Paris Accounting Corp

Our different approach helps select clients make more money, improve their quality of life and increase the market value of their business.

Phone: 718-281-0200
Email: [email protected]
PO Box 604993, Bayside, NY 11360
Profitability Consultant and CPA

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2016’s top IRS scams

The Journal of Accountancy today posted the top 12 tax scams.

I am writing about them because we are receiving numerous phone calls from our clients who have told us the IRS called threatening about past due balances etc.

IRS scamThe number one scam the article says is identity theft which we discussed previously. Someone steals your social security number with the intent of filing a tax return claiming a huge refund. The IRS says this is a major problem for them.

Most popular in our office are phone scams. Criminals call impersonating the IRS and threaten arrest, deportation, levies or license revocation.

Some scammers have fake titles and badge numbers to appear legitimate. Not included in the article, I have been told that there are phone caller devices that can cause IRS or Tax Dept [or anything the caller wants] to appear on your phone. Last week we got a call and my own name was on my phone from a scammer. So certainly they can say IRS, NYS, Tax office etc. Keep in mind the IRS would always write first several times before calling, and in my opinion, are more likely to visit you in person rather than call.

Phishing is unsolicited emails seeking financial or personal information from taxpayers. This also includes computer malware and ransom emails that literally take hold of your computer or server. It renames files and you are locked out of your own machine until you pay. We actually have insurance for this.

Preparer fraud involves dishonest preparer’s creating fictitious deductions to increase your refund. I have heard of preparer’s stealing the taxpayer’s info to the false returns paid to them. One time in 2003 a client came to me because his tax preparer was indicted on tax fraud and he wanted to amend the past 2 years of returns. We did this and had a very interesting interview down at the court houses in Manhattan with taxpayer after correcting his returns. We were in a NYS office where criminal investigations ripped the dishonest preparer and each dishonest participant a new orifice.

Hiding money or income offshore – if any really wealthy people still aren’t aware the IRS has had this as a major focus for years. Not only have they changed the reporting requirements this year and made them part of your tax return, but the penalty for failing to report could exceed the monies in foreign countries.

Falsely padding deductions is a crime. Actually it may even be a felony. Everyone signing a tax return signs under penalties of perjury that the return is accurate and complete to the best of their knowledge. Don’t perjure yourself. The IRS and NYS [and other states] consider this form of stealing. And the taxing authorities like to make examples publicly to discourage others.

The remaining items this year on the list include:

  • Excessive claims for business credits – which pertains to all of us but big business which seem to get these huge credits legally through political means Falsifying income to claim tax credits – referring to earned income credit. The refundable credit for poor people living near or below the poverty line.
  • Abusive tax shelters – any scheme that is set up as business but in reality is there only for tax purposes falls into this category. Beware of limited partnerships that don’t own anything. Don’t open a captive insurance company unless you have real insurance needs to support it. What out for international partnerships, foreign financial accounts and offshore credit cards.
  • Frivolous tax arguments – this particular scam is done by unscrupulous promoters of false tax advice.

These reasons should be enough motivation for taxpayers to find a licensed reputable preparer.

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When do you pay your accountant?

It was suggested that I write a little bit about when to pay for accounting services.

In our office there are generally two types of clients:  Monthly business clients and year-end clients.  Most of our active clients run businesses and pay us monthly for work based on the work we complete for them regularly.  Some of our larger clients are on monthly retainers.  Some businesses are so small that they really only send us information once a year around tax season.

An example of small client would be an individual who owns a 2 family rental property.  This type of client can send us 12 bank statements in January because each monthly statement for the prior year may reflect only a few deposits and a few disbursements.

So when are fees due?

When to pay your accountant

Accounting fees for taxes are due upon receipt in our office.  Which means we expect our 1040 clients and once a year business clients to pay when tax return services are rendered.

There are some clients whose tax work even though once a year, exceeds $2,000.  For new clients we usually ask for a deposit in advance.  This is because we need collateral from experiencing some clients withdrawing work after we accomplish some, most or all of it.

When our firm first started in November of 1989 we pretty much took any client that came our way.  Starting a new business does not mean you have to take EVERY potential client.  And this is an important lesson that most people don’t learn until years into a business.  These days, we are fairly picky about new clients and certainly need to get to know the new client a bit before formally accepting them.  You can’t please everyone; you need to know that in business.  You want to steer clear of known problem clients or potential clients that seem to exhibit indicators that they aren’t easy to work with.

In never ceases to amaze me the number of new clients that expect or request free services or discounted services based on their future growth and sales.  Our answer is NO.

  • Your accountant is your personal and business advisor.  We are trained in budgets, financial statements, taxes and general business knowledge.
  • Accountants are not financial institutions and certainly should not lend money to their clients.  Lending money to clients impedes the rational thinking as an independent third party.  Which is why accountants are not allowed to do a succeeding audits for a business who hasn’t paid the prior year audit fee.

I’m in business 25+ years.  At this point I have lost enough fees for allowing longer payment periods and have been disappointed by clients who promise to pay and then go out of business.  At this point in time, I can tell a good business model from a losing business model and protect my firm from customers who think one day the losing model will produce results.

Your accountant is perhaps the best guide to protecting your assets, growing your business and acting as a springboard for questions and decisions you need to make.  You want your accountant to be eager to take your calls, answer your questions and dispense winning advice.  Treat your accountant with dignity and respect, including timely payments, and you will have a trusted advisor for life.

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How to set up a company’s chart of accounts

A chart of accounts is a listing of financial statement categories in a numerical sequence.

Most clients are familiar with various sales and expense accounts.  The purpose of the chart of accounts is to total your financial information into a standard accounting format.  This enables skilled readers of financial statements to quickly see the highlights of summarized transactions in your company.

Having up to date precise records allows management to track a business as it grows and goes through sales cycles.  It is critical for businesses to measure their results against anticipated results [a budget] so that they can stay on track to attain the company’s goals.

Small business owner pain, chart of accountsI am often amazed at the number of small businesses which operate with no goals, no budget and no plan of action.  It is these very same businesses that wonder at yearend where all the money went and why profits are so low.  Yet every fortune 500 company and I suspect every company in the stock market runs a budget and constantly monitors and adjusts their forecasts.  Why?  Because knowing where you are headed allows the company to make the necessary corrections and adjustments to meet the company sales and profit goals.

All of this starts with a good chart of accounts.  Just as the name sounds, we are charting our growth and progress as a company, by categorizing each transaction as a sale, a particular expense, an asset purchase, acquiring or relinquishing debt etc.

Surprisingly, QuickBooks, the most famous small business accounting software does a rather lousy job at assigning businesses a chart of accounts.  I have been working with QuickBooks software for years and it appears to me as though the creator of the standard chart of accounts was either a programmer or a non-seasoned accountant.

A good chart starts with the assigning account numbers by financial statement categories.  Here is a basic chart that will work for most firms:

Assets – 10000
Liabilities – 20000
Equity – 30000
Sales – 40000
Cost of Sales – 50000
Selling expenses – 6000
Shipping and warehousing expenses – 70000
General and Administrative expenses – 80000
Non business expenses and officer withdrawals – 90000

This general list can be modified for smaller companies.  Many of our clients have most all their expenses in the 60000s.  We use 70000 for insurance and taxes.  We use 80000 for payroll.

So as an example, we assign numbers to each expense in a way that will automatically alphabetize the expenses.  This makes it easier for reader to find an expense they might be looking for.

If advertising expense is 60000, and auto expense is 61000 you can see already that advertising will appear in a financial statement followed by auto expense.  I have the expenses starting with the letter ‘A’ come first.  Telephone expense would be much further down the list and Wage expense would be at the end of the financial statement list of expenses [preceded by Utility expense].

Many clients make the error of assigning an expense to more than 1 account in the chart of accounts.  This only leads to confusion as one has to hunt all over and then add several categories labeled similarly to get the total for an expense category.  Also few clients truly understand a balance sheet and should not attempt to create the balance sheet chart without help.  Fixed Assets like machinery, buildings, improvements and vehicles belong to the same group of fixed assets, but each must have its own unique number.  This way if you dispose of an asset, we can clearly trace its cost and determine the gain or sale on disposition.

The same holds true for liabilities.  There are long term and short term liabilities.  I like to use 21,000 – 24,999 for short term liabilities and 25,000-29,999 for long term liabilities.  Typically, 20000 is for accounts payable since regular business bills usually are listed first.

Fewer clients understand equity.  Equity is what your company is worth.  The difference between assets and liabilities.  There are several equity categories.  For this short lesson for small businesses we will stick with Capital Stock we use account# 32500, additional paid in capital we use #35000 and retained earnings which we use #39000.  Partnerships don’t have stock and don’t use these categories but also should have separate capital accounts for each partner.

QuickBooks in particular does a lousy job in equity.  First they have an account called ‘opening balance equity’ which is in fact a meaningless account to all cpa’s.  They also list other equity accounts after retained earnings which no one I know would list in that order in a published financial statement.  Fortunately, QuickBooks allows you to keep your account names and change the numeric equivalent to facilitate proper order of accounts to display.

In order to set up a chart of accounts you need a working knowledge of typical accounts on your balance sheet and income statement.  You chart of accounts is permanent company information and once established are fairly set in stone.

Examining prior year financial statements to the current period allows management to see trends and help predict some future outcomes and growth for a business.  Which is why you want to start with a nicely set up chart of accounts for your business.  A good chart of accounts with up to date records allows you to track your business progress and react to changes in the market efficiently.

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It’s a new year and it’s tax time

In this blog I’d like to cover what tax documents to take to your accountant and also a little update about fraud identity.

IDtheftIdentity theft is a growing crime with no limit in sight in the future.  There are so many ways to illegally obtain someone’s personal information.  There is dumpster diving, pick pocketing wallets and purses, unauthorized release of personal data from computer hackers and phone solicitations that obtain data illegally.

We can’t protect ourselves from data breaches when large companies like Athene in California or even the US government offices are breached by computer hackers.  We can at least be aware of some important basics.

The majority of IRS refund and identity hacks have happened through threatening phone calls.  So far in 2016, our small accounting firm received 3 clients calling about a threatening IRS over the phone.  So let’s be clear, the IRS doesn’t threaten.  They also never call before sending notices in the mail.  So if your first contact with an outstanding IRS tax bill is from the phone, chances are it’s an attempt to fraudulently obtain identity information.  The IRS doesn’t use email either.  The IRS staff don’t threaten people.  Anyone telling you to pay now with a credit card or suffer an ill fate in the future is likely to be a hacker.  An IRS agent can direct you to website to pay on line with a credit card.  No agent will take your credit card data to pay a bill over the phone, to my knowledge.  Any time you get a call from the IRS have them send you a letter with payment directions in writing.  Then take that notice to your tax advisor.

Tax TimeOn the topic of seeing your tax advisor, what documents do you need to bring?

Every year our office sends out a welcoming letter advising our clients about what documents they need to bring or send to our office.

If you are prior year client, I don’t need last year’s tax return.  That copy is for you, we keep a copy of every return we file.  The most overlooked item in our office is estimated tax payments by our clients to IRS and NYS [and other states].  If you don’t pay tax estimated taxes, you can ignore this.  If you do pay estimated taxes be sure to bring complete records of your payments amounts and dates.  Not everyone pays their estimates timely; so dates paid count.

Our welcome letter a list of potential income items for you to examine.  Whichever items pertain to you, bring to your tax preparer.  Another important area people forget to include are new births [and the medical costs associated with it].  Children are in fact a small tax deduction.  Also, in the year of birth, extreme medical payments could amount to an itemized deduction for some taxpayers.

Recently the IRS has been enforcing foreign bank account reporting.  There is a tax form called schedule B for interest and dividends, and also includes an area about foreign bank accounts.  Failure to include foreign bank authorization in your taxes is an omission.  Deliberate omissions are a FELONY.  So don’t forget to include the fact that you may sign on an older relative’s bank account or brokerage account in another country.

This year the IRS made 2 major changes:

The first is reporting of foreign bank account amounts in excess of $10,000 US dollars in the prior year [reported on a treasury form we call an FBAR].  It used to be due by June 30th every year [with no extensions].  It is now filed with the 1040 return making it due 4/15 [and can be extended].  Failure to report FBARS timely carry a whopping $10,000 or 50% of largest balance penalty.  This is for foreign bank accounts and foreign brokerage accounts.  So don’t forget to file your FBAR timely.

The other significant change is partnership reporting.  Used to be partnership tax returns were due 4/15.  This lead to many taxpayers unable to file their taxes timely, as receiving an k-1 from a partnership on the due date does very little to producing the tax return on the same day.  The IRS probably thought this lead to more extensions.  So partnerships, like corporation tax returns are now due 3/15.  With extensions, all entity returns are due by 9/15 [if an extension is filed by 3/15].

One last point on extensions.  An extension is the right to file your paperwork later on.  It does not excuse full payment by the 4/15 [or 3/15 for entities] due date.  You are required to settle up financially on time.  You have the right to request and extension to submit your tax paperwork.  The extension for filing paperwork has no change to paying your taxes timely.

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NYC ever changing employer/employee rules and regulations.

Today’s blog on employer/employee rules in NYC comes after spending 6 business days at CPA seminars updating tax changes and learning recent events that affect my clients.

NYC has been making more employer/employee rules and regulations.

know the rules in NYC

Not only should EVERY employer have a time clock, the new employer/employee rules make it a crime for an employer to not have a time clock because it is a general disregard for the requirement to keep employee records.  In one case, a restaurant was indeed considered criminal for no time cards.

More importantly, the NYS Dept. of Labor, an agency for a long time considering all employers guilty and all employees innocent turn against any employer with inadequate records.

An employee fired for just reasons, for example stealing, can still sue a prior employer for not paying over time, or not paying all wages as required, and without time cards, the employer will lose the suit.  Regardless of the any outcome, the burden of proof from employee claims always falls on the employer.  Beware.

As a clarification, any employee who works 10 hours in any 1 day is to be paid for 11 hours.  [yes this is a real rule]

However, the additional hour of pay is not required to be at the employee pay rate, it is required at minimum wage only.  So a $17/hour employee working 10 hours need only be paid $9 per hour for the non-worked 11th hour.  This is contrary to what many employers believed, that the extra hour was at the employee’s rate of pay.

NYC-Wage-Rates

NYC wages for restaurant waiters and busboys [tipped employees] is increasing from $5 per hour to $7.50 per hour.  I can’t remember the last time anyone got a 50% increase in wages.  And, most importantly, the restaurant wage increase takes place 12/31 to include new year’s eve in the new rates.

Lastly, NYC requires 5 days personal/sick/vacation time to all employees.  The regulations made this effective April 2014.  Any employee who works 80 hours in a year starts to accrue time off.  1 hour for every 30 hours worked.

Harlan Kahn CPA

 

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