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Small Business Tax Audits

September 26th

When it comes to tax problems, individuals are not the only ones who suffer. Many businesses are dealing with tax audits and tax debt problems too. In fact, the IRS estimates that small businesses are responsible for around 80% of the $450 billion tax gap.

Cracking Down

In order to better regulate small business tax reporting, the IRS conducts audits for businesses. Predicted to be one of the largest sources of under reporting on taxes, small business owners may soon face tax audits looking to comb through their financial details. The IRS may soon be focusing on several areas:

  • Fringe benefits — such as sick time, company bonuses, personal use of company vehicles or properties, and company credit card charges.
  • Small business credits –such as deductions for health insurance premiums and medical expenses.
  • Employee classifications — such as tax classification of contract workers versus employees.
  • Form matching –such as 1099-K, Form 1065, 1120S, 1120 and Schedule C forms.

It is important that businesses and individuals keep all income, deduction and loss related documentation organized, especially in the even a tax audit is in the future. Small businesses should use professional accounting software or a service to ensure all financial information is categorized and tracked on a consistent basis. Keep all business related receipts and follow the IRS’ rules for deductions and write offs in IRS publication 463, to minimize problems with questionable tax return in the future.


Payroll Tax Holiday Extension Causes Concern

February 22nd

Last week, Congress announced the extension of the payroll tax holiday. The holiday was originally put forth to provide small businesses and employers a break from large tax burdens and the threat of owing back taxes in hopes of spurring job market growth. Despite some giving partial credit to the holiday for boosting the job market and decreasing the unemployment rate, many are concerned about the longer lasting effects the holiday could bring.

Down The Line

One of the biggest objections to the payroll tax holiday has always been the debt ceiling issue. Many lawmakers insist that the tax break only exacerbates the nation’s debt problems and has the potential for pushing us over the top in the future. Billions of dollars will be missing in revenue during the time of the tax holiday, leading many critics to argue whether the holiday is helping the economy as planned or simply redirecting the problem into other areas.

Further problems are soon to be seen in Social Security funds. As one of the main sources of funding for these vital government programs, payroll taxes are extremely important to the overall health of an already dying fund. Extending the payroll tax breaks will leave the Social Security funds millions less than could have been earned in revenue for the next year. Many are holding out hope that the funds will not be battered past the point of financial recovery as a result of the tax breaks.



Can Payroll Tax Cuts Create Jobs?

September 27th

payroll tax cutLast week, President Obama announced a series of possible policy changes, with the ultimate goal of stimulating job growth. Chief among these is payroll tax cuts, extension of unemployment benefits, and new infrastructure projects. While new infrastructure projects and unemployment benefits are helpful, the real job-creation potential comes from the payroll tax cuts.

New infrastructure projects will not do much to create jobs, but will help to improve infrastructure at a lower price than could be expected once the economy improves.

Likewise, unemployment benefits are a compassionate option but do little to improve job growth as they discourage unemployed people from actively seeking work

Details of the Payroll Tax Cut

Payroll tax cuts, on the other hand, could make a real difference. Annually, the payroll tax typically brings in around $900 billion, approximately 15 percent of all payroll. In fact, most workers pay more in payroll taxes than they do in income tax.

The President’s proposal involves cutting the employer portion of the payroll tax by 3.1 percent, bringing the combined total payroll tax down to approximately 12 percent. This cut will apply only to those employers with less than $5 million in payroll.

The other portion of the payroll tax cut reduces the employer’s portion of the payroll tax by 6.2 percent for any increases in payroll spending. This means that if this cut was put in place, the tax subject to reduction would be the difference between the 2012 and 2011 rates. This cut would thus make any expansion of the 2012 payroll less costly.



White House Aims to Extend Payroll Tax Cut

August 15th

In another attempt to revitalize the economy and stimulate job growth, the White House and its Democratic allies have backed a plan to extend the payroll tax cut enacted by Congress last year.

The proposal, which in its original form is set to expire at the end of 2011, involves a payroll tax holiday for employees. The revised plan would additionally add a payroll tax holiday for employers.

Controversy Over the Plan’s Effectiveness

While the Obama administration continues to argue for this proposal’s necessity as part of an overall plan of growth, others have their doubts. The White House remains firm in its belief that such a plan can only aid growth by putting money in the pockets of American taxpayers. Supporters claim that the extended tax credits will help stimulate the economy and that giving tax credits to businesses will actually help with unemployment.

Others, however, worry that it is too costly, at a time when Washington is fighting for increasing fiscal austerity. This plan would cost approximately $112 billion over the next year. They have also expressed apprehension over plan’s efficacy, noting concern that it has done little to stimulate growth over the past year.

Many Democrats also feel concern that the proposal will only add to the rising deficit. Rep. Earl Blumenauer, a member of the tax-writing House Ways and Means Committee, commented that the biggest increase in the deficit has stemmed from increasing tax cuts. He therefore is sceptical of a plan to add an additional tax cut.

Despite such concerns, the administration expects broad bipartisan consensus to support the extension of the payroll tax cut.


Increased IRS Scrutiny on Payroll Taxes for Small Business Owners

August 9th

In the current economic climate, it is becoming increasingly common for smaller companies to fore-go the submission of their federal payroll taxes. However, the IRS has also stepped up its scrutiny in recent months, with an increase in audits and more aggressive penalties for executives, accountants, and other potentially involved individuals.

payroll taxesAmong the tactics being used to crack down on small businesses are the freezing of the company’s accounts, seizure of assets, and appropriation of wages from those responsible. If it finds a company guilty, the IRS may apply substantial penalties and apply tax liens.

There have been numerous examples of small businesses being dealt serious blows in recent months by penalties applied for payroll tax debt. In some cases the money had been temporarily reallocated as a stopgap measure or as an emergency fund.

However, the IRS tends to be unsympathetic. A recent study underway by the IRS cited plans to audit payroll tax compliance at a rate of approximately 6,600 randomly picked employers per year.

What Can This Mean for Small Businesses?

Unfortunately, the tax code is written so that the company itself can be held accountable for employee tax errors. The blame can also be laid with a number of individuals within the business such as bookkeepers, accountants, or owners who may have prevented the company from paying its debts by seizing or reallocating funds.

The penalties applied by the IRS can be crippling for small businesses. In addition to fines applied outright for failure to pay taxes, there are also fines for paying late that can amount to as much as 25 percent of the total tax due.

Ultimately, most tax attorneys advise that small businesses should always aim to avoid these kinds of complications by paying their taxes on time. Short of that, companies should pay taxes that hold personal liability and, therefore, will not fall on the business should someone in the company default.


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