IRS CP-2100As for 2013 regarding backup withholding have been sent out

Many businesses have recently received a letter from the IRS notifying them about incorrect payee information and that they may need to begin backup withholding. Here is an explanation of what these notices mean.

The bottom line is this is a warning and a reminder to request correct Social Security numbers or federal EIN’s from the individuals and businesses listed in the notice and to start back-up withholding if you cannot obtain the correct information.

According to IRS regulations, you are required to withhold 28% of any amounts paid to an independent contractor if they have not given you their federal ID number or Social Security number. That’s why you are supposed to obtain a completed W-9 before you make any payments to an independent contractor.

If you have received one of these notices what has happened is you filed 1099’s for 2013 with either incorrect or missing numbers. Accordingly, the IRS is informing you that if you make any FUTURE payments to these individuals and companies, you are required to withhold the 28% and IF YOU DON’T the IRS will assess a penalty on us. You do not have to do anything about the prior year payments.

Fortunately, there is no penalty for first-time offenders. So as long as you correct the situation you will not be penalized.

If you need a W-9 to send to any of your independent contractors, you can download a copy on my Website Resource page

Phone calls coming from the IRS

Yesterday I got a phone call from a client indicating they had just been called by the IRS and they were threatening to send the sheriff to arrest him unless he made immediate payment. He asked to talk to their supervisor and supervisor told him the same thing.

I told him it was a scam and not to worry about it. He tried to discuss it with me and I told him there was nothing to discuss, that it is a scam.

On my Webinar today, the IRS confirmed that threatening phone calls pretending to be from the IRS are the biggest scam going. Their recommendation is to immediately hang up the phone and not engage in a conversation with them. If they call back hang up again. They will then probably move on to someone else.

Now having said that, if you have been talking with the IRS for an extended period of time about a specific issue then, yes, the IRS may tried to call you. But, they should not threatening in the phone call and they will not tell you they will be calling the sheriff.

Here is a link to the IRS page if you need to report a scam http://www.treasury.gov/tigta/contact_report_scam.shtml

Why and how to file an extension

You don’t have all your information. You’re too busy to get it together. You don’t have the money to pay. I’ve heard these and many other reasons why people cannot file their tax returns on time. Whatever your reason, you need to file an extension.

The most important reason for this is that if you owe money, the penalty for not filing your tax return on time is 5% per month up to 25%. So if you wait two months, it will cost you an extra 10% of the amount you owe to the IRS.

This doesn’t mean it’s not going to cost you anything. You still have interest accruing on your unpaid balance and there is a late payment penalty of 1/2% per month. But these are small compared to the late filing penalty described in the previous paragraph.

And filing an extension is as simple as filling out a Form 4868 and mailing it into the IRS. Please note that you are supposed to make a reasonable estimate of any tax liability in order for the extension to be valid. That’s why, when clients tell me to file an extension for them, I let them know that I need their W-2 or basic information in order for the extension to be valid.

Revenue Procedure tangible property regulations

Blog | REUVEN I. RUBINSON, CPA, MBA

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The IRS has just issued a new Revenue Procedure so that businesses with less than $10,000,000 of annual gross receipts will not have to file a Form 3115 and can choose to apply the tangible property regulations prospectively starting on January 1, 2014. Here is a link to the new Revenue Procedure and please be advised that you will need to consult with your own tax advisor before applying any of the rules http://www.irs.gov/pub/irs-drop/rp-15-20.pdf

Reasons to incorporate in a state the officers do not live in

First, the CYA – I am not providing legal advice. What I am stating is my understanding as a CPA and former CFO of a publicly-traded company. Before you take any actions, you should consult with counsel.

Two weeks ago I posted a Blog stating that a CA corporation generally cannot save taxes by incorporating in say Nevada. So now the question is “why would you incorporate in another state?”

The first answer is that the “home” state of a corporation is where many legal issues need to be decided. So many corporations incorporate in a “business friendly” state rather than the state in which the officers live. They then register in the state of the officers as a foreign corporation doing business in that state.

A second reason is that if confidentiality is important to you, in some states it may be easier to maintain the confidentiality of the officers and shareholders.

Lastly, it may be possible to shift taxes by legitimate means. For example, let’s say you are corporation with its operations based in CA and have material sales to the east coast. If you set up as a Nevada corporation, have a real operating office in Nevada and sign contracts in Nevada, you may be able to not pay CA taxes on them because they do not go thru CA. And your trips to the Nevada office in Las Vegas may be a tax deduction for you 🙂 .

The bottom line is there are some good reasons to choose certain states to incorporate in. Please consult with accounting and counsel in order to make sure you can legally accomplish your goals before do so.

Can you avoid CA taxes by incorporating in Nevada?

I have recently had a couple of conversations with people about incorporating in Nevada and I wanted to share them. Scammers are making money and putting companies at risk.

First, the CYA – I am not providing legal advice. What I am stating is my understanding as a CPA and former CFO of a publicly-traded company. Before you take any actions, you should consult with counsel.

At a meeting two weeks ago, someone stated that they had just incorporated in Nevada and were going to save CA taxes, IE the $800 minimum tax. I asked them where they were doing business and they told me San Diego. I asked them if they were aware that foreign corporations (corporations incorporated in another state) that are doing business in CA were required to register in CA and pay CA taxes as if they were incorporated in CA. They said no. So I had to tell them that they needed to register in CA and the money they had spent to incorporate in Nevada was probably thrown away.

Please do not shoot the messenger 🙂