With the end of tax filing and the start of summer why not focus on new beginnings? Included in this month’s newsletter are some ideas to help find summer employment and some suggestions on the benefits of creating a good accounting system for your small businesses.
Wonder what the IRS has in store for audits? Consider reviewing the article on audit statistics and a new area of focus within the agency on alimony reporting compliance.
Should you know of someone who may benefit from this information please feel free to forward this newsletter to them.
The Chances of Being Audited
What are the chances?
Every year the IRS publishes the statistics of tax returns they are examining. Provided here are the last three years of published information and a look back to 2008 to see any trends:
|Audit Rate Statistics for INDIVIDUALS|
|Fiscal Year Year||2013||2012||2011||2008|
|All Individual Tax Returns||0.96%||1.03%||1.11%||1.00 %|
|No Income (AGI)||6.04%||2.67%||3.42%||2.15%|
|Income under $25,000||1.00%||1.05%||1.22%||.90%|
|$25,000 – 50,000||.62%||.70%||.73%||.72%|
|$50,000 – 75,000||.60%||.64%||.83%||.69%|
|$75,000 – 100,000||.58%||.64%||.82%||.69%|
|$100,000 – 200,000||.77%||.85%||1.00%||.98%|
|$200,000 – 500,000||2.06%||1.96%||2.66%||1.92%|
|$500,000 – $1 million||3.79%||3.57%||5.38%||2.98%|
|$1 million – $5 million||9.02%||8.90%||11.80%||4.02%|
|$5 million – 10 million||15.98%||17.94%||20.75%||6.47%|
|$10 million and over||24.16%||27.37%||29.93%||9.77%|
|Note: These audit rates are stated as a percent of total tax returns in each Adjusted Gross Income (AGI) class as claimed on individual tax returns. In general the examinations are for tax returns filed in the previous calendar year.
Source: IRS Data Books
|Overall audit rates in 2013 have now fallen below the levels in 2008. Much of this is due to budget cuts from sequestration per the IRS.|
|These lower audit rates did not impact those with no AGI or negative income. This group saw a dramatic increase in audits during 2013.|
|Taxpayers with AGI between $200,000 and $5 million also saw their returns reviewed at a higher rate than last year.|
Having good records
Always retain your tax records and support documents for as long as they may be needed to substantiate your tax return. This is usually three years after the filing due date or when the tax return was actually filed (whichever is later). Include any state record retention requirements as you evaluate when it is safe to destroy old records. Remember some records need to be retained indefinitely. This includes, at minimum, copies of original tax returns, legal documents, confirmation of asset purchases, asset sales and real estate transactions.
Alimony in the Spotlight
What you need to know
Setting up Your Business Accounting System
You’ve done the hard work. You have a new business idea or you’ve found an existing business to purchase. Want to help ensure your business success? Pay attention to correctly setting up your business’ accounting system.
|Why it matters|
|Honoring cash flow. Often success or failure of your business is predicated on whether you have enough cash to pay your bills. Determining your cash needs means understanding the cash situation of your business. To do this requires a good set of records. This includes recording your current situation on a timely basis and establishing a forecast of cash needs throughout the year.|
|Fortress balance sheet. Banks love a strong balance sheet. If you think your business may need money for expansion, you will want to focus on developing a strong balance sheet that is low in debt and high in liquid assets like cash and accounts receivable. The irony here is that it is easy to borrow money when your records show you don’t need it and it is hard to borrow money when your business records show you need the funds.|
|Understanding financial pressure points. Every business has a few financial items that drive profitability. Do you know yours? It might be payroll in a labor-intensive business. It might be rent in a retail establishment. Perhaps your margins are low because of heavy promotional costs. A strong accounting system will help you stay focused on the more important financial elements of your business.|
|Understanding seasonality. By setting up a good accounting system AND forecasting performance over a twelve-month period, you will understand the true needs of your business. This is especially important if your business is seasonal in nature.|
Things to consider
|Separate books. If starting a business from scratch, remember to set up separate bank accounts and recordkeeping. IRS auditors are quick to disallow expenses when your business expenses are mingled together with personal expenses. The same is true with credit cards. Use a separate credit card for your business transactions.|
|Consider business entity. Choosing the right legal and tax entity for your business is important. Consult experts to discuss your options. On the tax side, sole proprietors use a Form 1040 Schedule C to report their activity, while other business entities “flow-through” profits to your individual tax return through a Schedule K-1. Still others like C-Corporations require separate tax returns without flow-through of profits onto your personal tax return.|
|Cash versus accrual. There are different approved methods of accounting. You will need to determine which is best for you. Sometimes your business dictates a required method, but not always. The basic difference lies in when you can book revenue and expense. One method (cash) is based upon when you actually receive or make payment. While the accrual method allows capturing this same information when there is an established obligation.|
|Sub-ledgers. Well-run businesses understand the need to organize elements of their business into accounting categories. These categories often use their own reporting system called sub-ledgers. Common areas are sales, accounts receivable, accounts payable, fixed assets, and inventory.|
Remember, by spending time setting up the accounting system that is right for you, you are increasing your business’ chance for success. As a final thought, if recordkeeping and accounting is not a strength of yours, ask for help.
Looking for a Summer Job
With summer upon us, you may have a teen looking for summer employment. Here are some ideas to help find a summer job.
|Things to consider
When trying to land a job, remember you need to stand out from the pack. What can you do to help yourself be the one hired?
|Be ready for no. Someone once said looking for a job can be summed up in one sentence: NO, NO, NO, NO, NO, YES. If you are turned down for a job, politely thank the manager for their time, reiterate how you would like to be considered for future openings and leave your contact information.|
|Leverage your network. Many summer jobs are landed because employers rely on current workers to help find qualified new workers. So pass the word you are looking for work. You never know what opportunities might develop.|
|Follow up. If you really want to work somewhere, be persistent. Follow up an interview with a thank you note. Then periodically check back.|
Some things to avoid.
|Being late or not showing for an interview|
|Being meek or timid|
|Having spelling errors on any correspondence|
|Showing up with a friend or parent. This is your job not theirs.|
|Not having a way to get to and from a job. Plan this out ahead of time.|
Ideas for summer work
Not sure where to look? Here are some ideas.
|Seasonal areas; garden stores, landscape, summer camps, vacation areas, resorts, festivals and fairs, construction|
|Restaurants. Especially in areas with heavy summer traffic|
|Nanny/child care. With school out, many homes are looking for summer help with their kids versus sending them to full-time daycare.|
|Craft fairs and conventions. Summer is the time for many community events. All of them need help.|
|Light manufacturing. Many workers are looking to take some vacation. Summer help can step-in and fill-in while current employees take a well-deserved break.|
Often the difference between landing the dream summer job and not having one is simply taking action. To win the game, you must be on the playing field. So go out there and get your job.
As always, should you have any questions or concerns regarding your situation please feel free to call.