Employers: Get Your Ducks In A Row!

Just received this in my inbox from the Texas Society of CPA's:

IRS and Employers Gear Up for Employment Tax Audits
October 9, 2009 – The Internal Revenue Service has announced plans to launch employment tax audits this fall in conjunction with its National Research Program (NRP). NRP audits are intensive audits followed by analysis. While it is expected that the audits will result in tax assessments, the underlying purpose of the audits is to collect data that will be used in designing profiles for future audits.

A random selection of approximately 6,000 employers will result in the audit class for this project. Employers will be chosen across a broad statistical platform and will include large, medium, and small businesses, for profit, and not-for-profit businesses.

Issues to be considered in these audits include classification of employees v. independent contractors, classification of fringe benefits, reimbursement of expenses, comparison of employee and independent contractor records to actual tax return filings by the recipients, and officer compensation.

Accountable plans for reimbursement of expenses will be examined in the audits. Such plans will be expected to demonstrate that there is a business connection for the expenses, the expenses are reasonable, there is reasonable accounting for the expenses, and reimbursements are paid in a reasonable amount of time.

Auditors will look at withholding and remittance of income taxes, Social Security and Medicare taxes, and unemployment taxes. Employer-prepared payroll tax forms and related deposits will also be examined for accuracy and timeliness.

The audits are expected to begin in November, 2009 and will be conducted over a three year period. Typical audits will cover three years of employment tax records.

S Corporation Shareholder/Employees and Social Security

One of the benefits of an S corporation is the flow through aspect of the income for tax purposes. S corporations do not have their own tax liability; the income simply flows through to the shareholder's individual income tax return. Even though the IRS says that S corporation shareholders who provide services to the company should pay themselves a "reasonable" salary, the shareholder/employees will often keep that salary to a minimum in order to avoid incurring Social Security and Medicare taxes, and take the rest of the funds they need as dividends/distributions of previously taxed income.

Young S corporation shareholders are particularly against paying into the Social Security system because they are of the opinion that by the time they retire, Social Security will be no more. What they do not realize is that the Social Security system is not only for retirement. It also provides disability and survivors benefits. Heaven forbid anything happen to that person, but if it does, Social Security benefits are made available to that person upon disability or to his/her survivors upon death. In the latter scenario, Social Security acts almost like a life insurance policy. Something to think about before you decide to set that low salary as an S corporation shareholder/employee. Not only will you possibly attract the scrutiny of the IRS for an unreasonable salary, you might also be short-changing your family, especially if you aren't sufficiently covered in the private market for disability or life insurance.

For more information about Social Security benefits, you may visit www.ssa.gov

QuickBooks 2010 Has Arrived!

Just received my copy of QuickBooks 2010 today. It is now available for ordering or download. Can't wait to check it out and see what new features are available. Stay tuned...

Houston Unemployment

Well it appears that the recession has finally made its way to Houston. It has just been reported that unemployment is at 8.4%. I believe it because I can see it and clients are definitely feeling it. Texas employers, get ready for your unemployment tax rates to go up at the first of the year.

Seems like one of the few industries unaffected right now is health care. Anyone affiliated in any way to the health industry seems to be doing okay. This may change however if Congress is irresponsible and passes sweeping health care legislation. Doctors really don't need another excuse to quit and young brilliant minds don't need another reason to avoid medicine as a profession.

NASA seems to be okay for now; United Space Alliance employees are affected because of the impending shuttle retirement and not because of the recession. There has been a pretty massive layoff here and I have a friend whose last day is October 9. This has to be the absolute worst time to begin looking for a new job.

Indirect Investors of Madoff Left Out in the Cold

Here is an interesting article in today's Wall Street Journal. It discusses how people who were invested in so called "feeder funds" - funds that were invested indirectly in Madoff's firm - are out of luck as far as declaring theft losses on their investments and making a claim with the SIPC.

Employer Question: Temporary Employment = Contract Labor?

These are definitely not the same thing.  The question posed is this:  An employer is hiring a person in a low-level position who was laid off from his previous high-paying job and the new employer knows that this person is going to be looking for permanent employment elsewhere.  If that person is probably only going to be working for the company temporarily, can the employer keep things easy and pay that person as contract labor?  The answer is a definite NO.  There is no period of time of employment that enters into the decision of contractor versus employee.  Regardless of the amount of time that person works for you, if he meets the definition of an employee, then he should be set up as such.  

IRS CP2000 Notices

It is the time of year for the IRS to send out CP2000 notices for tax year 2007.  This type of notice is generated when the IRS computers find a discrepancy between what was reported on the tax return versus the documents filed by various sources (1099-INT, 1099-R, etc.).  If you fail to report for example a 1099-R that you received for an early retirement distribution, the IRS will discover the discrepancy and you will eventually receive a notice.  It takes about a year from the time that the tax return was filed for the IRS to catch any discrepancies.  This is why you will see many CP2000 notices being sent around the time period of March, April, and May. 

If you receive one of these notices, do not panic.  It is not an audit.  The IRS simply wants you to respond to the discrepancy.  Also, do not just blindly send them a check for the amount due.  Read the notice carefully to see what the IRS is describing as the discrepancy.  It is possible that a mistake was made by the creator of the source document.  Here is an example that I just dealt with recently:  someone in the business of making mortgage loans accidently prepared a 1099-INT for interest income rather than a Form 1098 for mortgage interest paid.  This triggered a notice because the IRS was looking for the taxpayer to report interest income.  Rather than the originator having to file a corrected 1099/1098, the IRS simply required a letter signed by the originator acknowledging the error.  We attached a copy of that letter as a response to the notice.

If upon examining the notice you do discover that the IRS is correct, you will have 30 days from the date of the notice to make the payment.  If you need additional time for research, you can request an additional 30 days by calling the IRS.  There will just be additional interest assessed for the extra time.   The fact that it takes a year for the discrepancy to be found, unfortunately means that interest and penalties have accrued on the balance for that period.  It is possible to have the penalty abated, if you feel that you have a good reason.  Sometimes it is worth a shot.  Simply attached a letter explaining the reason you feel that the IRS should consider your request for penalty abatement.  All they can do is deny it.  Don't bother to try and abate the interest.  The IRS sees that as a time value of money issue (you had the use of the funds and not them) and therefore I have never seen them agree to abate interest.

If you are unable to pay the full balance, then the IRS will allow you to set up an installment plan.  You should find an installment plan application included with the copy of the notice.

IRS Audits Contract Labor

A CPA colleague contacted me yesterday to let me know that one of her clients is being audited by the IRS for paying contract labor.  This particular issue is emphasized by one of my prior posts.  The IRS and the state unemployment commissions do not like the contract labor classification, and it is a difficult position for an employer to defend.  If I hear any more detail regarding this case, I will post it here.  

Pitfalls of the Obama Tax Credit

Be aware that there are certain situations where your tax credit may be reduced or eliminated, yet the withholding tables do not account for this.  Review this article to see if you fall into any of these scenarios and need to adjust your withholding.

Question: Can I Do A 1031 Exchange With Foreign Property?

As tax season rolls along, I am posting real and of course compelling questions that I will field from clients during the season.  The answer is that yes you can do a 1031 exchange with foreign (non U.S.) property as long as the property you are exchanging to is also non-U.S. property.  A 1031 exchange refers to a section of the tax code that allows the tax-free exchange of investment or business real estate for other investment or business real estate as long as the property received is of like-kind as the property that is given up.  Therefore, in order to meet the definition of "like-kind" foreign property must be exchanged for other foreign property.  1031 exchanges are complicated and must abide certain time constraints in order to qualify.  For more information on the excellent planning tool of 1031 exchanges, this Wikipedia article is a good resource of how the process works.  

Quality Control In A Single Preparer Practice

Not long ago, I was asked by another CPA who works for a large accounting firm how I handle tax return quality control as a sole practitioner?  In his company, a partner reviews every return that he prepares.  I must admit that it is a challenge to make sure that I have accounted for everything in a tax return...there is so much that can be missed especially in the more complicated ones.  I was mentored early on by another sole practitioner CPA in the local area who has been practicing on her own successfully for probably close to 30 years.  The strategy that she uses and that I have implemented as well is this:  First, do an initial return preparation by inputing all the data into the tax software.  Then, set aside that return for several days, maybe even a full week.  Work on other tax returns or projects in the meantime.  Then, after that time has elapsed, go back to that tax return and review all the entries.  This has been effective for me because many times there are items that I did miss, or I will discover something that I need to ask the client about for further clarification.  I absolutely hate the "fast food tax preparer" mentality such as H&R Block for instance where you go in and 15 or 30 minutes later walk out with a completed tax return.  I just don't think enough time and attention is spent.  That works fine on the simplest of returns, but I just think it is dangerous on ones that are even slightly more complicated.

Offer from QuickBooks

QuickBooks is offering a free copy of QuickBooks Pro 2009 (a $199.95 value) with the purchase of QuickBooks Enhanced Payroll (cost=$349).  If you do your payroll in-house, you might want to consider this.  Or, receive a free copy of QuickBooks Premier 2009 (a $399.95 value) if you sign up for QuickBooks Assisted Payroll (cost=$720).

With Enhanced Payroll, you generate your paychecks in-house, but QuickBooks performs all the payroll calculations and creates the payroll reports for you.  All you have to do is print them.  It also calculates your tax deposit amounts. 

Assisted Payroll is similar to using an outsourced payroll service such as ADP or Paychex, but as I understand it, at a significantly lower cost.  With Assisted Payroll, you still generate the paychecks in-house, but QuickBooks will transmit the tax deposits and file the payroll reports for you.  

This offer is good until March 16!!  Click here to learn more and take advantage of the offer.

Paying Income Tax is Voluntary?

Harry Reid says that it is....

Pimp My Taxes

This guy should have paid attention to what happened to Al Capone:  It isn't illegal activity that will necessarily get you caught, but hiding the INCOME on that illegal activity from the IRS.  He is learning a lesson that income and gains from whatever source derived must be reported.

Maybe it was just an "honest mistake".  Tax evasion i.e. "honest mistakes" seem to be a hot issue right now.  I don't think there is much of a difference between a politician and a crook anymore.  Geitner and Daschle anyone?

Equilibrium

I have been trying to find a bright patch in this economic crisis.  My undergraduate degree is in economics so I often think a lot like an economist as well as an accountant.  I have been thinking about this crisis a lot in terms of an equilibrium.  This economy just got too out of hand for too long...spending too much, taking on too much debt, people getting into career fields and starting businesses in areas (real estate, mortgage lending) that they had no business getting into, investing in financial instruments (complex derivatives) they had no business investing in.  Things are just trying to equalize...revert back to the mean...become more in line with how they should be.  People buying homes that are more in line with their resources and saving money for a rainy day like they should be.  Those with strong balance sheets and fundamentals will survive this and we will all learn better habits in the process.  I truly believe that this is a good wake up call for everybody and hopefully we will all learn something from this.  How's that for making the best out of a bad situation?

There Is No Such Thing As Contract Labor!

That is what a retired IRS revenue agent told me a few months ago. He now operates a consulting practice assisting those on the “other side” with tax problems. I thought this was interesting and states very clearly the IRS position for the age old question of whether a worker should be classified as an employee or a “1099” vendor or contractor. What he means is that if you hire someone to work for you in your business and the only way to classify your payments to them is as “contract labor” then that person should probably be set up as an employee, having taxes withheld and you as the employer contributing half the social security and medicare. If the person fits more in the category of a consultant or professional service provider, then that implies most likely that person has other customers and his/her own business. The term “contract labor” assumes the person is under your control – you dictate how and when the job gets done. Many employers classify workers as contract labor to save money, but as in the case of paying a nanny as I discussed here, it could be an expensive decision and you could be liable for back taxes. Here is some official IRS guidance on the issue. However, if in doubt it is always best to err on the side of caution, do the right thing, and set that person up as an employee.

An Experiment in Socialism

I am not by any means implying that our country or leaders are “socialist”, free market principles and private ownership of property do still drive this country for the most part, but all the talk during this last election and the bailout fiasco got me thinking about the concept of socialism. My bachelor's degree is in economics and that is really my first love. Because I have had formal training in the subject, I think I approach it with a good background of knowledge. Just remember, what has made this country great and prosperous is not our government policies and programs, but FREEDOM. The freedom to pursue our own happiness as long as it does not encroach the liberty of others. as the Declaration of Independence so well stated. You just can't tax and re-distribute your way into prosperity, I don't care who is getting taxed. Yes, there are people who have a large piece of the pie, but the fact that they do have a large piece means that we all have a chance to obtain a larger piece ourselves. I know that the new administration will keep this in mind because we are still a center-right country in terms of our philosophy.

My clever husband has devised the following classroom socialism experiment. I really think it illustrates the concept of socialism in a way that is simple to understand. It would be cruel and unfair to implement...but that is exactly what socialism is...cruel and unfair.  I think it would work!  Here is his idea:

If I were a teacher or professor, I would first let the students take the initial exam. Then, I would tell those with the higher than average grades on the exam that it is unfortunate and unfair to those who made below average scores so I am going to take the extra points of the higher scoring students and give them to the lower scoring students so that essentially everyone would have an average score on the exam. Obviously, the students who scored higher on the first exam would no longer have the motivation to work and study for the subsequent exams and would thus score average or worse. The students who scored low to begin with would still not do well because they would be expecting those extra points, and certainly would not gain anything from this system because there would not be extra points to dole out on subsequent exams. Everyone would be worse off!

Taxpayer Question:Can I Claim My Grandchild As A Dependent?

The taxpayers have a 19 year old unmarried daughter who had a baby a few months ago.  She and her infant son are living with them while she attends college full-time and works a part-time job. They already know that they may claim their daughter as a dependent on their tax return, regardless of her income, because she is under the age of 24 and a full-time student.  They also realize that the daughter cannot claim her young son as a dependent on her own tax return because they are claiming  her as a dependent.  Their question is if they may claim their grandson on their own tax return.  My answer:  Yes, as long as the father is not in the picture and not eligible to claim the child as a dependent.  If the taxpayers are providing more than half of the support of their grandchild coupled with the fact that the baby is living with them, they may claim him as a dependent.

This Is Why....

This is why you should always live within your means in good times and in bad.

This is why you should not take on too much debt and pay cash for most purchases.

This is why you should have 6 months of living expenses in liquid funds saved up just in case.

This is why one of your major goals should be financial independence.

This is why....you know what I'm talking about...

Year End Payroll Filings

January is the fun month of quarterly payroll reporting along with year end payroll filings.  Lots of form printing, collating, envelope stuffing, etc.  Technology does make it so much easier and I just have to sing the praises of a form filler program that I have been using probably back as far as 2001.  It is called 1099-etc by Advanced Micro Solutions.  The interface of the program hasn't changed a lot since then.  It still looks like something that you would see running in Windows 3.1, but it is so easy to use and inexpensive.  I recommended it to one of my colleagues and she loves it too.  It does laser and preprinted form filling of all the federal and state payroll forms that you could possibly need.  It also has an after-the-fact payroll module that then transfers to the forms as well as e-filing capability.  The bulk of my clients use QuickBooks so I am able to print most of the forms from there, but I do have many clients who either do not use QuickBooks or they prepare their payroll manually.  1099-etc saves me so much time.  

Obama Proposing Tax Cuts as Part of Stimulus Package

Obama has proposed $300 billion in tax cuts for individuals and businesses as part of his stimulus plan.  It appears that he is leaning away from government spending to boost the economy and has warmed up to putting the funds in the hands of the people to decide what to do with their own money.  Do you think the government knows better than you how to spend your own money?  I think you know the answer to that!  I am relieved to see this direction because it would avoid all the unnecessary pork built in to any spending increases.  I'm sure everyone has been coming out of the woodwork to lobby for their own pet projects.