Archive for the ‘Running a Household’ Category

How I survived two IRS tax audits

June 5, 2009

I’ve been audited by the IRS, twice. Both times, after all was said and done,  I owed nothing and there was little work involved on my part.

I’m not a tax attorney or an accountant, so don’t take any advice from me at all without consulting with a professional (was that a legal disclaimer?)

Here are my 2 suggestions on how to survive an IRS income tax audit:

1. Be aggressive with your taxes, but don’t break the rules. My dad has always said that he tells his tax accountant to be as aggressive as possible short of sending him to jail. There are many gray areas with taxes.  I am usually pretty aggressive where things are ambiguous, but have always stopped short of doing something I knew was outright wrong. During my 2 tax audits, this paid off, as I hadn’t done anything that I was too worried about. In both cases the reason for my audit turned out to be either abnormalities or filing errors, neither of which were cases where I had underpaid.

2. When you file your taxes, purchase a tax audit defense service. After having done my own taxes for 18 years, in 2006 for the first time I purchased a service through Turbotax called “Audit Defense” by a company called Tax Resources. The cost was around $30. I was very lucky to have done this–Tax Resources was a lifesaver. 2006 was the first year I was audited and Tax Resources did everything for me at no cost. They will not pay your fines or extra taxes if you owe extra money, but they take care of all the communications with the IRS and do all the work to defend you. I also suspect that since this is what they do for a living, they likely know the IRS auditors pretty well and my guess is that this helps. I believe if you hire a tax accountant that many will offer the same service, so ask your accountant.

surviving an IRS audit

Some other things I learned along the way:

  • In our case, the audit really only included an examination of the 2 “fishy” elements of our tax return. I always believed that an audit meant that the IRS would go through everything and you’d have to dig up every receipt, bill or pay stub you’d ever received for the past 7 years. This was not the case at all for us. The IRS only wanted to look at the specific portion of our tax return that triggered the return. In conversations with Tax Resources, this is typical. Now, I did learn that if they find that you have committed some sort of fraud with that one “fishy” element, they may broaden their examination and in some cases may even examine earlier years. So this just reinforces rule #1 above.
  • The official communications from the IRS are very stern sounding and you are led to believe that you must follow their deadlines closely. My accountant from Tax Resources, Eric, sort of proved this wrong–he dismissed most of the deadlines and we never had a problem. I’m not saying you should do this, but if you work with Tax Resources and they are nonchalant about the deadlines, you can be at ease.

So why were we audited?

I’m sure there are a thousand different reasons that people get audited, so knowing what happened in my personal case likely won’t help you avoid one, but I’m sure you are curious so I’ll share my story.

In 2006, our tax return included a very large sales tax write off. We had done a major remodel to our home in 2006 and we wrote off the sales tax from the remodel. This triggered a flag in the IRS’s system and they chose to audit us. Writing off the sales tax on our remodel was totally within the tax law, so we incurred no penalty or backtaxes.

In 2007, we had a stock transaction (sale of stock options) that I reported incorrectly. I had paid the correct amount of taxes on the transaction, but didnt report things correctly. So again in this case, no penalty, no backtaxes.

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Best way to manage a family budget

April 26, 2009

If you are looking to create a family budget, read on. We have tried several different ways of budgeting and only in the last nine months have found a plan that works.

The budgeting system that finally worked for us it one that closely resembles a cash allowance. Here is how it works:

family budget

  • We have totally stopped using our credit cards.
  • We have 2 bank accounts, our “main account” and our “cash account”. 
  • The “main account” is where all our deposits go, including our paychecks. We pay our mortgage out of the main account, other loan payments and all other “non-discretionary” spending like utility bills. 
  • We decided upon a weekly budget for “discretionary spending”. We spent some time looking at our spending to understand how much we needed for groceries, dining, Starbucks, kid’s shoes, etc. We then agreed on a weekly amount which took into consideration what we had been spending on discretionary expenses and what we thought we could get by on. It’s really important to talk this weekly allowance through as a couple so that everyone is on board. We used a great site called mint.com to track our expenditures and break them into discretionary and non-discretionary items. 
  • We then set up a weekly recurring transfer (using Wells Fargo’s amazingly easy website) from our main account to our cash account in the amount of the weekly budget. 
  • The cash account has a $1000 cushion so that we don’t bounce checks. So when the balance gets to $1000 we know we’ve spent all we can for the week. 
  • We use our debit/credit cards from the cash account for all spending. 
  • We get daily alerts as to our balance on the cash account so that each of us always knows where we are for the week. 

The net affect of this budgeting system is that we have a target each week that we’ve agreed upon, we have visibility into how we are progressing against our budget and don’t have to manually track a single expense to do all of this.

The trick is to actually stick with it, which is not easy. :-)

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Is Cobra health insurance worth it?

October 22, 2008

I recently left my job and now need to obtain health insurance for my family of 4. Cobra insurance is available to me through my former employer, All Star Directories, at the rate of $893 a month for medical insurance and $143 for dental insurance, totaling a whopping $1,036 per month.

So the question is: Is paying over $1000 a month for Cobra health insurance work it?

Cobra Health Insurance

This is actually a very complicated question, which I’ve been pondering and analyzing for a week or two. This blog takes you through how I’ve thought about this–maybe it will help you if you are in the same position. 

The first thing that I did was to take a look at 2 years of past medical and dental bills. Rather than looking at the bills themselves, I looked at the Explanation of Benefit statements over that time period. Explanation of Benefit statements are sent to you by your insurance company every time there is an medical or dental bill. The statements tell you what they were billed, how much of a discount was applied to the bill, what insurance is covering and what you are responsible for. Most people probably throw these away… for years I didnt know what to do with these things, but stuffed them into a folder just in case. 

I entered all the information from the Explanation of Benefit statements into a spreadsheet to get a sense of what our total medical and dental expenses have been and to understand the value of the insurance over that time period. 87 rows later… 

The table below shows average monthly data over a 2 year period: 

Our monthly health costs

Our monthly health costs

  • Total monthly billings is what we were billed on average.
  • Insurance discount is the discount on the bill that the insurance company applied b/c of their buying power and pre-negotiated rates
  • Insurance paid is what the insurance companies ended up paying
  • We paid is of course what we were out of pocket for
  • One thing this table does not consider is prescriptions.

You can see that if we had no insurance at all, we would have been out of pocket $588 per month. Whoa?! So why have any insurance at all if our average out of pocket is less than Cobra? Clearly Cobra would not have paid looking backwards.

Of course, like car insurance or home insurance, one of the key reasons to have health insurance is to cover catastrophic events. If someone in our family came was hospitalized for weeks or months, we’d likely be bankrupt without insurance. 

Another thing that this analysis brought to light for me is the value that insurance companies provide in obtaining discounts for procedures. In our case this discount amounted to 20% of the total cost, which is substantial. 

So what to do now? 

I next looked to see if buying insurance through COBRA saved us any money for an equivalent plan. I couldn’t find the answer. Regence Blue Shield doesn’t even offer family plans with the same low deductible that I was getting through my former employer ($750 annual deductible for the whole family.) So, one benefit of Cobra might be that you can have access to a plan which you wouldn’t otherwise have access to. For us however, now that we are footing the bill, the $1000 seemed like a bad deal. 

I went shopping online for other options. I discovered a huge range of medical and dental insurance available for individuals and families.  The options for medical insurance for our whole family ranged from $205 to $1738 per month.

I used the site www.ehealthinsurance.com to compare rates. This is a great site for shopping for medical and dental insurance because it compares plans across many health insurance providers. 

We ended up choosing a plan that cost us $277 for medical insurance. We chose not to get any dental insurance. 

Here was our reasoning: 

  • Annual out of pocket limit: The primary factor we looked in comparing health plans was catastrophic coverage. Most plans call this the “annual out of pocket limit”. The cheapest plans out there have very high out of pocket limits,  $30,000 – 60,000. The key thing here is to consider how much your family could handle out of pocket. Do you have $60,000 in funds at hand? If not, choose a plan with a lower limit. We chose a plan with a limit of $10,200. This $10k was inclusive of the deductible (rather than on top of.) 
  • Annual Deductible: We chose a moderate family deductible of $4000. The thing to think about here is how much you think you spend vs. how much you can afford. If you expect a lot of medical costs, you might want I lower annual deductible, but of course your premiums will go up. 
  • Prescription drugs: One of the main considerations we had was whether or not to get prescription drug coverage. Covering for prescription drugs is expensive–it nearly doubled the cost of insurance. Noboby in our family is on any expensive drugs now so this seemed like a bad bet. Of course the risk we are taking is that nobody comes down with an exotic disease prevented only by exotic, expensive drugs.
  • Day-to-day costs: In looking at the day to day costs, these were less of a consideration, as we were primarily focused on catastrophic. Of course, the benefit we’ll get from insurance is the discount the insurance company will demand from any provider. 
  • Dental: We decided not to get dental insurance. I found that the 2 main reasons we opted to purchase health insurance did not apply: there really are no catastrophic dental situations that I could think of (most of these actually qualify under your medical coverage… like if you are in an accident and lose your teeth) and I found that the insurance company didn’t really provide any negotiated discounts. 
So clearly in our case, purchasing Cobra would have been a really bad deal. 

A couple tips when you are looking for health insurance:

  • If you are married, include your spouse in the decision making. Laura, my wife, had a lot of insight to add in the process and clearly I wanted to ensure she was on the same page.
  • Start early… the process of choosing a health insurance provider and getting signed up takes time. Don’t wait until the day before your insurance runs out to do this. You don’t want to have any gaps in coverage because insurance companies are very wary of this. In our case it took about 10 days to process everything.
 

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