The Bottom Line

                                               SITE BLOG

 

Thursday
Jan232014

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

Thursday
Jan232014

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.

Thursday
Oct312013

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.

Tuesday
Oct222013

2014 Tax Season to Start Later Following Government Closure; IRS Sees Heavy Demand As Operations Resume

WASHINGTON–The Internal Revenue Service today announced a delay of approximately one to two weeks to the start of the 2014 filing season to allow adequate time to program and test tax processing systems following the 16-day federal government closure. 

The IRS is exploring options to shorten the expected delay and will announce a final decision on the start of the 2014 filing season in December, Acting IRS Commissioner Danny Werfel said. The original start date of the 2014 filing season was Jan. 21, and with a one- to two-week delay, the IRS would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4. 

The government closure came during the peak period for preparing IRS systems for the 2014 filing season. Programming, testing and deployment of more than 50 IRS systems is needed to handle processing of nearly 150 million tax returns. Updating these core systems is a complex, year-round process with the majority of the work beginning in the fall of each year. 

About 90 percent of IRS operations were closed during the shutdown, with some major workstreams closed entirely during this period, putting the IRS nearly three weeks behind its tight timetable for being ready to start the 2014 filing season. There are additional training, programming and testing demands on IRS systems this year in order to provide additional refund fraud and identity theft detection and prevention.

“Readying our systems to handle the tax season is an intricate, detailed process, and we must take the time to get it right,” Werfel said. “The adjustment to the start of the filing season provides us the necessary time to program, test and validate our systems so that we can provide a smooth filing and refund process for the nation’s taxpayers. We want the public and tax professionals to know about the delay well in advance so they can prepare for a later start of the filing season.”

The IRS will not process paper tax returns before the start date, which will be announced in December. There is no advantage to filing on paper before the opening date, and taxpayers will receive their tax refunds much faster by using e-file with direct deposit. The April 15 tax deadline is set by statute and will remain in place. However, the IRS reminds taxpayers that anyone can request an automatic six-month extension to file their tax return. The request is easily done with Form 4868, which can be filed electronically or on paper.

IRS processes, applications and databases must be updated annually to reflect tax law updates, business process changes, and programming updates in time for the start of the filing season. 

The IRS continues resuming and assessing operations following the 16-day closure. The IRS is seeing heavy demand on its toll-free telephone lines, walk-in sites and other services from taxpayers and tax practitioners.

During the closure, the IRS received 400,000 pieces of correspondence, on top of the 1 million items already being processed before the shutdown. 

The IRS encourages taxpayers to wait to call or visit if their issue is not urgent, and to continue to use automated applications on IRS.gov whenever possible.

“In the days ahead, we will continue assessing the impact of the shutdown on IRS operations, and we will do everything we can to work through the backlog and pent-up demand,” Werfel said. “We greatly appreciate the patience of taxpayers and the tax professional community during this period.”

Wednesday
Oct162013

"I received this notice...CP-2100. Is it going to cost me?

A client (payer) has received notice CP-2100 for 2012 from the Internal Revenue Service. And to answer the question is this going to cost the client? No, the client will not be required to pay penalties or taxes; IF they comply with the notice.

The payer has 15 days from the date of the notice to compare a list of names and related social security numbers provided by the IRS in the notice to I-9s, W-4s and other records to verify the correct names properly spelled were matched to the correct ID numbers. The list provided by the IRS is from information forms filed by the payer (series 1099).

If the name is correct and spelled correctly and matched to the correct social security/ITIN number then the payer is to send two B notices (first and second) to inform the subcontractor Backup Withholding will be withheld from future payments. The rate for this withholding is 28% of the amount paid.

Why did the client/payer receive this notice?

The IRS has been notified of a person receiving payment for services that the service does not recognize because:

  1. The subcontractor provided the wrong information; using Bill, a nickname for the proper name William.
  2. The subcontractor provided the wrong social security or ITIN; omitted part of or altered the number.
  3. The subcontractor provided another person’s social security or ITIN number.
  4. The subcontractor failed to provide a social security or ITIN number.

Once the payer has confirmed the records sent to the IRS agree with what was provided by the contractor the payer only needs to start backup withholding at 28%, for that individual. At year end the payer prepares Forms 1099 showing total payments made to the subcontractor in Box 7: Nonemployee Compensation and the sum of back up withholding in Box 4: Federal Income Tax Withheld.

Complete Form 945 Annual Return of Withheld Federal Income Tax and submit payment of the withheld taxes to the IRS by February 28th using Form 945-V. Be aware of how much withholding you have collected, if you exceed $2500 in one quarter you may face penalties.

If the subcontractor is no longer used by the payer and the information agreed with the forms provided then the payer has met their obligation to comply with the law and further action is needed.

Backup Withholding can be applied to any of the 1099 series including rent, royalties, interest, attorney payments, dividends, proceeds from broker and barter exchanges.

There are additional tracking requirements such as record retention, returned B notices being held and other actions that are common sense for the payer to do.