Fraud and the IRS

While we’re all still smarting from paying taxes, it’s tough to hear that the IRS is having more fraud problems.  The Treasury Inspector General is complaining that the IRS still hasn’t addressed enforcement issues  in the whistle blower program that were discovered in 2009.  The issues are not small, ranging from poor controls in safeguarding data, poor processing and lack of timeliness in addressing tax fraud. One example is that IRS employees aren’t required to note the date of a claim.  Needless to say that’s pretty critical in terms of tax payments.  Tax payers who don’t file timely have to pay stiff penalties.  The IRS also recently won in Tax Court on the issue of being able to take any refunds due to offset taxes owed from prior periods.   Why not apply some of their own standards to themselves?

On a happier note, in light of concerns about government employees not behaving in exemplary fashion when they’re out of the office, the IRS has reportedly nixed out of town training conferences.  While more training is clearly needed, it sounds like it is simple enough to be done inside the Beltway. 

The other fraud problem that refuses to go away, is the ongoing issue of taxpayer identity theft.  Someone who has stolen your social security number files a tax return in your name that gives them a refund. The IRS only finds out that it wasn’t really you is when you file the legitimate tax return.  Needless to say untangling the ensuing mess is horrible.   The service is reportedly putting more resources against this problem, but they are not winning the battle.  A key fact to remember is that the IRS only uses snail mail to send notices.  You will never hear about a legitimate audit, refund or data request form the IRS via e-mail.  The service also doesn’t use social media sites.

Growth Springs

In an effort to channel my spring fever into something productive I’m continuing to look at new businesses.  In order to grow  (or sprout ) businesses typically need funding, and how that happens varies by the type of business.  For purposes of this post we’ll look at ventures that plan to grow into something big, and companies that just plan to grow.

For the ‘something big’ crowd there is the option of being funded by an angel investor, another name for someone who has money to invest and typically some experience being part of a start up.  Getting angel funding  isn’t a walk in the park.  You need to have done your homework and be able to quickly articulate why your business “has legs”. This is also true if you get help from a business incubator.  This description fits a number of organizations that provide both business infrastructure support as well as funding.   Going for the "soon-to-be-a-big-business" model also puts you into the space for crowd funding.  The new JOBS Act was designed to juice this concept and stop the crash between crowd investing and existing securities legislation.  We'll see if it actually works. At this point, all that is certain about crowd funding is that it allows a group of people you aren’t familiar with to invest in your business without knowing much about it or you. 

The JOBS Act was billed as improving funding options for small businesses.  This is particularly important, because small business is considered a job growth engine.  I agree with the folks at MultiFunding that while it’s not a bad thing, the JOBS Act is unlikely to be a Main Street job creator.  That’s because these are the businesses  that will grow, but are not the next big thing.  This second category  is a company that plans to grow in an established line of business.  They have a higher success rate than the ‘something big’ crowd, and they’re more likely to quickly provide stable employment.  For those types of businesses the most likely sources of capital tend to be the Small Business Administration, bootstrapping and leveraging your personal assets (credit cards, home equity loans, etc.).   Not as exciting as Angels or crowds investing in your business, but still very valuable. 

From an accountant’s perspective I’ll tell you up front what your banker wants (and if you’re using your personal credit then that will be you) is not only a viable business, but good record keeping that shows you are keeping track of where the money comes from and where it goes.  It sounds simple, but many potentially successful new ventures fail based on not paying attention to these financial fundamentals.  Perhaps more importantly in these tough times, being on top of where the money is in your business can keep it going through trouble spots. 

Growing with Small Business

While the economy in general is doing so-so, there are industries that are sweet spots for growth right now.  Many of these are perfect start up opportunities for a small business looking to expand or a new entrepreneur getting started.   That said, there are also business areas in free fall now that you’d do best to avoid, and despite the global village created by the Internet, location apparently matters now too.

Roughly half of all new business start ups fail within 5 years.  On the “don’t-go-there” list are the following industries:

1.  Men’s suits, coats and trousers top the list.  As best I can tell the only folks who still have to wear these things work in investment banking or law firms.  Not big areas for growth right now.
2. Photofinishing or a one hour photo shop.  Revenues in the industry have dropped 70% over the past ten years, and there’s no sign of a reversal or bottom in sight.
3. Same is true for video, DVD and game rentals.  Even with Blockbuster gone, the market continues to shrink.
4. This is the only one of the list to surprise me – small appliance repair is a losing proposition now.  It’s currently cheaper to replace small appliances than to fix them.  In a case where that isn’t true, the manufacturer now often insists that they do the repair.

On the flip side consider elder care and wellness as areas of opportunity.  Demographics of an aging population that on one side needs care and on the other side is trying to stay healthy drive growth here.  Other big areas growing and poised for more growth are warehousing and transportation logistics.  As more retail sales shift online, businesses in these areas are capturing what is being lost from bricks and mortar.

According to the folks who publish the Business Journals, where you have a business can be a success indicator.  Austin wins the top spot on this index for all the US.  It is worth noting though that Pittsburgh takes the prize for the northeast, and ranks 7th nationwide for best places to start a business. 

Tax Log 4/15/12

Since my pre-Easter post was a lecture on timely filing, I thought I’d use April 15^th to talk about why filing an extension is actually a good thing. Let me say that an extension doesn’t in any way get you off the hook for paying your taxes.  If you don’t pay Uncle Sam what you owe on April 17^th the IRS imposes a penalty of one-half percent each month on the amount of tax owed.  If you do an extension you must file your taxes by October 15^th.  If you miss that date the IRS charges you a penalty of 5% per month, up to 25%.  Neither approach is a good way to help lower the federal deficit. 

Here are my reasons not to file your taxes this week.

If you are missing key information – don’t guess.  Again, you want to make sure you’ve paid what you owe – but not having the K-1 or other key documents might mean you have to file an amended return.  That’s not the end of the world, but you are giving the IRS two returns to work on in terms of looking for issues.  That can’t help reduce your audit odds.

Sometimes you really have other things going on that are more important.  If there’s been an unexpected illness or death in the family, just file the extension. 

If you’re self employed and have a Keogh plan or SEP set up, you can use the time during the extension period to find the cash to make a deductible contribution that applies to tax year 2011.  If you had a good year income wise, but you’re short on cash now, this is a winning strategy.

If you’re self employed and have a Keogh plan or SEP set up, you can use the time during the extension period to find the cash to make a deductible contribution that applies to tax year 2011.  If you had a good year income wise, but you’re short on cash now, this is a winning strategy.

For people with Roth conversion remorse, you can use the extra time to reconvert your Roth back to a traditional IRA.  (No contribution opportunity here – this is just a “do over” from your decision to switch the type of plan you’re in.)   It’s worth noting that one of the reasons to “re-characterize” is if the value of your account declined since you converted.  You pay taxes on the value in the account at the time of conversion, not at the time you file your taxes 

Here’s one I hadn’t hear before.  There’s a school of thought that says you reduce your chance of being audited by filing later.  The logic is that the IRS samples a batch of returns that are timely filed, so if you haven’t filed, you can’t get caught in that net.  I think it’s a reach – but thought I’d pass it on. 

It's Tax Time

So it’s the time of year to talk seriously about tax deadlines.  Your IRA contribution for 2011 can be made as late as April 17^th of this year.  If you’re finding out bad news about your tax bill, this is a quick fix that you can still make.  If you contribute to a Coverdell education savings account you have until April 17^th to do that. 

Your income taxes are due this year on April 17^th.  Even though April 16^th falls on a Monday, Washington D.C. celebrates Emancipation Day on that date, so they moved the tax deadline one more day.  Presumably there’s a sense of irony associated with mixing emancipation and income taxes that enabled this decision. 

While you can file for an extension if you’re not ready to file a tax return, you must PAY all taxes owed for 2011 by April 17^th.  This is a hard and fast rule.  You file for an extension using IRS form 4868.  That can be e-filed as well.  You can pay by check, or charge it through an IRS approved credit card processer.  There are fees for using a credit or debit card, so you’re better off with a check if you can do that.  Any option is cheaper than the penalties and interest for not paying.  If you can’t afford to pay the whole thing at once the IRS does allow you to apply for an installment plan using Form 9465.  Again, this is expensive, but cheaper than the alternative of not paying anything up front.  It’s also important to remember that failing to file creates a whole other set of penalties and interest.  My advice is that you file and pay what you can.

If you get an extension you have until October 15^th to get the final tax return done.  If you have a Keogh plan in place and you file an extension you can wait until October 15^th to make that contribution.  Your Keogh plan must have been up and running by January 1^st of 2012 for this to work.  If you don’t meet that criterion, you can set up a SEP-IRA. 

Let me emphasize one more time how important it is to timely file and pay.  If you make mistakes it’s much easier to get them fixed if you can point out to the IRS that you tried to do the right thing.

 Back to doing tax returns….