Recent activity by the federal government suggests that increased scrutiny will be placed on nonprofit entities.  This increased scrutiny includes an increase in the number of audits.  Many smaller nonprofits may shrug off this recent development as an issue that does not apply to their organization.  The assumption, “we’re too small to be noticed”, would be wrong. 

The IRS is currently beefing up their Tax Exempt and Governmental Entities (TE/GE) Division with 155 new employees.  100 of these will work in examinations.  What does this mean for your organization?   You have a greater chance of receiving an inquiry or being audited.  The TE/GE Division expect to conduct around 500 audits of randomly selected exempt organizations.

So, rather than sitting back on your haunches and waiting to see if your entity is unlucky enough to draw the short straw, get proactive!  Be audit ready.  Below are a few practical measures to consider now.

Organizational documents.  Articles, bylaws, determination letters, and other formal documentation will be requested during the audit.  Make sure you can put your hands on these and that your organization is operating within the standards set forth in the documentation.

Minutes of meetings.  Make sure the minutes reflect all actions of the organization’s governing body and of any committee having the power to bind the organization.

Payroll information.  For all employees, make sure you have an employee file containing W-2s, copies of the Social Security card and driver’s license, and insurance documentation.  If you have any contract labor, make sure that the contract labor classification is defensible.  For descriptions on employment status, see the February 2010 issue of The PPC Nonprofit Update.

Financial records.  Ensure that you have good record of all financial statements, receipts, invoices, check registers, bank statements, expense reports, and any other financial documentation that supports your books.

Nonprofits of ALL sizes should be aware of the potential for an IRS audit.  Be prepared by following the above suggestions

Posted in Uncategorized on { August 31st, 2010 } ~ No Comments

Tagged with: audit • federal government • IRS • Nonprofits • Tax Exempt and Governmental Entities • The PPC Nonprofit Update

The IRS just sent out another round of collection letters.  Their computer spits these letters out  every 30 days.  The letters come with varying degrees of venom.  Generally, when you get the letter that threatens to place liens on your bank accounts and other properties, it is time for you (the taxpayer) to take some form of positive action.  Don’t shred this letter.    

The Internal Revenue Service is the collection branch of the United States government.  The IRS does not make tax law.  Your elected Congressmen make the laws.  If you do not like the tax laws, the collection laws or any other law, call your Congressman. 

So when you call your CPA and vent about the IRS and the unfairness of tax laws, fines, penalties, interest and collection procedures, you are complaining to the wrong person about the wrong group.  Call your Congressman.

ON THE OTHER HAND, if you want to complain about the quality of service provided by the IRS, call the IRS.  We need to let IRS management know that they have issues.  I have been a practicing CPA for 27 years.  In the “good ole days” you could take your client’s power of attorney, go to the local IRS office and work out every problem in a face to face meeting.  The process was simple and effective.  You can’t do that any longer. 

Today virtually all issues are handled by IRS telephone call centers and correspondence.  Your ability to resolve an issue often rests with the “luck of the draw”.  If you get a well trained, experienced agent on the phone, you may get your issues resolved quickly.  Please be aware that the call centers are staffed by the lower level, less experienced agents, so there is a very good chance that your issue will not be resolved. 

In the meantime, the IRS computer is sending out collection letters every 30 days.  It is not at all uncommon for an issue to be resolved or in the process of being resolver via the phone agent only to have an IRS collection letter generated via computer. 

Here is an actual case on this point.  We filed an amended income tax return for a client.  The amended return reduced the client’s liability substantially.   A week or so ago, the client received a letter stating that due to the unpaid taxes, the IRS was going to attach liens on their bank account and their home.  Needless to say our client was hot.  We called the IRS.  Their response to our call was that amended returns take 6 to 9 months to process.  They showed receipt of the amended return but we could not give a date for processing.  Their solution was to put a 30 day hold on the account.  Yes, a 30 day hold on an issue, that by their own admission may take as much as 9 months.  So we, the taxpayer, have to call the IRS every 30 days to get them to extend the “hold” every 30 days until the issue is resolved.

I am sure that the practitioners that you use can regale with similar stories.  Here is my point.  The number of returns being processed by the IRS is growing at a ridiculous rate.  Congress has not mandated the adequate funds to increase staff and equipment to keep up with the filing growth.  The problem is only going to get worse.  So don’t shoot the messenger!

Posted in Uncategorized on { August 26th, 2010 } ~ No Comments

One reality of running a business is that occasionally an employee needs to be terminated. Whether it be performance, incompatibility, or any number of other issues, there will come a time when a business owner is faced with this challenge. Preparation is key to firing an employee and avoiding facing legal problems down the road.

Documentation, Documentation, Documentation

You can NEVER have too much documentation. What location is to real estate, documentation is to termination. Document the employee’s performance over time and provide feedback in full detail. Make sure you have an employee handbook and you follow the guidelines with each employee equally.  If you document everything, there will be no questions in the end.

Is that your final answer?

You have thought long and hard about your decision to fire an employee. There will be a rush of emotion when you tell them the news. Grief and anger are a few to name BUT hold your ground. Give honest answers while avoiding any and all debatable issues. Do not apologize for your decision but offer explanations of the termination without creating a long discussion. Misleading the employee into thinking they have one last chance will only cause you more of a headache in the end.

Firing via Social Media or Text

Face-to-face is the best and ONLY way an employer should terminate an employee. Trash any and all electronic methods of termination (i.e. Facebook or text messaging). When you fire an employee, give them the courtesy you would extend to any other person and avoid any and all accusations of defamation. You might want to scribble this one down for break-up tips as well.

Firing without Warning

Firing without warning can be one of the biggest downfalls for an employer. As said earlier, documentation is key to firing and can become your biggest defense in a legal issue. Blindsiding your employee with a surprise can lead to an overwhelming amount of emotion that you do not want in your work place.

Can I get a witness?

Employment termination is a hot topic in court these days and definitely not the place you want to find yourself.  ALWAYS have a witness in the room with you before you begin the termination process. Most employers would rather have an employee from HR, but any witness is better than no witness. Keep in mind that anyone can sue anyone these days and your witness’ testimony for the events of the meeting could quite possibly be your defense in court.

What’s mine is mine and what’s yours is yours.

During the termination meeting, ask that the employee hand over all company property from cell phones to passwords. Accompany the employee to their desk in order to gather necessary items. If the employee has company property outside of the workplace, make documented and solid plans for when you expect them returned. Give the employee an explanation of how long they have to gather their personnel belongings and leave the premises. Following the termination, minimize the contact the former employee has with other employees at the work site. If the former employee is upset, schedule another time for them to come in and get their personal belongings.

Confidentiality

Keep all employee records and termination paperwork private. It is appropriate to let the company know the employee has left, but make sure to reassure them that their jobs are not in danger. Keep all conversations about the employee’s termination confidential as well.

Reflect

After the termination, review and reflect over the process. Was everything documented appropriately? Were all termination policies followed according to your company’s standards? Do any alterations need to be made for a smoother transition? All of these are things you should ask yourself.

Cover each base by documenting everything and preparing an appropriate termination process that your company can follow. Be consistent and remember: Documentation, Documentation, Documentation!

Posted in Uncategorized on { August 25th, 2010 } ~ 3 Comments

Our tax system is very difficult to understand. Even as a CPA with decades of experience, I still regularly face questions from clients that I have never heard before. Since taxation is a very hot political issue, there is a lot of inaccurate information passed around about our system – especially during an election cycle. Remember the quote “lies, damn lies, and statistics”? I think it originally referred to the way politicians discuss tax policy. Today’s blog is meant to relay some important – and accurate – facts about our tax system.

All numbers are according to official IRS statistics for 2008 filings:

Who is filing?

• 144.1 million individual tax returns were filed for 2008. 111.7 million of these returns resulted in refunds. A total of $324 billion in refund checks were issued.  The average refund was $2,902.
• The median adjusted gross income (AGI) reported for 2008 was $33,048. The cutoff point for the top 1% of earners was $380,354 and the cutoff point for the top 10% was $113,799. The cutoff point for the bottom 10% of earners was $5,942.
• 323,067 returns were filed reflecting AGI in excess of $1,000,000. California claims the highest number of millionaires, with 44,027. Vermont has the fewest, with only 389.

Who is paying, and how much?

• For the 2008 tax year, approximately 47% of all returns showed zero income tax liability. That’s right – almost half of all returns reflected NO income taxes. When almost half of the population pays no income taxes, something is wrong.
• The Congressional Budget Office estimates that the lowest earning 20% bear a total federal tax burden (including income and payroll taxes) of 3.9% of their income. By contrast, the burden on the highest earning 1% is 21.9%. Tell me again how our tax system “favors the rich”?

Refundable tax credits are popular

Refundable tax credits allow a taxpayer to claim a refund even if they had no tax liability and no taxes paid in. These types of credits are sometimes called “tax welfare” because they can result in large refunds for low earning families who already pay no taxes.

• 24.8 million returns were filed claiming the earned income credit. The total paid on earned income credit claims was $50.7 billion.
• 479,622 returns were filed claiming the first time home buyers credit. Total credits claimed were $3.5 billion. This number is not final, because the credit can still be claimed on unfiled 2009 returns.

Other miscellaneous facts

• 33.8% of returns claimed itemized deductions, while 66.2% used the standard deduction.
• 75.7% of returns were filed electronically.
• 57.7% of returns were prepared by a paid preparer. (Let’s get this number up, people!)

Hopefully, these facts will help clear up some of the misconceptions about how our tax system is really working. As you can see, the reality is far different from what your Congressmen or the President would have you believe!

Posted in Uncategorized on { August 20th, 2010 } ~ 1 Comment

Interest rates are at the lowest levels in my lifetime.  The economy is at the lowest level in my lifetime.  So, is this the time to recognize opportunity or just buy my few remaining dollars in the backyard?

This is the question that I get repeatedly.  To some extent your decision will depend on your risk tolerance level.  We had a client in the office this week that is convinced that we are headed for another Great Depression.  They are liquidating and holding the cash.  Yesterday, I met with a client whose business is growing so fast that their concern is that it is out of control.

My home is Galveston.  The richest family in town is the Moody’s.  The original Mr. Moody made a significant amount of money in the cotton business after the Civil War.  It was Grandpa Moody, however, that made the fortune.  He made that fortune during the Great Depression by buying grossly undervalued businesses and later selling those businesses.  At one point, he was the largest landholder in Texas.  He bank rolled such notables as Baron Hilton (Paris’ grandfather) and many others.   He created a banking and insurance empire by guaranteeing returns.  The old bank in Galveston sported a large 1% painted on the front door.

My point is this, protect your assets, but don’t be afraid of the future.  Invest your business in tomorrow, but invest wisely.  Put your business in a position to be a leader in your industry. The economy runs in cycles.   Money is extremely cheap right now.  Consider investing in your company’s infrastructure.  The Boy Scout motto is “Be Prepared”.  Our business motto is “Be Ready”.

Other Tidbits…

Senator John Kerry, Democrat from Massachusetts has agreed to pay the state of Massachusetts $500,000 in state taxes that he attempted to avoid by docking his $7 million yacht in Rhode Island.  Come on!  Screwing the state that elected you!

Chris Tucker is facing tax liens from the IRS of $11.5 million.  Ouch.  Who was his CPA?

I know most of my readers are into RAP, so here is the update on Lil Wayne. The IRS slapped a $1.1 million tax lien on our man.  Apparently he intends to address this issue as soon as he gets out of jail on the weapon charge.

Posted in Uncategorized on { August 12th, 2010 } ~ No Comments

There comes a time in every business owner’s career where they find themselves lacking motivation. After all, it isn’t every day that we fully expect our grand ideas to change the world as we know it. Sometimes, the fire just dwindles and it is all we can do just to go through the motions. Here are five tips on things an entrepreneur can do to stay motivated and five things to avoid doing that will drain the creative juices that entrepreneurs thrive on.

Do:

1. Avoid tasks that are overly routine or repetitive. The mind of the entrepreneur thrives on performing a variety of activities and the desire to constantly face new challenges. As such, settling into too much of a routine can be draining. If these types of tasks must be done regularly, hire someone else to do them.

2.  Set deadlines – and keep them. Nothing motivates activity like facing a hard deadline for the completion of a task.

3. Network. No one “gets” an entrepreneur like another entrepreneur. Networking provides a perfect opportunity to share thoughts and experiences and discuss challenges facing the business. The fact that most networking events tend to be fun doesn’t hurt.

4. Surround yourself with people who buy into your vision. No one wants to be surrounded by “yes-men” but the successful entrepreneur will hire people who see the vision for the business and believe in it. After all, if the staff doesn’t believe in the business, how will the customers ever be able to?

5. Recharge the batteries. It’s true that the business depends on the entrepreneur. However, it’s also true that no one can go indefinitely without rest and relaxation from time to time. Take some time off occasionally. Start a hobby. The business will benefit from the entrepreneur being refreshed and relaxed.

Don’t:

1. Give up. No one likes to be rejected, but the entrepreneur is especially susceptible to disappointment because they live for their ideas. Remember, some of the greatest ideas in human history came about only after several tries. Personal computers? Television? Both ideas that were initially rejected.

2. Linger on the negatives. Everyone has bad days. The key to maintaining focus as an entrepreneur is not letting bad days turn into bad weeks or even bad months. Each day must be looked at as a fresh opportunity. In sports, we used to say “That play is over; now it’s time for the next one”. Entrepreneurs can apply that logic to their businesses as well.

3. Lose sight of the goal. Every entrepreneur has a long-term plan for their business. In many cases, the long term plan was the first thing that they came up with and everything else was just details on how to get there. The successful entrepreneur will take time to revisit that long-term goal and evaluate how they are doing. Doing so keeps them from feeling like they are “lost in the wilderness.”

4. Suppress your feelings. While screaming at employees or family members when there is business-related stress isn’t advisable, it is healthy to freely express your emotions. When the big deal didn’t materialize or the company didn’t land that big contract, don’t stew. Find a trusted companion who you can vent to. In the electronic age, venting online through a blog can also be therapeutic.  Keeping the pressure off periodically prevents a major explosion down the road.

5. Ignore your health. Too often, entrepreneurs eat poorly or don’t exercise because they “don’t have time”. A healthy body will not only provide more energy to get work tasks done, but exercise can also be a great stress reliever.

Posted in Uncategorized on { August 10th, 2010 } ~ 1 Comment

Why do you need an accountant?  Why won’t a bookkeeper do?  While there are several good answers to these questions, the simplest one is this: a good small business accountant does much more than just record transactions and generate documents – a good accountant analyzes, interprets, and translates data into useful information.

The key is, you must select an accountant that fits your needs.  What’s important to you and your business?  Personalization?  Technological savvy?  Understanding your industry?  Consider raising the following questions in your quest to find a suitable accountant:

What services do you provide to small businesses? 

There are several areas that accountants can work or specialize in.  These can include audit, tax, bookkeeping, consulting, payroll, and financial planning.  Find out which areas could help your business and make sure the accountant you choose has experience fulfilling those needs.

Do you have knowledge about my industry?

In many cases, the more experience an accountant has with a certain industry, the more insight they’ll be able to provide to your business.  However, with areas such as payroll, industry knowledge may not be essential.

What types of services do you provide to others in my industry?

This question may open up other possibilities for your business.  Other entity’s in the same industry may be receiving services that could be beneficial, but that you hadn’t thought of.  This also gives you an idea of the accountant’s background and knowledge.

What type of technology do you use and how will that benefit my business?

Does the accountant keep a paperless office?   Will your files be accessible through a portal?  How can I access my financials?  Exactly what role will the Internet play in data interchange?  These are all important questions that need to be addressed prior to retaining an accountant. 

How do you calculate your fees?

Most accountants have both hourly rates and fixed fees.  If you plan on being a monthly or quarterly client, ask about the fee structure to see if you could qualify for a fixed fee.  This saves you from paying separately for quick e-mails, faxes, or brief phone calls.

Posted in Uncategorized on { August 3rd, 2010 } ~ 7 Comments

My grandfather was not an educated man.  He grew up in northwestern Louisiana on the family farm.  He had to quit school after 6^th grade to work on the farm.  But, like so many from that era, he was loaded with common sense and wise in the ways of the world.

During the Depression, he traveled from project to project.  Each week he brought his earnings home to the family.  He wanted to make more money, but the times were difficult.  He did his best and the family survived.  Regardless of the situation, he felt good about himself and, more importantly, the family felt good about him.  There was no shortage of pride and no self pity.

All of this brings be to the Obamacrats efforts to extend unemployment benefits to 99 weeks.  Let’s just round that number up a bit and call it two years.  At some point, government subsidies stop becoming   incentives for employment and become enablers for non-employment.  At some point, it is easier to sit on the front porch and wait for the mailman than to be gainfully employed.

Most people, and I include myself in this category, are driven by deadlines.  In our tax practice, the volume of tax returns increases as April 15 approaches.   I fail to see how lengthening the unemployment benefit aids in creating new jobs.  There is no sense of urgency.  There is no cause for activity.

The money paid to these folks should be put into projects that create immediate jobs.  The money should be made available for businesses to borrow.  Business growth is what actually creates jobs.  Working creates pride.  Pride creates desire.  A March 2010 economic report by Michael Feroli of J P Morgan Chase Bank examined this issue.  Their finding was “that lengthened availability of jobless benefits has raised the unemployment rate by 1.5%.”

The Tuesday, July 20, 2010, Wall Street Journal reported that a “record 6.7 million people have now been out of work for at least six months….that number was 23.4% in February 2009.  Americans tend to support jobless benefits on compassion grounds, but at some point such a policy becomes the false compassion of welfare by keeping people of the job market and thus not learning new skills.”

Perhaps we should tie unemployment benefits to some level of activity.  Activity is not going to TWC once a week and signing in on the computer.  Activity is real job training programs, picking up trash on the highways, washing police cars, etc.  Government claims to be strapped for manpower because of reduced tax funding.  All of these people on welfare are being compensated by the government, let them work.

The more you get something for nothing, the more of nothing you are going to receive.

Posted in Uncategorized on { July 26th, 2010 } ~ 17 Comments

Tagged with: unemployment benefits

Many companies that require an annual audit have no idea what an audit entails or what qualifications the auditor should possess.  The following is a list of some of the basic questions you should ask your auditor prior to the engagement.  Find out how Cook & Associates, CPAs answers these questions and see if your current audit firm measures up.

1. 1.      Are you independent?

Auditors must be independent and objective when conducting audits.  They cannot have a prior working relationship with your organization or provide in-house services.  At Cook & Associates we maintain a professional relationship that keeps your best interest in mind.

1. 2.      What is your audit experience?

The managing partner at Cook & Associates has over twenty-six years experience in auditing.  In that time, he has performed in excess of one hundred audits of various entities, including schools, cities, nonprofits, and other governmental entities.

1. 3.      How will you manage the engagement?

Cook & Associates is adequately staffed with professional and support personnel to provide all necessary services and to maintain personalized involvement with each client.  Each audit is overseen by the managing partner.  Staff members are directly supervised by the partner to ensure that the goals, objectives, and deadlines are met.

1. 4.      What type of reports do I get?

Our firm provides all reports requested by the audited entity.  These generally include an Independent Auditors’ Report, Audited Financial Statements, and a Report on Internal Control.  In addition, we generally provide a Management Letter to discuss operational areas that could be improved.

1. 5.      What auditing standards are used?

Auditing standards provide measures of quality that can be used to judge the effectiveness of the tests and procedures used to meet the audit objective.  Standards for traditional financial audits are known as generally accepted auditing standards (GAAS) and are promulgated by the American Institute of Certified Public Accountants (AICPA) through the Auditing Standard Board.

1. 6.      What are your certifications?

Management qualifications: All audit staff at Cook & Associates have received Masters in Accounting.  Both partners hold the title of Certified Public Accounting (CPA). 

Professional associations: The firm is a member of the San Antonio Chapter of the Texas Society of CPAs.  The firm is also a member of the Texas Association of CPAs.

Recognition: The firm was published in the San Antonio Business Journal.

1. 7.      Have you performed audits for our industry before?

Cook & Associates has performed audits for many sectors, including governmental, nonprofit, department of education, housing and urban development (HUD), and nonpublic.  We are well versed in the standards and regulations applicable to each.

1. 8.      What is your service approach and methodology?

Cook & Associates thoroughly understands the nature of the work to be performed.  We have developed programs and procedures designed specifically for these engagements.  Both the partners and the staff will have familiarity with the organization’s operating environment due to their ongoing involvement with other clients.

1. 9.      Will you provide constructive feedback?

A management letter is provided on every engagement.  This addresses internal control issues, potential areas of improvement, and an overall discussion on the health of your entity. 

10.  Why should we choose your firm?

You need a firm that has extensive audit knowledge, sufficient staffing, and an understanding of your entity.  At Cook & Associates we strive to provide top-notch service and present your entity with the reports and feedback it needs to maintain a healthy environment.

Posted in Uncategorized on { July 22nd, 2010 } ~ 15 Comments

Tagged with: auditor • masters in accounting • reports • standards

In 2001, the nation’s economy was rocked by the terrorist attacks of 9/11. The Government passed a far-reaching set of tax law changes called the Economic Growth Tax Relief Reconciliation Act (EGTRRA). This law provided the most sweeping range of tax cuts in our Nation’s history ($1.35 trillion over 10 years). EGTRRA has been credited with stimulating spending enough to keep us out of recession after 9/11 and it has been blamed for creating the nation’s budget deficit.

Why is this not ‘old news’? Here’s why:  EGTRRA included a provision stating that all changes would sunset after ten years. This means that effective January 1, 2011 all of the tax cuts established under EGTRRA will go away and we will return to the prevailing tax law as of 2001. What does this mean to the average American? Higher taxes for all, of course!

Here are some of the changes that we could all face if the EGTRRA provisions are allowed to expire:

Tax Brackets:  Currently, we pay taxes according to six tax brackets: 10%, 15%, 25%, 28%, 33%, and 35%.  Unless something changes, there will be five brackets: 15%, 28%, 31%, 36%, and 39.6%.  This would mean that everyone who pays taxes will see a tax increase of 3-5%.

Capital Gain Tax:  Under EGTRRA, the maximum tax rate on capital gains and dividends is 15%, and people in the 10% and 15% brackets are not taxed on capital gains at all. Without action, next year the highest tax will become 20% on capital gains. Dividends will be taxed as ordinary income, which could mean taxes as high as 39.6%. This would be a huge disincentive for anyone looking to invest in capital assets.

Marriage Penalty:  Before EGTRRA, couples routinely paid a “marriage penalty” to IRS. This existed because the brackets and deductions for married couples was not double what it would be for two single people, resulting in a higher tax liability for married couples than for two single people. EGTRRA corrected this problem, but it could be coming back in 2011.

Phase Outs:  Pre-EGTRRA, if you were lucky (unlucky?) enough to make a good living, you found yourself forfeiting itemized deductions and personal exemptions on your tax return as a “reward”. A married couple making $170,000 or more would see their itemized deductions phased out and anyone earning more than $252,000 would start to lose credit for personal exemptions. EGTRRA raised those limits slowly before eliminating them completely this year. Next year, they’ll be back in full force unless something is done to preserve the changes.

Child Provisions:  EGTRRA increased the Child Tax Credit from $500 to $1000, and made a portion of the credit refundable for families with more than one child. A refundable credit is a credit that you can take even if it exceeds the amount that you paid in for that year. Losing these provisions would mean significantly smaller tax breaks for working families.

Another credit that would be cut dramatically if EGTRRA expires is the Child Care credit. This credit is already woefully inadequate considering the cost of child care, so losing some of this one will especially hurt.

Estate Tax:  This is the one change that you have probably heard about. A taxpayer who dies and leaves significant assets behind could once expect to see a good portion of that value end up in the hands of the government. Pre-EGTRRA, estates valued at over $1 million could face a tax bill of up to 50%. EGTRRA slowly reduced the tax brackets for estates, and also raised the exemption level. This year, there is no estate tax. Next year, the rules revert back to their 2001 form. This provision has led to some (not so) tongue in cheek comments about the best estate plan being to die in 2010.

If the President and Congress allow these tax cuts to expire, we will all find ourselves paying more tax next year then we will this year. There has been discussion on Capitol Hill about extending many of these provisions, but there are also talks of letting them all expire and allow the government to close the deficit.  Alan Greenspan, former chair of the Federal Reserve Bank, has advised Congress to let all of the breaks expire. However, most pundits agree that at least some of the tax breaks will be saved.

Posted in Uncategorized on { July 20th, 2010 } ~ 7 Comments

Tagged with: 2011 • Capital Gain Tax • Child Provisions • Congress • EGTRRA • Estate Tax • Marriage Penalty • nation's economy • Phase Outs • president • Tax Brackets • tax cuts • tax increase