Tax News Blog Archive January 2010

IRS Notices Getting Better?

On January 11th, the IRS announced a program to redesign its communications with the public. Like a good government agency, it established a new office (with the simple moniker "Office of Taxpayer Correspondence") to oversee the redesign. The goal is to make its notices simple and effective.

The IRS has already released the first few notices it redesigned. The new notices have a lot more whitespace, more bold headings, and seem more sequential. However the few we looked at were several additional pages long!  "We want to make sure that taxpayers understand what they read in the simplest language possible," said the head of the new IRS office. We'll see how this goes.

For perspective: the IRS uses 1,000 different notices to correspond with taxpayers, and sends out 200 million annually. Yikes.


Related:

The original press release.

From the IRS YouTube Channel: Received a Letter from the IRS?


Note

Tax return season has started, and thus our postings to this blog will lessen. Be sure to get your stuff together and visit your tax preparer soon--we're all ready and waiting for you.

IRS: Scrutiny & Audit Rumors

We follow a few reputable IRS prognosticators and in-the-loop people. Here's the latest in scrutiny and audit alerts:

Appraisers: in a memo to field agents, the IRS mentioned the penalties for misstatements in appraisals that result in taxes saved. These penalties apply to the payer of the tax and may apply to the appraiser. Agents will be paying attention to both sides in any reviews or audits.

R&D Tax Credit: The IRS has found many R&D tax credit claims without proper documentation or based on bogus assumptions. Examiners have been told to slap a 20% fine on spurious claims.

S Corporations: Recent audits have found areas of noncompliance, so agents will be on the lookout for: excessive travel, meals, and entertainment expenses; expensing of tools and supplies; taking profits as dividends instead of salary to avoid payroll taxes. S Corporations can be a solid tax structure, but owners should be aware of increased scrutiny and follow the guidelines.

Payroll Tax Audits: notices of 6,000 exams over three years were going out in November, but were delayed until February of 2010.  The IRS wanted to fine-tune the selection criteria to select fewer profiles that would result in a no-change audit. Payroll audits look for employee classification issues, executive pay levels, and treatment of fringe benefits. Examiners will be closely looking at S Corps, ensuring owners aren't paid little/no salary. (The illegal strategy is to pay out profits as dividends, avoiding payroll taxes.)


As always, there's reason to fear the IRS if you've followed their regulations and kept good records. While audits can be nerve-wracking and tiresome, there are a few simple steps to prepare. If you've avoided taxes, then fearing the IRS is probably warranted.

Tax Tips for New Businesses

According to the New Hampshire Business Review, new business filings were up significantly in December. The most important thing for entrepreneurs is building a profitable business. However, many people get this right, but get fouled up in accounting and taxes.

To be successful, new entrepreneurs need to start out with the right framework and tax strategy. It's not enough to hire a decent accountant, entrepreneurs need to set themselves up for success.

Here are the top six things you should know when starting a new business:

1. First, you must decide what type of business entity you are going to establish. The type your business takes will determine which tax form you have to file. The most common types of business are: sole proprietorship, partnership, corporation, and S corporation. The choice is based on what you do and how many people will work with and for you.

2. The type of business you operate determines what taxes you must pay and how you pay them. There are four general types of business taxes: income tax, self-employment tax, employment tax, and excise tax. Your liability for these taxes will depend on your entity’s structure and your business activities.

3. An employer identification number is used to identify a business entity. Generally, businesses need an EIN. These can be obtained from the Internal Revenue Service.

4. Good record keeping will help you ensure successful operation of your new business. You may choose any record keeping system suited to your business that clearly shows your income and expenses. The law does not generally require that you keep any special kinds of records. However, the business you are in affects the type of records you need to keep for Federal tax purposes.

5. Every business taxpayer must figure taxable income on an annual accounting period called a tax year. The calendar year is the most common tax year used, but another 12 month period may work better for some businesses (i.e. ski resorts).

6. The business must also use a consistent accounting method, which is a set of rules for determining when to report income and expenses.  The most commonly used accounting methods are the cash method and the accrual method.  Under the cash method, you generally report income in the tax year you receive it and deduct expenses in the tax year you pay them. Under the accrual method, you generally report income in the tax year you earn it and deduct expenses in the tax year you incur them.


Please contact us in order to insure that you start out with the proper framework. We stand ready to assist you with all of your business tax and accounting needs. Share this list with new business people you know.


Site by iNathanael