Audit News Articles
1099 Reporting Update
By: Charles L. Telk Jr., CPA, Partner | email
With the recent “relaxation” of the new tougher 1099 reporting requirements, there seems to be a misconception that 1099’s are no longer required. This misconception could prove costly to you and your organization. Make no mistake about it – 1099’s are still required in certain circumstances. Improperly reporting 1099’s to the IRS can cost your organization thousands of dollars in penalties and professional fees.
Several of our clients have recently received penalty notices from the IRS regarding incorrect taxpayer identification numbers. Issues range from names not matching the FEIN, erroneous FEIN’s, missing FEIN’s, etc. The IRS assess a $50 penalty per occurrence and the sum of the penalties in several cases approached $8,000.
This type of IRS action is increasing as the IRS looks for proper reporting and additional revenue.
Therefore, it remains important for your accounting department to have a current, signed and legible W-9 form on hand for all members as well as for any non-employee who receives a check from you. Of course, you should also have a current, signed and legible W-4 form for all employees. An illegible W-9 form can cause an error on form 1099 which can trigger a penalty. We recommend that you update your files on an annual basis to ensure you have the appropriate W-9 form on hand, without exception.
We realize that obtaining these forms can be problematic. I’ve heard every excuse in the book as to why a W-9 form is not required, such as: “We’re a non-profit,” “We’re a corporation,” “We’re a trust,” “We’re a governmental entity,” etc. But the bottom line is this: If you are issuing a check to a non-employee, you should have a current, signed and legible W-9 form on hand without exception. This is not to say that everyone who receives a check from you will also receive a 1099. But by having the W-9 on hand, you will have the information necessary to issue a 1099 should it be required.
This is an important issue that will continue to receive IRS attention. We are available to answer your questions regarding form W-9 and 1099 reporting. Please call me in the Des Moines office at 515-270-1446 should you have any questions or concerns.
Fixed Assets and Depreciation
By: Dave Thomsen, Partner | email
Over the past few years or so, issues have arisen in our world of accounting for cooperatives that have brought the way we historically looked at property, plant and equipment, and the depreciation of those assets, under question. The first issue came about a few years ago when the loan commitments required to finance cooperative operations became so large that your lender saw it necessary to share some of the risk involved in certain loan packages. Thus, fixed asset appraisals became the norm in many cases. A second issue has occurred with new accounting standards related to mergers and the requirement to recognize business combinations at fair value.
Textbook Depreciation: Most accountants were taught in school to compute depreciation in the following manner: “Asset Cost” less “Salvage Value” divided by the “Useful Life of the Asset.” For example, a steel grain bin built for a cost of $500,000 with a scrap value of $25,000 that will be used for 25 years would have an annual depreciation expense of $19,000 and would have at least some book value for 25 years. However, in most cases today, salvage value is routinely ignored and the estimated useful life is based more on acceptable IRS tables than on the actual life the asset is used to produce income.
Actual Practice: Most of our cooperative audit clients take a “conservative” approach to depreciating their fixed assets. In the example above, the salvage value would be ignored and the $500,000 bin would depreciated over 10 years based on the IRS class life tables amounting to annual depreciation of $50,000. The asset is fully depreciated after 10 years and for book purposes has no value for more than half of its actual useful life.
Why do we do this? The accelerated depreciation expense lowers the bottom line thereby reducing income and income available for patronage dividend allocations, saving the cooperative cash. However, this conservative approach may be distorting the real value of the balance sheet by recognizing no or less than actual value of assets the company owns. Depending on the circumstances, appraisals may be necessary to give companies credit for the unrecognized value of those assets, or major adjustments will be required under the new fair value requirements in accounting for future mergers.
Maybe its time to re-think this process as we look at ways to further strengthen balance sheets and search for the right mix of allocated and unallocated members’ equity. We can still use these conservative ideas for tax purposes, but we must also consider alternatives to bring book balance sheets more in line with actual values. We are available if you would like to discuss this issue further and will be encouraging this debate as we begin our upcoming audit engagements.
Filing Requirements and Sales/Use Tax
By: Chris Coldiron, CPA, Tax Manager | email
Recent surveys indicate that individuals and businesses purchasing goods over the internet are not properly remitting sales or use tax, many times in violation of state law (the estimated non-compliance rate in California was greater than 98%). With states becoming more desperate for revenue sources to offset record deficits, this area becomes an easy target for state auditors. If you are unsure of your state’s laws regarding the payment of sales or use tax for internet purchases, please contact us so that we may research the matter and advise you accordingly.
State auditors are also on the lookout for businesses that might have a filing requirement in their state that is not being met. If your business engages in transactions outside your home state and you are unsure if this activity generates additional filing requirements, please contact us so that we may help you make that determination.
1099 Reporting Changes, Again
By: Chris Coldiron, CPA, Tax Manager | email
As you may have heard, H.R. 4, the “Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011” repealed all new 1099 reporting requirements that were set to take effect January 1, 2012. The Act was signed into law by President Obama on April 15th. Basically, 1099 reporting requirements will continue to be the same as they’ve always been. This change will significantly decrease the compliance burden small businesses were anticipating. However, this recent change does not do away with the requirement that payers obtain and retain a form W-9, Request for Taxpayer Identification Number and Certification, for all payees. This requirement applies even to governmental agencies and corporations, although these entities are typically exempt from the 1099 reporting requirement. Absent obtaining a W-9 that either documents an exemption to the 1099 reporting requirement or provides the necessary information for that reporting, backup withholding at a rate of 28% is mandatory.
Section 199 Amended Returns
By: Chris Coldiron, CPA, Tax Manager | email
The case for Section 199 amended returns continues! The first pre-settlement appeals conference with the IRS Appeals Office is scheduled for August 8th and 9th. Please be aware that if you filed an amended return to claim an enhanced Section 199 deduction and have not heard from the IRS, please contact us so that we may follow up on and track the status of your amended return.
401K Fee Disclosure Requirements To Change
By: Ryan Taylor, CPA, Audit Manager | email
Starting January 1, 2012, the Department of Labor will require 401(k) plans to clearly spell out all fees and expenses each quarter so that investors can more readily compare the costs of their holdings and investment choices.
Current laws don’t require sufficient information to allow workers to make the best investment decisions. Even if workers were given abundant investment information in the past, they didn’t always receive it in a user-friendly format.
Companies must begin laying out the administrative expenses, including accounting and recordkeeping fees, and the charges that apply to the individual choices a worker makes, such as fees charged for loans. The charges for administrative expenses must be laid out in the quarterly reports workers receive and also be made available online.
The fees and expenses associated with the funds a worker chooses must be explained as a percentage of assets held, and also expressed as a dollar amount for each $1,000 invested. Performance data must be provided for the various mutual funds offered, including 1-year, 5-year, and 10-year returns. Comparisons to appropriate benchmarks must also be provided for those time periods to enable investors to assess how their funds are performing.
The new rules also require that workers have access to an easily understood glossary of terms to help explain the investment options, fees, and other details. These rules can help fill an important knowledge gap because many investors don’t know that more than a half a dozen fees may be charged against their 401(k) account for recordkeeping, administration, investment advisory, brokerage and management services.
The regulations, however, offer protection to plan administrators on the completeness and accuracy of the information provided by a plan’s service provider, upon which the administrator reasonably and in good faith, relies.
The new regulations mean that plan administrators will want to discuss with their service providers (third-party administrators, record-keepers, fund managers) the various disclosure requirements and amend plan, trust, and provider agreements as necessary to allocate responsibility for satisfying those requirements.
Disclosure Requirements for Multi-employer Pension Plans
By: Mark Rodruck, CPA, Partner | email
On September 1, 2010, the Financial Accounting Standards Board (FASB) issued an Exposure Draft of a proposed Accounting Standards Update. The proposed update is intended to increase transparency in financial reporting for organizations that participate in multi-employer pension and other postretirement benefit plans. The update suggests new disclosures that the Board believes would help users of financial statements better assess the potential risks faced by those organizations.
Current U.S. GAAP requires employers to disclose their total contribution to multi-employer plans, but there is no requirement to describe the funding status of these plans. The objective of the project is to enhance the disclosures of an employer’s participation in a multi-employer pension plan. The Exposure Draft proposes the following disclosures, among others:
- Total assets and accumulated benefit obligation of the plan
- Quantitative information about the employer’s participation in the plan, for example, the number of its employees as a percentage of total plan participants
- A description of the contractual arrangements between the employer and the plan, including the length of the arrangement, the contribution rates agreed to, and any minimum funding arrangements
- Expected contributions for the next period and known trends in future contributions
- The amount required to be paid upon withdrawal from the plan
- A narrative description of any funding improvement plans adopted by the plan, including the expected effects on the employer.
This change was proposed to be effective for fiscal years ending after December 15, 2010 for public companies. A private company would be required to provide the enhanced disclosures for fiscal years beginning on or after December 15, 2010 (one year later than public companies). However, at its November 10, 2010 meeting, the Board decided that it will not be effective for the 2010 calendar year-end reporting period and it will decide on an effective date at a future meeting after it has substantially concluded its redeliberations. FASB will use the additional time to analyze and digest the more than 320 comments it received on the Exposure Draft, and to decide how to modify its Exposure Draft, if at all. The Board’s technical plan calls for the standard to be issued in the second quarter of 2011.
1099 Update: President Obama Repeals Business Tax Reporting Mandate
By: Gardiner Thomsen CPAs | email
Just recently, President Obama signed a bill repealing a tax-compliance mandate that was included within last year’s health care law. This mandate was going to require any U.S. business, large or small, public or private, to issue a Form 1099 to each and every entity to which it had paid more than $600 for goods and services rendered for business purposes within its fiscal year. This provision was to close the “tax gap,” the estimated $300 billion difference between tax revenue that is collected by the government and that which is not, presumably because of unreported business income. Further, it was doubted that the IRS had the matching capabilities to handle the massive volume of paperwork resulting from this provision, had it not been repealed.
As many of you do, most corporations file taxes on a fiscal year that is different than the calendar year in which 1099 forms are filed which could have resulted in substantial errors in IRS attempts to accurately match information.
If you need additional information or have specific questions about 1099 reporting requirements for your organization please let us know.
Big GAAP versus Little GAAP
By: Dennis Gardiner, Partner | email
The Financial Accounting Foundation, FASB’s parent organization, was recently presented a report which recommends changes to the future of accounting standard setting for private companies, including a separate standard-setting board. It is believed that exceptions and modifications to GAAP for private companies is a better response to the needs for the private company sector.
Under the recommendations, a separate private company standards board would be established to make exceptions and modifications for both new and existing standards. FASB will also need to define what differentiates private companies from public companies.
We will keep you posted as we learn more.
Recent Tax Legislation Changes for 2011 and 2012
By: Chris Coldiron, CPA, Tax Manager | email
In addition to the changes made for Bonus Depreciation and 1099 reporting, several other items of interest were changed by the recent legislation for 2011 and 2012:
- Section 179 expense limits have been changed. For 2011, the maximum expense is $500,000, and the maximum amount of property that may be placed in service before the deduction becomes limited is $2,000,000. For 2012, those figures are reduced to $125,000 and $500,000, respectively.
- A payroll tax “holiday” was added for 2011 only. Employees will see their FICA tax reduced by 2% to 4.2%. Self-employed individuals will enjoy the same reduction, with their FICA rate set at 10.4%.
- The maximum tax bracket for individuals, as well as corporations, will remain at 35% for 2011 and 2012.
- The maximum individual capital gain tax rate of 15% remains in effect for both years, as does the application of this rate to “qualified dividends.” These preferential rates will not be “phased out” for higher income individuals as was reported in the popular press prior to enactment of the law. As the market continues to improve and profitable corporations begin issuing dividends, this change should result in substantial tax savings to many taxpayers.
- Itemized deductions and personal exemptions will not be subject to phase-out for high-income individuals through 2012.
- Individuals will be able to continue using nonrefundable personal credits to offset Alternative Minimum Tax for 2011.
- The standard mileage rate, used in lieu of actual expenses and depreciation, has been set at $.51 per mile for 2011.
- Under the new legislation, executors for decedents dying in 2010 have two options:
1. Apply the 2010 rules that were in effect at the decedent’s time of death.
2. Apply the new 2011 rules retroactively.
Most executors will find the election to retroactively apply 2011 rules beneficial as the gift and estate taxes have again been unified in 2011 and 2012 with a $5 million exclusion equivalent. In English, that means the estates of decedents dying from 2010 – 2012 will be able to enjoy the traditional “step-up” in basis of all estate assets, with the first $5 million exempt from tax. It also means that gifts up to this amount will also be exempt from tax. This $5 million will be inflation-adjusted for 2012.