Month: November 2011

Salt Lake City UT Audit – Profile for S Corporations

Salt Lake City UT Audit  – Profile for S Corporations

A week ago I went to a Tax Seminar here in Salt Lake City UT and one of the things I learned regarding S Corporations from one of the instructors was the following:

  • S Corporations have a much lower audit profile than sole proprietorships.  In a recent study, only .4% of all S Corporations were audited by the IRS compared to a much much higher percentage of sole proprietorships.
  • This study was based on the fact that the owner was paid a reasonable and adequate wage out of the S Corporation.
I believe this is the case because the IRS views the sole proprietorship (Schedule C filer) as an unsophisticated taxpayer and thus they are prone to more errors, understatement of revenues and overstatement of expenses.  They believe that to form an S Corporation is a step up in sophistication and thus those that do it are more prone to be the opposite of what was indicated above.  Whether this approach is correct or not, I’ll let you decide, but this is an interesting finding none the less. (Salt Lake City UT Audit.)

Salt Lake City CPA – Abatement IRS Penalties

Salt Lake City CPA – Abatement IRS Penalties

The IRS has software titled Reasonable Cause Assistant (RCA) which is used by them for failure to file, failure to pay and failure to deposit penalty abatement requests.  Apparently the IRS’s over-reliance on its RCA leads to inaccurate penalty abatement determinations.  A 2010 usability test shows that IRS employees using the RCA determined penalty abatement requests correctly in only 45% of the cases!  The result is that the RCA is not supplementing human judgement as intended – it is supplanting it.  Without proper training and safeguards to ensure IRS employees arrive at appropriate abatement decisions using the RCA, the IRS continues to unecessarily harm taxpayers and create more re-work for itself.

In other words folks if you have a penalty abatement request denied, try again!  Chances are (a 55% chance) that their decision is wrong.  If you need penalty relief help, come see us. (Salt Lake City CPA – Abatement IRS Penalties)

IRS Wants Salt Lake City Tax Preparers – to Be Their “Homeboys”

IRS Wants Salt Lake City Tax Preparers – to Be Their “Homeboys”

It appears that the IRS is involved in a campaign of intimidation.  The IRS is sending out letters to thousands of  professional tax return preparers stating that “the returns they prepared for clients during the most recent filing season have a high percentage of attributes associated with returns typically containing inaccuracies and misinterpretations of tax law”!  Is that so?!  Not only does a letter of this type offend me but I highly disagree with this method and the amount of my time (as well as other professional CPAs time) they will waste with this program!  The letter further states “We will visit some return preparers who receive this letter starting in November to confirm compliance with return preparer requirements”.  I understand the need to police those preparers that have no business preparing returns because they are unethical or lack the knowledge or education to prepare a return accurately, but to target tax professionals that have prepared returns for years and have no history of excessive audits of their client’s returns nor situations where significant tax dollars have been recovered because of tax preparer error is plain ridiculous!  The only conclusion that I can draw from their current methodology is that they are trying to intimidate the tax preparer community to the point where they look out for the government’s best interests instead of their client’s best interests through proper tax planning and prudent identification of tax benefits and savings.  What is your opinion? I would like to know! (IRS Wants Salt Lake City Tax Preparers – to Be Their “Homeboys”)

Salt Lake CPA – Student Loan Interest Deduction

Salt Lake CPA – Student Loan Interest Deduction

A client called me today confused over who can take the student loan interest deduction.  He said he was told by another CPA that if he paid on his child’s loan, he could take the deduction even if his child was not a dependent.  I had to tell him the bad news that this was not correct.  According to Publication 970 you can take the deduction on qualified student loan interest if ALL of the following conditions are met:

  • Your filing status is any filing status except married filing seperately
  • No one else is claiming an exemption for you on his or her tax return
  • You are legally obligated to pay interest on a qualified student loan
  • You paid interest on a qualified student loan
Examples that are mentioned in this publication as exceptions are when a parent pays a loan payment for a non dependent child as a gift.  This payment is still deductible by the child.  Another example would be if the a parent is obligated on the loan and the educational expenses are incurred while the child was a dependent, then interest payments made by the parent on the loan would be deductible on the parents return.  Please keep in mind that the amount of interest that can be deducted on an individual tax return is capped at $2,500 per year.  Also, the deduction is only available to the following modified adjusted gross income limits:
  • single, head of household or qualifying widowers  less than $60,000 – not affected by phase out                                                                                                                                  between $60,000 and $75,000 – reduced by phase out                                                                                                           $75,000 and over  – no deduction
  • married filing jointly                                                            less than $120,000 – not affected by phase out                                                                                                                             between $120,000 and $150,000 – reduced by phase out                                                                                                       $150,000 and over no deduction
If you should have any further questions, please call us. (Salt Lake CPA – Student Loan Interest Deduction)

Salt Lake City CPA – Children Employed in Family Owned Business

Salt Lake City CPA – Children Employed in Family Owned Business

One great tax planning tool just got clarified in the last couple of days.  In final regulations issued by the Treasury Department on October 31, 2011 the exceptions from taxes under FICA and FUTA under sections 3121(b)(3) (concerning individuals who work for certain family members) and 3306(c)(5) (concerning persons employed by children and spouses and children under 21 employed by their parents) has again been extended to entities that are distregarded as separate from their owners for federal tax purposes.

Recent changes to Section 301.7701-2(c)(2)(iv) provide that, with respect to wages paid after December 31, 2008, a disregarded entity is treated as separate entity for purposes of employment taxes and is treated as a corporation for purposes of employment taxes and related reporting requirements.  Therefore, the entity, rather than the owner, is considered to be the employer of any individual performing services for the entity.

So in layman’s terms, the ability to take advantage of employing children under the age of 18 and not paying FICA or FUTA taxes if the parent owns a disregarded entity (single member LLC)  and pays the child through that entity  has been restored.  The same holds true for persons employed by children and spouses and children under 21 employed by their parents through a disregarded entity are not subject to FUTA taxes.   Prior to this regulation the recently passed law had made this impossible since an entity regarded as a corporation for payroll tax purposes could not take advantage or these exclusions.

This is a great way to save some significant tax dollars.  Please be aware that these exclusions are also available to partnerships owned exclusively by Mom and Dad. (Salt Lake City CPA – Children Employed in Family Owned Business)