Don’t Let Your “On the Side” Accountant Get You Audited

Accounting is a field filled with many accountants who prepare tax returns “on the side” or have a “side business” in addition to their full-time job. While this presents many problems with communication, audit representation, availability, etc., perhaps the biggest problem is the additional audit risk that the clients who use these types of tax preparers face.

Since many of these accountants are looking to make some extra money without any overhead, they have a tendency to share software with other accountants or steal software from the company they work for. When this happens, you can pretty much count on the fact that the “Paid Preparer’s Information” section of your tax return will either be left blank altogether, have “Unpaid Preparer” checked off, or have “Self-Prepared” checked off.

When any of the above items appear in the Paid Preparer Information section of a tax return, the audit risk of that tax return skyrockets. This is looked at the same as if a CPA prepared a return and does not stand by it enough to feel comfortable signing it.

Although it could be a perfectly innocent case of your tax preparer trying to save a few bucks on tax preparation software, the IRS will not know this until you tell them during your audit!

Additionally, the IRS is currently working on a piece of detection software that will identify quarterly payroll tax returns that are not signed by the preparer. Once in place, this system will be used to identify preparers who have a tendency not to sign their clients’ payroll tax returns and subject these clients to higher-than-normal audit risks.

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When Your Partner Should Also Be Your Business Partner

There has been a lot of hype over the past couple of years surrounding a new piece of legislation that allows a husband and wife who operate a business together to forego filing a Partnership return in favor of filing a Schedule C on their joint tax return.

The argument for this is that the accounting fees will typically be $200-300 less each year and the couple wouldn’t have to go through the hassle of signing & mailing in their tax return.

However, the downside is that audit risk will jump from .3% to 2.7%, leaving your business nine times more likely to be pulled for a random IRS audit!

The best options for any husband and wife business partners would be to establish an S-Corporation or an LLC. The second best option would be to remain a Partnership and continue to file a separate Partnership tax return. The worst option would be to "take advantage" of this legislation and file a Schedule C.

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Tax Relief for Heroes

On June 17, 2008, President Bush signed the Heroes Earnings Assistance and Relief Tax Act into law. This law provides various tax breaks for military personnel and their families. Here is a summary of the key benefits:

Penalty-Free Withdrawals
Reservists who get called into active duty will be allowed to withdraw funds from their retirement plans such as IRAs, 401(k)s, and 403(b)s without having to pay the standard 10% penalty. Note, these withdrawals will still be taxed as income, it is only the actual 10% penalty that is being waived.

Tax-Free Rollovers
Military death benefits and military insurance proceeds may be rolled over into ROTH IRAs or Coverdell Education Savings Accounts (ESAs) tax-free without regard to the standard limits/restrictions.

Economic Stimulus Payments
As long as one spouse is a member of the military, the couple will qualify to receive an economic stimulus rebate check.

Earned Income Credit
Non-taxable combat pay will be treated as earned income when calculating the Earned Income Credit.

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Selling Your Small Business

If you are like many business owners out there, you dream of one day selling your business, cashing that one last big check, and riding off into the sunset.

However, gearing up a business to sell is something that should be established and worked at from day one.

Many small business owners approach their business in a way that allows them to avoid paying taxes (not reporting all of your income, inflating your expenses, etc.). Aside from the legal and ethical implications here, you are setting yourself up for great disappointment when it comes time to sell your business.

Here are just some of the things you risk by taking the “I’ll do what I can to avoid taxes now and worry about the sale of my business later” approach:

1) Many years of continued profitability increase the likelihood of a quick sale and ensures that someone will be willing to pay top dollar for your business. Underreporting income and overstating expenses makes your business look less profitable

2) A good buyer will have his accountant run due diligence and look into the history of your business. A history of problems with the IRS means that your business will be less desirable due to the fact that with it may come additional future IRS scrutiny

3) A buyer who sees your tax avoidance as a sign of other possible unethical business practices, they may be less willing to negotiate with you or they may walk away from the deal all together

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Don't Claim the Home Office Deduction

Looking for a quick tax deduction this year?

If so, most tax preparers and unscrupulous accountants may steer you towards the Home Office Deduction. DIY tax preparation software such as TurboTax or TaxCut will also lead you down this road.

However, if you are fortunate enough to have hired a knowledgeable CPA who is ethical and looking to establish a long-term accountant/client relationship with you, you will not be claiming that Home Office Deduction anytime soon.

Claiming this deduction will save you a few hundred dollars on your current tax return. Sounds great, right? Even if claiming this deduction will expose yourself to significantly higher audit risk, you are willing to do it in exchange for those couple hundred dollars.

However, what you haven’t been told up until now is the long-term impact of claiming the home office deduction…how it can cost you up to $15,000 in additional taxes when you eventually sell your house!

Considering that the average homeowner who claims the home office deduction saves approximately $450 in taxes each year, they would have to live in their house for over 33 years to ensure that they have saved enough taxes each year to cover the potential $15,000 tax bill.

How does claiming the home office deduction lead to a high tax bill in the year you sell your house? Well, the IRS allows a $500,000 capital gain exclusion to married couples who file a joint tax return. What this means is that, given certain requirements are met, you can sell your house for a profit of up to $500,000 without having to pay a penny in capital gains taxes. However, if you allocate 20% of your house to your “home office” for purposes of claiming the home office deduction, you run the risk of losing 20% of your capital gain exclusion. Losing 20% of this $500,000 exclusion means that $100,000 of your gain would be taxed at the capital gains rate (currently 15%) and you would be faced with a $15,000 tax bill.

One caveat – renters. If you rent your home instead of owning it, you can claim the home office deduction without having to worry about this long-term negative financial impact. Keep in mind, that your tax returns will still remain subject to additional IRS scrutiny as the home office deduction is an often-challenged deduction.

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Don’t be a Small Fish in Your Accountant's Pond

Ever feel like you are one of the smallest fish in your accountant’s pond?

If so, it may be time for a change.

Being the small fish means that you are last in line to hear about changes in the tax code that could benefit you and your company…it means you receive answers to your questions weeks after you ask them…it means virtually no tax planning is done throughout the year to benefit you come tax time.

The main reason why accountants treat their smaller clients like “small fish” is simply due to the fact that they are not good business people themselves. Tip #1…if your accountant does not run his own business well, why do you have him on board as a trusted advisor for your business?

Let me explain to you why my firm, Merl & Hanley, LLP has made a conscious decision to view our smaller clients as our best clients:

1) Accounting is a service-driven business that revolves around one main thing…time. There are only so many hours in a day…a week…a year. Accountants gauge the success of their practice by their hourly rate. Taking on larger clients that provide us with 10, 15, 20+ hours of billable hours each month typically means having to offer these clients some type of “volume discount.” So, if we are able to earn $150 per hour working on the smaller (1-2 hour per month) client, we can only earn $125-140 per hour working on the larger (20+ hour per month) client. Since hourly rate is the driving force of our business, the smaller client is actually our better client since we are able to earn more per hour working on the smaller client’s file. That is why our smaller clients come first!

2) Accounting, like all other service-driven businesses succeeds due to referrals and satisfied clients are the number one source of referrals. By choosing to service 200 smaller clients for the same amount of fees that we could earn by servicing 50 larger clients, we expand our field of referral sources by 300%. Growing our business through referrals means spending less time on marketing, which means more time to service our existing clients.

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IRS Raises Standard Mileage Rates

With gas prices soaring, the IRS has announced an increase in the standard mileage rates that taxpayers can use to deduct the cost of driving for business, medical services, or moving.

BUSINESS MILES
Effective for driving from July 1 through December 31, 2008, the standard mileage rate for business driving has been increased to 58.5¢ per mile. The rate for business miles driven from January 1 through June 30, 2008, remains at the previous rate of 50.5¢ a mile.

MEDICAL AND MOVING MILES
The IRS also increased the deductible rate for medical and moving mileage for the last six months of 2008 to 27¢ a mile. For the first six months of 2008, the rate remains at 19¢ a mile.

CHARITABLE MILES
Note that the IRS made no change in the mileage rate for driving in conjunction with charitable activities. That rate is set by law and remains at 14¢ a mile.

The standard mileage rates provide taxpayers with an IRS-approved recordkeeping shortcut for deducting expenses for business, medical, and moving driving. The rates are adjusted annually based on operating costs for vehicles. When costs rise dramatically during the year, the IRS considers a midyear change.

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Fixed Fee Billing

When interviewing an accountant, whether this is your first time hiring one or whether you are making a change from your current accountant, one factor to strongly consider is how you will be billed. Will the accountant bill you on a per-hour basis or will you enjoy the benefits of fixed-fee billing.

Although hourly billing seems to have been the industry standard for over 50 years, as the client, it’s time that you stand up for your rights and demand a change to fixed fee billing.

Fixed fee billing is a method employed by many newer accounting firms. It involves them gathering enough information about you and your business to estimate what amount of work will be involved in servicing your company. Using this estimate, the accountant determines a set monthly, quarterly, semi-annual, annual, or per-project fee.

Major Benefits of Fixed Fee Billing:

1) You always know what the fee will be before you agree to the work

2) Rather than hesitating to call or e-mail your accountant with a question out of fear that his meter will be running, you enjoy the freedom of being able to pickup the phone or shoot him an e-mail whenever the need arises

3) No time wasted questioning or disputing bills for which your accountant and his staff spent more time on a project than you think they should have

4) Not being subject to “timesheet padding.” When your accountant’s staff is working on your file and they take a cigarette break, grab a cup of coffee, get interrupted by a phone call, have a computer problem, or chat with a co-worker, you can just about guarantee that this time will be billed to you. While all employees deserve a break, you should not be paying them for their rest.

5) Not being subject to billing program intervals. Most billing programs that accounting firms use to track billable hours run off minimum intervals such as ten minutes, twelve minutes, or fifteen minutes. This means that when you spend three minutes on the phone with your accountant, you are going to be billed for at least ten minutes. Doesn’t seem like much, but add up all the rounding for an entire year and you are looking at five-ten additional billed hours each year.

Small businesses can save an average of $500-$1,500 per year in fees simply by hiring an accounting firm that utilizes fixed-fee billing.

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QuickBooks Online versus QuickBooks Desktop Software

Ahhh, the thought of being able to access your QuickBooks data from anywhere in the world…multiple offices in different locations being able to access one central file…being able to review reports from the comfort of your hotel room…just think of the possibilities.

Now, think of the price of doing this. No, not the monetary price…in fact, the QuickBooks Online Edition only costs approximately $200 more for one year of service than the actual desktop software version (such as QuickBooks Pro or QuickBooks Premier). The price I’m speaking of is in terms of speed, and functionality:

1. The biggest downside for me and the average business owner is speed. The Online Edition adds a tremendous amount of time to your day-to-day operations…reports that generate in just a few seconds on the desktop edition now take 10-60 seconds depending on the size of your company file and the speed of your internet connection. Limitations on keyboard shortcuts add to the amount of time you will need to spend entering data.



2. While all users won’t experience a decline in functionality due to their limited use of the program, any business that uses QuickBooks as more than just a “checkbook” program will notice a dropoff in features offered by the Online Edition. One of the features that I find most frustrating is the fact that you can only have one report/screen displayed at a time. On the desktop software, you can have several windows opened at one time and flip back-and-forth between them as needed.

If remote access is your main reason for leaning towards QuickBooks Online, I would suggest that you combine the QuickBooks desktop software with some type of remote access program such as GoToMyPC, WebEx, Citrix, VPN, or some other similar type of remote access software. This way, you have the full functionality of the QuickBooks desktop software and you are still able to access it from remote locations.

Already have QB Online? Don’t worry. QuickBooks has developed a wonderful conversion process where they take your Online Edition company file and convert it to a working company file that can be used with your desktop software. It takes about a 24-48 hour timeframe to complete, during which time you cannot add new data to your file. However, it is well worth that minor inconvenience in order to avoid the ongoing inconveniences of the Online Edition!

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