Warren Averett O’Sullivan Creel publishes a monthly newsletter that highlights current tax and accounting news, which includes topics ranging from tax legislation updates to tax savings tips. Continue reading for a glimpse into this month's highlighted article topics.
Did you know…
- There are many “red flags” that might cause a tax return to be audited. For example, the IRS is on the lookout for taxpayers claiming large travel and entertainment deductions or home office deductions.
- Distributions and other payments by an S corporation to a corporate officer must be treated as wages to the extent the amounts are reasonable compensation for services rendered to the corporation.
- The Department of Labor has implemented new regulations that will enable pension plan fiduciaries to determine both the reasonableness of compensation paid to the service providers and any conflicts of interest that may impact a service provider’s performance under a service contract or arrangement.
- The government-sponsored initiative titled Home Affordable Refinance Program (HARP) has been extended through December 31, 2013. This program is designed to bail out homeowners with Fannie Mae or Freddie Max-owned loans who want to refinance their loans but the balance is higher than the market value of the property.
- If the Bush tax cuts are not extended this year, then we will only have a $1 million unifier estate and gift tax exemption (versus $5.12 million under the current rules) and a maximum estate and gift tax rate of 55 percent (versus 35 percent under the current rules). In addition, the valuable portable exemption privilege would become history.
- If your customers don’t pay their bills, you may be able to deduct a bad business debt in the year it becomes worthless – if you’ve tried everything to collect.
- Any charitable contribution amount that is posted in your credit card bill in December is deductible on your current year return – even if you don’t actually pay off the charge until later.
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Uncertainty Grows Over Fate of Bush-Era Tax Cuts
As this year’s tax season comes to a close, we are already looking ahead to the fate of the Bush-era tax cuts set to expire after 2012. Every day, the likelihood of this decision not being made until after the November elections increases. In addition, the uncertainty grows for the many taxpayers who face tax planning for 2013 and beyond. I ran across a great CCH Tax Briefing that discusses several tax topics that will be impacted by the end-of-year sunsets of the 2001 and 2003 tax cuts and benefits.
The 11-page Briefing, available via this post, focuses on a variety of tax topics which include:
- Income tax rates for individuals
- Capital gains tax rates
- Alternative Minimum Tax (AMT) -Relief expired at the end of 2011
- Child and dependent care tax credits
- Education-related tax incentives
- Estate and gift taxes; and more.
The two year Bush-era tax cut extension is drawing to a close and decisions must be made whether to extend the tax cuts any further, but a longer-term extension comes with a high price tag. According to the Congressional Budget Office, the extension of the “Bush-era” tax cuts would coast approximately $2.84 trillion over the next 10 years.
Click here to read more about the tax topics that will be impacted by the end-of-year sunsets. If you have any questions or wish to discuss a particular topic in more detail, contact me at Lori.Kelley@warrenaverett.com or call 850.837.0398.
Timeliness and preparedness can make a difference
On
e word that can make taxpayers cringe is “audit.” Fortunately, chances are slim that you’ll experience an audit: In 2010, the IRS audited just over 1% of returns. However, certain triggers can boost the likelihood that your return is among those targeted.
Red flags
There are several red flags that can trigger an audit. Your return may be selected because the IRS received information from a third party — say, the W-2 submitted by your employer — that differs from the information reported on your return.
In addition, the IRS scores all returns through its Discriminant Inventory Function System (DIF). A higher DIF score may increase your audit chances. While the formula for determining a DIF score is a well-guarded IRS secret, it’s generally understood that certain things are more likely to increase the likelihood of an audit, such as a traditionally cash-oriented business, tax shelters or a home office deduction.
Bear in mind, though, that no single item listed will cause an audit. Indeed, a relatively low percentage of returns are examined. One of the biggest factors in determining the likelihood of an audit, in fact, is your income. For instance, according to IRS statistics, if your adjusted gross income topped $1 million, your return had an 8.4% chance of being audited in 2010.
Finally, some returns are chosen as part of the IRS’s National Research Program. Through this program, the IRS studies returns to improve and update its audit selection techniques.
The audit process
Should your return be chosen for an audit, it helps to know what to expect and implement a few steps that can smooth the process.
Nearly three-quarters of audits are correspondence audits and are completed via mail. The IRS may ask for documentation on, for instance, your income or your purchase or sale of a piece of real estate. (Be aware that the IRS won’t contact you via e-mail for an initial appointment. Contact related to being selected for an audit will be made via telephone or mail only, according to the IRS.)
In-person audits may take place at an IRS office, your home or place of business, or at the offices of your CPA, attorney or tax preparer. If the proposed time and date are inconvenient, you can ask to reschedule. But the IRS has final say over when, where and how the exam will take place.
If you receive an audit notice, read it carefully. Most will indicate the items to be examined, as well as a deadline for responding. A timely response conveys that you’re organized, and thus less likely to overlook important details. It also indicates that you didn’t need to spend time pulling together a story.
Before responding to the notice, however, confer with your CPA or tax professional. He or she can calm any jitters and help you prepare your response. If the exam will take place in person, he or she can accompany you — or even appear in your place if you provide authorization.
If you’re going to meet in person, ask what documents the auditor is expecting, and what questions will be discussed. Of course, you’ll want to prepare this information and bring copies (not originals) of all that’s requested. You generally don’t want to bring more to an audit than what’s been requested, as it may prompt more questions. If an auditor asks about something that you didn’t prepare for, simply say that you’ll follow up.
Similarly, answer any questions honestly, but don’t volunteer extraneous information that might lead to more inquiries.
Finally, mind your manners by being polite. While you don’t need to become friends with the auditor, a cordial relationship can help the process go more smoothly.
Ease the process
Being organized, timely and professional can reduce the stress of an audit. In addition, bringing in your CPA can mean spending less in the long run, as he or she can help you navigate the process.
Questions to Ask About Retirement Plans, Reviewing Goals and Significant Tax Impacts
So, when was the last time you “paid yourself first”? Reviewed your goals and made changes to get where you want to go?
Did you know that there are new formulas in retirement plans that allow owners or key employees to receive larger contributions than other employees?
Did you know that you can fund IRA’s even though you may already participate in a 401k plan at work?
Did you know that you can convert your home that won’t sell into rental/business property which allows you to deduct more expense and take a loss on the sale?
Did you know that there are events in life that may have a significant tax impact? Whether it’s a marriage or a divorce, a new career or bankruptcy, check out this IRS link that explains the tax impact of significant life events.
I want to help you reach your goals. I’ve found that when my clients and I can meet to discuss their particular situation, we find answers and the best communications occurs. So, feel free to contact me at Ilona.Borish@warrenaverett.com or 850.435.7400 if you have any questions or wish to discuss a particular topic is more detail. Hope to hear from you soon!
How Estate Planning Can Protect You and Your Family
Many people believe “estate planning” is only for the wealthy. Nothing could be further from the truth. Neglecting to prepare a will or other estate planning documents can cause serious problems for loved ones. This article lists six estate planning documents and how they can help ensure that the author’s wishes are carried out in regard to such matters as asset distribution and end-of-life issues.
A 2011 survey by EZLaw indicates that only 44% of Americans have prepared a will or other estate planning documents. What the other 56% may not realize is that neglecting to prepare these documents can cause serious problems for their loved ones.
To avoid an undesirable outcome, prepare these documents:
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Will. This legal document arranges for the distribution of your property after you die and allows you to designate a guardian for minor children or other dependents. The will should name the personal representative who’ll be responsible for overseeing your estate as it goes through probate. (Probate is the court-supervised process of paying any debts and taxes and distributing your property after you die.) To be valid, a will must meet the legal requirements in your state.
If you die without a will (that is, “intestate”), the state will appoint an administrator to determine, based on the laws in your state, how to distribute your property. The administrator also will decide who will assume guardianship of any minor children or other dependents, if applicable. Bottom line? Your assets may be distributed — and your dependents provided for — in ways that differ from what you would have wanted.
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Living trust. Probate can be time-consuming, expensive and public. So you may prefer to avoid it. A living trust can help. It’s a legal entity to which you, as the grantor, transfer title to your property. During your life, you can act as the trustee, maintaining control over the property in the trust. On your death, a person (such as a family member or trusted advisor) or institution (such as a bank or trust company) you’ve named as the successor trustee distributes the trust assets to the beneficiaries you’ve named. Assets held in a living trust avoid probate.
Having a living trust doesn’t eliminate the need for a will, however. For example, you can’t name a guardian for minor children or other dependents in a trust. And a “pour over” will is a good idea. It directs that assets you own outside the living trust be transferred to the trust on your death. Another benefit of a living trust is that the successor trustee can also take over management of the trust assets should you become incapacitated.
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Letter of instruction. This can complement, but not replace, your will and living trust. It should provide vital information that your loved ones will need soon after your death. For example, you can include your desires for your memorial service, as well as the contact information for your employer, accountant, and any other important advisors. The letter isn’t a legal document.
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Durable power of attorney for property. This allows you to appoint someone to act on your behalf on financial matters should you become incapacitated.
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Durable power of attorney for health care. Also called a “health care proxy,” this covers medical decisions and takes effect if you become incapacitated. The person to whom you’ve transferred this power — your health care agent — can make medical decisions on your behalf.
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Living will or medical directive. This document outlines the conditions under which you’d want life support equipment removed or other specified life-prolonging medical treatments not to be given. It generally goes into effect only if you’re incapacitated and you’ve been certified by two physicians to be permanently unconscious or terminally ill.
Also remember to review the beneficiary designation forms on any insurance policies, as well as your 401(k) plans and IRAs, to be certain that the money will go where you want it to go.
Estate planning issues are complicated. To help ensure your estate planning documents will achieve your goals, consult your tax and financial advisors as well as a lawyer. The former can help you assess the tax and financial implications of your decisions. And, while you’re not required to use a lawyer to draw up your estate planning documents, a legal professional can make sure all documents are properly drafted.
Would you like additional information about estate planning? Contact me at Jody.Henderson@warrenaverett.com or 850.244.5121 if you have any questions or wish to discuss a particular topic in more detail.
Warren Averett O’Sullivan Creel is proud to announce the 3rd Annual 45 Eglin Professional Centre 5K Run in Fort Walton Beach, Fla. The family-friendly 5K run, sponsored by Warren Averett O’Sullivan Creel, Waldorff Insurance & Bonding, and Merrill Lynch Wealth Management, is open to local area businesses, individuals and their families. All proceeds will benefit Horizons of Okaloosa County.
Date: Friday, April 27th @ 4 p.m.
Check-In: 3:00 p.m. at registration desk
Location: 45 Eglin Professional Centre, located at 45 Eglin Pkwy, N.E.
Registration fee: $25 adults / $15 kids
To register, visit the Warren Averett O'Sullivan Creel website for an entry form, call (850) 244-5121, or e-mail Stacie.Derosa@warrenaverett.com.
Evaluating the Difference Between Enterprise Goodwill and Personal Goodwill
One of the most difficult aspects of a divorce in Florida is determining if goodwill associated with a business is marital property. Goodwill or “Blue Sky” is an intangible asset associated with a business enterprise. Assuming there are no other intangible assets related to a business, goodwill is the difference between the Fair Market Value and the value of its assets and liabilities. There are various approaches and methods to determine those amounts, which are too detailed to discuss in this blog.
Once that amount is determined, in Florida it is necessary to determine how much of that amount is enterprise goodwill (which is a marital asset) and how much is personal goodwill (which is not). This has been true in Florida for over 20 years.
The first rulings were pretty narrow, addressing the goodwill of doctors and other professionals who practiced alone. Over the years the application has been expanded to all businesses (the defining case in 2008 involved a trapeze business).
Generally speaking, if the ability to sell a business is dependent upon the seller’s willingness to sign a non-competition agreement, it will be hard to prove the existence of enterprise goodwill. One well known source has gone so far as saying “…enterprise goodwill as an element of marital property is dead.”
I don't believe it's that definitive. The larger the company and the more owners there are, the more likelyhood enterprise goodwill does exist. In any event, if you are faced with a situation where goodwill is an issue, hire an experienced business valuator who can assist you and your divorce attorney in the evaluation of your particular situation.
Would you like additional information about goodwill and how it can affect your business? Contact me at Marvin.Beasley@warrenaverett.com or 850-435-7400 if you have any questions or wish to discuss a particular topic in more detail.
Which Report is Right for You?
Statement on Standards for Attestation Engagements Number 16 (SSAE 16) has been effective for almost a year now. SSAE 16 replaced Statement on Auditing Standard Number 70 (SAS 70) and provides guidance on auditing the controls in place at a service organization. For example, an employee leasing company provides a service to their customers in the form of leased employees and payroll. When these customers have their financial statements audited, the auditor is responsible for documenting the controls. SSAE 16 provides this assurance by examining, documenting and testing the internal controls within the service organization and accumulating these into a single report that can be provided to the customers of the service organization.
SSAE 16 provides three types of reports, SOC 1, SOC 2, and SOC 3. There appears to be a lot of confusion and possible misinterpretation of which one is needed for a particular organization.
- The SOC 1 report is a report on controls at a service organization relevant to user entities’ internal control over financial reporting.
- The SOC 2 report is a report on controls at a service organization relevant to non-financial controls.
- Similar to a SOC 2 report, the SOC 3 report is also in relation to non-financial controls; however, it is for more general use and can be provided to third parties with the AICPA SOC 3 seal that indicates an opinion that the service organization maintains effective controls over its systems. The SOC 3 report does not include the description of the system nor does it contain information on testing.
Careful consideration of the intended use of the SOC reporting is necessary to determining which one is right for you. For example, a data center is a prime example of an organization that should get a SOC 2, however, we are seeing many examples of these types of organizations getting and promoting the SOC 1 report.
One of our business partners, Jon Long of Compliance Point, is very knowledgeable on this topic and is becoming recognized nationally as an expert in the proper use of the SSAE 16 reports. I urge you to check out his blog at http://riskassuranceguy.blogspot.com.
As always, we are here to assist you in all of your SOC reporting needs. If you would like additional information about SSAE 16 and SOC reporting, contact me at Kevin.Bowyer@warrenaverett.com or (850) 837-0398.
April 1st E-Verify Deadline Approaches
Even though political officials continue to debate Alabama's Immigration law, there is still an upcoming deadline of April 1, 2012 for all Alabama businesses to register with the E-Verify system. All new employees hired on or after April 1st must be verified through this system.
On January 1 of this year, businesses with any Alabama city or state contracts were required to register with the E-verify system and verify the immigration status of all new hires. Effective April 1, the requirement will apply to all companies, regardless of size, operating in the state, although it may have a more significant impact on some construction firms.
The free internet-based E-Verify system is operated by the Department of Homeland Security, and is designed to help employers verify that their workers are eligible to legally work in the U.S. in as little as five seconds. It serves as a supplement to the traditional I-9 Employment eligibility form, but does not replace it.
According to the law, companies that fail to fully comply with the law may be banned from obtaining state or municipal contracts or working with other contractors that work for the state. Business licenses could also be suspended. Companies looking to enroll in E-Verify, that have not done so, can visit https://e-verify.uscis.gov/enroll. Companies can also call 1-855-VERIFY-6. To use the system, companies will also need an employer identification number, also known as a federal tax identification number. Businesses can obtain one by visiting http://www.irs.gov/businesses/small/article/0,,id=97860,00.html or calling 1-800-829-4933 during IRS business hours.
Please contact us if you have any questions about this law and how it could affect you or your business.
Preventing Bad Credit Scores and Fraud
During unsettling economic times, you may find debt piling up faster than you think. Just a few late payments can significantly hurt your credit score. And, even if you’re keeping up with your payments, you face another credit rating risk: increasing vulnerability to credit card fraud and identity theft simply by having your account numbers in circulation more.
1) Knowing the score
Your credit score represents your creditworthiness and risk as determined by the credit bureaus. A poor score is typically anything under about 620; an excellent rating generally is a score of 720 or higher.
A poor score can result in creditors charging higher interest rates, imposing greater restrictions on loan amounts or even denying you the opportunity for loans altogether. When calculating a credit score, the bureaus typically review information pertaining to opening and closing of credit card and loan accounts, payment history, legal judgments, bankruptcy filings and tax liens.
2) Reporting for duty
Protecting your credit rating begins with requesting copies of your credit report annually. Make sure you get a report from all three major credit-reporting agencies: Equifax (http://www.equifax.com), Experian (http://www.experian.com) and TransUnion (http://www.transunion.com).
The Fair and Accurate Credit Transactions Act allows you to obtain one copy free of charge from each agency annually. You can order them online through the authorized central website: http://www.annualcreditreport.com. Consider spacing out report requests every four months (rather than requesting them all at once), so you’re aware of any changes to your credit history throughout the year.
Note that your credit score won’t be included in your free credit reports. Generally, you must pay the credit-reporting agencies a fee to obtain your score.
3) Catching any culprits
When you receive a credit report, review it carefully. Start by verifying your personal identification information. Creditors may make errors when entering your information for a credit or loan application.
Next, look for any inaccuracies or information that could drag down your credit score. To correct discrepancies, provide supporting documentation and a letter of explanation to all three credit-rating agencies.
4) Covering all the bases
Habitually reviewing your monthly credit card statements can help you catch errors and fraudulent activity, including identity theft, before it hurts your credit score. If you’re billed for credit card charges you didn’t make, dispute the charge within 60 days to limit the potential for it to adversely affect your credit rating.
If you believe your identity has been compromised, promptly call the credit card company to explain the situation, stop authorization of future charges on the account and request that they issue you a new account number and card.
Then submit required forms — available through the Federal Trade Commission (ftc.gov) — via certified mail to report the theft and close the unauthorized account. Request a return receipt and letter from the credit card company acknowledging the fraudulent claim and stating that the company has closed the account and relinquished you from the fraudulent debt. Keep the letter as proof of the creditor card company’s action. (The preceding steps aren’t legally required but are highly recommended by the FTC.) Also report the theft to local law enforcement and obtain a copy of the police report.
Last, contact one of the three major credit bureaus. Request that the agency put a fraud alert on your credit file to require creditors to contact you before opening any new accounts in your name or making changes to your existing accounts. The agency you contact will then notify the other two agencies to place fraud alerts on your credit file.
5) Threatening everyone
A bad credit rating, whether due to delinquent payments, credit card fraud or all-out identity theft, is a threat to everyone. If you’ve gotten lax in monitoring your credit reports and credit rating, make it a renewed priority this year. Although you may eventually be able to improve your credit score and recover amounts lost to fraud, the immediate hit to your cash flow could create inconveniences and stress that you probably don’t need right now.
Would you like additional information about preventing bad credit or improving your personal credit? Contact me at Judd.Jackson@warrenaverett.com or 850.837.0398 if you have any questions or wish to discuss a particular topic in more detail.