Interview with H.A. Beasley – Part Two

This is part two of an interview with H. A. Beasley, founder and director of H.A. Beasley & Company, PC, an accounting firm in Murfreesboro, Tennessee and ICS Law Group, PC. To listen to the the interview, visit this YouTube link .

Question: So, is it fair to say that the biggest problem that a business owner faces with filing their taxes on time is due to their lack of focus? Is that the most common problem?

H.A. Beasley: I think any aspect of compliance with the government is an issue for a first time business owner or a small business operator whether it is taxes or some other aspect of regulation. Most entrepreneurs are good at the business part of what they do. They don’t know where to start when it comes to addressing the necessary aspects of filing with tax laws.

Question: So if they don’t comply or if they are late, what are some of the consequences that occur?

H.A.: Well you know that is one of the interesting things; there are a lot of popular misconceptions about income tax compliance. Just talking for a minute solely about federal taxes, the late filing aspect of non-compliance is more expensive that late payment today.

For example let’s say I owe $50,000 worth of taxes because I have had a great year of business. Say that April 15^th rolls around and I don’t file my federal tax extension paperwork or my federal return. I don’t send any money, I don’t do anything. The most expensive aspect of that is the fact that I didn’t file an extension for a return. The IRS will begin immediately assessing 5% a month up to 25% in 5 months, from that $50,000 of tax that I owe, and that will become $62,500, just because I didn’t send in some paperwork.

Meanwhile the penalty for not paying taxes is dramatically less than that. It is a lot like working with a finance company, for the interest of penalties for not paying.

If we can help our clients to get used to the idea that they have got to file the paperwork, and if they can’t pay it immediately it is like dealing with any other creditor. We have got to be good with our paperwork and do what the creditor requires so that we can either get a payment plan or demonstrate that we aren’t presently able to pay.

We’ve found the IRS is very willing and able to work with people that are very good at communicating with them. The biggest penalty, to summarize, is they get people for not doing the paperwork. It may take a business to get on his feet; once he gets behind on his taxes it may take 2 or 3 years to pay those taxes. It would be relatively inexpensive to be late on payment so long as he has not failed to file all the required filing within the extended few days.

Question: How does the extension process work with the IRS?

H.A.: IRS Extensions are “automatic.” Individual taxpayers are entitled to get one automatic extension that is good until October 15^th. My understanding is that technically the IRS can challenge an extension with a tax is not fully paid but in my practice, I’ve never had them do that, that I can recall. So, an extension with the IRS does not require payment to be valid.

So in my prior example of the guy who owed $50,000, if he’s our client we’re going to send the extension off on April 14^th whether we know how much he owes or not. We’re going to get that extension ready and send it registered or certified or otherwise well known to the IRS that he’s filed his extension on time. That gives him the initial six months not only to determine how much tax he owes if he doesn’t know. But if the IRS doesn’t know how much he owes, they really can’t begin the collections process.

Filing an extension is also important because oftentimes for business owners that have had a great year and he would like to contribute to, lets say, a SEP IRA plan or some retirement program like that. SEP’s are one of the plans where, so long as you have filed valid extensions, you can make a contribution later…so…You can actually do after a year end tax planning with proper use of the extension.

Let me add that for Tennessee residents, Tennessee is a little more narrow-minded when it comes to the extension process. We’ve found that in order to get an approved extension you’ve got to pay the appropriate payment along with the extension. That puts a great deal more pressure on taxpayers, especially business owners.

Stay tuned for next Thursday as we share Part Three of the interview with H.A. Beasley.

Question of the Day – April 27

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax questions posed by producers. Here’s the question of the day.

Question: My client sent a check into her personal IRA account on April 15, claiming a $5,000 income tax deduction on her 2011 tax return filed the next day. The check bounced, as she found out on April 19. Can she make good on the check now and still preserve her 2011 tax deduction?

Answer: Unfortunately, it’s too late. The client needed to deposit good funds into her IRA by the tax filing deadline (April 17, 2012 for 2011 taxes). Since that didn’t happen, no deductible IRA contribution is permitted for 2011.

There’s a private letter ruling on this kind of situation, where the IRS ruled that an IRA rollover check that was deposited within the 60 day window but bounced was not a proper rollover when the check was replaced later.

Since the client cannot make a contribution for 2011 after the deadline, she will need to file an amended tax return as well.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Question of the Day – April 6

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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.

Question: My client wants to know if her tax records will be audited by the IRS. How can she tell?

Answer: The IRS generally gets involved with a taxpayer if

the taxpayer’s return gets selected for review, or
the taxpayer has failed to file a required return.

A return may be examined for a variety of reasons.

A return may be selected for examination on the basis of computer scoring. The IRS uses a computer program called the Discriminant Inventory Function System (DIF), which assigns a score to each individual and some corporate tax returns after they have been processed. If the program generates a high score under the DIF system, the return is likely to be selected for examination.

What kind of information on a return will generate a high DIF score? The IRS won’t say specifically. However, the philosophy behind the DIF is to identify those returns that, statistically speaking, are inconsistent with returns for taxpayers in similar circumstances. Tax returns with the highest DIF scores represent returns with the highest probability of inaccuracy, and should provide the best chance for IRS personnel to collect additional taxes.

A return may also be selected for examination on the basis of information received from third-party documentation, such as Forms 1099 and W-2, that does not match the information reported on the return. Or, a return may be selected to address both the questionable treatment of an item and to study the behavior of similar taxpayers in handling a tax issue.

In addition, a return may be selected as a result of information received from other sources on potential noncompliance with the tax laws or inaccurate filing. This information can come from a number of sources, including newspapers, public records, and individuals.

In fact, the IRS has an entire department devoted to gathering information provided by tax informants. The Whistleblower Office (you can’t make this stuff up) will even pay rewards to snitches. The amount of award will be at least 15%, but no more than 30%, of the collected proceeds in cases in which the IRS determines that the information submitted by the informant substantially contributed to the collection of tax.

After an examination, if any changes to the tax liability are proposed, the taxpayer can either agree with those changes and pay any additional tax owed, or disagree with the changes and appeal the decision.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.

Question of the Day – August 31

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Here’s the question of the day.

Question: My client intends to make a contribution to a Roth IRA for 2011 in April of 2012. If it turns out the client earned too much in 2011, can the contribution be applied to calendar year 2012?

Answer: Yes, assuming the client qualifies to make a Roth IRA contribution for 2012.

In the case of a traditional IRA, contributions made between April 16 and December 31 of a calendar year are assumed to be contributions made for that calendar year. On the other hand, traditional IRA contributions made between January 1 and April 15 may be a contribution for either that calendar year or the prior calendar year. The taxpayer must indicate on the form submitted to the IRA custodian to which year the contribution applies.

Here’s an example. On December 1, 2010, Sally made a traditional IRA contribution of $3,000. On January 5, 2011, Sally made an additional contribution of $3,000 and reported to the IRA custodian that this was a 2010 contribution.

On April 15, 2011, Sally filed her 2010 Federal Income Tax Return and took a deduction of $6,000 for an IRA contribution. Some time later (but in no case later than May 31) the IRA custodian issued a Form 5498 with copies to both the taxpayer and the IRS indicating Sally made $6,000 in 2010 traditional IRA contributions.

Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.