audits

Retirement Planning – Health Savings Account (HSA)

January 18, 2022 by Frank

Kiplinger published on January 5 an article by Kevin Webb, CFP, about using HSA accounts to fund retirement.

Déjà vu: Our July 5, 2016 Blog Discussed this Strategy.

When financial advisors write about retirement planning, their focus is usually on 401(k) & 403(b) plans, Individual Retirement Accounts (IRAs) – traditional and Roth, and perhaps non-qualified plans. How often are the overlooked HSA plans mentioned?

What is an HSA?

An HSA is a tax-advantaged way to save money to pay for qualified medical expenses. Generally, most HSA participants contribute the amount of anticipated health care costs they will incur for the year, and then withdraw funds from their HSA account to pay for those medical costs. At the end of the calendar year, if all goes as planned, the HSA account balance is zero as all the funds contributed to it (to lower taxable income) are withdrawn to pay medical expenses.

It is available for people who are covered by a high-deductible health insurance plan. While some high-income earners may find themselves ineligible for a Roth contribution or IRA tax deduction as their earnings exceed stated income ceiling thresholds, HSAs have no income limits on who can contribute.

What is a High Deductible Health Plan (HDHP)?

A HDHP has a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more health care costs yourself (your deductible) before the insurance company starts to pay its share.

For 2022, the IRS defines a HDHP as any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. An HDHP’s total yearly out-of-pocket expenses (including deductibles, co-payments, and coinsurance) can’t be more than $7,050 for an individual or $14,100 for a family. (This limit doesn’t apply to out-of-network services.)

Generally speaking, a HDHP best fits those with minimal health care needs. Whereas this group of individuals often dismiss health care coverage and opt to pay-as-they-go since they are healthy, it may be in their best financial interest to go with a HDHP and create an HSA account. As we generally incur more health issues as we age, it is all the more important to take full advantage of an HSA while you can.

HSA owners who wish to maximize the HSA benefits should be able to comfortably pay their medical expenses using after-tax dollars rather than reduce the HSA account balance to pay for those medical bills. The HSA retirement benefits are maximized by investing the contributions for growth and not withdrawing them right away for current medical costs. When they are withdrawn immediately, the account loses one of its three tax benefits (see below), as it is being denied the opportunity for tax-deferred growth.

The Triple Tax Benefits of an HSA

HSAs offer:

Unlike a flexible spending account (FSA) where the contributed funds have to be spent or are lost, HSAs allow account balances to roll over into future years. This makes HSAs an ideal long-term investment account (and medical retirement plan). HSAs provide:

Tax deductions on contributions;

2. Tax-deferred growth; and

3. Allows Tax-free withdrawals if used for qualified medical costs.

Paradigm Shift Needed

Many taxpayers contribute the maximum they can to their 401(k) plan, and with any remaining money, they contribute that amount to an HSA. Perhaps a paradigm shift is needed. Contribute the maximum amount allowed by the IRS to the HSA and contribute the remaining funds to a 401(k) plan. While both 401(k) and HSA plans allow pre-tax contributions, the monies withdrawn from a 401(k) plan are subject to income taxes whereas HSA plans, if properly done, can have those contributions and earnings come out tax-free. If the HSA withdrawals are used to pay for medical expenses, they are free of income tax.

Another benefit of HSA plans are that they do not have any limitations on when a health care expense is incurred and when it is reimbursed. If you maintain those health care expenses that you incurred out-of-pocket while the HSA plan was in effect, you can reimburse yourself for those medical expenses many years later free of income tax. That’s right – tax-free income received in your retirement years. IRS Notice 2004-50 Q&A 39 discusses the rules that govern these distributions.

Unlike qualified retirement plans that dictate when you must begin to take distributions from those plans, there is no such requirement with an HSA plan. You decide when you wish to make those tax-free withdrawals.

Are Death and Taxes Certain?

What happens upon your death? Well, upon the death of the second spouse, the HSA becomes taxable compensation to the beneficiary who receives the HSA.

That is the case unless you make a gift of your HSA plan to a beneficiary who will then receive the same benefits that you enjoyed. While death can not be avoided, sometimes taxes can be avoided.

Tax Tip #1

We suggest you search HSA in the search box of our blog to read prior posts on HSAs and FSAs.

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.

BE SURE TO READ THE DISCLAIMER PAGE: Tax laws, IRS rules and regulations change frequently. Although we hope you’ll find this information helpful, this blog is for educational purposes only and should not be considered as the rendering of tax, legal or investment advice. The publisher 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.

Taxpayer Options When You Owe the IRS & Receive Notice of Intent to Levy

January 12, 2022 by Frank

Once the IRS makes an assessment against a taxpayer, it is required to send a series of notices to the taxpayer before it takes enforced collection action.

Substitute for Return

When a taxpayer fails to file a tax return, the IRS will sometimes file the return for the taxpayer. The IRS refers to this as a “substitute for return”. The IRS uses third party reporting information (W-2, Forms 1099s, etc.) provided to it to compute the taxpayer’s taxes due. When the IRS computes the taxes due, it does so using the filing status most advantageous to the IRS, ignores any tax credits the taxpayer may be eligible to claim, and when computing gains on sales, the tax is based on the gross proceeds and the IRS ignores the taxpayer’s cost. The IRS uses SFRs to motivate the taxpayer to file their own return. The IRS thinking is that when the taxpayer sees the taxes due computed by the SFR returns, he or she will file a return simply to reduce their tax liability.

Assessment of Taxes

After the taxpayer files their return or an SFR return is prepared for them by the IRS, the IRS assesses the tax due it. Once taxes are assessed, the series of IRS collection notices begin.

Notice of Intent to Levy

When a taxpayer has failed to respond to the series of IRS notices, the IRS’s “final” notice will state its intent to levy against the taxpayer. “Levy” is just another word for “seize”. The two most common types of levies are garnishment of bank accounts and wages. A levy is used to collect the taxes due the IRS.

A bank levy is that the IRS will seize whatever funds are in the taxpayer’s bank account as of the date of the levy notice. It’s a one and done process, unless the IRS sends the bank another levy notice.

A bank levy differs from a wage garnishment. When a taxpayer’s wages are garnished by the IRS, the wage garnishment continues indefinitely until the IRS debt is satisfied.

Action Steps to be Taken by Taxpayer Upon Receipt of Intent to Levy Notice

Unfortunately, far too many taxpayers do not respond to IRS notices. They often do not open IRS notices sent to them realizing it they often are not good news. Once their bank accounts are seized or wages are garnished, they get religion and want to resolve their IRS tax debt. Unfortunately, ignoring IRS notices has simply added to the taxes, interest and penalties they owe and certain appeal rights may have been lost.

IRS notices should never be ignored. Doing so only exacerbates the problem. The taxpayer’s response, along with a copy of the notice, should be sent by certified mail using the envelope provided by the IRS. The purpose in sending a response is to demonstrate that the taxpayer is concerned about their taxes and is not ignoring them. Depending upon various factors, a taxpayer response may place a hold on IRS collections.

Possible IRS Resolution Alternatives

Installment Agreement – The IRS gives the taxpayer the right to pay taxes in installments.
Audit Reconsideration – In some limited cases, the IRS permits audits of returns after collection has begun.
Hardship on Taxpayer – A hardship exists if levy action prevents the taxpayer from meeting necessary living expenses. The IRS should not undertake collection action if a hardship is present.
Currently not Collectible – If a taxpayer cannot pay taxes owed without placing them in a financial hardship (unable to pay necessary living expenses), then the IRS will defer collection by classifying the case as “currently not collectible (CNC)”. If this is done, collection is deferred until sometime in the future (usually two years).
Bankruptcy – Bankruptcy will discharge taxes in some cases. We recommend that an experienced bankruptcy attorney work with an experienced tax resolution specialist.
Offers in Compromise – The Internal Revenue Code permits the IRS to accept an amount less than the full amount if there is doubt as to collectibility, and/or doubt as to liability. While OICs are publicized by many firms on cable TV and the Internet, be aware that of the 7.4 million tax resolution cases settled by the IRS according to its 2020 news report, 14,288 taxpayers got accepted into the OIC program. That is less than 1/4 of 1% of all cases settled by the IRS. An OIC should only be submitted if there is a strong possibility that it will be accepted due to (1) the fact that OIC submissions toll the statute of limitations, giving the IRS additional time to collect the taxes due it; and (2) require a significant time and financial investment by the taxpayer.
Abatement of Penalties – In almost all cases, an abatement of penalties should be sought. It is easy to request that penalties be abated, and the abatement of penalties could substantially reduce the amount of a taxpayer’s total tax liability.
Taxpayer Advocate – The Advocate will help with almost everything except negotiating a payout with a Revenue Officer.
Possibility of Amended Returns – Original returns should be reviewed to determine if amended returns will reduce tax liability. If so, they often should be prepared and filed.
Has the IRS Made a Valid Assessment? Check the statute of limitations. Generally, an assessment must be made within three years from the date the return was filed, plus any extension executed by the taxpayer. In addition, the IRS has ten years after the taxes are assessed to collect the taxes. If the IRS has not followed the proper procedure, the assessment may not be valid, and the taxes cannot be collected.
Form 911 – The Taxpayer’s Emergency Number. This form requests that a Taxpayer Assistance Order be issued to stop certain action being taken by the IRS. The taxpayer must be “suffering or about to suffer a significant hardship as a result of the manner in which the internal revenue laws are being administered.”

Tax Tip #1

While the use of the above alternatives was until a year ago fairly easy to avail oneself of, due to the pandemic, IRS budget cuts, early retirements, and IRS inefficiencies, many of the above are very difficult to implement due to the inability to reach someone at the IRS.

Tax Tip #2

At all levels of the IRS, the taxpayer has certain rights, and the taxpayer should take full advantage of these rights. If a taxpayer owes taxes, it is usually in the taxpayer’s best interest to seek professional advice in helping to resolve the matter. Carefully choose your tax professional . . . not all tax professionals, attorneys, CPAs, and enrolled agents have the experience and training in resolving IRS tax problems.

Tax Tip #3

All communications with the IRS need to be in writing and you need to be able to prove the mailing of the notice, return, payment, etc. to the IRS. If you are speaking with an IRS agent on the phone, be sure to document the name and proper spelling of the agent’s surname with whom you are speaking and the agent’s IRS identification number, the date of the call, and the issues and agreements reached during that call.

Tax Tip #4

If a person instructs you that you qualify for an OIC and a Form 433-A(OIC) has not been prepared and reviewed by you and the tax representative, run, don’t walk away from that representative. There is no way that one can determine if a person qualifies for an OIC without doing a financial information statement (FIS). Analyzing a FIS is also very helpful in determining if the taxpayer qualifies for an installment agreement, what type of an installment agreement or CNC status.

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.

Mailing Woes – Burden of Proof is on Taxpayer

January 5, 2022 by Frank

Failure to follow IRS mailing rules causes taxpayer to lose refund claim.

Facts: Crispino vs. US

The Crispino v US federal district court case in New Jersey addresses some very important administrative law principles regarding the mailing of tax returns to the IRS. The IRS assessed the taxpayers taxpayers $134,000 finding that they did not properly report an IRA rollover as a taxable event. The taxpayers claim they filed a claim for refund before the statute of limitations expired.

Problem #1: The IRS collected the tax via two levies against the taxpayer. Money was now in the hands of the IRS.

Problem #2: The IRS says it never received the refund claim and thus denied issuing the refund. The taxpayers then refile their refund claim.

Problem #3: The IRS notifies the Crispinos that the second filing of their refund claim was made after the statutory period to claim the refund had expired and again denied their claim for refund.

How Did the Taxpayer Prove Their Refund Claim Was Timely Filed?

Their tax representative asserted in a deposition that that he mailed a refund claim using a postage label printed from a Stamps.com postage meter on April 15, 2015. Having heard nothing about the claim, the tax rep also testified that at some point in 2015 he checked on the claim’s status and learned that the IRS did not have a record of receiving it. In November of 2015, the tax rep mailed a copy of the (supposedly) earlier filed claim. On December 31, 2015, IRS mailed a notice of disallowance on the basis that the claim was untimely because it was filed beyond two years of the tax’s payment.

IRS Regulations Stipulate How to Prove Date of Mailing

IRS regulations (regs) provide that Section 7502 is the only way to prove that documents that IRS never receives were actually mailed.

As Leslie Book, a professor of law at Villanova University of Law discusses in his Procedurally Taxing Blog post, this is important because a statutory tax-filing requirement generally can be satisfied only by actual, physical delivery. Section 7502 provides an exception to the physical delivery rule if a document is postmarked before the deadline and received after the deadline. In addition, sending the document via registered or certified mail, or with an authorized private delivery service, establishes that the document was in fact received even if the document never was received or the IRS has no record of receiving it.

The issue as to whether a taxpayer can introduce extrinsic evidence to prove mailing in the absence of using a 7502-proscribed method or whether Section 7502 was the exclusive way to prove mailing has been contested over the years. Some circuits said yes; others said no. The Third Circuit, where an appeal in this NJ case would lie, had come down in favor of allowing a taxpayer to prove mailing beyond what Congress established in Sec. 7502.

Other than direct proof of actual delivery, proof of proper use of registered or certified mail, and proof of proper use of a duly designated private delivery service as provided for by paragraph (e)(2)(ii) of this section, are the exclusive means to establish prima facie evidence of delivery of a document to the agency, officer, or office with which the document is required to be filed. No other evidence of a postmark or of mailing will be prima facie evidence of delivery or raise a presumption that the document was delivered.

The Crispinos challenged the reg’s validity citing other court cases and Rule 406 of the Federal Rules of Evidence. Professor Book thoroughly analyzed each of these arguments and their merits, which is beyond the scope of this post. As Professor Book states in his blog, “the Crispinos are out of luck, at least insofar as getting a court to consider the claim’s merits. Whether they have a cause of action against their practitioner is another matter. The case is yet another reminder that if one is snail mailing something important to the IRS, it is worth the extra time and money to mail it in a way that eliminates any risk of non-delivery.”

Tax Tip #1

Carefully choose your tax professional. If your tax pro instructs you to mail returns or documents to the IRS, use certified or registered mail, AND keep those proof of mailing receipts. If your pro will do the mailings, then request copies of the proofs of mailing for your files. Remember that you, the taxpayer, are ultimately responsible for the filing of your taxes and paying your taxes due.

Tax Tip #2

When mailing tax returns or important documents to the IRS, be sure to read IRS Reg. 301.7502-1 regarding proofs of mailings that the IRS will accept. The IRS says that certified and registered mail are acceptable, but Priority Mail is not mentioned. If the IRS local service centers were open, you could request a hand-stamp proof of delivery. If you choose to use a private carrier such as FedEx, UPS ,or DHL, be careful as not every mailing from these carriers will satisfy the IRS rules to prove date of mailing. https://www.irs.gov/filing/private-delivery-services-pds lists which of these services the IRS will accept as proof of mailing.

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.

IRS FLEXING ITS MUSCLES

December 28, 2021 by Frank

Build Back America Plan Proposes $80 Billion Increase to IRS Budget Allowing Hiring of 87,000 New Employees

Taxpayers in the News

IRS cases against actors Charlie Sheen and Chris Tucker made recent news headlines. As the 2021 tax filing season is quickly approaching, the IRS is using this form of publicity to warn taxpayers to fulfill their tax obligations.

It has been reported that the IRS alleges that Chris Tucker (the Rush Hour actor) owes it $9.6 million in back taxes, interest and penalties for tax years 2002, 2006, 2008 and 2010 when he reported and paid significantly less than he actually owed. Court docs state that Tucker attempted to pay off his debt three times through monthly installation agreements, but they ultimately fell through for various reasons.

Actor Charlie Sheen is best known for his TV role in Two and a Half Men. He owes the IRS millions, is tired of its collection efforts, and has been trying to negotiate a deal with the agency. Mr. Sheen has unsuccessfully attempted to settle his IRS debt via an installment agreement and via an offer in compromise (OIC).

It has been reported that Sheen owes for tax years 2015, 2017 and 2018. His 2015 tax liability was $5.7 million. He supposedly offered the IRS $1,240,000 as a compromise, but later revised it to $3.1 million to cover all three years. When he made his revised offer, he paid the IRS $626,000 as the required 20% down payment. When an OIC is rejected, the down payment is not returned to the taxpayer, but is applied against the balance due. Mr. Sheen is now suing the IRS claiming it abused its discretion when rejecting his offer, citing his tortured history dealing with the IRS, and that the Los Angeles area director did not give him a fair shake.

Tax Tip #1

You need to understand that installment agreements are easier to get since the IRS isn’t reducing the amount the taxpayer owes, it is merely agreeing to get paid the entire balance due it (in most cases) over time. OICs are much harder to attain because the IRS is agreeing to accept less than the full amount owed. If the IRS’s financial analysis (Form 433A) shows that it can collect the entire balance due before the statute of limitations expires, it will generally not accept the OIC.

Tax Tip #2

There is likely more to Mr. Sheen’s story than is being reported or alleged by him. If the Form 433-A(OIC) financial analysis shows that the taxpayer qualifies for an OIC, the taxpayer’s offer will generally be accepted by the IRS. If Mr. Sheen merely made an arbitrary monetary offer that he thought was a fair offer to the IRS to settle his debt, and the financial analysis did not support that offer amount, the IRS would reject his offer.

When OICs are made, the taxpayer makes an offer for all tax years owed to the IRS and the taxpayer needs to be in compliance (fully paid) for all other tax years. From the facts of Sheen’s case that were reported, that doesn’t seem to be the case which is likely why the IRS would have rejected his offer.

Tax Tip #3

The IRS has announced that if (and when) it gets an increased budget, it plans to hire more agents to audit more taxpayers. If you are not currently in compliance, this may be the time to reevaluate that strategy. The longer a taxpayer is non-compliant, the greater the penalty and interest assessments. These can very significantly add to the total tax debt.

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.

Offers in Compromise (OIC) – The Numbers Behind the Hype

December 21, 2021 by Frank

Every taxpayer who has IRS tax debt wants to be accepted in the IRS’s OIC program. Who wouldn’t? OICs allow taxpayers to settle their tax debt for less than the full amount owed.

Misconceptions About OIC Program

One of the IRS’s 2021 “Dirty Dozen” tax scams are schemes that persuade taxpayers into unscrupulous actions, such as Offer in Compromise mills. Many of these OIC mills advertise that they can settle taxpayer debt for “pennies on the dollar”. Some falsely claim that they have a special relationship with the IRS to get OICs accepted by the IRS. Very often taxpayers spend thousands of dollars to these OIC mills only to find out later that their offer was rejected by the IRS.

The Truth About OIC Program

What does the OIC program mean to the average taxpayer in collection? Absolutely nothing. The cold hard facts are – almost no taxpayer gets an Offer in Compromise as a way to settle their IRS Collection Case.

In 2020, the last year statistics are available, the IRS settled 7.4 million IRS Collection Cases. Of those settled cases, only 14,288 offers were accepted. That’s right – less than 1/4 of 1% are settled with an Offer in Compromise.

Tax Tip #1

If a tax resolution firm says that you are eligible for an OIC and does not perform a financial analysis of your assets and income and expenses . . . run, don’t walk, away from that firm. The only way to determine if a taxpayer is eligible for an OIC is to perform an analysis of the taxpayer’s financial situation . . . looking at the fair market value of assets held, all debt obligations, gross income, and expenses allowed per the IRS tables. The IRS uses Form 433-A(OIC) to compute what an individual taxpayer’s ability to pay is.

Tax Tip #2

CPAs, attorneys and EAs (enrolled agents) are eligible to file OICs on behalf of a taxpayer. However, just because a person is eligible to represent a taxpayer before the IRS, does not mean that they are qualified to do so. The cost to have a professional file an OIC will run in the thousands of dollars, totally dependent upon the number of years of returns not yet filed, the complexity of those returns, whether the taxpayer is self-employed or a W-2 employee, the amount owed to the IRS and the number and types of assets and debt held to name a few considerations. While the IRS informs taxpayers that they can self-file their OICs, which is correct, the IRS does not share the intricacies of filing an OIC that reflects the lowest amount (if any) that a taxpayer can afford to pay.

Hence, the importance of engaging a tax professional who specializes in IRS tax resolution. This specialist may know the IRS’s rules better than the person evaluating your OIC and get you the very best offer available to you.

Tax Tip #3

Far too often, some tax professionals and taxpayers focus solely on the federal taxes owed. If federal taxes are owed, it is likely that state taxes are often due. It often is in the taxpayer’s best interest to resolve the state taxes before seeking relief from the IRS. Payments made to the state, if structured properly, can be an allowed expenses when computing what the taxpayer can afford to pay the IRS.

Tax Tip #4

If a taxpayer does not qualify for an OIC, all is not lost. Other resolution alternatives include installment agreements, currently not collectible (CNC) status, and penalty abatements. A tax professional who specializes in IRS tax resolution will be intimately familiar with these alternative plans and can advise you accordingly.

If you would like to discuss your business or personal tax planning, tax preparation and other financial If you have been using the IRS has a bank to hold your overpayment,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.

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.

Sole Proprietorship or Limited Liability Company (LLC)

December 13, 2021 by Frank

Operating as a sole proprietorship is the least complicated way to run a business. But, is it the best way to run a business?

The Simplicity of a Sole Proprietorship

In the eyes of the IRS and state taxing authorities, a sole proprietor has full responsibility for his or her business. That’s good for owners who want simplicity. Owners can comingle their business assets with their personal assets. All revenues earned by the business and expenses paid by the business can be deposited into or written from the personal checking account.

Generally, no special filings need to be made with the department of state or revenue when a sole proprietorship is used.

Why Would Someone Prefer Operating as an LLC?

To limit personal liability. When one operates as a sole proprietor, the business owner is personally liable, meaning his or her personal assets and savings can be at risk. Incorporating or forming an LLC generally protects the owner against personal liability.

To establish business credit and get funding. Once you form an LLC (or corporation), the business itself begins its own credit profile.

To give your business more credibility. Adding an LLC or Inc. after your company name boosts your credibility in the eyes of some customers and vendors. In fact, a formal business structure is required in some industries to win certain contracts. Some businesses are more comfortable hiring a business than a sole proprietor to do work for them.

Potential tax benefits. Sometimes, corporate tax rates are lower than individual tax rates. Plus, there are additional tax benefits and deductions for corporations that are not available to individuals. By incorporating, you’ll lower what you owe in self-employment taxes.

What Are the Negatives of Creating an LLC?

Negatives of operating as an LLC include, but are not limited to . . .

Registrations with the state department of state and department of revenue are usually required.

A separate set of books and records will be required. The business owner (in most cases) will not be able to comingle business revenues and expenses with the owner’s personal checking account.

If the LLC needs to borrow from a bank, the loan will be treated as a commercial/business loan and not as a personal loan, resulting in an increased loan interest rate being charged.

Tax Tip #1

A business owner can create their own LLC using one of the many Internet resources available. However, before doing so, the business owner should consult with an experienced tax professional AND business tax attorney. Tax professionals do not know all of the nuances of the legal law and regulations, and likewise attorneys generally are not well-versed with the federal and state tax rules and regulations.

LLCs can operate as a sole proprietorship (if only one owner), a partnership (if two or more owners), and as a corporation (regardless of the number of owners). An LLC electing to be taxed as a corporation can be taxed as an S Corporation by timely filing IRS Form 2553, or as a C Corporation. An experienced tax professional working with your historical financial records or your 5-year budget plan (if a newly formed business) can best advise you which type of LLC legal entity best suits your business.

Tax Tip #2

Although sole proprietors can comingle their business revenues and expenses with their personal checking account, that is never a good idea for several reasons. If audited by the IRS or state, the audit will be more simplistic if the LLC’s financial records are kept separate from the personal financial records. If the finances are comingled, the audit of the business will by necessity include that of your personal finances. Also, the auditor will likely want to classify every deposit in your personal checking account as LLC revenues unless you can prove otherwise. Will you be able to recall every deposit in your checking account two or three years later when the auditor shows up, and will you be able to prove the source of that deposit as not being business related? Keeping the books separate eliminates so many potential audit issues.

When it comes tax preparation time, it is important that the business transactions are easily and readily identified to prepare a complete and accurate business tax return.

Should you decide to sell the business, the buyer will want to see the financial records to verify the business activity. Likewise, the seller will not wish for the buyer to see his/her personal finances. Short order – keep the business financial activity separate from the personal checking account.

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.