To get in full spirit of the Halloween season here at Cook and Associates, we’ve decided to share some of the scariest IRS horror stories we could find.
1. A Cayman Islands Vacation Gone Bad
When most people hear the words "Cayman Islands" they probably think of a relaxing Caribbean vacation. However, many might also think about illegal tax shelters, as the islands are somewhat infamous for hosting the private bank accounts of many American tax evaders. A few years ago, Joe ran into a few problems of his own in the Cayman Islands. He and his business partners used to vacation in, and bank in the islands on a regular basis, until Joe's vengeful ex wife got wind of the situation. She tipped off the IRS and Joe found out about it one afternoon when 25 federal agents stormed his home and business, ceasing all kinds of financial information. Joe was considered a flight risk and imprisoned under $5 million bail. It took dozens of court cases and thousands of dollars in legal fees to prove his innocence, and resulted in a major lifestyle change for Joe.
2. The Audit of Endless Receipts
Auditors are notorious for being difficult every now and then when it comes to documenting expenses and qualifying for credits, but usually leave a little leeway. However, this was not the case for a taxpayer named Heather who was audited by what she now refers to as the world's most relentless auditor. She claims that the auditor in question hounded her for not only proof of her business expenses, but receipts for every single personal and professional transaction made over the past two years. The auditor supposedly made her scrounge up receipts for transactions for as little as a dollar or two. Needless to say, Heather could not find every document required and faced several penalties.
3. The Beauty Shop Butchery
Celia, an honest and hardworking beauty shop owner, had her life ruined by the IRS a few years ago when her shop's equipment was seized and sold at auction to pay her back tax debts. Celia did not know much about taxes and hired a professional to assist her. Fortunately, the tax consultant found that Celia had indeed paid her taxes in full. The IRS had made a mathematical error, accidentally entering her tax amount twice in to the system, which made it look like she had not paid her taxes at all. Although she got her equipment back, she lost many of her clients and income due to the incident.
Friday, October 29, 2010
Friday, October 22, 2010
Refinancing Your Home - A Good Idea?
Refinancing is probably the last thought in many American’s minds. At a time when many people are having trouble just paying the monthly mortgage, how could you even consider throwing down a chunk of cash to reach a lower interest rate? Interestingly enough, this very thought has been on my mind quite a bit lately.
As more and more of my neighbors either walk away from their mortgages, resulting in foreclosure, or sell at a deep loss, the more I contemplate the benefits of refinancing. Crazy, right? Maybe not. While home mortgage refinancing can certainly be a tricky business, it may be worth your while to consider how refinancing can save your future.
1. It can reduce the length of your loan.
2. It can lower your interest costs.
3. It can lower your payments.
4. It can allow you to tap into your equity.
Paying off your loan more quickly may be one of your top reasons to refinance. Let’s say you have 25 years left on your mortgage loan, but the idea of a 15 year loan is appealing. Is it a good idea? It could be. If the interest rate is lower on the new 15 year loan allowing you to make payments equal to or slightly above your current amount, it might make perfect sense.
Lowering your interest costs generally means paying less overall in the long run. Is it worth paying the fees and points initially to save in interest costs over the course of the loan? How many months/years will it take to recoup the fees you paid by paying less in interest? Make sure you plan on being in the house long enough to start seeing the savings.
If you’re aiming to lower your monthly payments, refinancing to a lower interest rate or a longer term might make sense. However, keep in mind that the longer your loan, the more you’re paying in interest.
Have a child going to college? Have a yen to do some remodeling? You may want to refinance to tap into your equity. If the rates to refinance are less than the going rate on a personal loan, it may be beneficial to consider this option. On the other hand, if refinancing rates are higher than your current rate, you could end up paying a bundle more in interest than you would have on a personal note.
Finally, before you commit to any new financing, be sure you understand what you’re taking on. Do your research and be prepared. It could be the difference between -$ and $$$$$.
As more and more of my neighbors either walk away from their mortgages, resulting in foreclosure, or sell at a deep loss, the more I contemplate the benefits of refinancing. Crazy, right? Maybe not. While home mortgage refinancing can certainly be a tricky business, it may be worth your while to consider how refinancing can save your future.
1. It can reduce the length of your loan.
2. It can lower your interest costs.
3. It can lower your payments.
4. It can allow you to tap into your equity.
Paying off your loan more quickly may be one of your top reasons to refinance. Let’s say you have 25 years left on your mortgage loan, but the idea of a 15 year loan is appealing. Is it a good idea? It could be. If the interest rate is lower on the new 15 year loan allowing you to make payments equal to or slightly above your current amount, it might make perfect sense.
Lowering your interest costs generally means paying less overall in the long run. Is it worth paying the fees and points initially to save in interest costs over the course of the loan? How many months/years will it take to recoup the fees you paid by paying less in interest? Make sure you plan on being in the house long enough to start seeing the savings.
If you’re aiming to lower your monthly payments, refinancing to a lower interest rate or a longer term might make sense. However, keep in mind that the longer your loan, the more you’re paying in interest.
Have a child going to college? Have a yen to do some remodeling? You may want to refinance to tap into your equity. If the rates to refinance are less than the going rate on a personal loan, it may be beneficial to consider this option. On the other hand, if refinancing rates are higher than your current rate, you could end up paying a bundle more in interest than you would have on a personal note.
Finally, before you commit to any new financing, be sure you understand what you’re taking on. Do your research and be prepared. It could be the difference between -$ and $$$$$.
Tuesday, October 19, 2010
Tax Planning Tips For Year End 2010
Uncertainty is a factor in most tax planning decisions, but this year it is greater than ever. The recent decision by Congress to adjourn without addressing the expiring Bush tax cuts, as well as other items that expired at the end of 2009, leaves many tax advisors in the lurch.
With both political parties staking out irreconcilable positions - from the Republicans releasing a "Pledge for America" that calls for more tax cuts and the permanent extension of the Bush tax cuts, to the Democrats not extending those cuts.
"There's been universal frustration at the delays," said Robert Kerr, director of government relations at the National Association of Enrolled Agents. "The trend in the last few years has been to pass extenders at the end of the year. The extenders package, in addition to the tax rates, are up in the air. We go into November not knowing simple things such as whether the R&D credit exists, the deductibility of state and local sales taxes, or the Alternative Minimum Tax patch."
Yet planning, though difficult, is still possible and absolutely necessary, according to Greg Rosica, a tax partner in Ernst & Young's Tampa, Fla., office and a contributing author to the Ernst & Young Tax Guide.
"We're in a time of greater uncertainty when it comes to planning," he said. "But just because the legislative process has been delayed, it doesn't mean that taxpayers should. If they do delay, they might not be able to execute on ideas that make sense."
Rosica recommended planning a series of alternative scenarios based on the possibilities that might come out of the post-election process. "Instead of traditional year-end planning, we consider at least two different sets of assumptions," he said. "For example, Action List A would be the things to do if things stay the way they are. Action List B sets out the path to take based on various legislative changes. Once we get clarity as to what direction the rates will go, people can look at the list and execute the plan with the time remaining in the calendar year. Once we know what happens, we know what actions to take."
CORPORATE PLANNING
For private C corporations, Rosica recommended a look at accelerating dividends from 2011 to 2010. "If the corporation pays dividends, it should consider paying all its dividends, or as much as possible, in 2010 in light of the fact that there is currently a 15 percent tax rate on dividends that is scheduled to go up to 39.6 percent in 2011," he said.
Pass-through entities, such as partnerships and S corps, should re-evaluate their entity status, advised Rosica. "Is the S corporation or partnership status going to continue to make sense versus converting to a C corp? C corporation rates are not scheduled to change, but the flow-through rates are, so it's important to check where you are from an entity perspective," he said. "Even with an S corporation, there may be accumulated earnings and profits from a previous C corporation, so by accelerating some of these dividends there may be a more favorable tax result."
INDIVIDUAL PLANNING
"When you look at individuals, customary planning is 180 degrees different this year," said Rosica. "Traditionally you're looking to defer income and accelerate dividends, but now it's the opposite - accelerate income into 2010, and defer deductions till 2011, because income is worth more at lower tax rates, and deductions are worth more at higher tax rates. Real estate taxes, year-end deferred-compensation decisions, and charitable contributions are areas to consider."
"The important thing is to develop a plan with at least two different scenarios now so you will be able to execute it when the time comes. If you wait, you will be pushing up against a difficult time," he said.
All in all, this is a really tough time for those of us in the tax planning business. Our best advise is be prepared for anything.
With both political parties staking out irreconcilable positions - from the Republicans releasing a "Pledge for America" that calls for more tax cuts and the permanent extension of the Bush tax cuts, to the Democrats not extending those cuts.
"There's been universal frustration at the delays," said Robert Kerr, director of government relations at the National Association of Enrolled Agents. "The trend in the last few years has been to pass extenders at the end of the year. The extenders package, in addition to the tax rates, are up in the air. We go into November not knowing simple things such as whether the R&D credit exists, the deductibility of state and local sales taxes, or the Alternative Minimum Tax patch."
Yet planning, though difficult, is still possible and absolutely necessary, according to Greg Rosica, a tax partner in Ernst & Young's Tampa, Fla., office and a contributing author to the Ernst & Young Tax Guide.
"We're in a time of greater uncertainty when it comes to planning," he said. "But just because the legislative process has been delayed, it doesn't mean that taxpayers should. If they do delay, they might not be able to execute on ideas that make sense."
Rosica recommended planning a series of alternative scenarios based on the possibilities that might come out of the post-election process. "Instead of traditional year-end planning, we consider at least two different sets of assumptions," he said. "For example, Action List A would be the things to do if things stay the way they are. Action List B sets out the path to take based on various legislative changes. Once we get clarity as to what direction the rates will go, people can look at the list and execute the plan with the time remaining in the calendar year. Once we know what happens, we know what actions to take."
CORPORATE PLANNING
For private C corporations, Rosica recommended a look at accelerating dividends from 2011 to 2010. "If the corporation pays dividends, it should consider paying all its dividends, or as much as possible, in 2010 in light of the fact that there is currently a 15 percent tax rate on dividends that is scheduled to go up to 39.6 percent in 2011," he said.
Pass-through entities, such as partnerships and S corps, should re-evaluate their entity status, advised Rosica. "Is the S corporation or partnership status going to continue to make sense versus converting to a C corp? C corporation rates are not scheduled to change, but the flow-through rates are, so it's important to check where you are from an entity perspective," he said. "Even with an S corporation, there may be accumulated earnings and profits from a previous C corporation, so by accelerating some of these dividends there may be a more favorable tax result."
INDIVIDUAL PLANNING
"When you look at individuals, customary planning is 180 degrees different this year," said Rosica. "Traditionally you're looking to defer income and accelerate dividends, but now it's the opposite - accelerate income into 2010, and defer deductions till 2011, because income is worth more at lower tax rates, and deductions are worth more at higher tax rates. Real estate taxes, year-end deferred-compensation decisions, and charitable contributions are areas to consider."
"The important thing is to develop a plan with at least two different scenarios now so you will be able to execute it when the time comes. If you wait, you will be pushing up against a difficult time," he said.
All in all, this is a really tough time for those of us in the tax planning business. Our best advise is be prepared for anything.
Thursday, October 14, 2010
1040 DEADLINE
The Internal Revenue Service’s final deadline for individual taxpayers who filed an extension to submit their 2009 tax returns is October 15, 2010. The IRS expects over 10 million returns to be electronically transmitted on October 15. The IRS encourages filing the returns electronically not only to receive your refund more quickly, but also to prevent common errors that are not caught on paper returns.
This is also an important date for small non-profit organizations. If you have failed to file returns for the past three years, you are at risk of losing your tax-exempt status. Links to this information can be found at the address below:
http://budurl.com/gjb3
The IRS sent out one last reminder to individual taxpayers in general….check your federal filing status. There are about three months left in this calendar year so now is the time to make sure you are getting enough taxes taken out to prevent owing anything at the end of the year. The IRS has a free withholding calculator to estimate if you’re taking out too much or too little. Below is a link to that website:
http://budurl.com/4us6
This is also an important date for small non-profit organizations. If you have failed to file returns for the past three years, you are at risk of losing your tax-exempt status. Links to this information can be found at the address below:
http://budurl.com/gjb3
The IRS sent out one last reminder to individual taxpayers in general….check your federal filing status. There are about three months left in this calendar year so now is the time to make sure you are getting enough taxes taken out to prevent owing anything at the end of the year. The IRS has a free withholding calculator to estimate if you’re taking out too much or too little. Below is a link to that website:
http://budurl.com/4us6
Wednesday, September 29, 2010
Viva San Antonio
As an adopted San Antonian (or Houston refugee), I’ve come to enjoy life in the Alamo City.
The latest San Antonio Business Journal includes a supplement called All About San Antonio. The supplement contains all sorts of factual information regarding our fair city. I encourage you to pick up a copy. If you study the information, you will find a number of things that are positive. Unfortunately, there are a few items that are not that great.
Very few people outside of San Antonio realize that we are the seventh largest city in the country. In fact, we are larger than Dallas, which is eighth. Take that AT&T!
Here are some other interesting tidbits. The number of homicides has remained the same over the last three years. You would never know that by watching the six o’clock news. Theft is up 25% over the same period. So I guess you can expect to be burgled, but not shot.
The median priced home in 2008 was $151,000 in San Antonio versus $197,000 nationally. The median family income was $57,000 here and $64,000 for the nation. Our per capita personal income was $34,937 which was 189th in the country. Unemployment is just under 8%, which is well below the national average. In other words, people are working, but they are not being paid very much. So, while call center employment growth is good for the employment numbers that the mayor brags about, it really doesn’t put much money into the economy.
This trend will probably continue as long as the available quality of education is substandard. Companies with big paying jobs are not going to invest in communities that provide poor education for their families…..it is just that simple.
Of the sixteen school districts listed in the article, three districts were rated “Unacceptable” and seven districts were rated as “Acceptable”. “Acceptable” means that the district met no more than the minimum standards (good job Alamo Heights-you meet minimal standards). “Acceptable” is nothing to shout about. There were six recognized districts. Of this group, three were at the military bases. HEY, MAYBE DISCIPLINE MAKES A DIFFERENCE IN EDUCATION ………
The substandard schools were in the predominantly Hispanic neighborhoods. Hispanics have the highest drop out rate in Texas. Hispanics have the smallest percentage of kids going to college in Texas. If you are Hispanic, and you want your kids have income that is 189+th in the country, and their kids to have income that is 189th, then continue with your current attitude toward education.
In 2040, San Antonio is projected to have a population of 2.5 million people. Of these, 1.5 million will be Hispanic. That is 61% of the population. That would be 1.5 million people in our beautiful city making far below the national income median.
So my charge to my Hispanic friends is: “Get off your butt and make a difference unless you want to live in McAllen North!”
The latest San Antonio Business Journal includes a supplement called All About San Antonio. The supplement contains all sorts of factual information regarding our fair city. I encourage you to pick up a copy. If you study the information, you will find a number of things that are positive. Unfortunately, there are a few items that are not that great.
Very few people outside of San Antonio realize that we are the seventh largest city in the country. In fact, we are larger than Dallas, which is eighth. Take that AT&T!
Here are some other interesting tidbits. The number of homicides has remained the same over the last three years. You would never know that by watching the six o’clock news. Theft is up 25% over the same period. So I guess you can expect to be burgled, but not shot.
The median priced home in 2008 was $151,000 in San Antonio versus $197,000 nationally. The median family income was $57,000 here and $64,000 for the nation. Our per capita personal income was $34,937 which was 189th in the country. Unemployment is just under 8%, which is well below the national average. In other words, people are working, but they are not being paid very much. So, while call center employment growth is good for the employment numbers that the mayor brags about, it really doesn’t put much money into the economy.
This trend will probably continue as long as the available quality of education is substandard. Companies with big paying jobs are not going to invest in communities that provide poor education for their families…..it is just that simple.
Of the sixteen school districts listed in the article, three districts were rated “Unacceptable” and seven districts were rated as “Acceptable”. “Acceptable” means that the district met no more than the minimum standards (good job Alamo Heights-you meet minimal standards). “Acceptable” is nothing to shout about. There were six recognized districts. Of this group, three were at the military bases. HEY, MAYBE DISCIPLINE MAKES A DIFFERENCE IN EDUCATION ………
The substandard schools were in the predominantly Hispanic neighborhoods. Hispanics have the highest drop out rate in Texas. Hispanics have the smallest percentage of kids going to college in Texas. If you are Hispanic, and you want your kids have income that is 189+th in the country, and their kids to have income that is 189th, then continue with your current attitude toward education.
In 2040, San Antonio is projected to have a population of 2.5 million people. Of these, 1.5 million will be Hispanic. That is 61% of the population. That would be 1.5 million people in our beautiful city making far below the national income median.
So my charge to my Hispanic friends is: “Get off your butt and make a difference unless you want to live in McAllen North!”
Wednesday, September 22, 2010
IFRS VS. GAAP
A potential audit client recently came to us requesting a bid for an audit prepared under International Financial Reporting Standards (IFRS). This may be a first for us, but it definitely will not be the last. IFRS is taking the American audit community by storm.
Just the other day, as I was browsing audit reports online, I came across the Georgetown Chamber of Commerce report. Interestingly enough, the report complied with IFRS, not Generally Accepted Accounting Principles (GAAP). While IFRS has not yet become a requirement, it has certainly become a viable option for many organizations. So what, exactly, is the difference between IFRS and GAAP?
INTRODUCTION TO IFRS
The globalization of business and finance has led to mass adoption of IFRS in more than 110 countries. In the next three years, it is expected that 150 countries will mandate or allow IFRS. Canada, India, and Japan plan to adopt IFRS in 2011 with Mexico following suit in 2012. IFRS has the potential to enhance the quality of reporting and decrease the costs of preparing and interpreting financial statements.
DIFFERENCES BETWEEN IFRS AND GAAP
Revenue Recognition
With respect to revenue recognition, US GAAP is much more detailed and industry-specific. IFRS mentions just two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.
Expense Recognition
There are also some significant differences with expense recognition in regards to when an expense should be recognized and the amount that should be recognized. IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than GAAP.
Financial Instruments
Some significant differences exist in the area of financial liabilities and equity. While an instrument may be regarded as equity under GAAP, it may be considered as debt under IFRS.
Consolidation
GAAP has several criteria for consolidation while IFRS allows consolidation based on the power exercised by the company on the financial operational policies of the other entity.
Inventory Methodology
GAAP offers companies the option of using the last in, first out (LIFO) inventory methodology whereas IFRS forbids this type of inventory costing.
The above are just a few of the major differences and possible changes when converting to IFRS. For more information on IFRS requirements and transitioning to IFRS reporting, check out pcaobus.org or contact our office.
Just the other day, as I was browsing audit reports online, I came across the Georgetown Chamber of Commerce report. Interestingly enough, the report complied with IFRS, not Generally Accepted Accounting Principles (GAAP). While IFRS has not yet become a requirement, it has certainly become a viable option for many organizations. So what, exactly, is the difference between IFRS and GAAP?
INTRODUCTION TO IFRS
The globalization of business and finance has led to mass adoption of IFRS in more than 110 countries. In the next three years, it is expected that 150 countries will mandate or allow IFRS. Canada, India, and Japan plan to adopt IFRS in 2011 with Mexico following suit in 2012. IFRS has the potential to enhance the quality of reporting and decrease the costs of preparing and interpreting financial statements.
DIFFERENCES BETWEEN IFRS AND GAAP
Revenue Recognition
With respect to revenue recognition, US GAAP is much more detailed and industry-specific. IFRS mentions just two main revenue standards along with a couple of interpretations related to revenue recognition as guidance.
Expense Recognition
There are also some significant differences with expense recognition in regards to when an expense should be recognized and the amount that should be recognized. IFRS recognizes the expense of certain stock options with vesting over a period of time sooner than GAAP.
Financial Instruments
Some significant differences exist in the area of financial liabilities and equity. While an instrument may be regarded as equity under GAAP, it may be considered as debt under IFRS.
Consolidation
GAAP has several criteria for consolidation while IFRS allows consolidation based on the power exercised by the company on the financial operational policies of the other entity.
Inventory Methodology
GAAP offers companies the option of using the last in, first out (LIFO) inventory methodology whereas IFRS forbids this type of inventory costing.
The above are just a few of the major differences and possible changes when converting to IFRS. For more information on IFRS requirements and transitioning to IFRS reporting, check out pcaobus.org or contact our office.
Wednesday, September 15, 2010
Doom’s Day
Today, September 15, 2010, is the final deadline to file corporate tax returns if an extension was requested. If you haven’t gotten the work in to your local CPA or begun work on the return yourself, you’re looking to perhaps pay some penalties and interest.
If you have a balance due on a late tax return, the Internal Revenue Service will calculate further penalties and interest. Here’s what to look out for:
Failure to File Penalty
If you do not file your return by the due date, with or without an extension, you may be stuck with a failure to file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. If your return is more than sixty days late, the penalty will be the lesser of $100 or 100% of the balance due. If you can show reasonable cause as to why the return was filed late, you will not have to pay.
Failure to Pay Penalty
This penalty is pretty self explanatory. Until the full balance is paid on the return, there will be a 0.05% penalty for each month the balance is not paid in full. There is no limit on the failure to pay penalty.
Interest
Generally speaking, the IRS will waive some penalties but will be VERY hesitant to waive any interest fees. Interest rates are set quarterly and are calculated based on how much tax you owe. The underpayment tax is currently 4% per year.
Prepare yourself for tax season and its deadlines. If you feel like you cannot make the deadlines, file an extension. Remember it is ALWAYS beneficial to file sooner than later.
If you have a balance due on a late tax return, the Internal Revenue Service will calculate further penalties and interest. Here’s what to look out for:
Failure to File Penalty
If you do not file your return by the due date, with or without an extension, you may be stuck with a failure to file penalty. The penalty is 5% of the tax not paid by the due date for each month or part of a month that the return is late. If your return is more than sixty days late, the penalty will be the lesser of $100 or 100% of the balance due. If you can show reasonable cause as to why the return was filed late, you will not have to pay.
Failure to Pay Penalty
This penalty is pretty self explanatory. Until the full balance is paid on the return, there will be a 0.05% penalty for each month the balance is not paid in full. There is no limit on the failure to pay penalty.
Interest
Generally speaking, the IRS will waive some penalties but will be VERY hesitant to waive any interest fees. Interest rates are set quarterly and are calculated based on how much tax you owe. The underpayment tax is currently 4% per year.
Prepare yourself for tax season and its deadlines. If you feel like you cannot make the deadlines, file an extension. Remember it is ALWAYS beneficial to file sooner than later.
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