Lets Talk Audits.

Tax Audits:

 What is an audit? As defined by the IRS.gov: An IRS audit is a review/examination of an organization's or individual's accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is accurate.

In other words the audit is a just a review of what was placed on your tax return, it can also be viewed as method of verification.

OK that was the politically correct answer for and audit, my opinion of the reason for an audit are:

• $          Politicians are not going to raise taxes on working citizens
• $          The government needs the money
• $          During low economic times small businesses grow at the fastest rate and don’t keep good        records thus,  it is the easiest way for the government to get more tax dollars.
• $         Just the mentioning of audits elicits compliance from guilty and non guilty tax payers.

There are some things to remember about an audit notice:

• $         Open all mail from the IRS immediately, the response time to the IRS at the least is a month (30 days) from the date the notice was sent. Not meeting IRS response deadlines could cost you thousands of dollars in fees and penalties.
• $         Always assume you are right, do not allow the IRS notice or auditor to intimidate you.  You have rights. And you are protected.
• $         You are not alone; the audit process for many is not a process to take on alone. There are many experts that may assist you.
• $         You can appeal, as long as you respond in a timely manner from corresponding with the auditor, the manager the audit of appeals or even tax court you can appeal, that is your right,

The one thing I want you to remember if nothing else grabs your attention always, always ,always open your main (especially your IRS mail) on the day you receive it and pay special attention to the response time. I have had to perform damage control for my clients because they waited too long to respond to the IRS and they and the only thing that could be done for them was an offer in compromise request and an appeal for the penalties.  I welcome your thoughts comments and questions. 

Things to consider heading into the new year.

This information was forwarded to me from a fellow Franchise owner, Thank you Mr. Henry Swint.

TO My CLIENTS, FRIENDS, AND BUSINESS ASSOCIATES:

As 2011 comes to a close, economic uncertainty continues to be a hot topic in Washington, D.C. and around the world. The Joint Select Committee on Deficit Reduction (i.e. the Super Committee) created by the Budget Control Act of 2011 failed to reach a bipartisan agreement to address the financial challenges facing the United States. This failure to reach an agreement has left huge tax questions unanswered. The following are selected key issues of interest:

Tax Provisions Expiring at the End of 2011

·            Alternative-minimum tax patch;

·            Social Security tax reduction of 2%;

·            Special accelerated depreciation;

·            Higher education deduction;

·            Home energy tax credit; and

·            Charitable contribution of IRA assets.

Tax Provisions Expiring at the End of 2012

·            Top 35% income tax rate;

·            Top 15% long-term capital gain and qualified dividend rates and

·            Estate and gift tax rates and exemption.

Tax Provisions Taking Effect in 2013

·            3.8% tax on net investment income for joint filers with adjusted gross income more than $250,000

·            ($200,000 for single filers). This additional tax applies to taxable interest, dividends, capital gains,

·            rents, royalties and some annuities;

·            Personal exemption phase-out;

·            Itemized deduction limitations; and

·            Reduction in flexible spending account limits.

WITH UNCERTAINTY COMES OPPORTUNITY. The best way to take advantage of the changing legislation landscape is to understand your options and be ready to act. I SUGGEST that you investigate all planning opportunities before year-end.YEAR-END TAX PLANNING is not complete without a review of your RETIREMENT AND ESTATE PLANS. Early planning is key to making the most of your opportunities. I am available to help with your planning. Please contact me if you would like my assistance in developing a strategy for you before the year is out or in the future.  Remember life constantly changes and so do our plans.  Properly planning for taxes and life events helps ease the burden.  Tax evasion is against the law.  Tax avoidance is your civic duty.

         

Here are 10 things you can do before the year is over for increased tax savings:

1.       Donate to Charity (Fall into Spring cleaning, remember to get a receipt for donations)

2.       Sell off bad investments (up to $3,000 loss)

3.       Pay your December mortgage Payment in December

4.       Hold off on bonuses and extra income until the New Year.

5.       Max out your 401(k) ($16,500 tax free maximum)

6.       Pore over out of pocket medical costs

7.       Get Married (get it legally activated now, have the ceremony later

8.       State Sales Taxes for large purchases (for buying cars, boats, planes etc.)

9.       Energy efficient  home improvements (not all qualify)

10.    Military reservists travel expenses

And many more…If you or someone you know need tax planning advice please don’t hesitate to call.

Enjoy a HAPPY NEW YEAR by starting your tax planning now.

THE IRS HAS BEEN BUSY……..HAVE YOU?

  The IRS have hired an additional 15, 000 agents for the upcoming tax season. In the state of Virginia alone  in 2 years 7,000 agents were hired. The government needs money and they have elicited the help of the IRS to help collect. They are serious and focused on targeting small businesses. Some items the IRS are requesting when they audit small businesses are:

•          Invoice and receipts
•          Logs to track miles
•          Income and expense ledger
•          Proof travel was taken for business.
•          Daily business calendar or Tax Diary
•          Proof of home office deductions
•          Many others

It is very important that the information above answers the following questions:

•          Who
•          What
•          When
•          Where
•          Why/How

I have always believed that too much information is better than not enough information.

When a small business is audited by the IRS, the questions that need answers are: 

•          Who were you with / whom did you visit (if any one)?
•         What was the purchase or the event for?
•          Where did this event or purchase take place?
•          When did the purchase or event take place?
•          Why or how does it pertain to the business?

I think it is better to have the answer to a question not asked then not have an answer to an asked question. 

To put it simple, if a business owner keeps thorough records in anticipation of an annual IRS audit then the business will not have anything to worry about.

Having thorough and organized records makes it more affordable for the tax lawyers, tax professionals or accountants to counsel a business during an IRS audit.

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.