tax audit
Worker classification crackdown coming
Wednesday, October 26th, 2011 | consulting, litigation, tax | 2 Comments
The IRS recently announced a voluntary worker classification program that provides amnesty from back payroll taxes and penalties for companies who reclassify their independent contractors into employees. While there may be advantages on the federal tax side of this issue, you must consider other factors before deciding on a course of action. Worker classification has been a tricky, murky issue for many years. We will explore several aspects of this issue in future posts, including:
- Deciding whether your workers truly are independent contractors or employees;
- Protection from reclassification under Internal Revenue Code Section 530 or other precedents;
- Consequences at the state level of voluntary disclosure to the IRS;
- Related legal issues such as worker response to reclassification (e.g., retroactive reclassification to apply labor laws and collect overtime pay);
- Potential consequences from other government agencies such as the Department of Labor.
As we have seen before, a voluntary disclosure program is a harbinger of increased enforcement action in this long-contested area of business law. This makes it more important than ever for you to seek consultation from a knowledgeable professional. It is not an overstatement to say that this issue could bring your company to its knees. Unfortunately, we have seen it happen to smart, well-meaning business owners. Contact us today for a detailed analysis of your company’s exposure to the coming worker classification crackdown.
Standard mileage rates change
Friday, July 1st, 2011 | consulting, tax | No Comments
The IRS has adjusted the standard mileage rates beginning July 1, 2011, in response to higher gasoline prices. The new standard mileage rates will apply through the end of 2011.
Mileage Rate Changes
|
Purpose |
Rates 1/1 through 6/30/11 |
Rates 7/1 through 12/31/11 |
|
Business |
51 |
55.5 |
|
Medical/Moving |
19 |
23.5 |
|
Charitable |
14 |
14 |
You have the option of tracking actual vehicle costs or using the standard rates to calculate your vehicle expense deduction. You may deduct parking fees and tolls under either method. Remember to write down your odometer reading today and at year-end to help track total miles for each half of the year.
You do keep a mileage log, don’t you? The IRS has been finding easy money by increasing audits of business mileage because many taxpayers do not keep adequate records. You may keep your mileage log in any format that is convenient for you. IRS dictates that the log should contain the number of miles (beginning and ending odometer readings are best) for each business trip, the destination(s), and the business purpose of the trip. Anything less, and the deduction may be disallowed. If you spend the day on the road going to multiple work locations, a daily total is adequate along with a list of the locations you visited.
Another business mileage trip-up relates to commuting miles. If you do not report expenses for business use of your home, you had better report commuting mileage with your business mileage deduction. IRS says that mileage from home to the first work location of the day and from the last work location to home is non-deductible commuting mileage. If you do have a home office, then your home office is your first and last work location, and all mileage to other work locations throughout the day is deductible.
For more details about business, medical, moving, and charitable mileage deductions, feel free to call or email us. As with all things tax-related, special rules abound related to company expense reimbursement plans, personal use of company vehicles, depreciation, and other vehicle-related issues. We can help bring you peace of mind by setting up a reporting system that will pass muster with the IRS.
IRS abates penalties
Monday, April 4th, 2011 | tax | No Comments
In a payroll tax case we have been working on for over a year, the IRS has agreed to abate penalties, saving the taxpayer over $200,000. This is a very unusual decision for the IRS, which considers non-payment of payroll taxes to be an unauthorized loan of government funds.
Employers are required to withhold income tax, Social Security tax, and Medicare tax from their workers’ wages and deposit these funds regularly. At the same time, employers pay their share of Social Security and Medicare taxes. Penalties mount rapidly if an employer falls behind on these deposits.
The circumstances of this taxpayer’s case were unique. Their office manager/bookkeeper had let the company get behind on their payroll tax deposits, but she had told the owners that everything was fine. She had gained unauthorized access to the company’s post office box so she could intercept the IRS notices before the owners saw them. Her ruse unraveled when she was absent one day. The owners received one of the notices in the mail and called us.
Our investigation revealed how serious the situation was, with a delinquent tax liability in the mid-six figures, plus penalties and interest. The owners amassed enough funds to get the back taxes paid. We organized the documentation, interviewed the owners, and fashioned a compelling narrative describing the course of events that led to the late deposits. Through a series of letters, conversations, and meetings, we were able to persuade the IRS to abate the penalties. If the decision had gone the other way, the burden of paying the penalties on top of the back taxes probably would have put the company out of business.
We consider this a big win against the odds for our client. Not all of our engagements with the tax authorities end this well, but this is one example in which our willingness to stand toe-to-toe with the IRS on behalf of the taxpayer turned a potentially catastrophic situation into a more manageable one. As a result, the owners can now turn their focus back to managing their company through the recession.
Do you have an IRS story you’d like to share? How can we advocate for you?
Next IRS target - generous relatives
Wednesday, March 30th, 2011 | tax | No Comments
Generous relatives may be the next targets of IRS hunting expeditions. The IRS has asked a federal judge for a “John Doe” summons on the California Board of Equalization to force the board to turn over records of property transfers for little or no consideration. They are looking for people who have not paid gift tax on transfers of property to relatives between 2005 and 2010.
The Tax Code allows the transfer of up to $13,000 annually from one family member to another. Husband and wife can combine to give up to $26,000 a year. For each gift larger than that, the giver must file a Form 709 gift tax return. The giver, not the recipient, is liable for gift tax. Each taxpayer enjoys a lifetime gift tax exemption of a million dollars, making gifts up to that amount free of federal tax. But cumulative gifts over a lifetime must be accounted for in the estate tax calculation of the giver. If gift tax is owed but not paid by the giver, then the liability shifts to the recipient.
Property tax records and registered deeds are public records available for viewing by anyone. The IRS has been quietly gathering compliance information for some time, assisted by many states and counties who have voluntarily disclosed their property transfer data. The summons in California is one of the boldest attempts yet in the IRS effort to ferret out non-compliant taxpayers. Over the years, gift tax audits have been few and far between, but that could change as the IRS begins matching property transfer records with taxpayers.
If you are worried about the implications this may have for your family, please contact us. We can shed light on your situation and help keep the IRS gift tax target off of you.
Bad tax preparer leads to audit trouble
Thursday, March 24th, 2011 | tax | No Comments
We recently met with a new client who had been invited to the IRS local office for an examination of two years of her tax returns. She called the tax preparer, who told her she would not need the preparer at the meeting (red flag number one). After the meeting, she called the preparer back for help, but the preparer was not available (red flag number two). She has not been able to reach the tax preparer since then (red flag number three).
At the IRS meeting, she was shocked to learn for the first time that several items on her tax return were incorrect, mostly improper deductions. She came to us, and we opened her eyes to many ways that her tax preparer had misled her. We will be able to help her minimize the damage, but she was very unhappy to learn that her tax preparer had botched her return, and that she would owe a big chunk of money as a result.
Here’s the catch-22: The tax laws are so complex, the average taxpayer cannot possibly keep up, but you bear the burden of the accuracy of your tax return. Whether or not you rely on a professional to prepare your return, you are personally responsible for everything on the return. You must have documentation to back it up. “That’s how the tax software did it” is no defense. So finding a reputable, credentialed professional who will talk honestly with you is a good investment. No one can guarantee that the IRS won’t have questions about your return, but the process goes much better if your return is properly and accurately prepared based on good records.
Until this year, there has been no federal-level program to ensure at least a minimum level of competency for tax return preparers. There still is no way to get feedback about a tax preparer’s competency or quality of work, other than word of mouth. There is no authority given to the IRS or any other agency that can be used to force bad preparers out of business, other than harassing their clients. Watch for those red flag warnings before trouble comes. A reputable CPA firm (us, for example) or enrolled agent is your best choice.
IRS wants your QuickBooks file
Tuesday, December 14th, 2010 | tax | 2 Comments
The IRS recently announced that tax examiners across the nation are now trained in QuickBooks, and they are requesting taxpayers’ company files to conduct tax audits. Should you willingly hand over your company’s QuickBooks to an examiner? We think that’s an invitation to trouble.
If your company has been using QuickBooks for bookkeeping since it started, the working file contains the complete financial history of the company. Later versions of the software also contain an audit trail showing how, when, and by whom each transaction was entered, modified, or deleted.
Most tax audits question specific parts of the tax return and request documentation to support them. Our second rule of tax audits is to never give the IRS more information than they need to conduct the examination. Having access to the company’s complete books, the auditor would be tempted to look into other areas or other tax periods. This could lead to an increase in the scope of the audit, which we try to avoid by limiting the information the auditor receives.
What if the IRS requests your QuickBooks file? We find that we can provide the information the examiner needs by printing reports from QuickBooks and providing copies of supporting documents. By doing so, we deprive the auditor the opportunity to go on a “fishing expedition” and open up the examination to new areas.
What if they insist on the file? Karen Hellmund, our QuickBooks Pro Advisor, suggests one method. Using the ‘Clean Up Company Data’ utility, QuickBooks converts old transactions into monthly summary journal entries, making it impossible for a tax examiner to snoop through the individual entries in prior periods. To preserve your working file, run a backup, then restore the backup and run the cleanup utility. You might do this each year after “closing” the year, resulting in a series of files containing mostly transactions for the year. (The cleaned up file would also contain entries for the subsequent year up to the date the file is backed up.) Providing the cleaned up file to the auditor would provide only partial protection, because the file would still contain all entries for the year under examination. We consider providing the QuickBooks file to be a last resort.
Our first rule of tax audits? Tell the examiner one thing only: “I’ll have my representative call you.” Then call an experienced tax professional to represent you in the examination. We know the tactics of IRS personnel and the appropriate responses to achieve the best possible outcome under the circumstances.
Payroll Tax Audits Target Businesses
Friday, September 3rd, 2010 | tax | No Comments
Earlier this year, the IRS began its program of auditing businesses for compliance with payroll tax reporting and payment. As part of its National Research Program to gather statistics about payroll tax compliance, the IRS is examining 6,000 businesses large and small, 2,000 each year starting earlier this year. This study is part of their push to step up collection of unpaid payroll taxes. The second round of selection will take place at the end of 2010, and marks a continued increase in business audit frequency.
Even compliant employers face the possibility of being selected for these audits, incurring the extra time and expense of proving compliance. At a time when many businesses are struggling, the added burden could be disastrous.
The IRS is very aggressive in collecting past-due employment taxes because they are considered to be the government’s money that the employer is resonsible for collecting and remitting. Employers who fall behind on their payroll taxes face the highest penalty rates the IRS can impose, adding huge amounts of debt in a matter of months. Additionally, the IRS is empowered to file liens against property, seize funds in bank accounts, and divert payments by the company’s customers to collect payroll taxes. If the business cannot pay, the IRS will collect from the owner or other person responsible for payroll taxes, in some cases imposing civil or criminal penalties. In short, delinquent payroll taxes can shut down your business.
If you are thinking of going up against the IRS on your own, think again. You need experienced representation to keep the IRS from crippling your business. Depending on your situation, it may be possible to reduce the penalty amount, although the tax liability is rarely reduced. If you are behind on your payroll taxes, call for help before the IRS contacts you. If you receive a notice or call from the IRS, a timely and appropriate response is required. Help is available, and it can make a difference in the resolution of the problem.
IRS gives some solace in a sad story
Friday, June 18th, 2010 | tax | No Comments
About five years ago, a police officer and his wife decided to use their retirement money to build their dream home in the Smokies. They bought a pretty lot and a log home kit, and contracted with a local builder to erect it. From the beginning, the construction process went terribly wrong. Errors compounded so much that they stopped work and had the unfinished house inspected. The inspection revealed that if the house was finished, it would be so unsafe that it would not receive a certificate of occupancy. The only solution would be to tear it down and start over, which the couple could not afford to do. It was a total loss.
They came to us for help. We calculated the casualty loss on the structure and reported it on their tax return, which created a net operating loss for the year. We took their story all the way to the appeals level, where the deduction was allowed. Having won that battle, we carried the net operating loss back to the years prior to the casualty loss. Last week, we received word that the carrybacks were allowed on appeal.
Our clients had to go back to work to make the mortgage payments on their shattered dream, but we were able to recover over $38,000 in taxes to help ease the pain of their experience. For all the horror stories you hear about the IRS, sometimes they do right by the taxpayer.
Seminar presentations
Tuesday, June 8th, 2010 | consulting, tax | No Comments
Van and Karen presented at a seminar for business owners and managers in Morristown, TN today. Van talked about the increase in IRS audits and how companies can prepare for that possibility. Karen talked about detecting and preventing fraud in the workplace, which the latest study from the ACFE estimates costs the typical company 5% of annual revenue. Both shared many real-life stories from their experiences dealing with these issues. We also gave the participants practical ways to improve their recordkeeping and internal controls that they can implement in their businesses.
Tax audits winding down
Friday, June 4th, 2010 | tax | No Comments
We are winding down a year of tax audits of sole proprietors - that’s folks who have unincorporated businesses. Next coming from an IRS auditor near you will be audits of corporations. June 15th- the 14 new IRS auditors in the Knoxville office are going to training school in corporations. I expect to see a big push on corporate IRS audits. Can’t wait to see what nasty adjustments they try to make in the coming year.
Our track record for taxpayers we have represented in examinations has been good. Beyond the technical details, there’s an art to handling an audit to prevent the IRS from overrunning the taxpayer. We hope our success rate will be just as good with corporations later this year.