Archives for August 2018

IRS Approves Back-Door Roth IRAs

August 20, 2018 by Frank

IRS Approves

Back-Door Roth IRAs

The Ever-Changing World of Taxes

In our October 17, 2017 post, we cautioned taxpayers who used the back door Roth (converting a traditional IRA to a Roth IRA) that the IRS could challenge the use of this strategy claiming that it violated the step transaction doctrine. For those taxpayers who are not familiar as to why a taxpayer would attempt to convert a traditional IRA to a Roth IRA using the back-door strategy, please read our October 17, 2017 post.

The good news is that the IRS has now officially stated that they are ok with the back-door Roth strategy. In a Tax Talk Today webcast, Donald Kieffer Jr., tax law specialist (employee plans rulings and agreements), IRS Tax-Exempt and Government Entities Division, said the back-door Roth is allowed under the law. The IRS position is based on the conference report for the Tax Cuts and Jobs Act, Congress weighed in and said “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA.” Since Congress writes the tax law and congressional intent is a big part of interpreting the law, it was now pretty clear that the back-door Roth is a viable planning strategy.

However, while the back-door strategy is a viable planning strategy, taxpayers still need to understand the tax law to avoid unexpected tax consequences. Some of the tax pitfalls include: [Read more…] about IRS Approves Back-Door Roth IRAs

OUTSOURCING PAYROLL?

August 14, 2018 by Frank

OUTSOURCING PAYROLL?

Understand your Outsourced Payroll Responsibilities

Let’s face it. Payroll compliance is challenging, complex and time-consuming with the different federal, state and local rules, withholding tables, return filing dates, and tax withholding remittance dates. It’s hard enough to run a business without the headaches of processing payroll. If the payroll withholdings and remittances are not done properly, the employer may find itself subject to substantial penalties.

Accordingly, many employers outsource their payroll and related tax duties to third-party payroll service providers to help assure that the filing deadlines and deposit requirements are timely met. There are numerous national and local payroll processing companies. When choosing a payroll service provider, the employer needs to perform its due diligence. Unfortunately, some business owners view payroll compliance as a necessary evil and hire the lowest-cost payroll processing company without fully understanding the risks involved in such an approach.

Employers need to understand that they are ultimately responsible for the payment of income tax withheld and both the employer and employee portions of social security and Medicare taxes. What this means is that if your payroll processing company absconds with your company’s withheld payroll taxes, you are responsible for the payment of these undeposited payroll taxes, including interest and penalties. The Allentown PA Morning Call newspaper reported in April 2017 that a Bethlehem payroll processing company (NEPA Payroll Services) stole $5.3 million in wage taxes from clients of NEPA. The businesses that were the victims of NEPA were found ultimately responsible for the payment of these taxes. How many of these businesses were forced into bankruptcy?

But it gets worse! The IRS will not only assess the business for the unpaid taxes, but also make personal assessments against all responsible persons (Code Sec. 6672(a)). These responsible persons can be found liable even if they had no knowledge that the IRS was not being paid. So if you are found to be a responsible person, the IRS can pursue you personally for payroll taxes if the company fails to pay.

TAX SAVINGS ALERT: If there are issues with an employer’s payroll account, the IRS will send correspondence to the employer’s address of record. The IRS recommends that employers not change their record of address to that of the payroll service provider as it may limit the employer’s ability to be notified of tax matters regarding their business. Whenever the IRS learns of a change of address, it sends a notification to the last known address of record asking for confirmation of the address change. Upon receipt of such notice from the IRS, employers need to work closely with their tax professional to ensure that improper changes to the address of record are not being made.

TAX SAVINGS ALERT: Depending on the facts and circumstances, and the type of third-party arrangement (Payroll Service Provider, Reporting Agent, Section 3504 Agent, Certified Professional Employer Organization), an employer who uses a third party to perform federal employment tax functions on its behalf may remain solely liable for federal employment taxes, may become jointly and severally liable for such taxes or may be relieved of liability for such taxes. The IRS has provided a Third Party Arrange Chart that business owners may find useful in deciding the best payroll service provider choice for their business.

TAX SAVINGS ALERT: The IRS recommends that employers confirm with the IRS that its payroll taxes are being remitted to the IRS by the payroll service provider. The IRS recommends that business owners enroll in the Electronic Federal Tax Payment System (EFTPS) which will enable them to confirm that payroll tax deposits are being made on their behalf. Registration is done online and the IRS within 7 days will send the business owner a pin and instructions on how to create a password. Taxpayers can learn more about the EFTPS system by reading IRS Pub. 966.

TAX SAVINGS ALERT: If you suspect your payroll service provider of improper or fraudulent activities involving the deposit of your federal taxes or the filing of your returns, you can file a complaint using Form 14157 Complaint: Tax Return Preparer (PDF). The IRS has streamlined the process to file Form 14157. You can mail the form, or fax it to 1-855-889-7957. Once received, the PSP-identified complaints will receive expedited handling and investigation.

If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.

Copyright © 2018 Keystone Financial Solutions, P.C. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

Bryan Haarlander is an IRS licensed Enrolled Agent and who owns and operates a specialized tax services firm serving clients in the western suburbs of Philadelphia, PA, which includes the cities of Chester Springs, Coatesville, Collegeville, Devon, Downingtown, Exton, Frazer, King of Prussia, Paoli, Philadelphia, Phoenixville, Pottstown, Radnor, Reading, Wayne, West Chester in Berks, Chester, Delaware, Montgomery and Philadelphia Counties, as well as clients in Delaware, New Jersey, New York and throughout the continental USA.

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.

6-YEAR STATUTE OF LIMITATIONS

August 6, 2018 by Frank

6-YEAR STATUTE OF LIMITATIONS

How Long Does a Taxpayer Have to Maintain Tax Documentation to Support Tax Return?

A question taxpayers often ask is “How long must I maintain my tax records?” Unfortunately, there is not one answer, except, “It depends.” In most cases, maintaining three years of tax records is sufficient. If you own assets that are used in your business, the statute of limitations (SOL) could be five, seven, 27.5, or 39 years. If a taxpayer is found to file a fraudulent tax return, then the SOL never expires.

In the case of Manashi, U.S. Tax Court Docket No. 13034-13, the taxpayer was introduced to the 6-year SOL rules. Robert Manashi owned [Read more…] about 6-YEAR STATUTE OF LIMITATIONS

HOME OFFICE DEDUCTION DENIED

August 1, 2018 by Frank

HOME OFFICE DEDUCTION DENIED

Tax Court Agrees with IRS –

Home Office Deduction for Storage Denied

IRS Sees Through the Smog &

Taxpayer Strikes Out

Mohammed Najafpir (US Tax Court, Dkt. No. 9660-16, TC Memo 2018-103) owned a smog prevention business that he operated as a sole proprietorship. The IRS found that he had unreported gross receipts from his business. Since the taxpayer failed to maintain adequate records to establish his gross revenues, the IRS used the bank analysis method where it reconstructs the gross receipts from bank statements.

Strike one! The taxpayer argued that the IRS’s method resulted in non-taxable bank deposits being erroneously included as business gross receipts. However, since the burden of proof rests upon the taxpayer to prove the nature of the deposits, which the taxpayer was unable to do with respect to all of the deposits the IRS classified as unreported income, the IRS’s findings were affirmed by the court.

Strike Two! The IRS also denied the taxpayer claiming a home office deduction for storage of inventory. The taxpayer had contended that the use of his garage to store business records made him eligible for the claimed home office deduction. The court again found for the IRS stating that the taxpayer did not meet the conditions of the Internal Revenue Code which requires that a taxpayer have a trade or business of selling products at retail or wholesale to claim a storage deduction. The fact that the taxpayer may have stored his business records in his garage failed to constitute inventory.

Strike Three! Taxpayer argued that he should not be assessed a penalty for failure to timely file his returns because he was unable to find a reliable accountant in a timely manner. The court found that the taxpayer’s argument lacked reasonable cause and affirmed the penalty assessment.

What Can We Learn from this Case?

Taxpayers are entitled to claim every legitimate expense to reduce their tax liability to the lowest possible amount. Much can be learned by reading court cases . . . while the reasons why the IRS chose to audit this taxpayer is not public knowledge, let’s consider some factors that may have perked the IRS’s interest.

Fact: Schedule C filers – sole proprietorships – are the most audited business tax returns.
Claiming a home office increases the likelihood of an IRS audit.
The IRS compares a business’s expenses to its gross revenues. Is it possible that the expenses claimed in this case, compared to the gross revenues reported, made the IRS suspicious that the gross receipts were underreported?
Some taxpayers who self-prepare their tax returns may be more aggressive in claiming dubious tax deductions that those prepared by a tax professional.
During the examination, the IRS learned that the taxpayer had a cash slush fund of $60,000.
The taxpayer represented himself in Tax Court. Why? Didn’t wish to spend attorney fees? Attorneys interviewed by the taxpayer told him that his chances of prevailing were slim to none? The taxpayer thought that the courts are pro-taxpayer? Or, did he simply want his day in court to show the injustice of the tax system?

TAX SAVINGS ALERT: When preparing a tax return, it is important that claimed tax deductions are substantiated by the facts and by documentation. Taxpayers who fail to substantiate claimed tax deductions can find themselves subject to the 20% accuracy-related penalty.

Copyright © 2018 Keystone Financial Solutions, P.C. All rights reserved. BE SURE TO READ THE DISCLAIMER PAGE: Content in this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher of this blog makes no representations as to the accuracy or completeness of any information herein, will not be liable for any errors or omissions, and shall not assume liability for any losses, injuries, or damages from the display or use of this information.

About F. Bryan Haarlander, EA, CTRS:

A Certified Tax Resolution Specialist, Bryan is well-known for his IRS tax resolution expertise and his book How to Resolve Your IRS Tax Debt Problems.