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®

Stephen Pedneault, CPA, CFE, CFF, FCPA, owner of Forensic Accounting Services, LLC in Glastonbury, CT will be the guest speaker.  Steve is author of three books on fraud and most recently featured on the cover of the fall issue of the Connecticut CPA Magazine.

Receive a complimentary signed copy of Steve's most recent book "Preventing and Detecting Employee Theft and Embezzlement:  A Practical Guide" with your attendance.

THIS IS ONE SEMINAR YOU WON'T WANT TO MISS!

Please RSVP
Lynn (860) 656-2465
LynnO@Borgidacpas.com

Light dinner & drinks served 5:30-6:00 

• 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®
 

Steve is the author of two other books, Fraud 101: Techniques and Strategies for Understanding Fraud and Anatomy of a Fraud Investigation.  Steve has over twenty years of experience in forensic accounting, employee fraud, and litigation support matters.  (Full Disclosure—the author is a client of our firm.)

Why does a small business owner need to be concerned with fraud?  According to the Association of Certified Fraud Examiners:

• The typical organization loses 5% of its gross revenue to fraud.  This would equate to about $2.9 Trillion (with a T) annually.
• Almost 25% of the frauds in this study had losses of at least $1 million.
• The median fraud went on for 18 months before being detected.
• Fraud perpetrators display warning signs such as living beyond their means and experiencing financial difficulties.

Employee fraud may be prevented.  Reading and implementing this book will benefit any small business owner in this mission.  The author does a great job of providing practical advice for all aspects of employee fraud—from hiring to payroll matters.

The case studies in each chapter are very helpful and the control programs and checklists are an invaluable tool any small business owner could put to use immediately.

ACTION ITEM:  Buy, read, and implement this book.  It will help you prevent employee fraud.

Thomas F. Scanlon, CPA, CFP®
 

I recently attended a presentation by one of the Social Security representatives.  If you get a chance to attend one of these sessions, I strongly encourage you to do so.  Here are some of my notes from this seminar.  Please be aware that I did not verify these facts.  Any errors would surely be in my note taking ability.

• The SSA was formed in 1935 to provide a foundation for retirement and other benefits to people in need.
• Social security benefits became taxable in 1983.  The exclusions for amounts under the threshold for taxability, $25,000 for a single person and $32,000 for a married couple, were never indexed to inflation.
• There are approximately 53 million people receiving social security benefits.
• SSA pays out about $56 billion dollars per month.
• SSA mails out your annual statement three months before your birthday.  This lists your historic earnings and projected benefits.
• The trustees of the SSA are required to issue a report annually regarding the projected status of the organization.  Per the 2009 report, assuming no changes, they expect to be able to pay full benefits until 2038.  They also expect to have funding for approximately 75% of the benefits after this time.   

Are you planning on collecting social security benefits soon?

If so, are you planning on taking your benefits early?

If you are already receiving benefits, how have your dealings been with the agency? 

ACTION ITEM:  If you need to deal with the SSA, go online first.  If you need to see someone in person, call and make an appointment.  Don't just show up at the office, especially on a Monday, or after a long holiday weekend.

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®
 

         "SMALL BUSINESS FRAUD"
      How to Best Protect Yourself
            From Your Employees

Presented by:  Stephen Pedneault, CPA/CFF, CFE

                 September 15, 2010 @ 5:30pm
                Borgida & Company, P.C., CPA's
         360 East Center Street, Manchester, CT

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