Atlantic Capital Management

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While it still feels very much like winter here in the Northeast, weather forecasters and the calendar assure us that Spring will, indeed, get here soon. With the arrival of the first robin in the front yard also comes a day that many Americans dread, or at the very least loathe: April 15, the deadline for filing Federal and state taxes. Tax season can be stressful under even the best of circumstances. Adding to the unease for many people is the possibility of an arbitrary investigation of their tax returns, known as an audit, that the IRS sometimes performs. While most Americans will fortunately never have to deal with the tax man showing up at their door, there are some well-established red flags that make certain returns more likely to be audited. I’ve listed 3 of the most common below; your tax professional or accountant can discuss the rest with you. (Don’t have an accountant? Give us a call…we can refer you to one of our many local and national tax attorneys or CPAs.)

A quick note: Historically, the IRS audits less than 1% of the tax returns it receives every year. Given the recent scandals, budget cuts and staff eliminations, it’s likely that that percentage will drop for the ~250 million returns the agency receives in 2014. The scenarios I discuss below are the ones that raise the the likelihood your lucky number will be chosen.

You might be more likely to face an IRS audit if you:

1.    Earn a well-above-average income. The median household income in the United States is currently a little over $51,000 per year.  If you’re a “one percenter” with an income over $200,000, you are about 3 times more likely than the average person to be audited by the IRS. If you make over $1 million per year, your chances of being audited go up to 1 in 8. Obviously, we’re not going to counsel you to earn less income! But if you’re in a higher income bracket, be aware that you face more scrutiny.

2.    Claim excessive deductions on Schedule C. The IRS has been cracking down on self-employed taxpayers who over-report deductions on the Sole Proprietorship Profit and Loss form, otherwise known as Schedule C. This is due mostly to “paraprofessionals” like part-time real estate agents, day traders and others reporting rental and trading losses on Schedule C instead of the appropriate forms. We encourage honesty, obviously, but be wary that you might be paying for others’ sins if you are self-employed as a sole proprietor.  Word from the wise, there is a fine line between tax avoidance and tax evasion – evasion however is still illegal.


3.    Take a lot of charitable deductions. Auditors pay close attention to charitable deductions, and they specifically scrutinize how the amount of charity giving or gifting you report stacks up against your income. If there’s a large disparity, your return is more likely to spur unwanted interest. If you do a lot of charitable giving, understand the regulations, and relentlessly document everything.

These are just a few examples of the types of issues that can raise the likelihood of an IRS audit. As noted above, we’re happy to share our experience in this area with you, or refer you to a qualified CPA for more information.

Wednesday, 05 March 2014 00:00

Want Investment Success? Stay Invested

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As we’ve discussed in previous articles, there is no shortage of investment advice for maximizing portfolio returns using techniques that range from “cutting-edge” to “downright crazy.” Timing the market, chasing high yields, speculating in precious metals…all of these strategies are utilized on a daily basis by DIYers (Do It Yourselfers) and professionals alike in an effort to “beat the markets.” At Atlantic Capital Management, we don’t chase returns with faddish techniques. We advocate a much different solution for our clients and DIYers; think of it as a “base hit” approach vs. a “home run” approach.

Diversify…and stay invested.

It’s that simple. If financial security is your long term goal, stick with an approach that leads to success over the long-run. The foundational principle of this strategy is leaving your money where it is and riding out the inevitable market downturns. This doesn’t mean ignoring reality; it means you (or your investment advisor) should start with the end in mind and make changes to your portfolio that are driven by your long-term goals. The underpinnings of this approach are simple: allocate assets across markets for breadth and within market sectors for depth. This focus on diversification will instill confidence rather than lead to the impulse to “bail out” when things look bleak.

And it’s inevitable that things will look bleak. For example, consider the global financial crisis of 2008. Many people ran for the hills when the markets hit bottom in 2009, either dumping or converting their investments on a large scale. It’s hard to fault this reaction; after all, if it were possible to accurately predict a market’s bottom, most people would be doing it!

Some investors, however, stuck to their long-term focus knowing that their portfolios reflected their need for liquidity, their personal tolerance for risk, and an appropriate time horizon. Investors who structured resilient, diversified portfolios hung on to their positions. The results of this strategy are telling, and fundamental to why we advocate staying invested. According to data from Morningstar, $100,000 invested in the stock market in January 2007 (the beginning of the slide) was worth only $54,000 in February 2009 (the bottom point). Investors who pulled out at the bottom obviously suffered significant declines. More importantly, those who pulled out at the trough and let things cool off for a year and then reinvested ALSO saw a net loss on their investment. Only those investors who stayed invested and rode out the storm with a long term goal in mind saw the value of their investments grow. For those investors, that $100,000 was worth $143,000 at the end of 2013.

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