Accounting News

Tuesday, July 31, 2012
2012 Tax Planning

It may only be August but it is time to start planning for the 2012 tax season. As congress seems to be passing more significant changes to tax later and later it is crucial to be ahead of the game. It is no longer possible to know exactly what the tax law is going to be so here are some things to know for your tax clients as you meet with them this summer and fall.

The 800 pound gorilla hanging over everyone's head are the Bush era tax cuts. The Republicans want to extend them and the Democrats would like to limit that to only some tax brackets. In this election year whatever gets done won't happen until November. But it would be a mistake to assume that they will be extended with no changes. The dynamics in Washington are different this year than they were last year.

There is currently a $5 million give exemption but it is scheduled to revert to $1 million next year. If clients are thinking about making a give they should do so this year if possible to avoid the gift tax on the last $4 million.

Obama has proposed changes to the treatment of grantor trusts. This would increase taxes on trust distributions. It may be advantageous to accelerate them so they are taken in 2012.

With the possible increase in tax rates it may make sense to increase net income this year. This can be done by accelerating income into 2012 but also deferring some expenses to 2013. The net result is a higher income in 2012. It makes sense to be ready to do this based on how the legislation progresses. Have your plan in place so you can just pull the trigger if it makes sense for the client.

Look at how the client is investing in qualified accounts like 401Ks. It may make sense to alter that allocation for 2013. If the client is not looking at how the asset allocation is in their portfolio this is also something for them to consider. While beyond the scope of many CPAs, the total financial health of your clients is always important.

So as the boy scouts always say, "be prepared." This may be a winter of significant tax changes that require significant changes or it may also be that the tax cuts are extended and then it is more of the same for 2013.

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Accounting News

Thursday, July 26, 2012
S Corp Audits Yield Little

The Treasury Inspector General for Tax Administration has released a report on the S corporation audits the IRS performed over the last four years. The study was to determine the effectiveness of the audits and what improvements could be made by the agency. S corporation returns are the fastest growing area for tax filing. They are 4.5 million a year but growing at a rate of 26% They are twice the number of C corporations.

Over the period of the study the IRS conducted 53,544 audits of S corporations. They recommended $5.7 billion in adjustments. This was a 54% increase over the prior four year period. However, 62% of the audits were closed with no adjustments at all. This suggest that the IRS is not allocating their resources very well.

The Discriminant Index Function (DIF) system is used by the IRS to identify where to allocate their audit resources. It uses algorithms to determine the best targets for audits based on return potential. It may be time to examine what factors are being used to calculate the scores. This has been recommended but not completed but the IRS because they say the lack the manpower to complete it. Another problem with this method is it does not identify what area led to the higher score but rely on the auditor to determine what transactions should be included in the scope of the audit. 

One area that the study identified for potential change is the expansion of audits into S corporations to include the personal tax returns of the owners. This came up in a sample of owners who identified a significant discrepancy between income and living expenses. Six returns were identified where the owners declared living expenses that were more than $10,000 above their incomes. The issue is the auditor is limited in the scope of the audit to the the return filed but the corporation.

What I like to believe is the tax accountants are doing a great job with the tax return preparation for the corporations. Better training and tools allow accountants to reduce errors and omissions on the return.

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Accounting News

Tuesday, July 24, 2012
How To Handle an IRS Audit

No one wants to get the dreaded notice from the IRS that you are being audited. But it happens to many people every year. The larger your income the more likely the notice but the IRS does target all income brackets. Here are some basic steps you can take to get through it and keep your sanity.

  1. Don't throw it out. It is amazing how many people think that if they just throw the notice away the IRS will forget about them and go away. I can tell you from experience that this never works. Take the time to read it again and pay attention to the year(s) in question. Some times it is a simple question that can be answered quickly with the right documentation.
  2. Contact an expert. Everyone is an expert in something. But if tax law isn't your field then it is wise to work with someone who is. A tax accountant can offer advice and even represent you to the IRS. Years of experience are always a benefit when dealing with a bureaucratic process like an audit. They know all the short cuts to get to the finish line.
  3. Get everything together. Now collect all the backup that you and your account decide you need. Have it all organized so you are not wasting the auditors time or making it more difficult than it needs to be. Don't take in more than you need. You never want to expand the scope of the audit by showing backup that is not required. 
  4. Be honest. If you made a mistake then be upfront about it. Work for a good settlement. It is a crime to lie to an auditor and they are experts in finding out the truth. It is always good to bring your accountant with you for help and support.
  5. Be friendly. It never helps to be confrontational to the auditor. They have the power to make it a very painful process. Most are reasonable but not all. Just keep your cool and don't take anything personally. They are trying to do the best job they can even if it is a pain to you.
  6. Keep originals. Don't give your originals the the IRS. Make copies for them so you can make more copies in the future if needed. Telling a second auditor that the first one lost the originals just doesn't work.
  7. Be informed. There is no requirement that you accept the auditors settlement. You can always go to the Appeals Division or even tax court if you don't feel you are being treated fairly.

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Accounting News

Thursday, July 19, 2012
Biggest Accounting Firm in Chicago

McGladrey is now the biggest accounting firm in Chicago. That is because the company is moving their headquarters to Chicago from Bloomington, Minnesota. McGladrey is the fifth largest accounting firm in the US. The firm plans to add another 300 to 500 employees to their Chicago office. This will be above the 1,000 employees the firm currently has in the city.

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Accounting News

Tuesday, July 17, 2012
SEC Issues Report on IFRS

The Securities and Exchange Commission (SEC) has published their final staff report on the International Financial Reporting Standards (IFRS). The report makes is clear that the SEC has not yet made a decision on adopting IFRS. It examines the pros and the cons of adopting the standard for US capital markets.

The report was ordered by the SEC to help them make a decision. Work was performed under the office of Chief Accountant James Kroeker. Kroeker is leaving the agency later this month. This is yet another person biding their time to avoid making a decision.

Seven themes were throughout the report:

  1. Development of IFRS - There are still concerns about the revenue recognition and lease accounting in the standard.
  2. Interpretive Process - The speed at which changes and updates to the standards needs to be clarified and improved.
  3. National Standard Setters - Since the standard is international it has the complex problem of working with numerous national standard setting bodies. The SEC would like more definition of how the IASB would work the national bodies.
  4. Global Enforcement - The goal of a global standard is the ability for an investor to read any financial report for anyone using the standard and easily understand the approach. Their does seem to be consistency but the SEC wants enforcement to be standard.
  5. Governance - There is a lack of a global mandate for the IFRS Foundation. There may be a time that the SEC needs to protect US capital markets.
  6. Funding for IFRS Foundation - It is a non-profit organization that can not compel funding from any particular source. This may be a problem when only 30 of 100 countries using the standard currently contribute to the foundation.
  7. Investor Understanding - To convert to a new standard will require significant education for US investors. There will also need to be outreach to accountants and accounting firms.

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Accounting News

Thursday, July 5, 2012
Sales and Use Tax Audits

Everyone is familiar with IRS tax audits but that is not the only audits that a business might face. All states and localities conduct sales tax and use tax audits on businesses in their jurisdiction. The various taxing authorities can make sales taxes very complex. These rates can also change throughout the year. The move to Internet sales also add to the complexity of sales tax.

Along the same lines many businesses fail to account for use tax. It is a "gotcha" for many new business owners. Then an audit takes place and they lack the documentation to demonstrate that taxes were paid. Auditors will also not check to see if sales taxes were paid by the vendor and thus cause a double-tax.

The AICPA has outlined some great tips in how to approach and sales and use tax audit. Some ones that I would like to highlight are:

  1. Document all correspondence with the auditor. It is always good to keep everyone in the loop so there are no surprises. 
  2. Pay close attention to the methodology use to pick the sample. This can have a tremendous amount of bearing on the final numbers.
  3. Keep in contact during the audit to make sure that it is progressing at a reasonable pace. But don't feel obligated to over-disclose information.
  4. Watch out for double taxation between sales tax payments and use tax payments.
Any audit notification has a certain amount of stress involved. But a business owner doesn't need to lose all their cool. That is why you have a good accountant on your management team. Whether internal or external, small business accountants can take some of the pain out of any audit notification.  

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Accounting News

Tuesday, July 3, 2012
IRS Targets Tax Gap

The United States has the highest rate of tax compliance in the world. Last year the IRS estimated people voluntarily report 84% of their income. Compare this to Greece who has a problem with collecting half of the taxes the government estimates that its citizens owe.

While being number one may be a good thing if you are the IRS they missing money is still significant. The remaining 16% is estimated to be worth $450 billion. When you are running a deficit of $1.3 trillion then every dollar counts. But the IRS has a shrinking budget as the expectations for tax compliance rise. So what can we expect going forward.

At the AICPA Practitioners Symposium and TECH+ Conference they discussed ways they see the IRS moving over the next few years. This will impact how tax professionals and accountants help their clients stay in compliance with the law.

One thing the IRS can do is increase the use of technology. by using matching software they can easily identify all the income for individuals and businesses. This should help boost the voluntary disclosure rate as filers know they are being automatically audited based on matching.

As part of improving matching is improving reporting to the IRS. So expect more disclosure legislation for businesses. This will also flow to the amount of detail that must be provided in a tax return.

As Willy Sutton said about robbing banks, "that is where the money is." For the IRS the money is in high income returns. So expect the rates of audits for larger incomes to increase. Some targets they are likely to look at are worker classifications, S corp losses, rental property losses, 1099 compliance, international taxes, and small business filings.

The one thing that would increase compliance would be to simplify the code to prevent honest mistakes. But that will happen only after majority of Congress and the Senate is filled with people willing to put their constituents above politics. That doesn't look likely as far as my crystal ball can see.

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