There's a Whale in the Fish Tank!

While no one can put a number to the JP Morgan trading problem yet, in the vocabulary of auditors, the results likely will be material.  Using the word material in this context means that it would influence the decisions of folks relying on the financial statements.   Coming in the midst of efforts to improve both regulatory and financial controls for banks, it points out how much work remains to be done on the topic of appropriate risk management and reporting.

 It strains credibility that the bank’s CEO started to realize they had a problem when he read about the “London Whale” on the front page of the Wall Street Journal.  The trade was executed as part of what was supposed to be the bank’s risk management strategy.  If there’s a whale in your fish tank it shouldn’t take a third party to make you notice. 

While JP Morgan messed up in many ways here, you have to give them credit for keeping the conversation focused on how risky and complex the trade was.  No one can dispute that the speed and complexity of global financial transactions make them difficult to manage.  However, this focus misses the point that the bank is supposed to have internal control infrastructure that doesn’t allow them to get into a place where they make trades that have indeterminate impact.  

Anyone who has worked in a big organization knows that risk culture doesn’t change quickly in either direction.  There must be senior people at the bank today who didn’t have to read the Wall Street Journal to find out there was a problem.  Apparently the Treasurer’s position at the bank wasn’t filled during the time much of the controversial trading was going on.  However, before he left the bank, the person in the role apparently was concerned.  This is someone who was reporting the bank’s CFO.  GMI, an independent corporate ratings agency gave JP Morgan Chase an “F” for corporate governance policies in advance of the loss being made public.  This grade is typically given to less than 5% of the companies they rate.  GMI also ranked JP Morgan’s financial statements lower than 92% of comparable firms in terms of accounting and governance risk. 

Group On auditors’ found the company had a material weakness in its internal controls.  The tools are available today to highlight when controls don’t appear to be in good condition.  An error of the scale that occurred at JP Morgan Chase should not happen in an effective internal control environment.  It is hard to believe the deterioration of these controls happened suddenly since the last audit report.

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….

1099 More Ways to Have Tax Troubles

While most of my conversations about taxes at this point have to do with getting information about the return itself, an article in the Wall Street Journal reminded me of a change to returns this year that has big implications.  As indicated in this blog before, the IRS is falling ever deeper in love with third party reporting, and they are getting more serious about making sure it gets done.  The Service did back off on some of the more heinous aspects of making business owners reconcile the reporting they are getting from credit card companies (otherwise known as form 1099K).  Still, the reporting will be used to audit small businesses that accept payments via credit and debit cards.  What also hasn’t gone away is that if you pay for services with a credit card, and then have to issue a 1099, you need to subtract out what you put on the credit card.  Your vendor is already getting that income reported from the merchant bank that processed the transaction. Giving the IRS opportunity to double count income isn’t the best way to build business relationships.

This brings me to the matter of the 1099 Miscellaneous.

 

If you file taxes using a Schedule C, Schedule E, Form 1065 or Form 1120S there’s a question you have to answer for the first time this year asking if you did business with anyone who should have received a form 1099.  That would be anyone who you paid $600 or more to provide a service and they’re not incorporated.  Answer this question incorrectly, and if you get audited, you will face penalties, even though the form 1099 that you send has nothing to do with your gross income.  So your tax liability could be correct to the penny and you could still be in trouble with the IRS.  (Just when you thought you understood how bad this tax season was going to be!)  And the bad news doesn’t stop there.  Let me quote from the article.

In 2010 Congress stiffened the penalties on taxpayers who neglect to provide 1099 forms. The higher penalties took effect in 2011, and now the penalty for nonfiling is $100 per violation—$200, in most cases, because two forms are due, one to the IRS and one to the provider. The penalty for "intentional failure to file" is $250.

It’s a hassle to file these forms, as I know from personal experience filling them out.  However, this is a way for the government to raise more revenue without raising taxes.  That’s another way of saying it is a sure recipe for increased government action. 

Caveat Emptor -- Buyer Beware

As I can tell you from up close exposure, the tax code doesn’t get simpler each year.  If you are seeking out help with this project it is important to be careful.  The IRS (which right now is not on my list of favorite things!) did put out a helpful list of warning signs that the person who is offering tax assistance may not be legit. 

• No Preparer Tax identification number
  • In addition to a CPA license, I need to pay for one of these too.  At this point, they’re pretty easy to get, so a fraudster who doesn’t even bother to get one is both a lawbreaker and lazy.
• Not giving you a copy of the tax return to sign
  • You are responsible for what goes on the return, not your preparer.  Make sure you are familiar with what is on it.  Telling the IRS I didn’t look at my return will not help you avoid penalties.
• Promises related to refunds
  • No one should prepare taxes based on a percentage of your refund or promise you a bigger refund.  The only reason you get a big refund is that you overpaid your taxes during the year.  What you want in terms of tax preparation help is someone who helps you plan so you don’t give the IRS your money interest free for a year. 
• Tells you it’s OK to put false information on your tax return
  • The IRS doesn’t fight fair to begin with.  Don’t give them ammunition to put into the gun.  Be honest, and work with someone who can help you pay less in tax.  Tax avoidance is legal and encouraged.  Tax evasion is expensive and can involve jail time.

  

From my reading on this topic I would add a note to be skeptical of deductions that seem too good to be true.  Deductions and credits are usually designed so the more they could help you, the less they actually do.  An example of this kind of “advice” is a deduction of all your expenses – including personal items – because you have a home based business.  First of all you can’t take personal expenses for a business. Also, deductions for businesses get limited based on how much you invested in the business in the first place.  This is a perfect illustration of how the complexity of the system makes it easier to victimize people. 

While I’m not a fan of having to pay taxes, it is something to take seriously.  When the IRS decides you’ve done something wrong (even if you haven’t) it’s an enormous hassle.  If you’re going to spend time and money on tax preparation, it’s worth an extra amount of due diligence to think about what credentials your helper really has.