entry while employees record time weekly
    • Allocation methods described in writing but applied inconsistently
    • Controls that exist on paper but are not actively monitored

    The presence of a policy is not sufficient. Consistent implementation is the central issue.

    Structural Strain During Growth

    Contractors often encounter findings during periods of expansion.

    As contracts increase in number or complexity, systems that were adequate at an earlier stage may no longer provide sufficient structure. Additional personnel, expanded cost pools, and more complex billing requirements introduce new pressure points.

    If internal processes do not evolve alongside the business, inconsistencies may emerge. Audits frequently identify these transition-related gaps.

    Intent Versus System Reliability

    A common misunderstanding is that audit findings imply misconduct. In many cases, findings reflect weaknesses in structure rather than intent.

    DCAA audits evaluate whether accounting systems produce reliable, consistent, and supportable cost information. When systems lack discipline, traceability, or uniform application, findings may occur even when work was performed in good faith.

    Recognizing this distinction clarifies why audit results may not align with a contractor’s internal perception of compliance.

    Observing the Pattern

    Across different types of audits – pre-award reviews, accounting system evaluations, incurred cost audits, and billing reviews – the underlying themes remain consistent:

    • Consistency
    • Traceability
    • Documentation
    • Alignment between policy and practice

    Most findings are not isolated incidents. They are indicators of gradual system drift.

    Understanding these patterns allows contractors to view audits not as isolated events, but as evaluations of how well internal systems hold up over time.

    Looking Ahead

    In the next part of this series, we will examine what practical preparation means in the context of DCAA oversight and how preparation differs from reconstruction after an audit has already begun.

  • Tax Credits for Individuals: What the IRS Highlighted for 2025

    The Internal Revenue Service recently released Tax Tip 2026-10, outlining several individual tax credits and noting enhancements tied to the One, Big, Beautiful Bill. These credits apply to income earned during the 2025 tax year, reported on returns filed in the 2026 filing season.

    This article explains what the IRS highlighted, how these credits function, and why understanding the structure of each credit matters when preparing a tax return.

    What the IRS Means by “Tax Credits”

    A tax credit reduces income tax dollar for dollar. Unlike deductions, which reduce taxable income, credits directly reduce the amount of tax owed.

    Some credits are refundable, meaning a refund may be issued even if no tax is owed. Others are nonrefundable, meaning they can reduce tax to zero but cannot produce a refund. Certain credits are partially refundable, combining both features.

    These distinctions determine how a credit appears on a tax return and how it affects the final balance due or refund.

    Credits the IRS Highlighted

    Child Tax Credit

    For the 2025 tax year, the Child Tax Credit is up to $2,200 per qualifying child. Eligibility depends on income, filing status, and whether the child meets specific age and residency requirements.

    Child and Dependent Care Credit

    This credit may reduce federal income tax for taxpayers who paid child or dependent care expenses while working or actively seeking work. The allowable credit depends on expenses incurred and household income.

    Saver’s Credit

    Taxpayers who made eligible contributions to an IRA or an employer-sponsored retirement plan may qualify. The maximum credit is $1,000 ($2,000 for married filing jointly), subject to income limits.

    Refundable Credits

    Earned Income Tax Credit

    The Earned Income Tax Credit supports low-to moderate-income workers and families. The amount varies based on income, filing status, and number of qualifying children.

    Premium Tax Credit

    This refundable credit applies to taxpayers who purchased health insurance through the Health Insurance Marketplace and meet income and eligibility requirements. The credit amount is tied to household income and plan costs.

    Fuel Tax Credit

    The Fuel Tax Credit may be claimed for fuel used for qualifying off-highway business or farming purposes. It does not apply to personal vehicle use.

    Partially Refundable Credits

    Additional Child Tax Credit

    For 2025, up to $1,700 per qualifying child may be refundable, depending on earned income levels.

    Adoption Tax Credit

    The maximum adoption credit for 2025 is $17,280 per eligible child, with up to $5,000 refundable. Any nonrefundable portion may be carried forward, but it cannot later create additional refundable amounts.

    American Opportunity Tax Credit

    This education credit may provide up to $2,500 per eligible student, with up to $1,000 refundable, for qualifying education expenses.

    Documentation Still Matters

    The IRS emphasizes the importance of maintaining records to support any credit claimed. Eligibility is based on statutory requirements, not estimates or expectations. Proper documentation helps ensure accurate reporting and avoids processing delays.

    Closing Thought

    IRS Tax Tips are designed to inform taxpayers about how the law works, not to suggest that everyone qualifies for every credit listed. Understanding the structure, limits, and documentation requirements of each credit is essential to preparing an accurate return.

    Disclaimer

    This article is for general informational purposes only and does not constitute tax advice. Tax credit eligibility depends on individual facts and circumstances. Taxpayers should consult IRS guidance or a qualified tax professional before claiming any credit.

  • Didn’t File Your Tax Return? Here’s What Actually Happens

    “The hardest thing in the world to understand is the income tax.” — Albert Einstein

    Even a genius found the income tax confusing. Now consider what ordinary taxpayers actually do when faced with it.

    The U.S. tax system operates on a voluntary basis. That means taxpayers are expected to file federal income tax returns each year. Most people do file. Every tax season, however, some do not.

    This is more common than many expect. I see this regularly in my work with taxpayers in Fairfax County and surrounding areas.

    Non-filing takes different forms. Some taxpayers skip a single year. Others file sporadically, leaving gaps over time. Some stop filing altogether. This behavior is not limited to any one income level. It includes people who expect to owe tax, those who believe they owe nothing, and those who would likely receive a refund if they filed.

    Why Some Taxpayers Choose Not to File

    For many taxpayers, the decision not to file is not a protest or a political statement. It is often driven by avoidance, delay, or assumptions about the outcome.

    Some taxpayers already expect to owe tax and do not have the money available when the return is due. Others have the money but dislike writing a large check, especially when there was little or no withholding during the year. In those situations, filing can feel like voluntarily creating a problem rather than solving one.

    Other taxpayers assume they do not need to file because their income seems low, inconsistent, or similar to prior years in which no tax was owed. Some disengage from the process altogether. Surprisingly, some taxpayers do not file even when they are entitled to a refund, because they assume there is nothing to gain or do not realize a refund exists.

    In many of these cases, the decision not to file is based on assumptions rather than calculations.

    What Filing Actually Does

    Filing a federal income tax return is the way income, deductions, credits, and tax liability are reported for a specific tax year. A filed return records the taxpayer’s position for that year using the information available at the time of filing.

    When a return is filed showing tax due, that tax is owed at the time of filing. The obligation to pay exists even if the taxpayer is unable to pay the full amount immediately. Filing the return does not eliminate the payment requirement, but it does establish the amount owed based on the taxpayer’s own reporting rather than assumptions or estimates.

    When no return is filed, there is no taxpayer-reported record for that year. Income, deductions, and credits have not been stated, and the tax position for the year has not been established by the taxpayer.

    What Happens When a Return Is Not Filed

    When a required federal income tax return is not filed, there is no filed return on record for that tax year. The filing obligation does not disappear, and the absence of a return does not establish that no tax is owed.

    The Internal Revenue Service receives income information from third parties such as employers, banks, and other payors. That information exists regardless of whether a taxpayer files a return. In some cases, the IRS later uses that information to estimate tax for a year in which no return was filed. In many cases, it does not act immediately at all.

    Non-filing does not guarantee action, and it does not guarantee inaction. It leaves the outcome uncertain.

    Common Assumptions and How They Play Out

    A common assumption is that not filing avoids creating a tax liability. In reality, not filing only avoids calculating one. Until a return is prepared, the actual tax position, whether tax is owed, not owed, or refundable, remains unknown.

    Another assumption is that non-filing delays consequences without cost. Over time, missing returns often become harder to address. Records are lost, details fade, and reconstructing prior years becomes more difficult than filing would have been originally.

    For taxpayers who are due refunds, non-filing has a simple result: the refund is never claimed. Refunds are not issued automatically. They exist only if a return is filed.

    Why Non-Filing Is Rarely the Best Practice

    From a taxpayer’s point of view, non-filing can feel like a temporary solution. It postpones paperwork and delays dealing with uncomfortable numbers. Over time, however, it tends to replace clarity with uncertainty.

    Filing a return does not solve every issue, but it replaces assumptions with facts. Whether the outcome is favorable or not, a filed return establishes where things actually stand. Without that information, decisions are made in the dark.

    Non-filing does not improve outcomes for taxpayers who owe tax, and it offers no benefit to taxpayers who do not. It simply leaves the year unfiled.

    A Practical Reality

    Federal income tax works on a year-by-year basis, but life does not. When a return is not filed for a given year, that year does not disappear. It remains unfiled while new tax years arrive, each with its own deadlines and decisions.

    For many taxpayers, one unfiled year quietly leads to another. What starts as a short delay can turn into a longer gap, making the situation feel harder to approach over time rather than easier.

    From a taxpayer’s perspective, the practical question is whether leaving years unfiled makes future decisions simpler or more complicated. In practice, delay usually narrows options and increases uncertainty rather than reducing it.

    A Practical Next Step

    If you have unfiled tax returns, you are not alone. Many taxpayers find themselves in this situation over time, often without realizing how quickly it develops.

    Addressing unfiled returns earlier generally provides more options than waiting.

    If you would like to understand where you stand or what your options may be, you are welcome to reach out.

    You can also connect with me on LinkedIn.

    Disclaimer

    This article is for general informational purposes only and is not intended as tax, legal, or financial advice. Tax situations vary, and the application of tax law depends on individual facts and circumstances.

  • New Form 1099-DA & Digital Asset Reporting for 2025 Tax Returns

    Cryptocurrency reporting has become a recurring topic in recent filing seasons. In an earlier article, Crypto Transactions and Tax Returns, I discussed why digital asset activity often creates uncertainty on tax returns, particularly when taxpayers believe that transactions involving small dollar amounts do not require reporting or assume that no reporting is necessary because no information form was received from a broker.

    As part of the IRS’s ongoing efforts to address digital asset reporting, the Internal Revenue Service has introduced a new information reporting form: Form 1099-DA, Digital Asset Proceeds From Broker Transactions. Beginning with the 2025 tax year, brokers will use this form to report certain digital asset transactions to taxpayers and to the IRS.

    This form is new. It represents a change in how digital asset transactions are reported and tracked within the federal tax system.

    This article explains what Form 1099-DA is, why it was introduced, and how it affects the reporting of digital asset transactions for the 2025 tax year.

    What Is Form 1099-DA?

    Form 1099-DA is an IRS information return used to report gross proceeds from digital asset transactions handled by brokers. It is designed specifically for digital assets and is separate from existing information returns such as Forms 1099-B or 1099-K.

    The form applies to transactions involving digital assets such as cryptocurrency and other blockchain-based property when those transactions are facilitated by a broker. When a reportable transaction occurs, the broker reports the transaction to both the taxpayer and the IRS using Form 1099-DA.

    The purpose of the form is informational. It does not determine whether a transaction is taxable, nor does it calculate gain or loss. Instead, it provides transaction data that supports accurate reporting on the taxpayer’s income tax return.

    When Form 1099-DA Applies

    Form 1099-DA applies to digital asset transactions occurring during the 2025 tax year. Although the transactions occur in 2025, the form will generally be issued to taxpayers in early 2026, during the 2026 filing season.

    Taxpayers may receive one or multiple Forms 1099-DA, depending on the number of brokers or platforms used during the year. Each broker that has reportable transactions is responsible for issuing its own form.

    The introduction of Form 1099-DA does not change the longstanding requirement to report taxable digital asset activity. It changes how that activity is reported to the IRS by third parties.

    What Information Is Reported on Form 1099-DA

    For the 2025 tax year, Form 1099-DA focuses on gross proceeds from digital asset transactions. Gross proceeds generally represent the total amount received in a sale, exchange, or other disposition of a digital asset.

    For this initial reporting year, brokers are not required to report cost basis on Form 1099-DA. As a result, the form alone does not determine whether a transaction resulted in a gain or a loss.

    Taxpayers remain responsible for maintaining records that establish:

    • When the digital asset was acquired
    • How much was paid for it
    • When it was disposed of
    • The amount received upon disposition

    Those details are necessary to complete the taxpayer’s own gain or loss calculations on the tax return.

    How Form 1099-DA Fits Into the Tax Return

    Form 1099-DA is not filed with the tax return. Instead, it serves as supporting information used to complete the return accurately.

    Digital asset dispositions are generally reported on:

    • Form 8949, Sales and Other Dispositions of Capital Assets
    • Schedule D, Capital Gains and Losses

    The amounts reported on Form 1099-DA should be reviewed and reconciled with the taxpayer’s own records. Differences can arise due to timing, fees, transfers between wallets, or incomplete cost basis information.

    Receiving a Form 1099-DA does not automatically mean additional tax is owed. It does not mean the IRS has received third-party reporting related to the transaction.

    Why the IRS Introduced Form 1099-DA

    Digital Asset transactions have grown significantly over the past decade, but third-party reporting has not always kept pace. Form 1099-DA was introduced to create a standardized reporting framework similar to what already exists for securities and other financial transactions.

    By using a dedicated form for digital assets, the IRS can more consistently match information reported by brokers with information reported on individual tax returns. This aligns digital asset reporting more closely with existing information reporting systems used throughout the tax code.

    What to Watch Going Forward

    Form 1099-DA is the first step in a broader digital asset reporting framework. While cost basis reporting is not required for the 2025 tax year, future reporting requirements may expand as IRS guidance and regulations continue to develop.

    Taxpayers and practitioners should expect digital asset reporting to remain an evolving area of tax administration, particularly as digital assets become more integrated into financial activity.

    Disclaimer

    This article is for general information purposes only and is based on IRS administration guidance applicable to the 2025 tax year. It is not intended as tax advice and should not be relied upon as a substitute for professional guidance based on individual facts and circumstances.