The bill aims to keep the interest rate on college students’ loans from doubling on July 1, 2012, and would pay for the cost of keeping the current 3.4% loan rate in place by closing what’s seen as an S Corporation employment tax “loophole.” According to a summary of the legislation, the loophole would be closed by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from a S Corporation or limited partnership interest in a professional services business. The change would target only those S Corporations that derive 75% or more of their gross revenues from the services of three or fewer shareholders or where the S Corporation is a partner in a professional service business.

Under current law, businesses organized as S-corporations don’t pay corporate taxes, and income earned is passed through to shareholders, who report that income on their personal tax returns. But if these shareholders are also employees, they can choose to treat some of their income as business profit — not salary, which lets them escape payroll taxes.

Reid’s bill would eliminate that flexibility by requiring those with incomes over $250,000 to include, for purposes of employment taxes, income received from an S-corp or limited partnership interest in a professional service business. This change, however, would only apply to S-corps and partnerships in which more than 75 percent of its gross revenues come from the service of three or fewer shareholders, and only those in fields where most of the earnings come from the performance of services, like those involving lobbyists and lawyers.

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Whether individually or as a business, many of us tend to get through tax season unscathed by an audit by the Internal Revenue Service (IRS).  Only a small percentage of all the individual tax returns filed each year will be audited. The selection process is done largely by computer models. These were designed by looking at millions of tax returns and developing “norms.”

If your tax return has numbers that fall very much outside these norms, your chances of being audited increase.

IR 2012-36; 2011 Data Book

IRS has issued its annual data book, which provides statistical data on its fiscal year (FY) 2011 activities. As this article explains, the data book provides valuable information about how many tax returns IRS examines (audits) and what categories of returns IRS is focusing resources on, as well as data on other enforcement activities such as collections. The figures and percentages in this article compare returns filed in calendar year 2010 and audited in FY 2011 to returns filed in calendar year 2009 and audited in FY 2010.

What are the chances of being audited?
Of the 140,837,499 total individual income tax returns with a filing requirement, 1,564,690 were audited. This works out to roughly 1.1%, the same as the rate for the previous year. Of the total number of individual income tax returns audited in FY 2011, 483,574 (30.9%) were for returns with an earned income tax credit (EITC) claim, a slight increase from the 473,999 (30%) of all audited returns for FY 2010.

Only 25% of the individual audits were conducted by revenue agents, tax compliance officers, tax examiners and revenue officer examiners. That’s higher than the 21.7% figure for the previous year. The 75% balance of the audits were correspondence audits, down from 77.1% for the previous year.

Following are selected audit rates for individuals not claiming the EITC:

• ·         For business returns other than farm returns showing total gross receipts of $100,000 to $200,000, 4.3% of returns were audited in FY 2011, down from 4.7% in FY 2010.
• ·         For business returns other than farm returns showing total gross receipts of $200,000 or more, 3.8% of returns were audited in FY 2011, an increase from 3.3% in FY 2010.
• ·         Of the returns showing farm (Schedule F) income, .6% were audited in FY 2011 versus .4% in FY 2010.
• ·         For returns showing total positive income of $200,000 to $1 million, 3.2% of returns not showing business activity were audited, and 3.6% of returns showing business activity were audited. The audit rate for such returns was higher than the 2.5% and 2.9% respective rates for the previous year.
• ·         For FY 2011, the audit rate for returns with total positive income of $1 million or more was 12.5%, close to forty nine percent higher than the 8.4% rate for FY 2010.

Not surprisingly, examination coverage increased for higher income earners. For example, the percentage was 1% for those returns with adjusted gross income (AGI) between $100,000 and $200,000 (up from .71% for FY 2010), and 2.66% for those with $200,000 to $500,000 of AGI (up from 1.92% for FY 2009). Exam coverage jumped to 11.8% for those with at least $1 million but less than $5 million of AGI (up from 6.67% for FY 2010). Similarly, coverage increased for those with at least $5 million but less than $10 million of AGI, as well as for those with AGI of $10 million or more.

Select audit rates for business returns were as follows:

• ·         For all corporate returns other than Form 1120S, 1.5%, versus 1.4% for the year before.
• ·         For small corporations with balance sheet returns showing total assets of: $250,000 to $1 million, 1.6%; $1–$5 million, 1.9%; and $5–10 million, 2.6%. For FY 2010, the percentages were, respectively, 1.4%, 1.7%; and 3%.
• ·         For large corporations with returns showing total assets of $10 million or more, the overall audit rate was 17.6%, up from 16.6% for FY 2010. The audit rate for these corporations increased with the size of the entity. For example, the audit rates were 13.3% for those with total assets of $10–$50 million (slight decrease from 13.4% for FY 2010); 17.4% for those with $250–$500 million (versus 16.1% for FY 2010); 50.5% for those with $5–20 billion (up from 45.3% for FY 2010), and 95.6% for those with $20 billion or more (down from 98% for FY 2010).
• ·         For partnership and S corporation returns, the audit rate was .4%, the same as for the year before.

IRS’s activity on other fronts. Here’s a roundup of some of the other valuable information carried in the new IRS Data Book.

Number of returns filed. The number of partnership returns filed (Form 1065) increased by 1.9%, and the number of S corporation returns (Form 1120S) grew by .8%. The number of C or other corporation (e.g., REMIC, REIT, RIC) returns dropped by 1.8%.

The number of individual income tax returns (e.g., Forms 1040, 1040A, 1040EZ) increased by 1.7%, a turnaround, due no doubt to improvement in economic activity, from the 2% drop exhibited in FY 2010, and the 6.7% drop shown in FY 2009.

The number of estate tax returns filed in FY 2011 plunged by 62.1%, reflecting recent tax law changes. (The estate tax was temporarily repealed for deaths in calendar year 2010 before being reinstated retroactively with a $5-million exemption as part of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. As a result of this legislation, estates of 2010 decedents could elect to file either Form 706, due Sept. 19, 2011, or Form 8939 (allocation of increase in basis for property acquired from a decedent), due Jan. 17, 2012.)

Math errors on individual returns. Of the roughly 6.6 million math error notices that IRS sent out relating to the 2010 return, 49.5% were attributable to the making work pay credit (MWPC), which was a refundable tax credit based on earned income and was available to taxpayers in 2009 and 2010.

Of the total math error notices, 14.1% were for tax calculation/other taxes (which includes errors related to self-employment tax, alternative minimum tax, and household employment tax), 7.2% related to exemption number/amount, 6.1% related to the EITC, 6.2% related to the standard/itemized deduction(s), and 2.2% related to the child tax credit.

Penalties. In FY 2011, IRS assessed 28.75 million civil penalties against individual taxpayers, up from 27.1 million civil penalties assessed in the previous year. Of the FY 2011 assessments, the “top three” penalties in percentage terms were 58.6% for failure to pay, 25.6% for underpayment of estimated tax, and 13% for delinquency. On the business side, there were a total of 1,080,027 civil penalty assessments (down from 1,145,931 for the year before), and the “top three” penalties in percentage terms were 55% for delinquency, 24% for failure to pay, and 18.4% for estimated tax.

Offers-in-compromise. In FY 2011, 59,000 offers-in-compromise were received by IRS (versus 57,000 for FY 2010), and 20,000 were accepted (14,000 for the year before).

Criminal cases. IRS initiated 4,720 criminal investigations in FY 2011. There were 3,410 referrals for prosecution and 2,350 convictions. Of those sentenced, 81.7% were incarcerated (a term that includes imprisonment, home confinement, electronic monitoring, or a combination thereof). By way of comparison, in FY 2010, IRS initiated 4,706 criminal investigations, there were 3,034 referrals for prosecution, and there were 2,184 convictions. Of those sentenced, 81.5% were incarcerated.

The IRS Data Book can be viewed at http://www.irs.gov/pub/irs-soi/11databk.pdf.  IR-2012-36 can be viewed at http://www.irs.gov/newsroom/article/0,,id=255853,00.html.

Source:  Federal Tax Updates on Checkpoint News tab 3/26/2012

At Renaissance Consulting & Development, we bridge the gap between the art and science of tactical and strategic management to encourage a renaissance within your company. We are change agents and know what it takes to propel your business forward. Occasionally, your business masterpiece can get a little off course. Contact us today to help you access the tools needed to maximize your company’s potential and turn your organization into a masterpiece.

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By Patrick Temple-West

WASHINGTON | Fri Mar 2, 2012 7:41pm EST

(Reuters) – The U.S. Internal Revenue Service’s new software system for handling electronic tax returns has experienced problems during the tax filing season, angering some taxpayers whose refunds have been delayed. In an issue that could draw congressional scrutiny, the IRS said it was addressing the software glitches and that delays in sending refunds to taxpayers would be minimal.

The tax collection agency has made a big commitment to upgrading its software and has been expecting to shut down its old software system in October. “A final decision on that won’t be made until after the filing season and after we have a chance to have additional conversations with” tax return preparers, said IRS spokesman Frank Keith. The IRS said delays in sending out refunds began in February. “There were probably several million taxpayers whose returns we took longer to process,” Keith said. But the IRS has largely caught up and the number of refunds sent out is now on a par with last year, he said.

Some tax preparers said they are facing angry customers upset by the late refunds.

The IRS had projected that taxpayers who got their 2012 electronic returns in by April 15 would get direct-deposit refunds seven to 13 days later; or 17 days for mailed refunds. That projection was expected to improve on the previous year, when direct deposit refunds went out 8 to 15 days after e-files came in; and 22 days for refund checks sent in the mail. Keith said most “taxpayers this year did receive and will continue to receive their refunds within that period of time” that the agency had projected.

Some tax preparers said that outlook was too optimistic. Gina Jones, a tax preparer in Delhi, Louisiana, said 85 percent of the 220 e-file returns she has filed this year have had delayed refunds. These delays are often seven to 10 days beyond the IRS projected window for a refund, she said. “IRS this year promoted big time their new modernized e-file,” Jones said. “Right out of the starting gate, they got behind.”

Mark Staber, chief tax officer with Jackson Hewitt Tax Service, said: “The delays – and IRS not being as communicative as perhaps they could have been – have left many consumers frustrated and confused over the timing of their refunds.

The IRS has encouraged tax preparers to send in electronic returns through older software systems.

“While there were delays at the start of the season, the IRS allowed suppliers to return to the former technology platform at that time, which is appreciated,” said H&R Block spokesman Gene King.

IRS Commissioner Doug Shulman has made e-file a top priority for the agency. The IRS tax return system upgrade is estimated to cost $1.3 billion through 2024, the Government Accountability Office said. In 2012, tax preparers who file 11 or more returns are required to send them in electronically, known as e-filing. For 2011, preparers with 100 or more returns must e-file.

This year’s problems could draw scrutiny from Congress. The House of Representatives Ways and Means Committee, which oversees the IRS, “is aware of issues that have arisen that are related to e-filing,” said Michelle Dimarob, a spokesperson for committee chairman Republican David Camp. “We anticipate that members will look at this issue, and others, when the commissioner appears before Ways and Means to discuss the overall filing season,” she said.

Source:  Thomson Reuters News & Insight 3/2/2012

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Brandon Patch recently quoted Kevin Riggs, CEO of Renaissance Consulting in their article highlighting the Best Places to Work Survey results.

Kevin E. Riggs runs Renaissance Consulting and Development, a Greater Brandon area firm specializing in small and closely held family businesses in the Bay area and beyond.

A satisfied and engaged workforce is not just good for morale, Riggs said, it also pays off for the company on their balance books.

“That employee loyalty pays off in dollars. Just as it costs more to get a new client than to hold onto one, the same also goes for employees. To get a new employee costs more with training and you are also losing someone with corporate knowledge.”

Riggs has been helping small businesses for more than five years and has found one key element all successful businesses share.

“Communication is fundamental. If there’s standardized communication practice in a company that usually promotes tremendous loyalty.”

To read the full article by  Kevin Brady, please click here.

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