From an IRS audit prospective, this means that the door will be open to analyze data much further to determine where they may be able to effectively find compliance problems (aka get more money from you). If they have the electronic accounting file, they can review the audit trail to see if anything was changed after the transaction was originally entered. They can tell how often you update your records. They can also see all deleted transactions. The problem is that they can start asking a lot of questions that are really out of the scope of what may have originally selected your returns for audit.

Here is the Q&A from the IRS on requests for electronic software records. http://www.irs.gov/businesses/small/article/0,,id=238525,00.html

Check out Question #6 from the IRS:

Q6. How will the electronic data be used?
A: Most accounting software programs can generate a large number of pre-set reports. Each report can be modified to fit the examiner’s needs. When working with these reports, the examiner can “drill down” to the underlying data and documents to further investigate items, as appropriate. The software also allows the examiner to test the integrity and veracity of the accounting records in making a determination as to the reliability of the records for examination purposes. However, the examiner may still need to request other documents when such records are necessary to properly test a return item or issue.

Wow I really think this will help speed the audit along and I especially like the “further investigate items, as appropriate.” That sounds so fun!

How about Question #12 from the IRS:

Q12. The accounting software backup file can contain transactional data for several years that are outside the scope of the audit. What, if anything, will the IRS do with that information?
A: If IRS is given a backup file that includes data for years not under examination, IRS will not utilize that data during the examination of the current year. If based on the results from the current year examination a decision is made to expand the scope of the! examination to prior or subsequent years, the taxpayer will be notified. The records may be utilized after that notification.

So they probably won’t expand the scope of most audits, right (Sarcasm)?

For most clients that we see, their Quickbooks file does not contain all of the transactions necessary to complete their tax return until we clean the file and enter adjusting entries. Many Quickbooks files we see have significant problems like negative accounts receivables, large balances in their undeposited funds account, and negative accounts payable entries. If the IRS gets their claws into these types of files, I foresee that they will be digging much further and causing a lot more time and money to be spent because audits will last longer and require more documentation and research.

So what is a business owner to do to protect from this unnecessary evil? Here are a few items to consider:

1. Business owners should stop and think about their own skills. Are their books and records really something they would want to turn over to the IRS in their current condition?
2. Most business owners are trying to use Quickbooks to manage their check book or maybe their receivables. If so, let’s talk about other solutions that may even be more effective. There are receivables-only solutions that can help more effectively collect money and expedite the collections.
3. Is this really an effective use of the business owner’s time?

Our firm offers solutions to remove the burden of bookkeeping from the owner and allow them to concentrate on making money and growing their business. We use professional accounting software systems that are not compatible with the IRS electronic accounting systems. The records will be accurate from the start and good planning for taxes can occur all throughout the year. We generally can assist owners with this process and show them how they can save more money than it costs to have this service.

Let us show you how it can be a win-win situation for you and if you are the lucky recipient of an IRS audit notice, we can make the process much smoother and less costly than letting the IRS dig aimlessly!

Privilege license fees range from $50 to $10,000 and the fees are based on revenue from the prior year and the classification of the business. The license runs from July 1 through June 30 each year. Renewals were sent to all license holders within the past two weeks. If you did not receive a renewal, you may wish to contact the City-County Tax Collectors office to find out why.

View or Print the License Application
View the Classification Codes for Privilege Licenses

For more information, please visit the Mecklenburg county website.

First, get information on both scenarios to determine what the prices will be for both scenarios. Don’t forget to get the residual value on the lease. Then, you can determine the internal interest rate on the lease and determine which scenario is a better value for your dollar. You should also consider how many miles you will put on the vehicle. If you may go over the mileage allowance, you are probably better off purchasing the vehicle.

If you own a business and the business is the buyer or lessor of the vehicle, you will probably end up paying higher insurance rates for commercial vehicles and higher registration and property taxes. It usually works out better for the individual to purchase the vehicle and have the business reimburse the individual by the mile at the standard mileage rate. The only real exceptions to this is if you plan to purchase a Hummer or gas guzzling vehicle where actual expenses are preferable to the standard mileage rate. The rate for 2011 is 51 cents per mile.

If you still are not sure, we can perform a detailed analysis of lease vs. purchase based on the details of each deal that you provide to us. Let us know if we can help with this.

Our internal best practice has been filing this receipts in an accordion file by month. I don’t think It is necessary to spend too much time filing these receipts but just being able to locate them if asked by the IRS should be the goal. Another problem with our current technology has arisen though. Most receipts are now printed on thermal paper. If you have ever looked at one of these receipts a year or two later, they fade away and become a blank slip of paper. Therefore, I recommend that these receipts be periodically scanned to preserve the information. Otherwise, by the time the IRS gets around to asking for them, they may have turned into magical disappearing ink and the IRS may disallow the deduction.

I recommend all business owners invest in a sheet feed scanner and even consider going paperless to save time and have a reliable source of data for audit and record keeping. Fujitsu makes a great line of ScanSnap scanners and Neat Receipts has some great portable scanners also. Go ahead and bypass the flat bed scanners and move up to sheet feed scanners. You will thank me later!

We also have a new product for simplifying home and offices with paperless technology. Let us know if you would like more information on how we can protect your data in a paperless environment and help streamline your life!

Mileage Tracking Apps

The primary inquiries fall into three categories. Who has financial control of the job? Who can exercise control over how the worker performs the specific task? And how do the parties themselves view the relationship? When reviewing the checklist, keep in mind that the IRS will make its decision based on the whole picture, not just a single factor.

Workers are more likely to be classified as independent contractors if they:

• Make a significant investment in business property (a home computer is not significant);
• Pay their own business expenses;
• Receive a flat fee that is not based on an hourly or similar rate;
• Are not prohibited from doing work for other companies;
• Can pay subcontractors to get the job done;
• Are not performing services as an integral part of your regular business;
• Have a contract with an enforceable liquidated damages provision;
• Can make a profit;
• Can suffer a loss.

Workers are more likely to be classified as employees if they:

• Are given specific instructions and on-going training in how to get the work done;
• Cannot work for others;
• Have expenses paid by your company;
• Are paid with a salary or hourly wage;
• Do not have a significant investment in their trade or business;
• Are an integral part of your regular business;
• Receive direct reimbursement for all, or almost all, expenses;

Less important is:

• Whether or not the work is performed on the business’s premises;
• Whether the worker has flexibility in setting hours;
• Whether the relationship is temporary or short-term;
• Whether the work is full- or part-time;
• Whether the worker performs services for one or more businesses.

If you suspect from this list that there might be a problem, we would be happy to come in and do an audit of your hiring practices and suggest effective solutions if necessary.

Various types of Forms 1099 must be provided to certain type of payees by January 31, and to the IRS by February 28. Here’s a rundown of some of the more common payments that may require an information return.

• Payments of $600 or more to contractors or other services providers (other than corporations) must be reported to the recipient and to the IRS on Form 1099-MISC.
• Payments to attorneys for business-related services must be reported to the attorney and to the IRS. These payments must be reported on Form 1099-MISC regardless of the amount and regardless of whether the attorney is incorporated or not.
• Rents totaling more than $600 paid to an individual landlord, partnership, or estate (but not rents paid to a corporation) must be reported on Form 1099-MISC. (However, rents paid to a real estate agent are generally not required to be reported.)

These forms must be mailed to the recipient by January 31 and to the IRS by February 28.

Bear in mind that the penalties for failure to comply with these information-reporting requirements can be stiff. For example, you can be hit with a penalty as high as $100 for each return that is filed incorrectly or is not filed on time and deductions on tax returns may be disallowed in audits.

Group Term Life Insurance
The value of company-provided group term life insurance in excess of $50,000 must be included in the employee’s income and is subject only to FICA and Medicare withholding. The value of includable compensation is calculated according to the following table:

UNIFORM PREMIUMS FOR $1,000 OF
GROUP-TERM LIFE INSURANCE PROTECTION
———————————————————–
5-year Cost per $1,000
Age Bracket for one month
———————————————————–
Under 25 $0.05
25 to 29 .06
30 to 34 .08
35 to 39 .09
40 to 44 .10
45 to 49 .15
50 to 54 .23
55 to 59 .43
60 to 64 .66
65 to 69 1.27
70 and above 2.06

For 2% shareholders, the entire amount of premiums paid must be included as income on the shareholder’s W-2, subject to federal income tax withholding, but exempt from FICA, Medicare and FUTA.

Personal Use of Auto
When providing an employee (including shareholder/employees in corporations) the use of a company-provided vehicle, a value representing the personal portion of usage of the vehicle must be included in the employee’s W-2 income. The value computed must be included in the employee’s W-2 as wages and is taxable for federal income tax, FICA, Medicare and FUTA. Although FICA and Medicare withholding is required, federal withholding is not required if notice was provided to the employee of the Company’s decision not to withhold by January 31st.

There is no rigid set of rules for measuring the reasonableness of compensation. No definition of “reasonable” is contained in the Code; the regulations provide only that reasonable compensation is an amount paid for like service by like enterprise under like circumstances. Court cases have shown, however, that each situation must be resolved based on its unique facts and circumstances. Some Tax Court decisions have focused on the following five factors:

1. the character and financial condition of the corporation;
2. the role the shareholder plays in the corporation, including the employee’s position, hours worked, and duties performed;
3. the corporation’s compensation policy for all employees and the shareholder’s individual salary history including the corporation’s internal consistency in establishing the shareholder’s salary;
4. how the compensation compares with similarly situated employees of similar companies; and
5. whether a hypothetical independent investor would conclude that there is an adequate return on investment after considering the shareholder’s compensation.

In these and other cases, the courts have also considered additional factors in deciding whether the amount of compensation is reasonable, including:
1. the employee’s qualifications;
2. the size and complexity of the business;
3. a comparison of salaries paid to sales and net income;
4. general economic conditions;
5. comparison of salaries to shareholder distributions and retained earnings;
6. compensation paid in prior years;
7. the corporation’s dividend history;
8. whether the employee and employer dealt at arms’ length; and
9. whether the employee guaranteed the employer’s debt.

The court decisions confirm that no single factor controls, but rather a combination of the factors must be considered. Furthermore, these factors are not all-inclusive (and may not be given equal weight). Fewer or additional factors may be appropriate, depending on the surrounding facts and circumstances.

Eligibility Rules
• Providing health care coverage. A qualifying employer must cover at least 50 percent of the cost of health care coverage for some of its workers based on the single rate.
• Firm size. A qualifying employer must have less than the equivalent of 25 full-time workers (for example, an employer with fewer than 50 half-time workers may be eligible).
• Average annual wage. A qualifying employer must pay average annual wages below $50,000.
• Both taxable (for profit) and tax-exempt firms qualify.

Amount of Credit
• Maximum Amount. The credit is worth up to 35 percent of a small business’ premium costs in 2010. On Jan. 1, 2014, this rate increases to 50 percent (35 percent for tax-exempt employers).
• Phase-out. The credit phases out gradually for firms with average wages between $25,000 and $50,000 and for firms with the equivalent of between 10 and 25 full-time workers.

Three Simple Steps for Employers to Qualify
To determine if your small business or tax exempt organization qualifies for the Small Business Health Care Tax Credit, follow the three simple steps on the IRS fact sheet (see next page)

http://www.irs.gov/newsroom/article/0,,id=220809,00.html INSTRUCTIONS

http://www.irs.gov/pub/irs-news/health_care_postcard_notice.pdf SAMPLE POSTCARD

The maximum credit is 35 percent of premiums paid in 2010 by eligible small business employers and 25 percent of premiums paid by eligible employers that are tax-exempt organizations.
In 2014, this maximum credit increases to 50 percent of premiums paid by eligible small business employers and 35 percent of premiums paid by eligible employers that are tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with the 2010 income tax return they file in 2011. For tax-exempt employers, the IRS will provide further information on how to claim the credit.

http://www.irs.gov/pub/irs-utl/3_simple_steps.pdf 3 STEP WORKSHEET