Why are the Middle Class Bullied by the IRS?

 My honest but humble opinion of the basic ideology of the thee classes that exist (poor, middle class and wealthy) gives insight to that very question. The mind sets of the 3 classes are:

• The poor are trying to survive. 
• The middle class are maintaining. 
• The wealthy are looking to surpass. 

An old cliche' that has been repeated often (especially by me) is if you are not moving forward you are automatically moving backwards. The government and the IRS in particular understand this cliche' and keep track of  who are maintaining and and moving forward by conducting audits on every tax return every year. Most people are not aware of that fact. 

  The economy, politics and budget cuts have given the government another reason to search for more revenue. Unfortunately the middle class are the the target of such "financial bullying". I think one of the biggest reasons for such an assault is the middle class are an easy target. 

Like previously stated the middle class are considered "maintainers". Once the nature of a person or a group to maintain  is understood then it is easy to see why the middle class are the target of choice. On a whole they will do what ever it takes not to loose what they have.

 The fear of loss will encourage compliance with what ever is presented even if it the presented information is wrong. 

Example: The IRS sends a letter stating that there's an error on the tax return. The letter basically states that IRS records don't match the tax payers tax return so the refund is smaller than what was reported on the tax return. The "maintainer mentality" is.... , "ok I dodged a bullet so I will let them have what they want, I still get a refund check ".  There may appear to be nothing wrong with the above response. Lets look at it from a different perspective. How would the middle class respond to:

• The cashier gives $5.00 dollars change but should have given $10.00 dollars in change
• The ATM disperses $80.00 dollars instead of $100.00 and debits the account $100 dollars.
• The bank financing the car loan auto withdraws $350.00 from the account instead of  $300.00.

I think it is safe for me to assume that most people would not let any of those things happen without doing something to correct the issue. So why do middle class allow the IRS to bully them?

• Little to no knowledge of tax payers rights
• Public misinformation /perpetuated by the media,family members and friends.
• Fear of the IRS.

If  the the middle class does nothing to stop the bulling it will only get worse. I am just saying....

Deadline is coming DUE for those that filed for an extension

.

It seems like yesterday I filed extensions for my clients urging them to get back to me soon as possible and not wait until October 15^th to give me the information to file their 2010 tax return. Well, guess what? We are less that 3 weeks away from the deadline and it is approaching fast. Before you know it your tax professional will be sending you a reminder notice to get ready for the 2011 tax season.

For those that filed an extension form 4868. You have until October 15 2011 to file your 2010 taxes. If you fail to file your taxes by the deadline the following could happen.

1)    late filing penalty

2)    possible penalty of 5% per month of the unpaid tax

3)    possibility of being audited

If you have not filed your taxes for 2010 please get with your certified tax professional, accountant or tax lawyer and file your taxes as soon as possible.

This is not something you want to play around with.  In case you are not aware the government is in need of money and one the quickest ways to get an audit notice is to file your taxes after the deadline or not file for a particular year. Look at this as a public service announcement. Should you have any questions at all please feel free to post them below.  

Reasons to form a corporation

There are many reasons to form a corporation.

• $         Limits Personal Liability
• $         Tax benefits
• $         Shows that you are seriously committed to your business
• $         Offers a more professional appeal
• $         Corporations don’t need a passport
• $         When formed correctly offers asset protection

Another reason to form a corporation is to raise capital and additional lines of credit. I not only think this is one of the best reasons but, the most underrated and misunderstood reason.

This advantage applies to all corporation entities:

• $         Corporation – C Corp
• $         Small Corporation - S Corp
• $         Limited Liability Corporation – LLC
• $         Limited Liability Partnership - LLP

*Strategies and State laws may vary.

Corporations are called entities for a reason. They are treated separate from the individuals that form them. The Ein or Tin is how they are identified by the state government and the IRS.

What does this mean to the average person? You know the advantage of having two people in a house hold with exceptional credit (increases lending power and leverage). A person or persons may increase their lending power forming a corporation.  Of course it is not that simple. There are many things that must take place before a Corporation is credit worthy.  Proper business practices and credit structuring must take place before an investor or a bank will begin to look at a corporation as viable credit risk. The principle to obtaining good credit in a corporation is the same as obtaining good credit in one’s personal life. The laws and the strategies slightly differ but, with the right information and circumstances an individual can go from being a borrower to a lender.

Always consult your tax attorney, accountant or tax professional before venturing out to form a corporation because different corporations fit different business types.

Why do so many small businesses fail?

There are many reasons small businesses fail.

• Lack of business plan
  
• Lack of documentation
  
• Poor tax planning
  
• Not understanding the laws
  
• Only focusing on the work part of the business
  
• Many, many others.
  

I was informed by my mentor who has run a successful business in Real-Estate and Accounting for over 40 years that there are many reasons that a small business fails but, their are two in particular that handicaps a business litereally before it gets started and they are:


Federal Unemployment Tax Act (Futa)

State unemployment Tax Act (Suta)


Not to be confused with Federal Insurance Contributions (fica). Suta and Futa are a tax in addition to fica. What does this mean to a small business owner with employees? It means in addition to employee wages 10% to 15 % of the employee income must be paid to the State and Federal Government. If an employee earns $2000.00 dollars a month, at least $200 dollars goes to pay fica, Suta and futa. The unfortunate fact is many small businesses don't pay the payroll tax (fica, suta and futa). Some of the reasons for not paying the payroll tax are…..

• Unaware of the taxes exist
  
• Can't afford to pay the employees and the taxes
  
• Just flat out don't want to pay the taxes
  
• Convinced business will increase so they can catch-up on payroll tax
  
• Accepting bad advice from non tax professionals (friends, family members and co-workers)
  

Whatever the reason for not paying the payroll tax the outcome is the same. The employee/s  of the small file their tax return and a couple of months later the IRS sends the employee a bill for unpaid taxes. A phone call is made; the IRS shuts the business down for unpaid payroll taxes. The time frame for this to take place is from a year to six months of starting the business.

A word to the wise, if you are going to start a business consult a tax professional, law attorney or accountant before doing so. The information they provide will be well worth the time and money invested.


 

Assets vs. Liabilities in business

        Depending on the persons involved in the discussion. There are different definitions of assets and liabilities. The dictionary and accounting defines as follows:

Asset, Dictionary -  A valuable item that is owned

Accounting definition- The entries on a balance sheet showing all properties, both tangible and intangible, and claims against others that may be applied to cover the liabilities of a person or business. Assets can include cash, stock, inventories, property rights, and goodwill.

b. The entire property owned by a person, especially a bankrupt, that can be used to settle debts.

Liability, Dictionary - Something that holds one back; a handicap. Accounting definition - The financial obligations entered in the balance sheet of a business enterprise.
My mentor explained it to me this way,Assets -  something that makes you money. Liability - something that cost or looses you money.
  There can be grey areas. Should my children be considered an asset? If my son and daughter would have become a detriment to society, (in and out of juvenile detention and thus graduating to state penitentiary) would they still be considered an asset or a good return on investment (ROI))? The answer is obvious.
What I am talking about is strait forward. I am talking about a more immediate ROI. (Or a close to immediate ROI). I want to discuss this from a business perspective.
There are things that can be done in business that bring quick ROI's. 

Examples of assets and liabilities in business are as follows:
      Asset;
mentors - mentors are a great assets because a good mentor has fruit on their tree. They can help you avoid costly mistakes. A mentor is like a tour guide along your journey to success.
       Liability:
Negative friends and family and associates. Love them or hate them we all know of the nay Sayers. Individuals for whatever reason have nothing positive to say. These individuals are a drain on your mentality and offer nothing in the way of putting money in your pocket. The more time spent with them the less time available for making a business work. Negative people can’t be converted. If there is doubt, consult a mentor.
        Asset:

Business seminars, books and other business related training. This should be self explanatory but for the sake of argument.....  Business related training is an asset because it offers information, when used properly can have an immediate impact on a business. Training properly recorded offers a residual effect. Can always be referenced.

         Liability:

Television, video games - I can here the booing and hissing as I write this. These two mediums offer very little in the way of productive learning and education. Cable cost on average $159.00 dollars per month that is more than $1800.00 dollars a year. Video games cost on average $39 dollars per game not to mention the gaming system with all of its accessories. If $2000 dollars annually are spent on TV and video games, in 5 years the cost is 10,000.00 dollars (that could pay off a credit card). Enough said

Asset :

A master mind team - A master mind is a team of like minded  successful individuals. They meet on a regular basis (at least once a quarter) . They normally have expertise in valuable areas. (Law, Taxes, Marketing and Finance). Strategic plans are laid out and performed for the betterment of the team. The return on the investment is priceless.

        Liability:

Apathy/waiting on the government to improve the countries situation. This country had the greatest economic boom in its history during the 90’s through 2000. If the average person was not able to become independently wealthy during that time then there time has passed. That was the best the government could do (if you believe the government was responsible,forgive the sarcasm).

Basically there are a couple of choices, surround oneself with assets and increase net worth or surround oneself with liabilities and decrease ones net worth.

Tax preparation is an annual endeavor, happy tax season.

While doing a good work in and for your business..... dont get caught up

    I want to congratulate all those business owners that did more in their business in 2010. You set a goal to increase your clientele, get more referrals and  attend more training seminars. You even took a business trip in a vacation location. All these things were done but, (wait for it) you did not properly document those events. If you don't have proper documentation then all the work you did to increase your productivity in your business will increase your bottom line, however it will also unnecessarily increase your tax liability. Proper documentation answers the questions who, what, when, and where. Who were you with? (client , potential client , prospect, a referral). What was the purpose for the meeting? (to gain a client, to gain a referral, to show appreciation for a referral, to introduce a new product or service). When did this take place? (date and time) where did it take place? (location).
     I have receipts,  isn't that enough? Having receipts is a good start but,  it only proves that you purchased something (the what). Receipts do not show intent. Remember the IRS needs proof that you intended to make a profit. Without proof of intent you only have a hobby. Trust me hobby's are expensive and a liability. In any economy liabilities are not good.
 How do I keep good records to keep the IRS off my back?
     A good old fashion day planner is the least expensive way to keep track of you daily progress in your business. If you have a smart phone, i pad or samsung galaxy, there are many free apps that allow you to accomplish the same thing as a day planner. Do not go out and buy an expensive device for the purpose of  keeping track of your daily business
Keeping track of your business in this manner will allow you to see how close you are to reaching your goals for the week. You will be able to look back at your week and determine if you needed to keep doing what you were doing or if adjustments needed to be made. This is critical to your business. If you do not know how far you have gone in your business You will not be able to determine how far you have to go to reach your goals
     Proper record keeping on a daily basis keeps the IRS from deciding your business is a hobby. Once the IRS determines your business conducts it self as a hobby all business deductions are denied and  penalties and fines follow. The IRS will also look back through all your tax records.(this is allowed because they have determined that you have defrauded the government by under stating / under reporting income).
     I can not emphasize this point enough. Proper documentation is key to keeping the IRS from penalizing you with fees and bringing down the audit hammer.

Remember, tax preparation is a daily endeavor so happy tax season. 

Not All Business owners have until April to file their Taxes...........

For all the business owners that operate under the entity of LLC, LLP, SCorp or C Corp, you have leass than a month  to file your corporate taxes.(15 march 2011), or file an extension (Form 4868).
The filing date is not to be confused with the personal tax filing dead line of 18 April 2011. To the veteran business owner this may seem like a no brainer, or you may not even know that two different tax deadlines exist. One of my  new clients were unaware that there had ever been 2 separate tax deadlines, and they had been in business for 8 years. I suspect their previous tax professional just filed an extension for the business taxes and then filed everything ( personal and business taxes) by The April dead line. Now some business owners may be confused because you only receive a copy from your tax professional of a 1040 with a schedule c attached. The only reason that should happen is you are a sole proprietor or the sole owner in a LLC. If either are the case you would not be required to file form 1065 (limited liability tax form). If the corporate tax forms are not filed on time (15 march 2011), you will face penalties from both the federal and state government. Businesses that file taxes quarterly continue to do what you do.
Should you feel that you would not be able have your information in time to file your 2010 corporate taxes by 15 March 2011 I suggest you file an automatic extension (form 4868). Form  4868 must be filed on or before 15 March 2011 or you will face penalties and fines.
Tax management is a year round occurrence, so happy  Tax Season!