WASHINGTON, D.C. (JANUARY 26, 2012)
BY MICHAEL COHN, ACCOUNTING TODAY

The Internal Revenue Service warned Thursday that tax refunds could be delayed a week this tax season because of new anti-fraud safeguards.

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“The IRS has opened its filing season successfully this month, and refunds have started going out to many taxpayers,” the agency said in an email to tax professionals on Thursday. “As with the start of any tax season, there are system validations that occur requiring some fine-tuning of our systems. As part of this, some taxpayers will receive refunds approximately one week later than initial projections they may have received, but these are still in line with historical refund delivery times.”

The IRS noted that the one-week delay is related to the fine-tuning of IRS systems to adjust for new safeguards that were put in place this tax season to provide for stronger protection against tax refund fraud.  The agency has come under heavy criticism for the increasing number of identity theft cases related to tax refunds, and it recently added more stringent measures (see IRS Steps up Efforts to Combat Identity Theft).

The IRS said it is providing additional screening for fraud this year before issuing refunds, but the vast majority of taxpayers can still continue to expect to receive their refunds in a timely fashion.

The IRS also noted that the refund time frames provided by the “Where’s My Refund” tool on its Web site are projected time frames and are subject to revision. “Many different factors can affect the timing of the refund after the IRS receives the return for processing,” said the agency. “The IRS apologizes for any inconvenience caused by the revised refund dates.”

When the IRS announced the opening of the 2012 filing season, it advised taxpayers who electronically file and select direct deposit that they could see their refunds in as few as 10 days and 90 percent of refunds are provided within 21 days, the IRS added. Some taxpayers are getting refunds much faster, according to the agency, but at this time taxpayers should expect refunds to be issued as indicated in the original IRS guidelines.

An unplanned outage of the IRS's efile system also apparently led to trouble, according to KION TV's Central Coast News, and visitors to the Where's My Refund tool saw error messages. Agents with Jackson Hewitt and H&R Block have also seen a statement from the IRS about the problem, according to News Channel 7 in the Carolinas. The statement indicated that problems with the IRS's fraud screening and detection process could have an impact on 60 to 70 percent of the returns accepted before 11 am on January 18, and as part of testing on January 10, 11 and 12.

_The following has been taken from IRS Tax Tip 2012-16

Tax Tips for the Self-employed 

There are many benefits that come from being your own boss. If you work for yourself, as an independent contractor, or you carry on a trade or business as a sole proprietor, you are generally considered to be self-employed.

Here are six key points the IRS would like you to know about self-employment and self- employment taxes:

1. Self-employment can include work in addition to your regular full-time business activities, such as part-time work you do at home or in addition to your regular job.

2. If you are self-employed you generally have to pay self-employment tax as well as income tax. Self-employment tax is a Social Security and Medicare tax primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners. You figure self-employment tax using a Form 1040 Schedule SE. Also, you can deduct half of your self-employment tax in figuring your adjusted gross income.

3. You file an IRS Schedule C, Profit or Loss from Business, or C-EZ, Net Profit from Business, with your Form 1040.

4. If you are self-employed you may have to make estimated tax payments. This applies even if you also have a full-time or part-time job and your employer withholds taxes from your wages. Estimated tax is the method used to pay tax on income that is not subject to withholding. If you fail to make quarterly payments you may be penalized for underpayment at the end of the tax year.

5. You can deduct the costs of running your business. These costs are known as business expenses. These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year.

6. To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your field of business. A necessary expense is one that is helpful and appropriate for your business. An expense does not have to be indispensable to be considered necessary.

Many people look for help from professionals when it’s time to file their tax return. If you use a paid tax preparer to file your return this year, the IRS urges you to choose that preparer wisely. Even if a return is prepared by someone else, the taxpayer is legally responsible for what’s on it. So, it’s very important to choose your tax preparer carefully.

This year, the IRS wants to remind taxpayers to use a preparer who will sign the returns they prepare and enter their required Preparer Tax Identification Number (PTIN).

Here are ten tips to keep in mind when choosing a tax return preparer:

1. Check the preparer’s qualifications. New regulations require all paid tax return preparers to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer is affiliated with a professional organization and attends continuing education classes. The IRS is also phasing in a new test requirement to make sure those who are not an enrolled agent, CPA, or attorney have met minimal competency requirements. Those subject to the test will become a Registered Tax Return Preparer once they pass it.

2. Check on the preparer’s history. Check to see if the preparer has a questionable history with the Better Business Bureau and check for any disciplinary actions and licensure status through the state boards of accountancy for certified public accountants; the state bar associations for attorneys; and the IRS Office of Enrollment for enrolled agents.

3. Ask about their service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers.  Also, always make sure any refund due is sent to you or deposited into an account in your name.  Under no circumstances should all or part of your refund be directly deposited into a preparer’s bank account.

4. Ask if they offer electronic filing.  Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return.  More than 1 billion individual tax returns have been safely and securely processed since the debut of electronic filing in 1990.  Make sure your preparer offers IRS e-file.

5. Make sure the tax preparer is accessible.  Make sure you will be able to contact the tax preparer after the return has been filed, even after the April due date, in case questions arise.

6. Provide all records and receipts needed to prepare your return.Reputable preparers will request to see your records and receipts and will ask you multiple questions to determine your total income and your qualifications for expenses, deductions and other items. Do not use a preparer who is willing to electronically file your return before you receive your Form W-2 using your last pay stub. This is against IRS e-file rules.

7. Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.

8. Review the entire return before signing it.  Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.

9. Make sure the preparer signs the form and includes their PTIN.  A paid preparer must sign the return and include their PTIN as required by law. Although the preparer signs the return, you are responsible for the accuracy of every item on your return.  The preparer must also give you a copy of the return.

10. Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 from www.irs.gov or order by mail at 800-TAX-FORM (800-829-3676).

_Copied from IRS TAX TIP 2012-02 Inside 

You are required to file a federal income tax return if your income is above a certain level, which varies depending on your filing status, age and the type of income you receive. However, the Internal Revenue Service reminds taxpayers that some people should file even if they aren't required to because they may get a refund if they had taxes withheld or they may qualify for refundable credits.

To find out if you need to file, check the Individuals section of the IRS website at www.irs.gov or consult the instructions for Form 1040, 1040A or 1040EZ for specific details that may help you determine if you need to file a tax return with the IRS this year. You can also use the Interactive Tax Assistant available on the IRS website. The ITA tool is a tax law resource that takes you through a series of questions and provides you with responses to tax law questions.

Even if you don’t have to file for 2011, here are six reasons why you may want to:

1. Federal Income Tax Withheld You should file to get money back if your employer withheld federal income tax from your pay, you made estimated tax payments, or had a prior year overpayment applied to this year’s tax.

2. Earned Income Tax Credit You may qualify for EITC if you worked, but did not earn a lot of money. EITC is a refundable tax credit; which means you could qualify for a tax refund. To get the credit you must file a return and claim it.

3. Additional Child Tax Credit This refundable credit may be available if you have at least one qualifying child and you did not get the full amount of the Child Tax Credit.

4. American Opportunity Credit Students in their first four years of postsecondary education may qualify for as much as $2,500 through this credit. Forty percent of the credit is refundable so even those who owe no tax can get up to $1,000 of the credit as cash back for each eligible student.

5. Adoption Credit You may be able to claim a refundable tax credit for qualified expenses you paid to adopt an eligible child.

6. Health Coverage Tax Credit Certain individuals who are receiving Trade Adjustment Assistance, Reemployment Trade Adjustment Assistance, Alternative Trade Adjustment Assistance or pension benefit payments from the Pension Benefit Guaranty Corporation, may be eligible for a 2011 Health Coverage Tax Credit.

Eligible individuals can claim a significant portion of their payments made for qualified health insurance premiums.

For more information about filing requirements and your eligibility to receive tax credits, visit www.irs.gov.

by Evie Alvarez
Executive Summary
The IRS has sent out a newswire with tips for year-end giving, which has been posted below in it's entirety. These tips include: special charitable contributions for certain IRA owners, rules for clothing and household items, guidelines for monetary donations, and reminders.

WASHINGTON — Individuals and businesses making contributions to charity should keep in mind several important tax law provisions that have taken effect in recent years. Some of these changes include the following:

Special Charitable Contributions for Certain IRA Owners

This provision, currently scheduled to expire at the end of 2011, offers older owners of individual retirement accounts (IRAs) a different way to give to charity. An IRA owner, age 70½ or over, can directly transfer tax-free up to $100,000 per year to an eligible charity. This option, created in 2006, is available for distributions from IRAs, regardless of whether the owners itemize their deductions. Distributions from employer-sponsored retirement plans, including SIMPLE IRAs and simplified employee pension (SEP) plans, are not eligible.

To qualify, the funds must be contributed directly by the IRA trustee to the eligible charity. Amounts so transferred are not taxable and no deduction is available for the transfer.

Not all charities are eligible. For example, donor-advised funds and supporting organizations are not eligible recipients.

Amounts transferred to a charity from an IRA are counted in determining whether the owner has met the IRA’s required minimum distribution. Where individuals have made nondeductible contributions to their traditional IRAs, a special rule treats transferred amounts as coming first from taxable funds, instead of proportionately from taxable and nontaxable funds, as would be the case with regular distributions. See Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified charitable distributions.

Guidelines for Monetary Donations

To deduct any charitable donation of money, regardless of amount, a taxpayer must have a bank record or a written communication from the charity showing the name of the charity and the date and amount of the contribution. Bank records include canceled checks, bank or credit union statements, and credit card statements. Bank or credit union statements should show the name of the charity, the date, and the amount paid. Credit card statements should show the name of the charity, the date, and the transaction posting date.

Donations of money include those made in cash or by check, electronic funds transfer, credit card and payroll deduction. For payroll deductions, the taxpayer should retain a pay stub, a Form W-2 wage statement or other document furnished by the employer showing the total amount withheld for charity, along with the pledge card showing the name of the charity.

These requirements for the deduction of monetary donations do not change the long-standing requirement that a taxpayer obtain an acknowledgment from a charity for each deductible donation (either money or property) of $250 or more. However, one statement containing all of the required information may meet both requirements.

Reminders

To help taxpayers plan their holiday-season and year-end giving, the IRS offers the following additional reminders:

• Contributions are deductible in the year made. Thus, donations charged to a credit card before the end of 2011 count for 2011. This is true even if the credit card bill isn’t paid until 2012. Also, checks count for 2011 as long as they are mailed in 2011.
• Check that the organization is qualified. Only donations to qualified organizations are tax-deductible. IRS Publication 78, searchable and available online, lists most organizations that are qualified to receive deductible contributions. It can be found at IRS.gov under Search for Charities. In addition, churches, synagogues, temples, mosques and government agencies are eligible to receive deductible donations, even if they are not listed in Publication 78.
• For individuals, only taxpayers who itemize their deductions on Form 1040 Schedule A can claim deductions for charitable contributions. This deduction is not available to individuals who choose the standard deduction, including anyone who files a short form (Form 1040A or 1040EZ). A taxpayer will have a tax savings only if the total itemized deductions (mortgage interest, charitable contributions, state and local taxes, etc.) exceed the standard deduction. Use the 2011 Form 1040 Schedule A to determine whether itemizing is better than claiming the standard deduction.
• For all donations of property, including clothing and household items, get from the charity, if possible, a receipt that includes the name of the charity, date of the contribution, and a reasonably-detailed description of the donated property. If a donation is left at a charity’s unattended drop site, keep a written record of the donation that includes this information, as well as the fair market value of the property at the time of the donation and the method used to determine that value. Additional rules apply for a contribution of $250 or more.
• The deduction for a motor vehicle, boat or airplane donated to charity is usually limited to the gross proceeds from its sale. This rule applies if the claimed value is more than $500. Form 1098-C, or a similar statement, must be provided to the donor by the organization and attached to the donor’s tax return.
• If the amount of a taxpayer’s deduction for all noncash contributions is over $500, a properly-completed Form 8283 must be submitted with the tax return.
• And, as always it’s important to keep good records and receipts

by Evie Alvarez

Business Expenses: Entertainment

We’re going to be posting a series of blogs about common business expenses. Hopefully this will give you an overview of what expenses are deducted from gross receipts in calculating taxable business income.

Executive Summary

Entertainment expenses are an area which the IRS often scrutinizes closely. Therefore, it is important to be able to support your deductions. Generally speaking, expenses to entertain a client, customer, or employee are deductible. There are guidelines regarding how this is defined by the IRS. There is also a list of entertainment expenses which are never deductible.

First Question

For any business expense to be deductible, it must be an ordinary and necessary expense for carrying on a trade or business. There are several types of expenses that will be ordinary and necessary to multiple businesses. Conversely, there are expenses which will be specifically with one type of business. This is the first question to ask when determining whether or not your entertainment expense will qualify for a business deduction.

Tests to be Met

Once you determine that the expense is ordinary and necessary for carrying on your trade or business, the entertainment (any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client) must be directly-related or associated.

To be directly-related it must:

• Take place in a clear business setting OR
• The main purpose of entertainment is the active conduct of business AND
• The taxpayer has more than a general expectation of getting income or some other specific business benefit

To be associated:

• Entertainment is associated with the taxpayer’s business AND
• Entertainment occurs directly before or after a substantial business discussion

No or Limited Deductions

The following expenses have limited deductions or are not allowable deductions:

·         Facility rental

·         Country club dues

·         Cruise ships

·         Luxury sky boxes

·         Hunting lodges

Documentation

Documentation is required. The expense may easily be disallowed if the following documentation is not available:

1.      Itemized bill (must show what has been purchased)
2.      Documentation of what the business purpose was of the meeting.

Amount

Only 50% of the cost is deductible when it comes to meals and entertainment. Keep that in mind!

Business Gifts

This isn't a meal or entertainment expense, but is such a short topic, that we decided to tack it on here. Simply put, your business may deduct gifts to employees, clients, or customers. The cost of the gift cannot exceed $25 per person per year. Incidental costs of wrapping or shipping are not added to the $25 limit. If the cost is $4 or less, it below de minimis, so does not need to be reported. Advertising items are not included as a business gift. So, if you send your clients a magnetic calendar with your business information on it, it is not considered a business gift, but an advertising expense.

Be on the look-out for the next posting about business expenses...

by Evie Alvarez

Executive Summary

Estimated tax payments are made to the Internal Revenue Service on a quarterly basis when insufficient taxes are remitted to the IRS on behalf of a taxpayer through the taxpayer’s employer.

Why do we have estimated tax payments?

The US tax system is set up for taxpayers to pay-as-you-go. Basically, the IRS requires you to pay them throughout the year since there’s a government to fund, after all. Therefore, remittance of tax owed is required throughout the year. If you are an employee, your employer will have you file a form W-4 http://www.irs.gov/pub/irs-pdf/fw4.pdf which indicates to them employer how much of your gross check to withhold and remit to the IRS. If you are a business owner, you will likely have to make estimated tax payments since you don’t have an employer remitting payments on your behalf. (Oh, one of the many joys of owning a business!)

There are times when the amount withheld by an individual’s employer is not enough to cover their total tax liabilities. In this case, a taxpayer will need to make payments directly to the IRS in the form estimated tax payments.

When are estimated tax payments due?

For January 1 – March 31                               April 15

For April 1 – May 31                                      June 15

For June 1 – August 31                                   September 15

For September 1 – December 31                    January 15 (of following year)

How do I know if I have to make estimated tax payments?

If both of the following apply, you are likely to have to make estimated tax payments:

1. You expect to owe at least $1,000 in tax after subtracting your withholding and refundable credits.

2. You expect your withholding and refundable credits to be less than the smaller of:
- 90% of the tax to be shown on your 2011 tax return, or
- 100% of the tax shown on your 2010 tax return (your 2010 tax return must cover all 12 months)

How much do I need to pay?

This part is a bit tricky and is important for you to pay attention to since the IRS says, “If you do not pay enough during any payment period, you may be charged a penalty even if you are due a refund when you file your tax return” (IRS Publication 505, p. 22)

Did you have to pay more than $1,000 in taxes this past year? Is your income-level staying the same or increasing? If your income is increasing, has your withholding also increased? These are some considerations which may lead you to the point of needing to make some estimated tax payments. Everyone’s circumstances are different, so it’s hard to give a clear answer.

Are there special circumstances?

Of course! Farmers and fishermen have some special allowances regarding making payments since their income is more seasonal. If you have specific questions about this, please let us know.

How do I make payments?

In an effort to help you make these payments, the IRS has given you plenty of options!

1. Credit an overpayment on your 1040 from the prior year.

2. Pay by check or money order using the estimated tax payment voucher.

3. Pay electronically at www.irs.gov/e-pay with credit or debit card.

4. Set-up payment through EFTPS https://www.eftps.gov/eftps/ .

Conclusion

Now, I realize that this hasn’t answered all of the questions you may have about estimated tax payments, but I do hope that it will give you enough information to get you started down the right path.

by Evie Alvarez

Executive Summary
This deduction is available to employees and business owners who have a space in their home that is regularly and exclusively used for business. Most expenses will be allotted according the percentage of the home which is used for business. Sole-proprietors and single-member LLCs, will report this as an expense on Schedule C. Employees will report this on Schedule A as an Unreimbursed Employee Expense. For employees, the amount of the deduction is the excess of 2% of gross income.

Eligibility Tests
Regularly and exclusively. Regularly and exclusively. You got that? Great!

Now, what does that mean? Any space in your home for which you are claiming business use of home must be regularly and exclusively used for business.

Let’s work through a few examples together and you can tell me whether it is REGULARLY and EXCLUSIVELY used for business.

- The kitchen table? Not likely. You probably have to push your piles of papers aside in order to fit your plate of pizza on the wood.
- A room set aside as an office? Possibly. If it looks like an office, then it should qualify. If it has a large bed that your mother-in-law sleeps on when she visits (every other weekend), it may be crossing the line when it comes to exclusivity. However, you may still be able to use the area of the room that is exclusively used for business.
- The coffee table in your living room where you sit and type on your laptop? Probably not. Again, that darned exclusivity test!
- The desk in your bedroom which you use to work from home twice a week? Sorry, but no. That’s not regular, so this doesn’t qualify as your principal place of business.

Now, of course, this wouldn’t be the Internal Revenue Code if there weren’t a few exceptions to the rule.

For the exclusivity test, there are exceptions if you use part of your home for storing inventory or product samples, or if you use part of your home as a daycare facility. These exceptions are somewhat beyond the scope of this blog, however.

Claiming the Deduction
Information you’ll need to know in order to claim the deduction:
- Area (square footage) of your home
- Area (square footage) of the space you use regularly and exclusively for business
- Length of time used for business (full- or partial-year)
- Direct Expenses: Those expenses which are only for the business part of the home. Examples include: painting or repairing the business room.
- Indirect Expenses: The expenses for keeping up and running the entire home. Examples include: insurance, utilities, general repairs, etc.

Direct expenses are fully deductible while the deductibility of indirect expenses is figured using the percentage of the home used for business.

Example

Area of office room: 50 square feet
Area of home: 2000 square feet
Percentage used for business: 3%
Cost of painting office: $100
Cost of utilities: $3,000

Deductible amount: $100 + 3% of  $3,000 = $190

There is also an opportunity to take depreciation on your home, if you own your home. Land is never depreciable. Depreciation is a topic for another day, so I’ll just let you know that you can take depreciation on your home if you have qualified business use.

Now, whether you’re an employee or a business owner, the guidelines for claiming Business Use of Home is the same. The difference is where that information then goes onto your return.

Sole-Proprietor or Single-Member LLC

You’ll need to fill out form 8829, which will then flow through your Schedule C as an expense. This amount will either lower your profit or increase your loss, which will then affect your gross income to be taxed. Awesome! Lowered profit = lower taxes.

Employee

This will come through your 1040 Schedule A, Unreimbursed Employee Expenses. Of course, as the name implies, if your employer reimburses you for these expenses, you will not be able to claim them on your tax return. The Schedule A is where you document your itemized deductions. Now, here’s the catch which lowers the overall effect of this deduction on your return. Only the excess of 2% of your gross income is actually deducted to determine your taxable income. (I’m assuming that your overall, itemized deductions are greater than the standard deduction. If the standard deduction is greater, the unreimbursed employee expenses won’t help you.)

So, taking our example from above into consideration, if I had gross income of $9,000, I’d only be able to deduct $10, since 2% of $9,000 is $180 and my overall expense is $190.  If I’m in the 15% tax bracket and only taking into consideration this deduction, my overall tax would change from $1,350 (15% of  $9,000) to $1,348.50 (15% of $8,990). Yep, that’s a whopping buck and a half. But, since we round to the whole dollar…only $1.

You may ask why I chose to use gross income of $9,000. That’s rather low. I totally recognize that and realize the limitations of my example. So, why $9,000? If I chose $10,000, you’d get absolutely no deduction WHATSOEVER. 2% of $10,000 is $200. Only the amount over $200 is deductible and our total was $190.

Now, of course, your circumstances will be different, but this does show you how this generous deduction really flows through to very little effect upon the amount of taxes you actually owe if you are an employee. If you own your own business, the net effect will be greater since you don’t have to worry about it being the excess of 2%.

I hope all of this confusing rambling has helped you come to appreciate the complexities of the tax code! Hopefully, it has also helped to give you some understanding of how your tax is determined so that you can make the most of the deductions available to you.

By Ivan Alvarez, CPA

Many small businesses, specially construction contractors, that require an audit maybe surprised by additional requirements CPA's must comply with when issuing an audit opinion. 

First, it seems that small entities, generally speaking, have much to be desired when it comes to internal controls. Many firms believe that internal controls is something that CPA's "do." This is incorrect. Management is responsible for internal controls. Further, your CPA auditor has to be independent, hence, auditors cannot be involved in the design and implementation of internal controls without losing their independence. Hence, the audit is not going to "fix" your internal control issues. Internal controls should be designed and operating effectively to prevent, detect, and correct a material misstatement before the audit begins. 

What if internal controls are not designed or operating effectively when the audit begins? Well, more than likely, material adjustments will be made by the auditor (see below, material adjustments discovered during an audit are not optional1). If such material adjustments are proposed by the auditor then these proposed adjustments are evidence that a deficiency in internal control exist since internal controls did not prevent, detect, or correct the material amount.  

Okay. A deficiency in internal control exist. So what? The big deal is that in addition to an audit opinion letter, the client (management and those charged with governance) will receive an internal control deficiency letter that must be shared with outsiders relying on the audit opinion. This deficiency letter can affect lenders decision to lend or surety companies from underwriting.

Now, what if you don't require an audit? Well, internal controls, when properly designed should be cost-effective and help your business reduce waste. According to a leading fraud reporting organization, fraud costs the typical organization about 5% of annual revenues. This 5% can be made up of employees doing personal errands on company time, employees padding expense reports with personal expenses, stealing supplies, etc.  

How do you fix internal controls if you have an issue or how do you design internal controls effectively? Well, the best equipped person to help you with is your local Certified Public Accountant or experienced business consultant. You can always try to do this on your own, but  internal controls do require some professional judgement. A CPA should help you prioritize which controls are essential and help you implement the right controls.  

1-If the adjustments proposed are material, the client must accept the adjustment or an alternative adjustment to prevent their financial statements from being "materially misstated." No auditor will sign an audit opinion if the financials are materially misstated.