Memorial Day has come and gone, and the school year is quickly winding down, if it isn't already over. Kids are getting excited for summer vacay, and there's just one hurdle left -- the dreaded report card. (If your kids are getting nervous and antsy around mail time, you might want to pay attention!)

 Kids in school aren't the only ones who have to sweat report-card time. That's right, the IRS gets a report-card time, too. In fact, they get two. By law, National Taxpayer Advocate Nina Olson has to submit two reports to Congress each year: the "Objectives Report," which outlines goals and activities planned for the coming year, and the "Annual Report," which summarizes the 20 most serious problems encountered by taxpayers, recommendations for solving those problems, and other IRS efforts to improve "customer" service and reduce taxpayer burden.

 And how do you think our friends at the IRS are doing? Well, this year's Annual Report listed twenty-two problems, not 20. Their biggest conclusion is that the IRS is simply "not adequately funded to serve taxpayers and collect taxes." It identifies "the combination of the IRS's expanding workload and declining resources as the most serious problem facing taxpayers."

 Granted, the IRS faces an especially tough challenge. "There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims."

 And there were more specific problems, too. The IRS has to rely on computers to do most of their work, and computers don't always get things right. The IRS adjusts about 15 million returns per year -- but treats only 10% of those as "audits," so taxpayers don't always get traditional audit protections. And sometimes the IRS is just too busy to respond: they answer just 70% of taxpayer phone calls, and just 53% of written correspondence gets answered in 45 days. It's hard to ace your report card when you're missing that much of your homework!

 What can the IRS do about their report card? Well, they can't just make up their missing credit in summer school. But the Taxpayer Advocate does have two main recommendations. First, she urges Congress to "develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance." And second, she suggests codifying a "Taxpayer Bill of Rights" to clearly outline and explain taxpayer protections and and responsibilities.

 Fortunately, the news isn't all bad -- the IRS has joined the social media revolution! There's a smartphone app to help track your refund, a YouTube channel with helpful videos in English, American Sign Language, and various foreign languages, and podcasts you can download from the iTunes store. You can even follow them on Facebook and Twitter!

 Our "Plan A," of course, is to give you the concepts and strategies to help you pay the least amount of tax legally possible -- then help prepare returns that avoid IRS scrutiny. But just in case that scrutiny finds you, we're always ready with "Plan B" -- to help deal with the IRS on your behalf, and make sure you don't become another Annual Report statistic!

 If you have any questions about this topic, tax law changes, have questions about your business, or want to become a client, please call us at 954-591-8290 or use our Contact form.

The IRS issued them a levy notice to collect those unpaid liabilities. The taxpayers requested a collection due process (CDP) hearing before IRS Appeals pursuant to Sec. 6330, during which they sought an installment agreement. They submitted a Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, without supporting documentation. The taxpayer did not use a tax professional to assist them.

An Appeals team manager informed the taxpayers that the IRS's Philadelphia Service Center had calculated their acceptable amount for an installment agreement to be $900 to $1,000 monthly and advised them that their prior submission would be "sufficient". Without further communication with the taxpayers, the Appeals settlement officer closed the CDP hearing and sustained the proposed levy on the ground that the taxpayers had not provided sufficient financial information and that their ability to pay exceeded the proposed $900 to $1,000 per month.

The taxpayers filed a timely petition for review of that determination with the Tax Court, and the IRS moved for summary judgment. The Court held there was a genuine issue of material fact as to whether Appeals, having advised the taxpayers that their submission was "sufficient", abused its discretion in terminating the CDP hearing and rejecting their proposal for an installment agreement, rather than soliciting a satisfactory substitute proposal. The Court denied the IRS's motion for summary judgment.

If the taxpayers had consulted with a tax professional, the taxpayers may have saved themselves a lot of money, time and aggravation. A qualified tax professional would have ensured that the 433-A was properly completed and with the required documentation.  When the IRS said they wanted $900-$1000 per month, a tax professional could have invoked the "One Year Rule" as outlined in the Internal Revenue Manual, to force the IRS to accept payments the taxpayers could have afforded.  KR Hoffman & Co., LLC is that tax professional. Call us at 954.591-8290 to see how we can assist you.

If you have any questions about this topic, tax law changes, have questions about your business, or want to become a client, please call us at 954-591-8290 or use our Contact form.

The taxpayer paid various workers wages or contract labor expenses. Some of the payments were made by check and some of the payments were in cash. The taxpayer did not maintain complete books and records of the wages or contract labor payments he made during 2007 or 2008. Some, but not all, of the payments were reported to the IRS and to the workers as wages, and some were reported as nonemployee compensation.

Some, but not all, of the workers reported the income received from the taxpayer on their tax returns. Some of the workers provided to the taxpayer incorrect or illegible Social Security numbers. For 2007, the taxpayers reported on their tax return $356,581 as wage and contract labor expenses. The taxpayer was able to substantiate wage and contract labor expenses of only $230,291.

The IRS allowed a deduction $230,291 for 2007. For 2008, the taxpayers reported on their tax return $283,613 as wage and contract labor expenses but could substantiate expenses of only $157,190. The IRS allowed a deduction $157,190 for 2008.

The taxpayers' returns were prepared by his brother, who was not an accountant. The returns claimed erroneous, overstated or unsubstantiated deductions other than the ones for wages or contract labor. While the taxpayer testified he paid the amounts claimed, his testimony was not corroborated by any witnesses and he could not explain how he derived the amounts deducted on his tax returns in the absence of records, and his brother, who prepared the returns, did not testify.

The Court noted the taxpayer did not have any time records or other evidence from which we could estimate the amounts that he paid without substantiating documents. He did not identify any sources for cash payments to workers. The Court noted that it could have made an estimate of the expenses, but noted it could do so only when the taxpayer provides evidence sufficient to establish a rational basis upon which the estimate can be made. Without such evidence, the Court would not make an estimate. It allowed no more than the IRS allowed.

If you have any questions about this topic, tax law changes, have questions about your business, or want to become a client, please call us at 954-591-8290 or use our Contact form.

There are five things every business owner or executive should know when it comes to keeping your cool in a crisis. It helps to have a stress ball on your desk to squeeze when things start to go wrong. But for a real solution, nothing beats being prepared.

Business Planning. Small business owners often forget to put together a business plan when they are starting out. A business plan is a the comprehensive blueprint you use to run, grow and finance your company. Just like any good plan, a business plan also has a section that is dedicated to reacting to a crisis.

A business crisis is something that takes up your company resources. You should never use resources unless it fits the business plan. When you create your business plan, put together sections on options during a crisis. When a crisis occurs, you have a head start on getting yourself out of it.

Surround Yourself. The first thing a good business owner should do in times of crisis is surround himself with good people. It is important to avoid surrounding yourself with "yes" men or women that will only tell you want you want to hear. That will do nothing to help you come up with good answers. You need people you can trust that will give you good advice.

You should also surround yourself with the right kind of professional assistance. If your company is having economic problems, then hire an accountant. If it is a public relations issue, then hire a public relations firm. Contract the people who have the know-how to help.

Hit it Head On. The most common response to troubled times is to hide from it and hope it goes away. That is the wrong approach. When a crisis hits your company, then you need to meet it head on and address it immediately. Create a written evaluation of the situation and see where the problem originated. This will help you to solve the problem more quickly, or at least allocate the proper resources to get the issue resolved.

Restrict Access. If your company is having financial problems, then lock down your books and access to all financial tools such as credit cards and your bank account. Some people tend to take advantage of a crisis situation, which can only make it worse. Restrict access to the important elements of a crisis and make sure that only you know what comes in and what goes out.

Business as Usual. It is important that you maintain business as usual during a crisis. Of course, you may run into some situations that would make that difficult. For example, a financial problem may mean that your vendors are not extending you the credit that you need to get materials. In that case, you will need to find alternatives.

Maintaining business as usual gives you something else to think about to help get your mind off the crisis from time to time. It also helps you keep your company afloat and make sure that you are still in business when the crisis is over.

Troubled times require precise responses. When your company hits a rough patch, be sure you are prepared and can handle the problem efficiently.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

In Gomez v. Comm’r, (T.C. Summary Op. 2008-93, 2008) a husband and wife contributed a total of $6,548.27 to their local Texas church. The taxpayers made the donations by writing 20 separate checks. Ten of the checks were each for an amount over $250. The IRS challenged the deductions related to the ten donations over $250 by arguing that the petitioners failed to meet the substantiation requirements imposed by section 170(f)(8) of the Internal Revenue Code (the “Code”).

Specifically, section 170(f)(8)(A) of the Code disallows a charitable contribution deduction of $250 or more unless the church member substantiates the contribution by a “contemporaneous written acknowledgment.” The acknowledgment must come from the church and must include the following information: (i) the amount of cash and a description (but not value) of any property other than cash contributed by the church member to the church; (ii) whether the church provided any goods or services in consideration, in whole or in part, for anything the church member contributed; and (iii) a description and good faith estimate of the value of any goods or services provided by the church, or, if such goods or services consist solely of intangible religious benefits, a statement to that effect. To be “contemporaneous,” a church must provide the written acknowledgment on or before the earlier of: (i) the date on which the church member files a return for the taxable year in which the contribution was made; or (ii) the due date, including extensions, for filing the return.

Because their church did not provide the Gomez family with a contemporaneous acknowledgement, the Tax Court denied them a deduction for any of the contributions that were for $250 or more. The Tax Court determined that a letter from the church written almost three years after the contributions did not meet the federal tax law requirements for a “contemporaneous” acknowledgment. The court was careful to note that even though it was clear that the Gomez family wrote checks for tithes to their church, and the cancelled checks for these tithes were “reliable,” the failure to meet the necessary substantiation requirements required the court to disallow the claimed charitable contribution deductions for checks equal to or greater than $250. (The IRS allowed the Gomez family to deduct eight other checks that were less than $250, and the court acknowledged that this was the appropriate result with respect to those checks.)

A bill defining the legal limits for investors was recently signed by President Obama. But the IRS has yet to weigh in on the craze.

Will the contributions be a "gift" and not income to the business? If the business provides a service or product in return will the contribution be "income"? If the contribution is significant, it couldn't be classified as a gift and probably not income, but then is it a loan or equity capital? If it's equity, does that mean the investor is now a partner or shareholder?

If you're doing business as a partnership, LLC, or S corporation and the contribution is equity capital, you may have to send the individual a K-1 each year. You may consider the tax issues a minor problem if you're getting several large (e.g., $10,000) contributions, but not if you receive 100 small contributions and have to treat them as equity interests. Talk to your tax adviser before making a commitment.

If you have any questions about this topic, tax law changes, your business, or how to become a client, please call us at 954-591-8290 or use our Contact form.

It's no secret that Washington uses the tax code to do more than just raise revenue. Lawmakers also use it to influence some of our biggest financial decisions, with tax deductions for mortgage interest to encourage homeownership, tax credits for fuel-efficient cars to encourage conservation, and "bonus depreciation" to stimulate business spending. Washington seems to believe those incentives really work. And cynics argue that the real reason we'll never see a true flat tax is because lawmakers are loath to give up the power to regulate that comes with their power to tax.

Government also uses the tax code to sway some of our smaller decisions, too. This is especially true with so-called "sin taxes" -- essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, "sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of universal consumption, and which are therefore extremely proper subjects of taxation."

230 years later, sugar, rum, and tobacco are still taxed. (In New York City, a pack of smokes comes with a hefty $6.86 in federal, state, and local taxes -- the tobacco is extra!) The 2010 health care reform slapped a 10% tax on tanning beds. Public health advocates have proposed taxes on fatty foods and sugary sodas to fight obesity. And many Americans, discouraged by what they see as a decades-long failure in the War on Drugs, call for legalizing drugs, taxing them to shift profits from private cartels, and using the revenue to fund anti-addiction efforts.

So, how effective are sin taxes at balancing their dual goals of raising revenue and discouraging unhealthy behavior? Well, federal and state tobacco taxes alone raise nearly $30 billion per year. They seem to do that job just fine. But some economists find that sin taxes send the wrong message by legitimizing the behavior they try to discourage. Here's what Harvard Professor Michael J. Sandel says in his new book, What Money Can't Buy: The Moral Limits of Markets:

"A study of some child-care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased."

Clearly, telling parents "don't be late or we'll fine you" sends a very different message than telling them simply "don't be late." And so it goes with sin taxes, too. Telling smokers and drinkers "don't indulge or we'll tax you" offers them implicit forgiveness -- that it's actually OK to light up and enjoy two-for-one Happy Hour so long as they pay the fee. (If you're reading these words with a cigarette in one hand and a Red Bull in the other, you can breathe a sigh of relief!) It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other. But sin taxes have been around a lot longer than income taxes, and they aren't going away.

 There's really no "planning" we can help you do to avoid sin taxes. (We would just give you the same advice as your mother.) But it may be worth it, next time you pay any tax, to ask yourself "what's the government trying to accomplish with this tax? What's the government trying to get me to do?" Understanding why you pay a tax can make you a better-informed consumer. And that, in turn, helps all your dollars go farther.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

• Proprietorship: This is a business you operate yourself, in your own name or trade name, with no partners or formal entity. You remain personally liable for business debts. You report income and expenses on your personal return and pay income and self-employment tax on your profits. These are best for startups and small businesses with no employees in industries with little legal liability.
• Partnership: This is an association of two or more partners. General partners (“GPs”) run the business and remain liable for partnership debts. Limited partners (“LPs”) invest capital, but don’t actively manage the business and aren’t liable for debts. The partnership files an informational return and passes income and expenses to partners. GP distributions are taxed as ordinary income and subject to self-employment tax; LP distributions are taxed as passive income.
• “C” Corporation: This is a separate legal person organized under state law. Your liability for business debts is generally limited to your investment in the corporation. The corporation files its own return, pays tax on profits, and chooses whether or not to pay dividends. Your salary is subject to income and employment tax; dividends are taxed at preferential rates. These are best for owners who need limited liability and want the broadest range of benefits.
• “S” Corporation: This is a corporation that elects not to pay tax itself. Instead, it files an informational return and passes income and losses through to shareholders according to their ownership. Your salary is subject to income and employment tax; pass-through profits are subject to ordinary income but not employment tax. These are best for businesses whose owners are active in the business and don’t need to accumulate capital for day-to-day operations.
• Limited Liability Company (“LLC”): This is an association of one or more “members” organized under state law. Your liability for business debts is limited to your investment in the company, and LLCs may offer the strongest asset protection of any entity. Single-member LLCs are taxed as proprietors, unless you elect to be taxed as a corporation. Multi-member LLCs choose to be taxed as partnerships or corporations. This flexibility and asset-protection strength makes LLCs the entity of choice for many new businesses.

If you expect your business to lose money at first, consider a proprietorship, LLC, or “S” corporation. Losses from these entities (up to your basis in the business) offset outside income from salaries, investments, and other businesses. If losses exceed that income, they generate net operating losses (“NOLs”) that you can carry back two years or forward 20.

Filing Guide

Proprietors and single-member LLCs file Schedule C then carry profits or losses to Form 1040. Partnerships and LLCs taxed as partnerships file Form 1065, then report partners’ income and expenses on Form K1 “C” corporations file Form 1120 or 1120-A. “S” corporations file Form 1120S, then report shareholder income and expenses on Form K1.

IRS Publication 334:
Tax Guide for Small Business
 
IRS Publication 535:
Business Expenses
 
IRS Publication 536:
Net Operating Losses
 
IRS Publication 583:
Starting a Business and Keeping Records

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

For example, your spouse has a consulting business. You're taking a trip to a Germany and agree to purchase six cuckoo clocks for a friend for a total of $4,000. You use your credit card and upon returning your friend reimburses you the $4,000. You're later audited and the IRS claims the $4,000 you deposited in your personal bank account was unreported income from your business.

The first question is will you even remember what the $4,000 was for? If you pass that test, can you prove it? There are many income sources that may be difficult to prove; some are easy. A loan from relatives for your business. The repayment of a loan you made to your neighbor to start a business. The proceeds of a yard sale. The sale of an inherited art work.

At a bare minimum make some sort of diary entry to describe the source of the income. Copy the check before depositing the money. Retain any documentation such as a note that substantiates a loan, a bill of sale for an item, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.