“Perhaps the most telling indicator of taxpayer confusion over the code’s complexity is that today, 90% of individual taxpayers pay for professional tax preparation or tax software to prepare their tax returns. IRS research estimates that, over the past 10 years, the burden for the typical taxpayer has increased by about 20% and would likely be even more if they had to prepare returns themselves without any aids or tools. Moreover, we estimate individual taxpayers and businesses spend more than 7 [billion] hours each year complying with filing requirements.” [Tax-News via Tax Foundation]
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IRS’s Employment Tax National Research Project Just Getting Started
- GoingConcern
- September 21, 2010
This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.
About 2,000 firms around the US have received audit letters from the IRS as part of the agency’s Employment Tax National Research Project (NRP). If your firm isn’t one of them, you can’t breathe easy just yet – the agency has indicated that it include a total of 6,000 firms over three years. What’s more, the “examinations will be comprehensive in scope,” and “employers should have all of their records available to expedite these examinations,” the IRS said he project last November.
While similar to an audit, an NRP is designed to “take a snapshot of a given taxpayer population in order to determine the compliance (with tax regulations) within that population,” according to this article by Kevin Packman of Holland & Knight. In addition, the companies studied are chosen at random.
The NRP is the first the IRS has undertaken in 25 years. During that time, the agency noted, business practices regarding employment taxes may have changed significantly, prompting the need for study. In particular, the IRS is looking for data that will allow for a better understanding of just how well corporate tax filers comply with regulations. That way, they can focus their efforts on areas of greatest non-compliance.
Equally important, the agency is looking to boost its knowledge of the “employment tax gap.” The tax gap is the difference between the amounts that taxpayers should pay, and the amounts they actually pay on a timely basis. A gap can come about in several ways: non-filing or failure to file a return; underreporting income or overstating deductions; and underpaying the amounts actually owed.
In 2006, the IRS estimated a gap of $290 billion for the year 2001. The bulk of the gap — 80 percent — was due to under-reporting income, the IRS said.
In an effort to close the gap, the National Research Project will focus on several subject areas, noted the law firm of Morgan Lewis:
Worker Classification: The question of whether a worker is an employee or an independent contractor keeps rearing its head. From the IRS’ point of view, that’s probably because they see a fair amount of misclassification of employees at contractors – which means lost tax revenue. An August 2009 GAO report on the topic referred to a DOL study in 2000 which found that between 10 and 30 percent of firms audited in nine states misclassified at least a portion of their employees. In 1984, the IRS estimated that the misclassification of employees meant a revenue loss of $1.6 billion.
Executive compensation: This includes non-salary compensation, like loans, travel, deferred comp, stock-based compensation and more.
Fringe benefits: The fun stuff some execs get, like the use of company aircraft or cars, club dues, and housing, among other perks, will be under the microscope. The audits may even include benefits like gift cards, employer cafeterias and athletic facilities, Morgan Lewis notes.
Payroll taxes: The agents will examine Forms 941, Employer’s Quarterly Federal Tax Return. As part of this, they will look at backup withholding, next-day deposit requirements and Form 1099/W-2 compliance, among other issues.
What can a firm do to prepare in case it receives notice that it will be part of the NRP? As a starting point, management should conduct an internal compliance review. That way, they’ll have a better idea of potential weak points, and to take steps to resolve issues that could prove to be sticking points during an audit, Packman says.
In addition, all CFOs need to recognize that this project “is the beginning of a long-term emphasis by the IRS on employment tax issues,” Packman writes. Once the NRP is wrapped up, the IRS will use the data it has gathered to focus on areas that were shown to have higher rates of noncompliance.
CPAs: Start Your Stimulus Engines
- Caleb Newquist
- December 16, 2010
Apparently this video is from last year but whatevs. Since the new year is creeping up fast, it serves as a friendly reminder that all the tax jockeys out there carry some heavy responsibility, stimulating the economy year after year.
Okay, let’s forget about the refunds for two. What’s really worth noting is all the CPAs out there scarfing bagels and guzzling coffee from January until March/mid-April because their time is far to valuable to bother going to the grocery store to buy a piece of fruit. Then think about all the late night take-out. The profession is single-handedly keeping bagel shops, pizza joints and various Asian restaurants in business year after year.
Then Joe Kristan makes the following point:
Never mind that the refunds are a result of overwithholding, or anti-stimulus, the rest of the year. Actually, in a way, it underlines how all “stimulus” spending really works: it takes our money all year, and we’re supposed to feel stimulated when they give a little of it back.
So in reality, the only stimulus is CPAs giving a boost to various segments of the restaurant industry. It’s not ideal but it’s an annual boost they can rely upon, nonetheless.
[via Tax Update Blog via Tax Lawyer’s Blog]
And I’d Have Gotten Away with It if It Weren’t for Those Blasted Accountants!
- Joe Kristan
- September 22, 2011
If you can get away with tax cheating, is it malpractice for your CPA to make you stop?
A Massachusetts CPA firm found out a new client was using a lame old trick. The S corporation had paid out $1 million to its owner over the years without putting it on a W-2 or treating it as a distribution from the company. Instead, the company every year booked it as a “loan” to the owners – a loan with no note, no interest rate, no security, and no repayments.
This is a time-dishonored way for people who carelessly suck cash out of a corporation to try to avoid the tax consequences – though it is less common in S corporations. It normally fails if the IRS figures it out.
The CPAs told the client that the “loan” should be reclassed as “wages” on the 2002 return to clean it up. The client owner was not excited, and talked to a lawyer to see if there was another way. After the first lawyer failed to satisfy, she talked to a second lawyer, who agreed with the CPA. The client reluctantly filed an amended return, and the owner found herself with a $500,000 tax lien.
At a national firm where I once worked, an audit partner would go from one tax person to another until he found one who told him what he wanted to hear. The client here took that approach, eventually finding a practitioner willing to prepare the 2002 return the old way. That was enough to get the client to file another amended return claiming a refund and to sue the old CPA for malpractice. That might have been a bad decision, in light of this reaction from the astonished judge:
It is surprising that Plaintiffs had the temerity to bring this lawsuit. The complaint was clearly filed too late. The record, mainly as a result of Plaintiffs’ failure to file long-overdue tax returns, is utterly insufficient to demonstrate damages. Most importantly, it is clear that Plaintiffs for many years enjoyed over $1,000,000 in income without paying any taxes on it, and they accomplished this by filing a tax return that improperly characterized the monies they received as a loan. It is close to ludicrous to claim that, by advising Plaintiffs to amend the 2002 tax return to conform with what the law and good accounting practice required, Defendants were being negligent. On the contrary, they were serving their clients ethically and well.
The judge also implied that the client might have been unwise in calling attention to the matter by filing the suit:
As a result of behaving professionally, Defendants have found themselves slapped with this expensive lawsuit. That undeserved headache, at least, is now over. The court can only hope that the IRS and the state authorities will make sure that Plaintiffs now proceed to do what everyone who enjoys the privilege of living in our beloved country is required to do: pay their fair share of taxes.
In other words: come and get ‘em, IRS!
In a world full of charlatans, it can be tough out there for CPAs who try to do the right thing. When you do, it’s nice to know at least one judge has your back.