September 28, 2012

Withholding Tax Compliance

by Kenneth Hoffman in Business Counsel, Tax Counsel

Introduction

There are many reasons employers don't withhold or pay employment taxes. For some, it may be an attempt to use the government as a bank to 'borrow the money for a short while' with good intentions to pay it back later. For others, it may be a situation where an employer collects the taxes and elects to keep it during a period of financial difficulty rather than pay it to the IRS. Regardless of the reason, federal law requires employment tax withholding and payment by employers.

Employment taxes consist of federal income tax withholding along with social security and Medicare taxes and unemployment taxes. Also, many states have withholding requirements for various employment related taxes, such as income taxes. In addition, any business that has employees is liable for unemployment insurance contributions on at least a portion of the wages. Improper reporting or payment of employment taxes affects the ease with which employees can claim future benefits from these programs.

The IRS takes a variety of steps to combat employment tax non-compliance. The agency has a number of civil actions it can take like audits and filing tax liens against property the taxpayer owns. In addition to civil actions, IRS Criminal Investigation investigates and refers for prosecution individuals and businesses that have willfully attempted to avoid filing and paying employment taxes. These efforts have led to significant criminal convictions resulting in incarceration and fines.

Prison time is not unusual, for both federal and state violations. In many cases the taxpayer is still required to make restitution.

Eight Most Common Types of Employment Tax Non-compliance

Pyramiding. "Pyramiding" of employment taxes is a fraudulent practice where a business withholds taxes from its employees but intentionally fails to remit them to the IRS. The cause is often a lack of profit or capital for operating costs, so the business owner uses the trust funds to pay other liabilities. The quarterly employment tax liabilities accumulate (or "pyramid") until the employer has little hope of catching up. Businesses involved in pyramiding frequently shut down or file for bankruptcy and then start a new business under a different name starting the cycle over.

Unreliable Third Party Payers. There are two primary categories of third party payers--Payroll Service Providers and Professional Employer Organizations. Payroll Service Providers typically perform services for employers such as filing employment tax returns and making employment tax payments. Professional Employer Organizations offer employee leasing meaning that they handle administrative, personnel, and payroll accounting functions for employees who have been leased to other companies that use their services. Many of these companies provide outstanding services to employers. Unfortunately, in some instances, companies of both types of services have failed to pay over to the IRS the collected employment taxes. When these employment service companies dissolve, millions in employment taxes can be left unpaid. Employers are urged to exercise due diligence in selecting and monitoring a third party payer. For example, when choosing a third party payer, employers should look for one that is reputable and uses the Electronic Federal Tax Payment System (EFTPS). This allows the business owner to verify payments made on their behalf. Also, an employer should never allow their address of record with the IRS be changed to that of the third party payer.

Frivolous Arguments. Unscrupulous individuals and promoters have used a variety of false or misleading arguments for not paying employment taxes. These schemes are based on an incorrect interpretation of "Section 861" and other parts of the tax law and have been refuted in court. One variation of this scheme involves the improper use of Form 941c, Supporting Statement to Correct Information on Form 941, to attempt to get a refund of previously paid employment taxes. Employer participants could also be held responsible for back payments of employment taxes, plus penalties and interest.

Offshore Employee Leasing. This scheme, which was designated as a Listed Transaction by the IRS, misuses the otherwise legal business practice of employee leasing. Under the typical promotion, an individual taxpayer supposedly resigns from his or her current employer or professional corporation and signs an employment contract with an offshore employee leasing company. The offshore company indirectly leases the individual's services back to the original employer using a domestic leasing company as an intermediary. The individual performs the same services before and after entering into the leasing arrangement. While the total amount paid for the individual's services stays the same or increases, most of the funds are sent offshore as "deferred" compensation. The "deferred" compensation is then paid to the individual as a "loan" or ends up in an account under the individual's control. Promoters of these arrangements improperly claim that neither employment taxes nor income taxes are owed on the "deferred" compensation. Because it is a Listed Transaction those who use the scheme are required to disclose their participation on current tax returns, and will be liable for the unpaid tax and subject to penalties and interest. Civil and criminal actions are being taken against promoters and participants in offshore leasing schemes--one promoter was convicted of defrauding the U.S. and sentenced to 70 months imprisonment, two other promoters have been ordered by the courts to stop marketing the scheme and a San Diego doctor plead guilty to tax evasion and is awaiting sentencing.

Misclassifying Worker Status. Sometimes employers incorrectly treat employees as independent contractors to avoid paying employment taxes. Generally if the payer has the right to control what work will be done and how it will be done, the worker is an employee. Employers who misclassify employees as independent contractors (and are not eligible for relief under Section 530 of the Revenue Act of 1978) will be liable for the employment taxes on wages paid to the misclassified worker and subject to penalties.

Paying Employees in Cash. Paying employees wholly or partially in cash is a common method of evading income and employment taxes. There is nothing wrong with compensating an employee in cash, but employment taxes are owed regardless of how the employees are paid. And the IRS will build its case using all available information even if there are no payroll records or checks.

Filing False Payroll Tax Returns or Failing to File Payroll Tax Returns. Preparing false payroll tax returns intentionally understating the amount of wages on which taxes are owed or failing to file employment tax returns are methods commonly used to evade employment taxes.

S Corporation Officers Compensation Treated as Corporate Distributions. In an effort to avoid employment taxes, some S Corporations are improperly treating officer compensation as a corporate distribution instead of wages or salary. By law, officers are employees of the corporation for employment tax purposes and compensation they receive for their services is subject to employment taxes.

The IRS encourages employees to report any concerns that an employer is failing to properly withhold and pay federal income and employment taxes. Employers must report employment taxes withheld from their employees on Form 941. Employers are also responsible for filing Form 940, Employer's Annual Federal Unemployment Tax Return.

Second, you can be held personally liable for the unpaid amounts. And, should you end up paying the amount personally, you will not get a deduction for the payment. Moreover, any outstanding liabilities are not discharged in bankruptcy.

Except in cases where an employer is basically ignoring his or her responsibilities or just using the withheld amounts for personal spending, holding onto the withholdings generally indicates a serious cash flow problem that and the business probably need outside assistance.

If you're already behind one or more quarters, contact us immediatly. You may have options. But the longer you wait, the worse it will get.

September 26, 2012

Don Draper on Taxes

by Kenneth Hoffman in Tax Planning, Tax Counsel

Earlier this week, the Academy of Television Arts and Sciences handed out their 64th Primetime Emmy Awards. Showtime's political drama "Homeland" was the big winner -- stars Damian Lewis and Clare Danes won Best Actor and Best Actress, and the series itself won Best Drama. AMC's period drama "Mad Men" was the big loser, failing to win the Best Drama award after four previous victories. And Mad Men's brooding star Jon Hamm lost again for Best Actor, for the fifth year in a row.

Hamm's character, Don Draper, is an advertising genius who creates campaigns for clients as diverse as Lucky Strike cigarettes, Mohawk Airlines, Menkens Department Store, and Utz potato chips. Don uses all sorts of psychological triggers to promote his clients' products. But one trigger he he hasn't used -- at least, not yet -- is everyone's dislike of paying taxes. So, as Hamm leaves the Emmys empty-handed again, we had to ask: which real-world advertisers have used taxes to promote their products?

"You must pay taxes. But there's no law that says you've gotta leave a tip."
Morgan Stanley
"You'd be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (tax-free bond funds)
"Cheerios can lower cholesterol 4% in 6 weeks. To appreciate that number, give the IRS an extra 4%."
General Mills
"There is an inherent hypocrisy in increasing taxes on consumers to discourage smoking, while simultaneously relying on that revenue to fund the increasing cost of children's healthcare."
Lorillard Tobacco
"The Higher the Tax Bracket, the Better the View."
Florida Real Estate Developer
"Nowhere on any tax form does it say you can't be crafty."
Nuveen Investments

It's certainly no surprise seeing financial firms like Morgan Stanley and Nuveen Investments in this list. But cigarette makers and luxury homebuilders are a bit of a surprise. And if the makers of Cheerios can advertise "against" taxes, well, anyone can!

At our firm, we've known all along what these advertisers have discovered, too: you don't want to pay any more tax than you have to. That's why we focus on planning to pay less tax, legally. That's the kind of "can't miss" campaign that ought to finally win Don Draper an Emmy!

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

September 21, 2012

Election Day and Taxmageddon

by Kenneth Hoffman in Tax Counsel, Tax Planning

Election Day is almost here, and taxes are taking center stage in this campaign. We're not here to tell you how to vote. But we want you to know that we're following the race with an eagle eye. Our goal is to help you make the most of whatever changes eventually come with the next administration.

Several important tax changes are scheduled to take effect on January 1, and we're paying close attention to all of them:

The Bush tax cuts are scheduled to expire. This will mean higher tax rates for everyone, along with a higher top rate of 39.6% for the highest-earning taxpayers.
Top rates for long-term capital gains and qualified corporate dividends climb back from 15% to 20%.
The employee portion of Social Security and self-employment tax goes back up from 4.2% to 6.2%.
The Medicare tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
Finally, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income of those earning more than $200,000 ($250,000 for joint filers).

Below is our 2012 Campaign Tax Comparison to help you compare the current law with the Obama and Romney proposals. We'll be following the campaign carefully in order to help make the most of your opportunities, no matter who wins. And of course, if you have any questions, don't hesitate to call us at 954-591-8290.

2012 Election Tax Outlook

	Current Law	Obama Plan	Romney Plan
Top Marginal Rate – Ordinary Income	35%	39.6%	28%¹
Top Marginal Rate – Capital Gains	15%	20% (plus 3.8%²)	15%³
Top Marginal Rate – Qualified Dividends	15%	39.6% (plus 3.8%²)	15%³
Top Marginal Rate – Corporations	35%	28%	25%
Payroll Tax	13.3%⁴	Increase top rate from 2.9% to 3.8%	No Change
Alternative Minimum Tax	26-28%	30%⁵ (incomes >$1 million)	None
Estate Tax Unified Credit	$5 million⁶	$3.5 million	None
Estate Tax Rate	45%⁶	45%	None
¹Romney’s plan would extend current rates for 2013. Ultimately, he would lower rates by 20% across the board, and replace lost revenue by eliminating unspecified “loopholes and exclusions” ²Beginning on January 1, 2013, the Patient Protection and Affordable Care Act imposes a new “Unearned Income Medicare Contribution” applies on investment income for taxpayers with incomes over $200,000 ($250,000 for joint filers) ³Romney has proposed to eliminate all tax on capital gains, dividends, and interest for taxpayers earning under $200,000 ⁴Currently, FICA and self-employment taxes total 13.3% on incomes up to the Social Security wage base, plus 2.9% Medicare tax on earned income above that figure. ⁵Obama has proposed to replace the current AMT with a “Buffet tax” of 30% on incomes above $1 million ⁶Estate taxes are scheduled to revert to a $1 million unified credit and 55% rate on January 1, 2013

September 20, 2012

File Joint Tax Return Each of You Are Responsible

by Kenneth Hoffman in Tax Counsel, Tax Preparation

If you file a joint tax return, you're generally liable for taxes on the return if your spouse doesn't pay. Sec. 6015 provides relief from that rule for an innocent spouse. But you must meet certain requirements.

In Sharon K. Hudgins (T.C. Memo. 2012-260) the taxpayer sought relief from the liabilities she incurred with her deceased husband. In considering the taxpayer's request for relief the IRS determined that (1) of the outstanding 2007 tax liability, $3,639 was attributable to the taxpayer and $17,058 was attributable to her spouse; (2) the taxpayer did not have a reasonable belief that her spouse would pay the tax because she did not review the return in the first instance and because the tax liabilities shown on the spouse's individual returns from 2001 and 2002 were also not timely paid and (3) the taxpayer was not making a good-faith effort to comply with the tax laws because she did not file her 2008 return, which had an extended due date of October 15, 2009, until October 20, 2009.

The Court reviewed the factors and concluded that the taxpayer failed to satisfy the safe harbor requirements and the equitable factors in Rev. Proc. 2003-61 and that she was not entitled to relief.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

September 19, 2012

Turns Out Crime DOES Pay

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Back when you were a little kid, Mom and Dad warned you that crime doesn't pay. (They also told you it was the tooth fairy leaving that money under your pillow.) But it turns out that crime does pay -- at least for one felon-turned-whistleblower.

Bradley Birkenfeld grew up in suburban Boston before moving to Switzerland to pursue a career in banking. In 2001, he started work at Switzerland's biggest bank, UBS. His job was to solicit American depositors, 90% of whom he said were trying to evade taxes. His main duties included schmoozing clients at UBS-sponsored events like yacht races in Newport or the Art Basel festival in Miami Beach. But he also helped clients create shell companies to hide ownership of their accounts, shredded documents recording transactions in their accounts, and once even smuggled a pair of diamonds through U.S. Customs in a tube of toothpaste. (Doesn't everyone carry their diamonds in their toothpaste?)

By 2005, Birkenfeld reports, he suffered a crippling attack of conscience. He approached his superiors at the bank to complain about "unfair and deceptive" business practices. When those complaints went nowhere, he took his story to the U.S. government. He originally sought immunity for his own role in any crimes, but wound up pleading guilty to a single count of conspiracy to defraud the United States. He spent 2½ years in prison before moving to a halfway house, and he's scheduled to be released for good on November 29.

Now Birkenfeld is getting ready to "re-enter society." But he leaves the Big House with parting gifts that most felons don't enjoy. He'll have $104 million dollars waiting for him, courtesy of none other than -- you guessed it -- the IRS! That works out to $4,600 for every hour he spent behind bars. Of course, Birkenfeld doesn't get to keep all those millions. His lawyers get a cut, and the rest is fully taxable. But some of you reading these words might consider taking the same deal for yourself!

Birkenfeld wasn't the first guy to tell the IRS that rich Americans were using Swiss banks to cheat on their taxes. But he was the first to document it so devastatingly, and he was the first to offer evidence that the bank itself encouraged illegal behavior. The IRS said, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS."

How much was Birkenfeld's help worth? Well, UBS itself paid $780 million in fines and ratted out their 4,700 biggest American clients. But that's just the tip of the iceberg. Nearly 35,000 Americans have taken advantage of special IRS amnesty programs and have collectively paid more than $5 billion in back taxes. And Birkenfeld's bars-to-riches story, which included an appearance on 60 Minutes, has spurred a gold rush of whistleblower claims. In some cases, enterprising hedge funds have actually "invested" in those claims, paying whistleblowers up front in exchange for a share of any future awards.

The irony here is that none of the cheaters who sent their money on an alpine vacation had to cheat to pay less tax. They just needed to plan to take advantage of perfectly legal concepts and strategies. We give you the plan you need to pay less tax, legally, so you can spend your time in Switzerland visiting chocolate factories and cuckoo clocks -- not your hidden bank accounts!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

September 11, 2012

Time To Call Your Tax Advisor

by Kenneth Hoffman in Tax Counsel, Tax Planning

Waiting for your regular appointment to discuss current tax-related issues can create problems or cause you to miss out on beneficial options that need to be timely exercised before year-end. Generally, you should call this office any time you have a substantial change in taxable income or deductions. By doing so, we can advise you about how to optimize your tax liability, avoid or minimize penalties, estimate and pre-pay required taxes, document deductions, and examine and explore tax options. You should call this office if you or your spouse:

Waited until the last possible minute to start preparing your return
Receive a large employee bonus or award
Become unemployed
Change employment
Take an unplanned withdrawal from an IRA or other pension plan
Retire or are contemplating retirement
Exercise an employee stock option
Have significant stock gains or losses
Get married
Separate from or divorce your spouse
Sell or exchange a property or business
Experience the death of a spouse during the year
Turn 70½ during the year
Increase your family size through birth or adoption of a child
Start a business or acquire a rental property
Receive a substantial lawsuit settlement or award
Get lucky at a casino, lotto, or game show and receive a W-2G
Plan to donate property worth $5,000 ($500 if a vehicle) or more to a charity
Plan to gift more than $13,000 to any one individual during the year

In addition, you should call whenever you receive a notice from the government related to your tax return. You should never respond to a notice without first checking with us.

Don't wait until December 31st to call. By then, it is too late.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability while bringing his clients Peace of Mind.

Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a comment and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

September 4, 2012

3rd Quarter Estimated Taxes Are Due

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Due Dates

If you haven't done so already, calculate your third estimated tax payment for 2012. September 17th will sneak up on you faster than you expect, so it's best to have this taken care of early.

For most people, tax day comes just once a year - on April 15. But, for most entrepreneurs, Uncle Sam expects a check four times a year.

Who pays?
The rules are complex, but we will make this easy. You need to pay estimated taxes if:

If you are an sole proprietor, partner or S corporation shareholder AND you expect to owe at least $1,000 in federal income taxes when you file your personal income tax return in April; or
If your business is a C corporation AND you expect to owe at least $500 in federal income taxes when you file your annual corporate income tax return.

When payments are due.

For the 2012 tax year, estimated tax payments are due on April 17th, June 15th, September 17th and January 15th, 2013.

How much to pay.
The official answer is you must calculate your expected AGI, taxable income, taxes, deductions, and credits for the year, then use Form 1040-ES to figure your estimated tax.

Simplified: Take the total amount of federal income tax you paid last year and divide it by 4 to calculate your quarterly tax payment amount.

How to pay.

Mail : send a check or money order with a payment voucher from Form 1040-ES. If your business is a corporation, you must use the EFTPS system.

Phone: pay with a credit or debit card by calling 1-888-729-1040 or 1-800-272-9829

Online: pay with a credit or debit card at www.pay1040.com, www.officialpayments.com or www.payusatax.com

Underpayment of Estimated Tax

If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505, Tax Withholding and Estimated Tax, for additional information.

August 29, 2012

Trillion Dollar Taxpayer

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

When America's biggest corporations make news for their taxes, it's usually for how little they pay. One recent study, for example, argues that 26 big corporations, including AT&T, Boeing, and Citigroup, paid their CEOs more than they paid Uncle Sam in federal income tax. (Comparisons like that might bring to mind an old Babe Ruth quote. In 1930, a reporter pointed out that Ruth's $80,000 salary was more than the President's -- to which the Babe replied "I know, but I had a better year . . .") Now, another corporate giant is making headlines for its taxes. And for once, the surprising news involves how much it paid, not how little.

Exxon and Mobil are iconic corporate names. Both began life as parts of John D. Rockefeller's original Standard Oil Company. Both were spun off in 1911 when the U.S. Supreme Court found Standard Oil guilty of illegally monopolizing the oil refining industry. ("Standard Oil Company of New Jersey" eventually grew into Exxon, while "Standard Oil Company of New York" morphed into Mobil.) When the two giants re-joined to create ExxonMobil in 1999, they instantly became the biggest publicly-traded corporation on earth. And since then, they've only gotten bigger, with a "market capitalization" (total value of outstanding publicly-traded shares) topped only by tech giants Apple and Microsoft, and the largest company on earth by revenue.

You would expect a corporation this size to pay a lot in taxes, right? And for once, you would be right. In fact, a recent study by economist Mark Perry reveals that ExxonMobil has paid over one trillion dollars in taxes since that merger. That's a full three times the profit the company earned for its actual shareholders.

Take 2008, for example. ExxonMobil's profit reached a staggering $46.87 billion, the highest annual profit since the Romans invented the corporation. But they also paid $36.53 billion in income taxes, $34.51 billion in excise taxes, and $41.72 billion in other taxes, including sales taxes. Do the math and you'll see that totals $112.76 billion -- $9.4 billion per month, $2.17 billion per week, $309 million per day, and $214,535 per minute.

Skeptics might reply that ExxonMobil doesn't actually "pay" all those taxes out of its own pocket. They argue that the corporation just passes the cost of excise taxes on to customers and merely collects sales taxes imposed by state and local governments on buyers. But there's no arguing that the economic activity generated by this particular actor ultimately led to that trillion dollars in worldwide tax revenue.

We're not here to champion "Big Oil" in general, or ExxonMobil in particular. We realize ExxonMobil has been criticized for inadequately responding to various oil spills, funding research disputing "global warming" claims, and even violating workers' human rights in Indonesia. We're here to champion the value of surprising information -- especially when we can use that information to your benefit.

You'd probably be surprised, for example, to learn that some business owners deduct their family's medical bills as a business expense. But that's exactly what a medical expense reimbursement plan allows. You'd probably be surprised to learn that you can deduct the cost of crashing your car if it happens while you're driving for work. But that's what the law allows.

We constantly go to the well for smart tax strategies, so you don't have to. Call us if you want to put this sort of information to work for you! And remember, we're here for your friends, family, and colleagues, too.

August 22, 2012

Linsanity!

by Kenneth Hoffman in Tax Counsel, Tax Planning

The clock is ticking down on "summer." July 4th barbecues are a distant memory, and Labor Day is looming near. Forget about baseball's pennant races starting to heat up. Forget about the upcoming NFL season. It's time to talk basketball!

Taiwanese-American point guard Jeremy Lin played college ball at Harvard, where he notched an Ivy League-record 1,483 points, 487 rebounds, 406 assists, and 225 steals. That might have been enough to get drafted if "Ivy League" earned any respect with NBA scouts. Instead, he walked on to the Dallas Mavericks and warmed various benches for the Golden State Warriors, Houston Rockets, and (Chinese Basketball Association) Dongguan Leopards before catching fire with the New York Knicks. He averaged 18.5 points and 7.6 assists over 26 games before leaving because of a torn meniscus. But those 26 games were enough to ignite "Linsanity," with New York bars and restaurants introducing "Lintinis," asian-spiced chicken "Lings," and asian-inspired "lin-burgers" for beleaguered Knicks fans who finally had a reason to cheer.

At the end of the season, Lin became a restricted free agent. This meant he could sign an offer with another team -- but the Knicks could match it and keep him. Last month, the Houston Rockets re-signed him to a three-year, $25.1 million deal, which New York declined to match, and now, Linsanity moves south to Houston. So naturally, we want to know what it means for Lin's tax bill!

Let's start with Lin's rooting section at the IRS. Regardless of where he plays, he'll pay federal income tax at the top marginal rate of 35%. He'll also pay Medicare tax of 2.9%. If the Bush tax cuts expire at the end of the year, as they're already scheduled to do, that top rate will rise to 39.6%. And the Medicare tax jumps to 3.8% on January 1 as tax hikes included in the Affordable Care Act take effect.

Now let's look at his old tax bill for the Knicks. In "New York, New York", Frank Sinatra sings "If I can make it there, I'll make it anywhere." What ol' Blue Eyes probably meant is that if he could afford the taxes there, he can afford them anywhere. So, Lin starts out owing Uncle Sam anywhere from 37.9 to 43.4%. New York State shakes him down for 8.82%. Then New York City runs up the score for another 3.876% more. If Lin counted baskets like he paid taxes, he would have scored 481 points for the Knicks -- but kept just 239 after taxes!

Now let's look at his new tax bill for the Rockets. Lin will be glad that basketball is an indoor sport when he gets a taste of Houston humidity. But he'll find the tax climate a lot cooler. He'll pay the same amount to Uncle Sam, of course. But neither Texas nor Houston impose any tax on his income at all. None! So this difference could mean as much as a million dollars more per year in Lin's oversized pockets. Smart planning for a guy who graduated with an economics degree and a 3.1 GPA!

Of course, as is usually the case with taxes, things aren't quite so simple. Professional athletes pay state and local taxes wherever they play. That means that when Lin travels back to Gotham to play the Knicks, he'll renew his friendship with New York tax collectors -- but when he plays the Orlando Magic or Miami Heat, he'll enjoy the same zero percent tax rate in Florida that he gets in Texas. And of course he can deduct state and local taxes he pays from his federal taxable income.

Are you expecting an outstanding season in 2012? Maybe wondering where it makes the most sense to play ball? We're here to prevent the IRS from "calling a technical" on your finances. And remember, we're here for your teammates, too!

August 18, 2012

Documentation Is Key To Surviving A Sales Tax Audit

by Kenneth Hoffman in Business Counsel, Tax Counsel

Inadequate business records are not only a problem for an income tax audit by the IRS or state, the issue is critical for sales tax purposes. While the rules differ among the states, in most cases sales tax auditors can reconstruct the sales for a multi-year period based on a one or two day test period if your records are inadequate. That could prove disastrous if the test period is a particularly good day, or if your current sales are much higher than in the recent past. You could end up paying more in taxes than if you had kept good records.

You should also be aware than in most states payment of sales tax, like withholding taxes on employees, can become a personal liability of the responsible party, for example, an owner, corporate officer or stockholder. That responsibility may not be discharged in bankruptcy, either.

States are in need of revenue and are hard pressed to raise tax rates. Instead, they are becoming more aggressive at enforcing current tax laws. Sales tax is a very lucrative area; $200,000 in gross revenue may result in little or no income tax to the state. However, it could easily amount to $10,000 in sales tax.

The key to surviving a sales tax audit (actually, almost any audit) is good documentation. If your documentation is poor, the agent will reconstruct from a day's or a few days' sales or from some other criteria. And agents know that if a taxpayer's documentation is poor, their adjustment will be much larger. Moreover, courts have often held that a taxpayer with inadequate records can't challenge the state's approach since the problem was of the taxpayer's own making.

You must keep records of every sale, the amount of the sale, and the sales tax on the sale. If you give a receipt to the purchaser, you must keep a copy of the receipt or other evidence. Otherwise, you must keep a daily record of all cash and credit sales in a daybook or similar journal. Ask your accountant for help if you aren’t sure how to do this.

One state requires vendors to keep copies of:

sales slip, invoice, receipt, contract, statement, or other memorandum of sale;
guest check, hotel guest check, receipt from admissions such as ticket stubs, receipt from dues; and
cash register tape and any other original sales document.

If you sell both taxable and nontaxable goods or services, you must identify which of the items you sell are subject to sales tax and which are not on the invoice or receipt. For example, a cash register tape must list each item sold with enough detail to determine whether that item is subject to sales tax. You must always separately state the amount of sales tax due on the invoice or receipt that you give your customer. All of your records must be dated and kept in good order. You must be able, through your records, to connect an exempt sale to a particular purchaser to the exemption certificate you have on file for that sale or purchaser. If you issue an exemption certificate when you make a purchase, you must maintain a record of the purchase and be able to prove the exempt use.

The burden of proving that a sale, etc. is not taxable falls upon the vendor. Thus, an exemption document from the customer is necessary to relieve the vendor of his liability for not collecting the sales tax. Or, in the case of nontaxable items, you should be able to show the reason an item or service was not taxable. Some states now have an on-line database that you can check to insure a purchaser is registered. You must still have an exemption certificate, but if the ID and name on the exemption certificate doesn't match the on-line database, you should reject the certificate. Failure to check the database could be costly.

Make sure you and your employees know which items or services are subject to tax and which are not. If your accounting or POS software can handle this task, so much the better.

Maintain a record of:

total sales;
taxable sales;
purchases by the business subject to tax on which no tax was paid to the seller;
credits (if any);
sales and use taxes due for each locality; and
any other special taxes due.

If you deliver goods outside of the state they will probably be exempt from tax in your home state. You must maintain records which substantiate points of delivery. The records should include receipts from delivery services, common carriers, truckers, the United States Postal Service, foreign freight forwarders and logs from company vehicles. The documents must be referenced to specific sales transactions.

In support of deductions, or claims for tax credit or refund for bad debts, returned merchandise, and cancelled sales, vendors must maintain records showing:

date of original sale,
name and address of purchaser,
amount purchaser contracted to pay,
amount on which vendor paid tax, and
all payments or other credits applied to the account of the purchaser and the date of such payments or credits.

You should be able to reconcile your general and subsidiary books of account such as the general ledger, a sales ledger, etc. to your sales documents.