I recently returned from some professional training in New Orleans on this issue. Income Tax Planning is an emerging trend in the tax compliance industry. Tax Planning is a way of being proactive in managing your tax liabilities.
In tax planning, I will do a technical analysis of a tax return and advise the client of any potential missed opportunities. The tax code is an ever-increasing and complex set of rules. We constantly study the changes and look for ways to help clients save on their tax bills.
One of the most common mistakes made by small corporations is the failure to pay corporate officers (usually the owners) a “reasonable salary.” The tax code provides that corporate officers who provide services to a corporation must be compensated by the corporation commensurate with the fair market value of those services.
But many corporate officers do not draw a salary. Rather, they take their entire compensation in the form of a “dividend.” The difference is that the dividend is generally not subject to social security tax while the salary is. This is an issue of growing concern, but most small business owners will not see it coming.
Too many tax return preparation professionals just do not understand the nuances of determining reasonable compensation or even that the IRS will challenge the compensation package of a small business owner. I expect many business owners to be blindsided by this issue. It could cost you a fortune.
Payment of fringe benefits to employees. Unless specifically excluded by law, the payment of money, property or services of any kind as compensation for services is taxable income. If a person receives goods in exchange for services, those goods are taxed at their fair market value.
On the other hand, the tax code does exclude from taxation certain fringe benefits paid by companies to their employees. But the exclusions are limited and are expressly defined. To the extent that any benefits exceed those limits, they are taxable.
To illustrate how desperate for revenue the Federal government now is, the random audit program targeted at small businesses will also focus on the payment of fringe benefits to employees. Look for the IRS to work on taxing every possible benefit that’s paid to employees. And of course, it intends to squeeze that money out of your pocket.
Employment tax return non-filers. The Treasury Inspector General for Tax Administration recently called on the IRS to step up enforcement against businesses that don’t file employment tax returns or pay employment taxes on time. The IRS treats this issue very seriously since employment tax money is largely withheld from the paychecks of employees. The employer is then responsible to pay it to the IRS. When the employer fails to do that he is treated as violating a “trust” relationship and becomes personally liable for the unpaid withholding taxes.
The IRS is now expanding its audits to randomly probe businesses for employment tax compliance. And because these audits are entirely random, there’s really no way a business can avoid such an audit. The best you can do is to make sure your business is in compliance.
The misclassification of workers as independent contractors (ICs). Employment taxes represent a staggering cost to businesses, both in terms of money and time. For this reason, many businesses look for ways to trim costs by reducing employees. One strategy is to use independent contractors (ICs) rather than employees to perform services for the business. But there is a right way and a wrong way to use ICs. If you go about it the wrong way you open yourself up to substantial tax assessments with penalties and interest.
Because employment taxes are such an important revenue source, the IRS is determined to audit as many businesses as possible to ferret out those that use ICs. The Government Accountability Office (GAO) recently reported that in 2007, various audits by state revenue departments found that more than 150,000 workers were misclassified as ICs. This report prompted the IRS to undertake its own study. So beginning immediately, the IRS will launch at least 6,000 random audits of small businesses. The announcement came on April 22 and was issued by Robin Arnold, a senior IRS program manager and field specialist.
Of course, the random audits are just the beginning. Once the IRS has the audit program fully developed and refined it will let loose its agents upon businesses on a much wider scale. The agency is training 200 revenue agents right now to conduct these audits. Moreover, it’s in the process of hiring nearly 2,000 more agents this year to help carry the load. Even worse, the results of the audits will be shared with the states so they can get in line behind the IRS to pick the bones clean.
And while it’s certainly not illegal to use ICs, you must be sure the workers are legitimate ICs and not merely employees masquerading as ICs.
There has been much talk lately about gold and silver. You see pawn shops and jewelers buying it on every corner. I am not licensed to give financial advice, so I will limit the scope of this column to academics only. Precious metals go back in history for thousands of years.
Over the past 5,000 years, there has been a ratio of 12:1 between silver and gold. This means that silver is 12 times more abundant than gold, which means that (historically) gold is valued at 12 times silver. PMs are typically traded in ounces. Precious metals made a big comeback back during the highly inflationary era of the 1970’s.
It appears that they are re-emerging in a very similar fashion. In times of high inflation, people tend to run to real money. The only real money we have access to is gold and silver. I see this as an emerging trend that will continue for the next several years.
A Stretch IRA is an effective wealth transfer tool that allows you to pass on IRA assets to a beneficiary, usually your children or grandchildren. If the beneficiary is under age 59 1/2 the premature distribution 10% penalty is avoided because these payments are treated as death distributions.
In 2002 the IRS issued regulations that enable a person that has a traditional IRA to change the beneficiary to stretch IRA distributions. Under these regulations, when you stretch the IRA distribution you are effectively stretching out the length of time withdrawals can be taken from the IRA. The length of time is usually based on the life expectancy of the younger beneficiary. This extends the period of tax deferred earnings beyond the age of the individual that initially set up the IRA.
When you adopt a stretch IRA strategy for wealth transfer you still maintain control over your IRA assets. A stretch IRA is revocable, meaning that you can change your beneficiaries at any time. You can even change the amount of your distributions from the IRA. When you reach 70 1/2 you are required to make required minimum distributions (RMDs) from an IRA. Any changes that you make to the beneficiary do not affect this amount.
