Late S Corporation Elections

If you are having trouble with any S corporation elections you need to know that there are ways to fix late or incomplete elections. This goes for the S corporation election, Electing Small Business Trust (ESBT) elections, Qualified Subchapter S Trust (QSST) elections, and Qualified Subchapter S Subsidiary (QSub) elections.

Eligibility to be classified as an S corporation goes further than just filing a form. Pertinent factors that need to be considered include but are not limited to; entity eligibility, shareholder eligibility, legal requirements, capital structure, election process, LLC’s as eligible entities, Q-sub elections, association status, trust structures, and converting from an existing C corporation.

If you failed to make the proper elections, the elections were late, or the elections contained flaws, you need to consult with a licensed tax practitioner to avoid mistakes. Maybe the IRS sent you a letter that your S election has been rejected. Or you’ve been in business a while, filed the tax return for an S corporation and the IRS sends you a letter stating that your corporation has not been granted S status and that you need to re-file using form 1120 for your C corporation. Contact our firm because we can help. Remember that your first attempt failed and your chances to fix this are going to run out.

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Do I Need A Tax Attorney For My Tax Problems?

The answer is maybe. If you owe tens of millions of dollars and have complex situations like international corporate reporting, or you have so many investments that you loose track of them, you may already know a tax attorney.

If you need a lien released, can’t pay the full amount, are behind in filing, have an IRS letter you don’t understand, or are just stressed at the mention of the IRS, pick up the phone and call a CPA firm like ours that specializes in taxpayer representation. If it turns out that you need to go to tax court, or need an attorney rest assured that we will tell you. Don’t wait because if you miss key deadlines you will loose some of your rights and that can cost you. Start at www.taxhelpsource.com and we can help you.

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2018 year end tax tips

The time for 2018 tax planning is over, but there are still some things you can do to lower your federal tax.  Once the year ends you will have lost your chance so act now.

Some quick tactics to reduce your personal federal tax include offsetting capital gains with capital losses, charitable giving (gifts/wealth transfers not required to be reported are limited to $15K), pay your assessed property tax or state taxes if your SALT is less than $10K, max out your retirement account contributions, and consider paying off those medical bills because the floor (currently 7.5% of AGI) goes back to 10% for 2019.

For small businesses you can accelerate paying bills (rent, mortgage, insurance, subscriptions and education) and delay invoicing customers until January. Beware that if you follow this strategy every year you will loose the effectiveness; it’s for windfall years. You can buy equipment or software that you need and probably write all of it off. Stock up on supplies; inventory and job materials follow different rules and you might not be able to expense those so ask your accountant. Have you asked your accountant if your business qualifies for the 20% deduction?

There are many within the tax community who are predicting a shake-up in the 2018 filing season because of the changes under the Tax Cuts and Jobs Act. The big reason is that the payroll withholding amounts decreased in conjunction with the lowering of the tax rates. Any refund that you are used to getting; well that’s not going to happen. You might even owe a small amount of tax – not because your taxes went up, but because your withholding went down even further.

So check your withholding if you want to head off any surprises come April 15. You can use the IRS’s withholding calculator available here:  https://www.irs.gov/individuals/irs-withholding-calculator. You may want to make sure that you set some money aside.

If you make quarterly estimated tax payments, the fourth quarter is due by January 15.

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Are Your Workers Employees or Independent Contractors?

If you have ever prepared payroll then you are familiar with IRS Publication 15, the Employer’s Tax Guide. Just as important is Pub 15-A, the Employer’s Supplemental Tax Guide because this pub will help you to properly classify your workers as either employees or independent contractors.

The general rule for classifying workers as either employees or independent contractors rests on a three factor test but there are also many other factors that may come into play depending on your situation. Those other factors are beyond the scope of this brief discussion so do not rely or act upon this article, it is only intended as general knowledge, get a professional to help you. The three general factors are; the extent of behavioral control that you exert over the worker, the extent of financial control you enjoy, and the nature of the relationship. Pub 15-A goes further in helping you learn and determine the differences between employees, independent contractors, statutory employees and common-law employees. This is important because when a worker is incorrectly classified it is the employer that pays for the costly mistake.

A number of years ago we had a small-business client who owned some dump trucks as part of his construction business. Unbeknownst to us, this client was paying some drivers as independent contractors despite maintaining complete control over them. One of those drivers knew better and did something about it. At the end of the year that driver left his job for greener pastures. The following March our client received a notice from the IRS that he owed more than $10,000 in back payroll taxes, penalties and interest related to that driver. Best guess is that the driver completed and sent form SS-8 to the IRS, the IRS agreed, re-classified the independent contractor driver as an employee, assumed that all payments made to that driver were now paychecks net of taxes, and then sent our client the bill for the difference.

If you are not familiar with form SS-8 it is titled, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. If you are an employer, despite the instructions suggesting that you can allow the IRS to make your determinations for you, consider the consequences of telling the IRS that, “I run a business, have workers, and don’t know what I’m doing, won’t you please help me?” And they will. Allow me to paraphrase part of a decision written by a U.S. Tax Court judge, “To rely upon the IRS for advice is to do so at your own peril.” Get a paid professional to help you. Your CPA is the best place to start. If you plan on having a larger workforce, you will also want to involve HR experts and attorneys who specialize in labor law.

There was nothing that we could do about the taxes and penalties for our client. We are professional accountants, not TV miracle workers. Sometimes you have to pay for your mistakes and he was lucky it was only $10,000. The labor laws are not for the faint of heart, and if they are new to you then get help. The cost of the consultations will be a good investment compared to any payroll or labor-related pitfalls which can run into the millions of dollars.

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Wesley Snipes’ Continuing Tax Nightmare

The U.S. Tax Court recently upheld the IRS’ rejection of Wesley Snipes’ Offer in Compromise. Snipes has tax liabilities of approximately $23.5 million covering tax years 2001-2006. He already served three years in prison and recently made a cash offer of $842,061 to settle his balance.

His argument centered on a financial adviser diverting funds without his knowledge thus greatly reducing his wealth. At a collection hearing he requested that the IRS conduct a transferee investigation of the financial adviser, and if they found that his wealth was diverted, that his offer be accepted. The IRS denied; Offers in Compromise will never be accepted with conditions, and the collection hearing could not be held open long enough to accommodate an investigation.

The IRS settlement officer did however set Snipes’ Reasonable Collection Potential to $9,581,027 (better than $23.5M) in an effort to compromise for a final settlement. Snipes refused the offer and the settlement officer concluded that it was not in the Government’s best interest to settle. Wesley then filed a petition with the U.S. Tax Court to appeal the IRS decision. The Tax Court sustained the IRS decision.

The court noted that Snipes’ tax liabilities were not an issue. The court concluded that the settlement officer did not abuse her discretion, and that accepting Mr. Snipes’ offer was not in the best interest of the United States.

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Three Tax Takeaways for November 7

The IRS is expected to begin issuing Affordable Care Act penalties for businesses that were non-compliant during 2016. The IRS has already sent letters to businesses that they believe should have filed information returns but did not; this was the warning. If those businesses failed to answer the first letter, the next one, Letter 226J, is the penalty notice.

Head of Household filers are now included in the list of taxpayers who have to be questioned by their tax return preparers for evidence that they are truly entitled to make that money-saving claim. In the past, tax pros have been required to obtain and keep copies of due diligence evidence supporting their clients’ claims to the Earned Income tax Credit, American Opportunity Tax Credit, the Child Tax Credit and the Additional Child Tax Credit. Under the TCJA the due diligence requirements are extended to returns claiming the Head of Household filing status. These claims and credits are worth good money, and sometimes refunds even if you did not pay in. Because they are so enticing, they represent areas rife with fraud. Taxpayer’s are not the only ones stretching the truth here because these attributes are also the most common tools used by fraudulent tax preparers to “Bump up,” a fraudulent refund. So if you go to a fly-by-night tax service that guarantees a higher refund than anybody else, and nobody working there is a CPA or EA, don’t be surprised if you get an IRS letter a year later asking for copies of the college tuition records for kids on your return that aren’t even yours. You should also not be surprised that when you call the tax service, that they are nowhere to be found.

In relation to the above point, number three this week is what happens when you sign your tax return. Above the space where you sign your return you will see this statement; “Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and accurately list all amounts and sources of income I received during the tax year.” Make no mistake, once you sign that return you are responsible for what it contains because you attested under penalty of perjury, that you did examine it and it is true and correct. Don’t worry about what happens to the preparer, because there is a special place in hell for people that get caught making a living by committing fraud.

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Three Tax Takeaways for Friday

There are reasons to file your taxes on time even if you have a refund coming. The 2017 extended deadline passed on October 15. If you had a refund coming, and knew that nothing would happen if you filed after the deadline, would you still procrastinate? Did you know that as long as you pay and file on time for three years in a row, that you qualify for first-time AUTOMATIC late penalty abatement just for the asking? Why miss a chance to beef up your get-out-of-penalty-free-card? File on time whenever you can.

Businesses can no longer write-off entertainment as an expense; meals are still OK though. The TCJA denied business expenses for entertainment, amusement, or recreation, but failed to specifically mention business meals. Interim guidance from the IRS says that until further guidance is forthcoming, business meals are still deductible. The TCJA goes further in not allowing a deduction for any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) that taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished.

The Court of Appeals for the Sixth Circuit reversed a Tax Court decision and held that the economic benefits enjoyed by a taxpayer when their S corporation payed the premiums for split-dollar life insurance were taxable to them. In addition to the premium payments no longer being a business expense but a taxable distribution instead, the increase in value of the policy was also deemed to be taxable income to the owners. S Corporations are pass-through entities. Anything that belongs to the S Corporation ultimately passes-through back into the pocket of the shareholders. Therefore the life insurance for the owners, that was paid for with profits from the business they own, turns out to be taxable to – well, them.

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Three Sales Tax Tidbits for Friday

Not all states impose a sales tax. The five states that do not are Oregon, Delaware, Alaska, Montana and Hew Hampshire.

Thinking about buying or merging with an existing business? You always conduct research for hidden liabilities and sales tax liabilities are a frequent exposure area, especially if the business has sales outside of its home state. Out-of-state retail sales often ignore state registration laws and are a big deal in today’s internet based economy. Compliance continues to be a problem and states are starting to go after their money. Do your research before putting pen to paper, or risk paying somebody else’s bills.

What is use tax? When you buy a retail item, a tax must be remitted to the state; it’s called sales and use tax. If you buy a retail item at a physical store, the store adds a sales tax to your purchase and gives those taxes to the state every month. If you buy an online retail item and the out-of-state seller does not collect sales tax, tax is still owed to your state. The difference is that now you, the user, are supposed to pay the tax; it’s called a use tax. So, um, how long have you been using Amazon Prime?

Estimates for 2012; it takes a while to compile some of these stats, list the top five states in revenues lost to unpaid sales and use tax due to online sales:

California        $4,159,000,000

Texas               $1,777,000,000

New York         $1,767,000,000

Florida             $1,483,000,000

Illinois              $1,058,000,000

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Tax Fraud

IRS examinations can take different forms; from a computer algorithm, a letter audit asking for information, or a full-blown in-person audit. During the process the IRS will be keenly aware that fraud may exist. When indicators (badges) of fraud are uncovered, the matter is serious enough to immediately involve management and technical advisors as the case for fraud is developed. The taxpayer now has the full attention of the most powerful collection agency in the United States.

Allegations of fraud by the IRS could not be more serious. The penalty for civil fraud is 75% of the tax that was not paid (plus interest), and in cases of criminal fraud, the penalty is 100% of unpaid taxes, interest, and possibly jail time. Criminal fraud is often referred to as tax evasion, especially when the fraud involves the willful and intentional concealment of income.

Most cases of fraud are smaller civil cases because proving willful and intentional criminal fraud is difficult. A typical example of civil fraud might be something like a construction contractor who fails to report 1099 income; we had a case like this once. His payer issued a form 1099-MISC reporting about $110,000 of gross income. The IRS got their carbon-copy of the 1099, but because the contractor had moved, and failed to forward his mail, he didn’t get his copy. Since he did not get a 1099 he must not be responsible to report that income, right? The answer is that, 1099 or not, you are responsible for reporting all of your worldwide income.

In this case the IRS re-computed the tax and added the 75% civil fraud penalty with interest. Because he was basically caught red-handed, the only thing we could do was amend the original tax return to at least include business expenses, and protect his rights. The tax owed was about $22,000, add the 75% penalty at $16,500, other smaller penalties, and interest that started at April 15, and the liability was about $44,000.

Assuming that your business and family survive this blow, it can take as long as 10 years to recover from a pitfall like this. If something like this happens to you, or the IRS is proposing a charge of fraud, this is the time to seek out professional help and it needs to come from a licensed tax professional.

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Three Quick Tax Tips for Friday

Tax scams continue to be rampant and the IRS predicts that they will increase as the October 15 deadline gets closer. Scam artists continue to impersonate IRS employees making threatening phone calls. If you receive a phone call from someone claiming to be an IRS agent demanding immediate payment for a tax debt, hang up the phone. The IRS will never call to threaten or demand a payment. Your first contact with the IRS is always a notice or letter that you receive in the mail.

IRS Notice 2018-77 announced per diem rates that are effective October 1, 2018. Taxpayers may use these new rates to substantiate the amount of expenses for lodging, meals and incidental expenses when traveling from home. There are also special rates for the transportation industry. You can find the Notice here: https://www.irs.gov/pub/irs-drop/n-18-77.pdf

We recently gained a client who was planning on offsetting S corporation income with a substantial year-end purchase of inventory. We informed the client that retail inventory is NOT an expense when it is purchased; it is an expense when it is sold. When you buy inventory, you are exchanging a cash asset for an inventory asset; there is no expenses event in the transaction. At the time of the subsequent sale, Sales are recognized as well as a Cost of Goods Sold expense. The Cost of Goods Sold expense decreases your total inventory. The basic equation is Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold.

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