Archives for November 2020

Avoid These 5 Common Tax Filing Mistakes That Can Get You In Tax Trouble

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Whether you file the simple 1040EZ or a complex 1040 with multiple schedules, making a mistake on your tax returns could lead to big tax trouble. Something as simple as a math error or unsigned form could invite extra attention from the IRS.

The tax agency sees those mistakes every year, and IRS representatives warn taxpayers to be careful when filling out their forms. Even if you think you have everything filled out perfectly, it never hurts to double-check and look for these common errors.

#1 — Assuming your tax pro prepared your taxes properly
Blindly trusting your accountant or tax preparer to file your taxes correctly can be costly. Most tax professionals do a thorough job, but letting them file without your careful review is a mistake.

We resolve back tax problems for people, and often what gets people in trouble is a simple mistake, like forgetting to report income, missing deductions or taking too many deductions. These are sometimes honest mistakes that if not caught early can trigger red flags and have the IRS sending you balance due notices.

No one knows your financial situation better than you, do so it’s important you double-check your return so you’re not blindsided with an unwanted surprise.

#2 — Waiting until the last minute
Filing taxes is stressful enough. Don’t make things worse by waiting until midnight on deadline day to get your return in the mail. Give yourself plenty of time to gather all the necessary documents and complete your return.

Keep in mind that unexpected problems could interfere with your last-minute tax filing plans. Getting your taxes completed early is the only way to protect yourself from unforeseen circumstances that can delay your tax filing.

#3 — Failing to file on time
If you cannot file your return on time, you can ask for an extension by filling out a single form. Even if your documents are in disarray, there is no excuse for not filing on time. An extension gives you six more months to get everything in order and complete your return.

Keep in mind that even when filing an extension, you will still need to estimate the tax you owe and make your payment. Filing an extension extends the amount of time you have to get your return to the IRS, but it does not provide a reprieve from your tax debt. If you wait to make your tax payment, you will get hit with penalties and interest.

#4 — Not making a backup or keeping good records
Making backup copies of your tax returns, income documents and schedules is an essential part of tax planning and preparation. Set up a folder or file box and use it to store your tax documents as they come in, and then scan each one before you put it away.

Once you have completed your return, be sure to make copies of every document, including your W-2 form and tax schedules, before sending the return to the IRS. If you file electronically, save a PDF copy of your return before completing the final step. Save all of those electronic tax documents on your computer or cloud storage device. Ordering a lost copy of a past year’s return from the IRS is time-consuming and expensive; you can save time and money by making your own backup copies. If the IRS audits you or requests more information, having your own records organized will be extremely helpful in the process.

#5 — Ignoring letters from the IRS after you file your taxes.
Sometimes the IRS will send follow-up correspondence, especially if you owe them money. It can be easy to ignore the first few letters. Even if you have the intention of paying your taxes soon, you should still take action and either get on an installment agreement or reach out to a reputable tax relief firm if your financial situation requires it.

That’s not all. Here are some suggestions to keep in mind if you’re preparing your own return.

Owe back taxes?
Our firm specializes in tax problem resolution. And you certainly don’t want to talk to them yourself. If you want an expert tax resolution specialist who knows how to navigate the IRS maze, reach out to schedule a virtual or in-person no-obligation confidential consultation to explain your options to permanently resolve your tax problem. Need immediate assistance? Call 973-846-8265 today.

PPP Loans: Forgiveness, Guidance and Disclosure

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In the wake of the coronavirus (COVID-19) pandemic emerged the Coronavirus Aid, Relief and Economic Security (CARES) Act, which included the Paycheck Protection Program (PPP) administered by the Small Business Administration (SBA). The SBA incentivized banks to extend PPP loans to those small businesses that qualified by paying a percentage to the banks for the lenders’ fees for processing the PPP loans.

Over 5.2 million loans were approved, totaling more than $525 billion. The deadline to apply for a PPP loan has passed and companies are beginning to apply to their lenders for forgiveness. Financial reporting periods for business are here and the PPP loan must be presented and disclosed properly. There are issues affecting both banks and businesses, regarding the compliance of loan covenants.

Loan forgiveness
Banks that receive PPP loan forgiveness applications must determine if the company has met the proper requirements for forgiveness within 60 days of submission. If the bank approves the forgiveness, they must then submit to the SBA for approval of the forgiveness, which could take up to 90 days. If the SBA approves the forgiveness, then the SBA will pay the bank back for the loan and the company will be relieved of their debt to the bank. If the bank and/or the SBA does not approve the forgiveness, then the company will still owe all or a portion of the loan based on the terms of the loan.

Forgiveness of a PPP loan all depends on if the company complied with the covenants of the loan to ensure the funds were used in accordance with what was intended. Covenants include using 60% of the loan on payroll costs over an 8- or 24-week covered period ending prior to December 31, 2020, among others.

Uncertainty in guidance
There has been uncertainty surrounding presentation and disclosure requirements for financial statements for both for-profit companies and not-for-profit organizations that received a PPP loan. This is affecting many entities with reporting periods that have passed and are coming in the near future.

The question is whether the PPP loan should be recognized as a liability or as revenue at year-end, given the timing of whether the PPP loan has been forgiven. Due to a lack of specific guidance in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) for a program as unique as the PPP, the AICPA developed the Technical Questions and Answer (TQA) 3200.18. The TQA provides multiple models in which to account for the PPP loan in the financial statements.

Presentation and disclosure
The most conservative option to present and disclose the PPP loan in the financial statements is FASB ASC 470, Debt, in which the PPP loan would be presented on the balance sheet as a liability and disclosed as a loan in the footnotes with the proper terms. The loan will not be recognized as revenue until it is forgiven by the SBA. Interest would also be accrued in accordance with the interest method under FASB ASC 835-30.

There are multiple other options that can be used in which a company can recognize revenue prior to the loan being forgiven. Their options include: FASB ASC 958-605, Not-for-Profit Entities: Revenue Recognition, FASB ASC 450-30, Contingencies: Gain Contingencies Model, and International Accounting Standards (IAS) 20, Accounting for Government Grants and Disclosure of Government Assistance.  The preferred method for not-for profit entities is FASB ASC 470 and FASB ASC 958-605. The entity must decide which method best fits its specific situation.

The Payroll Protection Program has been a savior for many businesses during this trying time, however it is not without flaws. Constant changes and lack of authoritative guidance have created uncertainty for banks and companies alike. The PPP loans were originally designed to be forgiven by the banks and the SBA if the covenants were complied with; however, this has become a long process. It also appears that those entities who received larger loans have a more scrutinized process of loan forgiveness as opposed to those that receive a smaller loan amount.

There is no right or wrong answer as to what guidance must be used in order to present and disclose the PPP loan in an entity’s financial statements; it is based on the specific entity’s situation and professional judgment should be used. These issues are of the utmost importance pertaining to how banks handle loan forgiveness and covenants, as well as how companies comply with financial statement presentation and disclosure.

Need help navigating PPP forgiveness? Reach out to Magone & Company or call (973) 301-2300.

Paycheck Protection Program Forgiveness: Is it Taxable Even if Not Forgiven? An Analysis of Current Guidance

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The only certainty in 2020 seems to be whatever you think you know about the Paycheck Protection Program (PPP) changes like the wind.

Established by the CARES Act (signed into law in March 2020), the PPP provided loans to eligible small businesses. If the borrower used the loan proceeds to pay certain eligible expenses, an amount of the loan up to such eligible expenses would be forgiven under the law, and such forgiveness would not be treated as taxable income to the borrower.

In April 2020, the IRS issued Notice 2020-32 explaining a deduction is not allowed for expenses where proceeds are effectively tax exempt, as is the case with the loan forgiveness. This would mean the loan proceeds received by businesses will be taxable since the expenses paid with those proceeds would be disallowed in determining taxable income.

This is a consistent position of the IRS, as expenses associated with tax-exempt investment income are not deductible.

Alternatively, the other argument in Notice 2020-32 is that the expenses are not tax deductible, because prior case law and published rulings essentially deny deductions for otherwise deductible expenses for which “the taxpayer receives a reimbursement.”

A second issue relates to economic performance. Economic performance states that a taxpayer is able to deduct expenses associated with a liability such as a loan, whereby the amount of the liability is unconditionally fixed. Upon review of the PPP loan document language, one finds the note to include language such as “The Note is subject to partial or full forgiveness, the terms of which are dictated by the SBA, Interim Final Rule RIN 3245-AH34, subsequent SBA guidance, the Code of Federal Regulations, the PPP, and all related rules, laws, regulations, and guidance, as may be amended from time to time (the “Forgiveness”).”

The fact the loan is subject to partial or full forgiveness is enough to question whether or not it is unconditionally fixed. It is our belief it is not unconditionally fixed and therefore, the expenses will be disallowed based on Notice 2020-32.

Finally, there is possible reliance on the Bliss Dairy case, which for the sake of brevity draws the following conclusion, “until a taxpayer obtains forgiveness there is no tax exempt income” and IRS Notice 2020-32 does not apply until there is tax-exempt income. The problem with this court case is the American Institute of Certified Public Accountants (AICPA) made an inquiry in regard to forgiveness occurring after year-end and the impact on the expenses paid with PPP monies. According to Mr. Edward S. Karl of the AICPA, “Treasury officials generally stated that if a borrower has a reasonable expectation of loan forgiveness, the expenses can’t be deducted to the extent paid by the loan. That’s true regardless of when the loan is forgiven.”

So what’s a business to do? Here are the options:

  1. Pay the tax on the disallowed expense (not optimal).
  2. Defer the tax on the basis of the Bliss Dairy case (not certain it will withstand an audit challenge).
  3. Place your business tax return on extension and await more guidance.

Congress may act on this issue with the relief being granted retroactively, as bills have been proposed by chairs of both tax committees and have bipartisan support. If this occurs, the entire discussion above for most businesses is moot.

Given the environment in Washington, we are not hopeful there will be a bill in time for the filing of most business tax returns. If Congress does not act, many businesses may find the relief of the PPP funding will be met by the possible nightmare of having to find the funds to pay the taxes.

Need help navigating Paycheck Protection Program loan forgiveness? Call us at (973) 301-2300 or reach out — we’re here to help.

What is a Levy? IRS and Other Asset Levies Explained

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Falling behind on your debts is never a fun position to be in. It’s less fun when a levy is placed on your assets. In this article, we take a look at what an IRS levy is, why it happens, and what you can do about it.

What is an IRS levy?
Simply put, if you owe back taxes and you ignore the IRS, they can seize your property, take money from your bank accounts, or sell your assets in order to satisfy the balance due.

The IRS will give you plenty of notices via mail before they take this step. If you do not satisfy the debt or make payment arrangements by the specified date, the IRS will attempt to take the amount of the levy directly out of your bank account.

Other types of levies
Private creditors may issue a levy against your bank account with a court order. Court orders are not required for levies by government agencies. The creditor must notify you of the upcoming levy at least 21 days before removing any funds from your account. You may not withdraw money or close the account during this waiting period.

Funds earned from child support, social security, unemployment, workers’ compensation settlements and certain other types of government agency payments are exempt from levy. You must request the exemption and offer proof of the source of the funds.

Wage garnishments
Government agencies may also garnish an employee’s wages for back taxes, child support and other delinquent payments required by law.

The IRS has the authority to levy up to 85 percent of your paycheck. The levy notice will be sent to your company’s payroll or human resources department, which will then withhold the appropriate amount of money from each paycheck and send it to the IRS or state tax board. You must provide a wage garnishment release if you’re able to work out a payment arrangement.

If you are behind on your taxes, the IRS may levy most payments from federal agencies. This includes railroad retirement benefits, Medicare supplier and provider payments and federal retirement annuities, among others.

Seizing your assets
The IRS may also seize your real estate and personal property such as a car or boat. You will receive a 30-day notice indicating that seizures will follow if you do not pay your outstanding taxes or contact the IRS to make payment arrangements. This authority also extends to property and money you own that’s being held by another party, such as the cash value accrued from a life insurance policy. The government sells its seized property at auction to recover some of the funds owed by delinquent taxpayers.

What to do if you have an IRS levy
Back taxes don’t just disappear if you ignore them long enough. Putting your head in the sand will cause the problem to get worse. The IRS knows if you’ve paid or not. They might even be willing to compromise.

If you have back tax debt, we highly recommend you reach out to our firm first, particularly if you owe more than $10k in federal or state taxes and can’t pay in full. Our clients never have to talk to the IRS, and tax resolution through our firm can save you money and time in the long run. You might also be eligible for other IRS relief programs or get your penalties reduced or removed. Reach out today for a consultation.