Scary Tax News: The IRS is Auditing More Small Businesses

In the following article, written by Anita Campbell and published at OpenForum.com, a report in Forbes shows a trend we have been seeing for some time. IRS audits of small businesses are on the rise. In fact, the article points out the IRS is auditing 30% more small businesses, while audits of larger companies have dropped 33% during the same time frame.

An IRS audit can be a simple correspondence audit – or it can be much more complicated and difficult. If you receive an audit notice and are uncertain of what to do, call JK Harris and let our Audit team help you get through this difficult process. Read the full article below.
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It’s disturbing news for entrepreneurs: the Internal Revenue Service apparently sees small businesses as a ripe target for audits.

A recent study from Syracuse University’s Transactional Records Access Clearinghouse (TRAC), reported in Forbes, reveals that in the last five years, the number of hours the IRS spends auditing small businesses (those with assets of $10 million or less) has increased by 30 percent. In the same time period, the time the IRS spends auditing companies with $250 million or more in assets has dropped by 33 percent.

The rate at which large corporations are audited has declined drastically, from 42.6 percent to 25 percent, in the last five years.

The auditing of corporations with assets of $5 billion or more dropped from 78 percent in 2007 to 64 percent in 2009.

The average number of hours spent on each audit of large corporations also went down, from 973 in 2005 to 830 in 2009. By contrast, the average number of hours spent on a small or midsized business audit has remained substantially the same.

TRAC’s report points out:

“The decline in audits of large corporations is surprising because (1) the highest levels of misreported tax dollars per auditor hour are found among the biggest business organizations and (2) since FY 2005, Congress has provided the IRS with the funds it needs to hire an increasing number of revenue agents trained to handle these very complex returns.”

Theorizing as to why smaller companies are being targeted, TRAC writes:

“Choosing to audit the smaller rather than the larger businesses would on its face help individual [IRS] agents meet their performance targets [for auditing a certain number of returns]. But the decision to audit the smaller companies does not help the government collect more taxes… because the data indicates that the larger the business, the larger the dollar amounts of tax under-reporting and back taxes on average that they may owe.”

In fiscal 2009 the average amount of tax “underreporting” IRS auditors uncovered per hour spent auditing small to midsized businesses was $1,025. The average for large corporations was $9,354.

In other words: the IRS is targeting small businesses because it helps individual agents meet their targets, not because it helps government coffers.

Forbes notes that the IRS focus on small business is counterproductive in many ways. First, while big corporations can pawn off the hassle of an audit onto an accounting department or managers, an audit of a small business usually requires lots of time and effort from the business owner himself or herself. And while the government is currently attempting to stimulate small-business job creation with tools such as tax credits, the news that the IRS is focusing disproportionately on small businesses is likely to scare businesses away from using such tax credits at all.

I’d also add that small businesses are “easy” targets — easier than large corporations. So chances are a small business won’t fight as hard, lacking the funds and the time to keep going.

You can read the full report at TRAC’s website.

Posted by JK Harris

JK Harris employees talk about Habitat for Humanity experience

By Gina Anton, Director of Corporate Communications

Recently, a team of volunteers from JK Harris assisted in building a Habitat for Humanity home in nearby Moncks Corner. The day started cloudy and humid, but the rain held off. None of us really knew what to expect – or how to build anything for that matter – but the Habitat coordinators and regular volunteers were more than happy to demonstrate the two tasks we were assigned to: hanging sheetrock and installing vinyl siding. We worked throughout the day, stopping only for water breaks and the lunch provided for us. We had a chance to sit and talk with the homeowner-to-be at lunch, which allowed us all to have a more personal connection to the home and the occupants who will soon occupy it. At the end of the day, she gave each us a personal thank you, colored by her children in appreciation to all the strangers who did not know them, but were compelled for one reason or another to help participate in building their new home.

A few of the volunteers who participated in the build sent me a message about their experience to let me know what they got out of it. I thought I would share those thoughts here. Their comments on their experience are as follows:

Kelly, Licensed Taxpayer Representative: I chose to participate for two main reasons – first, because I wanted the opportunity to perform some volunteer work in our community, and second, because I wanted to learn more about Habitat and their mission. I also just wanted to see if I could do it – it was a new challenge!! I went in not knowing very much about construction – and I’m basically a big klutz when it comes to working with a hammer – so I was pretty nervous about being able to contribute anything worthwhile. I was pleasantly surprised by the attitudes of the Habitat coordinators. They were very appreciative of the extra help and took the time to teach me the skills I’d need to help complete the job. Who would have thought you could feel such a sense of accomplishment just by hanging some sheets of drywall!

It was truly a heartwarming experience to meet the future homeowner and hear about her struggles, and about how Habitat is helping her to achieve her dream of home ownership. I left feeling not only a personal sense of achievement, but also the satisfaction of knowing that I helped to make someone else’s dream come true. It’s an experience I’d definitely encourage everyone to look into, and one I’m sure I’ll repeat in the future.

Anthony, Archiving Specialist: I joined in because, I feel everybody needs a helping hand from time to time. I feel blessed to be able to assist someone else. I did learn how to hang sheetrock – that was a new experience for me. I really enjoyed meeting all the people and talking with them. I feel like I met them as strangers and left with a bunch of new friends and family. I really think everyone who is able and has a chance to, should at least do it (Habitat) once. I must say that you can not help but leave with a good feeling in your heart.

Mari, Accounts Payable: My fiancé and I have always wanted to volunteer for Habitat for Humanity but, as is commonly the case, we just never followed through with it. So when JK Harris was looking for volunteers, I jumped at the chance to help. It was an interesting experience. I’d never done any work like that before and it gave me a new perspective on the effort and teamwork it takes to complete a house. My fiancé, two sisters and I are looking forward to going back to help in the future. Everyone in the group from JK Harris came with these great attitudes, cheerful and ready to help.

If you are interested in volunteering with Habitat for Humanity, you can find their website here. On the website, you can find homes being built near you. With the economy still sluggish, not all of us can give financially, but if you have time to spare, organizations like Habitat can use you.

IRS Examination Letters, Collection Letters and Notices

Continuing our series of blogs on IRS forms, Licensed Taxpayer Representative, Kelly Scott briefly details some of the commonly seen examination letters, collection letters and notices taxpayers may come across when dealing with the IRS.

Grateful client thanks JK Harris for saving her from a fate ‘worse than death’

I know when our clients come to us they are beyond stressed out. Carrying around the weight of a tax liability is overwhelming. Our clients are typically facing the unknown – they don’t know if they will ever be able to repay the debt or when the IRS is going to catch up to them and start levying their wages.

Last week, I received a glowing testimonial from a Ms. Claudia Jones of Eunice, LA. She owed the IRS more than $23,000 in back taxes. Her tax problems had been mounting for several years and she did not have the financial ability to pay her back tax debt, so initially, she ignored the problem. (Many of our clients do this because they simply don’t know what else to do when they cannot pay their tax bill.)
When she received an IRS notice stating her wages were about to be levied, she knew she had to act. She saw one of our JK Harris TV commercials and decided to call us.

“JK Harris was a godsend,” said Jordan. “The employees were very helpful in answering all my questions. They do what they say on television; they meet with you face to face, not a phone interview like the other companies.”

Initially, a Professional Staff Report was created specifically for Ms. Jordan. The report was based on her financial situation, and analyzed what options she had for resolving her tax liability. Her financial situation made her a prime candidate for an Offer in Compromise.

An Offer in Compromise is an agreement between the IRS and the taxpayer that allows the taxpayer’s delinquent tax debt to be compromised for less than the amount owed. The offered dollar amount is based on the taxpayers net worth plus their future income potential, in other words, what the taxpayer is actually able to pay.

According to the case specialist who handled Ms. Jordan’s case, Ms. Jordan was single, living with relatives and had no means to repay her IRS liability in full without causing her undue hardship. Ms. Jordan was cooperative in sending JK Harris all of the financial documents needed to negotiate her case. Her case specialist was able to expedite all paperwork to the IRS and meet all deadlines on time. The IRS accepted Jordan’s offer amount of $1,500, saving her $22,311.38.

“JK Harris saved me from a fate worse than death,” said Jordan. “Thank you, JK Harris and Company!”

We are always glad to help – and so glad to help Ms. Jordan get back on her feet.

Common IRS Forms & Notices

John Shoop, J.D., Licensed Taxpayer Representative

The IRS uses a wide variety of forms to contact taxpayers regarding information inquiries, balances due, etc. There are also forms taxpayers should be familiar with in case you should need to contact the IRS to request information from them. In our ongoing blog series on IRS forms, Licensed Taxpayer Representative John Shoop briefly details some of the more commonly seen Forms taxpayers may come across in dealing with the IRS.

Form 4506 is used to order actual copies of tax return and requires the payment of a fee (currently $57.00).

Form 4506-T is used to order old or archived transcripts from the IRS. There is no fee required.

CP 504 – Final Notice – Balance Due
Informs recipient when payment has not been made. This is the final notice that a levy will be place on certain assets.

CP 521 – Balance Due
Notifies the recipient a payment is due penalties and interest that have accrued and will continue to accrue until the balance is paid in full.

CP 523 – Notice of Intent to Levy – You Defaulted on Your Installment Agreement
Informs the recipient that they defaulted on their installment agreement, provides the reason for the default, and describes the actions we intend to take and what they can do to prevent us from taking those actions.

HIRE Act: Two New Tax Benefits Aid Employers Who Hire and Retain Unemployed Workers

With the enactment of the Hiring Incentives to Restore Employment (HIRE) Act earlier this year, two new tax benefits are now available to employers hiring workers who were previously unemployed or only working part time. (Resource: IRS website)

Employers who hire unemployed workers this year (after Feb. 3, 2010 and before Jan. 1, 2011) may qualify for a 6.2-percent payroll tax incentive, in effect exempting them from their share of Social Security taxes on wages paid to these workers after March 18, 2010. This reduced tax withholding will have no effect on the employee’s future Social Security benefits, and employers would still need to withhold the employee’s 6.2-percent share of Social Security taxes, as well as income taxes. The employer and employee’s shares of Medicare taxes would also still apply to these wages.

In addition, for each worker retained for at least a year, businesses may claim an additional general business tax credit, up to $1,000 per worker, when they file their 2011 income tax returns.

“These tax breaks offer a much-needed boost to employers willing to expand their payrolls, and businesses and nonprofits should keep these benefits in mind as they plan for the year ahead,” said IRS Commissioner Doug Shulman.

The two tax benefits are especially helpful to employers who are adding positions to their payrolls. New hires filling existing positions also qualify but only if the workers they are replacing left voluntarily or for cause. Family members and other relatives do not qualify.

In addition, the new law requires that the employer get a statement from each eligible new hire certifying that he or she was unemployed during the 60 days before beginning work or, alternatively, worked no more than 40 hours for anyone during the 60-day period. Employees should use IRS Form W-11) to make the required statement.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit for eligible newly-hired employees. Household employers cannot claim this new tax benefit.

Eligible employers can claim the payroll tax benefit on the federal employment tax return they file, usually quarterly, with the IRS).

IRS Summertime Tax Tip 2010-02

The IRS has released helpful tips for students working summer jobs. Many students may not realize that any earnings from odd jobs or self-employment such as baby-sitting are subject to income tax.
JK Harris and Company urges students and parents to read the full IRS release below.
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School’s out and many students now have a summer job. Some students may not realize they have to pay taxes on their summer income. Here are the six things the IRS wants everyone to know about income earned while working a summer job.

1. All employees fill out a W-4, Employee’s Withholding Allowance Certificate, when starting a new job. This form is used by employers to determine the amount of tax that will be withheld from your paycheck. If you have multiple summer jobs you will want to make sure all your employers are withholding an adequate amount of taxes to cover your total income tax liability. To make sure your withholding is correct, use the Withholding Calculator on IRS.gov.

2. Whether you are working as a waiter or a camp counselor, you may receive tips as part of your summer income. All tip income you receive is taxable income and is therefore subject to federal income tax.

3. Many students do odd jobs over the summer to make extra cash. Earnings you received from self-employment are subject to income tax. These earnings include income from odd jobs like baby-sitting and lawn mowing.

4. If you have net earnings of $400 or more from self-employment, you will also have to pay self-employment tax. This tax pays for your benefits under the Social Security system. Social Security and Medicare benefits are available to individuals who are self-employed the same as they are to wage earners who have Social Security tax and Medicare tax withheld from their wages. The self-employment tax is figured on Form 1040, Schedule SE.

5. Food and lodging allowances paid to ROTC students participating in advanced training are not taxable. However, active duty pay – such as pay received during summer advanced camp – is taxable.

6. Special rules apply to services you perform as a newspaper carrier or distributor. You are a direct seller and treated as self-employed for federal tax purposes if you meet the following conditions:

You are in the business of delivering newspapers.

All your pay for these services directly relates to sales rather than to the number of hours worked.

You perform the delivery services under a written contract which states that you will not be treated as an employee for federal tax purposes.

Generally, newspaper carriers or distributors under age 18 are not subject to self-employment tax.

Posted by JK Harris

First-Time Homebuyer Credit Fraud

By Troy Sholl, Enrolled Agent

The First-Time Homebuyer Credit, originally passed in 2008 and modified in 2009, provides up to $8,000 for first-time homebuyers. The purchaser, however, must qualify as a first-time homebuyer, which for purposes of this credit means someone who has not owned a primary residence in the past three years. If the taxpayer is married, this requirement also applies to the taxpayer’s spouse. The home purchase must close before Dec. 1, 2009, to qualify, and the credit may not be claimed on the purchaser’s tax return until after the taxpayer closes and has purchased the home. Different rules apply for homes bought in 2008. (Resource: IRS website)

The Worker, Homeownership, and Business Assistance Act of 2009 (WHBAA), signed into law on November 6, 2009, extended and expanded the Homebuyer Credit allowed by the previous acts. The WHBAA also added documentation requirements for claiming the credit. Under the new law, an eligible taxpayer must buy, or enter into a binding contract to buy a principal residence on or before April 30, 2010, and close on the home by June 30, 2010. The law maintained that the taxpayer would not be required to repay the Credit and kept the maximum amount at $8,000. For qualifying purchases in 2010, taxpayers have the option of claiming the Credit on either their 2009 or 2010 tax returns.

On June 17, 2010, the Treasury Inspector General for Tax Administration (TIGTA) released results of an investigation detailing fraud connected with the First Time Homebuyer Credit program. Some of the more salient findings include the following:

• 2,555 taxpayers received $17.6 million in credits for homes purchased before the dates allowed by law.
• 4,608 prisoners listed on the IRS 2009 Prisoner File attempted to claim the Homebuyer Credit on their Tax Year 2008 returns. It is estimated that at least 1,295 prisoners received fraudulent Homebuyer credits from their 2008 tax returns totaling more than $9.1 million.
• As many as 67 taxpayers used the same home to receive the credit. TIGTA determined that 18,832 taxpayers filed claims for the Homebuyer Credit using a total of only 7,695 addresses.

To combat the fraudulent activity, the IRS has implemented the following steps:

• Documentation will be required to support the purchase of a house when a credit is claimed.
• Enter data from First-Time Homebuyer Credit and Repayment of the credit (Form 5405) into IRS computers.
• Implement additional age filters to identify returns filed by taxpayers under the age of 18 claiming the credit.
• Initiate actions to recover credits, when appropriate, from taxpayers who had indications of prior home ownership but received the credit before the IRS implemented filters to identify questionable claims.

“We will vigorously pursue anyone who falsely tries to claim this or any other tax credit or deduction,” said Eileen Mayer, Chief, IRS Criminal Investigation. “The penalties for tax fraud are steep. Taxpayers should be wary of anyone who promises to get them a big refund.”

IRS employees apparently are not immune from temptation. The IRS successfully prosecuted a Jacksonville, FL, tax practitioner who faced the possibility of up to three years in jail, a fine of as much as $250,000, or both. Per TIGTA, as many as 34 IRS employees have claimed the credit when they did not qualify under the guidelines of the program. This is in addition to 53 IRS employees who allegedly did the same in the prior year.

In response to the report, the IRS has developed a Recapture and Repayment strategy to use third party data for identifying taxpayers potentially false claims.

IRS reviews differences between “Power of Attorney” and “Tax Information Authorization” forms

IRS Telephone Forum

A recent IRS telephone forum focused on the differences between Form 2848, Power of Attorney and Declaration of Representative, and Form 8821, Tax Information Authorization. The forum was conducted by Anna Bazaco and Rita Prendergast, who are both Senior Tax Analysts in the IRS Wage and Investment Division.

Form 2848. A taxpayer files Form 2848 to authorize an individual, who must be a person, to represent the taxpayer before the IRS. The individual (often referred to as a “representative”) must be a person eligible to practice before the IRS (e.g., an attorney, CPA, or enrolled agent).

Form 8821. A taxpayer files Form 8821 to authorize an individual, corporation, firm, organization, or partnership to inspect and/or receive confidential IRS information (including employment tax returns) on the taxpayer’s behalf. The third party (known as an “appointee”) has less authority than a representative. A taxpayer may want to file Form 8821 if the third party does not qualify as a representative on Form 2848. Unlike Form 2848, Form 8821 does not authorize the third party to: (1) advocate the taxpayer’s position with respect to the federal tax laws; (2) execute waivers, consents, or closing agreements; or (3) otherwise represent the taxpayer before the IRS.

The taxpayer remains ultimately responsible for the tax liability even if it files Form 2848 or Form 8821.

IRS notices and other communications. Both forms have sections where the taxpayer may indicate whether it wants the third party to receive copies of notices and communications that it receives from the IRS.

Retention/revocation. Both forms have sections that explain how to retain or revoke a previous version of the form. Filing a Form 2848 does not revoke an existing Form 8821, and vice versa.

Common reasons for rejection. The forum moderators reviewed some of the common reasons why the forms are rejected by the IRS. For example, either form will be rejected by the IRS if it does not clearly state which specific tax years are covered by the authorization. It is not acceptable to say that the form covers “all years” or “all future periods.”

Transcripts. A taxpayer may file Form 4506-T, Request for Transcript of Tax Return, to request tax return information from the IRS. The taxpayer may also designate a third party to receive the information. The taxpayer can call (800) 829-1040 to order a transcript through the IRS automated self-help system.

Further information. Several publications are available to assist both practitioners and taxpayers in this area, including IRS Publication 216, Conference and Practice Requirements; IRS Publication 947, Practice Before the IRS and Power of Attorney; and IRS Publication 4019, Third-Party Authorizations.

Closing Deadline Extended to Sept. 30 for Eligible Homebuyer Credit Purchases

The IRS recently announced the extension of the closing deadline to September 30th for eligible homebuyer credit purchasers. Read the full IRS release below.
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WASHINGTON — Eligible taxpayers who contracted to buy a home, qualifying for the first-time homebuyer credit, before the end of April now have until Sept. 30, 2010 to close the deal, according to the Internal Revenue Service.

The Homebuyer Assistance and Improvement Act of 2010, signed by the President today, extended the closing deadline from June 30 to Sept. 30 for any eligible homebuyer who entered into a binding purchase contract on or before April 30 to close on the purchase of the home on or before June 30, 2010. The new law addresses concerns that many homebuyers might be unable to meet the original June 30 closing deadline.

The IRS reminds taxpayers that special filing and documentation requirements apply to anyone claiming the homebuyer credit. To avoid refund delays, those who entered into a purchase contract on or before April 30, but closed after that date, should attach to their return a copy of the pages from the signed contract showing all parties’ names and signatures if required by local law, the property address, the purchase price, and the date of the contract.

Besides filling out Form 5405, First-Time Homebuyer Credit and Repayment of the Credit, all eligible homebuyers must also include with their return one of the following documents:

• A copy of the settlement statement showing all parties’ names and signatures if required by local law, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.
• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties’ names and signatures, property address, purchase price and date of purchase.
• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address and date of the certificate.

Besides providing a tax benefit to first-time homebuyers and purchasers who haven’t owned homes in recent years, the law allows a long-time resident of the same main home to claim the credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. Homebuyers claiming this credit can avoid refund delays by attaching documentation covering the five-consecutive-year period:

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
• Property tax records or
• Homeowner’s insurance records.

There are three options for claiming the credit on a qualifying 2010 purchase:

• If a 2009 return has not yet been filed, claim it on Form 1040 for tax-year 2009. Though these returns cannot be filed electronically, taxpayerscan still use IRS Free Fill to prepare their return. The returns must be printed out and sent to the IRS, along with all required documentation. The IRS urges taxpayers claiming refunds to choose direct deposit.
• If a 2009 return has already been filed, claim it on an amended return using Form 1040X.
• Whether or not a 2009 return has been filed, wait until next year and claim it on a 2010 Form 1040.

More details on claiming the credit can be found in the instructions to Form 5405, as well as on the First-Time Homebuyer Credit page on IRS.gov.

Posted by JK Harris