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EisnerAmper Blog

Private Business Services Blog - An Accounting & Advisory Resource

Things to Remember When Communicating with the IRS

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July 21, 2014

By Daniel Gibson, CPA

Gibson_New(1)The Internal Revenue Service (IRS) sends millions of notices to taxpayers every year.  Some notices alert taxpayers of unpaid or underpaid tax amounts as determined by the IRS.  Others advise of overpaid amounts resulting in refunds or credits towards other liabilities.  Yet others warn of impending collection actions by the IRS (e.g., liens or levies) for past failures to pay taxes, or even failures to file returns.  Notices also alert taxpayers of rather simple and mundane corrections made by the IRS to filed tax returns to fix simple mathematical errors.  Some letters or notices request supporting documentation for routine information reported on a return.

The common and even understandable first reactions bring forth confusion, denial, distress or even outright panic.  Even worse, you might think that your tax professional did something wrong.  Yikes!

Instead of reacting this way, you are better served by calmly reviewing and trying to understand the notice, and then responding directly to the correspondence in a timely fashion or immediately contacting your professional preparer to obtain assistance.  To help you deal with these pieces of mail, here are some things you should know and consider with regard to IRS notices:

  1. First and most importantly, don’t ignore these notices.  As a general rule, never let a notice go unanswered. 
  2. When you receive a notice or letter from the IRS, immediately read it closely to see exactly what the notice or letter is saying or requesting.  Each letter and notice generally will offer specific instructions on what you are asked to do to satisfy the inquiry. 
  3. Don’t assume the worst.  You are not necessarily in trouble or do not necessarily owe more money when you receive a notice from the IRS.  As stated above, there are a number of reasons why the IRS might send you a notice.  Not all of them are catastrophic.   
  4. Don’t assume the notice is correct.  If you receive a correction notice, you should review the correspondence and compare it with the information on your return. 
  5. If you choose to handle the matter on your own without counsel or another authorized representative, you should send a written explanation of why you disagree with the notice and include any documents and information you want the IRS to consider, along with the bottom tear-off portion of the notice.  Always be mindful of time deadlines listed in the notice for filing your response.
  6. The IRS advises taxpayers that most correspondence can be handled without calling or visiting an IRS office, and this generally is true.  If you have questions, you can call the telephone number in the upper right-hand corner of the notice.
  7. Be aware of your rights as a taxpayer.  Some notices request a taxpayer to bring additional information or records to a local IRS office and may request that the taxpayer appear and answer questions.  Federal law requires that such notices be accompanied by IRS Publication 1 which includes a notice to the taxpayer of his or her rights to be represented before the IRS by an authorized representative. 
  8. Always keep copies of any and all correspondence you send to or receive from the IRS (especially for future reference to help a tax professional that you might later hire to take over the matter for you).  Furthermore, to protect you in case you receive contradictory or erroneous advice from an IRS representative, also keep a record of the names and identification numbers of every IRS agent you speak with on the phone with regard to the matter in the letter or notice.  All IRS personnel are required to give you their name and identification number, and generally will offer it at the beginning of every phone call.
  9. When sending documents to the IRS, never send originals.  Always send copies.
  10.  The IRS never makes initial contact with a taxpayer via e-mail.  Since these e-mails are always phony, you should never respond to them.  You should also not open any attachments, since they might contain malware.  Forward a suspicious e-mail to phishing@irs.gov.

What is a Sales Tax and What is a Use Tax?

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January  22, 2014

Gibson_New(1)By Daniel Gibson, CPA

Understanding the nature of a sales tax is critical to establishing an effective program to administer the tax. So, what is it?

Sales Tax: The sales  tax on the sale of tangible personal property and certain taxable services.

If you sell tangible personal property to someone else, that sale is presumed to be taxable unless it is specifically excluded/exempted by statute. On the other hand, if you sell a service to someone, that sale is presumed to be non-taxable unless that service is specifically included by statute.

The presumption of taxability is also important in another sense. Have you ever heard the term "innocent until proven guilty?" Unfortunately, that is not the way it works in connection with the sales tax. When you make a sale of tangible personal property or a taxable service, the sale is presumed to be taxable, which means the burden of proof to show that it is not a taxable transaction falls on you.

Use Tax:  A use tax is a tax on the storing, using, consuming, and sometimes distributing tangible personal property or providing a taxable service. In other words, you will be subject to the use tax in the state where that event occurs.

A use tax is considered a compensating tax or complementary tax. This means the use tax is assessed and due on the property or taxable service when the sales tax has not been paid. For example, have you ever bought something from a mail order company and they did not charge you tax on the item. Did you self-access (this makes sense as access, but it also makes sense (to me) as assess—is access correct? and pay the use tax due on that item? You see, you bought an item and did not pay sales tax to the seller, but you stored, used, or consumed that item in your state. The purchase is now subject to your state's use tax.  As a general rule, all states that have sales tax have a use tax.

If you want to learn more about this topic, please take part in a webinar titled Golden Rules of Sales and Use Tax featuring Andria Siciliano and myself on February 11 at Noon E.T. 

The New Net Investment Income Tax

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December 12, 2013

By Daniel Gibson, CPA

Gibson_NewI suppose the last thing you want to think about as we head into the Christmas season is taxes.  But you may want to start planning so that you are not surprised by a higher tax bill as a result of the Affordable Care Act tax provisions that kicked in last January. As usual, nothing is as simple as it should be. Let’s focus strictly on the new investment income tax, which affects taxpayers whose modified adjusted gross income exceeds $200,000 (single filers) or $250,000 (joint filers).    

What is Net Investment Income? It consists of investment income (interest, dividends, gains from investments, rental income, income from passive activities, etc.) which is reduced by certain expenses, such as investment interest expense, investment advisory and brokerage fees. A tax of 3.8% will be assessed on the lesser of net investment income or portion of modified gross income that exceeds the $200,000 and $250,000 thresholds stated above.

There has been no shortage of confusion and misinformation regarding this new tax, and with 2013 rapidly coming to a close and the filing season soon to follow, the time to separate fact from fiction regarding the new tax is now. Plan to attend our upcoming webinar “Explaining the 3.8% Net Investment Income Tax,” scheduled for January 10, 2014 at Noon EST, presented by Ami Avraham and myself.

New Lease Accounting Proposal

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Bergamo_Phil1November 14, 2013

By Phil Bergamo, CPA

The Financial Accounting Standards Board (FASB) is finalizing a new accounting standard update that will greatly change the way lessees and lessors account for leases under generally accepted accounting principles.   The new lease accounting will require that CPAs and other accounting professionals re-learn the fundamentals of accounting for leases, including recognition, measurement, presentation and disclosure. 

Some highlights of the proposal:

  • Eliminates the current operating lease model and replaces it with a right-of-use model which
  • Requires the lessee to record an asset that represents the lessee’s right to use the underlying asset and a liability for the lessee’s obligation to make payments to the lessor. 
    • Initial recognition of the liability is measured as the discounted present value of the lease payments over the lease term.
    • Initial recognition of the right-of-use asset includes the initial carrying amount of the lease liability plus any initial indirect direct costs incurred by the lessee. 
  • Subsequent to the date of commencement of a lease, the lessee measures its right-of-use asset at amortized cost, amortizing the asset on a systematic basis and the liability is reduced as payments on the lease are made.

On November 21st at 12:00pm, the professionals of EisnerAmper will be presenting a one-hour webinar on this topic titled “Overview of Proposed Accounting for Lease Standards from FASB.”

Employer Coverage Notice

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Gibson_NewSeptember 27, 2013

By Dan Gibson, CPA 

The Affordable Care Act (ACA) requires employers to provide all new hires and current employees with a written notice about ACA’s Health Insurance Marketplace, or exchanges, by October 1, 2013. The Department of Labor (DOL) has provided two sample exchange notices, one for employers who offer a health plan to some or all employees and one for employers who do not offer a health plan. Employers may use one of these models, as applicable, or a modified version, provided the notice meets the content requirements described above.

But don’t panic!   The DOL website has many FAQs, most notably, the following:
 
Q: Can an employer be fined for failing to provide employees with notice about the Affordable Care Act's new Health Insurance Marketplace?

A: No. If your company is covered by the Fair Labor Standards Act, it should provide a written notice to its employees about the Health Insurance Marketplace by October 1, 2013, but there is no fine or penalty under the law for failing to provide the notice.
 

We have a number of upcoming live presentations planned in Philadelphia, New Jersey and New York City to review the impact that ACA will have on employers.    Please check out  our events page

 

A Subtle Nuance of the Net Investment Income Tax

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Gibson_NewSeptember 10, 2013

By Daniel Gibson, CPA 

Beginning in 2013, the Internal Revenue Code imposes a surtax on the net investment income (NII) of individuals, estates and trusts In the case of an individual, the surtax for each tax year is 3.8% of the lesser of:

  • the individual’s NII for the year, or 
  • the excess (if any) of the individual’s Modified Adjusted Gross Income (MAGI) over a threshold amount.

The threshold amounts are (1) $250,000 for married individuals or a surviving spouse filing a joint return; (2) $125,000 for a married individual filing a separate return; and (3) $200,000 in all other cases. MAGI for this purpose is Adjusted Gross Income (AGI), increased by the foreign earned income exclusion, less properly allocated deductions.

Here’s the nuance. Disposition of assets not related to a trade or business produce net investment income that is subject to the NII Tax. Losses realized are only allowed to offset other gains in determining NII. In other words, net gain (loss) for NII calculation purposes cannot be less than zero.

Example 1: John, a single filer, has MAGI of $425,000 which includes investment income of $10,000 of interest income and 2 stock dispositions. One disposition yields a $5,000 gain, while the other generates a loss of $13,000. What is the NII? It’s actually $10,000. The net loss of $8,000 on the stock dispositions is less than zero and not allowed to offset any of the $10,000 of interest income for the NII calculation. The favorable $3,000 capital loss deduction which could be used in calculating adjusted gross income is not allowable for the NII calculation. The surtax applies to the $10,000. The 3.8 % surtax would be applied to the lesser of NII ($10,000) or the excess of MAGI ($225,000) over the threshold amount $200,000 (for a single filer).

Example 2: Mary, a single filer, reports only $500,000 of interest and a $500,000 net capital loss. NII is $500,000, since none of the capital loss can be used to offset the interest. However, Mary’s excess MAGI over the $200,000 single filer threshold would be the $297,000. The surtax applies to $297,000, $500,000 less the $200,000 threshold and the $3,000 maximum capital loss that may offset ordinary income. The 3.8%surtax would be applied to the lesser of NII ($500,000) or the excess of MAGI of ($297,000) over the threshold amount of $200,000 (for a single filer).

If you have gains and losses from the disposition of assets which may be subject to the net investment income tax, make sure you double-check the resulting NII tax or have a professional tax advisor review the calculation for you.
 

 

Technology Trends for Small and Middle-Market Businesses

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September 6, 2013

By Daniel Gibson, CPA

Gibson_NewVirtualization, mobility, and the “cloud” are transforming the way businesses purchase, use, and manage their IT assets and data.  These are powerful and disruptive trends that present opportunities, as well as challenges, for businesses of all sizes.  Technology vendors and service providers are responding by offering entirely new products and services for their clients. 

The overwhelming trend to “move to the cloud” is driven by claims of lower costs; higher reliability; and better security, backups, and disaster recovery, as well as 24/7 uptime.   Are these claims real?  They seem too good to be true, and often they are.   But how can business leaders who need to focus on their business, with little time to research these new technologies, be able to understand the real costs as well as pros and cons of these new solutions?

Business leaders and decision makers are also challenged with not only understanding and making sense of these new offerings, but also deploying them in their unique environment.  They know they need to deploy new technologies faster and more cost-effectively; that is undeniable.  Meanwhile employees are now demanding mobility and want the freedom to choose the devices they use for consuming and producing information.   And these challenges are all compounded by the fact that new technologies are evolving at an astounding, unprecedented pace.

We have prepared a one-hour webinar, to be held from 12-1pm on September 19, which examines cloud offerings, explains the benefits of virtualization, and analyzes the mobility trend.  With this session you’ll gain an understanding of what to look for, what to avoid, and how you can make well-informed decisions relative to these new technologies.   Join us for an hour that we believe will provide great value for you and your business.

EisnerAmper is an independent member of PKF North America.
PKF North America is an independent member of PKF International.