Sapurstein & Associates CPAs have a word to the wise about your tax preparation:

Not only are there new rules and updated regulations in place this year, but IRS audits are on the rise.

Caution is the word, the small business experts at Sapurstein & Associates advise, particularly if your business is one that uses a lot of contract workers. This practice is often closely looked at by the IRS, Sapurstein associates have learned, so be sure to file 1099 forms on all contract workers on a timely basis.

What do you do if you know you are flagged for an audit and want to file additional 1099 contract forms?

Doing this during the audit virtually guarantees steep penalties, and the CPAs at Sapurstein & Associates never recommend this practice. If, as a result of the audit, the IRS reclassifies your contractors as employees, penalties will apply.  Only if you can show the misclassification was unintentional is there a chance those penalties might be reduced.

The IRS penalty for misclassification is 1.5% of the contractor compensation paid. The penalties get significantly steeper – double, in fact – if 1099 forms were overlooked or simply not filed for the workers.

As Indianapolis area small business CPA specialists, we help our clients navigate the IRS audit process, which may reduce additional taxes and penalties. How? By staying abreast of IRS regulations and making sure our clients’ books are in perfect order. We advise our clients to take no chances with 1099 contract fillings in your small business tax and accounting practices. Audits may be on the rise, but with professional help, you won’t be part of that IRS statistic!

It’s not uncommon these days for cash-strapped companies to fail to deposit their payroll taxes. Unlike other creditors, however, Federal and state taxing authorities are not at the company’s door demanding their money. They will wait until cash is available, adding penalties, of course.

But what happens when payroll tax money is never available? Answer: the problem compounds.

Eventually, tax collectors will appear and try to obtain the tax, plus penalties and interest. If immediate payment cannot be made, tax collectors will enter the company into an installment agreement. Liens against the company’s property may also be instated, and recorded in the register of deeds’ office of the county where the company is located. This will disable the company from selling or mortgaging interests in the property – in addition to impairing the company’s credit. Eventually, the property will be seized.

Sapurstein & Associates wants to be sure small business owners understand that both Federal and state taxing authorities can also assess a company’s taxes due personally against the company’s “responsible persons,” those who controlled the company’s available cash. Such an assessment is called a “trust fund recovery penalty.” From the time this penalty is assessed, the IRS has ten years to collect it.

There’s more ugliness. Under IRS Code Section 7202, anyone required to collect, account for, and pay over to the IRS any tax is guilty of a felony, punishable upon conviction by fine of up to $10,000, or imprisonment of up to five years, or both, for each offense.

Make sure this scenario never applies to you or your company. Make sure – even when money is tight – that all payroll taxes are paid promptly. In arrears? The small business CPAs at Sapurstein & Associates can help you work with the IRS to get a payment plan negotiated.

The American Payroll Association announced some recommended tasks that all employers should perform in December and early January to make year-end processing as efficient and streamlined as possible.

Here are those tasks along with a few suggestions from Sapurstein & Associates to make tax-filing and planning go smoothly:

End of the year reminders to employees

• Remind workers who have had life changes, such as marriage, divorce, or a change in the number of dependents, to make the appropriate changes to their withholding on Form W-4.
• Employees who wish to continue claiming exemptions from withholding need to submit a new Form W-4 by Feb. 15, 2012.
• If you have not received a new 2012 W-4 form by February 15, 2012 from your employees, you must withhold taxes based on a marital status of “single” with zero withholding allowances, even if you have a 2011 W-4 form on file.

Got a question about end of year accounting, bookkeeping or tax issues? Consult the small-to-medium-sized business experts at Sapurstein & Associates. Your initial one hour of consultation is free.

Did you know that the IRS can effectively reopen a closed tax year to recover erroneous write-offs?

In an effort to maximize IRS results in audits, the IRS is resorting to some unusual, but perfectly legal tax recovery methods, Sapurstein & Associates has learned.

One such method is detailed in this story:  An accrual-method S corporation bought its inventory from a related cash-method S corporation in a previous tax year. But since the company did not actually pay for the goods, instead trading for them, the selling firm did not report any income.

Nevertheless, the accrual method firm took a deduction for the accounts payable, which is not allowed under the federal related party tax law. Subsequently the IRS audited the accrual method company. The Court let the Service go back to past years, even to years that were closed by the three-year statute of limitations, and add the erroneously deducted amounts into the buyer’s income.

Once an IRS credit technique like this is essentially approved by the court system, it tends to be applied more freely to other corporations, so take heed!

The CPAs at Sapurstein & Associates are familiar with federal and state business taxes. We are experts in small to medium sized business tax law. So if you have a business tax question, chances are, we can answer it.

Sapurstein & Associates is blogging about Estate taxes and how gifts of inherited closely held stock could present a problem.

For instance, a gift of 50% or more of an inherited business will negate your estate tax break. IRS says when more than 35% of an estate is made up of interests in closely held (for instance, family) businesses, estate tax due on the business portion can be deferred for an initial five-year period. The tax can then be paid in up to 10 annual installments, which may be a huge help to your bottom line if your estate tax is large.

That said, if half or more of an interest in the stock of an inherited closely held business is sold or otherwise disposed of, the tax deferral is terminated. According to IRS rules, an heir’s gift of 51% of the stock in a closely held inherited business even to family members is considered a “disposal.”

It’s a simple explanation, but it can get complicated if you are in the midst of working on an estate. The CPAs at Sapurstein & Associates know the ins and outs of federal and state taxes and are small to medium sized business tax experts. They can help you understand how estate tax rules apply to your particular circumstance. If you have a question, call Sapurstein & Associates. Your first hour of consultation is free.

The CPAs at Sapurstein & Associates have been blogging about owner-employees S corporations’ health insurance and 125 cafeteria plans. There are strict guidelines to follow and it is important to understand owner-employee health insurance and 125 cafeteria plans thoroughly so you don’t get tangled up in claiming tax or insurance deductions that run counter to federal regulations.

An owner-employee is a employee who owns 2% or more of the “S” corporation’s stock on any day of the year. Through attribution rules, a child, grandchild, wife or parent of the actual owner of the stock are also considered 2% owners of the S corporation.

As surprising as this may seem, Section 318 of the IRS tax code treats employed children, grandchildren or parents of the actual stockholders AS IF they themselves owned the stock. With this in mind, an adult employee of an S corporation owned by his/her grandparents is treated “as if” they own their grandparents’ stock. They are therefore treated as “owner-employees” of the S corporation and are subject to the IRS rules.

Looking at insurance, it’s important to know that health insurance premiums paid by S corporations on behalf of owner-employees must be reported on the owner-employee’s W-2 form each year. The S corporation usually deducts insurance premiums as “officer’s compensation” (which could help with your “reasonable compensation” tax position) and the owner-employee then writes-off the premium on their 1040 personal income tax return.

However, S corporation owner-employees AND their employed children, grandchildren (and even their parents) can not participate in the S corporation’s pre-tax Section 125 plan. Participation by an owner-employee can result in a termination of the plan’s tax benefits for the non-family member employees.

For these reasons, the CPAs at Sapurstein & Associates recommend that all S corporations establish general ledger expense accounts separate out owner benefits from non-owner benefits. Owner benefits would then be added to the owner’s W-2 and become an expense of the business as salary expense. The health insurance portion of the benefits is a front page deduction on the owner’s form 1040.

Got a question related to S corps? Give Barry or Leanne, CPAS at Sapurstein & Associates a call. Your first hour’s consultation is free!

If you own a trucking fleet or are an independent trucker, you got a tax extension this year. The IRS recently advised truckers and owners of heavy highway vehicles that their federal highway use tax return usually due August 31, is now due November 30^th.

Why the extension? The highway tax was scheduled to expire at the end of September. By allowing the extension, any confusion or multiple filings due to Congressional reinstatements or modifications, will be avoided. With this extension, returns should be filed and payments made after November 1^st.

In 2010, the IRS received about 650,000 forms 2290 totaling $886 million in tax revenue. The highway use tax applies generally to trucks, truck tractors and buses with a gross taxable weight of 55,000 pounds or more. Vans, pickups and panel trucks are not taxable because they fall below the 55,000 pound threshold.

To aid truckers applying for state vehicle registration on or before the new deadline, new IRS regulations require states to accept Schedule 1 of Form 2290 issued by the IRS for tax year ending June 30, 2011, as proof of payment. If you acquired and registered a new or used vehicle during the July-to-November period, the new regulations require a state to register the vehicle – even without proof that the highway use tax was paid – if the registrant presents a copy of the bill of sale within the July-to-November period.

Sapurstein & Associates CPAs provide exceptional tax expertise to small and medium-sized companies and businesses including those in the trucking industry. If you have a question relating to highway use or business taxes, give Barry or Leanne a call. We’ll make sure you get an answer you can depend upon to be up-to-date and factual.

Sometimes debt settlements get forgotten when it’s time to file tax returns. But they shouldn’t be. Most debt settlements are classified as taxable income, so says the IRS Tax Court.

What about student loan settlements? Still taxable income, according to Tax Court documents, say the CPAs at Sapurstein & Associates. When after an Indiana student graduated and fell behind on his student loan, his lender tried to collect the unpaid debt unsuccessfully. Finally, the total debt was discounted in a $28,000 settlement agreement by both the lender and former student. But the former student did not declare the discharge of indebtedness as income, believing his “insolvency” debt was tax-free.

The IRS did not agree and pressed the case in Tax Court. The IRS claimed his discharge of indebtedness was income because there was no dispute that he was liable for the full amount of the debt. The IRS says that insolvent debtors aren’t taxed on waived debts, but this exception didn’t apply here.

Sometimes the fine print on IRS Tax Court decisions are difficult to apply to individual cases – like your own. If you aren’t sure about tax code and how it applies to your particular situation, ask the CPAs at Sapurstein & Associates. We make it our business to stay up on tax regulation, new tax code, and IRS Tax Court decisions.

As Sapurstein & Associates has been reporting, the IRS is ramping up its enforcement efforts in the present era of budget deficits. Enforcement is wide-spread, and especially active in several areas that pertain to small business.

One such focus is worker misclassification. Inaccurate classifications of part time workers, consultants and contract workers could result in owed back taxes, accrued overtime and benefits, and substantial assessments and penalties for the small business employer.

The small business experts at Sapurstein & Associates know the tax rules related to worker classification and can help you side-step tax issues related to worker misclassification.

Our CPAs at Sapurstein & Associates can help your small business:

• Examine your worker status and review contractual agreements your business may have with independent contractors
• Review your current employment tax processes
• Advise your HR department on what worker classification rules apply to specific agencies at the federal and state level
• Apply appropriate up-to-date information when determining worker classification

The CPAs at Sapurstein & Associates are small to medium-sized business tax experts. If you have a question, chances are, we can answer it.

If you are the owner of a small business, have a side business, or if you recently organized your business as an LLC or corporation, there are all kinds of required records for state and federal tax purposes.

Are you familiar with all the requirements? If not, how do you know when it’s time to contact a CPA who understands your small business issues? Here are some questions to ask yourself:

• How should my LLC or corporation be taxed?
• Do I have choices on how my LLC or corporation is taxed?
• Are you behind on filing quarterly taxes?
• Do you have a partner in your business? Are you adequately protected?
• What happens to your business if you or your partner split?
• Do you know how new state and federal tax regulations affect your business?
• As a business LLC or S-corp, do you know the distinct tax ramifications of each?

Nobody understands small business accounting and taxes better than Sapurstein & Associates, and our CPA services are remarkably affordable. Contact CPAs Barry or Leanne about setting up a free consultation: (317) 706-0958