Tax Regulations

IRS Chief Counsel Margie Rollinson announced the creation of a new Associate Office that will focus exclusively on partnerships, S-corporations, trusts and estates.

During the last decade of IRS budget cuts, the pass-through entities like S Corporations and partnerships have not seen too many audits or scrutiny. But this change is imminent because, as we discussed earlier, the IRS will receive an infusion of $60 billion over the next ten years, in addition to its annual appropriation. So now it has enough funding and it’s moving fast.

The IRS also plans to bring in outside experts with private-sector experience regarding pass-throughs to work alongside the expert in-house knowledge of current IRS employees.

Plus, the Internal Revenue Service now is paying a lot more than in the past and it’s attracting more mid-career professionals, so that the Service can increase its compliance enforcement fast and not spend a lot of time on training its employees.

S Corporations

If you have an S Corporation, make sure you have all owners pay themselves reasonable salaries for their work. Pay attention to properly calculate your basis in your S Corporation. When owners take distributions make sure that these are made according to the ownership percentages, so that you do not lose your S Corporation status. Make sure you have the proper support for your deductions, especially in hot areas like vehicle expenses, meals, uniforms, donations. Properly reconcile your books. Do your bank and credit card reconciliations.

Partnerships

If you have a partnership, pay attention to the basis calculation. Another hot are here is the income flowing to the owners that is subject not only to income tax, but also to self-employment tax. Pay attention to the status of the partners, if they are truly limited partners or are they involved in the management of the business? Pay attention to how you deduct your out-of-pocket expenses. And of course, do your reconciliations and have the proper support for your deductions.

Conclusion

If you need tax advice regarding your business or if you are opening a new business, we offer comprehensive business advisory services that help our clients not only avoid IRS headaches, but also save on taxes by having the right tax set-up and strategy. If you are in need of a good CPA firm contact us!

You can check our YouTube channel for more subjects that you might find useful.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

The IRS is evolving fast! The IRS that you are dealing with today or dealt with last year is not the same IRS that you’re going to be dealing with in 2 – 3 years.

Over the next ten years, an infusion of a whopping $60 billion will be allocated to the IRS, in addition to its annual appropriation. This isn’t just a minor adjustment; it’s a major financial influx that’s enabling the agency to transform how it operates.

What Does This Mean For You And Me?

The IRS now has enough money that it can hire more people.  And we’re not talking fresh graduates, but mid-career professionals who can really hit the ground running. This is evident from the job postings on their website, which now offer significantly higher pay than in the past.
And with these new hires, the IRS is ramping up its audit activities of everyone, which are going to hit pretty soon.
Last year alone, they increased the number of revenue agents by about 9%.

IRS Commissioner Danny Werfel said in March that the Service has focused enforcement on high-income groups by serving notices to 125,000 people who have not filed a federal income tax return since 2017, including 25,000 with incomes over $1 million; conducting audits focused on the use of corporate jets; and collecting $520 million since mid-2023 in taxes owed by millionaires.
But it’s not just millionaires in their sights. Pretty soon they will expand their audit activities to all individuals and businesses. Because now the IRS doesn’t have to pick and choose among whom to audit anymore.

With new technology that the IRS is putting in place and with increased audit workforce they will have the capacity to significantly increases its examinations.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If your tax situation is simple enough, where you feel comfortable filling your tax return on your own, you might not need to buy a tax software, like TurboTax or Tax Act every year.

That is because starting with 2025, so starting with the next year tax season you will be able to file your tax return directly with the IRS.

This year, in the 2024 tax season, the IRS had a pilot program called Direct File which allowed people to file their returns directly with the IRS. This program was available only in 12 states and only for 5 weeks. The program went so well that the IRS decided to make Direct File permanent starting with the 2025 tax season while making it available to all states, with plans to expand to more complex returns.

As of now the returns supported by DirectFile are the ones with the following types of income and deductions:

Income: wages, Social Security income, unemployment compensation and interest income of $1,500 or less.

Credits: earned income tax credit, child tax credit and credit for other dependents.

Deductions: standard deduction, student loan interest and educator expenses.

So for now you cannot use the IRS software if you itemize deductions.

We will keep you posted as the IRS expends the type of returns that can be filed through their program.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

Having a good accountant can save you a lot of IRS troubles. The size of your refund should not be your criteria of evaluating your accountant. Because there are a lot of cases when the accountant without the client’s knowledge claimed bogus deductions.

Deductions Claimed With No Basis

You don’t want an accountant that claims your pet bulldog as a security expense, arguing it protected your home office. Or an accountant that lists your daily morning coffee as a stimulant necessary for work efficiency deductible as a utility. That was the case of Mr. C who claimed deductions that had no basis in fact. For example, for one client, who made approximately $103,000 in income, Mr. C claimed over $90,000 in deductions related to unreimbursed employee expenses.

Mr. C, who had graduated law school but who but repeatedly failed the bar exam, claimed deductions for his clients based on extreme and unsupported legal theories. He argued that expenses related to preventing an illness qualified as an “impairment related work expense.” He claimed the full value of his clients’ mortgage and utilities as long as the client had some type of Schedule C business to claim. When legally you can only claim the business portion of your home office expenses based on the square footage that you use exclusively and regularly for business. Another example of fraudulent deductions he used for his clients were invented unreimbursed employee expenses. On many occasions, he also filed tax returns on behalf of clients without their permission or knowledge.

Undercover Agent Sent By IRS

You can imagine that all these wild, fraudulent deductions generated all sorts of red flags in the IRS’ system. So, the IRS sent an undercover agent to catch this preparer.

The undercover IRS agent posed as a potential client. Mr C wanted a $5000 retainer to meet with the undercover agent. Instead, the undercover agent corresponded with Mr. C via email. Mr. C said that if the agent used another preparer, he would receive a refund of $373, but that if he used Mr. C, he would receive a refund of $6,007. Mr. C would take half, netting him $3,008. Two days later, Mr. C filed the undercover agent’s return, which claimed $29,339 in fraudulent deductions, including $2,400 in employee expenses, and 28,600 in other expenses that the undercover agent had never discussed with Mr. C or his employees.

According to evidence presented at trial, Mr. C engaged in a similar pattern with his other clients. When the victim- clients learned what Mr. C had done, many of them demanded copies of their tax returns. Mr. C refused to engage in conversation and even delayed providing returns for months at a time. And he often acted in a highly vindictive manner when questioned or challenged by clients or others. Often he berated these clients in emails, threatening legal actions. Or he filed amended tax returns, without clients’ permission or knowledge, that removed all deductions, causing the taxpayer-victim to then owe the IRS tens of thousands of dollars.

Conclusion

You have to be very careful when choosing your accountant. That’s because once the IRS flags an accountant for shady deductions, all the clients of that accountant have a higher risk of being audited by the IRS. In Mr C’s case many of the victim-clients have since been audited and/or filed amended returns, causing them significant financial hardship.

As to Mr. C he was convicted on May 24^th, 2024 of 33 counts of tax fraud. He now faces up to 99 years in federal prison, three years per count.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

If you are a victim of domestic abuse, our heart goes out to you.

There is an option to access up to $10,000 retirement money penalty free for domestic abuse survivors

We want to bring to your attention some good news when it comes to your financial situation. Starting with 2024 a domestic abuse survivor can withdraw up to $10,000 from their retirement account penalty free. This can help you or your loved one to escape an unsafe situation.

Normally, early distributions from retirement accounts, such as IRAs or 401K accounts, are subject to a 10% tax, in addition to the regular income tax. The amounts you withdraw from an IRA or retirement plan before you reach age 59½ are called “early” or “premature” distributions.  On these distributions you must pay an additional 10% early withdrawal tax, unless an exception applies.

As a victim of domestic abuse, you can have these early distributions penalty free, up to $10,000, but not to exceed half of your retirement account.

Option for repayment and Refund of income tax

Additionally, if you take advantage of this new rule, you have the opportunity to repay the money you withdrew from your retirement plan over three years. And you will get a refund for the income taxes you paid on this money at the time of the distribution.

Requirements

To be able to do this, you will have to self-certify that you experienced domestic abuse. This means you do not need any further documentation such as law enforcement records or medical records. But you do need to take the distribution within 12 months of the domestic abuse incident.

This is a provision found in the Secure Act 2.0 of 2022, section 314, which is effective for distributions made after December 31^st 2023.

You can check our YouTube channel for more subjects that you might find useful. If you are in need of a good CPA firm contact us!

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.

What happens if the car you are using for business is not title to your business and it is your personal car? In this blog we are going to discuss the situation in which your business is a corporation or an LLC that is treated for IRS purposes as an S Corporation or as a C Corporation.

If you are not sure how your LLC or your business is treated for tax purposes, check what tax form the business files with the IRS. In case that it is Form 1120S, your business is an S Corporation. If it is Form 1120, your business is a C Corporation.

Personal Car Used For Business

In this situation when you use your personal car for business, are you allowed to deduct the vehicle expenses? Business deductions like:

• gas, repairs maintenance, insurance, or even the cost of the vehicle through depreciation, or the interest you pay on the car loan can be very useful in reducing your tax.

And another question that arises is: from what bank account or credit card account do you pay these expenses? Do you use the business accounts or the personal accounts? Let’s see what happens in this situation:

• First, because the car is not under the business name, the car is not a business asset. It is a personal asset. So, you should pay all the expenses from your personal accounts.
• Second, how can you deduct the car expenses, since even though this is a personal asset, you are using it for business purposes?

Well, in this situation the business will have to reimburse you, as an owner-employee of your business, for the business vehicle usage. The business can claim an expense equal to the number of miles you drove for business for that period multiplied by the IRS mileage rate applicable for that time frame. This means two things:

First, that you will need to have a mileage log and track your miles. We did a separate blog regarding what information a mileage log should have.

And second, your business should have in place an arrangement called an employer reimbursement accountable plan.

Employer Reimbursement Accountable Plan

The employer reimbursement accountable plan will allow you to submit a mileage reimbursement request to your own Corporation or LLC. Having an employer reimbursement accountable plan is very important. Because if you do not have such a plan, the IRS can treat any mileage reimbursements as wage income to you. In this case, you will have to pay unnecessary payroll taxes or you can get into other complications.

Now, an employer reimbursement accountable plan is an arrangement that needs to respect three rules:

First, you must have paid or incurred deductible expenses while performing services as an employee of your employer, in our case your own company.
Since we said that your business is treated as an S Corporation or a C Corporation, you are both an owner and an employee of your own business. As a sideline, you should always pay yourself a reasonable salary for the work that you do for your corporation.
And since you are using the vehicle for business purposes, any mileage reimbursement for your business trips should satisfy this first condition.

Second, you must return any excess reimbursement or allowance within a reasonable period of time.
And third, you must adequately account to your employer, so to your own company, for these expenses within a reasonable period of time. This is where the mileage log comes into play. You should also keep documentation regarding the cost of the car and any improvements and the date you started using it for business.

Reasonable Period of Time

Now let’s see what the IRS means to be a reasonable period of time.
The IRS says that a reasonable period of time depends on the facts and circumstances of your situation. But since this is a very murky definition, the IRS came up with some time frames that the IRS will treat as taking place within a reasonable period of time. Let’s see what these are:

• You receive an advance within 30 days of the time you have an expense.
• You adequately account for your expenses within 60 days after they were paid or incurred.
• You return any excess reimbursement within 120 days after the expense was paid or incurred.
• You are given a periodic statement (at least quarterly) that asks you to either return or adequately account for outstanding advances and you comply within 120 days of the statement.

If you do not fall under these timelines doesn’t mean that you don’t have an accountable plan. It just means that the IRS will evaluate your plan based on your facts and circumstances. But of course, the safest way is to fall within these timelines.

Conclusion

For more information on the employer reimbursement accountable plan see Publication 463.
One more thing I want to mention before wrapping up this blog: this situation where you are using your personal vehicle for business, might not be an ideal situation. That’s because a bigger deduction might result from using the actual car expenses instead of the mileage reimbursement. Whenever possible you should have the vehicle purchased under the business name.

Tax regulations can be complicated. That is why, it is very important when you have a business to seek professional advice.
If you are in need of a good CPA firm contact us!

You can check our YouTube channel for more subjects that you might find useful.

This material is for informational purposes only. It does not constitute tax, legal or accounting advice.