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.