Nonprofit organizations that don’t meet their filing requirements for three consecutive years automatically lose their tax-exempt status.

Losing your tax-exempt status is likely something most organizations would not want.  The re-application process to reinstate your tax-exempt status can be a “nightmare” and costs money and takes time.  Additionally, any income received after losing their tax-exempt status would be taxable to the organization.

The IRS recently issued a list of organizations that are not in compliance with their filing requirements.  These organizations have not filed in three years and are at risk of losing their tax-exempt status.

The IRS is granting one-time relief for organizations with due dates after May 17, 2010 and before October 15, 2010.

Many nonprofit organizations appear to be confused about their filing requirements.  Under the old rules, organizations that normally generated less than $25,000 in revenue were not required to file anything.  The IRS changed this rule several years ago.  All nonprofit groups are now required to file some document at least annually.  The smaller nonprofit organizations generating $25,000 or less in revenue can file the E-Postcard, Form 990-N.

There is no paper form with the Form 990-N.  This is sent electronically.  There are only eight questions to answer. 

• Employer Identification Number (EIN)
• Tax Year
• Name and address of a principal officer
• Confirmation that the organizations gross receipts are less than $25,000
• Any other names the organization uses
• Website address, if applicable
• Local unions charted name and mailing address, if applicable
• A statement that the organization is terminating, if applicable

There are over 3,900 on the list of nonprofit organizations from Connecticut.

ACTION ITEM:  If your nonprofit organization is on the list, you should file soon.  Losing your tax-exempt status is likely something you don’t want to happen.

Thomas Scanlon, CPA, CFP®

• People move quite a bit.  Then you know what happens.  The tax returns get put in a box that…well, you just can't seem to find.
• People pass away.  A parent passes away and one of their children needs to pick up the pieces and complete the estate and probate filings.  The individual tax returns, that hopefully were filed, are nowhere to be found.

What should you do?

The easiest thing to do is complete IRS Form 4506—Request for Copy of Tax Return.  Along with this you will need to send in a check for $57 for each year requested.  The good news is if there is no copy of the return on file, the IRS will send you the check back.  The bad news is that there may have been a non-filing of returns for several years.  This can happen with elderly taxpayers who forget to file.  We have even had situations where the taxpayer filed the federal return but not the state income tax return.  State income tax returns require a different request form.

The issue with Form 4506, in addition to the cost, is the delay in getting a response.  According to the instructions to the form, it indicates it will take at least 60 days.  Our experience is that it takes much longer.

What if you can't wait that long?

Complete IRS Form 4506-T—Request for Transcript of Tax Return.  There are two benefits to using this form.  First, there is no cost associated with this form.  Second, the response can be as little as ten business days.

What's the downside to just requesting the transcript?

The transcript is not a tax return.  It's just a summary of the various items of income and some third party reporting, i.e. mortgages, that have been reported.  These forms, however, can be somewhat challenging to read.

ACTION ITEM:  People that need a copy of an old tax return that are not under a big time constraint should complete IRS Form 4506.  If you need information quickly, complete IRS Form 4506-T and get just the transcript.

Thomas F. Scanlon, CPA, CFP®
 

How do you calculate this?  For taxpayers with adjusted gross income ("AGI") under $150,000, they need to have paid in 100% of the prior year tax.  For example, if someone's AGI was under $150,000 and their tax was $20,000, they would need to have paid in $5,000 per quarter or have this withheld.  For someone with AGI over $150,000, they need to have paid in 110% of the prior year tax.

Here are four reasons to review this now:

1. The Required Minimum Distribution ("RMD") is back.  Taxpayers over age 70½ with IRA's or qualified retirement plan assets will have to take their RMD again this year.  Last year there was no requirement to do this.  This will increase taxpayer’s taxable income.
2. All taxpayers need to be aware of the Alternative Minimum Tax ("AMT").  This is a nasty back door tax that may affect many more taxpayers this year.  Congress created a “patch” the past few years to keep a lot of taxpayers out of paying AMT.  If the “patch” is not approved again this year, many more taxpayers will be in for an unpleasant surprise and a tax increase. The AMT is not really titled very well—there is nothing “alternative” about it.  Taxpayers don't get to choose if they pay this or not.  Taxpayers need to calculate their taxes two ways.  First, calculate the tax under the regular method, second under the AMT method.  Pay the higher of the two taxes.  The AMT starts with regular income and then makes adjustments to it.  The biggest add back is typically for state, local, and property taxes.
3. Taxpayers that started collecting social security benefits in 2010 will also have higher taxable income.
4. Tax rates may rise in 2011.  By reviewing your withholding and estimated tax payments now, you will be in a better position to handle potential changes that may be made in 2011.

ACTION ITEM:  Review your withholding and estimated tax payments to assure you will not have to pay a penalty for underpayment of taxes.

Thomas F. Scanlon, CPA, CFP®

For the self-employed in Connecticut, every week is "Shark Week".  A self-employed person is someone who runs their business as one of the following entities:

• Sole Proprietor
• General partnership with the spouse as the only other partner
• Single Member Limited Liability Corporation ("LLC")
• An LLC where the spouse is the only other member

For this discussion, we are not including business owners that have either a corporation or have elected Subchapter S filing status.

The self-employed in Connecticut have to deal with a much more difficult shark than the ones in the ocean.  They have to deal with land sharks, also known as the tax collectors that want a piece of you. 

For example, a self-employed person lives in Connecticut with his wife and two children.  He makes $100,000 a year.  They do not itemize their deductions and to keep the example straight-forward, we are ignoring any possible tax credits they may be entitled to.  Here is the income tax they will pay based on the 2009 tax tables:

• Federal Income Tax (The Great White) ― $9,204
• Social Security Tax (The Hammer Head) ― 15.3% social security tax on their net income of $100,000 would be $14,130 (the calculation is slightly different).  They are allowed to deduct one-half of this tax in calculating their federal income tax.
• State of Connecticut Income Tax (Jaws) ― $3,822

Let's add these up…federal income tax of $9,204, social security tax of $14,130, and Connecticut income tax of $3,822.  Total taxes are $27,156.  That's a big shark bite!

What can a self-employed business owner do to minimize this?

• Fund your IRA – this is a great tax-deferral tool to provide for your retirement.
• Look at a 401(k) plan or SEP – these qualified retirement plans may allow you to contribute more to your retirement.
• Hire your children under age 18 – if you are eligible, this is a great way to hire your children and save taxes.

   

ACTION ITEM:  The self-employed business owner needs to be aware of the tax planning techniques available to reduce their tax bite.

Thomas F. Scanlon, CPA, CFP®
 

In a business audit, someone is authorized by the business to represent their interest.  This person will likely be interviewed by the IRS.  The business may request a change of venue from their location to have the audit done.  You would typically select the CPA's office for the audit to take place. The IRS does not have to grant this request, but it usually does.  If granted, they still reserve the right to tour the building where the business is operated.

One possible exception to the rule of not representing yourself is a so-called correspondence audit.  This is where the IRS is auditing a return through the mail.  Almost all of the communication is done in writing.  In this type of audit, depending on the facts and circumstances, a taxpayer may elect to represent themselves if the issue is fairly straight forward.

In over 25 years of practicing, there were only two specific exceptions to the rule of not having the client attend the audit. 

1. This case involved a professor that traveled to Russia to teach some summer classes.  I insisted that he come along to the audit so his testimony could support the deductions he had taken.  It worked.  There was no change in his return.
2. The second case was more difficult.  We had not prepared the taxpayer’s returns.  He came to us to just represent him in the audit.  It is always challenging to represent a taxpayer when someone else has prepared the returns.  In this case it was even worse.  The tax preparer was ultimately found to have had a history of preparing fraudulent tax returns.  There were some glaring errors in this return.  Here, we were fortunate to get the balance of the tax reduced, as some of the deductions were allowable.  In this case, I also insisted the taxpayer go to the audit.  This was to show that the taxpayer was honest and had, unfortunately, gotten involved with the wrong preparer.  

How can you have someone else represent you in an audit?  They will need to complete Form 2848, Power of Attorney.

ACTION ITEM:  If you receive a notice from the IRS regarding an audit, contact your CPA.  It's likely you will want to engage them to represent you in the audit.

Thomas F. Scanlon, CPA, CFP®

Payroll Tax Exemption—provides employers with an exemption from the employer's 6.2 percent share of social security tax on wages paid to qualifying employees.  This exemption is effective for wages paid from March 19, 2010 through December 31, 2010.  Employers claim the payroll tax benefit on federal Form 941—Employers Quarterly Tax Return.

General Business Tax Credit—for each qualified employee retained for at least 52 consecutive weeks, businesses will be eligible for the new hire retention credit for up to $1,000 per worker.  Employers claim the credit on their 2011 income tax returns.

The new law requires that the employer get a statement (IRS Form W-11) from each new hire certifying that he or she was unemployed or employed for less than a total of 40 hours during the 60-day period ending on the date employment begins.

Businesses, agricultural employers, tax-exempt organizations and public colleges and universities all qualify to claim the payroll tax benefit.  Household employers cannot claim this new tax benefit.

Informational Article IR-2010-33 is available on the IRS website www.irs.gov

STATE OF CONNECTICUT TAX BENEFITS
In addition to the federal tax credits, the State of Connecticut has enacted two new tax credit incentives.

Small Business Jobs Creation Tax Credit—a qualified small business (50 or fewer employees) that hires a new employee who resides in Connecticut may be allowed a credit of $200 per month for each employee hired.  “New employee” means a person hired by the qualified small business after January 1, 2010 and prior to January 1, 2013 to fill a new full-time job.  A new employee does not include a person who was employed in Connecticut by a related person to the qualified small business during the prior 12 months. The credit is not allowed for any new employee who is an owner, member, or partner in the business or who is not employed at the close of the income year of the qualified small business.

Vocational Rehabilitation Job Creation Credit—an employer who hires a new qualifying employee who resides in Connecticut and requires the employee to work at least 20 hours or more per week for not less than 48 weeks in a calendar year may be allowed a tax credit of $200 per month for each new qualifying employee hired. The credit many not be claimed for any new qualifying employee who is an owner, member, or partner in the employer’s business or who is not employed at the close of the employer’s income year.

Informational Publication 95(2.1), Guide to Connecticut Corporation Business Tax Credits, is available on the DRS Web site www.ct.gov/drs

• Starting a business that will have employees
• Having a corporation
• Having a qualified retirement plan with $100,000 or more of plan assets
• Opening an estate
• Having a trust that is required to file a tax return

If you have your own unincorporated business and don’t have any employees, you are not required to have a federal tax identification number.  You can use your social security number. 

Even if you are not required to have a federal tax identification number, you may choose to get one.  Your bank may require it as a condition of opening a business bank account.  Also, when you render services to a customer, the party paying for the service is required to issue a Form 1099.  To properly complete Form 1099, the customer will request information such as your name, address and social security number.  If you have a tax identification number, you won’t be required to give out your social security number. 

How do you get a Federal Tax Identification number?   Complete IRS Form SS-4 (Application for Federal Tax Identification Number).  This number may be obtained by regular (snail) mail, fax, or online.

ACTION ITEM:  Understand when you are required to have a federal tax identification number and when it might be a good idea.

Thomas F. Scanlon, CPA, CFP®

Form 990 is due on the 15th day of the fifth month following the year-end.  For organizations with a December year-end, the due date would be May 15.  An extension of time to file the return can be applied for by using Form 8868.  A timely and accurate request for an extension provides an automatic three month extension of time to file.

Form 990―Filed by all organizations not eligible to file Form 990-EZ or Form 990-N

Form 990-EZ―For 2009, use this form if the gross receipts are less than $500,000 and the total assets are less than $1,250,000.  For 2010, use this form if the gross receipts are less than $200,000 and the total assets are less than $500,000.

Form 990-N―This is required by all organizations with less than or equal to $25,000 of annual gross receipts.  This is the so-called E-Postcard.

Due to lowering the thresholds, more organizations will be required to file Form 990 instead of Form 990-EZ.  The new Form 990 now contains 16 schedules.  This expanded form requires more narrative information regarding program service accomplishments, governance and management disclosure, and employees, director and contractor compensation.

There are extensive penalties for failure to file:

• $20 per day, not to exceed the smaller of $10,000 or 5% of the gross receipts of the organization
• Organizations with $1 million of gross receipts or more are subject to a $100 per day penalty, not to exceed $50,000
• Penalties may be assessed against “responsible person(s)” for $10 per day, not to exceed $5,000
• Organizations that fail to file their required form for three consecutive years will automatically lose their tax-exempt status

Penalties may also be assessed if the organization files an incomplete return.

ACTION ITEM:  All nonprofit organizations should be familiar with Form 990 so that they can file the appropriate form.

Thomas F. Scanlon, CPA, CFP®
 

An extension of time to file the return may be granted.  To request an extension, file Form 5558–Application for Extension of Time to File Certain Employee Returns.  File this request before the due date of the return.  As with all correspondence with the tax authorities, we suggest you send this Certified Mail/Return Receipt Requested.  This will provide you with proof of mailing.  An extension can be granted for an additional 2½ months.  For a December year-end with a valid extension, the return would be due on October 15.

The version of the form that would be required is as follows:

Form 5500―Employers with more than 100 participants.  This requires Schedule H–Financial Information to be completed.  The plan also requires to be audited by an independent Certified Public Accountant.

Form 5500 SF (short form)―Employers with less than 100 participants.

Form 5500 EZ―One participant plan.

Failure to file these returns can be very expensive. The main penalties are as follows: 

• Up to $1,100 per day for each day a plan administrator fails to file a complete report.
• $25 per day penalty (up to $15,000) for not filing returns of certain plans of deferred compensation or trusts and annuities by the due date.
• $1,000 for failure to file actuarial statement Schedule MB or Schedule SB. 

ACTION ITEM:  File your Form 5500 on time to be in compliance.  If you can't complete by the due date, request an extension of time to file.

Thomas F Scanlon, CPA, CFP®
 

Taxpayers can take distributions from their IRA's after they turn 59½ without incurring the 10% premature distribution penalty.  There are some limited exceptions to taking distributions from a qualified plan before age 59½ as follows:

• Paid as a result of death or disability
• Being age 55 or older and leaving your job
• Distributions paid as a result of a divorce decree or separation agreement
• Taking a series of "substantial economic payments" over your lifetime
• For medical expenses if they exceed 7.5% of adjusted gross income 

In addition to the exceptions listed above, these are the exceptions for distributions from an IRA before age 59½:

• New home buyer, but limited to $10,000
• College expenses for taxpayers and their dependents
• People who are unemployed and pay for their own health insurance

Taxpayers, however, must begin to take distributions from their IRA's before April 1 following the year they turn 70½.  However, be cautious.  If you wait until April 1 of the following year you turn 70½, you will be required to take two distributions that year.  This may cause you to be in a higher tax bracket.

To calculate the RMD, consult IRS Publication 590, Appendix C.  Most people will use the "Uniform Life Table."   The "Joint Life Expectancy Table" is used by a married couple where the spouse is at least 10 years younger than the spouse taking the RMD.  If this sounds like too much work, don't worry.  IRA custodians have the responsibility to notify their customers of their RMD amount.

Please don't forget to take your RMD.  If you fail to take this distribution, there is this little IRS penalty.  The penalty is 50% of the amount that should have been distributed.  That's not a misprint—the penalty is 50% of the amount that should have been distributed. 

ACTION ITEM:  Taxpayers that are required to take an RMD should do so before the end of the year to avoid this outrageous penalty.

Thomas F. Scanlon, CPA, CFP®