THE WEEK ON WALL STREET
Stocks dropped last week as investors focused on “what's next” for interest rates after mixed comments from multiple Fed officials.
FACT OF THE WEEK
On April 9, 1859, a 23-year-old Missouri youth named Samuel Langhorne Clemens received his steamboat pilot’s license.
Clemens had signed on as a pilot’s apprentice in 1857 while on his way to Mississippi. He had been commissioned to write a series of comic travel letters for the Keokuk Daily Post, but after writing five, decided he’d rather be a pilot than a writer. He piloted his own boats for two years, until the Civil War halted steamboat traffic. During his time as a pilot, he picked up the term “Mark Twain,” a boatman’s call noting that the river was only two fathoms deep, the minimum depth for safe navigation. When Clemens returned to writing in 1861, working for the Virginia City Territorial Enterprise, he wrote a humorous travel letter signed by “Mark Twain” and continued to use the pseudonym for nearly 50 years.
MARKET MINUTE
Fed Officials Weigh In
Stocks struggled out of the gate again last week, ending Monday and Tuesday in the red on concerns that recent economic data could derail the Fed’s plan for short-term rates.
The markets recovered Wednesday through Thursday morning when weekly jobless claims were better than expected. But stocks fell broadly Thursday afternoon following mixed comments from multiple Fed officials. All three averages ended the day down more than 1 percent for the first time in a month. On Friday, a strong jobs report gave investors much-needed confidence. The U.S. economy created 303,000 jobs in March—higher than economists’ expectations—while unemployment dropped slightly to 3.8 percent. Markets rallied after the news, but not enough to recoup all weekly losses.
What’s The Scoop?
Several Fed officials made speeches last week, including Chair Jerome Powell. In a Wednesday speech at Stanford University, Powell said it was a “bumpy” path to a soft landing, but Fed officials are continuing to look at the long-term trends. Last week, Atlanta Fed President Raphael Bostic suggested one cut. San Francisco Fed President Mary Daly noted no guarantees, and Cleveland’s President Loretta Mester said rate cuts may come later this year. Minneapolis President Neel Kashkari rattled markets by suggesting that no cuts may be on the table, followed by Fed Governor Michelle Bowman, who said on Friday that it’s possible rates may have to move higher to control inflation.
The flurry of comments comes following the end of the Fed’s blackout period. Fed officials are not allowed to make public comments except for very narrow windows during the year.
FINANCIAL STRATEGY OF THE WEEK
Red Flags for Tax Auditors
No one wants to see an Internal Revenue Service (IRS) auditor show up at their door. The IRS can’t audit every American’s tax return, so it relies on guidelines to select the ones most deserving of its attention.
Here are six flags that may make your tax return prime for an IRS audit.
The Chance of an Audit Rises with Income
In recent years, the IRS has been auditing less than 1% of all individual taxpayer returns. However, the percentage of audits rose to 1.3% for those with incomes between $1 million and $10 million and to 8.7% for those making over $10 million.
Deviations from the Mean
The IRS has a scoring system which it calls the Discriminant Information Function that is based on the deduction, credit, and exemption norms for taxpayers in each of the income brackets. The IRS does not disclose its formula for identifying aberrations that trigger an audit, but it helps if your return is within the range of others of similar income.
When a Business is Really a Hobby
Taxpayers who repeatedly report business losses increase their audit risk. In order for the IRS not to consider your business as a hobby, it needs to have earned a profit in three of the last five years.
Non-Reporting of Income
The IRS receives income information from employers and financial institutions. Individuals who overlook reported income are easily identified and may provoke greater scrutiny.
Discrepancies Between Exes
When divorced spouses prepare individual tax returns, the IRS compares the separate submissions to identify instances where alimony payments are reported on one return but alimony income goes unreported on the contra party's return.
Claiming Rental Losses
Passive loss rules prevent deductions of losses on rental real estate, except in the event when an individual is actively participating in the property’s management (deduction is limited and phased out) or with real estate professionals who devote greater than 50 percent of their working hours and over 750 hours per year to this activity. This is a deduction to which the IRS pays keen attention.