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If You Pay Peanuts, You Get Monkeys.

People love a deal, the satisfaction of being a good negotiator, tales of how the sales person gave the deal wanted, the steal it was.  Truthfully, people like the sensation of control a good bargain grants. But, is it a bargain when there are hidden payments after the deal is closed? Hire a contractor because he is cheaper than everyone else may look like good business at the start of the project. But what if that contractor drops equipment down a hole and someone else must be paid to extract it.  The costs of recovery will exceed the “savings” of a cheap contractor. There is a reason the contractor is cheap.  He is hoping to finish the job with no incidents. 

It is the same with bookkeepers and office managers, the office help you ignore until the letter from the IRS announces to you payroll taxes are unpaid with interest and penalties accruing. Or the state sends you the letter declaring the corporate entity has been terminated because a form was not filed. Those are big events in a business; both can and have been the point of no return for businesses, money to pay the payroll taxes now spent on the current project, or inability to bid on new projects until the corporate entity is reinstated. Hopefully the office girl as you call the person in the back office has paid the CPA who will help you get out of this mess quick if not cheaply.

But, you say those are the things you keep an eye on. Or, the data entry person knows not to do that. Do they know how to keep from double paying invoices? How many of your vendors will tell you about double payments? How much time will it take to clean out the double entries? When will you notice? How much will it cost to have the CPA come or send his bookkeeper?  Can you stomach the worry and for how long. Or will you just change bookkeepers until one gets it right?  Will your investment that you thought will make you rich survive?

There are hidden costs in hiring cheap. Ask what the hidden costs are before you buy the sales item, or hire your daughter to keep your books. You are surrendering control when you purchase or hire. Don’t give up control cheaply.  You get what you pay for.


Where ARE My Tax Forms?

April 15th is on a Tuesday this year so taxpayers will not have the additional time they enjoyed last in prior years when the tax due date fell on weekends.  Everyone understands the need to gather tax documents, records, total receipts and the general summarization required for filing tax returns.  Most however do not make it a habit thru out the year like CPAs.

You will need to dig thru that stack of mail growing on the hall table and look inside magazines for them.  Maybe even look in the recycle bin (you know, that big green garbage can the city left at your house) for them.  Many people do not recognize the envelope the form comes in, some taxpayers stick the 1099-B with the rest of their investment retirement papers unopened.

If your CPA sends a Tax Organizer to you look on the first page for a list of tax forms used in prior years. Typically the tax forms are listed on the first page in most tax organizers as taxpayers only look at the organizer once. This list will help you determine what forms are missing before you contact your employer, investment advisor, CPA at a time that is most stressfull for them.

As a final check check your paystub for the website were you will be able to download a copy of your W-2 (if download is offered by your company) and the investment advisor or brokerage house website for download of Forms 1099-DIV, 1099-INT and 1099-B. And check your email for such websites and links to them.

If you are unable to locate a copy of the tax form contact your employer for your W-2. If the employer has moved or closed try anyway. Try Google for new address of old employers and send them a letter. Most will have forwarding address or someone responsible for wrapping up the business. 

Make every reasonable effort to collect the forms. They may have been mailed to your old address and and not forwarded, your address was incorrect or incomplete in the sender's records or they may not be aware they are suppose to provide you the form. (More on that in a later post.)

If you have been unable to get a form copy or contact the one responsible for providing a copy then wait until April 14th and call the IRS at 1.800.829.1040. Have your personal information handy (name, social security number, address, and blood type). Also have information on your employer such as Name, Address, Phone Number and Wages, Withholding, (from your last paystub or best guess) and the dates you worked for them. The IRS will Form 4598, Form W-2, 1098 or 1099 Not Received, Incorrect, or Lost to you and to your employer. Smart form providors will send you your tax forms.

WAIT until April 15th to file your return using Form 4598.

If you use Form 4852 for “improper use” you could be hit with accuracy-related penalties equal to 20% of the amount of taxes that should have been paid; civil fraud penalties equal to 75% of the amount of taxes that should have been paid, and/or a $5,000 civil penalty for filing a frivolous return or taking a frivolous position.

If, after filing your return, you receive the tax document and need to correct the filing do so using Form 1040X-Amended U.S. Individual Income Tax Return

Please wait to file your return until you have ALL your tax documents. If you file telling your preparer that is all the forms or provide information for missing forms you will be forced to file an amended return. Tax preparers charge the same or greater fees for preparing an amended return. And amended returns are a red flag to the IRS to audit a taxpayer.

So get your forms together and if you do not have them all by April 15th then pay an estimated tax amount and EXTEND until October 15th.

The most common forms taxpayers will need to send to their tax preparer are:

W-2: Wages

W-2G: Gambling Winnings

1099-B: Proceeds from Broker and Barter Exchange Transactions

1099-C: Cancellation of Debt

1099-DIV: Dividends and Distributions

1099-G: Government Payments

1099-H: Health Insurance Advance Payments

1099-INT: Interest Income

1099-K: Merchant Card and Third Party Network Payments

1099-MISC: Miscellaneous Income

1099-OID: Original Issue Discount

1099-Q: Payment from Qualified Education Programs

1099-R: Distributions from Pensions, Annuities, Retirement Plans, IRAs, or Insurance Contracts

1099-S: Proceeds from Real Estate Transactions (Typically tax payer home)

1099-SA: Distributions From an HSA, Archer MSA, or Medicare Advantage MSA

SSA-1099: Social Security Benefit Statement

1098: Mortgage interest

1098-C: Contribution of a motor vehicle, boat, or airplane to a charity

1098-E: Student loan interest

1098-T: Tuition Statement

K-1: From a Partnership (Form 1065), S-Corp (Form 1120S), Trusts (Form 1041)



Business Groups Tell Senate They Oppose Accrual Accounting Requirement 

Washington, D.C. (January 22, 2014)

By Michael Cohn

A coalition of a half dozen business organizations, including the American Institute of CPAs, have banded together to express their opposition to a proposal from the Senate Finance Committee to require businesses to use the accrual method of accounting for tax purposes.

Along with CPAs, other groups signing the letter include organizations representing engineers, architects, dentists, farmers and S corporations. The proposed change in the taxation of businesses was included in the Senate Finance Committee’s Cost Recovery and Accounting Discussion Draft of Nov. 21, 2013 (see Baucus Proposes Changes to Tax Accounting and Cost Recovery Rules).

The proposal would require many of the groups’ members to change the method of accounting used for tax purposes from the cash basis method to accrual method. Together with the AICPA, the other groups signing the letter include the American Council of Engineering Companies, the American Dental Association, the American Institute of Architects, the Farm Bureau and the S Corporation Association.

“Most significantly, a change from the cash basis method for tax purposes would result in those who own and operate these businesses to pay tax before cash is received,” they wrote in a January 17 letter to Senate Finance Committee chairman Max Baucus, D-Mont., and ranking member Orrin Hatch, R-Utah. “They would be required to recognize revenue in advance of actually getting paid. Because the expenses of such organizations would essentially remain the same, this requirement would result in higher net taxable income for federal tax purposes. In addition, switching from the cash method to the accrual method of accounting will lead to significant cash-flow problems. For example, among professional services firms, the primary cost is labor, and businesses must regularly pay their employees even if they are not paid by their clients for several months. The use of cash accounting helps to mitigate this challenge by allowing the business’s owners to make tax payments after receiving payment for their services.

“We believe that tax reform is a laudable goal and that simplification of the tax code is very important,” the organizations added. “However, converting from the cash method to accrual basis would not be simpler and may actually create a significant burden on those professional services sector businesses and farms.”

Note: Accrual Basis accounting recognizes income when the sale is complete, the service is rendered. Expenses are recognized when accrued or incured (fancy terms for when the business uses something.)

Cash Basis accounting recognizes income when the cash is received. Expenses are recognized when paid.

Of the two methods Accrual recognizes income earlier and is considered a more accurate reporting basis of accounting.  As is stated above payment for goods or services may come many months after the service or product is sold. For a small business which already deals with cash flow difficulties waiting for collections the added requirement to pay taxes on uncollected sales would eat into lines of credit, cash reserves and investor willingness to invest.

Large businesses; i.e. ExxonMobile, Microsoft, and FedEx already use accrual accounting for financial and tax reporting. The use of accrual accounting by these entities is a requirement imposed by the market, investors, lendors and government. These are complex entites with ready access to many sources of cash to make the tax payments and have armies of accountants working to minimize the tax burden.

This raises two questions; do Senators understand basic business, do Senators dislike small businesses and favor of large corporations?

The fact that the Senate Finance Committee is looking at forcing small business to use an a


Former IRS Employee Pleads Guilty to Claiming $1.7M in Fraudulent Tax Refunds

Fresno, Calif. (January 22, 2014)

By Michael Cohn

A former Internal Revenue Service employee has pleaded guilty to stealing identities from an IRS Service Center in Fresno, Calif., and using them to claim more than $1,745,000 in fraudulent tax refunds and obtain more than $175,000 in refunds from the IRS.

Monica Nanette Hernandez, 41, pleaded guilty Tuesday to one count of filing false income tax returns, one count of wire fraud, and one count of aggravated identity theft.

While employed as a part-time data entry clerk, Hernandez filed three tax returns for herself claiming excessive federal tax withholdings as a result of falsely claimed interest and dividend income, according to prosecutors. In addition, in April 2010, Hernandez stole 68 tax returns from the IRS Service Center in Fresno and filed fraudulent tax returns using information from the stolen tax returns to claim excessive federal tax withholdings.

“IRS Criminal Investigation has made investigating refund fraud and identity theft a top priority, especially in those situations where individuals with positions of trust commit fraud by taking taxpayer information to file fraudulent tax returns in the name of the stolen identity to obtain a larger tax refund,” said IRS special agent-in-charge José M. Martinez in a statement. “This resulted in significant harm to those taxpayers whose identities were stolen, as well as a monetary loss against the U.S. Treasury.”

Hernandez is scheduled to be sentenced on April 14. She faces up to 38 years in prison and a $500,000 fine, but the sentence is likely to be less under the plea agreement.

This case was investigated by the IRS’s Criminal Investigation unit and the Treasury Inspector General for Tax Administration. Assistant U.S. Attorneys Grant B. Rabenn and Christopher D. Baker are prosecuting the case.


Identity Theft and the IRS.

Identity theft has become the BIG FEAR of many American's as horror stories of accounts drained, exploding credit card bills, arrests for fruadulant checks, and lives ruined as opportunities and reputations are lost.

Add to this a bold new crime of Refund Fraud. Identity thieves file a federal return claiming a substantial refund using a stolen social security number and other relevant information and fabricated tax information. Google searches for identity theft and tax returns returns 1 million plus articles about this crime. Those few convicted of this crime have collected millions, some hundreds of millions in refunds.

In the Select Committe on Aging, United States Senate on April 10, 2013; Chairman Bill Nelson stated in his opening comments the following facts:

  • The U.S. Treasury is loosing $5 Billion each year to refund fraud, and the number is growing.
  • The IRS reported that from 2010 to 2011 Identity Theft incendents nearly tripled.
  • The Federal Trade Commission reported Tax Related Fraud is growing at an 'astronomical' rate. While credit card related identity theft is declining.
  • The IRS reports a backlog of cases exceeding 300,000 taking  an average of180 days to resolve.
  • Taxpayers victimized in one year are victimized in the following year
  • Many victimes of Refund Fraud

The IRS claims that only 1% of taxpayers are victims of identity theft. For those who are the victims of identity theft the IRS will issue a Identity Protection Personal Identifer Number (IPPIN) for use in filing returns. It has yet to be determined if such PINs detere identity theft and many victims continue to wait for the IPPIN to be issued by the IRS.

According to TIME Magazine in a March 26 article stated the IRS has 3,000 employees devoted full time to resolving 650,000 cases of identity theft. A TaxPro Today article referred to the Treasury Inspector General for Tax Administration report where these numbers were first issued.

The IRS is facing an uphill task in combating this crime. The theives operate across the nation, quickly change operations to avoid apprehension or detection and are sphisticated and are becoming more sophisticated.

Suggested steps to protect our Identity follow.

  • Protect yourself by filing early.
  • Don’t carry your Social Security card or any documents with your SSN or Individual Taxpayer Identification Number (ITIN) on it.
  • Don’t give a business your SSN or ITIN just because they ask. Give it only when required.
  • Protect your financial information. Shred any document with a social security number, bank or credit card account number or other personal information.
  • Check your credit report every 12 months.
  • Secure personal information in your home. Put the documents with the information in a strongbox, safe, or other secure place.
  • Protect your personal computers by using firewall, anti-spam/virus software, update security patches and change passwords for Internet accounts. Keep your antivirus and malware protection software up to date. Identity monitoring company LifeLock says that if you use online tax preparation software, make sure the URL starts with “https” as opposed to just “http.” (The “s” indicates a secure connection.)
  • The IRS never contacts taxpayers via email or social networks. Delete suspisious emails.
  • Don’t give personal information over the phone, through the mail or on the Internet unless you have initiated the contact or you are sure you know who you are dealing with.
  • Order a tax return transcript from the IRS  and compire it to your own records of income andexpenses and filing history.
  • Collect your mail daily and read it. If you get a notice from the IRS about a tax return you never filed, or regarding income you never earned, you should get in touch with them.

To this I add a sole proprietorship who must provide a social security number for IRS information forms to contact the IRS for a Tax Payer Identification Number (TPIN) to use in place of your social security number. This number will appear on Forms 1099-MISC provided by businesses you provide services to. Doing so will reduce the number of people who have access to your social security number.

The most often stressed advise was to file your return early.

If you suspect that you are the victim of identity theft file FORM 14039 with the IRS. This will notify the agency of the theft. There will be more steps you will need to take to reclaim your life from the theives that stole it.

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