Beware of the Dirty Dozen Tax Scams
This time of year is not only tax filing time, but also the time of year that tax scams are rampant. You will often hear or read about ways you can obtain lost refunds or keep from paying any income taxes at all. Don’t believe everything you hear or read!
Each year, the IRS releases a “Dirty Dozen” ranking of tax scams. This past week the IRS released the following Dirty Dozen Tax Scams for 2012:
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Identify Theft – The IRS is increasingly seeing identity thieves looking for ways to use a legitimate taxpayer’s identity and personal information to file a tax return and claim a fraudulent refund. An IRS notice informing a taxpayer that more than one return was filed in the taxpayer’s name or that the taxpayer received wages from an unknown employer may be the first tip off the individual receives that he or she has been victimized. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit. For more information, visit the special identity theft page at www.IRS.gov/identitytheft.
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Phishing—This is carried out via unsolicited e-mails or fake websites that lure you into providing your personal and financial information. These e-mails will usually ask for your personal information, such as date of birth, social security number and bank account numbers. Keep in mind that IRS will not e-mail you. If they need to contact you they will send you a letter.
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Return Preparer Fraud—Unfortunately there are some return preparers who are unscrupulous and they will try to skim off part of your tax refund or encourage you to use false information on your return so you will obtain a larger refund. For more information, visit Tips for Choosing a Tax Preparer on the IRS website.
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Hiding Income Offshore—Some individuals have evaded U.S. income taxes by hiding income offshore or using foreign trusts and then not fulfilling the reporting requirements for assets held offshore. There are significant penalties for not filing the proper reports and the possibility of criminal prosecution.
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“Free Money” from the IRS & Tax Scams Involving Social Security—Be suspicious of advertisements, flyers and “friends” suggesting you can file a tax return with little or no documentation and obtain a refund. Scammers will also try to lure you in with a promise of a non-existent Social Security refund in order to obtain your Social Security number.
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False/Inflated Income and Expenses—Under this scam, you are lead to believe that by claiming income that you did not earn on your tax return, you will qualify for the Earned Income Tax Credit. If you fall for this, you could have serious repercussions such as having to repay the refund, plus penalties and interest and perhaps even criminal prosecution.
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False Form 1099 Refund Claims—Don’t be misled into thinking you can file a fake Form 1099-OID, report it on your return and receive a refund. This is based on a bogus theory that the government maintains secret accounts for U.S. citizens and that you can gain access to the accounts by issuing a Form 1099-OID to the IRS.
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Frivolous Arguments—Promoters of these schemes encourage you to make an unreasonable claim in order to avoid paying taxes you owe. Click here for an IRS listing of frivolous tax arguments you should avoid.
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Falsely Claiming Zero Wages—This scheme encourages you to file a phony information return, such as a substitute W-2 or corrected 1099 to reduce or zero out your income. Filing this type of return or form could result in a $5,000 penalty.
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Abuse of Charitable Organizations and Deductions—The IRS is actively investigating schemes that involve the donation of non-cash assets that are highly overvalued and attempts by donors to maintain control of donated assets or the income from donated property.
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Disguised Corporate Ownership—This scam encourages you to setup a corporation that obscures the true ownership of the business and then to underreport income, claim bogus deductions, facilitate money laundering or perform other financial crimes.
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Misuse of Trusts—There are legitimate uses of trusts, but the IRS is seeing an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. Before setting up a trust, be sure to obtain the advice of a trusted professional.
For more details about the 2012 “Dirty Dozen”, you can read the full IRS article. Please note that the official IRS website is: http://www.irs.gov.
Would you like more information about about tax scams? Contact me at Connie.Cushing@warrenaverett.com or 850.435.7400 if you have any questions or wish to discuss a particular topic in more detail.
What You Need to Know About Managing Business Profitability
As a CPA, I am asked a lot of questions about managing a business. It's vital for a business owner to understand the basic principles surrounding the disciple of business, especially the concept of profit.
“What is profit?”
Simply put, profit is what 's left over after you've paid all of your expenses. Some things involved in the basic definition of profit are within your control and some are not. If you want to improve your profit, you should spend time working on the things you can control.
In order to understand profit, you must focus on the four factors that determine profit in a business.
- Price - what you charge for the product or service you sell.
- Quantity - the volume of products or services that you sell.
- Variable costs - the costs that increase or decrease as your sales increase or decrease.
- Fixed costs - those costs that do not change with increases or decreases in your sales.
It is my contention, however, that in the short term, all costs are fixed and in the long term, all costs are variable.
“How do I increase profits in my business?”
In order to increase profits, you must consider the four factors, the possible actions you must take, and the required conditions that would have to be applied to make this happen.
Remember that profit can be improved by increasing or decreasing any of the four factors, as long as some conditions are met. Also, no single factor can be considered without evaluating its impact on each of the other factors.
In order to understand how this works, let's consider how a 5% change to each of these four factors can affect profit.
| Factors |
Base |
% Change |
Result |
| Price |
100 |
5% increase |
105 |
| Sales Volume |
100 |
5% increase |
105 |
| Total Revenue |
10,000 |
|
11,025 |
| Variable Cost ($60) |
6,000 |
5% decrease |
5,985 |
| Gross Margin |
4,000 |
|
5,040 |
| Fixed Costs |
3,000 |
5% decrease |
2,850 |
| Net Profit |
$1,000 |
|
$2,190 |
With a small 5% change in each of the four factors of profit, net profit increased by over 110%! There may be consequential impacts of these changes that were not considered in this example, but the fact is that small improvements made to each of the four factors will combine to give a staggering impact.
It is also true that the reverse can happen. If you discount your price, allow your sales volume to slip, don't control your overhead costs, or let your variable costs increase just slightly, you can destroy a potentially profitable business.
It’s all about leverage. It can make or break any business. If you get all the small things right, then the big picture takes care of itself. The bad news is that if you don't, you’re going to be in real trouble, and it’s likely that you’ll never know why.
For additional information on maximizing profit for your business, feel free to contact me at Dan.Bowers@warrenaverett.com or (850) 682-0791.
QuickBooks Short-Cut Keys Everyone Should Know
A good way to measure how efficient you are using QuickBooks is to count the number of key strokes it takes you to do to perform a specific function. If you are like me, any time-savers are welcomed. Within QuickBooks, there are a series of short-cut keys that can speed up data entry and reporting. Some of my favorites are outlined as follows:
1) Control-C and Control-V: When making journal entries or entering accounts payable, the Control-C feature allows you to copy text or amounts, while the Control-V will allow you to paste what was previously copied. QuickBooks will remember the last item copied, until you copy something else.
2) Control-Page Up and Control-Page Down: When in any of the registers, you can advance one previous month or advance to the next month simply by hitting Control-Page Up and Control-Page Down, respectively.
3) “M”, “H”, “Y”, and “R”: When running reports, you must select a date or date range. If you are running a monthly report (MontH) you can simply enter “M” in the “From” field and “H” in the “To” field. If you are in the month of January, this will run a report from January 1 to January 31. The same works for annual reports (YeaR), by using the “Y” and “R” short cuts.
4) Control-F: By invoking this command, you will activate the find feature. You will more than likely want to go to the advanced tab and from there you will be able to search for anything in QuickBooks by choosing the proper filters.
5) While not a short-cut key, you should go to the menu bar and choose “View”, and check “Open Window List”. This will create a listing of all open windows. By using this list you can navigate between windows without having to open and close reports.
I find that moving my hands from the keyboard to the mouse increases the time to complete certain functions within the software. By using these short-cut keys, you can decrease your time in Quickbooks and go home early!
If you're interested in learning more about QuickBooks or receiving special client pricing, please contact one of our QuickBooks ProAdvisors for additional information.
Research a Not-for-Profit's Form 990 Before Committing to Serve
Many of us take the opportunity to support charitable organizations, either through cash donations or the contribution of our time. Eventually this may result in an invitation to sit on the organization’s board of directors. Most of us are honored when asked and agree without giving it much thought. However, with all the scrutiny of financial practices over the last several years, it’s good to understand the organization, its mission, and policies. It’s also important to recognize all the rules and regulations that a non-profit must abide by in order to keep their exempt status, as it is the board’s responsibility to ensure its organization adheres to them.
Probably the easiest way to understand most of these requirements is to understand the Form 990 – the IRS form which reports the non-profit’s information and activities. This form serves two functions – it reports the activities of the organization to federal and state governments to ensure continued tax exempt activities are taking place. It also provides financial information in detail so that someone reviewing the 990 can make decisions about the strength of the organization. Form 990 is considered a public document and is posted to the internet by organizations such as Guidestar (www.guidestar.org). The public nature of this document allows a potential donor to review the financial status of a charitable organization and its organizational/operational structure to help determine if they would like to make a contribution.
Recently, the IRS overhauled Form 990, with increased transparency into the organization; not only its programs and financial activities, but board governance and operations, as well. The form can be divided into three categories of information:
- Factual information about the organization; who it is, what it does, board members, etc.
- Financial information, including documenting compensation.
- Board governance and potential abuse issues (personal inurement, conflicts of interest, etc.
Let’s focus on the third category. The largest area of change rests here. The IRS has increased emphasis on the board of directors, how it operates and governs the organization, and the level of accountability it requires within the organization. Inquiries on Form 990 include questions regarding conflicts of interest and independence of board members (individual & business relationships amongst board members and the organization). Due diligence should be a part of an organization’s processes to justify any transactions between related or non-independent members. Compensation to board members and the executive director is also examined heavily. These questions are designed to identify those who are getting paid and that they are remunerated for services they have actually provided. Questions regarding whistleblower policies, document retention policies, and board meeting minutes are other examples of the inquiries made on Form 990.
As you can see, serving on the board of a not-for-profit organization should not be taken lightly. Always be mindful of what you are getting into before you make a final decision. Be aware of the commitment expectations – in terms of time and money. And know the organization with which you are getting involved, inside and out! Utilize Form 990 for your research. As we’ve discovered, it contains a lot of pertinent information about the operations of the organization that can help you in your decision making!
For more material on Board Service, see www.boardsource.org, and for additional information on Form 990 and non-profit tax reporting, feel free to contact me at Lori.Kelley@warrenaverett.com or (850) 837-0398.
Green Energy Savings: Knowing How to Build Green and Save
One of the most exciting pieces of tax legislation that has passed in recent years is Section 179D, “The Green Building Deduction.”
A tax deduction of up to $1.80 per square foot is available to owners of a new or existing commercial building. The most exciting piece of this legislation is that it is available to the primary designer (ARCHITECTS AND/OR ENGINEERS) in the case of a publicly owned building. The building must be constructed or retrofitted to save at least 50% of the energy costs compared to ASHRAE Standard 90.1-2001. Eligible commercial buildings include but are not limited to offices, retail buildings, warehouses, rental housing of four stories or more, publicly-owned buildings, and even parking garages.
Each of the three energy using components of the building –envelope, lighting, and HVAC – is eligible for one third of the incentive ($0.60 per square foot) if it meets its share (16 2/3% per component) of the whole building energy cost savings goal.
Commercial building compliance is determined by third party inspectors who review the plans and the actual construction. Energy cost savings are determined by software that must be certified by the Department of Energy as meeting criteria of consistency and accuracy.
The incentives apply to buildings or systems placed in service or remodeled during calendar years 2006 – 2013.
Do you think your building or a building you designed might qualify for the green building deduction? Contact me, Scott Warren at Scott.Warren@warrenaverett.com or 251-943-8571.
Notes from the 46th Annual Heckerling Institute on Estate Planning
The Heckerling Institute, presented by the University of Miami School of Law, is one of the nation’s leading conferences for estate planners. The presenters are among the leading experts in estate planning, many of whom are often involved in the precedent – setting cases that are discussed. Many of them frequently get “up close and personal” with the IRS!
I have selected a few topics from the week-long conference that may be of interest to you: Portability, ILITs and FLPs.
Portability: Each person has an amount that they can exclude from estate taxes when they die. The 2010 Tax Act increased this amount to $5,000,000. The Act also provided that, for someone dying in 2011 or 2012, a surviving spouse could use any of that $5m that their spouse did not use. In other words, the unused portion is “portable!”
Before portability, anyone dying with an estate less than the exclusion amount would not have to file an Estate Tax Return, Form 706. However, a return must be filed in order to take advantage of any unused exclusion. The experts do not expect any new tax law to be passed during 2012. This means that, for 2013, the $5m exclusion amount could return to the $1m amount effective in 2001.
So, if you have a decedent with an estate < $5m who was married, then you should consider whether the costs of filing the Form 706, including appraisal and accounting fees, are worth the additional exclusion for the surviving spouse. We can help you with these considerations. The Form 706 is due nine months from the date of death.
ILITS: This is the shorthand term for Irrevocable Life Insurance Trusts. It is a common planning tool used to purchase Life Insurance to provide funds for your heirs, but that is not in your estate.
Lee J. Slavutin of New York gave a presentation with important advice to the Trustees of these trusts. He pointed out that the Trustee has a fiduciary responsibility to the beneficiaries of the trust and that this includes:
- Confirming the owner and beneficiaries of each policy
- Monitoring the continued strength of the life insurance company
- Reviewing the terms of the policy to verify that it is still suitable
- Reviewing the health of the insured to determine if premiums could be reduced
- Verifying that the policy will still last for the life of the insured
It is too common for these ILITs to be formed, the policies purchased and the premiums paid each year without much other consideration. So, if you are a Trustee, Insured or Beneficiary of an ILIT, please take time to consider these suggestions. Lee J. Slavutin provided a great checklist for Life Insurance planning. Click here to view.
FLPs: This is the shorthand term for Family Limited Partnerships. This, too, is a common planning tool, and includes, for my discussion, Family Limited Liability Companies (FLLCs). The typical plan is to put assets into a Limited Partnership or Limited Liability Company, then make gifts of LP or LLC interests to family members, using a discount of the value. There was not a lot of new information from recent cases, but I want to review the steps that are important to avoid trouble with the IRS:
- Form the entity and contribute the property into it, then wait some time before making the gifts
- Operate the FLP as a valid business: have a separate bank account, keep books and records, do not comingle with personal assets, have partner meetings, including the children when they are old enough
- Make partnership distributions pro rata, not all to the parents
- Do not make the FLP Operating Agreement so restrictive that the children really do not have any current benefit of ownership
If you form a FLP and then immediately make gifts to your children, the IRS can claim that you made gifts of the underlying property in the FLP, not FLP interests. This is significant, because you would lose the benefit of any minority interest discounts taken in valuing the gifts. If you wait to make the gifts, then the FLP has been subject to market risk, i.e. the assets in the FLP may have changed in value based on the economy.
If you treat the FLP as your own personal assets, then the IRS and the courts will most likely do that as well. So once it is in the FLP, if you are the managing partner, don’t forget that you have a fiduciary responsibility to your other partners!
Would you like additional information about estate planning? Contact me at
McGee.Lorren@warrenaverett.com or 850-435-7400 if you have any questions or wish to discuss a particular topic in more detail.
During the past few years, we have watched our profession undergo significant changes which have caused us to be even more committed to raising the bar with the level of expertise we bring to our clients, while remaining focused on quality and personalized service. It is with this in mind that we would like to share some very exciting news.
O’Sullivan Creel is pleased to announce we are joining forces with the Birmingham-based certified public accounting firm of Warren, Averett, Kimbrough & Marino, LLC and the Montgomery-based firm of Wilson, Price, Barranco, Blankenship & Billingsley, P.C. to create the Southeast’s premier accounting firm. The collaboration creates one dynamic firm offering expanded resources and expertise, additional service lines and industry specialties, with the same commitment to personal client service. Our combined resources and expertise will enable us to draw from the best and brightest talent to effectively serve our clients, now and in the future.
Effective January 1, 2012, the three firms combined as the newly formed accounting firm of Warren Averett, LLC and our firm will operate as Warren Averett O’Sullivan Creel. Mort O’Sullivan will continue to serve as Managing Member of Warren Averett O’Sullivan Creel and the professionals who have advised and served our clients in the past will continue to provide the same close personal attention.
We are excited about the opportunities that lie ahead. Feel free to visit www.warrenaverett.com for additional information.
What You Should Know About How an LLC is Taxed
In teaching continuing education classes around the country, I have found an interesting trend in the methods being used to form businesses. The limited liability company (LLC) has become widely used, possibly the most common form of business entity choice. There are several reasons for this including the simplicity of formation, the lower administrative burden when compared to corporations and partnerships, similar liability protection as incorporation and flexibility as to taxation. All have contributed to its popularity.
Flexibility of taxation, however, also leads to confusion. The IRS and Congress helped with this confusion by taking several years to clearly define how a LLC is taxed. There is no separate tax law for LLCs. In fact, for several years the IRS attempted to look at each individual LLC and compare it to a corporation. If it was most like a corporation, then it was taxed as a corporation. If not, it was taxed as a partnership or a disregarded entity. As you can imagine this was confusing and difficult to enforce.
Finally the IRS and Congress came up with a much simpler process. First, there are the default rules. These rules apply if no other election is made. If an LLC has one member (owner), then the LLC will be disregarded. So if an individual forms a business as an LLC and makes no election to be treated otherwise, he will be treated as if the business is his sole proprietorship. Similarly if a corporation is a single member, the business will simply be included with the corporation’s other business activity on its income tax return. No separate return will be filed. If the LLC is a multi-member (more than one owner), the default treatment is a partnership. The entity would file a Form 1065 partnership return and fall under the tax rules for partnerships.
In addition to the default rules, the law allows a “check the box election.” This rule allows any LLC to elect to be treated as a corporation. This simply requires that the LLC file a form 8832 and “check the box” to be treated as a corporation. Of course there are time requirements for filing and the entity must qualify for the tax treatment applied for. For instance, if the choice is to be a Sub-S corporation, the number of members and the class of ownership rules has to be met. Also, the election to be treated as a Sub-chapter S corporation must be timely filed.
The decision of how to treat your LLC should not be made lightly. If you elect to be treated as a corporation and then decide to change back, this could result in a taxable liquidation of the corporation. Also, once you elect to change the treatment of the LLC you will not be allowed to change again for five years. Finally, all the rules that apply to the reporting method you choose will apply to your entity. If you are being treated as a corporation, all the tax law applicable to corporation will apply to your LLC. You should consider all the options before making a decision.
Would you like additional information about taxation of Limited Liability Companies? Contact me at jlundy@osullivancreel.com or call 850-682-0791 if you have any questions or wish to discuss a particular issue in more detail.
11 Business-Improving Resolutions for 2012
As 2011 comes to a close, we all have the sometimes dreaded, sometimes anticipated New Year's resolutions to make. I ran across a great article on American Express' Open Forum website by Barry Moltz, a small business author and consultant. Moltz suggested 11 New Year's resolutions that businesses should make in 2011. The list is still true for 2012. Read the tips below, but you'll need to get the full article by Barry Moltz to catch the details.
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I will stop complaining about the bad economy.
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I will only sell painkillers. (see the full article!)
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I will fire the employees that do not increase profit.
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I will only market to prospects that can actually pay for my product.
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I will not lower my price to substitute a real marketing strategy.
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I will meet with customers and vendors face to face.
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I will attend at least one major industry event.
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I will invest in me and learn at least one new skill.
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I will take time off.
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I will understand my businesses financial statements each month.
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I will be proud to be a small business owner.
Since 2012 is quickly approaching, what would you suggest as the 12th New Year's resolution a small business should make to shine in 2012?
Top 5 Key Tax Law Developments in 2011
The 15-page special report available via this post is a very good summary of the major tax legislation passed in 2011. Although there is still quite a bit of uncertainty in tax planning for future years, the tax legislation passed in 2011 laid the groundwork for tax reform. There is, as of this post, one more piece to come which should hopefully extend the payroll tax cut on wages into 2012. In my opinion, this year’s top 5 key pieces of legislation to note are:
- Business Information Reporting. The Comprehensive 1099 Taxpayer Protection and Replacement of Exchange Subsidy Overpayments Act of 2011 (yes, it’s a mouthful) repealed the burdensome expansion of 1099 reporting for many taxpayers including qualified landlords.
- The Three Percent Withholding Repeal and Job Creation Act repealed the three percent withholding on government contractors.
- The IRS issued Rev. Proc. 2011-26 which provides guidance on claiming the 50% or 100% first-year depreciation bonus for qualifying business property.
- IRS Notice 2011-28 has excused small employers from having to report the cost of employer-provided health insurance coverage on the employee Forms W-2.
- The IRS issued Rev. Proc. 2011-34 to allow qualified real estate professionals to make a late election to aggregate rental real estate interests for applying the passive activity loss rules under IRC Section 469.
There are several other important items included in this summary. Click here to view. Contact me at gtringas@osullivancreel.com or call 850-435-7400 if you have any questions or wish to discuss a particular issue in more detail.