Red Spot Design2, Author at The CJ Group

Key Areas of DOL Scrutiny

Posted on April 27, 2018 by Red Spot Design2

Does your employee benefit plan auditor really understand what’s at stake when performing your audit? It is more than a governmental requirement. It protects the assets promised to your employees and ensures that plan administration is in full compliance with the US Department of Labor and IRS.

The DOL has spent more than 25 years assessing the quality of employee benefit plan audits and taking aggressive action to improve them. The most recent study showed that only 61% of audits fully complied with professional standards compared to a 1997 baseline study that showed 81% of plan audit compliance. The decline correlates to an increasing amount of plan assets and number of plan participants at risk. This fact increases the chances of personal liability for your organization’s plan administrators and board members.

How is the DOL measuring audit deficiency? There are several areas it deems vital to compliance as defined by Generally Accepted Accounting Principles (GAAP), Generally Accepted Auditing Standards (GAAS) and the ERISA Act of 1974. ERISA was enacted by Congress to fix abuses in the nation’s private pension and welfare benefit plan system. Since then, the Act has been extended to apply to all defined contribution and defined benefit plans such as Simple IRAs and 401(k)/403(b) plans.

Let’s outline a few of these areas, and the questions you should ask your potential audit team about their knowledge or level of accomplishment in these areas.

Level of EBP Specific Continuing Professional Education

The DOL found that audit teams with at least 8 or more hours of continuing professional education specific to employee benefit plan audits in the previous three years had fewer audit deficiencies. CPAs with the fewest deficiencies (and who also performed the most audits) cited an average of 24 or more hours of continuing professional education in the last three years previous to the audit.

Ask your prospective employee benefit plan audit team about the level of CPEs they have achieved in the years leading up to your audit. Also ask them how many EBP audits they perform each year.

Compliance with Plan Documents

Cornwell Jackson audits more than 75 employee benefit plans a year. The number one issue we identify is that daily management of the plan often does not match the original plan documents. For example, definitions of compensation in the plan documents don’t match what is actually reported for employees. Auto enrollment is another area that requires careful management, since employees must be enrolled within a timely manner as soon as they are deemed eligible (unless they choose to opt out). The mere opportunity to enroll must be communicated to employees in a timely manner, too.

The DOL has noted other deficiencies in day-to-day management, including accurate recording of participant data, proper and timely payments of benefits and timely, accurate collection of employee contributions.

Quality independent auditors should be able to discuss the importance of consistency between plan documents and day-to-day management as well as internal controls — and how they test for such weaknesses.

Limited Scope Audits

An increasing number of what are called “limited scope” audits appear to have contributed to a decline in audit quality since 2001. Limited scope audits allow auditors to issue “no opinion” on the plan’s financial statements. However, limited scope audits do not decrease the auditor’s duty to focus on all relevant audit areas. They simply allow auditors to exclude investments held and investment-related transactions and income already certified by qualifying entities (e.g. investment brokerage firms).

Almost 60% of limited-scope audits in the 2015 DOL study “contained major GAAS deficiencies in areas of the audit not related to investments, including contributions, participant data, benefit payments and internal controls.”

When considering a potential auditor for a limited-scope audit, ask about the audit team’s approach to ensure that all relevant audit areas were included in the audit engagement.

Clean Peer Review

Many of the auditors included in the DOL study were also found to show deficiencies in professional standards based on peer review. A qualified peer auditor with particular knowledge of EBP audits can identify these deficiencies. Peer review overall is designed to support high quality audit standards and best practices across all firms. However, the DOL found that many CPAs with deficient or rejected audits also did not have an acceptable peer review. Some of them did not undergo peer review at all.

Ask your potential EBP auditor about their history of peer review and whether they can attest to an acceptable peer review.

If you are concerned about your audit team’s qualifications to perform a quality independent employee benefit plan audit, include these questions and considerations in your RFP process and visit the AICPA EBPAQC to learn more. There is also an EBP audit preparedness checklist available through the AICPA at http://bit.ly/1pWHGIM.

Plan administrators have a greater burden to hire a qualified auditor, given evolving training and certification of auditors and the complexity of the audit itself. It will greatly benefit any plan administrator or trustee to schedule time with a EBP auditor at Cornwell Jackson to understand these changes and pursue additional training if necessary.

Continue Reading: For more information, check out our next blog post about Top Employee Benefit Plan Audit Quality Improvements here.

Mike Rizkal, CPA is a partner in Cornwell Jackson’s Audit and Attest Service Group. In addition to providing advisory services to privately held, middle-market businesses, Mike oversees the firm’s ERISA practice, which includes annual audits of over 75 employee benefit plans. Contact him at mike.rizkal@cornwelljackson.com.

Originally published on June 27, 2016. Updated on April 27, 2018.

Selecting a Quality Auditor for a 401k Plan Audit

Posted on April 16, 2018 by Red Spot Design2

The Department of Labor and IRS are ramping up efforts to improve compliance in corporate employee benefit plan administration. Frequent errors point to inadequate or improper administration by organizations, but also to auditors that lack the proper training and experience to conduct a technically appropriate employee benefit plan audit. Failure to make improvements can result in penalties and fines to companies and organizations — and even criminal charges in severe cases. That’s why it’s so important to choose an 401k Plan Audit team with experience once your organization reaches 100 eligible participants.

When seeking a quality, independent public accountant to perform a financial statements audit of your employee benefit plan, the AICPA outlines several guidelines to consider. First of all, auditors found to be out of compliance with professional standards had the following characteristics:

Inadequate technical training and knowledge
Lack of awareness regarding the unique factors of employee benefit plan audits
Lack of established quality review and internal process controls for each audit
Misperception that EBP audits are simply fulfilling a governmental requirement
EBP audits encompassing a very small percentage of the firm’s overall audit practice
Missing necessary audit work
Misinterpreting the limited scope audit exception
Limited time to adapt to new technical guidance

As you can see, there are many telltale signs that a potential auditor may not be highly qualified. When seeking an auditor, you must know how to evaluate knowledge and experience, licensing and ability to perform tests unique to employee benefit plan audits. Such tests may include:

Finding whether plan assets covered by the audit are fairly valued
Unique aspects of plan obligations
Timeliness of plan contributions
How plan provisions affect benefit payments
Allocations to participant accounts
Issues that may affect the plan’s tax status
Transactions prohibited under ERISA

Less experienced auditors may be assigned to perform routine aspects of the audit, but you need to make sure that a more experienced employee benefit plan auditor will be reviewing that work as well as performing more complicated aspects of the audit.

When looking for a quality, independent auditor, you might start by asking for references and discuss the quality of work with other EBP clients. Ask the firm about recent training and continuing education specific to employee benefit plans. Another simple way to compare quality auditors with one another is to search for the firms that are members of the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). These firms have made a voluntary commitment to audit quality by adhering to higher standards in their policies, procedures and training. At a minimum, auditors for these plans must be licensed or certified as public accountants through a state authority.

“The DOL noted that firms with membership in the AICPA EBPAQC had fewer audit deficiencies. By contrast, most CPAs performing the fewest audits and showing the most deficiencies were not members.” —U.S. Department of Labor

Given all of these factors, one more distinction that must be identified is if the firm has sufficient independence to satisfy ERISA standards for third-party reporting. An independent auditor or its employees, for example, should not also maintain the financial records for the employee benefit plan. The same firm may perform tax filing, but accounting work may be deemed a conflict of interest that would affect an objective audit report. For more information on selecting a quality auditor for EBP financial statement audits, refer to the AICPA report, http://bit.ly/1SN8w0h

The report even provides guidelines on developing a detailed RFP to engage auditors.

To download the full whitepaper, click here: Choose Your Auditor Carefully for Employee Benefit Plans

As you can see, plan administrators have a greater burden to hire a qualified auditor, given evolving training and certification of auditors and the complexity of the audit itself. It will greatly benefit any plan administrator or trustee to schedule time with a EBP auditor at Cornwell Jackson to understand these changes and pursue additional training if necessary.

Choose Your Auditor Carefully for Employee Benefit Plans

Posted on April 6, 2018 by Red Spot Design2

The Department of Labor and IRS are ramping up efforts to improve compliance in corporate employee benefit plan administration. Frequent errors point to inadequate or improper administration by organizations, but also to auditors that lack the proper training and experience to conduct a technically appropriate employee benefit plan audit. Failure to make improvements can result in penalties and fines to companies and organizations — and even criminal charges in severe cases. That’s why it’s so important to choose an audit team with experience once your organization reaches 100 eligible participants.

The American Institute of Certified Public Accountants has made a concerted effort to cooperate with the Department of Labor and the IRS to inform companies and organizations about their fiduciary responsibilities regarding employee benefit plans. In 2014, the AICPA released an advisory report for plan sponsors, administrators and trustees on the basics of why employee benefit plans need an independent audit — and how to hire a qualified, independent public accountant.

This awareness is more important than ever. The DOL has noted an unacceptable level of errors in plan audits. Exploring further, they found that many plan administrators failed to properly administer and record plan information on behalf of qualified employees. An audit should catch administrative errors, but the auditors themselves are causing mistakes.

Auditors who perform only a handful of employee benefit plan audits a year may lack enough experience or credentials to identify areas of weakness in controls or plan operations. If companies and organizations aren’t aware of these weaknesses or don’t remedy them, they can face serious penalties. The DOL Employee Benefits Security Administration (EBSA) may reject plan filings and assess penalties on companies and organizations of up to $1,100 per day, without limit, for these deficient filings. Administrators and officers can even be held personally liable to restore losses incurred by the plan or other losses connected to employee payroll.

A 2015 report by the DOL found that nearly four in 10 Form 5500 filings had enough major deficiencies to merit rejection of the filing. This percentage encompasses $653 billion and 22.5 plan participants and beneficiaries at risk. The DOL report was based on Form 5500 filings from 2011, which sounded the alarm bells regarding the integrity of employee benefit plans for participants and their beneficiaries.

“There is a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed. CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate.” –U.S. Department of Labor

If CPA firms simply needed to perform more plan audits to improve audit quality, the accounting industry could encourage more intensive training and membership through the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). However, the nature of employee benefit plans and third-party administration continues to evolve and increase in complexity. Public accountants who have specialized for years in audits of employee benefit plan financial statements are at a clear advantage to deliver consistent quality to their clients into the future.

Any company or organization that has 100 or more eligible participants in an employee benefit plan is required to have a financial statement audit of the plan in accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and DOL requirements. An independent, qualified public accountant must perform these audits to deliver a reliable report to participants, plan management, the DOL and other interested parties. The audit helps protect the financial integrity of the employee benefit plan so that the necessary funds will be available to pay retirement and other promised benefits.

The magic number of “eligible participants” may include more than just current employees. They could include former employees with funds still held in the benefit plan as well as retired employees receiving benefits. It also includes eligible but not participating employees. That’s why it’s so important to work with a qualified plan auditor to identify and assure compliance and accurate reporting.

To download the full whitepaper, click here: Choose Your Auditor Carefully for Employee Benefit Plans

Auto Dealers Can Fill Gaps Between Inventory and Collections with Smart Debt Management

Posted on April 3, 2018July 23, 2024 by Red Spot Design2

In the life cycle of any auto dealership, there will be times when cash flow is tight. Buy here pay here dealers in particular face complexity to ensure enough inventory is on hand to attract buyers — and offset that investment with a healthy flow through collections and debt management. This balance is never perfect. Dealers need strong banking and/or equity relationships that will extend credit to fill in the cash flow gaps.

Debt Management is Proactive

Even if their balance sheet is healthy, dealers on the shy side of $1 million in receivables will likely get a less favorable interest rate on credit than more established or larger dealers. This does not mean that smaller dealers should accept rates of 10 to 15 percent. It pays to shop around and to understand how the bank or private equity firm will consider the characteristics explained above to justify their terms.

By working with your CPA, you can provide the lender with financial statements and accounting that aligns with their expectations. As part of the terms of the loan, dealers may be required to provide reviewed or audited financial statements. Because of this additional expense and also to get more favorable terms, it’s important for dealers to actively seek lower interest rates. It is perfectly acceptable to shop around. Contact competing banks as well as your existing lender and ask about new credit options. Talk to colleagues about the banks they are using. Request multiple offers.

Strong accounting, tax and compliance practices help with this process. On the accounting side, owners need regular financial statement preparation to view trends and forecast cash flow — helping them prepare for lending conversations and extensions of credit at the right time each year. On the tax side, the number one tax planning technique for buy here pay here dealers is the discount (or loss) on the sale of notes from the dealership to the RFC, which requires cash. Dealers may also qualify for opportunities such as bonus depreciation and deductions with regard to employee perks and compensation.

Management may also consider a review of operational efficiencies or gaps in controls that can affect cash flow. Keep in mind that every dealership is different when it comes to managing cash flow, so best practices must occur within your own dealership.

As buy here pay here dealerships grow to portfolios of $4 million and above, more favorable financing opens up. But it’s not a guaranteed scenario. Dealers should weigh the benefits of obtaining more financing against the extra administrative costs of public accounting services.

Once you have the credit you need, there are various ways to reinvest in your business. Some dealers may decide to purchase their location — adding real estate holdings that support the extension of credit in the future. If the dealership also has a service department, cash flow can be set aside to cover repairs and maintenance on recently sold cars. Some dealers choose to cover repairs on cars shortly after purchase in order to support the customer’s ability and willingness to keep making monthly payments. For example, a repair may cost $800, but it leads to another six to 12 months of customer payments.

Compensation is another area that cash flow can support. Attracting and keeping good back office personnel supports collections, which in turn supports the business. Dealers may also consider additional compensation for good salespeople.

Let’s say you’ve done as much proactive management that you can. At certain points in the life of a dealership, you will still experience challenges. Some of these challenges can’t be handled alone. Whether you’re with a big bank and have secured a favorable interest rate or your dealership is still considered high risk for lenders, don’t ignore cash flow problems. Your CPA can help you formulate a plan to show numbers and communicate effectively with lenders in a way that is focused on solutions rather than the immediate problem. Lenders don’t like to call a loan for a short-term issue, and there is usually room for negotiation on loan modifications that will support cash flow as well as repayment.

However, year-over-year problems make lenders less willing to keep taking a risk on default. As soon as an issue comes to light, prepare your strategy to keep a strong lender relationship. Work through it like you and your lender are on the same side. It’s in the best interests of you and the lender to find a solution.

Debt Management Supports Valuation

It is also in the best interests of the dealership long-term to show a consistent history of loan financing, healthy cash flow and debt management. Owners want to show a return on investment and consistent profitability, tied to valuation of the business.

There are different approaches to valuation. A key component, however, is determining equity value, which is the market value of the dealership assets minus the market value of its liabilities.

Assets include such things as the dealership’s auto inventory and fixed assets including real estate. They can include intangible assets such as the goodwill value of the dealership’s name and location, sales and service agreements, and also synergies such as multiple locations and strong management.

Liabilities will include debt, any excess compensation, tax and rent issues, inventories and contingent liabilities such as environmental issues related to the storage and disposal of fuel, oil or batteries.

The bottom line is that a well-performing portfolio, a good location and healthy foot traffic — combined with properly managed debt — will be attractive to a potential buyer. A dealership that is attractive to lenders is also attractive to buyers or outside investors, even with debt factored in.

If your dealership struggles with debt management or cash flow either intermittently or throughout the year, don’t let it hinder opportunities to grow. Talk to the team in Cornwell Jackson’s auto dealership practice group. They will help you understand the proper structure of financial statements to support proactive lender conversations.

Download the Whitepaper: Use Debt to Increase Cash Flow

Scott Bates is an assurance and business services partner for Cornwell Jackson and supports the firms auto dealership practice. His clients include small business owners for whom he directs a team that provides outsourced accounting solutions, assurance, tax compliance services, and strategic advice. If you would like to learn more about how this topic might affect your business, please email or call Scott Bates.

Originally published on February 29, 2016. Updated on April 3, 2018.

Outsourced Payroll Onboarding: Build in Time for Transition and Results

Posted on March 30, 2018July 23, 2024 by Red Spot Design2

Every company or organization will have different needs for payroll administration based on business and compensation structures, benefit offerings, the specific industry and the state and local tax laws. While determining a good fit for outsourced payroll, anticipate how much time the set-up of such services could take. A long set-up time and possible mistakes could have a significant impact on business management and employee morale. Rather than having our clients input all of their data, we walk them through the data collection process. We also provide consultation on areas where the company has had questions or problems, such as garnishment deductions or shareholder compensation. We alert them to any changes in wage and hour laws or multi-state laws that could affect them.

Our goal is to limit client exposure to penalties as we manage payroll. Common questions include:

Structure of the payroll
How often employees are paid
Direct deposit or by check (or both!)
Structure of the company and number of offices and employees
Location of offices (multi-state?)
Types of benefits
Unusual deductions
Unusual compensation

Collecting this information up front allows us to help clients design an outsourced model that makes sense for them, and doesn’t leave them trying to figure it out for themselves. We find that some clients like to manage parts of the payroll and benefits process themselves, while other parts are best handled through outsourcing.

The Outsourced Payroll Onboarding Process

As a CPA firm dedicated to payroll administration and consulting, Cornwell Jackson has onboarded new clients in less than a month depending on the level of payroll complexity. Our goal is always onboarding within 30 to 45 days. We typically recommend that companies convert at the beginning of a new quarter or pay period — or at year-end — to make the transition align with financial reporting deadlines. A typical onboarding process with our firm looks like this:

Client consultation to design the outsourced model
Client data gathering
Buildout of the payroll account
Payroll set-up checklist to cover all items

Once your company has an efficient model for payroll administration, it is much easier to adjust items as needed through the year. For example, we run across a lot of questions regarding personal use of a company-owned vehicle as a benefit. The ratio of personal use must be calculated for the employees’ W-2s and the benefit run properly through payroll. New hires and promotions also bring with them a wealth of payroll questions, but are more easily handled with an efficient system.

When your CPA is in touch with daily business realities through payroll administration, the long-term value extends beyond payroll accuracy. A dedicated team can consult with you on decisions such as when to hire more employees, when to adjust tax planning and cash flow strategies and timing of bonuses. Payroll efficiency even ties into business valuations as a consideration of overall processes and systems in place to run the business.

Payroll is the most up-to-date KPI in a business — and the most expensive. Business owners we talked to are more than happy to find ways to save money in this area. Are you ready to consider an alternative to your current system of payroll administration? Call the payroll team at Cornwell Jackson.

Download the Whitepaper: With Payroll Outsourcing, Don’t Go it Alone

Scott Bates, CPA, is a partner in the audit practice and leads the firm’s business services practice, which includes a dedicated team for outsourced accounting, bookkeeping and payroll services. He provides consulting to clients in healthcare, real estate, auto, transportation, technology, service, dealerships and manufacturing and distribution. Contact Scott at scott.bates@cornwelljackson.com or 972-202-8000.

Blog originally published May 13, 2016. Updated on March 30, 2018.

Got Bitcoin? Virtual Cryptocurrency Complicates Tax Reporting

Posted on March 28, 2018July 23, 2024 by Red Spot Design2

Bitcoin has been around for nearly a decade. But the tax rules related to “virtual currency” are still evolving. In fact, some Bitcoin investors may be in for a surprise when they file their 2017 returns. Tax matters will become even more complicated for 2018 returns because relevant provisions of the new tax law (the Tax Cuts and Jobs Act) took effect starting in 2018.

The Basics

Here’s what you should know about the brave relatively new world of virtual currency.

Bitcoin emerged in 2009, and it’s currently the most widely recognized form of virtual currency. It may also be referred to as digital, electronic or cryptocurrency.

Unlike cash or credit cards, your local pizza parlor or hair salon isn’t likely to accept Bitcoin payments for routine transactions. However, a growing number of larger businesses — including Overstock.com, the Sacramento Kings and online gaming company Zynga — now accept Bitcoin payments. And the trend is expected to continue.

Bitcoin has an equivalent value in real currency. It can be digitally traded between users. You can also purchase Bitcoin with real currencies (such as U.S. dollars or euros) and exchange Bitcoin for real currencies. The most common ways to obtain Bitcoin are through virtual currency ATMs or online exchanges that typically charge nominal transaction fees.

Once you obtain Bitcoin, you can pay for goods or services using “Bitcoin wallet” software that can be installed on your computer or mobile device. When you make a purchase, the software digitally posts the transactions to the global public ledger. This ensures that the same unit of virtual currency can’t be used multiple times.

Some merchants accept Bitcoin to avoid transaction fees charged by credit card companies and online payment providers (such as PayPal). It’s also popular in certain foreign countries (including Argentina and Iran) where national currencies are susceptible to inflation, corruption, capital controls or international sanctions.

The supply of Bitcoin is capped at 21 million units. As a result, some people have obtained them for investment purposes, hoping that the value will appreciate over time. The Financial Industry Regulatory Authority (FINRA) warns that Bitcoin is highly speculative and investors shouldn’t risk more in Bitcoin than they’re willing to lose.

Some of the limited Bitcoin supply hasn’t been issued yet. These new issues have been reserved for Bitcoin “miners.” These are the people who provide computing power to verify and record virtual currency payments into the global public ledger.

Ups and Downs of Cryptocurrency

Under the tax law, capital gains and losses are recognized when you cash in Bitcoin (and other forms of virtual currency) or use it to pay for goods and services. However, if you’ve held your Bitcoin for less than a year, the gain may be taxed at higher ordinary income tax rates, unless you’re a professional Bitcoin miner or broker.

For example, suppose you buy a $2,000 sofa on Overstock.com using Bitcoin. You originally acquired the Bitcoin that you exchanged for the sofa for $1,200 in 2016 using a Bitcoin ATM. Unless you’re a professional Bitcoin miner or broker, you must report an $800 capital gain ($2,000 – $1,200) on your personal tax return.

The transaction would be more complicated if your Bitcoin had been acquired at different dates and prices. Generally, taxpayers would prefer to exchange their highest-value Bitcoin first to minimize the taxable gain or generate a beneficial tax loss.

Initially, Congress was going to crack down on the “specific identification” technique for capital gains and losses in the new tax law, but the provision didn’t make the final cut.

Federal Tax Reporting

The use of virtual currency has triggered many tax-related questions. Unfortunately, the IRS has been slow to catch up with the new technology and has provided only limited guidance.

In a 2014 ruling, the IRS established that Bitcoin and other convertible virtual currency should be treated as property, not currency, for federal income tax purposes. (See “Ups and Downs of Cryptocurrency” at right.)

As a result, businesses that accept Bitcoin payments for goods and services must report gross income based on the fair market value of the virtual currency when it was received. This is measured in equivalent U.S. dollars.

From the buyer’s perspective, purchases made using Bitcoin result in a taxable gain if the fair market value of the property received exceeds the buyer’s adjusted basis in the Bitcoin exchanged. Conversely, a tax loss is incurred if the fair market value of the property received is less than its adjusted tax basis. The character of a gain or loss from the sale or exchange of Bitcoin depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

On the other hand, wages paid to employees using virtual currency are taxable to the employees. Such wages must be reported by employers on W-2 forms. And they’re subject to federal income tax withholding and payroll taxes, based on the fair market value of the virtual currency on the date of receipt.

Payments using virtual currency made to independent contractors, qualifying Bitcoin miners and other service providers are also taxable. The rules for self-employment tax generally apply, based on the fair market value of the virtual currency on the date of receipt. Normally, payers must issue 1099-MISC forms.

A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Tax Treatment of Bitcoin Exchanges

One gray area related to virtual currency is how to treat the capital gains and losses realized by taxpayers who invest in Bitcoin and exchange it for real currency (such as U.S. dollars). Previously, some tax experts claimed that these exchanges qualify as “like-kind exchanges” of properties under Section 1031 of the tax code. With a like-kind exchange, no current tax is due on the exchange of investment or commercial properties. To qualify for the favorable tax treatment, the properties you relinquish and receive must be similar in nature.

This was an easy solution for Bitcoin traders. They could fall back on the rules for like-kind exchanges to avoid current tax bills.

But the Tax Cuts and Jobs Act eliminates tax-deferred like-kind exchanges — except for exchanges of real estate — for 2018 and beyond. However, prior-law rules that allow like-kind exchanges of property other than real estate still apply if one leg of an exchange was completed as of December 31, 2017, but one leg remained open on that date.

This change creates a burden for Bitcoin investors who trade in currencies: They must use the price of the Bitcoin when it was acquired and the price on the date of the exchange to calculate the resulting capital gain or loss. Unlike sales of securities, no authority is tracking these figures for investors. In addition, it’s unclear whether investors can deduct transaction costs and accounting fees related to virtual currency investments.

Costly Mistakes

Most taxpayers are unaware of the requirements for reporting virtual currency transactions. For the 2013 through 2015 tax years, the IRS estimates that fewer than 900 taxpayers declared Bitcoin earnings annually.

The IRS plans to ramp up compliance in this area. Underpayments of tax attributable to Bitcoin transactions could be subject to penalties, unless the taxpayer can establish that the failure to properly file was due to reasonable cause.

Bottom Line

The IRS is targeting virtual currency transactions as a potential source of additional tax revenue. But it’s issued very limited guidance on the reporting requirements. For the latest developments on reporting Bitcoin and other virtual currency exchanges, contact your tax advisor.

Court: Company President Is Liable for Unpaid Employment Taxes

Posted on March 27, 2018July 22, 2024 by Red Spot Design2

A U.S. District court recently ruled that a company president was a “responsible person” who was liable for the trust fund recovery penalty. The court found that the president’s failure to pay over employment taxes was willful despite the fact there was a security agreement with a lender requiring the lender’s approval before any payments could be made. In addition, the court wasn’t convinced that the company’s co-owner had more control over the company’s finances than the president did.

Basics about the Trust Fund Recovery Penalty

Under Internal Revenue Code Section 6672, if an employer fails to pay its employment tax liability to the IRS, the tax agency can impose the trust fund recovery penalty against any person who:

Is responsible for collecting, accounting for, and paying over payroll taxes; and
Willfully fails to perform this responsibility.

Facts of the Case

During the four-year period in question, a construction contracting company had

two co-owners. The president managed the company’s field operations and was responsible for the hiring and firing of employees. The co-owner served as the company’s bookkeeper and she managed the finances and office staff. However, the president had signing authority on the business checking account and would sign payroll and vendor checks prepared by the co-owner when she wasn’t available.

The company withheld money from its employee paychecks to pay federal payroll tax obligations. But it didn’t send the money to the IRS. Instead, the funds were diverted to pay creditors, operating expenses and the personal obligations of the co-owners.

The company entered into an agreement with a bank for a line of credit. In exchange, the company provided a security interest in its assets, including its accounts receivable. The company also entered into a commercial security agreement with the bank. Under the deal, the company agreed it would not assign, convey, lease, sell or transfer any of the collateral (for example, physical assets, accounts receivable or cash on hand) without the bank’s prior written consent.

The president became aware of the company’s failure to remit withheld payroll taxes to the IRS but he never asked the company to rectify the tax delinquencies with the IRS.

The IRS assessed nearly $1 million in tax penalties against the president, personally, for non-payment of the employment taxes. He challenged the assessment.

The Court’s Ruling

The district court ruled that the president was a responsible person with respect to the company’s failure to remit delinquent employment taxes during the period at issue.

The court found that, throughout the company’s life span, the president was a corporate officer of the business, held company stock, and had the ability to hire and fire staff members. Although his co-owner exercised considerable, if not dominant, control over the company’s finances, it was apparent that she did so effectively by the president’s delegation of that authority, and not because the president lacked the power to control the company’s finances.

In addition, the court found that the president acted willfully in failing to use company funds to pay unpaid payroll taxes. It was undisputed that the president had not even asked the bank for permission to use some of the company’s line of credit to pay the delinquent taxes that both he and the bank knew existed. (Davis, DC CO, 121 AFTR 2d 2018-508)

Congress Raises 401(k) Hardship Withdrawal Limits

Posted on March 26, 2018 by Red Spot Design2

Most 401(k) plans permit hardship withdrawals, though plan sponsors aren’t required to allow them. As it stands today, employees seeking to take money out of their 401(k) accounts are limited to the funds they contributed to the accounts themselves, and only after they’ve first taken a loan from the same account. Loans must be repaid, of course. The theory behind the loan requirement is that employees would be less apt to permanently deplete their 401(k) accounts with hardship withdrawals.

Thanks to the Bipartisan Budget Act (BBA) enacted in February, the rules change, beginning in 2019. Under the BBA, the employees’ withdrawal limit will include not just amounts they have contributed. It also includes accumulated employer matching contributions plus earnings on contributions. If an employee has been participating in your 401(k) for several years, this modification could add substantially to the amount of funds available for withdrawal in the event of a legitimate hardship.

Liberalized Participation Rule

In addition to the changes above, the BBA also eliminates the current six-month ban on employee participation in the 401(k) plan following a hardship withdrawal. This is good news on two fronts: Employees can stay in the plan and keep contributing, which allows them to begin recouping withdrawn amounts right away. And for plan sponsors, it means they won’t be required to dis-enroll and then re-enroll employees after that six-month hiatus.

One thing that hasn’t changed: Hardship withdrawals are subject to a 10% tax penalty, along with regular income tax. That combination could take a substantial bite out of the amount withdrawn, effectively forcing account holders to take out more dollars than they otherwise would have in order to wind up with the same net amount.

For example, an employee who takes out a $5,000 loan from his or her 401(k) isn’t taxed on that amount. But an employee who takes a hardship withdrawal and needs to end up with $5,000 will have to take out around $7,000 to allow for taxes and the 10% penalty.

Hardship Criteria

The BBA also didn’t change the reasons for which hardship withdrawals can be made. Here’s a reminder of the criteria, as described by the IRS: Such a withdrawal “must be made because of an immediate and heavy financial need of the employee and the amount must be necessary to satisfy the financial need.” That can include the need of an employee’s spouse or dependent, as well as that of a non-spouse, non-dependent beneficiary.

The IRS goes on to say that the meaning of “immediate and heavy” depends on the facts of the situation. It also assumes the employee doesn’t have any other way to meet the needs apart from a hardship withdrawal. However, the following are examples offered by the IRS:

Qualified medical expenses (which presumably don’t include cosmetic surgery);
Costs relating to the purchase of a principal residence;
Tuition and related educational fees and expenses;
Payments necessary to prevent eviction from, or foreclosure on, a principal residence;
Burial or funeral expenses; and
Certain expenses for the repair of damage to the employee’s principal residence.

The IRS gives two examples of expenses that would generally not qualify for a hardship withdrawal: buying a boat and purchasing a television.

Finally, a financial need could be deemed immediate and heavy “even if it was reasonably foreseeable or voluntarily incurred by the employee.”

Deadline Extension

Another important and somewhat related change in 401(k) rules was included in the 2017 Tax Cuts and Jobs Act (TCJA) that took effect this year; it pertains to plan loans. Specifically, prior to 2018, if an employee with an outstanding plan loan left your company, that individual would have to repay the loan within 60 days to avoid having it deemed as a taxable distribution (and subject to a 10% premature distribution penalty for employees under age 59-1/2).

The TCJA changed that deadline to the latest date the former employee can file his or her tax return for the tax year in which the loan amount would otherwise be treated as a plan distribution. So, for example, if an employee with an outstanding loan of $5,000 left your company and took a new job on Dec. 31, 2017, that individual would have until April 15 (or, with a six-month fling extension, Oct. 15) 2018 to repay the loan.

Alternatively, the former employee could make a contribution of the same amount owed ($5,000, in this example) to an IRA or the former employee’s new employer’s plan, assuming the new plan permitted it. In effect, that $5,000 contribution to a new plan would be treated the same as a rollover from the old plan.

While this new flexibility might seem like a boon to plan participants, it could also represent a financial trap. Employees typically aren’t accumulating enough dollars to put themselves on track to retire comfortably at a traditional retirement age. Therefore, although you can’t prevent a plan participant from taking advantage of the new rules if they qualify, you can redouble your efforts to help employees understand the importance of thinking of their retirement savings as just that — savings for retirement, and not a “rainy day” fund.

Survey: Employers Adapt Quickly to Withholding Tax Changes

Posted on March 22, 2018July 22, 2024 by Red Spot Design2

Most employers had no problems meeting the February 15, 2018, deadline to begin using the 2018 federal income tax withholding tables, which reflect changes made by the Tax Cuts and Jobs Act (TCJA). However, many employees question how the TCJA will affect them.Those are findings of a recent American Payroll Association survey of 1,000 payroll and finance professionals. The Tax Reform Membership Survey found that about 97% of respondents said they began using the tables by the February 15 deadline. Nearly 84% of participants said that the tax law didn’t place any additional burden on year-end processing. Almost 63% noted that they process payrolls in-house.

The annual withholding tables typically come out in December but were delayed until January 11 due to the enactment of the TCJA. Employers only had until February 15 to begin using the tables. Of the survey respondents, about 17% said they started using the tables between January 15-19, 27% started the week of January 22, and about 32% began the week of January 29.

Changes in the Law

The TCJA brings many modifications, effective Jan. 1, 2018, including:

Lower personal income tax rates,
Elimination of personal exemptions,
Significantly increased standard deductions for 2018 to $24,000 for married joint-filing couples, $18,000 for heads of households, and $12,000 for others, and
Elimination of some tax-free benefits.

On the other hand, many employees have expressed concerns about the long-term impact the law will have on their finances. Fourteen percent of employers said they received a large number of employee questions, but the majority, 61% say they received only a few inquiries. Among the most common questions were:

How will this affect my income taxes next year?
Will my taxes go up or down?
Should I change my W-4?
Will I need to complete a new Form W-4 to make sure I’m not being under withheld?
How should I adjust my withholding allowances?
How do I increase the withholding to avoid owing money at the end of 2018?
Do I need to change my exemptions to match my new tax liability?
Why is my net pay increasing?
How will this affect the bicycle commuter benefit?
What’s the effect of moving expenses paid to a moving company?

“Input from our survey made it clear employees are worried they’ll be negatively affected by the new law once tax time 2019 rolls around,” said Michael O’Toole, Esq., Senior Director of Publications, Education, and Government Relations for the APA. “It will be important for employees to quickly review their withholdings once the new Form W-4 is available to make sure they are not under withholding on their federal taxes.”

Reaching Out to Employees

Asked if they had been proactively communicating with employees to let them know how the TCJA could affect their paychecks, about 57% said yes, 10% said they plan to do so; 30% said no.

The APA has more than 20,000 members who represent 17,000 employers.

Things to Ask your CPA about Payroll Outsourcing

Posted on March 20, 2018July 23, 2024 by Red Spot Design2

For many small businesses, payroll may be handled in-house. And yet, the laws and regulations surrounding employee compensation and benefits can challenge owners and back office staff to stay efficient and compliant. Payroll ties directly into individual and company tax reporting as well as employee benefit compliance. If and when companies choose payroll outsourcing, they must weigh the potential benefits against the ability of the payroll provider to deliver a high level of customer service and communication. Companies and industries differ on how they structure payroll and benefits. Laws and regulations also vary state by state. Consulting on payroll structure, schedules, regulatory changes and reporting, therefore, should be part of the relationship while still being cost effective for the company. It’s helpful to start this discussion with your CPA.

What to Ask your CPA about Payroll Outsourcing

Some CPA firms offer payroll administration as part of basic or strategic accounting services. The level of administration and services vary widely. The potential benefit of having your CPA firm handle payroll administration, however, is that the team understands the world of taxes and accounting. They can streamline payroll reporting, deposits and filing schedules into the audit or tax deadlines they already handle for the business.

However, not every CPA firm offers payroll administration. Due to its complexity, it’s also important that the firm has a staff of professionals dedicated to this area of your business. If, in fact, the firm offers a focused niche in payroll administration and consulting, there are several benefits to the arrangement:

Expanded resources to monitor new compliance issues
Reduced overhead costs (assuming a packaged engagement with other services)
Multi-state payroll experience
Corrected instances of overpayment or underpayment
Managed filing and payment schedules with IRS, state and local tax authorities
Limited client exposure to potential penalties
Consulting on software options and efficient payroll structures
Streamlined communication with other tax, audit and business needs

At Cornwell Jackson, we offer payroll administration and consulting services to our clients. We have invested in software and training for a team dedicated to this service, including certification as a CPP through the American Payroll Association.

The need was evident after too many instances of misclassification 1099 errors as well as W2 mistakes at tax time. We also noted mistakes in HSA and life insurance reporting and general improper reporting of cash and non-cash benefits. Our clients were paying for payroll administration, and then paying our firm to fix mistakes. We realized that our experience could help reduce or prevent problems before they even happen — and reduce our clients’ expenses.

After investigating the value our firm could provide in this area, we learned about many differences between payroll providers. When discussing payroll administration with your CPA firm or an outsourced service, there are several questions you should ask:

How much experience does the provider have in payroll administration — and is there a dedicated team?
Will the team walk you through data collection and set-up or are you on your own?
Who is your go-to contact to ask questions about liabilities or deadlines?
Is the provider NACHA compliant for ACH direct deposits?
Can you arrange for payroll tax payments on a schedule that supports cash flow along with compliance?

This last question is an important business consideration that most companies don’t know about. Some payroll services withdraw all funds from the business account for payroll transfers and taxes all at once, even if taxes aren’t due for a few weeks. If your receivables come in the first week of the month and payroll taxes are due on the 15^th of the month, you can schedule payments in a way that supports cash flow while still being compliant. In addition, payroll services may not provide guidance on industry-specific issues like auto dealer comps or law firm shareholder bonuses, for example. Business owners must carefully consider the level of expertise a provider has in your industry.

Continue Reading: Outsourced Payroll Onboarding: Build in time for transition and results

Blog originally published April 18, 2016. Updated on March 20, 2018.

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