Authored By: Neal Machanic completed his Masters in Accounting at the University of Utah prior to qualifying as a Certified Public Accountant.  He is also an Enrolled Agent authorized to represent taxpayers before the Internal Revenue Service. He is currently studying to become a Certified Valuation Analyst. Neal crunches numbers in his sleep!

What happens when a taxpayer is ready to file their 2011 individual income tax return and they have a balance due? Well, the Internal Revenue Service wants them to pay it in full by April 15^th. Unfortunately, a taxpayer’s current fiscal situation might require a different response.

If a taxpayer is not going to pay their tax bill in full they usually have three options:

1. Ignore it, hoping it will go away (it never does)
2. Pay it off over time (very much like a loan)
3. Negotiate a reduction in the total amount due (such as with a short sale of a house)

We can assist you with all three options. In fact, many taxpayers who originally chose option one have come to us to help them out. We may have then chosen option two or three to assist them in getting their tax dilemma resolved.

The option that this article will focus on is number two, which in tax lingo is called an installment agreement. The condensed version goes something like this: a taxpayer cannot pay their balance due in full, they request an installment agreement. The IRS sets them up with monthly payments. They pay the tax bill over time with smaller, more manageable payments. The downside to this option is that the IRS will continue to charge them interest on the outstanding balance until it is paid in full. 

Beginning in 2012, the 2011 tax filing season, the Internal Revenue Service has loosened its rules on who can qualify for an installment agreement and the amount of financial data the taxpayer is required to disclose in order to qualify for an installment agreement. They have also increased the maximum number of months generally allowed to pay off an installment agreement.

The IRS now requires only minimal disclosure for tax balances up to $50,000. They have identified three balance groups: balances up to $10,000, balances between $10,000 and $25,000 and balances between $25,000 and $50,000; with each group requiring progressively more financial disclosure. However, disclosure in the highest group listed is minimal as compared to the information the IRS requires for installment agreements over $50,000.

For those taxpayers who owe $10,000 or less in combined tax, interest, and penalties for all open tax years, the IRS will guarantee acceptance. The IRS cannot turn you down as long as you meet these three conditions:

1. During the past five years, you have filed all tax returns in a timely manner, paid any tax due, and did not enter into any other installment agreements.
2. The IRS determines you cannot pay the balance in full when due, and you provide the IRS any information it requires to make that determination.
3. You agree to complete the installment agreement within three years, and you comply with tax laws while the agreement is in effect.

For those taxpayers whose total balance owed is between $10,000 and $25,000; they are not guaranteed acceptance for an installment agreement, although most requests are granted. In this group, if accepted, they can have up to seventy-two months to pay off the balance owed.

For those taxpayers who owe between $25,000 and $50,000, they must provide answers to a number of basic financial questions in addition to the information provided with lower dollar balance owed installment agreement requests.

It should be noted here that balances owed that are greater than $50,000 are eligible for an installment agreement. But before the IRS grants such a request for these large balances, a taxpayer would be required to disclose substantial amounts of financial data, and fill out a significant amount of IRS forms.

Even though the IRS has relaxed its rules on what balances qualify for an installment agreement and how long a taxpayer can take to pay, the IRS does not want to be America’s money lender. They want taxpayers to try to obtain the funds from any and all other possible sources before resorting to an installment agreement.

So, if you are faced with a tax bill you cannot pay in full, an installment agreement is an excellent way of taking care of your tax responsibility. It sure beats the option of doing nothing because the IRS will find you eventually; they always, always do. It is also an effective method unless you are in dire financial straits, and cannot pay even with an installment agreement. Then an offer-in-compromise might be in order for you. But before this method is considered, remember that like a request for an installment agreement greater than $50,000, the amount of financial information that must disclosed and provided is significant.

The accountants of Cook Martin Poulson, PC are ready to assist you with this or any tax situation or problem.

Many people have been dipping in to their retirement savings in order to make ends meet.  What many people don’t realize is that there is a 10% penalty on most early withdrawals from IRA’s and qualified accounts such as 401(k)’s if they are made before the age of 59 1/2.  This 10% penalty is in addition to the income tax that must be paid on the withdrawal amount at the taxpayer’s individual tax rate.

There are some exceptions to this 10% penalty that many people may not be aware of.  If the money is used for any of the reasons below you could avoid the 10% penalty.  Some of these exceptions only apply to IRA’s and some only apply to qualified accounts, so be sure to consult with your tax advisor regarding your specific situation.  You will also need to notify your tax preparer that you used the money for one of the reasons listed below as that information will not be reported on the 1099-R tax form you will receive in the year of distribution.

Exceptions:

• Distribution made to an employee who has attained age 55 and separated from service
• Distribution is part of a scheduled series of substantially equal periodic payments made over the life expectancy of the participant or joint lives of participant and his beneficiary
• Distribution made due to total and permanent disability
• Distribution made due to death of the employee or account owner
• Distribution to the extent the individual’s unreimbursed medical expenses exceed 7.5% of his AGI
• Distribution made to an alternate payee pursuant to a qualified domestic relations order (QDRO)
• Distribution to pay for health insurance premiums for certain unemployed individuals
• Distribution to the extent of the qualified higher education expenses for the year of the taxpayer, spouse, child or grandchild
• Distribution for first-time home purchases (no home ownership in prior two years). This distribution is limited to $10,000 (lifetime)
• Distribution due to an IRS levy on the qualified plan or IRA.  This exception will not apply if funds are withdrawn to avoid a levy or to satisfy a levy on other property
• Distribution to reservists while serving on active duty for at least 180 days

Authored By:  Dustin Wood, CPA.  Dustin has been with the firm 7 years and is the audit manager here at Cook Martin Poulson, PC.  He specializes in financial statement services.

Significant changes to accounting standards for lease accounting are on the horizon as part of a convergence project between accounting standards setting bodies in the United States and internationally.  Potential changes to lessee accounting would do away with current accounting requirements, which provide a bright line test to determine whether a lease is an operating lease or a capital lease for the lessee.  Operating lease payments are currently expensed as rent and lease payments while capital leases require the recording of an asset and a liability, as if the asset were being purchased.  Based on current discussions, changes to lease accounting would require recording assets and accompanying liabilities for all leases, and would require adjusting lease accounting for leases already in place.  The proposed changes are currently still in the discussion stage, but if finalized, would require analysis by companies and their accountants to determine the effects of the changes and what adjustments may be necessary.

Nathan Shields, CPA, Senior Accountant.  Nathan has been with the firm 4 years and works in both tax services and financial statement services.

In Black’s Law Dictionary the definition of fraud includes “all multifarious means…which are resorted to by on individual to get an advantage over another by false suggestions or suppressions of the truth.”  Fraud affects every organization, but may not always be material to the organization.  Taking a pen from the supply closet home is fraud, but is it material?  To most firms, a pen is not material, but it is still fraud. 

A couple things to know is that it’s not possible to prevent all wrongdoing and fraud, and that every instance of fraud is unique.  When fraud occurs in your firm, emotions must be controlled.  Fraud has, and will occur even by the most honest people in the firm.  If it’s the most honest people that can commit fraud, then we should look at why people commit fraud.

There are three things which lead people to commit fraud.  Pressure, rationalization and opportunity make up what is known as the fraud triangle.  Some people feel pressure to commit fraud.  That pressure may come from within the firm, or from an outside source.  Pressures include major medical expenses; trying to catch up to the Jones’s or pressure to meet firm expectations.  Rationalization usually happens when a person feels they need the money more than the company does, or they think they will put the money back in a month or two.  Or a lack of morals will help rationalize the fraud.  Everyone experiences pressure, and rationalization at some point and you cannot control which employees’ experiences pressure and rationalization, but, you can control the opportunity to commit fraud.

What can you do to prevent fraud?  There are hard and soft controls.  Soft controls would be controls such as a firm fraud policy, or an excerpt in the employee handbook about fraud, and tone at the top.  Hard controls are internal controls that dictate who can sign checks, and who reconciles the bank account each month.  It is crucial for management to actively address fraud with both hard and soft controls.  The firms that are effectively deterring fraud have taken a very proactive approach and everyone in the firm knows what is being done to prevent fraud, as well as, what the consequences of committing fraud are. 

What should you do if you suspect fraud?  Keep your emotions in check.  Call a lawyer to help with labor laws, and call us, your accountants.  We can help you make sure that you have addressed possible fraud and have the appropriate hard and soft internal controls in place.

By Troy Martin, Shareholder, Cook Martin Poulson, P.C.

The federal Research and Development Tax Credit (also available at the state level in Utah) can provide, among other things, a hidden and immediate source of cash as well as a significant reduction to past and future years’ income tax liabilities for companies of all sizes in many industries. The state of Utah also offers both a 5% incremental and a 9.2% flat credit on qualified research expenditures (in addition to the federal credit).

R&D is not just about rocket science, lab coats, and patents anymore. If your company designs, develops, or improves prod­ucts, processes, techniques, formulas, inven­tions, or software; or if your company has in­vested time, money, and resources toward the advancement and improvement of products and processes, then your activities may qual­ify for the R&D tax credit. Because of the “research and development” name, the tax credit is often overlooked, especially by small and mid-sized businesses. At the federal level, R&D tax credit rules allow eligible taxpayers to “look back” to all open tax years (typically three years plus the current year) for potential R&D cred­its that were never claimed.

I have been working with alliantgroup, a specialty tax service provider who is the leader in the R&D tax credit study space, and have been excited about the potential refunds and savings for some of my clients. Most recently, alliantgroup identified nearly $1.5 million in R&D credits for a mid-sized electronics manufacturing industry client of mine. This is money businesses are entitled to by the government – funds that make a significant impact on the ability for companies to remain competitive and innovative, something we need more of in this country.

Contractors, architects, engineers, manufacturers, software developers, and many more types of companies may not realize some of their standard activities may entitle them to generous R&D tax incentives. If your company is already utilizing the R&D tax credit, you could be missing out on additional savings because the traditional notions of R&D often cause companies to limit qualified research expenditures to activities associated only with new products and inventions. However, in many cases, companies spend a considerable amount of time and effort to develop product designs that achieve optimized process performance. Furthermore, many companies conduct extensive activities to design and develop processes themselves to achieve specific project requirements or to stay ahead of competitors in the marketplace. All of these activities likely require time and money which may be captured as qualified research expenditures leading to significant tax benefits.

Cook Martin Poulson’s partnership with alliantgroup provides additional and powerful specialty tax service offerings that help many of our clients reduce pending tax liability. alliantgroup’s experts include specialized industry teams of engineers, architects, software developers, chemists, biologists, accountants, and lawyers who understand our clients’ industries and how to navigate the complexities of an R&D study. alliantgroup also has national tax insiders on their staff including Mark Everson, former IRS Commissioner, and Dean Zerbe, former Tax Counsel to the U.S. Senate Finance Committee.

To learn more about whether your company may qualify for R&D tax credits, contact your CMP partner for a complimentary assessment by alliantgroup’s professional team.

Authored By: Connie Ward

Which are you?

For federal tax purposes, this is an important distinction.  Worker classification affects how you pay your federal income tax, social security and Medicare taxes, and how you file your tax return.

The courts have considered many facts in deciding whether a worker is an independent contractor or employee.  These relevant facts fall into three main categories:  behavioral control; financial control; and relationship of the parties.

BEHAVIORAL CONTROL

These facts show whether there is a right to direct or control how the worker does the work.  A worker is an employee when the business has the right to direct and control the worker.  For example:

Instructions – if you receive extensive instructions on how work is to be done, this suggests that you are an employee.  If you receive less extensive instructions about what should be done, but not how it should be done, you may be an independent contractor.

Training – if the business provides you with training about required procedures and methods, this indicates that the business wants the work done in a certain way, and this suggests that you may be an employee.

FINANCIAL CONTROL

These facts show whether there is a right to direct or control the business part of the work.  For example:

Significant Investment – if you have a significant investment in your work, you may be an independent contractor.  While there is no precise dollar test, the investment must have substance.  However, a significant investment is not necessary to be an independent contractor.

Expenses – if you are not reimbursed for some or all business expenses, then you may be an independent contractor, especially if your unreimbursed business expenses are high.

Opportunity for Profit or Loss – if you can realize a profit or incur a loss, this suggests that you are in business for yourself and that you may be an independent contractor.

RELATIONSHIP OF THE PARTIES

These are facts that illustrate how the business and the worker perceive their relationship.  For example:

Employee Benefits – if you receive benefits, such as insurance, pension, or paid leave this is an indication that you may be an employee.  If you do not receive benefits, however, you could be either an employee or an independent contractor.

Written Contracts – a written contract may show what both you and the business intend.  This may be very significant consideration if it is difficult to base the distinction based other factors, however, by merely having a contract will not trump all the other factors in determining where you are an employee or an independent contractor.

Understanding where you are an independent contractor or an employee is critical for your tax planning.  If you’re unsure please give us a call to discuss the tax ramifications of each of the options.