Make sure you have all the needed documents, including all your Forms W-2, before you file your 2011 tax return. You should receive an IRS Form W-2, Wage and Tax Statement, from each of your employers. Employers have until Jan. 31, 2012 to issue your 2011 Form W-2 earnings statement.
If you haven't received your W-2, follow these four steps:
1. Contact your employer If you have not received your W-2, contact your employer to inquire if and when the W-2 was mailed. If it was mailed, it may have been returned to the employer because of an incorrect or incomplete address. After contacting the employer, allow a reasonable amount of time for them to resend or issue the W-2.
2. Contact the IRS If you do not receive your W-2 by Feb. 14, contact the IRS for assistance at 800-829-1040. When you call, you must provide your name, address, Social Security number, phone number and have the following information:
• Employer's name, address and phone number
• Dates of employment
• An estimate of the wages you earned, the federal income tax withheld, and when you worked for that employer during 2011. The estimate should be based on year-to-date information from your final pay stub or leave-and-earnings statement, if possible.
3. File your return You still must file your tax return or request an extension to file by April 17, 2012, even if you do not receive your Form W-2. If you have not received your Form W-2 in time to file your return by the due date, and have completed steps 1 and 2, you may use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Attach Form 4852 to the return, estimating income and withholding taxes as accurately as possible. There may be a delay in any refund due while the information is verified.
4. File a Form 1040X On occasion, you may receive your missing W-2 after you file your return using Form 4852, and the information may be different from what you reported on your return. If this happens, you must amend your return by filing a Form 1040X, Amended U.S. Individual Income Tax Return.
Form 4852, Form 1040X
Tuesday, January 31, 2012
Friday, January 27, 2012
Prior Years Tax Information from the IRS
Sometimes taxpayers need a copy of an old tax return, but can't find or don't have their own records. There are three easy and convenient options for getting tax return transcripts and tax account transcripts from the IRS: on the web, by phone or by mail. There are eight things you need to know about getting federal tax return information from a previously filed tax return.
1. You can order transcripts online or by phone for the current tax year as well as the past three tax years. Earlier tax years must be requested with Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript.
2. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed.
3. A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income.
4. To request either transcript online from this website use our online tool called Order a Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message. When you use these automated self-service options, the selected transcript will be mailed to your current address of record. To have your transcript mailed to a different address, complete and mail Form 4506-T, Request for Transcript of Tax Return. The IRS does not charge a fee for transcripts.
5. To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T.
6. If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail using Form 4506T or Form 4506T-EZ.
7. If you still need an actual copy of a previously processed tax return, it will cost $57 for each tax year you order. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year as well as the past six years. Please allow 60 days for actual copies of your return.
8. Visit this website to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ can be downloaded here or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
1. You can order transcripts online or by phone for the current tax year as well as the past three tax years. Earlier tax years must be requested with Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript.
2. A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed.
3. A tax account transcript shows any later adjustments either you or the IRS made after the tax return was filed. This transcript shows basic data, including marital status, type of return filed, adjusted gross income and taxable income.
4. To request either transcript online from this website use our online tool called Order a Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message. When you use these automated self-service options, the selected transcript will be mailed to your current address of record. To have your transcript mailed to a different address, complete and mail Form 4506-T, Request for Transcript of Tax Return. The IRS does not charge a fee for transcripts.
5. To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use the Form 4506T.
6. If you order online or by phone, you should receive your tax return transcript within five to 10 calendar days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail using Form 4506T or Form 4506T-EZ.
7. If you still need an actual copy of a previously processed tax return, it will cost $57 for each tax year you order. Complete Form 4506, Request for Copy of Tax Return, and mail it to the IRS address listed on the form for your area. Copies are generally available for the current year as well as the past six years. Please allow 60 days for actual copies of your return.
8. Visit this website to determine which form will meet your needs. Forms 4506, 4506T and 4506T-EZ can be downloaded here or by calling the IRS forms and publications order line at 800-TAX-FORM (800-829-3676).
Wednesday, January 25, 2012
Repairs versus Improvements: New Rules for Deductibility
The IRS and Treasury have issued long-awaited, comprehensive regulations on the capitalization of amounts paid to acquire, produce or improve tangible property. The regulations, released at the end of 2011 and effective immediately for most taxpayers, provide the standards that businesses must now apply to determine whether expenditures can be deducted as repairs or must be capitalized and then recovered over a period of years.
The regulations are broad and far-reaching - they apply to every business taxpayer that uses tangible property, whether owned or leased, regardless of the form of entity that operates the business, and regardless of the entity's foreign or domestic status. They apply to manufacturers, wholesalers, distributors, and retailers.
The new regulations have taken effect and steps must be taken to comply with them. They generally apply to amounts paid or incurred in tax years beginning on or after January 1, 2012. Thus, for calendar year taxpayers, the rules already apply. Some of the rules build upon rules already in place; other requirements, however, are completely new. The IRS will take comments and consider further changes, so any plans set forth to respond to these new regulations must themselves be ready for fine tuning.
The regulations are generally beneficial to most businesses, but they also add complexity. They provide a more defined framework for determining capital expenditures, along with some clarifications of the law and some simplifying conventions. The regulations make significant and substantial changes to the previous proposed regulations issued by the government in 2008. In many cases, the tax treatment of an expenditure will vary from its treatment for book purposes, putting an additional burden on taxpayers to apply new tax accounting systems to track and collect data.
The regulations will require many decisions by taxpayers in determining the appropriate tax treatment. In some cases, taxpayers are given an explicit election to decide what type of tax treatment to follow. In other cases, taxpayers must make a de facto election. In either case, once the taxpayer adopts a particular method of accounting for particular assets, that business must continue to follow that method of accounting, and will not be able to change it without the IRS's permission.
There will be more guidance from the IRS. Most taxpayers will need to change their method of accounting to comply with the new regulations. The IRS has promised to issue revenue procedures that provide transition rules for taxpayers changing their method of accounting. The regulations require that taxpayers make so-called Code Section 481(a) adjustments to prevent duplicated or omitted tax benefits. Because of this requirement, taxpayers will in effect have to apply the new rules to costs incurred prior to the effective date of the regulations. As a result, some taxpayers may have to capitalize amounts they previously deducted, and recognize income based on the difference in treatment. Conversely, other taxpayers may be able to deduct amounts previously capitalized, and take a deduction for the difference.
Our firm is here to help you determine how the regulations affect your business, what you must do to comply, what changes are necessary, what decisions must be made, and what opportunities are available. Please contact us so that we can arrange to discuss how this important development directly affects your business.
The regulations are broad and far-reaching - they apply to every business taxpayer that uses tangible property, whether owned or leased, regardless of the form of entity that operates the business, and regardless of the entity's foreign or domestic status. They apply to manufacturers, wholesalers, distributors, and retailers.
The new regulations have taken effect and steps must be taken to comply with them. They generally apply to amounts paid or incurred in tax years beginning on or after January 1, 2012. Thus, for calendar year taxpayers, the rules already apply. Some of the rules build upon rules already in place; other requirements, however, are completely new. The IRS will take comments and consider further changes, so any plans set forth to respond to these new regulations must themselves be ready for fine tuning.
The regulations are generally beneficial to most businesses, but they also add complexity. They provide a more defined framework for determining capital expenditures, along with some clarifications of the law and some simplifying conventions. The regulations make significant and substantial changes to the previous proposed regulations issued by the government in 2008. In many cases, the tax treatment of an expenditure will vary from its treatment for book purposes, putting an additional burden on taxpayers to apply new tax accounting systems to track and collect data.
The regulations will require many decisions by taxpayers in determining the appropriate tax treatment. In some cases, taxpayers are given an explicit election to decide what type of tax treatment to follow. In other cases, taxpayers must make a de facto election. In either case, once the taxpayer adopts a particular method of accounting for particular assets, that business must continue to follow that method of accounting, and will not be able to change it without the IRS's permission.
There will be more guidance from the IRS. Most taxpayers will need to change their method of accounting to comply with the new regulations. The IRS has promised to issue revenue procedures that provide transition rules for taxpayers changing their method of accounting. The regulations require that taxpayers make so-called Code Section 481(a) adjustments to prevent duplicated or omitted tax benefits. Because of this requirement, taxpayers will in effect have to apply the new rules to costs incurred prior to the effective date of the regulations. As a result, some taxpayers may have to capitalize amounts they previously deducted, and recognize income based on the difference in treatment. Conversely, other taxpayers may be able to deduct amounts previously capitalized, and take a deduction for the difference.
Our firm is here to help you determine how the regulations affect your business, what you must do to comply, what changes are necessary, what decisions must be made, and what opportunities are available. Please contact us so that we can arrange to discuss how this important development directly affects your business.
Friday, January 20, 2012
The New 1099-K Adds New Level of Confusion
This year, there's one more 1099 form to add to the mix: the 1099-K. If your business takes payments via credit cards or services like PayPal, you may find one in your mail box later this month.
The forms will be sent by payment settlement entities -- typically, banks or other institutions that pay merchants and other businesses as settlement for payment card transactions -- and could include payments made via credit, debit or even gift cards. They'll also be sent by third-party settlement organizations -- organizations like PayPal that are contractually obligated to make payments to participating payees or merchants, in a third-party payment network -- if the gross payments to a payee exceed $20,000 and consist of more than 200 transactions.
The upshot? Many small businesses that accept credit card or PayPal payments soon will be receiving 1099-Ks; they are due to merchants by January 31, 2012. The payment settlement entities and organizations also separately report this information to the IRS.
The new forms and reporting requirements come courtesy of a provision in the Housing Assistance Tax Act of 2008. According to this summary of the bill by the House Ways and Means Committee, "some merchants fail to report accurately their gross income, including income derived from payment card transactions. Generally, compliance increases significantly for amounts that a third party reports to the IRS." The provision was expected to raise more than $9.5 billion over 10 years.
So, this reporting requirement doesn't actually impose any new taxes. Instead, "the bulk of the revenue is estimated to come simply from improved compliance among those accepting a payment card as payment and/or accepting payment from a third-party settlement organization," according to this brief by Grant Thornton.
The forms themselves look similar to other 1099 forms. They'll contain contact information on both the entity filing the tax return, and the payee. In addition, boxes 5a-5l on the form will show the gross amount of merchant card/third-party network payments the payee received during the year, broken out by month. The amounts reported will not be adjusted for any credits, discounts, or refunds, Grant Thornton says.
If your business receives a 1099-K, you have to report the amounts. For 2011, however, the reporting requirements are a bit confusing, to say the least. While Schedule C now includes Line 1A, which is where you normally would report the amounts shown on a 1099-K, the instructions read: "Merchant card and third-party payments. For 2011, enter 0." Huh?
The more detailed IRS instructions explain this: "We added new lines 1a and 1b to implement reporting of gross receipts received via merchant card (credit and debit trade or business cards) and third-party network payments. However, for 2011, the IRS has deferred the requirement to report these amounts. Therefore, enter zero on line 1a and report all gross receipts on line 1b, including any income reported to you on Form 1099-K Merchant Card and Third Party Network Payments (but excluding any W-2 income reportable on line 1c).
That's not the only part that's confusing. As Barbara Weltman writes in EcommerceBytes, businesses that sell both goods and services may receive both a 1099-K and a 1099-MISC for the sale of the same service. If that happens, they'll need to contact the entity that issued the duplicate 1099s, and ask for a correction. Otherwise, the income will be reported twice.
More info on the 1099-K can be found here on the IRS website or feel free to contact us for further information on how this may impact your business.
Source URL: http://businessfinancemag.com/article/new-1099-k-adds-new-level-confusion-0118
The forms will be sent by payment settlement entities -- typically, banks or other institutions that pay merchants and other businesses as settlement for payment card transactions -- and could include payments made via credit, debit or even gift cards. They'll also be sent by third-party settlement organizations -- organizations like PayPal that are contractually obligated to make payments to participating payees or merchants, in a third-party payment network -- if the gross payments to a payee exceed $20,000 and consist of more than 200 transactions.
The upshot? Many small businesses that accept credit card or PayPal payments soon will be receiving 1099-Ks; they are due to merchants by January 31, 2012. The payment settlement entities and organizations also separately report this information to the IRS.
The new forms and reporting requirements come courtesy of a provision in the Housing Assistance Tax Act of 2008. According to this summary of the bill by the House Ways and Means Committee, "some merchants fail to report accurately their gross income, including income derived from payment card transactions. Generally, compliance increases significantly for amounts that a third party reports to the IRS." The provision was expected to raise more than $9.5 billion over 10 years.
So, this reporting requirement doesn't actually impose any new taxes. Instead, "the bulk of the revenue is estimated to come simply from improved compliance among those accepting a payment card as payment and/or accepting payment from a third-party settlement organization," according to this brief by Grant Thornton.
The forms themselves look similar to other 1099 forms. They'll contain contact information on both the entity filing the tax return, and the payee. In addition, boxes 5a-5l on the form will show the gross amount of merchant card/third-party network payments the payee received during the year, broken out by month. The amounts reported will not be adjusted for any credits, discounts, or refunds, Grant Thornton says.
If your business receives a 1099-K, you have to report the amounts. For 2011, however, the reporting requirements are a bit confusing, to say the least. While Schedule C now includes Line 1A, which is where you normally would report the amounts shown on a 1099-K, the instructions read: "Merchant card and third-party payments. For 2011, enter 0." Huh?
The more detailed IRS instructions explain this: "We added new lines 1a and 1b to implement reporting of gross receipts received via merchant card (credit and debit trade or business cards) and third-party network payments. However, for 2011, the IRS has deferred the requirement to report these amounts. Therefore, enter zero on line 1a and report all gross receipts on line 1b, including any income reported to you on Form 1099-K Merchant Card and Third Party Network Payments (but excluding any W-2 income reportable on line 1c).
That's not the only part that's confusing. As Barbara Weltman writes in EcommerceBytes, businesses that sell both goods and services may receive both a 1099-K and a 1099-MISC for the sale of the same service. If that happens, they'll need to contact the entity that issued the duplicate 1099s, and ask for a correction. Otherwise, the income will be reported twice.
More info on the 1099-K can be found here on the IRS website or feel free to contact us for further information on how this may impact your business.
Source URL: http://businessfinancemag.com/article/new-1099-k-adds-new-level-confusion-0118
Mantyla McReynolds CPA's Featured in Local Newsletter
Jim Oveson and Don Mantyla were featured this month in the newsletter of Professional Insurance Exchange (PIE). Professional Insurance Exchange is Utah State's leading carrier of dental malpractice insurance, insuring more than 95% of dentists in the state. The article advises dentists about finding the right CPA for their business.
How Do You Find the Right CPA?
Accounting has been called the language of business, but what do you do if it sounds like a foreign language to you? You find a good interpreter, or in this case a competent CPA. So, how can you tell if you have the right CPA? When we are seeking a professional to work with, most of us will ask our colleagues, family, friends and neighbors who they use. A referral is the greatest compliment that anyone can give to those that they work with, but even with a good reference you should interview the CPA to make sure he will provide the service you need. So what should you be asking?
• Unfortunately, too many business owners start with the wrong question, "What will it cost?"
o I do not go to the dentist that I have chosen because of cost, I go to him/her because he/she is good, he/she takes care of me and he/she is the best dentist that I have ever used. Of course cost is a consideration, but in the long run a good CPA can help you understand your practice, control the costs and save taxes. These savings will outweigh the cost.The real questions to start with are:
• Does the CPA do the accounting and taxes of any other dentist? If so, how long has he been working with them? How many other dentists do they serve in the dental community? If you have a specialty in your practice, does he have other dental clients in your specialty?
o You want an accountant that knows what to expect in analyzing your practice financial statements. They need to understand what the staff salaries, dental supplies, lab fees, rent, utilities, promotion and other expenses should be in a practice similar to yours. This will help you understand what areas to focus on to be more profitable.
• Ask the accountant to explain the various services that they provide to their other dental clients.
o It has been said that there are basically two types of CPAs, physicians and morticians. The morticians take your information and prepare financial statements and tax returns based only on what they receive. The physician is one that is proactive and provides tax planning and saving suggestions for you to consider - similar to the difference between a dentist that just fills cavities and one that focuses on preventing cavities.
• What other services does the CPA offer other than standard bookkeeping, financial statement and tax preparation?
o This should be very important to you as a dentist. Among the important other services that may be offered are:
Fraud analysis - setting up proper segregation of duties, identifying out of line costs and other potential fraud hazards.
Fraud analysis - setting up proper segregation of duties, identifying out of line costs and other potential fraud hazards.
Retirement planning - your CPA should work hand in hand with your financial planner to make sure that you are using the right vehicle for your retirement plan.
Practice valuation - providing accurate and complete information is critical to a proper valuation of your practice.
Practice analysis - understanding how you compare to other general dentists and specialists in your area is valuable in managing your practice.
• What is the CPA's policy in returning your phone calls and/or answering your emails or texts?
o You need a responsive accountant that returns your calls and answers your emails within at least 24 hours. You shouldn't have to wait days or weeks to hear from them.
• Is the accountant a sole practitioner or is he part of a firm?
o A firm allows your accountant access to the combined experience and resources of many other people, which could be a significant benefit to you. This is particularly true when you talk about tax laws. There are many times when there is no black or white with the tax code, just various shades of grey. You want to reduce taxes, if possible, but not to the point of risking an audit. A sole practitioner can often times get so overwhelmed that he does not give you the service that you need. These questions are just meant to be a starting point in selecting a CPA, but the real test is in the actual services performed.
Never hesitate to let your accountant know if they are providing the service that they promised, and even more important, if he is not. One of our clients once admitted that his many years of education taught him how to be a dentist, but not an accountant. If we were all dentists or accountants, our community would have a great void. We appreciate good dentists out there who watch out for our family's dental care. And we also appreciate the opportunity to help the dental community with their accounting and tax needs, and the opportunity to help dentists find solutions to their accounting and tax problems. Click below to see the entire newsletter:
Tuesday, January 17, 2012
IRS Examiners May Increase Small Corporation Audit
Small corporate clients may be subject to more exacting audits from the IRS in the near future. The Treasury Inspector General for Tax Administration (TIGTA) recently issued a report containing recommendations for improving the IRS's performance in audits of corporations falling within the purview of the IRS Small Business/Self-Employed Division (SB/SE).
SB/SE currently serves more than 57 million taxpayers, among them 9 million small businesses with assets of less than $10 million.
Background
For Fiscal Years (FY) 2006 through 2011, SB/SE reported an average of 32 percent of its audited corporate returns as "no-change," meaning examiners made no recommendations for additional taxes for those audited returns.
The "no-change" rate has been shrinking and agent productivity has been rising in recent years, even as the IRS is called to do more. For FY 2011, the additional taxes recommended per IRS agent's hour was $843, a marked improvement from $384 in FY 2006. For fiscal years 2006 through 2011, the no-change rate was, respectively, 37 percent, 38 percent, 28 percent, 32 percent, 28 percent, and 27 percent.
Although IRS management is prohibited by Congress from evaluating agents individually on dollar productivity for their audits, records are kept for other purposes.
The high corporate return "no-change" rate, according to TIGTA, suggests that the IRS is wasting its resources on unproductive and needlessly burdensome audits targeting the wrong small corporations. On the other hand, the report speculated that the high rate may stem from inadequate audits that, among other things, ignored major discrepancies between the labor costs deducted on the return and the amounts reflected on employment tax returns filed with the IRS.
Increased Small Business Audits
The TIGTA report represents a development in a larger push by the IRS to improve tax compliance among small businesses, an area considered ripe with compliance issues. A 2007 Government Accountability Office report on the tax gap estimated that sole proprietors in particular had underreported their net 2001 income by 57 percent. The report found that 39 percent of all sole proprietors had erred in reporting their gross income on Schedule C and 11 million had overstated their expenses by $40 billion. Of the $345 billion tax gap from 2001, sole proprietors accounted for $68 billion, or 20 percent.
Small corporate taxpayers may be able to predict what is in store for them by comparing the IRS response to previous TIGTA reports on small business audits. In September 2010, for example, TIGTA issued a report on IRS audit performance with respect to sole proprietorships, viewing the area as one still rife with compliance problems, both intentional and unintentional. TIGTA found, however, that IRS audits covered only a small portion of sole proprietors each year. The IRS's Data Book for FY 2008 showed more than 4.9 million sole proprietors, but just 72,801 field audits and $1.1 billion in recommended additional taxes.
IRS and Unincorporated Businesses
SB/SE audits consist of several preliminary tests for unreported income, or "minimum income probes," which begin with the Financial Status Analysis, or Cash-T analysis. Using the Cash-T probe, IRS examiners compare the balance sheet and income statements from the year under audit with prior/subsequent year data. TIGTA reported in September 2010 that for FY 2008 it had sampled 227 sole proprietor audits and found the Cash-T stage of the income testing to be lacking. Notably, in several cases, examiners did not consider the taxpayer's personal living expense (PLE) data or determine whether the reported income was sufficient to pay both for the business expenses deducted on the tax return as well as the taxpayer's basic rent, food, clothing, and other living expenses not included on the tax return.
In a 2010 report, TIGTA recommended the IRS should increase examiner accountability for their audits by instructing group managers to provide written feedback to their examiners on their application of the minimum income probes. They should also incorporate that feedback into the examiners' progress reports and annual appraisals. Finally, TIGTA recommended that IRS examiners consider PLE data in their Cash-T analyses.
In another 2010 report, TIGTA report estimated that the tax gap for unreported income earned by unincorporated businesses and unpaid self-employment tax was still $148 billion. While this represents a marked improvement over the figure from 2001 contained in the GAO report, TIGTA would still like the IRS to improve small business audit performance. TIGTA plans to release reports on S corporation and passthrough entity audits with similar findings later in the fiscal year.
IRS and Small Corporations
The latest TIGTA report targets IRS audits of small, closely-held corporations. The opening lines of the report state that close corporation transactions are often structured to avoid tax compliance. The report states:
"Shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions so they reduce the income taxes owed by the corporation or the shareholders. Corporations and shareholders that take advantage of such opportunities to understate their tax liabilities can create unfair burden on honest taxpayers and diminish the public's respect for the tax system".
TIGTA found that audits of close corporations increased the recommended additional taxes, but TIGTA still had quality concerns. Among these concerns, the report stated, IRS examiners ignored or overlooked many discrepancies between the corporate return and other returns that were filed or should have been filed, such as information returns, employment tax returns, and shareholders' individual tax returns.
National Quality Review System statistics cited in the report stated that examiners had failed to complete these required filing checks in an average of 24 percent of field examinations. Additionally, for the reporting periods between 2006 and 2010, the percentage of examiners that had not completed the filing checks had never been lower than 22 percent.
TIGTA made several recommendations:
• Examiners should take advantage of the IRS's automated information systems to complete their checks for filed returns;
• First-line managers should continue to monitor audit performance and provide written feedback on points where examiners could improve their filing checks, while also citing specific examples of accomplishments and achievements in their reviews.
IRS Return Selection Methods
In light of TIGTA's report and recommendations, the IRS is updating the Discriminate Index Function (DIF), used to score corporate tax returns for their audit potential. The DIF assigns a higher score to corporate returns containing red flags such as larger-than-usual deductions, losses, and expenses, blank sections, and too many round numbers. The higher the score, the more likely a corporate return will trigger an audit.
The high "no-change" rate may be due in part to outdated DIF formulas, last updated in 1988. The report stated the following:
"Consequently, it is no surprise that the passage of time has made using the DIF less useful for identifying and searching returns for audit, given the tax law and economic changes that have occurred."
In light of the age of the DIF formulas, the current policy is for the IRS to use non-DIF sources to select appropriate corporate returns for audit. This is one factor that TIGTA attributes to the increasing amount of recommended additional taxes. For FY 2010, 45 percent of the corporate audits involved returns selected by non-DIF sources.
The IRS plans to conduct a National Research Program study of tax compliance by small corporations and small corporate shareholders. The study could lead to an updated DIF that the IRS would use to generate a new workload identification formula for taxpayers with similar situations as those selected for the study. Officials anticipate that the study will involve the selection of 2,500 returns from the 2010 tax year filed by corporations with assets of less than $250,000.
SB/SE Measures to Improve IRS Performance
In light of the likely increase in number or intensiveness of IRS small corporate audits, TIGTA recommended that practitioners should alert their corporate clients to several IRS programs and initiatives designed to improve small business tax compliance. ).
Voluntary Classification Settlement Program (VCSP). Under the VCSP, qualifying employers can reclassify their workers as employees rather than improperly classified independent contractors, for whom they pay no employment taxes. In exchange for their voluntary compliance with the tax laws, they will pay an amount of just over one percent of the wages paid to the reclassified workers for the past year, but without interest or penalties. Additionally, the employers will not be audited on the reclassified workers' payroll taxes for prior years.
To qualify, employers must have consistently treated the workers to be reclassified as nonemployees and filed all required returns, such as Form 1099, for at least the three prior calendar years. In addition, employers may not currently be under audit for worker classification issues by the IRS, U.S. Department of Labor, or any state government agency.
IRS outreach efforts. Acknowledging that SB/SE compliance issues arise out of taxpayer ignorance of the ever-changing Tax Code, the IRS has focused on increasing its customer service, website navigation, and available educational materials.
Because the majority of SB/SE division tax returns are prepared by practitioners, much of the outreach effort is intended for practitioners. But telephone assistance is available for businesses during the work week, from Monday through Friday, 7:00 am to 10:00 pm EST. There is a 24-hour recorded assistance line as well.
The IRS.gov website also offers a Virtual Small Business Tax Workshop to educate small business owners about their Federal tax obligations. Common business issues covered on the website include how to apply for an Employer ID Number (EIN), regularly used small business forms and publications, which factors generally determine a worker's status, and more.
"Shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions so they reduce the income taxes owed by the corporation or the shareholders."
SB/SE currently serves more than 57 million taxpayers, among them 9 million small businesses with assets of less than $10 million.
Background
For Fiscal Years (FY) 2006 through 2011, SB/SE reported an average of 32 percent of its audited corporate returns as "no-change," meaning examiners made no recommendations for additional taxes for those audited returns.
The "no-change" rate has been shrinking and agent productivity has been rising in recent years, even as the IRS is called to do more. For FY 2011, the additional taxes recommended per IRS agent's hour was $843, a marked improvement from $384 in FY 2006. For fiscal years 2006 through 2011, the no-change rate was, respectively, 37 percent, 38 percent, 28 percent, 32 percent, 28 percent, and 27 percent.
Although IRS management is prohibited by Congress from evaluating agents individually on dollar productivity for their audits, records are kept for other purposes.
The high corporate return "no-change" rate, according to TIGTA, suggests that the IRS is wasting its resources on unproductive and needlessly burdensome audits targeting the wrong small corporations. On the other hand, the report speculated that the high rate may stem from inadequate audits that, among other things, ignored major discrepancies between the labor costs deducted on the return and the amounts reflected on employment tax returns filed with the IRS.
Increased Small Business Audits
The TIGTA report represents a development in a larger push by the IRS to improve tax compliance among small businesses, an area considered ripe with compliance issues. A 2007 Government Accountability Office report on the tax gap estimated that sole proprietors in particular had underreported their net 2001 income by 57 percent. The report found that 39 percent of all sole proprietors had erred in reporting their gross income on Schedule C and 11 million had overstated their expenses by $40 billion. Of the $345 billion tax gap from 2001, sole proprietors accounted for $68 billion, or 20 percent.
Small corporate taxpayers may be able to predict what is in store for them by comparing the IRS response to previous TIGTA reports on small business audits. In September 2010, for example, TIGTA issued a report on IRS audit performance with respect to sole proprietorships, viewing the area as one still rife with compliance problems, both intentional and unintentional. TIGTA found, however, that IRS audits covered only a small portion of sole proprietors each year. The IRS's Data Book for FY 2008 showed more than 4.9 million sole proprietors, but just 72,801 field audits and $1.1 billion in recommended additional taxes.
IRS and Unincorporated Businesses
SB/SE audits consist of several preliminary tests for unreported income, or "minimum income probes," which begin with the Financial Status Analysis, or Cash-T analysis. Using the Cash-T probe, IRS examiners compare the balance sheet and income statements from the year under audit with prior/subsequent year data. TIGTA reported in September 2010 that for FY 2008 it had sampled 227 sole proprietor audits and found the Cash-T stage of the income testing to be lacking. Notably, in several cases, examiners did not consider the taxpayer's personal living expense (PLE) data or determine whether the reported income was sufficient to pay both for the business expenses deducted on the tax return as well as the taxpayer's basic rent, food, clothing, and other living expenses not included on the tax return.
In a 2010 report, TIGTA recommended the IRS should increase examiner accountability for their audits by instructing group managers to provide written feedback to their examiners on their application of the minimum income probes. They should also incorporate that feedback into the examiners' progress reports and annual appraisals. Finally, TIGTA recommended that IRS examiners consider PLE data in their Cash-T analyses.
In another 2010 report, TIGTA report estimated that the tax gap for unreported income earned by unincorporated businesses and unpaid self-employment tax was still $148 billion. While this represents a marked improvement over the figure from 2001 contained in the GAO report, TIGTA would still like the IRS to improve small business audit performance. TIGTA plans to release reports on S corporation and passthrough entity audits with similar findings later in the fiscal year.
IRS and Small Corporations
The latest TIGTA report targets IRS audits of small, closely-held corporations. The opening lines of the report state that close corporation transactions are often structured to avoid tax compliance. The report states:
"Shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions so they reduce the income taxes owed by the corporation or the shareholders. Corporations and shareholders that take advantage of such opportunities to understate their tax liabilities can create unfair burden on honest taxpayers and diminish the public's respect for the tax system".
TIGTA found that audits of close corporations increased the recommended additional taxes, but TIGTA still had quality concerns. Among these concerns, the report stated, IRS examiners ignored or overlooked many discrepancies between the corporate return and other returns that were filed or should have been filed, such as information returns, employment tax returns, and shareholders' individual tax returns.
National Quality Review System statistics cited in the report stated that examiners had failed to complete these required filing checks in an average of 24 percent of field examinations. Additionally, for the reporting periods between 2006 and 2010, the percentage of examiners that had not completed the filing checks had never been lower than 22 percent.
TIGTA made several recommendations:
• Examiners should take advantage of the IRS's automated information systems to complete their checks for filed returns;
• First-line managers should continue to monitor audit performance and provide written feedback on points where examiners could improve their filing checks, while also citing specific examples of accomplishments and achievements in their reviews.
IRS Return Selection Methods
In light of TIGTA's report and recommendations, the IRS is updating the Discriminate Index Function (DIF), used to score corporate tax returns for their audit potential. The DIF assigns a higher score to corporate returns containing red flags such as larger-than-usual deductions, losses, and expenses, blank sections, and too many round numbers. The higher the score, the more likely a corporate return will trigger an audit.
The high "no-change" rate may be due in part to outdated DIF formulas, last updated in 1988. The report stated the following:
"Consequently, it is no surprise that the passage of time has made using the DIF less useful for identifying and searching returns for audit, given the tax law and economic changes that have occurred."
In light of the age of the DIF formulas, the current policy is for the IRS to use non-DIF sources to select appropriate corporate returns for audit. This is one factor that TIGTA attributes to the increasing amount of recommended additional taxes. For FY 2010, 45 percent of the corporate audits involved returns selected by non-DIF sources.
The IRS plans to conduct a National Research Program study of tax compliance by small corporations and small corporate shareholders. The study could lead to an updated DIF that the IRS would use to generate a new workload identification formula for taxpayers with similar situations as those selected for the study. Officials anticipate that the study will involve the selection of 2,500 returns from the 2010 tax year filed by corporations with assets of less than $250,000.
SB/SE Measures to Improve IRS Performance
In light of the likely increase in number or intensiveness of IRS small corporate audits, TIGTA recommended that practitioners should alert their corporate clients to several IRS programs and initiatives designed to improve small business tax compliance. ).
Voluntary Classification Settlement Program (VCSP). Under the VCSP, qualifying employers can reclassify their workers as employees rather than improperly classified independent contractors, for whom they pay no employment taxes. In exchange for their voluntary compliance with the tax laws, they will pay an amount of just over one percent of the wages paid to the reclassified workers for the past year, but without interest or penalties. Additionally, the employers will not be audited on the reclassified workers' payroll taxes for prior years.
To qualify, employers must have consistently treated the workers to be reclassified as nonemployees and filed all required returns, such as Form 1099, for at least the three prior calendar years. In addition, employers may not currently be under audit for worker classification issues by the IRS, U.S. Department of Labor, or any state government agency.
IRS outreach efforts. Acknowledging that SB/SE compliance issues arise out of taxpayer ignorance of the ever-changing Tax Code, the IRS has focused on increasing its customer service, website navigation, and available educational materials.
Because the majority of SB/SE division tax returns are prepared by practitioners, much of the outreach effort is intended for practitioners. But telephone assistance is available for businesses during the work week, from Monday through Friday, 7:00 am to 10:00 pm EST. There is a 24-hour recorded assistance line as well.
The IRS.gov website also offers a Virtual Small Business Tax Workshop to educate small business owners about their Federal tax obligations. Common business issues covered on the website include how to apply for an Employer ID Number (EIN), regularly used small business forms and publications, which factors generally determine a worker's status, and more.
"Shareholders typically have a significant amount of control over managing and directing the day-to-day operations of the corporation. This, in turn, provides opportunities to improperly structure transactions so they reduce the income taxes owed by the corporation or the shareholders."
Top Tips Every Taxpayer Should Know about Identity Theft
Identity theft often starts outside of the tax administration system when someone's personal information is unfortunately stolen or lost. Identity thieves may then use a taxpayer's identity to fraudulently file a tax return and claim a refund. In other cases, the identity thief uses the taxpayer's personal information in order to get a job. The legitimate taxpayer may be unaware that anything has happened until they file their return later in the filing season and it is discovered that two returns have been filed using the same Social Security number.
Here are the top 13 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.
1. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS does not send emails stating you are being electronically audited or that you are getting a refund.
2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at phishing@irs.gov.
3. Identity thieves get your personal information by many different means, including:* Stealing your wallet or purse* Posing as someone who needs information about you through a phone call or e-mail* Looking through your trash for personal information* Accessing information you provide to an unsecured Internet site.
4. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov,' forward that link to the IRS at phishing@irs.gov.
5. To learn how to identify a secure website, visit the Federal Trade Commission.
6. If your Social Security number is stolen, another individual may use it to get a job. That person's employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return. When this occurs, you should contact the IRS to show that the income is not yours. Your record will be updated to reflect only your information. You will also be asked to submit substantiating documentation to authenticate yourself. That information will be used to minimize this occurrence in future years.
7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.
8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification - such as a Social Security card, driver's license, or passport - along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 978-684-4542. Please be sure to write clearly. As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490. You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.
9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your Social Security number.
10. For more information about identity theft - including information about how to report identity theft, phishing and related fraudulent activity - visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching "Identity Theft" on the IRS.gov home page.
11. IRS impersonation schemes flourish during tax season and can take the form of e-mail, phone websites, even tweets. Scammers may also use a phone or fax to reach their victims. If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, contact the IRS at http://www.irs.gov/contact/index.html to determine if it is a legitimate IRS notice or letter. If it is a legitimate IRS notice or letter, reply if needed. If the caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484. You may also fax the notice/letter you received, plus any related or supporting information, to TIGTA. Note that this is not a toll-free FAX number 1-202-927-7018.
12. While preparing your tax return for electronic filing, make sure to use a strong password to protect the data file. Once your return has been e-filed, burn the file to a CD or flash drive and remove the personal information from your hard drive. Store the CD or flash drive in a safe place, such as a lock box or safe. If working with an accountant, you should ask them what measures they take to protect your information.
13. If you have information about the identity thief that impacted your personal information negatively, file an online complaint with the Internet Crime Complaint Center (IC3) at www.ic3.gov. The IC3 gives victims of cyber crime a convenient and easy-to-use reporting mechanism that alerts authorities of suspected criminal or civil violations. IC3 sends every complaint to one or more law enforcement or regulatory agencies that have jurisdiction over the matter.
Here are the top 13 things the IRS wants you to know about identity theft so you can avoid becoming the victim of an identity thief.
1. The IRS does not initiate contact with taxpayers by email to request personal or financial information. The IRS does not send emails stating you are being electronically audited or that you are getting a refund.
2. If you receive a scam e-mail claiming to be from the IRS, forward it to the IRS at phishing@irs.gov.
3. Identity thieves get your personal information by many different means, including:* Stealing your wallet or purse* Posing as someone who needs information about you through a phone call or e-mail* Looking through your trash for personal information* Accessing information you provide to an unsecured Internet site.
4. If you discover a website that claims to be the IRS but does not begin with 'www.irs.gov,' forward that link to the IRS at phishing@irs.gov.
5. To learn how to identify a secure website, visit the Federal Trade Commission.
6. If your Social Security number is stolen, another individual may use it to get a job. That person's employer may report income earned by them to the IRS using your Social Security number, thus making it appear that you did not report all of your income on your tax return. When this occurs, you should contact the IRS to show that the income is not yours. Your record will be updated to reflect only your information. You will also be asked to submit substantiating documentation to authenticate yourself. That information will be used to minimize this occurrence in future years.
7. Your identity may have been stolen if a letter from the IRS indicates more than one tax return was filed for you or the letter states you received wages from an employer you don't know. If you receive such a letter from the IRS, leading you to believe your identity has been stolen, respond immediately to the name, address or phone number on the IRS notice.
8. If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost wallet, questionable credit card activity, or credit report, you need to provide the IRS with proof of your identity. You should submit a copy of your valid government-issued identification - such as a Social Security card, driver's license, or passport - along with a copy of a police report and/or a completed IRS Form 14039, Identity Theft Affidavit, which should be faxed to the IRS at 978-684-4542. Please be sure to write clearly. As an option, you can also contact the IRS Identity Protection Specialized Unit, toll-free at 800-908-4490. You should also follow FTC guidance for reporting identity theft at www.ftc.gov/idtheft.
9. Show your Social Security card to your employer when you start a job or to your financial institution for tax reporting purposes. Do not routinely carry your card or other documents that display your Social Security number.
10. For more information about identity theft - including information about how to report identity theft, phishing and related fraudulent activity - visit the IRS Identity Theft and Your Tax Records Page, which you can find by searching "Identity Theft" on the IRS.gov home page.
11. IRS impersonation schemes flourish during tax season and can take the form of e-mail, phone websites, even tweets. Scammers may also use a phone or fax to reach their victims. If you receive a paper letter or notice via mail claiming to be the IRS but you suspect it is a scam, contact the IRS at http://www.irs.gov/contact/index.html to determine if it is a legitimate IRS notice or letter. If it is a legitimate IRS notice or letter, reply if needed. If the caller or party that sent the paper letter is not legitimate, contact the Treasury Inspector General for Tax Administration at 1-800-366-4484. You may also fax the notice/letter you received, plus any related or supporting information, to TIGTA. Note that this is not a toll-free FAX number 1-202-927-7018.
12. While preparing your tax return for electronic filing, make sure to use a strong password to protect the data file. Once your return has been e-filed, burn the file to a CD or flash drive and remove the personal information from your hard drive. Store the CD or flash drive in a safe place, such as a lock box or safe. If working with an accountant, you should ask them what measures they take to protect your information.
13. If you have information about the identity thief that impacted your personal information negatively, file an online complaint with the Internet Crime Complaint Center (IC3) at www.ic3.gov. The IC3 gives victims of cyber crime a convenient and easy-to-use reporting mechanism that alerts authorities of suspected criminal or civil violations. IC3 sends every complaint to one or more law enforcement or regulatory agencies that have jurisdiction over the matter.
Thursday, January 12, 2012
SEC Issues Advisory Regarding Investors Use of Social Media
Bulletins include information about avoiding fraud and establishing an account on a social media website such as Facebook or Twitter. Click below for links to these Investor Bulletins.
Investor Bulletin: Social Media and Investing - Understanding Your Accounts
Investor Alert: Social Media and Investing - Avoiding Fraud
Monday, January 9, 2012
Mantyla McReynolds CPA's Featured on the Front Page of The Journal Entry
The Journal Entry is a magazine created by the UACPA (Utah Association of Certified Public Accountants). Bryan Wright, Ken Oveson and Spencer Strickland answer the question, How are you Going to Respond When the IRS asks for your Client's QuickBooks File?
Click on the picture below to read the article on page 6 - page 11.
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