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Misadventures in Tax - Vol. 12/25/2024 Sade asked "Is it a crime?" When it comes to purposefully evading taxes or obstructing IRS processes - the answer is yes. Misadventures in tax is an ongoing series of blog posts that give real world examples of what not to do when it come to income and payroll tax. Tax planning and tax evasion are two totally different things. Failing to file and/or pay taxes that you owe can land you in prison. The goal of providing these concrete examples of what not to do is to help the small business owner from unknowingly putting their freedom at risk. The owner of a company in Kansas City, MO., who allegedly withheld payroll taxes from their employees and did not turn the withholdings over to the IRS, was indicted on a charge of willfully failing to pay over employment taxes owed to the IRS and faces up to five years in prison if found guilty. A CEO of a corporation in California pleaded guilty to willfully failing to pay employment tax withholdings. This case shows that an individual responsible for turning over withholding taxes can be charged even when the company is a corporation. Cryptocurrency transactions like Bitcoin are not off the radar when it comes to the IRS. A Texas man faces three years in prison after being indicted with filing false tax returns that underreported his sale of bitcoin. Don't get booked for having two sets of books. Having two sets of books is what they got Al Capone for. A woman from Alaska kept two sets of books for her business (one real set and one fake set of books she used for her tax return) and ended up getting indicted with tax evasion and filing false tax returns. There are legal means to minimize tax burden, but actions like the one's above can destroy your business and take away your freedom.
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FinCEN Beneficial Owner Reporting2/19/2024 As a small business owner, you need to understand the Financial Crimes Enforcement Network (FinCEN) beneficial owner reporting requirements. This regulation aims to enhance transparency and combat financial crimes such as money laundering and terrorism financing.
Small businesses are now required to disclose information about their beneficial owners to FinCEN. A beneficial owner is an individual who directly or indirectly owns or controls a significant portion of the business, typically defined as owning 25% or more of the equity or having “substantial control” over the management of the company. The following criteria are used in evaluating if an individual has “Substantial Control” over a company:
Under the new regulation, small businesses must provide the following details for each beneficial owner:
Penalties for non-compliance with FinCEN beneficial owner reporting can vary depending on the severity and duration of the violation. Small businesses may face civil penalties of up to $591 per day for willful violations or negligent failures to report accurate and complete information. Moreover, knowingly providing false or misleading information can lead to criminal penalties, including fines of up to $10,000 and imprisonment for up to two years. It's essential for small business owners to prioritize compliance with FinCEN beneficial owner reporting to avoid these potential penalties and safeguard their businesses' reputation and financial integrity. As a CPA, I recommend taking the following steps to ensure compliance:
The government is taking this requirement very seriously and no small business should procrastinate as the penalties can be substantial. If you are unsure how to accurately report the required information, you can contact our office or some other trusted professional for help.
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Independent Contractor vs. Employee1/15/2024 As a business owner, it’s important to understand that when you hire workers there is a set of criteria that determines if a worker is an independent contractor vs. an employee. If you plan on the person being an independent contractor, then you must make sure they fit the criteria for an independent contractor. The classification matters significantly to the IRS, as it impacts tax obligations, reporting requirements, and potential liabilities. Understanding how the IRS determines this classification and the pitfalls associated with misclassification is crucial for compliance and avoiding costly penalties. The IRS employs a series of factors to differentiate between independent contractors and employees. While no single factor is determinative, the overall relationship between the worker and the business is considered. Here are some key criteria the IRS assesses: 1. Behavioral Control: If the business has the right to control what work is done and how it is performed, the worker is more likely to be classified as an employee. 2. Financial Control: Factors such as who provides tools and supplies, whether the worker can realize a profit or loss, and how payment is structured (hourly wage vs. project-based) are taken into account. 3. Relationship Type: Written contracts indicating the nature of the relationship, benefits provided (such as insurance, vacation pay), and the permanency of the relationship are considered. Misclassification can lead to several pitfalls for businesses. One common pitfall is the failure to withhold and pay employment taxes. Employees' taxes must be withheld from their paychecks for income tax, Social Security, and Medicare. If a worker is misclassified as an independent contractor, the business may be held liable for failing to withhold these taxes, resulting in penalties and interest charges. Moreover, misclassified employees may miss out on important benefits and protections afforded to employees, such as minimum wage, overtime pay, unemployment insurance, and workers' compensation. This could lead to disgruntled workers filing complaints or lawsuits against the business, resulting in legal expenses and reputational damage. A new federal regulation Additionally, misclassification can trigger IRS audits and investigations, leading to back taxes, fines, and penalties. Even unintentional misclassification due to ignorance or misunderstanding of the rules does not absolve businesses of their tax obligations. To mitigate these risks, businesses should carefully evaluate the working relationship with each worker and ensure proper classification based on IRS guidelines. Consulting with legal and tax professionals can provide valuable guidance in navigating these complexities and in keeping up to date with U.S. Department of Labor's guidance on analyzing who is an employee and who is an independent contractor.
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Being Audited by the IRS?10/23/2023 Receiving notice from the IRS that your tax return is being audited can be a daunting experience for any business or individual. However, it's important to approach the situation calmly and strategically to ensure the best possible outcome. As a CPA with experience in handling IRS audits, I've outlined key steps you should take to navigate this process effectively and minimize the potential for an expanded audit scope. Upon receiving the audit notice, carefully review it to understand the specific issues or areas of your tax return that the IRS is questioning. Understanding the scope of the audit will help you prepare relevant documentation and responses. Collect all relevant records, receipts, and documentation related to the items under audit. Having organized and comprehensive records will demonstrate your compliance and help support your position during the audit. If you don’t have experience dealing with IRS and a knowledge of tax laws, It can be risky to deal with the situation without professional help. If an IRS Revenue Officer contacts you regarding the audit, you should be polite but refrain from holding a lengthy conversation as any answers you give may be misinterpreted or you may inadvertently cause an expanded scope of the audit. According to the Taxpayer Bill of Rights, you have the right to retain representation and an IRS Revenue Officer should fully understand your reason in doing so. Reach out to your CPA or tax advisor immediately after receiving the audit notice. They can provide valuable guidance and assistance throughout the audit process, including interpreting the IRS's requests, preparing responses, and representing you during meetings with the IRS. Here are a few reasons why enlisting the services of a CPA with experience in IRS representation can be crucial to producing the most advantageous outcome: 1. Expertise and Experience: Tax professionals have in-depth knowledge of tax laws, regulations, and audit procedures. They understand the nuances of IRS audits and can anticipate potential issues, allowing them to provide strategic guidance tailored to your specific situation. 2. Effective Communication: Professional representatives act as intermediaries between you and the IRS auditor. They can effectively communicate with the IRS on your behalf, ensuring that responses to inquiries are accurate, comprehensive, and timely. This minimizes the risk of misunderstandings or misinterpretations that could escalate the audit. 3. Strategic Advocacy: A skilled tax professional will advocate for your best interests throughout the audit process. They can present your case in the most favorable light, highlighting relevant documentation and legal arguments to support your position and mitigate any potential tax liabilities. 4. Minimize Stress and Time Investment: Dealing with an IRS audit can be time-consuming and emotionally draining. By engaging a professional representative, you can offload the burden of managing the audit process, allowing you to focus on your business or personal priorities with peace of mind. 5. Maximize Tax Savings and Opportunities: Tax professionals are adept at identifying opportunities for tax savings, deductions, and credits that you may have overlooked. They can help you navigate complex tax issues and explore options for minimizing your tax liabilities within the confines of the law. 6. Navigate Complex Situations: In cases where the audit involves complex transactions, international tax issues, or disputes with the IRS, professional representation is invaluable. Tax professionals have the expertise to navigate these intricate situations effectively, ensuring that your rights are protected and the audit is resolved in your favor. 7. Appeals and Resolution: If disagreements arise during the audit process, your representative can guide you through the appeals process and represent your interests in negotiations with the IRS. They have the knowledge and skills to explore alternative dispute resolution methods and pursue the most favorable resolution possible. 8. Long-Term Compliance and Planning: Beyond the audit, professional representation offers long-term benefits for your tax compliance and planning needs. Your tax advisor can help you implement proactive strategies to minimize future audit risks and optimize your tax position for years to come. One last thing, going through an IRS audit is a partnership between the tax advisor and the client. The tax advisor will depend on the client to provide the information they need in a timely fashion. This gives the advisor an opportunity to review any documentation requested by the IRS prior to the IRS deadline. A proper review will allow the tax advisor to provide an analysis of the information to the IRS that provides the best opportunity of minimizing any tax burden.
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Most employees are honest, hardworking individuals that add great value to an organization. Some employees, when given the opportunity, take advantage of their employer in ways that can go undetected until it’s too late. Occupational Fraud is fraud committed by an organization’s employees. According to a report from the Association of Certified Fraud Examiners, a typical case of fraud lasts 12 months and causes a median loss of $117,000. As a certified public accountant with years of experience working with small to medium-sized businesses, I've witnessed firsthand the devastating effects of employee theft on a company's financial health. In today's business landscape, where trust and integrity are paramount, safeguarding your financial assets against internal threats is more critical than ever. In this article, we'll delve into the importance of internal controls and regular financial reviews in preventing employee theft, and how partnering with a CPA can provide your business with the necessary safeguards to protect against embezzlement. The Threat of Employee Theft Employee theft, or embezzlement, occurs when individuals within an organization misappropriate funds or assets for personal gain. While it's an uncomfortable reality to acknowledge, businesses of all sizes are vulnerable to this type of fraud. In fact, according to the Association of Certified Fraud Examiners (ACFE), organizations lose an estimated 5% of their annual revenue to fraud, with smaller businesses being disproportionately affected. The Consequences of Employee Theft The repercussions of employee theft extend far beyond financial losses. They can erode trust among employees, tarnish your business's reputation, and even lead to legal ramifications. Moreover, for small to medium-sized businesses, the impact of embezzlement can be particularly devastating, potentially threatening their very survival. The Role of Internal Controls Internal controls are the policies, procedures, and systems implemented within an organization to safeguard assets, ensure accurate financial reporting, and mitigate the risk of fraud. Establishing robust internal controls is essential for preventing and detecting employee theft. Some key components of effective internal controls include: 1. Segregation of Duties: Assign different responsibilities for financial transactions to multiple employees to create checks and balances and prevent any single individual from having control over an entire process. 2. Authorization and Approval Procedures: Implement clear protocols for authorizing and approving financial transactions, such as purchases, payments, and payroll disbursements, to prevent unauthorized access to funds. 3. Regular Reconciliations: Conduct regular reconciliations of financial accounts, including bank statements, accounts receivable, and accounts payable, to identify discrepancies or irregularities promptly. 4. Physical Security Measures: Secure physical assets, such as cash, inventory, and sensitive documents, with measures such as locks, surveillance cameras, and restricted access to minimize the opportunity for theft. 5. Monitoring and Oversight: Establish monitoring mechanisms, such as internal audits and review procedures, to ensure compliance with internal controls and promptly detect any anomalies or suspicious activities. The Importance of Regular Financial Reviews Regular review of your business's financial records and transactions is another critical aspect of safeguarding against employee theft. By conducting thorough and frequent financial reviews, you can identify potential red flags or irregularities early on and take corrective action before they escalate into significant losses. Additionally, regular financial reviews demonstrate your commitment to transparency and accountability, fostering a culture of integrity within your organization. They typical fraud scheme lasts an average of 12 months because most companies do not perform needed financial reviews until the end of the year. The Value of a Certified Public Accountant Partnering with a CPA can provide your business with invaluable expertise and support in implementing and maintaining effective internal controls. A CPA brings a deep understanding of financial systems and regulations, along with experience in fraud detection and prevention strategies. They can conduct comprehensive risk assessments, tailor internal control measures to your business's specific needs, and provide ongoing monitoring and oversight to mitigate the risk of employee theft. Conclusion In conclusion, safeguarding your business's financial assets from employee theft requires a proactive approach centered around robust internal controls and regular financial reviews. By implementing sound internal control measures, conducting thorough financial reviews, and partnering with a certified public accountant, you can protect your business from the devastating impact of embezzlement and ensure its long-term financial health and success. Remember, prevention is key—investing in safeguarding measures today can save your business from costly losses tomorrow.
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Preparing for a Financial Audit10/9/2023 Some non-profit organizations, and for-profit organizations that receive government service contracts, have a requirement to produce audited financial statements. Even when it’s not a requirement, non-profit organizations can get value from an audited set of financial statements when applying for grant funding and other contributions. As a Certified Public Accountant (CPA) specializing in financial audits, I understand the importance of thorough preparation before commencing the audit process. Preparing adequately not only ensures the accuracy and integrity of your financial statements but also contributes to a smoother audit experience and potentially saves your company valuable time and resources. Here is a list of steps your organization should take before seeking the services of a CPA for auditing your financial statements: 1. Organize Financial Records: Ensure that all financial records, including balance sheets, income statements, cash flow statements, and supporting documents, are organized and readily accessible. This streamlines the audit process and minimizes delays. 2. Reconcile Accounts: Conduct thorough reconciliations of all accounts, including bank accounts, accounts receivable, and accounts payable. Resolving any discrepancies beforehand reduces the need for extensive adjustments during the audit. 3. Document Procedures: Document internal controls, accounting policies, and procedures followed by your organization. Clear documentation provides transparency and helps auditors understand your financial processes, leading to a more efficient audit. 4. Address Significant Transactions: Identify and address any significant transactions or events that occurred during the financial reporting period. This includes acquisitions, disposals, restructuring, or changes in accounting principles. Properly disclosing these transactions ensures compliance with accounting standards and facilitates audit procedures. 5. Perform Internal Reviews: Conduct internal reviews or preliminary assessments of your financial statements to identify any errors or irregularities. Rectifying issues proactively mitigates the risk of audit findings and associated penalties. 6. Allocate Sufficient Resources: Allocate adequate resources, including personnel and technology, to support the audit process. Providing auditors with timely access to information and resources expedites the audit and minimizes disruptions to your operations. In a small organization with a small staff, it is important to make time to respond to auditor queries. 7. Plan Ahead: Plan ahead and schedule the audit well in advance to avoid last-minute rushes and conflicts. Early planning allows ample time for preparation, review, and resolution of potential issues, reducing stress and minimizing audit fees. By following these steps, your organization can streamline the audit process, enhance audit quality, and potentially reduce audit fees. Here is a link to a guide for small non-profits preparing for a financial audit published by The Virginia Society of CPAs, It contains good information related to preparing for an audit. As a CPA, I am committed to partnering with your company to ensure a successful audit experience and uphold the integrity of your financial reporting.
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When it comes to tax resolution services, individuals facing back tax problems often find themselves bombarded with advertisements from national firms that heavily market their services on television. While these firms may promise quick solutions and flashy results, there are compelling reasons why opting for a local CPA is a more wise choice. If you have federal tax issues, typically you will also have state and local tax issues. Local professionals will have a deeper understanding of the unique tax laws and regulations specific to their region. Tax codes can vary significantly from state to state. A local CPA or attorney who is intimately familiar with the intricacies of the local tax landscape can navigate these complexities with precision, ensuring that their clients receive the most advantageous outcomes possible. Furthermore, local professionals offer a personalized approach to tax resolution. Unlike large national firms that often treat clients as mere numbers in a system, local CPAs and attorneys take the time to understand the individual circumstances of each client. They offer tailored solutions that are designed to address the specific needs and goals of their clients, rather than applying cookie-cutter approaches that may overlook important details. Another key advantage of working with a local professional is accessibility and responsiveness. Clients who choose a local CPA or attorney can rest assured that they will have direct access to their advisor whenever they have questions or concerns. In contrast, clients of national firms may find themselves lost in a sea of bureaucracy, struggling to reach a real person who can provide timely assistance. Moreover, local professionals often have established relationships within the community, including connections with local tax authorities and other relevant stakeholders. These relationships can prove invaluable when negotiating with tax agencies or advocating on behalf of clients. A local CPA or attorney is accountable to a state licensing board and has more skin in the game when it comes to satisfying a client. In my opinion, choosing a local CPA or attorney is the superior option for handling back tax problems. By leveraging their expertise, personalized approach, and accessibility, , local professionals can provide clients with the high-quality representation they need to navigate the complexities of tax resolution successfully. As with most things these days, it's crucial to remain vigilant when seeking tax resolution assistance. The Internal Revenue Service (IRS) and other governmental agencies warn against falling victim to tax scams, particularly those promoted by unscrupulous firms promising unrealistic results. To learn more about how to avoid tax scams and protect yourself from fraudulent schemes, read the following article by the New York Society of CPAs About Tax Debt Settlement ‘Mills.’ Stay informed and make informed decisions when seeking assistance with back tax problems.
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Why should a profitable single member LLC elect S-Corporation Tax Status? One of the core values a certified public accountant can provide is the exploration of strategies that can optimize a company’s tax position. If you own a single member LLC that is making a profit, one of those strategies is to elect S-Corporation status and yield significant tax benefits. When a single member LLC elects to be taxed as an S Corporation, it changes the way it reports income and pays taxes to the IRS. Instead of the traditional LLC tax structure where all profits are subject to self-employment taxes, S Corporation status allows business owners to split income into salary and distributions, potentially reducing self-employment taxes. Here are some key tax benefits of electing S Corporation status: 1. Self-Employment Tax Savings: One of the primary advantages is the potential for substantial self-employment tax savings. By taking a reasonable salary as an employee of the S Corporation and distributing the remaining profits as dividends, business owners can avoid paying self-employment taxes (Social Security and Medicare taxes) on the distribution portion of income. 2. Pass-Through Taxation: Like an LLC, an S Corporation is a pass-through entity, meaning business profits and losses flow through to the owners' personal tax returns. This can potentially reduce the overall tax burden compared to the standard corporate tax structure. 3. Flexibility in Income Distribution: S Corporation status allows for flexibility in distributing income. As owner you must take a reasonable salary per IRS rules, but you can receive additional profits as distributions, which are not subject to self-employment taxes. 4. Tax Deductions and Benefits: With S-Corporation tax status, your business can take advantage of additional tax deductions and benefits, such as health insurance premiums, retirement plan contributions, and certain fringe benefits, which can further reduce taxable income. Electing S-Corp status and filing an S-Corporation tax return does require a little more paperwork, but it can be well worth it in the tax savings that are achieved. This article is specific to single member LLCs. Multi-member LLCs have a few more things to consider. There is an October 2022 article from the Tax Adviser that touches upon reasons why some LLCs should not elect to be S Corporations. Do your research and then talk to a tax professional about what is best for you and your business. |