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EisnerAmper Blog

Private Business Services Blog - An Accounting & Advisory Resource

The IRS Interview – What to Do

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April 27, 2016

By Dan Gibson, CPA, EA  

Under Section 7521(c) of the Internal Revenue Code, while conducting an audit, the Internal Revenue Service is required to speak only with the taxpayer’s qualified representative, not the taxpayer, if that is the taxpayer’s preference.  This includes any interviews conducted during the audit. Qualified representatives include certified public accountants, enrolled agents and attorneys, who are so designated on a properly executed Form 2848, Power of Attorney and Declaration of Representative. 

However, there may be instances where it becomes necessary for the taxpayer to participate in the interview process. On those rare occasions when this happens, you must keep the following in mind: 

  • Above all, when answering a question, answer it honestly. Never lie to a federal agent.
  • If you don’t know the answer to a question, say so.
  • Do not volunteer an answer that exceeds what has been asked – brevity is best.
  • If you need a break, ask for one.
  • If you are unclear about a question, request a clarification. 

Keep in mind that the revenue agent you are speaking to is trained in interview techniques. Agents are taught to build rapport with taxpayers by maintaining a friendly and professional demeanor. A favorite technique is to leave long pauses in between questions so as to create a temptation of the taxpayer to fill that void with further chatter. Don’t fall into that trap! 

Please join us for our webinar on May 5, 2016 from Noon to 1PM EDT titled “Dealing with the IRS Audit Division, Part 1” which is first webinar of 6 that we are presenting this year as part of our Tax Resolution Webinar Series.

 

Selling Your Business: Things to Keep in Mind

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February24, 2016

Gibson_DanBy Dan Gibson, CPA 

Throughout the year, we meet with a number of clients wanting to “cash in” and sell their business. Among the most important considerations to selling a business is determining the structure itself and then doing the cash flow analysis of the transactions. Frankly, most owners who are selling their business are interested in only one thing: How much cash will I have when all has been said and done? 

There may be more important questions, though: How do you want to structure the sale? What is the difference between the options? 

Sale of Assets 

When the seller structures an asset sale, they are selling the assets of the company. These assets include hard assets (i.e., fixed assets) and intangible assets (i.e., trade secrets, customer lists, trade name, etc.) The seller retains ownership of the entity. If the seller has debt owed to outside creditors, this must be factored into the cash flow analysis as these debts will either be assumed by the buyer (a non-cash increase to the selling price) or paid off by the seller from the sales proceeds (use of cash). Assuming there are no more assets or liabilities in the entity, the entity is just a shell. The seller can continue to own this entity shell or dissolve it under the state laws that govern its formation. The timing of the dissolution should not be taken lightly. If the dissolution results in a capital loss to the seller, the seller may opt to dissolve the entity in the year of the sale so as to offset any gain from the sales transaction. Otherwise, the loss is realized in the future with no ability to carry it back. As a practical matter, sales of privately held entities normally are structured as an asset sale since buyers are leery of any unknown liabilities that may come along with sale of an ownership interest.  

Sale of an Ownership Interest  

Sellers can choose to sell the ownership interest (corporate stock or partnership interest). Though all the assets and liabilities are being transferred over to the buyer, the buyer is really purchasing the ownership interest in the entity that has within it the assets and liabilities. Prior to the consummation of the deal, the buyer may select what assets and liabilities they want to be retained, which could ultimately have a bearing on the seller’s cash flow from the transaction. Though sale of an ownership interest is less common in the privately held entity arena, it can still happen. Important considerations such as contractual commitments may not be transferable and necessitate a sale of the interest. State taxes must also be considered. The sale of an interest, in many cases, is considered to be a sale of an intangible. Depending on state laws, the gain on that sale may be sourced to the owner’s resident state and not the state that the business is located in. This could mean the difference between paying upwards of a 10% state tax rate to paying no state taxes. 

Other Considerations:  

  1. Letter of intent: This is normally a summary of the transaction prior the sales contract being drawn up. This should be written in lay terms so that all parties (owners, advisors and professionals) understand exactly what the transaction consists of.
  2. Qualified Advisors: Retain and consult with experienced transaction advisors (attorney and accountant) before you enter into any negotiations for the sale of your business.
  3. Cash Flow Analysis: This can’t be stressed enough. The owner’s expectations need to reconcile with the ultimate amount of cash (or other assets) they will end up with.
  4. Due Diligence by the Buyer: This is often an under-appreciated and overlooked element of the sales transaction. It’s almost like having a baby: Until you have one, you really don’t have a clue as to the cost, time and stress it entails.
  5. Earn-outs: These are payment terms to the seller normally based on future performance of the company. Sometimes they are unavoidable parts of a deal, but you should always assume that the performance measures might not be met and payments may never be made.
  6. State Issues
    • Dissolution: As stated above, if an entity is being closed, a formal dissolution notice should be filed with the state of formation. In some instances, it’s easy; in others, not so easy.
    • Withdrawal: To the extent an entity is formally registered in a state to do business and that business is closing, a formal withdrawal notice should be filed with that state. Again, in some cases this is easy; in others, not so much.
    • State Filing Obligations: Prior to getting into the thick of the sales process, a call to the state’s Bulk Sale Unit can help quell a lot of grief later. Inevitably, there is always an unfiled state form (payroll, litter, SUI, etc.) from 5 years ago that needs to be filed that, if not taken care of, could slow down the sales process.
    • Withholding Tax: If any tax is expect to be owed to the state as a result of the sale, many states will want to make sure they get paid before closing, so it is always a good idea to check in with state on this during the early stages. The taxes paid will then be used as a credit on the owner’s state return.    
     
  7. Building Operational Infrastructure: It is always a good practice for a business to look for opportunities to create solid operational infrastructure whether it be on the factory floor or in the marketing group or accounting department. But this is most true in setting up a business for sale. Most buyers are not looking for an opportunity to baby sit your company. They want to get a good sense that there are steady hands, other than the seller, in place to run the business. 

Turn Your Health Savings Account into an IRA on Steroids

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January 21, 2015

Gibson_DanBy Dan Gibson, CPA 

Health savings accounts (commonly referred to as “HSAs”) have grown in popularity over the past few years, especially in light of the Affordable Care Act. The beauty of these accounts is that you can get a deduction for contributions to the HSA. The maximum contribution in 2015 is $3,350 and $6,650 for individual and family plans, respectively; add $1,000 for those age 55 and older. When taking amounts (including investment earnings) from the account to reimburse medical expenses, the amounts are non-taxable. As most of us know, amounts coming out of a Roth IRA are nontaxable as well. However, unlike an HSA, contributions to a Roth IRA are made with after-tax dollars. See the possibility? Why not, then, treat your HSA as an investment vehicle?

I know what you’re thinking. “Hey, how am I going to get all those dollars out of my HSA without a significant amount of medical costs in the future?” There is nothing in the law or regulations against accumulating receipts of reimbursable medical expenses and reimbursing yourself years later, as long as you incurred the medical expenses after the HSA was established.    

So, you take a deduction for the contribution, like with a traditional IRA. Then, you pull the money (including earnings and appreciation) out tax-free, like a Roth IRA. That sounds like an IRA on steroids to me!

As with all investment vehicles, this may not be for everyone. Those with tight cash flow, particularly with high medical expenses, may have a tough time making this work. However, the HSA can be a tool for many in the quest to accumulate wealth.

New Year's Resolution - Mileage and Expense Logs

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December 22, 2015

By Dan Gibson, CPA  

I know it is tedious to do, but one of the most frequent hits on an IRS or state audit is the lack of documentation for auto mileage and expenses. 

My experience has been that most companies are pretty good about it when it comes to the rank and file employees, but often fall short on owners and key employees. 

During your year-end and planning discussions, I’d suggest looking at your current practices in this area and tighten them up for the upcoming year, if needed. In short, keep the following in mind: 

For Mileage: The documentation needs to include the starting point, destination, total mileage and business purpose. 

If the vehicle is owned or leased by the business, an odometer reading at the beginning and end of the year are required in order to document the personal use calculation. 

For Travel, Lodging, Meals and Entertainment: Documentation needs to show a business purpose and the expense amount. For meals and entertainment, there is a requirement to specify who attended and what business matters were discussed. Keeping receipts, whenever possible, for all these expenses is a good practice as well. 

If you are not using a log already, there are a number of searchable spreadsheets out there.  They can be used as a computer worksheet; it’s also perfectly fine to print it so that it can be updated manually. The important thing is to use something to capture the required information. 

For those who are comfortable using them, there are also apps out there that can assist in tracking mileage and expenses as well. Look around to see what works best for you and your company; here are a few links to get you started on your search: 

http://www.apppicker.com/applists/2567/the-best-mileage-tracking-apps-for-iphone-and-ipad

http://www.computerworld.com/article/2492648/mobile-apps/mobile-apps-10-smartphone-apps-that-can-help-track-your-expenses.html

http://expense-tracking-services-review.toptenreviews.com/

Phased Out of a Roth IRA?

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December 22, 2015

By Dan Gibson, CPA

 

Unfortunately, many taxpayers who would otherwise want to contribute to a Roth IRA cannot due to the income-based phase-out that ranges from $183,000 to $193,000 for married couples; $116,000 to $131,000 for singles and heads of households. However, there is a work-around for this. Taxpayers can make a nondeductible contribution to a traditional IRA account; then convert the amount from the traditional account to a Roth. This works ideally with taxpayers that do not have any traditional accounts with deductible contributions. In these cases, there is minimal tax impact on conversion. 

 

This still works for those that have traditional accounts with deductible contributions. However, under this scenario, there will normally be a greater tax impact under what is known as the pro rata rule. Without getting into the weeds, the pro rata rule requires that you consider all of your traditional IRA accounts – those with deductible and nondeductible contributions. Therefore, a portion of the conversion would be consider from the deductible contributions and be subject to tax on a pro rata basis.

FBAR Due Date Revised

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August 12, 2015

Gibson_New(1)By Dan Gibson, CPA
 
The Foreign Bank and Financials Report (“FBAR”) is used to report signature authority over or a financial interest in a foreign financial account. The report formerly done on a Form TD F 90-22.1 is now done, electronically, via a FinCEN Form 114.

Generally, for years ending through December 31, 2015, those with foreign accounts that aggregate a value that exceeds $10,000 at any time during the calendar year must file a Financial Crimes Enforcement Network (“FinCen”) Form 114. These reports are due to the Treasury Department on or before June 30 of the year following the calendar year being reported on. The filing date cannot be extended. 
 
Under the recently passed Highway Trust Fund extension law, the due date and ability to extend the due date has been revised for years beginning after December 31, 2015. The Department of the Treasury has directed that the FinCEN Form 114 will be due on April 15 of the year following the calendar year being reported on. Treasury will allow an extension for a period of 6 months that would extend the due date until October 15. In addition, the Department will be providing first-time abatement relief to those required to file for the first time who fail to request or file an extension.

Changes to Business Tax Return Filings

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August 10, 2015

Gibson_New(1)By Dan Gibson, CPA

In case you were wondering, your federal government has been hard at work. Recently, new legislation (Highway Trust Fund extension law) has come up with new filing due dates for business tax returns.

All of these changes apply to returns for tax years beginning after December 31, 2015 with the one exception described above for C corporations with June 30 year-ends.

  • March 15 – Will now be the filing due date for all calendar year-end partnerships and S corporations. This is new for partnerships and continues to be the case for S corporations. Those not filing with calendar year-ends will file their returns on the 15th day of the third month following the year-end of the entity (for example, an S corporation with a March 31 year-end would have a due date of June 15,excluding any extension).
  • April 15 – C Corporations will file by the 15th day of the fourth month following the year-end of the entity. For calendar year-end C corporations, this will mean a filing due date of April 15. The exception to the rule is for those C corporations with years ending on June 30. For these entities, the due date will remain the 15th day of the 3rd month following the year-end of the entity until tax years ending after December 31, 2026. At that time, the filing due date will be the 15th day of the 4th month following the year-end of the entity.

Extension filing periods have been affected as well.    

  • S Corporations – Will continue to be allowed an automatic extension for 6 months.
  • Partnerships – Automatic extensions will increase from 5 months to 6 months.
  • C Corporations – Calendar year-end C corporations will have an automatic extension of 5 months. C corporations with year-ends that end on June 30 will be allowed a 7-month extension. C corporations with other year-ends will be granted extensions of 6 months.


There are items in this legislation that affect other taxpayers, but more on that in future postings.

EisnerAmper is an independent member of Allinial Global.
EisnerAmper is an independent member of EisnerAmper Global.