IRS Updates Disclosure Guidance for Understatement Penalties

 The IRS has made minor changes to its guidance describing when disclosure on a taxpayer’s income tax return is adequate to reduce an accuracy-related penalty for substantial understatement of income tax and to avoid a preparer penalty. For a copy of the update, see Rev. Proc. 2012-15.

Sales Tax Lower in 2011

Last year more states, counties and cities lowered their sales tax rates than in 2010, and the number of sales tax changes also went down. A new report by Thomson Reuters found that the average county sales tax was 1.15 percent in 2011, down from 1.23 percent in 2010; the average city sales tax was 1.67 percent in 2011, down from 1.72 percent in 2010. Sales tax software provider Vertex also released an End of Year Sales Tax Report that found the combined average sales tax rate and number of rate changes declined in 2011 compared to recent years. The highest city sales tax rate in 2011 was Wrangell, Alaska, at 7.00 percent. The highest combined sales tax rate of 13.725 percent is found in Tuba City, Coconino County, Ariz. 

Original Post by the Colorado Society of Certified Public Accountants on August 22, 2011

Do accountants make good entrepreneurs? I think if we polled the general public and the accounting population itself, overwhelmingly the answer would be no. I alluded to the reason why, and the benefits of having an entrepreneurial mindset, in my last blog post (See the Entrepreneurial Accountant). The world doesn’t view us as entrepreneurs, largely because we don’t view ourselves as entrepreneurs.
In order to really dig in and evaluate why this is, we need to understand what an entrepreneur is and is not.

• Myth #1: An entrepreneur is a “roll the dice” gambler – someone who financed the ranch through the bank of Visa and Mastercard before betting it all on lucky number seven.

Truth: Research data indicates that successful entrepreneurs are actually risk averse and may not assume the risks involved to undertake a business venture. They are successful because their passion for an outcome leads them to organize available resources in new and more valuable ways. In doing so, they are said to efficiently and effectively use the factors of production, which include at least the following elements:

• land (natural resources)
• labor (human input into production using available resources) 
• capital (any type of equipment used in production, i.e. machinery, technology)
• intelligence, knowledge, and creativity.

• Myth #2: Entrepreneurs must have a unique and innovative idea, something that no one else has thought of before.

Truth: Execution is what matters most, not the star-quality of the idea. A brilliant idea with weak execution will never surpass a good idea with brilliant execution. An entrepreneur takes possession of the company, enterprise, or venture that promotes an idea, and assumes significant accountability for the inherent risks and the outcome.

When we compare ourselves to these myths, we don’t stack up. Most people don’t. But when we take a closer look at the truth, we can begin to see the similarities. Let’s take a closer look at the true entrepreneur for similarities to the accounting population.

• Risk and risk aversion – Risk is a prerequisite to everything good in life. I wouldn’t have my wonderful family if I hadn’t taken the risk to ask my wife out on a date. I wouldn’t have the practice that I have today if I hadn’t taken the risk to leave Ernst & Young. But the most successful entrepreneurs manage or avoid risk as opposed to constantly rolling the dice. As an extreme example, I was in the offices of a venture capital firm a few weeks ago and they were discussing a venture that they were funding. They mentioned that the founder had an eight figure exit from his last venture so they were hoping that he would put some of his own money in his latest venture, but they weren’t sure if he would. Here was an entrepreneur with in excess of $10 million in the bank and the venture capitalists were unsure whether he would put one dollar of that money into his new venture. Entrepreneurs are excellent risk managers, minimizing or avoiding risk wherever they can, as are accountants.

• Accountability – Cognitive dissonance is a term for the noise that exists in between the actual results we have today and the results that we want. For many, that noise will culminate in excuses and blame, and ensure that we never achieve the desired result. Successful entrepreneurs filter through the noise and have significant personal accountability for their desired results, as do accountants. We beat the deadline, always. Excuses or blame won’t do.

• Passion for an outcome – The etymological origins of the word “passion” lies in the Greek verb paschō, which means to suffer. Forget about entrepreneurs for a minute. After working in public accounting for over two decades, I can’t imagine a group more passionate about achieving a certain outcome.

• Efficiency vs. Effectiveness – The difference between efficiency and effectiveness is huge. Understanding the difference is invaluable. Quick and dirty – we can be incredibly efficient, but if we are efficient at the wrong things, we’ll be completely ineffective ¬– like being in a car making good time in the wrong direction. Successful entrepreneurs are both efficient and effective as they juggle multiple priorities and competing demands with typically insufficient resources. I’ll give us high scores in the effectiveness area because deadlines don’t move yet we typically find ways to meet them. And when it comes to efficiency, that’s another conversation altogether. For now, suffice it to say that whatever we lack in efficiency, we make up for in passion.

• Factors of Production – This is the idea vs. execution conversation. Amazon and Barnes & Noble (bn.com) start online book retail outlets at roughly the same time. Amazon did not have the financial or human resources that Barnes and Noble did but we know how this story ends. Amazon had better utilization of their factors of production. Likewise, Wikipedia, an all-volunteer online encyclopedia, is still here while Encarta, backed by Microsoft’s financial and human resources, is not. They had the same idea. The differentiator was execution and management of their factors of production. Successful entrepreneurs are effective at both, as are accountants. We constantly manage our human and intellectual capital, and technology and outside resources to bring about the best result for our clients or our employers.

As partners of firms, practice leaders, and engagement managers, these elements are a part of our life. Does this make us entrepreneurs? It is certainly a great start!

Brian Amann is a CPA and entrepreneur. He is the Managing Director and founder of TaxOps, LLC, a rapidly growing tax consulting firm with offices in Lakewood and Englewood and a Principal with My Element Advisors. Brian also leads TaxOps Investments, an entity established to meet the complex tax needs and cash flow requirements of promising early stage companies, and recently launched the TaxOps Foundation, a not-for-profit organization focused on funding “soft skill” education for accounting and tax students. Brian has worked with, biked with, trained with, and consulted with some of the top entrepreneurs in North America and can be reached through his company’s website at www.taxops.com or www.myelementadvisors.com.

Original Post by the Colorado Society of Certified Public Accountants on July 19, 2011

A few years ago, I was talking to a tax accountant I was considering for a partner position with my tax firm. I mentioned to him that I would be out of town for a few days on a retreat with a peer group that focused on entrepreneurial leadership and development. He got a confused look on his face. After a slight hesitation, he asked if I was teaching a tax course to the group. I said no, which was followed by another confused look and hesitation. He finally replied, “I don’t get it. What are you going to do there?” It did not occur to him that I was a member of the peer group and a participant at the retreat.

The magazine “The Entrepreneurial Accountant” came out in print about a decade ago. It went away not long after it surfaced. No one bought into the concept then, and few buy into the concept when I use the term today. Something I do frequently. New people I meet tend to get the same confused look. They stare intently at me trying to get any signal as to whether I’m joking or not. I’m not.

Unfortunately, the world doesn’t view us as entrepreneurs, largely because we don’t view ourselves as entrepreneurs. This is evident in my discussion with the potential partner and the lack of subscribers to The Entrepreneurial Accountant. The term “the entrepreneurial accountant” itself is viewed somewhat of an oxymoron. Your position doesn’t determine whether you are an entrepreneur, regardless of whether you are a partner in a large firm, a partner in a small firm, a managing partner, or a sole proprietor. Likewise, being an employee does not prohibit you from being an entrepreneur (although technically you would be considered an intrapreneur). I don’t distinguish. Having an entrepreneurial mindset is what makes an entrepreneur – and it is this mindset and spirit that is the “secret sauce” and accelerator to success in this business.

The statistics support my claim. The large majority of accounting firms only have a few hundred thousand dollars of revenue. Most don’t break a million. Three million in revenue puts a firm in the top 10% and thirty million puts it on the Top 100 list. Relatively low numbers. What are the top 10% of firms doing differently? We have an outstanding example here in Colorado with one of our local firms sitting roughly midway on the Top 100. When I asked one of the firm’s partners what he attributed their success to, he responded, “Simple. We started running the firm like a business.” Like entrepreneurs.

There is a huge difference between what the business does and what “the business” is. By adopting an entrepreneurial mindset, and focusing on “the business,” we create many advantages: higher levels of service; better solutions; increased client and employee satisfaction; and a stronger bond and connection with our clients. After all, wouldn’t a client prefer that their business advisor be someone who is effective at running their own business? Can’t we advise them better if we have a better understanding of the business issues that they face? All lead to the end game – increased levels of success and satisfaction for ourselves and our firms.

This blog series will be dedicated to The Entrepreneurial Accountant – what that means, the issues that we face, and the results that we can achieve. Most importantly, this blog series is dedicated to the excitement that we can create within our firms and for our clients, and the fun that we can have along the way.

Brian Amann is a CPA and entrepreneur. He is the Managing Director and founder of TaxOps, LLC, a rapidly growing tax consulting firm with offices in Lakewood and Englewood. Prior to, and during his tenure at TaxOps, Brian grew up in a family business, was a successful practice leader with Ernst & Young, a failed internet entrepreneur, and a real estate investor with mixed results. Brian also leads TaxOps Investments, an entity established to meet the complex tax needs and cash flow requirements of promising early stage companies, and recently launched the TaxOps Foundation, a not-for-profit organization focused on funding “soft skill” education for accounting and tax students – the stuff that makes us better at what we do. Brian has worked with, biked with, trained with, and consulted with some of the top entrepreneurs in North America and can be reached through his company’s website at www.taxops.com.

The IRS has issued transitional relief from information reporting requirements under Section 6045B for stock reporting organizational actions taken in 2011. Notice 2011-18 indicates that the IRS will not penalize issuers for missing the deadline of Jan. 17, 2012, to file a return reporting the actions that changed the basis of their outstanding stock or other securities in 2011, such as a stock split or a distribution in excess of earnings and profits, or post the return on its Web site. This notice does not apply to an issuer’s requirement to furnish the same information to the issuer’s stockholders and nominees of its stockholders. Issuers of stock in a regulated investment company are not subject to the issuer reporting requirements for 2011 organizational actions.

Beginning on January 1, 2011, regulations issued under Section 6045B of the Internal Revenue Code required domestic and foreign corporations to file a statement with the IRS and furnish a similar statement to their security holders describing the effect of the reporting action on the basis of each share of their stock. Public and private companies were required to file:

• A description of the transaction and relevant Internal Revenue Code provisions;
• The quantitative effect of the transaction on the basis of the corporation’s stock as an adjustment per share or as a percentage of the old basis;
• The data supporting the calculation; and
• Other information necessary to implement the stock tax basis adjustment.

The information was to be filed with the IRS, or published on the corporate website on or before the 45th day following the organizational action or, if earlier, January 15 of the year following the calendar year of action. Reporting is not required for actions involving corporate subsidiaries if the security holders are “exempt recipients.”

Without the transitional relief, companies that failed to meet the Jan. 17, 2012, deadline faced penalties of up to $50 for each information return with a maximum of $250,000, or $100 per failure, with no maximum amount if the failure to file is the result of an intentional disregard of the filing requirement.

For more details, see the IRS Notice 2011-18

Temporary and Proposed Regs Address U.S.-Sourced Dividend EquivalentsTaxes will be required to be withheld on any payments of “dividend equivalents” to nonresident aliens and foreign corporations as a way to crack down on certain tax avoidance practices, IRS says in temporary (T.D. 9572) and proposed (REG-120282-10) rules. The IRS has released these temporary and proposed regulations for treatment of dividend equivalents under Code Sec. and 871(m). More details at T.D. 9572 and REG-120282-10.

IRS 2012 Auto/Truck Fringe Benefit Valuation Details Released IRS has released the 2012 maximum fair market values (FMVs) for employer-provided autos, trucks and vans, the personal use of which can be valued for fringe benefit purposes at the mileage allowance rate of 55.5¢ per mile for 2012. The IRS also released the 2012 maximum fleet-average vehicle FMVs for autos, trucks and vans for purposes of the annual lease value (ALV) fringe benefit valuation method. More detail can be found by downloading the Employer’s Tax Guide to Fringe Benefits.

Partners’ Interest Expense Allocation Subject of New Regulations
The IRS issued new temporary and proposed regulations that change the way partners allocate and apportion interest expense. The changes affect corporate partners with a 10% or more interest in a partnership and certain other partners. The regulations also address allocation and apportionment of interest expense using the fair market value method. Details can be found at Federal Register, T.D. 9571.

IRS Transitional Relief from Sec. 6045B Reporting RequirementsIn a notice, the IRS has provided relief from the Code Sec. 6045B reporting requirements for filing Form 8937, Report of Organizational Actions Affecting Basis of Securities. The requirements can be satisfied by either posting the Form or the required information in readily accessible format on the issuer’s primary public website. The IRS has provided penalty relief for issuers who make good faith efforts to comply with the eased reporting requirements. See Notice 2012-11 for details.

Many small businesses that accept credit cards as payment or accept payment from a third-party settlement organization, such as PayPal, may be receiving 1099-Ks this month. The 1099-K is new as of Jan. 1, 2012. Payment settlement entities (PSE) and third-party PSEs are sending out 1099-K forms to companies that receive payments from credit cards or third-party settlement agencies; a similar report is sent to the IRS.

Companies accepting credit cards in their business must report the revenue earned via credit card payments separately on their income tax return starting in 2012. Right now, many companies track revenue coming in but not specifically revenue paid by a credit card. Companies may need to change their operating system to track this information so that it can be readily accessible for reporting to the IRS. Companies will need to report revenue from credit cards at the gross amount and report the credit card transaction fees as a separate expense.

The new form is intended to collect taxes due from merchants that may have been under-reporting sales from credit card transactions. Previously, companies tracked revenues coming in, not specifically revenues that were paid by a credit card. “Companies need to change their system to track this information so it can be reported to the IRS,” TaxOps Director Dan DeLau says. “Gross receipts and credit card transaction fees are reported separately.” More details at 1099-K or call 720-227-0067 for a TaxOps consultation on 1099-K reporting.

The Internal Revenue Service reopened the offshore voluntary disclosure program to help people hiding offshore accounts get current with their taxes and announced the collection of more than $4.4 billion so far from the two previous international programs. The offshore program will be open for an indefinite period, and there is no set deadline for people to apply. Continuing taxpayer and tax practitioner interest in the Offshore Voluntary Disclosure Program (OVDP) prompted the IRS to reopen the program after the closure of the 2011 and 2009 programs. The 2009 and 2011 initiatives generated 33,000 voluntary disclosures. Penalties under the new program are substantially the same, except for the highest penalty category, and range from 5 to 27.5 percent for the eight full tax years prior to the disclosure. More details will be available within the next month on www.IRS.gov.

For a free consultation on this issue please contact Kristine Newkirk at 720-227-0067 or knewkirk@taxops.com.

IRS e-File System open to Business Tax FilersThe Internal Revenue Service electronic filing system is now open for business tax returns. The modernized e-File, or MeF, system, can now accept tax year 2011, 2010 and 2009 business-related tax returns. The MeF system for e-filing individual tax returns opens Jan. 17, 2012. System updates on the Modernized e-File service are available at http://www.irs.gov/efile/article/0,,id=168537,00.html.

FinCEN Sees Uptick in FBAR ReportingThe Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has reported an uptick in the number of filings of Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). FinCEN reported that 618,134 FBARs were filed in fiscal year 2011, up from 594,488 in fiscal-year 2010. The FBAR is used to report a financial interest in, or signature or other authority over, one or more financial accounts in foreign countries whose aggregate value is greater than $10,000. Read more about FBAR reporting at http://www.fincen.gov/statutes_regs/guidance/.

IRS FAQ Highlight 2011 Tax Benefit Changes
A new IRS fact sheet details changes made in 2011 that offer tax benefits and provides information on special tax payment and reporting requirements. The fact sheet, FS-2012-1, can be found at http://www.irs.gov/newsroom/article/0,,id=251837,00.html. A summary of the fact sheet follows.

Two Extra Days to File and PayIndividual taxpayers have until Tuesday, April 17, 2012, to file their 2011 income tax returns and pay any taxes due. Corporate taxpayers still have until March 15, 2012 to file returns or request an extension.

Limited Nonbusiness Energy Property Credit for 2011The credit is generally equal to 10 percent of what a homeowner spends on eligible energy-saving improvements, up to a maximum tax credit of $500. See Form 5695 at www.irs.gov/pub/irs-pdf/f5695.pdf.

Repayment of First-Time Homebuyer CreditReport second payments for first-time homebuyer credits for a home bought in 2008 on Form 1040 Line 59b. Report repayment requirements where a taxpayer purchased a home and claimed the credit on a prior year return and then sold it or stopped using it as a main home in 2011 on Form 5405, available at www.irs.gov/pub/irs-pdf/f5405.pdf.

New Way to Report Capital Gains and LossesFor securities bought and sold in 2011, the Form 1099-B, issued by the broker, normally shows the taxpayer’s basis, which will help taxpayers correctly fill out Form 8949. See the www.irs.gov/pub/irs-dft/i1040sd–dft.pdf for Form 8949 and Schedule D for details.

Reporting Roth ConversionsAll of the income resulting from a 2011 conversion must be included on the taxpayer’s 2011 return. See www.irs.gov/pub/irs-pdf/f8606.pdf and its instructions for details.

Standard Mileage Rates Up in 2011The 2012 standard mileage rate for business use of a car, van, pick-up or panel truck remains 55.5 cents a mile. Additional mileage rates are detailed in the fact sheet at http://www.irs.gov/newsroom/article/0,,id=251837,00.html.

Health Insurance Deduction for Self-Employed PeopleIn 2011, eligible self-employed individuals and S corporation shareholders can continue to use the self-employed health insurance deduction to reduce their income tax liability. Eligible taxpayers still claim this deduction on Form 1040 Line 29. The deduction from self-employment income for determining self-employment tax, which was available only in tax-year 2010, no longer applies. For details see Publication 17 and the instructions to Form 1040 (including a worksheet) at www.irs.gov/pub/irs-pdf/i1040.pdf.

Change for HSAs and MSAsIn 2011, the additional tax on distributions from a health savings account (HSA), not used for qualified medical expenses, increases from 10 percent to 20 percent. Report at www.irs.gov/pub/irs-pdf/f8889.pdf. The additional tax on distributions from an Archer medical savings account (MSA), not used for qualified medical expenses, rises from 15 percent to 20 percent. Report at www.irs.gov/pub/irs-pdf/f8853.pdf.

New Form for Reporting Foreign Financial AssetsTaxpayers must report specified foreign financial assets on new www.irs.gov/pub/irs-dft/f8938–dft.pdf, if the aggregate value of those assets exceeds certain thresholds. Form 8938 is separate from and does not replace the existing requirement that U.S. persons with financial accounts located in a foreign country report those accounts to the Treasury Department using Form TD F 90-22.1 at www.irs.gov/pub/irs-pdf/f90221.pdf.

IRS Extends Tax-Filing Deadline to April 17. The Internal Revenue Service is giving individual taxpayers two extra days to file their 2011 tax returns this year. Due to April 15 falling on a Sunday and a holiday, Emancipation Day, in the District of Columbia on April 16, all taxpayers will have until Tues., April 17 to file their 2011 tax returns and pay any tax due. The IRS will begin accepting e-file and Free File returns on Jan. 17, 2012.

Credit for Hiring Veterans Claims. The Three Percent Withholding Repeal and Job Creation Act, P.L. 112-56, extended the work opportunity tax credit (now called the returning heroes and wounded warriors work opportunity tax credits) for businesses that hire certain military veterans who begin work for the employer before Jan 1, 2013. Tax-exempt employers can also receive a payroll tax credit against Social Security tax for hiring “qualified veterans” who began work for the employer after Nov. 21, 2011 and before Jan. 1, 2013. Tax-exempt employers eligible to receive the credit on their fourth quarter 2011 Form 941 should file Form 941 by Jan. 31, 2012. Form 941, Employer’s Quarterly Federal Tax Return, can be downloaded at www.irs.gov/pub/irs-pdf/f941.pdf.

IRS Updated Covered Compensation Tables. IRS has issued tables of covered compensation for the 2012 plan year. The IRS tables provide covered compensation amounts and rounded covered compensation amounts. The tables can be found at http://www.irs.gov/pub/irs-drop/rr-12-05.pdf.

FBAR Reporting for Former Employees. The Financial Crimes Enforcement Network has issued additional guidance on the reporting requirements of former employees that had signature authority over a foreign financial account of a former employer. Although former employees do not need to maintain records of the foreign financial accounts of their former employers, minimum information must be provided regarding the signature authority on Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). Read more at www.fincen.gov/statutes_regs/guidance/html/fin-2011-g003.html.

Temporary regulations alter cost treatment of tangible property. IRS has issued temporary regulations that provide guidance (Code sections 162(a) and 263(a)) on amounts paid to acquire, produce, or improve tangible property. The temporary regulations will affect all taxpayers that acquire, produce, or improve tangible property. The temporary regulations expand the current standards and provide certain threshold tests for applying these standards. Additional guidance is also provided for property subject to section 168. Read more in the Federal Register at http://www.federalregister.gov/articles/2011/12/27/2011-32024/guidance-regarding-deduction-and-capitalization-of-expenditures-related-to-tangible-property#p-3

The IRS launched a new Voluntary Classification Settlement Program (VCSP) for taxpayers that agree to prospectively treat workers as employees. To be eligible, the employer must have consistently treated the workers as nonemployees and have filed all required Forms 1099 for the workers for the previous three years. Taxpayers accepted into the VCSP will pay 10% of the employment tax liability that may have been due on compensation paid to the workers for the most recent tax year; the taxpayer will not be subject to additional interest and penalties, or a tax audit.

For more information, see www.irs.gov/irb/2011-41_IRB/ar14.html.