Here are just a few areas that you’ll want to focus on to minimize the amount of money you’ll be sending to your friends at the local, state and federal taxation authorities while avoiding problems.

Deductions, Deductions, Deductions

According to the law your business can deduct all “ordinary and necessary” business expenses from its revenue to reduce its taxable income. Many of these expense deductions are obvious — business travel, mileage, equipment, salaries, or rent. But the rules governing write-offs aren’t always simple. Don’t overlook these potential deductions:

* Training for employees. several types of training for company employees may be deducted as long as the relationship between training and job roles is apparent.

* Purchases financed by business loans or credit cards. These costs can be deducted in the year the purchases are made even if they won’t be paid off until sometime in the future.

* Business Loans. The principal and interest you pay on your loan are business expenses and when classified correctly you can deduct them from your taxes.

* Startup expenditures. Only a portion of expenses related to starting up a business can be deducted — $10,000 of general startup costs, and $5,000 of organizational costs. Additional expenses must be amortized over 180 months once the company is up and running.

Pay Your Sales Tax

Generally, services provided are exempt from sales tax, while products sold are taxable. Knowing how to bundle services and products efficiently can help to save some types of products from tax. A knowledgeable tax accountant can help you manage these bundles for maximum effect.

If your business sells a product or service that is subject to sales tax, you’ll need to register with the state’s tax department. Of course you’ll need to track taxable and nontaxable sales and report them accordingly on your return.

Managing Payroll Taxes

If your business has employees, a variety of taxes will have to be withheld from their salaries. These are usually referred to as “payroll taxes”. The three primary payroll taxes are:

* Withholding. Social Security (FICA), Medicare, and federal and state income taxes must be withheld from employees’ pay.

* Employer matching. Businesses must match the FICA and Medicare taxes and pay them along with employees.

* Unemployment tax. Businesses must pay federal and state unemployment taxes.

If you use contractors in your business, make sure that they meet the specific definition of a contractor according to the federal government. A good overview can be found here: http://www.irs.gov/businesses/small/article/0,,id=99921,00.html

Make Sure Quarterly Estimated Taxes Are Correct and On-Time

Below are the most common pitfalls for small businesses, especially home-based businesses and entrepreneurs because they are easy to lose track of. However, quarterly estimated tax lapses can lead to cash flow problems and unfortunately IRS penalties, so it pays to stay on top of them.

* Do they apply to you? Probably. If your tax bill by year’s end will exceed $500 you’ll need to calculate and pay quarterly estimated taxes.

* How much is enough? As with all things related to taxation, quarterly estimated taxes can be a bit confusing as well. In general though you’ll need to have paid at least 90% of the taxes you owe or 100% of the previous year’s taxes. One caveat, if your business income is greater than $150,000 you’ll be required to pay 110% of your prior year’s tax bill.

Avoiding the Awful Audit

Let’s wrap up with one of the biggest reasons why you want a professional tax accountant on your side : Tax Audits.

If thinking about an audit is enough to make you queasy, then just try to imagine what you’ll feel like when you don’t even have the support of a professional taking care of your returns and making sure your audit goes smoothly.

There are many types of audits and they range from simple requests for specific types of information to comprehensive reviews that will examine virtually every detail of your business.
There are many types of audits, from bad to worse….:

* Correspondence Audit: essentially a request for information conducted through the mail.

* Office Audit: You report to a nearby IRS office to review and document items on your return.

* Field Audit: Meeting with an IRS agent and digging into the details of your return. This is what most think of when they hear “audit”.

* Taxpayer Compliance Measurement Program Audit: You’ll be asked to document and prove every item on your return. Participants are chosen at random and the results are used by the IRS and Congress for statistical purposes.

* Criminal-Investigation Audit: This is a very serious audit, it is used if you are suspected of tax evasion. If you are proven a tax evader… watch out.

Lexus Stimson is a plantation owner in Jackson, MS. He has gotten many tax tips from his accountant over the years. He found this site’s section on tax planning in Aurora to be helpful. For more information, click here or call 630-898-5578.

If any of these questions resonate with you, it may be time to consider hiring a professional income tax preparation service.

As taxpayers, we are required to file accurate tax returns on time. The reality is that the tax code is extremely complicated and meeting the requirements of accurate and timely filing becomes more difficult as the taxpayer’s income and deductions rise.

Generally speaking, people with only wage and interest income who are taking the standard deduction should be able to prepare their own returns. These folks may choose to hire a tax preparer just for the ease of preparation or to ensure they are getting all the deductions and credits they can.

Tax preparation software programs may be a good option for those who choose to prepare their own returns. They will generally be cheaper than hiring a professional tax preparer and will make the job faster and easier than doing it by hand.

However, once your tax return becomes more complicated it is usually time to bring in a professional. Any one of the following situations can complicate your returns and should tell you that it is time to see a professional.

* You own, sold or started a business.
* You have many investment losses or gains.
* You have capital asset transactions.
* You’ve bought a home or have other real estate transactions.
* You receive real estate rental income.
* You’ve had a change in marital status.
* Your income and residence are not in the same state or country.
* You have trust fund transactions.
* You’ll be completing a Schedule for self-employment income

Advantages of Hiring a Professional Tax Preparer

Your Time

In 2007, it was estimated by the IRS that the average person spent around 25 hours preparing tax returns. A professional can save you that time and the accompanying headache too!

Tax Preparation Fees May Be Deductible

Assuming you itemize, any fees you incur while preparing for your taxes can be deducted on Form 1040 as long as the sum of your miscellaneous deductions you are claiming here is greater than 2% of your adjusted gross income.

Save the Frustration

Filing tax returns is not only confusing and complicated, it is constantly changing. Every year, the Federal tax code is adjusted. Therefore, it is nearly impossible for the average person to stay up to date.

More Deductions and Credits

Even the best tax preparation software programs are not perfect in finding every single deduction and credit for your situation. The more complicated your tax situation, the more likely that something will be missed.

Audit Assistance

If you are faced with a dreaded IRS audit, only a CPA, Enrolled Agent, or Tax Attorney can deal with the IRS on your behalf. If you have self-filed, you’ll be going it alone.

Better Accuracy

Even if you are confident in your ability to file your taxes, mistakes are inevitable. Many professional tax preparers use software to double check their work and catch errors before filing.

More Convenience

The pressure of filing taxes is not to be underestimated. Many people choose to seek help for this reason alone.

In closing, you might consider that even Brad Smith, the CEO of Intuit, maker of TurboTax hires a professional tax preparer. As reported in USA Today, Smith was asked “Do you use TurboTax to file your own tax return?” He responded, “I use it every year to help my mom do her taxes and my brother. (I) have situations with trusts and things, (so) I’ve used someone to help me with my taxes the last couple of years. I do go through my own taxes with TurboTax and compare it (with my accountant’s results).”

Mercedes Johnson is a small business owner in St. Louis, MO. She spends a lot of her free time learning about running a business. She found this site, http://www.kleinhallcpa.com/taxprep.php, about tax preparation in Naperville to be helpful. For more information, call 630-898-5578.

What is Forensic Accounting, and What is a Forensic Audit?

Forensic accounting is a financial service which concentrates on identifying or preventing fraud in business settings; forensic audits performed by forensic accountants focus on identifying ways in which a business is vulnerable to fraud or identifying fraud which is being committed. Professionals who are qualified to perform forensic audits gather concrete evidence which is admissible in a court of law.

Common Aspects of Fraud

Embezzlement is the most common form of fraud in business settings. People who commit embezzlement typically do so systematically, in small amounts to avoid detection. Without the help of a forensic audit, embezzlement can often continue over a long period of time, adding up to significant financial losses for the company against which fraud is being committed. If tried, civil fraud cases (cases in which the victim is an individual, not the public) are often settled out of court, meaning that the person who committed fraud is able to walk free and commit fraud again.

When a forensic accountant performs a forensic audit, he or she investigates the business financial records in search of patterns which could indicate skimming or embezzlement. Forensic accountants also perform thorough background checks of employees, since people who commit fraud often have a history of doing so.

Detecting Fraud through Forensic Auditing

Forensic audits involve a very detailed, thorough investigation of every aspect of a business financial activities and history, a process which may involve detective work.

Take, for example, a restaurant owner who suspects that one of his waiters is skimming cash from his or her tables. In order to take action against the employee, however, the business owner requires proof. A forensic accountant might begin by hiring trained professionals to dine at the establishment in order to observe the employee in question take orders, place orders at the kitchen, deliver food and complete sales at the cash register. The professional might find that the employee completed credit card transactions normally, but voided the sale whenever dinner was paid in cash, pocketing the cash.

By itemizing all voided receipts, the forensic accountant could determine exactly how much money the employee was skimming, providing the restaurant owner with the evidence needed to press charges.

Forensic Auditing and Fraud Prevention

Forensic audits are not only used for detecting fraud; a forensic accountant may also investigate a company to find any areas in which the company may be vulnerable to fraud. By identifying these areas with a thorough forensic audit, companies can take action to prevent fraud by following recommendations such as using video camera monitoring, increasing management involvement, segregating duties or performing random spot audits.

Maggie Segundas is an assistant to West Michigan forensic accountant Doug Zandstra. Mr. Zandstra is a CPA, EA and CFA with over 15 years’ experience. Based in Grand Rapids, Michigan, Mr. Zandstra provides expert forensic accounting services in cases involving fraud. To enlist Mr. Zandstra’s forensic auditing services, visit www.forensiccpaservices.com

For those of you running to your trusty copy of the IRC, Sec 6041 generally requires information returns to be made by every person (payer) engaged in a trade or business who makes payments (as defined in Sec 6041(a)) in the course of the payer’s trade or business that are in aggregate $600 or more to another person. Broadly, the new requirements (as reported in E@lert earlier this year) expand Sec 6041 information reporting requirements to apply to payments made to corporations and to include certain payments of gross proceeds with respect to property.

In order to provide guidance for the new law, which applies to payments made after December 31, 2011, IRS issued Notice 2010-51 requesting public input. While it proposed regs exempting payment of credit card purchases otherwise reportable under Sec 6050W, the Service did not issue proposed regs for the entire new law; instead opting for an approach that allows more flexibility. The notice allows for a 90-day comment period closing on September 29, 2010.

While the National Association of Enrolled Agents will be providing comments on behalf of the enrolled agent community, individual EAs are also welcome to provide individual comments. Should you be interested in providing comments, IRS has posted the following instructions on its website illustrating three methods of submission:

Email comments to: Notice.Comments@irscounsel.treas.gov. Include “Notice 2010-51″ in the subject line. Mail comments to: Internal Revenue Service, CC:PA:LPD:PR ( Notice 2010-51), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Hand deliver comments to: CC:PA:LPD:PR ( Notice 2010-51), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue NW, Washington, DC, between 8 a.m. and 4 p.m., Monday through Friday.

Also, the government relations team would be interested in receiving a copy of your comments. Please copy them at governmentrelations@naea.org. One suggestion, your response will be most effective if you focus on two things: the five specific questions on page four of the notice and real world examples. IRS attorneys, by and large, do not have the wealth of practical experience that enrolled agents have and that’s why the real world examples are so welcome.

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The audits, a component in the first statistical analysis since 1984, are designed to investigate the frequency with which companies misclassify workers in order to save money by not paying their share of FICA taxes, failing to pay taxes on fringe benefits such as bonuses and employee personal use of company vehicles and other payroll related obligations. IRS says that the companies will be randomly chosen.

“We think that businesses have changed significantly over the last 25 years,” said John Tuzynski, chief of employment tax operations at the IRS, in an interview on September 18, 2009. “This will help us find out where there are real issues that we have to address.”

Based on the 1984 data, the Treasury Department estimated in 2005 that US companies underpay employer taxes by around $14 billion annually. A particular area of concern is the classification of workers as independent contractors rather than employees.

Echoing the IRS’s sentiment, the Government Accountability Office said in August, 2009 that employee misclassification could be a significant problem with adverse consequences because it cheats the government out of tax revenue and employees out of labor protection. Typically, independent contractors do not qualify for benefits such as health insurance, overtime pay and unemployment insurance.

Mr. Tuzynski has aid that the audits are to be undertaken over a three year period and would also focus on S corporation officer salaries, company cars and corporate owned vacation properties. Most of the audits will be held in person; however IRS will also use internal information as a supplement. Mr. Tuzynski also said “We’re going to try to make it as least burdensome as we can.”

Employers are required to pay half of their employees’ FICA taxes which translate to 6.2% for Social Security and 1.45% for Medicare. These percentages are generally calculated using the employees’ gross wages. Employers are also required to pay both federal and state unemployment taxes on behalf of their workers. Independent contractors are required to pay the entire levy themselves.

The Bureau of Labor Statistics reported that 10.3 million workers, or about 7.4% of the workforce, were classified as independent contractors in 2005. It is unknown how many of these were misclassified.

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Many of the returns that included these wages were filed utilizing the taxpayers’ correct names and social security numbers or individual taxpayer identification numbers (ITIN’s). While this is predominant among illegal aliens, collections activities on the accounts of legitimate identification number holders can create considerable problems for both parties.

The TIGTA report concludes that the Internal Revenue Service does not currently have the resources or ability to identify this type of identity theft. TIGTA investigated this activity after it was apprised that numerous individuals, fraudulently utilizing other people’s Social Security numbers for wage earning purposes, had their wages garnished by IRS due to the delinquent tax accounts of the legitimate holders of said numbers.

ITIN’s are intended to provide tax identification numbers to both resident and nonresident aliens, but do not change an individual’s immigration status. Part of TIGTA’s investigation was to assess whether IRS has policies and procedures to effectively address collection issues relating to ITIN’s.

The analysis found that IRS lacks employee guidelines with regard to assisting the taxpayer whose wages are being attached or the legitimate Social Security number holder who almost certainly is a victim of identity theft.

TIGTA recommendations include updating guidelines for collection issues associated with ITIN’s, alerting taxpayers that their identities most likely have been compromised and matching ITIN returns with their related reporting returns.

Numerous benefits would almost certainly be derived from IRS adopting TIGTA’s recommendations; not the least of which would be the creation of another avenue by which authorities may detect and subsequently deport illegal aliens.

The adoption of said policies would also help prevent taxpayer identity theft, ultimately reduce the demand for IRS resources, reduce the comingling of taxpayer accounts and provide for greater accountability among non-citizens working in this country.

Another consequence of IRS’s seemingly lax oversight of ITIN usage according to the Center for Immigration Studies is the threat to homeland security by not adequately insuring that identification numbers are not issued to terrorist, criminals on the FBI database and those under deportation notices.

Additionally, the Center alleges that IRS subverts immigration law by failing to prevent illegal aliens from receiving tax benefits to which they are not entitled and withheld from public review data that is relevant to determining the economic contribution of illegal aliens to US society.

Rizzolo Group has many years experience helping small business owners decrease taxes and improve profitability. You need the fight financial data and the right tax preparer who knows accounting bookkeeping, payroll services and gives you timely advice. Rizzolo Group does that!

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One of the first places to look for information is in your accounting software. If your business uses an accounting software package to track your sales and expenses and banking that means that you have a wealth of information to work with to see how you can improve your bottom line.
This information will give you an accurate history of how you have been performing and from those previous trends you can get a better idea of where sales come from and what can be done to improve them. We will discuss some basic things that you can look at to see how you can start to improve your business.

Who are your top five customers in sales?
Most businesses will have a small number of customers that they deal with for most of their turnover. Do you know which customers they are? It could be the case that you will have customers that you will do a lot of work for but actually they may not get you much in the way of revenue. These customers may be a lot of work and at the end of the day not generate much profit. This means that they may not be as important as you think due to the amount of labour involved.

Who are your top five customers with regards to margin?
Businesses normally sell a range of products or services and they will have different price structures and costs, this means that some of your products will have a better margin. This mean that the gross profit you get from some sales will be a lot higher than others.

Looking at these two things could lead to insights that you may not have noticed about your business. Do you have customers that you spend a lot of time with but they do not purchase as much as other clients? This means that maybe you should spend some more time focussing on some of the other clients to see if you can improve their sales. If you have customers that buy a large amount without much encouragement from you could you increase the amount they buy by spending some extra time on them?

With looking at the margin of customers there may be some services that you offer that may give you a very low return. Are there other services or products that you could offer them that offer you a higher return? Are your prices a lot lower than other businesses and should they be increased to match what the market rate is?

These two aspects of who your top customers are and which ones have the best margin are very important tools for your business. They will offer insights into how your business is actually performing and who your most important customers actually are.

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This is not something I would normally do but this client is a real estate investor and I could tell from my personal tax preparation interview with her that their return was not correctly prepared. I began comparing the numbers from their worksheets to the tax return.

It quickly became evident that I was not going to be able to complete the review that way that they wanted me to do it. Why? As a CPA with over 20 years experience in personal tax preparation, I have an intuitive feel for the way the numbers should come out. If something doesn’t look right to me, I go back and check the back-up calculations made by the software to see if the calculations make sense.

It turns out you can’t do this in Turbo Tax. At least, I couldn’t after over an hour of fiddling around with the software trying to figure out why the state tax refund was coming out wrong and why depreciation on their rental properties was not what I expected it to be. My conclusion, Turbo Tax is completely inappropriate for personal tax preparation that includes small businesses reported on Schedule C or rental properties reported on Schedule E or frankly, anything else even remotely complicated (which is basically the entire IRS tax code)

Here’s are the major differences between an experienced CPA preparing your personal tax return and using an off-the-shelf personal tax preparation software like Turbo Tax to do it yourself:

1. An experienced CPA uses judgment to determine where maximum deduction is available for expenses. It does matter where you put deductions on a return. Turbo Tax cannot do that.
2. An experienced CPA spends hundreds of hours a year keeping up with and applying new tax laws. A person trying to use Turbo Tax does not.
3. An experienced CPA can tell you if you calculated deductions like depreciation correctly. They know what to look for and can tell if you made an error. Turbo Tax cannot.
4. An experienced CPA knows how to audit-proof your tax return so that you eliminate the “red flags” that cause IRS tax audits. Turbo Tax cannot.

Overall, I found that my new client had made numerous mistakes trying to do their own taxes. They had misapplied a tax law to their benefit, they had doubled up some deductions, and they had calculated the cost basis of their rental property incorrectly. They were an IRS tax audit waiting to happen.

Even with those errors, all of which were to their benefit, I was able to find enough missing deductions and move some existing deductions to other schedules to get them a larger personal tax refund than the Turbo Tax return they had prepared. They netted an additional $1,000 even after my charge for re-doing their personal tax preparation was paid.

The moral of the story: minimizing and audit proofing your taxing Is a job for an experienced CPA and does not come out of a box!

Ted Lanzaro, CPA owns and operates Lanzaro CPA, LLC, a boutique tax strategy, accounting and IRS debt resolution firm with offices in Shelton, CT. He can be reached by phone at 203-922-1742 or via email at Ted@lanzarocpa.com. You can visit his website at www.lanzarocpa.com.

The IRS has determined that small business owners filing schedule C have the most likelihood to be underreporting their income or overstating their expenses. This information is based on research done by the National Research Program (NRP), the arm of the IRS that collects data to measure taxpayer compliance.

The IRS has determined the following areas are where most of the “cheating” occurs. If this sounds like you, it’s time to stiffen up your record-keeping and documentation for 2010 in order to minimize the downside if you are audited by the IRS.

The primary audit areas are:

1. Income – IRS suspects are many small business owners are under reporting their income, not reporting cash income, and/or not properly reporting income earned from barters and cancelled debts.
2. Car & Truck Expenses – IRS suspects that many small business owners are overstating their expenses by either not reducing their costs by their personal usage or by overstating the number of business miles actually travelled every year.
3. Travel & Entertainment – IRS suspects that small business owners routinely charge personal travel and meals against their business. Only ordinary and necessary business related expenses for travel and entertainment are deductible.
4. Rents – IRS suspects that business owners that own buildings that are being rented from them by their business are overcharging their business for rent in order to avoid self employment taxes. Rents must be “reasonable” and reflect current market rents for the area.
5. Sham Businesses – These are write-offs by individuals who really are not operating a business but are trying to write off the expenses of their hobbies against their other earned income. Be sure you are operating your business like a business if you expect to get the write-offs that are available to a business.
6. Independent Contractors – the IRS suspects that small business owners are treating employees as independent contractors to avoid the payroll taxes associated with employees. If you have independent contractors that you are paying, be sure that you are in compliance with the rules that differentiate employees from independent contractors.

There are definitely steps you can take to minimize the risks of being audited in these areas. Proper documentation of deductions is the key. For example, proper receipts, business mileage logs, and independent contractor agreements play a big role as to whether the IRS allows you to keep your deductions during the audit. Another strategy would be to select a different entity to run your business such as a corporation, S corporation or partnership. The proper entity selection is based on your unique circumstance and should be discussed with your tax advisor.

Ted Lanzaro, CPA owns and operates Lanzaro CPA, LLC, a boutique tax strategy, accounting and IRS debt resolution firm with offices in Shelton, CT. He can be reached by phone at 203-922-1742 or via email at Ted@lanzarocpa.com. You can visit his website at www.lanzarocpa.com.

IR35 is legislation that is contained in Chapter 8 of ITEPA 2003 that says that if a worker who is supplying a service personally is a disguised employee of the client then the worker should be suffer tax and national insurance on the same basis as other employees.

So this legislation ignores the fact that the worker may be working for their own Limited Company and focuses on the arrangements under which the worker is supplied.

It does not make any difference if you are working through an Agency or Staffing Company either, the legislation interacts with Chapter 7 of ITEPA 2003 which basically says that if an Agency engages a worker then they have to apply PAYE unless the worker is engaged through a Limited Company.

This legislation applies when the worker is engaged through a Limited Company, and the worker (and their associates) has a shareholding of 5% or more.

If the worker is working with an Umbrella Company then they will not own 5% of the shares so IR35 does not apply, but the Agency Legislation does still apply.

In effect what this means is that any Professional Contractor and Freelancer who runs their own company should be aware of this legislation as it does apply for each and every engagement that you take on, whether direct for a client, or though a staffing company.

The effect of a contract being caught by the legislation is that the Intermediary (your Limited Company) is required to calculate a Deemed Payment, on which PAYE and National Insurance is applied.

So how you could be caught by this legislation is the thing that all UK Contractors and Freelancers need to understand in order to ensure that they are HMRC compliant. Contractor accountants can help and guide you with this.

Not being HMRC compliant means that you may face an unexpected tax bill, years after you complete a contract.

For a contract to be caught by the legislation it needs to be shown that:

“The circumstances are such that, if the services were provided under a contract directly between the client and the worker, the worker would be regarded for income tax purposes as an employee of the client.”

This is an important point to be remembered.

A contract caught by the rules is one where the engagement is one of employment.

This would be a contract “of service”

Therefore:-

A contract that is outside IR35 is one where the engagement is NOT one of employment.

This would be a contract “for service”.

For the sake of clarity there is no need to prove self-employment for the contract to be outside IR35, you need to just prove that the contract is NOT one of employment.

This difference is slight, but vital!

So all contractors and freelancers in the UK need to be aware of what tests will be applied to see if these rules apply to their engagement.

It is not just enough for the contractor to think their Agency or Client will know the rules and organize things in their favor. The contractor themselves can be personally liable for the unpaid tax if the contract is shown by HMRC to be inside IR35.

Apart from knowing what the rules are and how they are applied, it is a good idea to get your contract checked by an IR35 specialist.

Contractor accountants should be able to help you with this and they can guide you on your final decision as to how to apply the rules in your case.

Sally Fletcher is New Client Adviser with BFCA Limited Chartered Accountants.
Sally has been helping Professional Contractor and Freelancer Clients since 1994 and has a wide range of experience and knowledge in this sector. Accountants For IR35 & Contractors