Ten Tips for New Business Start-Ups

1. Determine the type of business entity in which you will conduct business.  The major choices include sole proprietor, partnership, limited liability company LLC, corporation, nonprofit, and L3C (low-profit limited liability company). 

2. Apply for your Federal Tax ID number if you haven’t already.  Here is an IRS URL to give you some guidance on this: http://www.irs.gov/businesses/small/article/0,,id=98350,00.html

3. Establish a separate bank account for your business.  This will significantly reduce the time and cost you spend on bookkeeping and allow you, at a glance, to track how much cash is going in and out of the business. 

4. Set up an accounting system that matches the complexity of your business.  There are many flavors of QuickBooks to meet small business’s needs.

5. Set up the forms you need to track transactions.  For example, you’ll need an invoice or receipt form and checks at the very least.  You might also want to set up purchase orders, estimates, and statements.  All of these forms are included in QuickBooks so that you don’t have to reinvent the wheel.

6. Check to make sure you have all of the business licenses you need.  This usually includes a city license and sales tax license.  You might also need food and beverage licenses, environmental permits, health permits, building approvals, and more.  Go to www.business.gov to find out more. 

7. Secure business insurance to protect your financial investment.  

8. Create a realistic budget, and work within the budget as much as you can. 

9. Make estimated tax deposits throughout the year, especially if your type of entity is a sole proprietor, partnership, or S-corp.   

10. Value your time.  Spend as much time as possible on your core business and outsource accounting, administrative, and legal work to experts and staff.

Compliments of VXL Services, a Business Consulting Services Company that provides Accounting, Tax, Payroll, Consulting and Company Incorporation Services to Start ups, Small and Medium Sized companies across US. If you have any questions please contact us at (732) 983 – 4150 or visit us at www.vxlservices.com for all the various Business Packages that we have to offer.

ABC of Financial Statements

The Small Business Administration (SBA) reports that two-thirds of new businesses survive for at least two years and only 44 percent last four years. Allbusiness.com a D&B company, reports that the main reasons small businesses fail are because of poor capital structure, overspending when starting a business, lack of cash reserves, and poor accounting controls. On the face of it, these are startling facts and every entrepreneur may be worried. “Will it happen to me?” is a question that may keep popping up in their mind. You may have also noticed that many of the major reasons for failure are directly or indirectly tied to accounting.

Strong and robust accounting may be the difference between creating a successful business and filing for bankruptcy. It is as simple as that. Small business accounting may seem very complicated and may be intimidating for some. It doesn’t really have to be that way.

The accounting system in a nutshell keeps a track of all the money that you received or likely to receive and the payment made or likely to be made. This is essential to assess the profit or loss of your business. Most of the accounting software used by small business owners these days assists in tracking this data.

In all my years dealing with small businesses, I realized that some of the frequently used accounting jargons or terminologies are not necessarily understood by the small business owner. Through this blog I am hoping to explain some of commonly used terminologies. We hope this may help you gain a better understanding of the basic concepts that go to make a Financial Statement.

Accounting Method

One of the early accounting decisions you may need to make for your business is the accounting method to choose from. There are two accounting methods namely cash basis and accrual (also known as mercantile) basis of accounting. In the cash basis of accounting, revenue or income is recorded in the books of accounts only when payment is received from the customer while expenses are recorded only when the payment is actually made to the vendor. In case of accrual basis the revenue or income is recorded when the sale is completed irrespective of whether money has been received or not while expenses are recorded when a bill is received from a vendor even if payment is not made.  It is generally believed that the accrual basis of accounting presents a more accurate picture of the company’s financial condition.

General Ledger

General Ledger or “GL” as it is commonly called, is a sum total of all transactions that affect the accounting system. This is the base document that is used to prepare Financial Statements such as Income Statement, Balance Sheet and Cash Flow Statement. General Ledger like a bank statement shows the income received and expenses paid. In the General Ledger each of these transactions are either associated with a specific customer (who has paid) and an income type (such as Sales, Interest Income etc.) or with a specific vendor (to whom payment was made) and an expense type (on account of say rent, utilities, taxes etc.). In addition a General Ledger also includes transactions which are non-cash transactions such as depreciation, provision for accrued expenses (which will be discussed in the following paragraph).

Income Statement, Balance Sheet and Cash Flow

All these statements are subsets of General Ledger. An Income Statement also known as Profit & Loss account or “P&L” describes the sales made to customers and the various expenses incurred by the business in order to execute the sale. The net amount is either a Profit or Loss and this determines how your business is performing.

Balance Sheet consists of the assets in your business such as Cash and Bank balance, Accounts Receivable, Investments, Fixed Assets and the liabilities that you owe such as Accounts Payable, Taxes Payable, Loan and Advances payable. The difference between the Assets and Liabilities is what is commonly referred to as the Equity section. This typically consists of Common Stock and Retained earnings.

Current Assets

Also known as “CA”, includes Cash and Bank Balance, Accounts Receivable, Prepaid expenses, Short term investments and Inventory. Some of these assets are self-explanatory. Accounts Receivable or “AR” as it is known, are amounts owed by customers for goods and services that you allowed the customer to purchase on credit. While an example of a prepaid expense is an insurance policy payment, since the money is paid upfront to cover the risk of a possible damaging event occurring in the future. Prepaid expenses are expensed over time as the goods or services are received. Short term Investments are usually for a period less than 12 months.

Current Liabilities

Also known as “CL”, includes Accounts payable and Short term debt. Accounts payable or “AP” are debts resulting from purchasing assets or receiving goods or services on credit.

Equity

Refers to the Retained Earnings and Common Stock (also known as Equity). Retained Earnings as the name indicates is retained by the business over the years and not distributed to the shareholders or owners of the business. At the end of the every year, the net income or loss is added or subtracted from the Retained Earnings. Common Stock is the seed capital that was invested by the owner while starting the company.

Cash Flow Statement

This statement indicates the receipts and payments made by the business. The cash flow statement doesn't show whether the business will be profitable, but it does show the cash position of the business at any given point in time by measuring revenue against outlays.

This concludes the outline of the major terminologies that a small business owner should be aware of while they manage their business. I firmly believe that understanding these terminologies will enable a business owner in having a more informed idea about their business and help in the discussions with outsiders. If you have any questions regarding this article or need further clarifications please feel free to get in touch with me.

This article is written by Prakash Iyer CPA, President, VXL SERVICES INC., a Business Consulting Services Company based in New Jersey. You can reach him at (732) 983 - 4150 or at prakash@vxlservices.com.

VXL is recognized for its comprehensive service offerings that support end-to-end functions in an Accounting department. VXL helps enterprises by leveraging their deep finance and accounting expertise. Our offering includes Accounting, Payroll, HR Advisory, Taxation, CFO/Controller and Consulting Services to start ups, small and medium sized companies across US.

Avoid Common Tax Return Errors

At the close of each tax filing season, the Internal Revenue Service (IRS) compiles a list of the most common errors taxpayers make when filing their tax returns. Believe it or not, incorrect mathematical calculations are not the number one error. The most frequent culprit for the past several years is incorrect Social Security numbers being submitted on individual income tax returns.

When an incorrect return is filed, the IRS first “rejects” it then sends a notice to the taxpayer requesting additional information. This can delay a refund by several weeks, or even months. In other instances, the IRS may issue a refund to you, but for a lesser amount than what you were expecting. This may occur when a claimed dependent has a missing or incorrect Social Security number, or when another taxpayer claims the same dependent.

Another reason you may receive a reduced refund is if you are eligible to claim a tax credit for child and dependent care expenses but you do not include the Social Security number of your caregiver on your tax return. The IRS will issue your refund, less the amount of the credit. You will then have to file an amended return and wait several more weeks for the rest of your money. All this can be avoided if care is given when entering required information on your return.

Other details to keep in mind when filing your taxes this year include:

·         Remember to sign your return in the proper place. If you are filing a joint tax return with a spouse, both of you must sign. If one spouse has passed away during the year, the surviving spouse must sign both names.

·         For proper filing, attach Copy B of all Forms W-2 received during the year to the federal return. Also, attach any Forms 1099 that report tax withholding. For electronic filing, all of the appropriate W-2 or Form 1099 information should be entered on the input form, which is included with the electronic return.

·         Mail your return to the proper address. The IRS often changes the address for mailing returns. If you have a balance due, you must use a payment voucher and mail your return to a lock box instead of the service center. If you electronically file your return, the chance of mailing your return to the wrong service center is virtually eliminated.

·         If you owe money this year, make your check payable to the United States Treasury Service not the IRS.

·         Double-check the tax from the tax tables, as well as all calculations.

·         Make a copy of the return for your records.

·         Be certain there is enough postage on the envelope. Include your full return address. If you owe, it’s a good idea to spend the extra dollars and use registered mail so there is a record that the IRS received your return.

Taking a few minutes to double check your tax return before you send it to the IRS, whether you mail it or electronically file, will ensure your refund is issued in a timely manner. The IRS encourages taxpayers to e-file. By e-filing your tax return, many common errors may be avoided or corrected by the computer software. Contacting a qualified tax preparer is the easiest way to e-file. Tax professionals are experts who keep current on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you. 

Source: NATP

Tax Implications for Self-Employed Consultants

Picking up a second job to supplement household income in a tough economy is becoming more common. Many Americans are choosing to become consultants that visit homes to sell make-up, jewelry, candles, kitchen utensils and food products. But filing taxes as an independent contractor is a lot more involved than as a traditional, full-time employee.

Conducting business as a sole proprietor is one of the simplest forms of operation. It’s easy to start a business operated as a sole proprietorship and equally easy to discontinue. But with this comes the challenges of proper maintenance of accounting records for tax filing purposes. Here are some of the tips that will help you in the process:

1.   Open a separate bank checking account for this business. This account has to be separate from your personal account. Don’t co-mingle the accounts as you will spend a significant amount of time analyzing the transactions from a tax perspective.

2.     Deposit all business income in this bank account. It could be cash or check. Pay all the business expenses from this account. The payment could be in the form of check, cash withdrawn for paying the expenses or via ATM/Debit card. These days most bank offer Bill Pay facility through their online service. You should avail of this service as usually it is a free service by the bank. You can log in and pay a vendor or an individual and the bank would issue a physical check to that person. You save the time of writing a check and incurring the cost of mailing.

3.        Another valuable tip for independents is to pay estimated taxes to prevent any additional interest charges.  If your business is profitable, you will likely have to pay estimated taxes throughout the year, usually on a quarterly basis.  Also, don’t cheat yourself – anything that is business-related is tax deductible.  Deductions can be taken on everything from home office and utilities, phone and internet charges, office supplies and transportation expenses, be it carfare or mileage.  Once again, it is crucial to provide proof of payment and an explanation of the business nature of the expense.  If you are deducting travel expenses, be sure to have proof of where you went and why.

4.   Home office deductions, which are often the largest deduction, are determined by deducting the square footage of your home office area from the total square footage of your home to calculate what percentage of your mortgage, rent and/or maintenance is deductible.  You may even be able to deduct a portion of your utilities.  On top of all that, “Client meals and entertainment costs are generally 50% deductible,” says Payne.

5.     Taking advantage of the latest health insurance filing change can also be helpful.  Effective this year, health insurance is now 100% deductible against your income to the extent that your business is profitable.  That’s a change from previous years, when it was a standalone deduction unrelated to your income.  “The Benefit of this change is that it lowers your self-employment tax, also known as social security tax,” says John Murrill, another NTA endorsed CPA.

6.     If you have a high-deductible health plan, a sensible choice for independents who rarely tap into their medical coverage (because the monthly premiums are lower) might be a Health Savings Account (HSA).  With a HSA, you contribute money that goes towards paying medical expenses.  The contributions you make to your HSA are tax deductible (up to certain allowable limits), which lowers your taxable income.  In order to qualify for an HSA, your health plan must have a deductible of at least $1,200 for an individual or $2,350 for a family.

7     Another good way to lower your taxes is to open an Individual Retirement Account (IRA) or a Simplified Employee Pension (SEP) plan to secure retirement savings.  These retirement-savings plans are usually for people who don’t have a 401(k) plan available to them.  An IRA allows you to save (and write off) up to $5,000 a year toward your retirement.  If you think you want to sock away more than $5,000 a year towards your retirement, set up a SEP plan, which allows you to contribute approximately 20% of your income.  One stipulation is that your business must be profitable in order to contribute any money to a SEP plan.

8.     If your annual income exceeds $50,000 you may want to consider incorporating.  If you’re an independent contractor, especially in the trucking industry, this is a no-brainer.  If for no other reason than this, you should incorporate your business to protect what you have worked so hard to build.  “Organize your business as a corporation or LLC, put yourself on the payroll, and make an S-Corp. tax election, which could save you $3,000 to $4,000 for every $50.000 in profits,” says Murrill.  If you’re operating as a business such as a corporation or LLC, you must set up a separate bank account.  “Keep your personal and business expenses separate for tax liability reasons,” says Murrill.  Finally, set up a bank account that’s totally separate from your personal account.

Your first step when starting a business is to open a separate business checking account. It will be easier to track your deductible expenses if they are not commingled with your personal expenses. If you incurred expenses prior to opening your business, keep them separate from your other expenses. Special tax treatment applies to startup expenses.

It is important to keep track of your mileage, as you might be eligible to deduct it. If you are self-employed and maintain an eligible office in your home (more on this later) you can deduct the mileage to and from your client’s or customer’s place of business, as well as between jobs. There are two ways to calculate your auto deductions – the standard mileage rate or actual expenses. The standard mileage rate is the easier method as you simply take your total mileage and multiply it by the current rate ($.555 for 2012). The actual expense method is exactly that, recording the actual expenses such as the cost of gas, oil, insurance, repairs, maintenance, tires, washing, licenses and depreciation. This method requires you to keep very detailed records and if you use your car for personal and business purposes, you’ll have to divide the expenses between the personal and business portion.

The IRS allows self-employed taxpayers to claim a deduction for home-based business expenses if they meet certain requirements. They must use the home office regularly and exclusively:

·         As the principal place of business for a trade or business.

·     As a place to meet with customers in the course of the trade or business, or in connection with the taxpayer’s trade or business, if the location is in a separate structure not attached to the dwelling unit.

The IRS may allow a deduction for inventory storage if the product is regularly sold to others and there is no other fixed location available for the business. Home office calculations are divided into direct and indirect expenses. Direct expenses are those that pertain exclusively to the home office, such as painting the walls or installing new carpet. Indirect expenses are those that pertain to the entire residence, such as rent, mortgage interest, taxes, insurance, repairs, utilities and depreciation. Indirect expenses need to be allocated between the business and nonbusiness portions of the home. The amount of expenses you can deduct is subject to specific limitations and ordering provisions. Please contact a tax professional for guidance. 

This article contains general tax information for taxpayers. Each tax situation may be different, so do not rely upon this information as your sole source of authority. Please seek professional advice for all tax situations. Tax professionals are experts who keep current on tax law changes. They can save you time and offer insight on how to use the tax breaks available to you.

An article on Foreign Bank Account Report

In the last couple of years this rather unknown tax form has garnered a lot of interest in the press and media. Form TDF 9022.1 also popularly known as FBAR is a report that the IRS uses to monitor the foreign bank accounts held by US residents overseas.

So why is this form in the limelight? For this we need to step back a bit. Since the commencement of the IRS’s offshore voluntary disclosure programs in 2009, the most significant form in the IRS’s reporting arsenal seems to have been the Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), better known as “FBAR.” Around for decades, FBAR emerged as preeminent only recently. Of course, FBAR isn’t even a form required by the Internal Revenue Code. It is instead a form to report interests required by the Bank Secrecy Act, which is administered by the Financial Crimes Enforcement Network (“FinCEN”).

The FBAR is a tool to help the United States government identify persons who may be using foreign financial accounts to circumvent United States law. Investigators use FBARs to help identify or trace funds used for illicit purposes or to identify unreported income maintained or generated abroad.

Salient Features of an FBAR

·          If you have a financial interest in or signature authority over a foreign financial account, including a bank account, brokerage account, mutual fund, trust, or other type of foreign financial account, the Bank Secrecy Act may require you to report the account yearly to the Internal Revenue Service by filing FBAR.

·          United States persons are required to file an FBAR if: -

1.    The United States person had a financial interest in or signature authority over at least one financial account located outside of the United States; and

2.    The aggregate value of all foreign financial accounts exceeded $10,000 at any time during the calendar year to be reported.

United States person means United States citizens; United States residents; entities, including but not limited to, corporations, partnerships, or limited liability companies created or organized in the United States or under the laws of the United States; and trusts or estates formed under the laws of the United States.

·         A person who holds a foreign financial account may have a reporting obligation even though the account produces no taxable income. 

·          The FBAR is not filed with the filer's federal income tax return. The granting, by the IRS, of an extension to file federal income tax returns does not extend the due date for filing an FBAR. You may not request an extension for filing the FBAR.

·         The FBAR is an annual report and must be received by the Department of the Treasury in Detroit, MI, on or before June 30th of the year following the calendar year being reported.

·       Exceptions to the FBAR reporting requirements can be found in the FBAR instructions and include certain foreign financial accounts jointly owned by spouses; United States persons included in a consolidated FBAR; Correspondent/nostro accounts etc.

·         Taxpayers with specified foreign financial assets that exceed certain thresholds must report those assets to the IRS on Form 8938, Statement of Specified Foreign Financial Assets. The new Form 8938 filing requirement does not replace or otherwise affect a taxpayer’s requirement to file FBAR. 

·          The penalties for failure to file an FBAR are worse than tax penalties. Failing to file an FBAR can carry a civil penalty of $10,000 for each non-willful violation. But if your violation is found to be willful, the penalty is the greater of $100,000 or 50 percent of the amount in the account for each violation —and each year you didn’t file is a separate violation.

·     Criminal penalties for FBAR violations are even more frightening, including a fine of $250,000 and 5 years of imprisonment. If the FBAR violation occurs while violating another law (such as tax law, which it often will) the penalties are increased to $500,000 in fines and/or 10 years of imprisonment. Many violent felonies are punished less harshly.

So if you are not sure what to do. The first thing to do is to gather details of the various overseas accounts that you have including all details required as per FBAR. Then you should review the accounts to see if you meet the threshold limit that has been set for reporting purposes. The other thing you should assess is the time period for which you have missed the reporting. Finally based on you overall assessment please consult a CPA or a Tax Attorney who will help you make the decision of whether you fall under the OVDP that is currently being offered by the IRS.

Form W-2 Missing?

If you worked as an employee last year, your employer must give you a Form W-2, Wage and Tax Statement. This form shows the amount of wages you received for the year and the taxes withheld from those wages. It’s important that you use this form to help make sure you file a complete and accurate tax return.

Most employers give Forms W-2 to their workers by Jan. 31. If you haven’t received yours by mid-February, here’s what you should do:

1. Contact your employer.  You should first ask your employer to give you a copy of your W-2. You’ll also need this form from any former employer you worked for during the year. If employers send the form to you, be sure they have your correct address.

2. Contact the IRS.  If you exhaust your options with your employer and you have not received your W-2, call the IRS at 800-829-1040. You’ll need the following when you call:

• Your name, address, Social Security number and phone number;
• Your employer’s name, address and phone number;
• The dates you worked for the employer; and
• An estimate of the amount of wages you were paid and federal income tax withheld in 2013. If possible, you can use your final pay stub to figure these amounts.

3. File on time.  Your tax return is due by April 15, 2014. If you don’t get your W-2 in time to file, use Form 4852, Substitute for Form W-2, Wage and Tax Statement. Estimate your wages and withheld taxes as accurately as you can. The IRS may delay processing your return while it verifies your information.

If you need more time, you can apply for a six-month extension to file your federal tax return. The easiest way to apply is to visit IRS.gov and use IRS Free File to e-file the extension. You can also mail Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Make sure you file your request by midnight on April 15.

You may need to correct your tax return if you get your missing W-2 after you file. If the tax information on the W-2 is different from what you originally reported, you may need to file an amended tax return. Use Form 1040X, Amended U.S. Individual Income Tax Return to make the change.

Source: IRS

IRS Releases the “Dirty Dozen” Tax Scams for 2014; Identity Theft, Phone Scams Lead List

WASHINGTON — The Internal Revenue Service today issued its annual “Dirty Dozen” list of tax scams, reminding taxpayers to use caution during tax season to protect themselves against a wide range of schemes ranging from identity theft to return preparer fraud.

The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.

Illegal scams can lead to significant penalties and interest and possible criminal prosecution. IRS Criminal Investigation works closely with the Department of Justice (DOJ) to shutdown scams and prosecute the criminals behind them.

The following are the Dirty Dozen tax scams for 2014:

Identity Theft

Tax fraud through the use of identity theft tops this year’s Dirty Dozen list. Identity theft occurs when someone uses your personal information, such as your name, Social Security number (SSN) or other identifying information, without your permission, to commit fraud or other crimes. In many cases, an identity thief uses a legitimate taxpayer’s identity to fraudulently file a tax return and claim a refund.

Taxpayers who believe they are at risk of identity theft due to lost or stolen personal information should contact the IRS immediately so the agency can take action to secure their tax account. Taxpayers can call the IRS Identity Protection Specialized Unit at 800-908-4490. More information can be found on the special identity protection page.

Pervasive Telephone Scams

The IRS has seen a recent increase in local phone scams across the country, with callers pretending to be from the IRS in hopes of stealing money or identities from victims.

These phone scams include many variations, ranging from instances from where callers say the victims owe money or are entitled to a huge refund. Some calls can threaten arrest and threaten a driver’s license revocation. Sometimes these calls are paired with follow-up calls from people saying they are from the local police department or the state motor vehicle department.

Characteristics of these scams can include:

Scammers use fake names and IRS badge numbers. They generally use common names and surnames to identify themselves.

Scammers may be able to recite the last four digits of a victim’s Social Security Number.

Scammers “spoof” or imitate the IRS toll-free number on caller ID to make it appear that it’s the IRS calling.

Scammers sometimes send bogus IRS emails to some victims to support their bogus calls.

Victims hear background noise of other calls being conducted to mimic a call site.

After threatening victims with jail time or a driver’s license revocation, scammers hang up and others soon call back pretending to be from the local police or DMV, and the caller ID supports their claim.

In another variation, one sophisticated phone scam has targeted taxpayers, including recent immigrants, throughout the country. Victims are told they owe money to the IRS and it must be paid promptly through a pre-loaded debit card or wire transfer. If the victim refuses to cooperate, they are then threatened with arrest, deportation or suspension of a business or driver’s license. In many cases, the caller becomes hostile and insulting.

If you get a phone call from someone claiming to be from the IRS, here’s what you should do: If you know you owe taxes or you think you might owe taxes, call the IRS at 1.800.829.1040. The IRS employees at that line can help you with a payment issue – if there really is such an issue.

If you know you don’t owe taxes or have no reason to think that you owe any taxes (for example, you’ve never received a bill or the caller made some bogus threats as described above), then call and report the incident to the Treasury Inspector General for Tax Administration at 1.800.366.4484.

If you’ve been targeted by these scams, you should also contact the Federal Trade Commission and use their “FTC Complaint Assistant” at FTC.gov.  Please add "IRS Telephone Scam" to the comments of your complaint.

Phishing

Phishing is a scam typically carried out with the help of unsolicited email or a fake website that poses as a legitimate site to lure in potential victims and prompt them to provide valuable personal and financial information. Armed with this information, a criminal can commit identity theft or financial theft.

If you receive an unsolicited email that appears to be from either the IRS or an organization closely linked to the IRS, such as the Electronic Federal Tax Payment System (EFTPS), report it by sending it to phishing@irs.gov.

It is important to keep in mind the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels. The IRS has information online that can help you protect yourself from email scams.

False Promises of “Free Money” from Inflated Refunds

Scam artists routinely pose as tax preparers during tax time, luring victims in by promising large federal tax refunds or refunds that people never dreamed they were due in the first place.

Scam artists use flyers, advertisements, phony store fronts and even word of mouth to throw out a wide net for victims. They may even spread the word through community groups or churches where trust is high. Scammers prey on people who do not have a filing requirement, such as low-income individuals or the elderly. They also prey on non-English speakers, who may or may not have a filing requirement.

Scammers build false hope by duping people into making claims for fictitious rebates, benefits or tax credits. They charge good money for very bad advice. Or worse, they file a false return in a person's name and that person never knows that a refund was paid.

Scam artists also victimize people with a filing requirement and due a refund by promising inflated refunds based on fictitious Social Security benefits and false claims for education credits, the Earned Income Tax Credit (EITC), or the American Opportunity Tax Credit, among others.

While honest tax preparers provide their customers a copy of the tax return they’ve prepared, victims of scam frequently are not given a copy of what was filed. Victims also report that the fraudulent refund is deposited into the scammer’s bank account. The scammers deduct a large “fee” before cutting a check to the victim, a practice not used by legitimate tax preparers.

The IRS reminds all taxpayers that they are legally responsible for what’s on their returns even if it was prepared by someone else. Taxpayers who buy into such schemes can end up being penalized for filing false claims or receiving fraudulent refunds.

Taxpayers should take care when choosing an individual or firm to prepare their taxes. Honest return preparers generally: ask for proof of income and eligibility for credits and deductions; sign returns as the preparer; enter their IRS Preparer Tax Identification Number (PTIN); provide the taxpayer a copy of the return.

Beware: Intentional mistakes of this kind can result in a $5,000 penalty.

Return Preparer Fraud

About 60 percent of taxpayers will use tax professionals this year to prepare their tax returns. Most return preparers provide honest service to their clients. But, some unscrupulous preparers prey on unsuspecting taxpayers, and the result can be refund fraud or identity theft.

It is important to choose carefully when hiring an individual or firm to prepare your return. This year, the IRS wants to remind all taxpayers that they should use only preparers who sign the returns they prepare and enter their IRS Preparer Tax Identification Numbers (PTINs).

The IRS also has a web page to assist taxpayers. For tips about choosing a preparer,  details on preparer qualifications and information on how and when to make a complaint, visit www.irs.gov/chooseataxpro.

Remember: Taxpayers are legally responsible for what’s on their tax return even if it is prepared by someone else. Make sure the preparer you hire is up to the task.

IRS.gov has general information on reporting tax fraud. More specifically, you report abusive tax preparers to the IRS on Form 14157, Complaint: Tax Return Preparer. Download Form 14157 and fill it out or order by mail at 800-TAX FORM (800-829-3676). The form includes a return address.

Hiding Income Offshore

Over the years, numerous individuals have been identified as evading U.S. taxes by hiding income in offshore banks, brokerage accounts or nominee entities and then using debit cards, credit cards or wire transfers to access the funds. Others have employed foreign trusts, employee-leasing schemes, private annuities or insurance plans for the same purpose.

The IRS uses information gained from its investigations to pursue taxpayers with undeclared accounts, as well as the banks and bankers suspected of helping clients hide their assets overseas. The IRS works closely with the Department of Justice (DOJ) to prosecute tax evasion cases.

While there are legitimate reasons for maintaining financial accounts abroad, there are reporting requirements that need to be fulfilled. U.S. taxpayers who maintain such accounts and who do not comply with reporting requirements are breaking the law and risk significant penalties and fines, as well as the possibility of criminal prosecution.

At the beginning of 2012, the IRS reopened the Offshore Voluntary Disclosure Program (OVDP) following continued strong interest from taxpayers and tax practitioners after the closure of the 2011 and 2009 programs. The IRS works on a wide range of international tax issues with DOJ to pursue criminal prosecution of international tax evasion. This program will be open for an indefinite period until otherwise announced.

Impersonation of Charitable Organizations

Another long-standing type of abuse or fraud is scams that occur in the wake of significant natural disasters.

Following major disasters, it’s common for scam artists to impersonate charities to get money or private information from well-intentioned taxpayers. Scam artists can use a variety of tactics. Some scammers operating bogus charities may contact people by telephone or email to solicit money or financial information. They may even directly contact disaster victims and claim to be working for or on behalf of the IRS to help the victims file casualty loss claims and get tax refunds.

They may attempt to get personal financial information or Social Security numbers that can be used to steal the victims’ identities or financial resources. Bogus websites may solicit funds for disaster victims. The IRS cautions both victims of natural disasters and people wishing to make charitable donations to avoid scam artists by following these tips:

To help disaster victims, donate to recognized charities.

Don’t give out personal financial information, such as Social Security numbers or credit card and bank account numbers and passwords, to anyone who solicits a contribution from you. Scam artists may use this information to steal your identity and money.

Don’t give or send cash. For security and tax record purposes, contribute by check or credit card or another way that provides documentation of the gift.

Call the IRS toll-free disaster assistance telephone number (1-866-562-5227) if you are a disaster victim with specific questions about tax relief or disaster related tax issues.

False Income, Expenses or Exemptions

Another scam involves inflating or including income on a tax return that was never earned, either as wages or as self-employment income in order to maximize refundable credits. Claiming income you did not earn or expenses you did not pay in order to secure larger refundable credits such as the Earned Income Tax Credit could have serious repercussions. This could result in repaying the erroneous refunds, including interest and penalties, and in some cases, even prosecution.

Additionally, some taxpayers are filing excessive claims for the fuel tax credit. Farmers and other taxpayers who use fuel for off-highway business purposes may be eligible for the fuel tax credit. But other individuals have claimed the tax credit although they were not eligible. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

Frivolous Arguments

Promoters of frivolous schemes encourage taxpayers to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous tax arguments that taxpayers should avoid. These arguments are wrong and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or disregard their responsibility to pay taxes.

Those who promote or adopt frivolous positions risk a variety of penalties.  For example, taxpayers could be responsible for an accuracy-related penalty, a civil fraud penalty, an erroneous refund claim penalty, or a failure to file penalty.  The Tax Court may also impose a penalty against taxpayers who make frivolous arguments in court.  

Taxpayers who rely on frivolous arguments and schemes may also face criminal prosecution for attempting to evade or defeat tax. Similarly, taxpayers may be convicted of a felony for willfully making and signing under penalties of perjury any return, statement, or other document that the person does not believe to be true and correct as to every material matter.  Persons who promote frivolous arguments and those who assist taxpayers in claiming tax benefits based on frivolous arguments may be prosecuted for a criminal felony.

Falsely Claiming Zero Wages or Using False Form 1099

Filing a phony information return is an illegal way to lower the amount of taxes an individual owes. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any variations of this scheme. Filing this type of return may result in a $5,000 penalty.

Some people also attempt fraud using false Form 1099 refund claims. In some cases, individuals have made refund claims based on the bogus theory that the federal government maintains secret accounts for U.S. citizens and that taxpayers can gain access to the accounts by issuing 1099-OID forms to the IRS. In this ongoing scam, the perpetrator files a fake information return, such as a Form 1099 Original Issue Discount (OID), to justify a false refund claim on a corresponding tax return.

Don’t fall prey to people who encourage you to claim deductions or credits to which you are not entitled or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

Abusive Tax Structures

Abusive tax schemes have evolved from simple structuring of abusive domestic and foreign trust arrangements into sophisticated strategies that take advantage of the financial secrecy laws of some foreign jurisdictions and the availability of credit/debit cards issued from offshore financial institutions.

IRS Criminal Investigation (CI) has developed a nationally coordinated program to combat these abusive tax schemes. CI's primary focus is on the identification and investigation of the tax scheme promoters as well as those who play a substantial or integral role in facilitating, aiding, assisting, or furthering the abusive tax scheme (e.g., accountants, lawyers).  Secondarily, but equally important, is the investigation of investors who knowingly participate in abusive tax schemes.

What is an abusive scheme? The Abusive Tax Schemes program encompasses violations of the Internal Revenue Code (IRC) and related statutes where multiple flow-through entities are used as an integral part of the taxpayer's scheme to evade taxes.  These schemes are characterized by the use of Limited Liability Companies (LLCs), Limited Liability Partnerships (LLPs), International Business Companies (IBCs), foreign financial accounts, offshore credit/debit cards and other similar instruments.  The schemes are usually complex involving multi-layer transactions for the purpose of concealing the true nature and ownership of the taxable income and/or assets.

Form over substance are the most important words to remember before buying into any arrangements that promise to "eliminate" or "substantially reduce" your tax liability.  The promoters of abusive tax schemes often employ financial instruments in their schemes.  However, the instruments are used for improper purposes including the facilitation of tax evasion.

Misuse of Trusts

Trusts also commonly show up in abusive tax structures. They are highlighted here because unscrupulous promoters continue to urge taxpayers to transfer large amounts of assets into trusts. These assets include not only cash and investments, but also successful on-going businesses. There are legitimate uses of trusts in tax and estate planning, but the IRS commonly sees highly questionable transactions. These transactions promise reduced taxable income, inflated deductions for personal expenses, the reduction or elimination of self-employment taxes and reduced estate or gift transfer taxes. These transactions commonly arise when taxpayers are transferring wealth from one generation to another. Questionable trusts rarely deliver the tax benefits promised and are used primarily as a means of avoiding income tax liability and hiding assets from creditors, including the IRS.

IRS personnel continue to see an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses, as well as to avoid estate transfer taxes. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

The IRS reminds taxpayers that tax scams can take many forms beyond the “Dirty Dozen,” and people should be on the lookout for many other schemes. More information on tax scams is available at IRS.gov.

Source: IRS

Tax Deductions – Charitable Contributions

Tax Deductions – Charitable Contributions

In our series on Tax Deductions, we would like to highlight some of the salient points that should be noted while claiming tax deductions on account of Charitable Contributions.

• Charitable contributions are deductible only if you itemize deductions on Form 1040, Schedule A.
• Charitable contributions made only to qualified organizations are tax deductible. To verify if the contribution that you made is tax deductible or not, you can enter the name of the organization in this link Exempt Organization Check to check if it is a qualified organization.
•  A receipt is needed for any donation claimed as deduction in Schedule A even if it is a dollar. Your deduction for charitable contributions is generally limited to 50% of your adjusted gross income, but in some cases 20% and 30% limits may apply
• Political Contributions are not tax deductible. Clothing or food given directly to victims is not deductible; the items must be given through a charity.
• For a contribution of cash, check, or other monetary gift (regardless of amount), you must maintain as a record of the contribution a bank record or a written communication from the qualified organization containing the name of the organization, the date of the contribution, and the amount of the contribution. In addition to deducting your cash contributions, you generally can deduct the fair market value of any other property you donate to qualified organizations.
• For any contribution of $250 or more (including contributions of cash or property), you must obtain and keep in your records a written acknowledgment from the qualified organization indicating the amount of the cash and a description of any property contributed. The acknowledgment must say whether the organization provided any goods or services in exchange for the gift and, if so, must provide a description and a good faith estimate of the value of those goods or services. 
• Other common donations are property or out-of-pocket expenses paid to do volunteer work. If transportation costs to perform the volunteer work are incurred, the actual cost of gas and oil or the standard rate of 14 cents a mile can be deducted. Add parking and tolls to the amount claimed for either method. Clothing and household items are deductible at its current value, whereas food items are deductible at cost. 
• For non-cash contributions greater than $500 there are additional forms that need to be filled out. Pl consult your tax consultant or CPA.

This article is collated by Prakash Iyer CPA, President, VXL SERVICES INC., a Tax Planning and Tax Return Preparation Company based in New Jersey. You can reach him at (732) 983 - 4150 or at prakash@vxlservices.com.

VXL is recognized for providing comprehensive tax advice to Individuals and Businesses across US. This includes filing Federal and State Tax returns including Resident and Non Resident Individual Tax returns, Business Tax returns, ITIN application and filing Amended tax returns. You can visit us as www.vxlservices.com