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IRS Audit Techniques Guides provide clues to what may come up if your business is audited

Tax Prep, Planning & Strategy|May 7, 2018

IRS examiners use Audit Techniques Guides (ATGs) to prepare for audits — and so can small business owners. Many ATGs target specific industries, such as construction. Others address issues that frequently arise in audits, such as executive compensation and fringe benefits. These publications can provide valuable insights into issues that might surface if your business is audited.

What do ATGs cover?

The IRS compiles information obtained from past examinations of taxpayers and publishes its findings in ATGs. Typically, these publications explain:

• The nature of the industry or issue,

• Accounting methods commonly used in an industry,

• Relevant audit examination techniques,

• Common and industry-specific compliance issues,

• Business practices,

• Industry terminology, and

• Sample interview questions.

By using a specific ATG, an examiner may, for example, 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 taxpayer resides.

What do ATGs advise?

ATGs cover the types of documentation IRS examiners should request from taxpayers and what relevant information might be uncovered during a tour of the business premises. These guides are intended in part to help examiners identify potential sources of income that could otherwise slip through the cracks.

Other issues that ATGs might instruct examiners to inquire about include:

• Internal controls (or lack of controls),

• The sources of funds used to start the business,

• A list of suppliers and vendors,

• The availability of business records,

• Names of individual(s) responsible for maintaining business records,

• Nature of business operations (for example, hours and days open),

• Names and responsibilities of employees,

• Names of individual(s) with control over inventory, and

• Personal expenses paid with business funds.

For example, one ATG focuses specifically on cash-intensive businesses, such as auto repair shops, check-cashing operations, gas stations, liquor stores, restaurants and bars, and salons. It highlights the importance of reviewing cash receipts and cash register tapes for these types of businesses.

Cash-intensive businesses may be tempted to underreport their cash receipts, but franchised operations may have internal controls in place to deter such “skimming.” For instance, a franchisee may be required to purchase products or goods from the franchisor, which provides a paper trail that can be used to verify sales records.

Likewise, for gas stations, examiners must check the methods of determining income, rebates and other incentives. Restaurants and bars should be asked about net profits compared to the industry average, spillage, pouring averages and tipping.

Avoiding red flags

Although ATGs were created to enhance IRS examiner proficiency, they also can help small businesses ensure they aren’t engaging in practices that could raise red flags with the IRS. To access the complete list of ATGs, visit the IRS website. And for more information on the IRS red flags that may be relevant to your business, contact us.

Beware IRD if you’ve received an inheritance

Tax Prep, Planning & Strategy|April 26, 2018

Most people are genuinely appreciative of inheritances. But sometimes it may be too good to be true. While inherited property is typically tax-free to the recipient, this isn’t the case with an asset that’s considered income in respect of a decedent (IRD). If you inherit previously untaxed property, such as an IRA or other retirement account, the resulting IRD can produce significant income tax liability.

IRD explained

IRD is income that the deceased was entitled to, but hadn’t yet received, at the time of his or her death. It’s included in the deceased’s estate for estate tax purposes, but not reported on his or her final income tax return, which includes only income received before death.

To ensure that this income doesn’t escape taxation, the tax code provides for it to be taxed when it’s distributed to the deceased’s beneficiaries. Also, IRD retains the character it would have had in the deceased’s hands. For example, if the income would have been long-term capital gain to the deceased, it’s taxed as such to the beneficiary.

IRD can come from various sources, such as unpaid salary and distributions from traditional IRAs. In addition, IRD results from deferred compensation benefits and accrued but unpaid interest, dividends and rent.

What recipients can do

If you inherit IRD property, you may be able to minimize the tax impact by taking advantage of the IRD income tax deduction. This frequently overlooked write-off allows you to offset a portion of your IRD with any estate taxes paid by the deceased’s estate that was attributable to IRD assets.

You can deduct this amount on Schedule A of your federal income tax return as a miscellaneous itemized deduction. But unlike many other deductions in that category, the IRD deduction isn’t subject to the 2%-of-adjusted-gross-income floor. Therefore, it hasn’t been suspended by the Tax Cuts and Jobs Act.

Keep in mind that the IRD deduction reduces, but doesn’t eliminate, IRD. And if the value of the deceased’s estate isn’t subject to estate tax — because it falls within the estate tax exemption amount ($11.18 million for 2018), for example — there’s no deduction at all.

Calculating the deduction can be complex, especially when there are multiple IRD assets and beneficiaries. Basically, the estate tax attributable to a particular asset is determined by calculating the difference between the tax actually paid by the deceased’s estate and the tax it would have paid had that asset’s net value been excluded.

Be prepared

IRD property can result in an unpleasant tax surprise. We can help you identify IRD assets and determine their tax implications.

Accounting for pledges isn’t as simple as it might seem

Tax Prep, Planning & Strategy|April 26, 2018

When a donor promises to make a contribution at a later date, your not-for-profit likely welcomes it. But such pledges can come with complicated accounting issues.

Conditional vs. unconditional

Let’s say a donor makes a pledge in April 2018 to contribute $10,000 in January 2019. You generally will create a pledge receivable and recognize the revenue for the April 2018 financial period. When the payment is received in January 2019, you’ll apply it to the receivable. No new revenue will result in January because the revenue already was recorded.

Of course, you can’t recognize the revenue unless the donor has made a firm commitment and the pledge is unconditional. Several factors might indicate an unconditional pledge. For example:

• The promise includes a fixed payment schedule.

• The promise includes words such as “pledge,” “binding” and “agree.”

• The amount of the promise can be determined.

Conditional promises, on the other hand, could include a requirement that your organization complete a particular project before receiving the contribution or that you send a representative to an event to receive the check in person. Matching pledges are conditional until the matching requirement is satisfied, and bequests are conditional until after the donor’s death.

You generally shouldn’t recognize revenue on conditional promises until the conditions have been met. Your accounting department will require written documentation to support a pledge before recording it, such as a signed agreement that clearly details all of the terms of the pledge, including the amount and timing.

Applying discounts

Pledges must be recognized at their present value, as opposed to the amount you expect to receive in the future. For a pledge that you’ll receive within a year, you can recognize the pledged amount as the present value. If the pledge will be received further in the future, though, your accounting department will need to calculate present value by applying a discount rate to the amount you expect to receive.

The discount rate is usually the market interest rate, or the interest rate a bank would charge you to borrow the amount of the pledge. Additional entries will be required to remove the discount as time elapses.

Word of caution

Proper accounting for pledge receivables can be tricky. But if you don’t record them in the right financial period, you could run into audit issues and even put your funding in jeopardy. Contact us for help.

Medicare and Medicaid Scams – What you need to know

Tax Prep, Planning & Strategy|April 25, 2018

The Centers for Medicare and Medicaid Services is issuing new Medicare cards to seniors, with random letters instead of Social Security numbers.

The Social Security numbers are being removed from the cards as a security precaution to prevent fraud. But true to form, scammers are exploiting the switch over in an attempt to defraud seniors.

AARP reports scammers are calling up Medicare recipients and pretending to be representatives from the government’s healthcare program. The caller tells the victim that they need personal identifiers – including Social Security numbers and bank account information – to facilitate the switch to a new card.

According to AARP, here is some of the misinformation scammers are telling seniors: You must pay for your new Medicare card now or else you’ll lose your Medicare benefits Medicare is updating its files and needs your bank and credit-card numbers Medicare is confirming your Social Security number before you can receive your new card Medicare needs your bank information to send you a refund on your old card.

Many unaware of the new cards

None of these things are true. However, some seniors might fall for them because an AARP survey shows that 75 percent of seniors are unaware that new Medicare cards are being issued.

The survey shows other information gaps – 60 percent of seniors think they must pay for the new Medicare cards and half said they wouldn’t question a phone call from someone claiming to be a Medicare rep.

Representatives of Medicare do not call consumers. The Coalition Against Insurance Fraud says seniors should just hang up on any caller claiming to be from Medicare. In actuality, they’re crooks trying to scam you.

Medicare will actually send you an alert when your new card is in the mail. You can sign up for the alert here.

Once your new card arrives, destroy your old one; don’t just toss it in the trash. It contains your Social Security number and can be used to steal your identity.

Tax document retention guidelines for small businesses

Tax Prep, Planning & Strategy|April 23, 2018

You may have breathed a sigh of relief after filing your 2017 income tax return (or requesting an extension). But if your office is strewn with reams of paper consisting of years’ worth of tax returns, receipts, canceled checks and other financial records (or your computer desktop is filled with a multitude of digital tax-related files), you probably want to get rid of what you can. Follow these retention guidelines as you clean up.

General rules

Retain records that support items shown on your tax return at least until the statute of limitations runs out — generally three years from the due date of the return or the date you filed, whichever is later. That means you can now potentially throw out records for the 2014 tax year if you filed the return for that year by the regular filing deadline. But some records should be kept longer.

For example, there’s no statute of limitations if you fail to file a tax return or file a fraudulent one. So you’ll generally want to keep copies of your returns themselves permanently, so you can show that you did file a legitimate return.

Also bear in mind that, if you understate your adjusted gross income by more than 25%, the statute of limitations period is six years.

Some specifics for businesses

Records substantiating costs and deductions associated with business property are necessary to determine the basis and any gain or loss when the property is sold. According to IRS guidelines, you should keep these for as long as you own the property, plus seven years.

The IRS recommends keeping employee records for three years after an employee has been terminated. In addition, you should maintain records that support employee earnings for at least four years. (This timeframe generally will cover varying state and federal requirements.) Also keep employment tax records for four years from the date the tax was due or the date it was paid, whichever is longer.

For travel and transportation expenses supported by mileage logs and other receipts, keep supporting documents for the three-year statute of limitations period.

Regulations for sales tax returns vary by state. Check the rules for the states where you file sales tax returns. Retention periods typically range from three to six years.

When in doubt, don’t throw it out

It’s easy to accumulate a mountain of paperwork (physical or digital) from years of filing tax returns. If you’re unsure whether you should retain a document, a good rule of thumb is to hold on to it for at least six years or, for property-related records, at least seven years after you dispose of the property. But, again, you should keep tax returns themselves permanently, and other rules or guidelines might apply in certain situations. Please contact us with any questions.

4 estate planning techniques for blended families

Tax Prep, Planning & Strategy|April 19, 2018

Today, it’s not unusual for a family to include children from prior marriages. These “blended” families can create estate planning complications that may lead to challenges in the courts after your death.

Fortunately, you can reduce the chances of family squabbles by using estate planning techniques designed to preserve wealth for your heirs in the manner you want, with a minimum of estate tax erosion, if any. Here are four examples:

1. Will. Your will generally determines who gets what, when, where and how. It may be combined with “inter vivos trusts” established during your lifetime or be used to create testamentary trusts, or both. While you can include a few tweaks for your blended family through a codicil to the will, if the intended changes are substantive — such as removing an ex-spouse and adding a new spouse — you should meet with your estate planning attorney to have a new will prepared.

2. Living trust. The problem with a will is that it has to pass through probate. In some states, this can be a costly and time-consuming process. Alternatively, you might transfer assets to a living trust and designate members of your blended family as beneficiaries. Unlike with a will, these assets are exempt from probate. With a revocable living trust, the most common version, you retain the right to change beneficiaries and distribution amounts. Typically, a living trust is viewed as a supplement to — not a replacement for — a basic will.

3. Prenuptial agreement. Generally, a “prenup” executed before marriage defines which assets are characterized as the separate property of one spouse or community property of both spouses upon divorce or death. As such, prenuptial agreements are often used to preserve wealth for the children of a first marriage before an individual enters into a second union. It may also include other directives, such as estate tax elections, that would occur if the marriage dissolved. Be sure to investigate state law concerning the validity of your prenup.

4. Marital trust. This type of a trust can be customized to meet the needs of blended families. It can provide income for the surviving spouse and preserve the principal for the deceased spouse’s designated beneficiaries, who may be the children of prior relationships. If certain tax elections are made, estate tax that is due at the first death can be postponed until the death of the surviving spouse.

These are just four estate planning strategies that could prove helpful for blended families. You might use others, or variations on these themes, for your personal situation. Consult with us to develop a comprehensive plan.

Should your nonprofit have an advisory board?

Accounting & Assurance|April 19, 2018

Your not-for-profit is likely governed by a core group of board members. But the addition of an informal advisory board can bring complementary — and valuable — skills and resources to this group.

Review representation

Look at your general board members’ demographics and collective profile. Does it lack representation from certain groups — particularly relative to the communities that your organization serves? An advisory board offers an opportunity to add diversity to your leadership. Also consider the skills current board members bring to the table. If your board lacks extensive fundraising or grant writing experience, for example, an advisory board can help fill gaps.

Adding advisory board members can also open the door to funding opportunities. If, for example, your nonprofit is considering expanding its geographic presence, it makes sense to find an advisory board member from outside your current area. That person might be connected with business leaders and be able to introduce board members to appropriate people in his or her community.

Waive commitment

The advisory role is a great way to get people involved who can’t necessarily make the time commitment that a regular board position would require. The advisory role also may appeal to recently retired individuals or stay-at-home parents wanting to get involved with a nonprofit on a limited basis.

This also can be an ideal way to “test out” potential board members. If a spot opens on your current board and some of your advisory board members are interested in making a bigger commitment, you’ll have a ready pool of informed individuals from which to choose.

Be candid

Advisory board members likely will be present at board meetings, so it’s important to explain to them the role they’ll play. Advisory board members aren’t involved in the governance of your organization and can’t introduce motions or vote on them.

How you use your advisory board members is up to you. Use them as much, or as little, as you need; just make sure they understand limits to their authority. Contact us for more information.

IRS Extends Filing and Payment Deadline until midnight Wednesday, April 18th

Tax Prep, Planning & Strategy|April 18, 2018

The IRS’s Modernized e-File and Direct Pay systems were not in operation for most of the day on Tuesday, which was the deadline for individual taxpayers to file their 2017 tax returns. As a result, the IRS extended the filing and payment deadline until midnight on Wednesday, April 18.

Direct Pay allows taxpayers to securely pay taxes directly from their bank account. However, on Tuesday, taxpayers who attempted to make a payment were greeted with a message that said, “This service is temporarily unavailable. We are working to resolve the issue.” The Modernized e-File system had a similar message: “The MeF System is currently down. We are working on this as a priority.”

Both systems were back up and running at approximately 5 p.m. EDT on Tuesday.

Earlier during the day, the IRS website cautioned: “Note that your tax payment is due although IRS Direct Pay may not be available.” Taxpayers were directed to a page listing other payment options.

However, on Tuesday evening, the IRS extended the payment and filing deadlines. Taxpayers do not need to do anything to receive the extra time, the IRS said.

The IRS reports that last year, more than 5 million tax returns were filed on the deadline day.

Acting IRS Commissioner David Kautter apologized in a prepared statement: “The IRS apologizes for the inconvenience this system issue caused for taxpayers. The IRS appreciates everyone’s patience during this period.”

Blockchain may soon drive business worldwide

Tax Prep, Planning & Strategy|April 12, 2018

“Blockchain” may sound like something that goes on a vehicle’s tires in icy weather or that perhaps is part of that vehicle’s engine. Indeed it is a type of technology that may help drive business worldwide at some point soon — but digitally, not physically. No matter what your industry, now’s a good time to start learning about blockchain.

Secure structure

Blockchain is sometimes also called “distributed ledger technology.” It was introduced in 2009 to support digital “cryptocurrencies” such as bitcoin. Entries in each digital ledger are stored in blocks, with each block containing a timestamp and providing a link to the previous block.

Typically, a blockchain is managed on a secure peer-to-peer network with protocols for validating blocks. Once data is recorded, no one can change it without altering all other blocks — which requires approval by most network participants. Blockchain proponents argue that this process essentially authenticates all information entered.

Various uses

The financial industry led the way in recognizing blockchain’s potential, foreseeing that users could execute transactions without relying on banks and other third parties. Another potential application is in the M&A sphere. Buyers and sellers could shift due diligence documentation to blockchain, so financial and legal advisors wouldn’t have to spend as much time poring over so many different and disparate records. The M&A process could thereby be completed more quickly.

There are also many industries that could employ blockchain technology to conduct quicker and more secure transactions or simply track data more efficiently.

Take manufacturers, as well as virtually any supply chain business: Blockchain could provide safeguards against errors, fraud or tampering. This functionality could bolster trust among supply chain partners. Over the long run, blockchain may even eliminate the need for third-party payment processors.

Another example: the health care industry. Blockchain could be used to better secure electronic health information, improve billing and claims processing, and enhance the integrity of the prescription drug supply chain. All of this could positively impact the health care insurance market for every employer.

Ahead of the curve

Most business owners don’t need to scramble to incorporate blockchain-related technology right this minute. But you might want to get ahead of the curve by learning more about it now and pondering some ways that blockchain could affect your company. Let us know if you need further information or other ideas on the future of business.

4 steps to boosting positive PR for your nonprofit

Accounting & Assurance|April 11, 2018

For most not-for-profits, there’s no such thing as too much good publicity. If you’re struggling to get enough attention from media outlets, follow these steps:

1. Seize the day. Raise your nonprofit’s profile by putting out news releases regularly rather than just occasionally. A variety of events, such as the addition of a key staff member, an operational milestone, a new grant you’ve received or the kick-off of a fundraising campaign, can warrant a press release.

2. Target the right media. Go beyond simply sending out news releases and become familiar with potential media targets. Focus on outlets that are most likely to use your press releases — for example, local newspapers that have a section devoted to community news. Get to know assignment editors, their key sections and special features, target audiences, and publication and broadcast schedules. By taking the time, you can pinpoint the most suitable outlets for your news.

3. Time your news. When it comes to good publicity, timing can be everything. You might increase your odds of coverage by submitting requests at the start of a new publication cycle. Another tactic is to host an event or release an important announcement on a typically slow news day. For example, daily newspapers and local television stations may be particularly receptive to requests for coverage on Sundays.

4. Make it local. Providing a local angle on an issue of national importance will increase your appeal to the media. Whenever possible, offer an expert source from your organization who can talk knowledgeably about the local impact of a national story. By positioning yourself and your organization as an authority and noting trends and other interesting items, you can grab the attention of reporters and editors.

Getting your nonprofit in the news in a positive way broadens its exposure, enhances its credibility and enables you to spread the word about your mission to potential donors — all free of charge. It just takes a little strategic planning on your part.

IRS Audit Techniques Guides provide clues to what may come up if your business is audited

Beware IRD if you’ve received an inheritance

Accounting for pledges isn’t as simple as it might seem

Medicare and Medicaid Scams – What you need to know

Tax document retention guidelines for small businesses

4 estate planning techniques for blended families

Should your nonprofit have an advisory board?

IRS Extends Filing and Payment Deadline until midnight Wednesday, April 18th

Blockchain may soon drive business worldwide

4 steps to boosting positive PR for your nonprofit

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