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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.

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.

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.

IRS Backlog Reaches All-Time High

November 19, 2021 by Frank

We have periodically reported about the IRS’s backlog of unprocessed tax returns. The IRS commissioner has reported that all current filings are being addressed as received and the IRS is diligently working on the backlog of returns. The depth of the backlog has hit an all-time high.

Interest-Free Loans Taxpayers Give to the U.S. Treasury

Historically, some taxpayers like to overpay their taxes during the year as a means of forced savings. Come April 15, they receive a significant income tax refund from the IRS. This is tantamount to giving the IRS an interest-free loan. If the taxpayer had placed these funds in an interest-bearing account, their “bonus money” come April 15 would be greater that the tax refund because the IRS does not pay interest when a taxpayer overpays their taxes during the year. Due to concerns about ID theft and the increased algorithms the IRS uses to thwart ID theft, these refunds are often delayed by weeks or months. The situation has been exasperated by all of the recent problems of the IRS starting with its close during the pandemic and agents working remotely and its workforce reaching their retirement age.

Amended Tax Returns

Taxpayers sometimes make a mistake when filing their original tax returns. They may fail to include a Form 1099-R that they had forgotten, or their financial advisor sends them an amended 1099 to reflect corrected gains/losses on sale of securities, or changes to interest or dividend income previously reported. There are countless reasons why taxpayers may need to file an amended return. Most recently, there was much confusion about reporting unemployment compensation benefits. The IRS sometimes directly deposited these benefits in the taxpayer’s checking account, or the taxpayer simply did not provide their tax professional with the IRS notice showing the amount of benefits received. Hence, there were numerous (millions) amended returns filed in the past year. Taxpayers followed IRS guidance to go to its website and ask “Where is my refund?” only to be frustrated. If the taxpayers called the IRS Form 1040 hotline, the waits were very long and often the calls were automatically dropped by the IRS computers due to the backlog of calls.

Role of Taxpayer Advocate Office

The Taxpayer Advocate Office (TAO) branch of the IRS is an independent branch of the IRS that assists taxpayers who are having problems with the IRS and are experiencing a financial hardship due to the actions or inactions of the IRS. The taxpayer files Form 911 with the TAO who investigates the matter and nudges the IRS personnel to get their act in order. Due to the millions of taxpayers that were due a refund and had not received it, and their frustration of dealing with the IRS’s normal means of communication, these taxpayers contacted the TAO for assistance. This type of situation is exactly what the TAO handles.

TAO No Longer Helping with Amended Tax Returns

BUT, the backlog of millions of unprocessed tax returns at the IRS has prompted the TAO to reject requests for assistance where the only issue involves amended returns through the end of the year.

National Taxpayer Advocate Erin Collins, who runs the TAO at the IRS, announced the move in a blog post. The IRS has been facing a backlog of unprocessed tax returns since the start of the pandemic last year, when millions of pieces of unopened mail piled up outside IRS facilities. IRS officials have told Congress they have mostly caught up with the unopened mail, but the processing of all the tax returns is another matter.

The TAO was inundated with requests for help and has been unable to get the IRS to process the amended returns any faster, so it has made the decision not to accept requests when the decision only pertains to amended returns, at least through the end of December.

“Under our current procedures, TAS does not accept cases in which we cannot meaningfully expedite or improve case resolution for taxpayers,” Collins wrote. “Amended returns fall into this category. Due to the broad impact of COVID-19, the IRS has faced significant challenges in all its return processing operations. Unfortunately, until the IRS processes a tax return, TAS cannot assist the taxpayer. For that reason, TAS will not accept new cases solely involving the processing of an individual or business amended return. TAS will continue to monitor IRS developments in amended return processing and will reevaluate this determination as the situation changes.”

The TAO is still going to continue helping taxpayers with other issues. Collins said TAO would accept new cases if the main issue meets the case criteria detailed in Section 13.1.7 of the Internal Revenue Manual. The group, however, will mainly allocate its resources for now toward closing its current inventory of cases. TAO also plans to keep advocating for taxpayers at the IRS for changes to clear the unprocessed returns.

“On Nov. 9, 2021, I issued a Taxpayer Advocate Directive directing the IRS to complete processing all backlogged amended tax returns by Dec. 29, 2021, or provide a detailed plan for completing processing the backlog,” said Collins. “My TAD also directed the IRS to provide weekly updates to TAS on the progress in processing these returns and to post weekly updates on IRS.gov.”

Her office noted that taxpayers who are looking for the status of their amended tax returns can use the Where’s My Amended Return tool on IRS.gov. The IRS has also created a web page that includes updated information about IRS operations and backlogs.

“I appreciate your patience and understanding as we work through these unprecedented circumstances,” Collins wrote. “This is not a situation in which the IRS is unwilling to work with taxpayers or TAS. Rather, it has been caused by reduced staffing and the pandemic, which have created extraordinary challenges the IRS must overcome. We are aware of the problems taxpayers are experiencing, and we are continuing to advocate within the IRS to resolve them as quickly as possible.”

TAO Limitations

Unfortunately for taxpayers and tax professionals, the TAO can only make recommendations to the IRS. It has no power or authority to demand or implement changes. Thus, Ms. Collins’ blog post merely defines where the problem lies, but does not solve the problem.

Tax Tip #1

These are unprecedented times that require taxpayers to be patient. Be sure to keep copy of all of your IRS correspondence and your telephone inquiries. When calling the IRS, be sure to get the name and ID number of the person who assisted you. Contact your state and federal congressional representatives and ask them to address the problems with the IRS.

Tax Tip #2

If you have been using the IRS as a bank to hold your over payment, this practice needs to stop because all significant over payments will be scrutinized by the IRS for ID theft which will delay the issuance of those refunds. Unlike a bank where you can withdraw your money upon demand, the IRS has sole discretion when it releases your over payment.

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.

Why Did the IRS Select Me for an Audit Exam? [Part 2]

October 19, 2021 by Frank

In our August 25 blog post, we discussed how the IRS selects returns for an audit exam. In this post, we discuss your rights as a taxpayer and how to appeal the IRS’s findings.

Your Rights as a Taxpayer

IRS Publication #1 outlines the rights every taxpayer has when dealing with the IRS. These rights include:

Understand the Audit Process – IDRs

It is important that taxpayers thoroughly understand the audit exam process. The IRS will request information from a taxpayer to support an income item, tax deduction or claimed tax credit that was reported on a tax return. If the request is made verbally, ask for the agent to put the request in writing using IRS Form 4564, Information Document Request (IDR). When dealing with the IRS, it is best practice that all communications be in writing to minimize any miscommunications. When responding to IDRs, keep the response short and direct. If the answer calls for a yes or no response, that is all that you need to state in your response. One of the dangers of a taxpayer dealing directly with the IRS without having proper tax representation is that they do not understand their rights and have a tendency to offer more information than necessary. Volunteering information is not recommended.

Self-Representation

Most experienced tax representation professionals will inform the IRS that its request to have the taxpayer present at the audit will not be honored. Why? As stated above, taxpayers have a tendency to talk too much and that can lead to a less favorable outcome when dealing with the IRS. Once a taxpayer makes a statement, it becomes part of the IRS case files as testimony by the taxpayer. The tax professional will remind the IRS that one of the taxpayer’s bill of rights includes the right to representation. Can the IRS force a taxpayer to attend? Yes, but a subpoena would be required, signed off by the case manager, and subpoenas are seldom issued by the IRS. If an experienced tax professional realizes the dangers of having a taxpayer attend the audit sitting alongside the tax pro, imagine the perils of self-representation.

Preparation for IRS Audit

To prepare for an IRS audit, the return(s) that are being audited need to be reviewed to identify potential audit issues. The support for those identified items needs to be reviewed prior to the audit exam to determine if the taxpayer will need additional support to substantiate the amounts reported on the tax return. The most effective way to end an IRS inquiry into any amount shown on the tax return is to “bury” the IRS agent with support documentation. The IRS agent will not want to challenge an item if the agent believes the taxpayer has the necessary support.

If the support is missing because the item reported was without merit, depending upon the circumstances, a voluntary disclosure may be an option if criminal activity is expected.

IRS What Happens if You and the IRS Agent Disagree?

Disagreements between the taxpayer and the IRS are best resolved at the lowest administrative level at the IRS. If the taxpayer and the IRS exam agent disagree, and the taxpayer believes they are correct, ask to speak with the case manager. Case managers are more experienced than the exam agents and may understand why your position should be acceptable.

30-Day Letter

If you and the IRS cannot agree on any of the items being examined by the IRS, the IRS will issue you its 30-day letter. IRS Form 4549, Report of Income Tax Examination Changes, a report showing the proposed adjustments to your tax return, will be enclosed with the letter. Generally, Letter 525 is issued if your audit was conducted by mail and Letter 915 is issued if your audit was conducted in person. These letters and the enclosed reports should identify the specific items the examiner is proposing be adjusted and provide an explanation as to why these adjustments are being proposed. The examiner’s proposed changes will affect the amount of tax you owe or, perhaps, the credits you claimed. The 30-day letter is your opportunity to review these changes and determine if you agree or disagree with the changes proposed.

Tax Tip #1

Do NOT ignore the IRS’s 30-day letter. If you represented yourself during the audit and still disagree with the IRS’s exam findings, immediately consult with an experienced tax representation professional. The IRS will not extend this 30-day period in which you can appeal the IRS’s findings. A tax professional, if s/he agrees with your tax return, will likely advise you to request a Collection Due Process (CDP) hearing. The CDP filing will put your case before the IRS’s Independent Office of Appeals who has more discretion in accepting a taxpayer’s position because it is required to consider the hazards of litigation.

If you missed the 30-day period to file for a CDP hearing, you can request an Equivalent Hearing with the IRS. The negative of the Equivalent Hearing is that you cannot go to Tax Court if you do not prevail at the Appeals hearing, something that is available to a taxpayer who timely files a CDP hearing request.

90-Day Letter

If after attending a CDP hearing and the IRS insists that its position is correct, it will issue what is often referred to as a 90-day letter, which is a statutory notice of deficiency. During this 90-day period, the taxpayer can file a petition with the U.S. Tax Court to hear its argument as to why the IRS position is not correct.

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.

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 Record Retention Guidelines

October 11, 2021 by Frank

Taxpayers are always asking “How many years do I need to maintain my tax records before I can dispose of them?”

What Tax Records Must be Maintained?

You must keep records such as receipts, cancelled checks and other documents that support an item of income, a deduction or a credit appearing on a return. They may be needed to back up everything you put on your tax return, generally until the period of limitations for that return expires.

The Statute of Limitations (SOL) Determines How Long to Maintain Tax Records

The statutes of limitations are different for assessments of different types of tax. Tax cannot be assessed after:

Three years for tax you owe. This is counted from the date you filed the return.

Any period of time if you file a fraudulent return or fail to file a return. In such cases, there is no period of limitations.

Six years from the date you filed a flawed return. This applies if you fail to report reportable income of more than 25% of the gross income shown on the return, or income attributable to foreign financial assets that is more than $5,000.

Property Records

The SOL involving property makes the year of disposition more challenging. For example, if you are depreciating real estate say with a 33-year life, your support documentation for reporting the gain or loss on disposition could require you to prove to the IRS the date of acquisition, the cost of acquisition, improvements made over the life of that property, and annual depreciation claimed. Thus if you only retained those records for three years, you may have an audit issue if your return is selected for an examination. Thus, it is best to maintain those real estate property cost basis support papers until three years after the date of disposition.

When you dispose of stocks or bonds, you need to report the cost basis of the security sold to compute the taxable gain or loss. Thus if you purchased stock in year 1 and sold it 5 years later, you will need to provide the year 1 documentation to show what you paid for that stock.

Health Care Insurance

You should keep records of your health care insurance coverage and your family members. If you’re claiming the premium tax credit, you’ll need information about any advance credit payments you received through the Health Insurance Marketplace and the premiums you paid.

Business Income & Expenses

The IRS requires you to keep records so you have a backup to prove everything you put on your tax return. Insurance companies and creditors may require you to keep records longer, so you may want to verify that before you start discarding paperwork.

Claims for Refunds & Overpayments

For filing a claim for credit or refund, the deadline to make the claim is three years from the date you filed the original return or two years from the date the tax was paid, whichever is later.
The deadline for filing a claim for an overpayment resulting from a bad debt deduction or a loss from worthless securities is seven years from when the return was due.

How Must Your Tax Records Be Maintained?

As long as you can provide documentation when needed, it doesn’t matter how you keep records, but the IRS suggests you keep them in an orderly fashion and in a safe place.

If you’re in business, there’s no particular method of bookkeeping you must use. However, you must use a method that clearly and accurately reflects your gross income and expenses. The records should substantiate both your income and expenses. If you have employees, you must keep all your employment tax records for at least four years after the tax becomes due or is paid, whichever is later.

Tax Tip #1

Well-organized records make it easier to prepare a tax return and help provide answers if your return is selected for examination or if you receive an IRS notice.

Tax Tip #2

If you use an investment advisor who provides you with periodic statements, look at those statements very carefully. If you transferred securities from one advisor to another, the current advisor may not know what you paid for some of your investment holdings. The advisor’s statements will show that there is no unrealized gain or loss being reported. You want to begin to document what your tax basis is for that security now and not wait until the security is sold. Due to company mergers and reorganizations, pay out of dividends that get reinvested in your account rather than being distributed to you, stock splits, etc., it is much easier to determine tax basis early in the process rather than over a several year span.

Tax Tip #3

Consider backing up your tax records in an electronic format. Hard disks crash and files can inadvertently be deleted. Accordingly, keep at least one copy of your tax records off-site, such as in a safe deposit box.

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:

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.

Tax Planning – Will Future Taxes Increase?

September 22, 2021 by Frank

The House Ways and Means Committee on Monday released legislative text for proposed tax changes to be incorporated in the budget reconciliation bill known as the “Build America Back Better” act.

How Will This Legislation (if enacted) Affect Taxes Paid?

The proposed legislation would raise tax rates for corporations and individuals and make many other changes to the Internal Revenue Code.

What Are the Highlights of this Legislation?

As is typical of most legislation, there are numerous provisions. Since the vast majority of our clients are individual taxpayers, S Corporations, or partnerships, we focused only on those types of taxpayers in analyzing this proposed legislation. Keep in mind that S Corporations and partnerships are flow-through tax entities, meaning that the income reported on the K-1s from those entities gets reported on the owner’s individual income tax return.

Individual & Estate Taxpayer Highlights

Tax rates: The proposal would increase the top marginal individual income tax rate to 39.6%. This marginal rate would apply to married individuals filing jointly with taxable income over $450,000; to heads of household with taxable income over $425,000; to unmarried individuals with taxable income over $400,000; to married individuals filing separate returns with taxable income over $225,000; and to estates and trusts with taxable income over $12,500.

Capital gains: The proposal would increase the 20% tax rate on capital gains to 25%. A transition rule would provide that the current statutory rate of 20% would continue to apply to gains and losses for the portion of the tax year prior to Sept. 13, 2021. Gains recognized later in the same tax year that arise from transactions entered into before Sept. 13, 2021, pursuant to a written binding contract would be treated as occurring prior to Sept. 13, 2021.

Net investment income tax: The proposal would expand the net investment income (NII) tax to cover net investment income derived in the ordinary course of a trade or business for taxpayers with greater than $400,000 in taxable income (single filers) or $500,000 (joint filers), as well as for trusts and estates.

Qualified business income deduction: The proposal would set the maximum allowable deduction under Sec. 199A at $500,000 in the case of a joint return, $400,000 for an individual return, $250,000 for a married individual filing a separate return, and $10,000 for a trust or estate.

Limitation on excess business losses: The proposal would permanently disallow excess business losses (i.e., net business deductions in excess of business income – think NOLs) for non-corporate taxpayers.

Unified credit: The proposal would revert the unified credit against estate and gift taxes to $5 million per taxpayer, adjusted for inflation.

High-income surcharge: The proposal would impose a tax equal to 3% of a taxpayer’s modified AGI (MAGI) in excess of $5 million (or in excess of $2.5 million for a married individual filing separately). For this purpose, MAGI would mean AGI reduced by any deduction allowed for investment interest (as defined in Sec. 163(d)). (AGI meaning adjusted gross income.)

Retirement Plans

Contributions to IRAs: The proposal would prohibit further contributions to a Roth or traditional IRA for a tax year if the total value of an individual’s IRA and defined contribution retirement accounts generally exceeds $10 million as of the end of the prior tax year. The limit on contributions would only apply to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation).

Required Minimum Distributions (RMDs): For high-income taxpayers, as defined above, if an individual’s combined traditional IRA, Roth IRA, and defined contribution retirement account balances generally exceed $10 million at the end of a tax year, a minimum distribution would be required for the following year. The minimum distribution would generally be 50% of the amount by which the individual’s prior-year aggregate traditional IRA, Roth IRA, and defined contribution account balance exceeds the $10 million limit. To the extent that the combined balance amount in traditional IRAs, Roth IRAs, and defined contribution plans exceeds $20 million, that excess would be required to be distributed from Roth IRAs and Roth designated accounts in defined contribution plans up to the lesser of (1) the amount needed to bring the total balance in all accounts down to $20 million or (2) the aggregate balance in the Roth IRAs and designated Roth accounts in defined contribution plans.

Roth conversions: The proposal would eliminate Roth conversions for both IRAs and employer-sponsored plans for single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, married taxpayers filing jointly with taxable income over $450,000, and heads of household with taxable income over $425,000 (all indexed for inflation).

“Back door” Roth IRA strategies currently allow taxpayers who exceed existing Roth income limits to make nondeductible contributions to a traditional IRA, and shortly thereafter, convert the nondeductible contribution from the traditional IRA to a Roth IRA. Current law also allows taxpayers to contribute to a Roth 401(k) plan regardless of income limits (including making non-Roth after-tax contributions) and convert such contributions to a Roth IRA. The proposal would prohibit applicable taxpayers from engaging in these “back door” Roth IRA strategies.

To eliminate these strategies, the proposal would prohibit Roth conversions, for both IRAs and employer-sponsored plans, for applicable taxpayers, as defined above. The proposal would be effective for distributions, transfers and contributions made in taxable years beginning after December 31, 2031 (10 years from now). However, for taxable years beginning after December 31, 2021, the proposal would prohibit all employee after-tax contributions in tax-qualified retirement plans and would prohibit after-tax IRA contributions from being converted to Roth IRAs regardless of income level.

Paid family leave and medical leave: The proposal would end the employer credit for wages paid to employees during family and medical leave to tax years beginning after 2023, instead of the current 2025 expiration date.

S Corporations

S corporation reorganization: The proposal would allow eligible S corporations to reorganize as partnerships without triggering tax. An eligible S corporation would be any corporation that was an S corporation on May 13, 1996 (prior to the publication of current-law check-the-box regulations).

Tax Tip #1

Please keep in mind that this is proposed tax legislation that has not been enacted into law. However with the Democratic Party controlling the White House, the Senate and the House, the likelihood of passage is far greater than if one of the branches of Congress was controlled by another party.

Tax Tip #2

Far too many taxpayers start thinking of taxes during the tax filing season instead of during the calendar year. Proposed tax legislation is an important reminder as to why it is very important to do tax planning before year end. Tax planning not only includes income tax planning, but also gift and estate tax planning.

Tax Tip #3

Consider accelerating ordinary income to 2021 when projected tax rates will be lower.

Tax Tip #4

Consider making gifts up to the 2021 estate tax basic exclusion amount, $11,700,000.

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.

Why Was My Company Selected for a Sales Tax Audit?

September 21, 2021 by Frank

So you have received a notice from a state informing you that your company is being audited for sales (and use) tax compliance. The first question that usually comes to mind is “Why me?”

The Most Common Triggers for a State Audit Exam

Mark Friedlich (Vice President, U.S. Government Affairs, Wolters Kluwer Tax & Accounting North America) interviewed many state revenue authorities across the country, as well as companies that have been through a sales and use tax audit over the past 12 months. These interviews and additional research surfaced a top 10 list of the most common sales and use audit triggers across most industries and states.

Here are the top 10 triggers for audits:

1 Prior sales and use tax audit liabilities – some taxpayers don’t learn or falsely believe that once audited, the odds of being audited again are slim.

2 Pattern of late or irregular sales and use tax filings – this is like waving a red flag. The taxpayer is demonstrating that it lacks proper procedures.

3 Amount of exempt sales compared to gross sales reported on sales and use
tax returns – states use analytical studies to compare your exempt sales to total sales for your industry. If the percentage of your exempt sales to total sales is greater than the norm, the state will want to understand why.

4 Industries that are frequent sales and use tax audit targets – certain industries may receive a large percentage of their sales revenues in the form of cash rather than credit card sales. The former is prone to under-reporting and would be of a greater interest to state sales tax auditors.

5 Type of business entity – historically, sole proprietorships are subject to greater scrutiny than corporations.

6 Changes in a state’s sales and use tax law – some businesses do not have or provide for the necessary resources to track sales tax rate changes and changes to exemptions and taxable items. The Supreme Court’s Wayfair decision very significantly changed the nexus rules as to how states can tax businesses.

7 Business closure, dissolution, or bankruptcy – the clock has begun on the time when the state can audit a taxpayer as the taxpayer may not be found going forward. There is no time like the present in such situations.

8 Supplier or vendor sales and use tax audits – if one of your business “partners” is audited, the state may have found something of interest and wishes to audit your business, or your business “partner” “ratted you out” rather than take the responsibility for the transactions between you both.

9 Regularly scheduled audits for a state’s largest taxpayers – some states like to periodically audit those taxpayers who remit the highest amount of taxes, especially if prior audits resulted in sizable assessments.

10 Whistleblowers or referrals from third parties – don’t be surprised if a competitor or a dissatisfied customer shares your practices with a state authority, especially if there is a monetary reward for doing so. Many states belong to state compacts and share audit information with other states. It’s possible that an audit in Oregon of another taxpayer could generate an audit of you by your state.

Tax Tip #1

Tax laws are constantly changing. Periodically, engage your tax professional to review you business operations to determine if you have established nexus in a state that previously you did not have nexus with, check for revised sales tax rates for your state(s), and review your internal procedures on how you are identifying and capturing taxable sales tax transactions.

Tax Tip #2

If you were audited by a state and were assessed for unpaid taxes, take immediate action to review your current procedures with the state auditor and request guidance as to how best to get in compliance. Then work with your tax professional to implement those changes.

Tax Tip #3

Immediately upon receipt of an audit exam notification letter, share it with your tax professional and consider engaging your tax professional to represent you. The tax professional can provide invaluable advice regarding audit techniques, sample audits, scope of engagement, and negotiating penalty abatement.

Tax Tip #4

Work with your tax professional to create a sales tax operating manual that spells out taxable versus non-taxable transactions, how invoices need to constructed to avoid non-taxable sales being treated as taxable sales, support needed to support your sales tax returns and for how long these supporting documents must be maintained by the business.

Tax Tip #5

If a customer claims to be exempt from sales tax, work with your tax professional as to how to properly document that exemption and for how long you must retain that notice of exemption and how frequently you need to request that it be renewed.

If you would like to discuss your business or personal tax planning, tax preparation, audit concerns or 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.

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.