Monthly Archives: June 2015

Correct those tax return errors

What should you do when you discover an error on an already-filed tax return? In most cases, the answer is: prepare and file a correction or an amended return. Here’s a refresher on the rules.

  • What to amend. You don’t have to correct math errors on your already-filed original personal federal income tax return. Also, you don’t have to file an amended return if you forgot to attach your W-2 or a supporting schedule. The IRS will send notices for those mistakes.

    Situations that indicate an amended return is necessary include inadvertently not reporting income or deductions on the original return, incorrectly claiming too few or too many dependents, and changing your filing status.

  • What forms to use. Forms for amending already-filed returns typically have an “X” in the title. For example, you’d use Form 1040X to correct your individual federal income tax return, even if you originally filed Form 1040A or 1040EZ.

    Most payroll returns also have an “X” in the title to differentiate forms used for amendments (Form 941-X, for example), as do C corporations (Form 1120X). S corporation returns and information reports such as Form 1099 generally have a checkbox on the regular form to indicate you’re filing a corrected return.

  • When to amend. Normally you need to file an amended return within three years of the filing date of the original return.

    Amended returns tend to have a “ripple” effect, meaning you may also have to amend state filings, as well as prior-year federal returns affected by carryforward or carryback items.

If you discover an error on your tax return, please call Carl Heinemann, your Chattanooga CPA, for assistance.

Make time for a midyear payroll review

As the last month of the second quarter, June provides a good opportunity for a midyear payroll review. Here are three areas to assess and update.

  1. Form I-9. Make sure you have a completed Employment Eligibility Verification Form on file for each of your employees. Check that you and your employees signed the right sections and that you met the deadlines for completion. Finally, make sure retention policies are up to date. You’re required to keep Form I-9 as long as an employee works for you. For ex-employees, retain the form for three years after the date of hire or one year after the date employment ended, whichever is later.
  2. Retirement plans. Consider introducing your employees to the new myRA, a retirement savings option. These plans allow employees to contribute monthly to a no-fee account that is similar to a Roth IRA. The funds in myRA accounts are invested in a government security and backed by the Treasury Department. As an employer, your only obligation is to facilitate the payroll deduction. You’re not responsible for filing forms, making contributions, or tracking assets.
  3. Health insurance law compliance. Verify that you have stopped reimbursing your employees for health coverage. After June 30, 2015, repaying employees specifically for health insurance premiums could subject you to a penalty of $100 per day per employee.

    Another health law reminder: Make sure you have procedures in place so you can track information needed to fill out new 1095 forms for health insurance coverage. For 2015, these forms are generally required at year-end when you have 50 or more full-time employees, even if you do not offer coverage.

Give Carl Heinemann, your Chattanooga CPA, a call for more information and for help completing your midyear payroll review.

What is the accumulated adjustments account?

If you’re the owner of a Subchapter S corporation, you’re probably familiar with the accumulated adjustments account. The AAA is shown on the last page of Form 1120S and measures the amount of previously taxed but undistributed earnings of your corporation. The account is adjusted each year to reflect business activity such as current income and distributions.

Since the calculation of the AAA appears to be similar to the way you determine your basis in the corporation, you may think they are the same. But generally the two are very different.

For example, your basis can include your original contribution to the business, as well as tax-exempt income. These items are generally not included when figuring the corporation’s AAA balance.

In addition, your basis in the corporation cannot be less than zero. The AAA account, on the other hand, can be a negative number.

One reason it’s important to understand the difference between basis and the AAA is because your basis determines whether distributions you take from your business during the year are taxable or not. If you rely on your AAA balance when taking distributions, you could be in for a surprise at year-end. Be aware that you are responsible for tracking your basis, while the corporation maintains the records for the AAA.

Contact Carl Heinemann, your Chattanooga CPA, if you would like more information about the AAA and basis calculations.

How to respond to that IRS notice

Tax season is over. Now comes the season for IRS notices — particularly a notice called a CP2000. If you’re the recipient of one or more of these letters, here’s what you need to know.

  • What the notice is. The IRS matches amounts you include on your tax return with information reports such as Forms W-2 and 1099, and sends you a notice when a discrepancy occurs. The process is called the “Automated Underreporter Program” and the multi-page notice you receive is generally a CP2000. The “CP” stands for computer paragraph. The “2000” means the notice is an information return program verification request. You can identify the notice by the number printed on the top right of each page.
  • What to do. The CP2000 is a proposed adjustment, not a bill. The IRS is asking you to explain the differences between the amounts reported on various information reports and what you put on your federal income tax return. These differences are provided in a summary area on the notice, and you generally have 30 days to let the IRS know if you agree or disagree with some or all of them. The CP2000 includes the forms you need for your response as well as an application for a payment plan.

    Keep in mind that the IRS shares information with state revenue agencies. You may need to correct or update your state income tax filings to reflect any changes.

  • When to expect a response. According to the Taxpayer Advocate office, IRS guidelines call for processing your answer within approximately 45 days. However, the Taxpayer Advocate notes the IRS receives more than ten million letters a year in response to notices and is often unable to reply within the 45-day time frame.

Please contact Carl Heinemann, your Chattanooga CPA, whenever you receive an IRS notice. We’re here to help.

Consider “dollar cost averaging” as an investment strategy

Planning to retire someday? Hoping to help your kids with the cost of college? Setting aside money for such long-term goals requires discipline and a workable investment plan. “Dollar-cost averaging” is one such plan, a reasonable and relatively painless way to keep your hard-earned dollars working and your wealth accumulating.

If you participate in your employer’s 401(k) plan, you’re likely applying this investment concept already. The idea is this: you contribute a set amount of money to an investment account on a regular schedule — every paycheck, every month, or every quarter. When stock or bond prices drop, your contribution buys more shares; when the market recovers, you buy fewer shares with the same amount of money.

For example, let’s say you invest $50 every paycheck in a 401(k) account that buys shares in 1,000 U.S. companies. At the end of the first pay period, the share price is $25, so your contribution buys two shares. Two weeks later the share price drops to $20. Now your $50 will purchase 2.5 shares. The following paycheck the share price climbs to $60, so your $50 buys only .83 shares. Your contribution purchases more shares when the stock price falls, fewer when it climbs. Over time, you’re buying shares at average prices, hence the term “dollar-cost averaging.”

Of course, no investment is entirely risk free. For most people who have neither the time, interest, nor expertise to research individual company offerings, index funds provide a low-cost way to reduce both investment risk and cost. For example, an S&P 500 stock fund is designed to mimic the returns of that specific index. By contributing to such a fund, you’re buying fractional shares in 500 large U.S. companies. In theory at least, stock prices for all those companies won’t respond to market forces in the same way, giving investors a measure of protection against the roller coaster ride of day-to-day market fluctuations. By contrast, if you buy only a few individual stocks, your risk tends to be greater. In addition, by setting up automatic contributions from your paycheck or bank account, you can minimize the temptation to divert those funds to more immediate priorities.

Dollar-cost averaging isn’t the only way to invest, but for many people it’s a great way to save for far-off goals without excessive risk or arduous discipline.

Keep good corporate minutes

An employee who is required to communicate with board members, take notes at board meetings, and compile corporate minutes may cringe at such a tedious and often thankless assignment.

But carefully prepared corporate minutes are valuable, even essential, in many circumstances. They can be used to convince state regulators that directors performed their fiduciary responsibilities with due care. During an audit, favorable tax treatment — including the deductibility of officer compensation and travel-related expenses — may hinge on unequivocal documentation in the board minutes. If a company’s corporate status is called into question, shareholders may become personally liable. Accurate board minutes can be used to demonstrate that the corporation has maintained its legal status and acted in the best interest of its shareholders. And by documenting the basis for board decisions, meeting minutes may provide insight to managers who must implement corporate policies and procedures.

  • When should meeting minutes be kept? Of course, every routine discussion doesn’t need to be documented. But at a minimum, a record should be made when the board selects new corporate officers, implements significant new policies, establishes new retirement plans, borrows significant amounts, or sells major assets. In fact, minutes should be taken at any official meeting in which significant discussions are held and corporate decisions made.
  • What information should be included? Without necessarily identifying the individuals who spoke, the minutes should document the scope of the discussion. The goal should be to summarize the major points that support the final decision or resolution. The minutes might also indicate, in general terms, the time spent reaching a decision. This type of language — “the board then discussed the matter at length” — may serve to show that agenda items were not passed over lightly. Should the company’s position ever be questioned in court, such verbiage may provide support for the board’s decisions. In addition, the minutes should record any documents considered (though such documents may be incorporated by reference only). If board members relied on the advice of attorneys, accountants, or other professionals, this information should be included as well.
  • What should be left out? In general, it’s a good idea to omit a record of the detailed discussions that led to final decisions. Such “he said/she said” transcripts may later provide fuel to those who want to question the firm’s actions.

In a court of law, the minutes speak for the corporation. Discuss your minute taking process with your attorney.