Regardless of which gridiron gladiators we support for the BCS championship, Americans are #1 in another competition. That’s right, Americans cheat their government out of more tax dollars than the citizens of any other country in the world!

A recent study by the Tax Justice Network, a British think-tank dedicated to transparency in international finance, shows the U.S. government lost $337 billion annually to tax evasion. We’re followed by Brazil ($280 billion), Italy ($238 billion), Russia, Germany, France, Japan, China, U.K., and Spain. Overall, the study finds that worldwide tax evasion tops $3 trillion, or 5% of the world’s economy.

However, while Americans are #1 in absolute dollars lost to cheating, we’re not actually the biggest fibbers. The report attempts to quantify the size of each country’s “shadow economy” that hides from official view to avoid tax. Russia is the biggest loser here, with 44% of its Gross Domestic Product (GDP) lurking underground and evading tax. Brazil is next, with 39% of its economy hiding in the shadows. Our own shadow economy, at 8.6% of GDP, is actually the smallest of those top ten tax evaders listed above.

Looking at it from a different perspective, next to the cost of financing government, the cost of financing health care is perhaps our country’s biggest fiscal challenge. The Tax Justice Network’s report draws an interesting contrast between each country’s cost of tax cheating and cost of health care. Worldwide tax evasion costs an average of 55% of worldwide health care costs. But that average encompasses an enormous range. Here in the U.S., for example, tax evasion drains the equivalent of just 15% of our national health care budget. By contrast, in Bolivia, where the “shadow economy” accounts for 66% of GDP, tax evasion costs that nation more than four times the amount of their annual health care spending.

American tax cheats may even show a conscientious side. The Charities Aid Foundation, a British organization dedicated to encouraging efficient charitable giving, just released their World Giving Index 2011 report. They found that the U.S. is #1 in charitable giving, out of 153 countries surveyed. “Using data from Gallup’s Worldview World Poll,” the report says, “the results show that the USA is officially the most charitable nation in the world.” Now there’s something we can all take pride in this holiday season!

The irony here is that there are so many legal ways to pay less tax that nobody needs to cheat. Proactive planning is the key to paying less tax without having to hide in the shadows. As 2012 dawns, remember that we’re here to deliver that planning — for you, and for your family, friends, and colleagues as well.

Typically, these benefits apply to you, your spouse, or a dependent you claim as an exemption on your tax return:

1. American Opportunity Credit – This credit has been extended for an additional two years: 2011 and 2012. The credit is valued at up to $2,500 per eligible student and is available for the first four years of post-secondary education. Forty percent of this credit is refundable in most cases. This means that you may be able to receive a tax refund from the government of up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies, and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 if married filing jointly).

2. Lifetime Learning Credit – In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled at an eligible educational institution. There is no limit on the number of years you can claim the Lifetime Learning Credit for an eligible student, so graduate-level and professional degree courses qualify, but to claim the credit, your modified adjusted gross income must be below $61,000 ($122,000 if married filing jointly). The $2,000 cap applies per return, not per student.

3. Tuition and Fees Deduction – This deduction can reduce the amount of your income subject to tax by up to $4,000 for 2011 even if you do not itemize your deductions. Generally, you can claim a tuition and fees deduction of up to $2,000 for qualified higher education expenses for an eligible student if your modified adjusted gross income is below $80,000 ($160,000 if married filing jointly). The deduction can be as much as $4,000 if your modified AGI is under $65,000 ($80,000 if married filing jointly).

4. Student loan interest deduction – Generally, personal interest you pay, other than certain mortgage interest, is not deductible. However, if your modified adjusted gross income is less than $75,000 ($150,000 if married filing jointly), you may be able to deduct interest paid during the year on a qualified student loan used for higher education regardless of when you obtained the loan. It can reduce the amount of your income subject to tax by up to $2,500, even if you don’t itemize deductions.

For each student, you can choose to claim only one of the credits in a single tax year. However, if you pay college expenses for two or more students in the same year, you can choose to claim credits on a per-student, per-year basis. You can claim the American Opportunity Credit for your sophomore daughter and the Lifetime Learning Credit for your senior son.

Remember that the education credits are claimed by the individual who claims the exemption for the student, not necessarily the person who pays the tuition. Also, the tuition expenses qualifying for the education credits can be pre-paid for the first three months of the subsequent year if you have not paid enough to take advantage of the full credit in 2011.

You cannot claim the tuition and fees deduction in the same year that you claim the American Opportunity Credit or the Lifetime Learning Credit for the same student. You must choose to take either the credit or the deduction and should consider which is more beneficial for you.

Our Charlotte CPA firm has recently announced the addition of the Coach4College planning service. We utilize your information to provide you with a personalized plan on how to take advantage of all funding sources, make the right tax decisions, and reduce the overall cost of education. If you have questions or would like to schedule an appointment to discuss how best to finance and pay for education expenses and maximize tax benefits, please give us a call.

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!

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!

For more information, you can visit the NC Department of Revenue website.

In a move aimed at sparking job growth, a South Carolina House panel is considering a measure that would provide a tax credit to angel investors who invest in the State. While the details of the two versions of the bill (H.3044 or H.3270) are still being debated, it has several goals that it hopes to accomplish. Among those are encouraging individual investors to invest in early stage, high growth, job-creating businesses in South Carolina and enlarging the number of high quality jobs within the State.

While the details of the bill are still being debated, both of the current versions of the act limit the credit to $100,000 per individual. In addition, the credit is nonrefundable – meaning that the credit can not exceed the individuals total income tax liability. And unused credit amount is allowed to be carried forward for ten years from the taxable year in which the qualified investment was made.

One important detail is that in order for an angel investor to qualify for the proposed credit, they must file an application for the credit by December 31st of the year in which the qualified investment was made. This is means that the investor can not wait to file this with his/her tax return which isn’t due until April 15th of the following year.

Also, in order to receive the credit, the investors application must be approved by the Department of Revenue. They will look at the type of investment, the qualifications of the investor and several other factors detailed in the act to determine if the investor qualifies. The aggregate amount of all of the credits allowed to all taxpayers can not a specified amount (one version of the bill says $3 million, and the other version says $6 million). If the total amount of approved applications exceeds that specified, then investors will only receive a portion of their credit – so that the total calculates to whatever the maximum amount is.

When asked about the act, our local Representative from SC House District 47, South Carolina Representative Tommy Pope, said “Hopefully this and similar measures will create an environment in our state that will draw the investment capital needed to re-start our local economy. At a minimum, these measures are needed to keep us competitive with our border states. Some decry the tax break for the “angel” investor but unfortunately the reality is they will put their money where they can get the best return, and we sorely need such investments.”

Almost half the states, including neighboring North Carolina, already have similar credits in place (N. C. Gen. Stat § 105-163. 010). Passage of a similar act in South Carolina could be one more thing that the state must do to lure investment dollars into the State. North Carolina allows for a credit equal to 25% of the investment, just as is considered in South Carolina, but it has a maximum of $50,000 per investor per year and only allows for a 5 year carry-forward.

The Act defines an angel investor in the same manner that the US Securities and Exchange Commission defines one – an individual with a net worth of more than $1 million, or who makes at least $200,000 a year personally or $300,000 as a couple.

Keep in mind that this Act is still not law. Lawmakers must agree on a version of the bill and it must be signed by Governor Haley.

Read more:

GSA Business – Investors hope angel credits gain wings

SC bill would give tax breaks to wealthy investors

State Angel Investor Tax Credit Programs – Summary from the State of Connecticut’s Website

While the repeal of the heath care bill as a whole failed to pass yesterday (all the Democrats voted against the repeal/all Republicans voted for repeal), a separate amendment to the bill (S.AMDT.9) passed easily with an 81-17 margin.

The primary purpose to this amendment was to repeal the portion of the bill that expanded the 1099 reporting requirements to a level that would have easily crippled many businesses – especially hitting smaller businesses hard. Generally speaking, without the repeal, the current 1099 rules would have expanded to include payments made to corporations and payments made for tangible goods. Think of all of the Corporations that you deal with on a daily basis – like Wal-mart, Staple’s, Harris Teeter (or other grocer). All of these would have required a 1099 if you paid them more than $600 in the year. There are also a lot of details that I won’t go into because now that it is repealed, it is a mute point. Just be happy as a small business owner that you don’t have to do this! It would have been really expensive and/or time consuming to administer.

I can’t imagine why any Senator would vote against the repeal of this provision in its current state. It is over reaching and cumbersome. It would have been nearly impossible for the average business to fully conform to the law. It would have been a nightmare to enforce. And at the end of the day, it accomplished nothing in its current state. There would have been tons of double reporting and the numbers reported to the IRS would mean less than the ones they get now. Nonetheless, these 17 Senators voted against the repeal:

Akaka (D-HI)

Carper (D-DE)

Durbin (D-IL)

Franken (D-MN)

Gillibrand (D-NY)

Harkin (D-IA)

Inouye (D-HI)

Lautenberg (D-NJ)

Leahy (D-VT)

Levin (D-MI)

Mikulski (D-MD)

Murray (D-WA)

Reed (D-RI)

Reid (D-NV)

Sanders (I-VT)

Schumer (D-NY)

Whitehouse (D-RI)

As far as the Health Care Act as a whole, many Senators, including South Carolina’s own Lindsey Graham, have vowed to continue their fight to repeal the bill – in whole or in part. Along with Senator John Barrasso of Wyoming, Senator Graham introduced The State Health Care Choice Act that would allow states to ‘opt-out’ of Obamacare. This is far from passage and as you might imagine it will be a long and hard fight before there is closure on the Obamacare issue.

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.