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EisnerAmper Blog

Private Business Services Blog - An Accounting & Advisory Resource

Interviewing the IRS?

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May 17, 2016

By Dan Gibson CPA, EA

 

Often, the Internal Revenue Service conducts interviews that I affectionately refer to as the ‘meet and greet conference’ prior to the start of an audit. This is where the IRS asks a number of questions to the representative, accounting personnel and owner. Depending on the revenue agent, this meeting could last anywhere from 30 minutes to 2 hours. The line of questioning usually sets the tone for the audit by asking questions regarding the business, accounting procedures, banking practices, etc.

 

Have you ever considered turning the table and asking your own questions to set your tone for the upcoming audit? Here are a few things you might want to inquire about:

 

Ask to see the agent’s identification. Not just their business card, but their badge. Check their name and identification number. You’ll also want to make sure that the agent is in fact a revenue agent, not an agent from the IRS’ criminal investigation division. This is especially true if you are seated across the table from 2 or more agents. If you find that the agents are from the criminal investigation division, note their contact information, promptly end the meeting and then contact a criminal tax attorney.

 

If the agent is a revenue agent, ask if they have had any contact with the criminal investigation division regarding the case or have spoken to a technical fraud advisor. If the answer is yes, as with the above situation, exit the meeting promptly and contact a criminal tax counsel.

 

Another area of concern should be third party contacts. Ask the agent if any third parties have been or will be contacted.  First of all, this may provide insight into what areas the IRS is focusing on. Another reason is that these contacts or future contacts by the IRS may have a devastating effect on the business of the taxpayer.  By knowing who has been contacted, the representative can alert the taxpayer who can then reach out and save a potential disruption with a valued customer, vendor or lending source. For any third parties that the IRS wants to contact but has not yet done so, the representative can seek other options that may satisfy the IRS needs.

 

Everyone has a boss. So the representative should always make sure they have contact information for an agent’s supervisor. One, the representative is putting the agent on notice that if the audit goes south, a call to the agent’s supervisor is not far behind. Second, in the heat of an audit, the agent may not be so willing to give out that information. There are alternative ways of getting this information, but they can take time.

 

Now that you know who the boss is, it makes sense to find out what involvement the agent’s supervisor has had on the case. Revenue agents don’t just pick up a return and start auditing. Normally, returns are pulled from a pool of returns based on a variety of criteria. Once pulled, a surveyor provides the human touch and identifies issues on the return.  These returns end up in office with an audit group. The IRS’ practice is that an audit planning meeting be conducted between the revenue agent and his or her supervisor. This meeting outlines issues and timing for the audit. The taxpayer representative will want to know what the issues are and the audit timing. This will assist the representative in keeping the agent within the scope of the planned audit and help prevent them from swaying into other areas.

 

In addition to the questions above, the representative should be providing the agent with direction on how they should be conducting their audit.

 

First, as the representative that has power of attorney, the agent should be instructed to speak to no one at the client location without approval from the taxpayer representative.

 

Second, the agent should be instructed to make no copies of documents themselves. If there is a need to make copies, the representative will arrange for copies to be made.

 

Third, if additional documents are needed, the request for those documents should be submitted by way of an individual document request to the representative.

 

Lastly, the representative should request that the agent provide a progress report at the end of every day and identify any issues that are developing.

 

Everyone has a job to do, including IRS revenue agents. However, taxpayer representatives have a job to do as well, which is to zealously represent their clients. This includes monitoring the agents assigned to their clients to insure that the audit is conducted in the most effective and efficient manner.

 

Don’t forget to sign up for our June 15 presentation on “Dealing with the IRS Audit Division, Part 2”. You can register here.

 

The Cost Benefit of the FDA’s Menu Labeling Rule

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May 16, 2016

By David Capodanno, CPA

Consumers are currently taking in approximately one-third of their calories away from their own home. 

As health awareness continues to increase, the FDA’s final rule for nutrition labeling will enable consumers to have transparent information regarding nutritional facts.  This will enable consumers to make informed dietary choices for themselves and their families.

History

Originally expected to take effect in December 2015, the U.S. Food and Drug Administration’s (FDA’s) menu labeling requirements are now slated to begin December 1, 2016. The requirements, which date back to the 2010 Affordable Care Act, are the first significant federal regulations on nutrition labeling since the 1990 Labeling and Education Act.

What’s Covered

These regulations apply to restaurants and retailers with 20-plus locations that sell prepared food (such as convenience stores, movie theaters and supermarkets) requiring them to display nutrition and calorie information on menus. The law also applies to vending machines companies that have 20 or more machines. There are some exceptions to the regulation; for instance, the law also does not apply to food served by establishments without a fixed location, such as airplanes, food trucks, or trains.

Costs

The FDA estimates that approximately 300,000 establishments, includ¬ing non-restaurants such as grocery stores, will be impacted. The FDA further estimates it will cost chain restaurants, grocery stores, and vending machine companies from $111 million to $118 million to comply. The supermarket industry determined a much higher compliance amount, upwards of billion dollars. Conversely, the Center for Science in the Public Interest figures a grocery store chain’s average cost would only amount to $22,500. Costs will come from lab testing, printing, employee training and record keeping. The FDA believes that the costs involved will be offset by $3.7 billion to $10.4 billion in benefits over the next 20 years.

In February 2016, the House passed the “Common Sense Nutrition Disclosure Act,” designed to give more flexibility to those impacted by the FDA’s menu labeling requirements. The bill still needs to pass in the Senate. 

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.

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