Businesses can utilize the same information IRS auditors use to examine tax returns

The IRS uses Audit Techniques Guides (ATGs) to help IRS examiners get ready for audits. Your business can use the same guides to gain insight into what the IRS is looking for in terms of compliance with tax laws and regulations.

Many ATGs target specific industries or businesses, such as construction, aerospace, art galleries, child care providers and veterinary medicine. Others address issues that frequently arise in audits, such as executive compensation, passive activity losses and capitalization of tangible property.

How they’re used

IRS auditors need to examine all types of businesses, as well as individual taxpayers and tax-exempt organizations. Each type of return might have unique industry issues, business practices and terminology. Before meeting with taxpayers and their advisors, auditors do their homework to understand various industries or issues, the accounting methods commonly used, how income is received, and areas where taxpayers may not be in compliance.

By using a specific ATG, an auditor may be able to reconcile discrepancies when reported income or expenses aren’t consistent with what’s normal for the industry or to identify anomalies within the geographic area in which the business is located.

For example, one ATG focuses specifically on businesses that deal in cash, such as auto repair shops, car washes, check-cashing operations, gas stations, laundromats, liquor stores, restaurants., bars, and salons. The “Cash Intensive Businesses” ATG tells auditors “a financial status analysis including both business and personal financial activities should be done.” It explains techniques such as:

  • How to examine businesses with and without cash registers,
  • What a company’s books and records may reveal,
  • How to analyze bank deposits and checks written from known bank accounts,
  • What to look for when touring a business,
  • Ways to uncover hidden family transactions,
  • How cash invoices found in an audit of one business may lead to another business trying to hide income by dealing mainly in cash.

Auditors are obviously looking for cash-intensive businesses that underreport their cash receipts but how this is uncovered varies. For example, when examining a restaurants or bar, auditors are told to ask about net profits compared to the industry average, spillage, pouring averages and tipping.

Learn the red flags

Although ATGs were created to help IRS examiners ferret out common methods of hiding income and inflating deductions, they also can help businesses ensure they aren’t engaging in practices that could raise audit red flags. Contact us if you have questions about your business. For a complete list of ATGs, visit the IRS website here.

Now’s the time to review your business expenses

As we approach the end of the year, it’s a good idea to review your business’s expenses for deductibility. At the same time, consider whether your business would benefit from accelerating certain expenses into this year.

Be sure to evaluate the impact of the Tax Cuts and Jobs Act (TCJA), which reduces or eliminates many deductions. In some cases, it may be necessary or desirable to change your expense and reimbursement policies.

What’s deductible, anyway?

There’s no master list of deductible business expenses in the Internal Revenue Code (IRC). Although some deductions are expressly authorized or excluded, most are governed by the general rule of IRC Sec. 162, which permits businesses to deduct their “ordinary and necessary” expenses.

An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your business. (It need not be indispensable.) Even if an expense is ordinary and necessary, it may not be deductible if the IRS considers it lavish or extravagant.

What did the TCJA change?

The TCJA contains many provisions that affect the deductibility of business expenses. Significant changes include these deductions:

Meals and entertainment. The act eliminates most deductions for entertainment expenses, but retains the 50% deduction for business meals. What about business meals provided in connection with nondeductible entertainment? In a recent notice, the IRS clarified that such meals continue to be 50% deductible, provided they’re purchased separately from the entertainment or their cost is separately stated on invoices or receipts.

Transportation. The act eliminates most deductions for qualified transportation fringe benefits, such as parking, vanpooling and transit passes. This change may lead some employers to discontinue these benefits, although others will continue to provide them because 1) they’re a valuable employee benefit (they’re still tax-free to employees) or 2) they’re required by local law.

Employee expenses. The act suspends employee deductions for unreimbursed job expenses — previously treated as miscellaneous itemized deductions — through 2025. Some businesses may want to implement a reimbursement plan for these expenses. So long as the plan meets IRS requirements, reimbursements are deductible by the business and tax-free to employees.

Need help?

The deductibility of certain expenses, such as employee wages or office supplies, is obvious. In other cases, it may be necessary to consult IRS rulings or court cases for guidance.

For questions about tax deductions specific to your business, give Launch Consulting a call today.

Controversial Charitable Contribution Regulation Withdrawn

This past September, the IRS proposed a regulation that would require charitable organizations to collect personal information from its donors and file information returns with the IRS with this personal information for donations over $250. The IRS would, in turn, would use informational returns received from the donee to match the amounts with the social security numbers of the donors.

A few days ago, we received notice that the IRS has scrapped these regulations. (whew!) This could have only led to more paperwork for non-profit organizations and greater risks for individuals to become victims of identity theft.

As a reminder, the IRS still requires contemporaneous written acknowledgement of a contribution from a charitable organization if the donation exceeds $250.  The acknowledgement must state the amount of cash or a description (but not the value) of property other than cash contributed. The letter must also state whether the donee provided any “goods or services” in consideration for the contribution. Lastly, if the goods or services received were entirely intangible religious benefits, the letter must provide a statement to that effect.

For more information on charitable contributions, please contact Paul Glantz, CPA at paul@launchconsultinginc.com

 

IRS to Begin Contacting Employers with Late Payroll Tax Payments

Falling behind on payroll taxes? Expect a call from the IRS soon.

In a recent news release, the IRS announced its plans to launch a new initiative aimed at monitoring payroll deposit patterns. Employers that are falling behind on payments will receive a letter or automated phone message reminding them of their payroll tax responsibilities.

For more information on Employment Tax & Reporting due dates, visit the IRS website.

For questions about payroll reports or taxes, contact Paul Glantz, CPA at paul@launchconsultinginc.com

How to Choose a Tax Preparer

With the 2015 tax filing season quickly approaching, I thought I would share this article the IRS published earlier this month about how to “Make a Wise Choice when Selecting a Tax Preparer”. I summarized a few key points below, because lets face it, it’s 2015 and nobody has the attention span to read a full article.

Here are some key take-aways:

  • Select a professional you trust. Since they will have access to sensitive data, including your social security number along with income and investment data, make sure you aren’t handing an engagement over to someone who could compromise your personal data. At Launch Consulting, we safeguard your data and use a secure file exchange software to protect your privacy.
  • Ask about preparation fees upfront. No-one likes surprises, especially in April around deadline time. Avoid any preparer that charges a fee based on refund, or says they can get you a larger refund. If a CPA is telling you this, it’s 100% unethical and against the rules of the State Board holding their license.
  • Make sure your preparer doesn’t disappear after April. Sometimes questions arise and you need your preparer to clarify. At Launch Consulting, we are with you year round, not just for tax preparation, but for tax planning and business consulting. We want to see you succeed, and we promise to be there every step of the way to help.

Lastly, only Enrolled Agents (EA), Certified Public Accountants (CPA), and Attorneys have unlimited representation rights in front of the IRS. As a licensed CPA, I can represent you on any matters including audits, payment/collection issues, and appeals.

 

The full article can be read here.

For any questions about business or personal taxes, contact Paul Glantz, CPA at paul@launchconsultinginc.com

IRS Audit Rates Drop, Again

A recent report shows IRS individual audit rates at the lowest level since 2004. In addition to cuts in IRS funding and staffing, the 8 million phone calls the IRS dropped, and the cyber theft of $39mm from fraudulently filed returns, audit rates have dropped to 0.84%. To put this in perspective, just over 8 returns for every 1,000 filed are examined by the IRS in person or via mail correspondence.

Tax Return, Tax Preparation, CPA, Certified Public Accountant, Austin, Texas, 78701, 78703, 78745, 78746, Tax Refund, 1040, 1065, 1120S

USA Today compiled audit rates from 2000-2015

The drop in audit rates marked the third consecutive year with audit coverage below 1%. Things have not been looking good for the IRS post the Tea-Party Scandal. Revenue from audit collections have been a measly $7.32 billion so far this year, compared with the $14.7 billion average between 2005-2010.

Less head count in the office, fewer audits, and longer phone wait times put the voluntary compliance system at risk for tax cheats and fed up taxpayers.

The IRS is working diligently to correct the problems. We have already seen new processes for ramping up security and battling fraudulent returns.

 

For questions or more information on how this may impact you, or if you are in need of assistance with an IRS audit, contact Paul Glantz, CPA at paul@launchconsultinginc.com

“Blow Up the Tax Code and Start Over”

Rand Paul wrote a piece in the Wall Street Journal the other day titled “Blow Up the Tax Code and Start Over”. Can his proposal for a flat 14.5% tax to personal and corporate income be the solution to our nations complex tax code?

Rand states that from 2001 to 2010, there was an average of one “fix” made to the tax code daily, for a total of over 4,400 in that same ten year span. Clearly the code has become much more complex. Rand proposal includes an elimination to all deductions with the exception of mortgage interest and charitable givings, and even goes as far as eliminating payroll taxes. Rand also proposes that the first $50,000 of income for a family of four would not be subject to tax.

The complexity of the tax code has obviously become an issue in America, but government spending needs reformation as well. Rand’s plan may be on the right track, but he doesn’t go in depth about how medicare and social security would be funded if payroll taxes were cut, he doesn’t examine the unforeseen implications of granting families of four or larger their first $50,000 tax free, and the effect it will have on population growth, poverty growth, the food supply, and our resource supply. Despite these issues, I applaud Rand for proposing a solution to a problem that has really impacted growth in America.

What are some of your thoughts?

Email me at paul@launchconsultinginc.com

 

The IRS data breach and how to prevent becoming a victim

5 Tips to Protect Your Identity

We live in a digital era of information. While we try to simplify the way data is stored and accessed, we need to be sure that this information is safeguarded from those who can use it to harm us. Recently, the IRS released a bulletin about the data breach they had just experienced. Out of the 23 million taxpayers that accessed their online transcript service (which has really been a blessing over the traditional fax and snail mail alternatives!), about 100,000 accounts were compromised. While the IRS works to remedy this breach, those who were affected will receive a letter in the mail.

In the meantime, I have compiled a list of 5 tips to help you protect your personal information from scammers:

  1. First and most obvious, DO NOT post personal or financial information publicly on social media.
  2. Protect your social security number. Do not carry your card in your purse or wallet.
  3. Be sure that websites requesting personal data are secure. Look for a padlock in the address bar next to the URL.
  4. Monitor financial accounts often, but only from a personal device. Avoid using public computers or unsecured public networks to view private information.
  5. Shred bank statements and other documents containing personal information

For more information on the IRS Data breach, visit the IRS website.

 

Spring 2015 Statistics of Income IRS Bulletin Released!

Last week, the IRS released the Spring 2015 Statistics of Income Bulletin. The bulletin includes preliminary numbers from the 2013 tax year. Some of the more interesting data points include the following:

  • 147.7 Million tax returns were filed, 1.9% more than the previous year.
  • Although Adjusted Gross Income (AGI) and taxable income was only up 0.8% from 2012 to 2013, total income tax increased 3.6% and total tax liability increased 4.5%, mainly due to the increase in the marginal tax rates implemented in 2013.
  • The Net Investment Income Tax (NII Tax – 3.8%), new for 2013, brought in $11.7 Billion from 3.1 million tax returns.

The complete bulletin can be found here.

CPA, Austin, Texas, Taxes, Tax Refunds, IRS

Spring 2015 Statistics of Income Bulletin