Avoiding IRS Underpayment Penalties

Congress considers our tax system a “pay-as-you-earn” system. To facilitate that concept, the government has provided several means of assisting taxpayers in meeting the “pay-as-you-earn” requirement. These include: 

  • Payroll withholding for employees; 

  • Pension withholding for retirees; and 

  • Estimated tax payments for self-employed individuals and those with other sources of income not covered by withholding.

When a taxpayer fails to prepay a safe harbor (minimum) amount, they can be subject to the underpayment penalty. This nondeductible interest penalty is higher than what might be earned from a bank. The penalty is applied quarterly, so making a fourth-quarter estimated payment only reduces the fourth-quarter penalty. However, withholding is treated as paid ratably throughout the year, so increasing withholding at the end of the year can reduce the penalties for the earlier quarters. This can be accomplished with cooperative employers or by taking an unqualified distribution from a pension plan, which will be subject to 20% withholding, and then returning the gross amount of the distribution to the plan within the 60-day statutory rollover limit (but check with this office before using the latter strategy). 

Federal law and most states have so-called safe harbor rules, meaning if you comply with the rules, you won’t be penalized. There are two Federal safe harbor amounts that apply when the payments are made evenly throughout the year.

  1. The first safe harbor is based on the tax owed in the current year. If your payments equal or exceed 90% of your current year’s tax liability, you can escape a penalty. 

  2. The second safe harbor—and the one taxpayers rely on most often—is based on your tax in the immediately preceding tax year. If your current year’s payments are equal to or exceed 100% of the amount of your prior year’s tax, you can escape a penalty, regardless of the amount of tax you may owe when you file your current year’s return. If your prior year’s adjusted gross income was more than $150,000 ($75,000 if you file married separate status), then your payments for the current year must be 110% of the prior year’s tax to meet the safe harbor amount.

Where taxpayers get into trouble is when their income goes up or their withholding goes down for the current year versus the prior year. Examples are having a substantial increase in income, such as when investments are cashed in, thereby increasing income but without any corresponding withholding or estimated payments. Another frequently encountered situation is when a taxpayer retires and their payroll income is replaced with pension and Social Security income without adequate withholding. Taxpayers who don’t recognize these types of situations often find themselves substantially underpaid and subject to the underpayment penalty when tax time comes around. 

The bottom line is that 100% (or 110% for upper-income taxpayers) of your prior year’s total tax is the only true safe harbor because it is based on the prior year’s tax (a known amount), whereas 90% of the current year’s tax amount is a variable based on the income for the current year, and often that amount isn’t determined until it is too late to adjust the prepayment amounts. 

That being said, there are times when using the 100%/110% safe harbor method doesn’t make a lot of financial sense. For example, let’s say that in the prior year, you had a large one-time payment of income that boosted up your tax to $25,000, which is $10,000 more than you normally pay. You know that you won’t have that extra income in the current year. Rather than rely on the 100%/110% of prior tax safe harbor, where you’d be prepaying $10,000 more than your current year’s tax is likely to be, it may be appropriate to use the 90% current-year tax safe harbor, determined by making a projection of your current year tax, and as the year goes along, monitoring your income and the tax paid in to be sure you are on track to reach the 90% goal. 

Please contact your tax pro promptly if you have a substantial increase in income so that withholding or estimated tax payments can be adjusted to avoid a penalty.

As always folks, don’t trust anything from the internet. These posts are meant to inform and educate, not to advocate for any position. Always reach out to your own tax preparer for your own advice. 


Required Minimum Distributions Have Resumed for 2021

Ok folks, this one’s pretty long. Here’s the tldr:  RMD’s were postponed in 2020, they’re not in 2021. You MUST take your RMD in 2021. Make sure you do! Brave souls only, read on past this point!

When Congress established tax-favored retirement plans, they allowed taxpayers to take a tax deduction for the amount of their allowable contribution to the plans. But they also included a requirement for a portion of the funds to be distributed each year and be subject to income tax. Such a distribution is referred to as a required minimum distribution (RMD). 


RMDs are commonly associated with traditional IRAs, but they also apply to 401(k)s, SEP IRAs and other qualified retirement plans. The tax code does not allow taxpayers to keep funds in their qualified retirement plans indefinitely. Eventually, assets must be distributed, and taxes must be paid on those distributions. If a retirement plan owner takes no distributions, or if the distributions are not large enough, he or she may have to pay a 50% penalty on the amount that is not distributed.  


There is no maximum limit on distributions from a Traditional IRA, and as much can be withdrawn as the owner wishes. However, if more than the required distribution is taken in a particular year, the excess cannot be applied toward the minimum required amounts for future years.


There have been some recent tax law changes that have led to some confusion among taxpayers subject to the RMD requirement. Prior to 2020, the required starting age for RMDs was 70½. Thanks to the Secure Act passed by Congress in late December 2019, the age at which distributions have to begin was increased to age 72 starting in 2020. 

    
However, as part of the 2020 COVID relief, Congress suspended the RMD requirement. Thus those turning 72 in 2020, and those who turned 70½ in prior years, were not subject to the RMD requirement for 2020. 


RMDs Resume in 2021 - Since the suspension was for one year only, the RMD requirement resumes for 2021. Of course, the resumption applies to those that attained the age of 70½ in years before 2021, those who turned 72 in 2020 and those who turn 72 in 2021.


Still Working Exception – If you participate in a qualified employer plan, generally you need to start taking RMDs by April 1 of the year following the year you turn 72. This is your required beginning date (RBD) for retirement distributions. However, if your plan includes the “still working exception,” your RMD is postponed to April 1 of the year following the year you retire.

This delayed-until-retirement distribution provision does NOT apply to IRAs, so even though someone age 72 or older with an IRA is still working, and perhaps still contributing to the IRA, they are required to take a minimum distribution from the IRA each year. 


First Year IRA RMD Exception – If a taxpayer so chooses, he or she can delay an RMD for the first year an RMD is required until the second year, thus making the distribution includible in the second year’s tax return. This is sometimes desirable if the taxpayer has substantial wages or other income in the year the mandatory distribution age is reached and expects less income the next year. In this situation, by delaying the distribution to the second year the tax bracket could be substantially lower. If the taxpayer chooses that option, then:

• The first year RMD must be taken by April 1 of the following year, and

• The taxpayer must also take the second year RMD distribution by December 31 of year two, thus doubling up the distributions in year two.


Determining the RMD Amount - The required withdrawal amount for a given year is equal to the value of the retirement account on December 31 of the prior year divided by the life expectancy (“distribution period”) from the Uniform Lifetime Table illustrated below, with the exception where the taxpayer’s spouse is 10 years younger, in which case the Joint and Last Survivor Table is used. It is not illustrated because of its size.  

 

Note: the above table is only valid through 2021. The IRS has released a new table which must be used for the RMD computations beginning for 2022 and subsequent tax years.    

Example: An IRA account owner is age 75 in 2021, and the value of his only IRA account was $120,000 on December 31, 2020. His 73-year-old wife is the sole beneficiary of the IRA. From the uniform lifetime table, we determine the owner’s distribution period to be 22.9. Thus, his RMD for 2021 is $5,240 ($120,000/22.9). That amount must be withdrawn by no later than December 31 of 2021. 


If the same set of facts were to occur for a different taxpayer in 2022, using the new table (not illustrated), the distribution period will be 24.6 and the RMD $4,878 ($120,000/24.6). The new table was designed to take into account individuals’ longer life expectancies based on actuarial statistics developed since the last time the tables were updated. Thus, the comparable RMD is less than under the current table, and at least in theory, the IRA won’t be depleted as quickly. 

The RMD for the year can be taken from any one or several of the taxpayer’s IRA accounts, but the minimum distribution amount must be figured separately for each account, and then totaled to determine the RMD for the year. 


Caution: Some individuals roll over their distribution in the mistaken belief they can circumvent the RMD requirement. This is not true – remember, the purpose of the RMD is to force taxable distributions.    


If the taxpayer dies prior to taking the entire RMD for the year of death, the IRA beneficiaries are responsible for figuring the owner's required minimum distribution in the year of death and distributing it to the named beneficiaries. If there are no beneficiaries, the distribution goes to the decedent’s estate


Excess Accumulation Penalty – The tax law includes a penalty referred to as an excess accumulation penalty. This draconian penalty is 50% of the RMD that should have been distributed for the year and wasn’t. In the preceding example, if the taxpayer does not withdraw the $5,240 for 2021, he would be subject to a 50% penalty (additional tax) of $2,620 ($5,240 x 50%). 


Under certain circumstances, the IRS will waive the penalty if the taxpayer demonstrates reasonable cause and makes the withdrawal soon after discovering the shortfall in the distribution. However, the hassle and extra paperwork involved in asking the IRS to waive the penalty makes avoiding it highly desirable; to do so, always take the correct distribution in a timely manner. Some states also penalize under-distributions. 


Even though a qualified plan owner whose total income is less than the return filing threshold is not required to file a tax return, he or she is still subject to the RMD rules and can thus be liable for the under-distribution penalty even if no income tax would have been due on the under-distribution. 


Qualified Charitable Distribution – A taxpayer is allowed to transfer funds from their IRA to a qualified charity and the distribution is non-taxable. To constitute a qualified charitable distribution (QCD), the distribution must be made: 


(1) Directly by the IRA trustee to a qualified charitable organization other than a private foundation or a donor-advised fund, and 

(2) On or after the date the IRA owner attains age 70½. A distribution from an IRA made to a charitable organization in the year that the IRA owner turns 70½ but prior to the date the individual reaches age 70½ is not a qualified charitable distribution.


For those 72 and older a QCD will also count towards the annual RMD requirement. However, after 2019 the restriction on making traditional IRA deductions after age 70½ was repealed and Congress added a complication to QCDs. That provision requires the non-taxable portion of a QCD to be reduced by any deductible IRA contribution made after reaching age 70½.  


Example – Bob makes a traditional IRA contribution of $7,000 when he is age 71 and another $7,000 contribution at the age of 72 and deducts the IRA contributions on his returns. Then later when he is 74, he makes a QCD in the amount $20,000 to his church’s building fund. Since Bob had made the deductible IRA contributions after age 70½, his QCD must be reduced by the $14,000. As a result, of the $20,000 QCD, $14,000 is a taxable distribution and only $6,000 is nontaxable. However, because the $14,000 was taxable Bob can claim a $14,000 charitable contribution if he itemizes his deductions. In addition, the entire $20,000 will count towards his RMD for the year.  


Designated Beneficiaries - Keeping your designated IRA beneficiary or beneficiaries current is very important. You may not want your account going to your ex-spouse, and you certainly do not want a deceased individual to be your beneficiary.  


In many cases, advance planning can minimize or even avoid taxes on Traditional IRA distributions. Often, situations will arise in which a taxpayer’s income is abnormally low due to losses, extraordinary deductions, etc., where taking more than the minimum in a year might be beneficial. This is true even for those who may not need to file a tax return but can increase their distributions and still avoid any tax. If you need help with the tax consequences of planning your RMD, please call this office for assistance.



As always folks, this post is educational and informational only. Don’t take advice from the internet. Ask your own tax pro or financial advisor for specific information about your situation. 


Employers Hiring New Employees May Be Able to Claim a Work Opportunity Tax Credit

The Covid-19 pandemic has had a significant impact on the labor market – mandated government lockdowns and workers’ and customers’ fears of contracting the illness resulted in businesses closing or temporarily cutting back and laying off or furloughing millions of employees. In April 2020, the unemployment rate reached 14.8%, the highest rate since such data started to be collected in 1948. While by September 2021 the unemployment rate had declined to 4.8%, millions of job openings went unfilled as former employees were reluctant to return to work. Some businesses still weren’t operating at full capacity because they weren’t able to find enough employees. 

If you are a business owner, and are hiring new workers, you may be able to claim a Work Opportunity Tax Credit (WOTC) if you hire someone who has been unemployed for 27 consecutive weeks or more or if the individual is from one of several other categories of eligible employees, as explained below. This credit is an income tax credit, unlike some of the pandemic-related credits that are applied to employment taxes of the business.   

The WOTC is typically worth up to $2,400 for each eligible employee, but it can be worth up to $9,600 for certain veterans and up to $9,000 for “long-term family assistance recipients.” The credit, which was extended by Congress in late 2020 legislation, is available for eligible employees who begin working for the new employer after 2020 and before 2026.

Generally, an employer is eligible for the WOTC only when paying qualified wages to members of any of the targeted groups listed below. For more details on the required qualifications for each group, see the instructions for IRS Form 8850 (Pre-Screening Notice and Certification Request for the Work Opportunity Credit).

(1) Qualified IV-A recipients – generally, members of a family that is receiving assistance under the Temporary Assistance for Needy Families (TANF) program; 

(2) Qualified veterans;

(3) Qualified ex-felons – generally, those hired within one year of release from prison; 

(4) Designated community residents – those who are aged 18 through 39 and who are living in an empowerment zone or a rural renewal area*; 

(5) Vocational rehabilitation referrals – handicapped individuals who are referred by rehabilitation agencies;

(6) Qualified summer youth employees – those who are 16 or 17 years old, have never previously worked for the employer and reside in an empowerment zone*;

(7) Qualified members of families who participate in the Supplemental Nutritional Assistance Program (SNAP); 

(8) Qualified Supplemental Security Income recipients;

(9) Qualified long-term family assistance recipients – those receiving TANF assistance payments; and 

(10) Qualified long-term-unemployed individuals. The period of unemployment cannot be less than 27 consecutive weeks, and must include a period (which may be less than 27 consecutive weeks) in which the individual received unemployment compensation under state or federal law.

* Both empowerment zones and rural renewal areas are listed in the IRS Form 8850 instructions. The empowerment zone designations expired at the end of 2020. However, the legislation that extended the WOTC through 2025 also provides for an extension of the designations to the end of 2025.

For an employer to qualify for the credit, the employee must work a minimum of 120 hours and receive at least 50% of his or her wages from that employer for working in the employer’s trade or business. Relatives of the employer and employees who have previously worked for the employer do not qualify for the credit. 

  • For an employee from most of the targeted groups, the credit is based upon the first $6,000 of first-year wages. If an employee completes at least 120 hours but less than 400 hours of service for the employer, the credit is equal to those wages multiplied by 25%. If the employee completes 400 or more hours of service, the credit is equal to the wages multiplied by 40%. Thus, the maximum credit per employee in one of these groups would be $2,400 (.4 x $6,000). For the summer youth employees, only the first $3,000 of the first-year wages are taken into account, resulting in a maximum per-employee credit of $1,200 (.4 x $3,000)

    Two categories allow for higher first-year wages to be eligible when calculating the credit:

    Long-term family assistance recipients – For this category, the first-year wage that can be taken into account for the credit is increased to $10,000, thus allowing a maximum credit of $4,000 (.4 x $10,000). In addition, this group qualifies for a credit in the second year (immediately following the first year); this is equal to 50% of second-year wages up to $10,000. 

  • Veterans – The three possible qualifications of veterans (family received SNAP benefits, unemployed, or service-related disability) have applicable first-year wages for the credit of up to $12,000, up to $14,000 and up to $24,000. Thus, the maximum credit for this group is between $4,800 (.4 x $12,000) and $9,600 (.4 x $24,000), depending upon the qualification. The unemployment-based qualification for veterans without a service-related disability is either that the veteran was:

    • (1) Unemployed for a period or periods totaling at least 4 weeks (whether or not consecutive) but less than 6 months in the 1-year period ending on the hiring date, or

    • (2) Unemployed for a period or periods totaling at least 6 months (whether or not consecutive) in the 1-year period ending on the hiring date.

Certification Process - To be eligible to claim the WOTC, the employer must file Form 8850 with its state workforce agency (SWA) no later than 28 days after an eligible employee begins work. Due to the COVID-19 emergency, the IRS has extended many filing due dates, including if the 28th calendar day falls on or after January 1, 2021, and before October 9, 2021; in that case, employers are allowed to submit Form 8850 to the SWA by November 8, 2021. Once the worker is state-certified as a member of a targeted group and has worked sufficient hours, the employer can claim the WOTC on Form 5884 (Work Opportunity Credit).

Other Issues:

  • No Multiple Benefits – No deduction is allowed for the portion of wages equal to the WOTC for that tax year. Also, the same wages used to compute the WOTC can’t be used by the employer when claiming the coronavirus-related Employee Retention Credit, the credit for qualified sick and family leave, and the disaster-related employee retention credit.

  • Unused Current-Year Credit – The credit is included in the general business credit, and if an employer’s credit is greater than its income-tax liability (including the alternative minimum tax), the excess credit is considered an unused credit that is available for use on another year’s return. The unused credit is first carried back one year (generally by amending the return for the carryback year) and then carried forward until any remaining credit is used up (but for no more than 20 years). 

If you are expanding your work force as the pandemic winds down, be sure to keep in mind that you may be eligible to claim the WOTC for eligible employees from the targeted tax groups noted in this article. However, in some circumstances, electing not to claim the WOTC may be more valuable tax-wise for you. Please call this office for additional information related to the WOTC and to see if it would be beneficial in your particular tax circumstances. 


As always folks, don’t trust anything from the internet. These posts are meant to inform and educate, not to advocate for any position. Always reach out to your own tax preparer for your own advice.

5 Simples Steps to get your Accounting Under Control

Intimidated by Accounting? Five Simple Steps Are All You Need

When you decided to start your own company, you likely focused on the products or services you were selling, along with your amazing customer service and marketing skills. While running your own small business offers plenty of upsides, it also means you’re responsible for every aspect of operations, including the parts you think are beyond your capabilities – or just plain boring. Accounting tasks often fall into both of these categories, but that doesn’t keep attending to them from being absolutely necessary. The good news is that you don’t need an accounting degree – or even to be good at math - to do what needs to be done. The five tips that follow are simple to do. Incorporating them into your everyday tasks and mindset will not only cover the basics – but will also give you a much clearer sense of your business’s financial health.

  1. Avoid mixing business expenses with personal expenses – It may feel simpler to reach for the same credit card or use the same bank account to pay for everything, but from a business accounting perspective it’s a recipe for disaster. Whether you are a sole proprietor or are an LLC (where separating these expenses out is a requirement), you’ll find that if you pay for your business expenses separately it will make it much easier to optimize your taxes and to make smarter decisions based on a good understanding of your revenues and cash flow.

  2. Use cloud-based accounting software. Where it was common for small businesses to invest in off-the-shelf accounting software, cloud-based software has made it much easier to access your information from anywhere. It also offers the advantage of continuous software updates that are responsive to both improved performance and legislative changes, as well as superior security.

  3. Log expenses and payments every single day. Procrastination is something we’re all guilty of, especially when it comes to tasks we’d rather not do, but keeping current on logging expenses and revenue is crucial. Make it part of your daily activities, like making yourself a cup of coffee or brushing your teeth. Otherwise, you’re going to have a big pile of records that either has to be entered into your books or get forgotten about completely. The good news is that there are plenty of apps that make the task easier.

  4. Put a quarterly (or monthly) check-up on your calendar. Every quarter you need to take a close look at how your business is doing, so put it on your calendar as if it is an important appointment. If you’ve kept your records up to date, this will provide you with the opportunity to get a helpful overview of how your business is doing and what trends you can track and respond to.

  5. If you can’t handle your accounting tasks, get help. We offer bookkeeping and accounting services to help you stay on track. Though you may be able to manage on your own for a while, business growth may necessitate hiring help. Whether that is a part-time or full-time employee or an outside service like ours is up to you. Just make sure that you recognize when you’re in over your head or out of the time you need to do it yourself.

Keep your business headed in the right direction with the critical financial data you need to make smart decisions. Contact us to discuss how we can help your entity prosper.   


 As always folks, don’t trust anything from the internet. These posts are meant to inform and educate, not to advocate for any position. Always reach out to your own tax preparer for your own advice. 


The IRS Backlog Is Causing Taxpayer Heartburn

Before the COVID-19 pandemic, the IRS was getting refunds out swiftly and responded to calls and correspondence in a, mostly, reasonable amount of time. However, COVID-19 brought about a perfect storm of delays, initially caused by employees having to stay home because lockdowns prevented processing centers from operating and workers from going to their offices. And in most instances, IRS employees could not work from home because of the secure nature of their tasks and the IRS’s computer system. 


Congress also heaped more work on the IRS by making the service responsible for distributing the economic recovery payments (stimulus payments), not just once but three times. Plus, Congress made retroactive tax changes, which required the IRS to modify already filed tax returns. Bottom line: it has been a rough couple of years for the IRS, and it is taking a long time for them to catch up.


More recently, Congress mandated paying eligible taxpayers 50% of their child tax credit for 2021, estimated based on the 2020 return information, in six monthly installments from July through December, placing an additional burden on IRS resources. These payments have been going out since July, but if you are having trouble with them, this article can provide some simple answers. 


For those who hadn’t filed their 2020 return yet, the third economic recovery payment and the advance child tax credit payments were based on their 2019 tax return. But as people filed their 2020 returns, the IRS needed to recalculate the amounts of the payments so that taxpayers weren’t shorted. These do-overs take away time that otherwise could be spent working through the backlog of correspondence and amended returns for prior years and processing the 2020 returns being filed on extension. 


One of the IRS watchdogs, National Taxpayer Advocate Erin Collins, applauded the IRS in her mid-year report to Congress for processing most returns in a timely manner and issuing most of the economic recovery payments despite all of its added responsibilities. The NAEA also wrote a letter asking the IRS to make some changes to reduce the burden of error letters while the IRS gets back on track. 


According to the advocate, the IRS did not have time to adjust its systems for the last-minute Dec. 27, 2020, legislation that made changes for the 2021 filing season. This required the IRS to manually verify the returns for which the taxpayer elected to use their 2019 earned income to claim 2020 earned income tax credit or the additional child tax credit. Unlike prior years, the IRS had to deal with a large volume of returns requiring manual reviews. At the end of the 2021 tax season, the IRS had over 35 million individual and business returns backlogged. 


But the IRS is chipping away at the logjam. As of the end of July 2021, the backlog was down to 13.8 million returns.


So, if you are caught up in the gridlock, not much can be done except to be patient. But there’s some tiny bit of good news – if the IRS owes you a refund that’s been delayed, they’ll likely pay you interest at the annual rate of 3%. 


There are not enough IRS employees to field all the calls about “Where is my refund?” or other issues, and anyone who does get through on the phone is lucky. Most spend hours on hold and never get through. A recent article said that the IRS was receiving about 1500 calls a minute. 


We aren’t making excuses for the IRS but just letting you know what the problems are and that it may be a bit longer for them to catch up. We are trying to get answers for each of you that may have received a letter, but it’s going to take extra time as they dig out of this mess. If you would like us to monitor your IRS account, please stop by the office and request Form 8821. Once we have an 8821 on file, we can see what’s happening on your account without waiting for the IRS to answer our calls or letters. 


As always folks, this post is educational and informational only. Don’t take advice from the internet. Ask your own tax pro or financial advisor for specific information about your situation. 


Watch Out for Tax Penalties!

Most taxpayers don’t intentionally incur tax penalties, but many who are penalized are simply unaware of the penalties or the possible damage they can do to their wallets. As tax season approaches, let’s look at some of the more commonly encountered penalties and how they may be avoided.

Underpayment of Estimated Taxes and Withholding Penalty – The United States’ income tax system is a pay-as-you-earn tax system, which means that taxpayers are required to pay their tax liability as they receive income during the year through withholding or by making estimated tax payments. Normally, estimated tax payments are made in four installments that are due by April 15, June 15, September 15, and January 15 of the subsequent year. If a taxpayer owes more than $1,000 when filing their return for the year, the IRS will assess the penalty for underpayment of estimated tax, which is currently 3% of the underpayment. “Safe harbor” payments can protect you from this penalty, which are payments of 90% of the current year’s tax liability or 100% (110% for high-income taxpayers) of the prior year’s tax liability. Farmers and fishermen need only prepay 66-2/3% of their current liability or 100% of their prior year’s liability. 

The 100%/110% safe harbor works well when the taxpayer’s tax will be higher than that of the prior year. But when a taxpayer anticipates a large drop in income as compared to the prior year, there can be a huge impact on the necessity of estimated tax payments. The 100% and 110% of the prior year’s tax liability are most likely not viable safe harbor amounts for estimated tax in the lower-income year, and most taxpayers will want to pay 90% of the current year’s tax liability. Please contact this office to see if you need to make any payments and, if so, how much.

Required Minimum Distribution (RMD) Penalty – To prevent an individual from investing in tax-deferred retirement plans, including traditional IRAs, but never withdrawing funds from the plans (which would mean the government wouldn’t ever collect taxes on the retirement funds), retirees must take an RMD each year after reaching the mandatory RMD age. The mandatory distribution age is currently 72. Failing to take the correct minimum distribution (also known as excess accumulation) results in a penalty of 50% of the difference between what should have been withdrawn and what was actually withdrawn. However, the IRS generally is very liberal about abating the penalty in most situations when corrective action is taken.

Late-Filing Penalty – If a return is filed after the due date, including after extensions, a late-filing penalty of 4.5% per month (maximum 22.5%) will be applied. The normal due date for returns is April 15 of the subsequent year. Because of COVID-19, the original due date for 2020 returns was extended to May 17, 2021. Those who had not filed by that date could have requested a further extension to October 15, 2021. If you have not filed your 2019, 2020, or any earlier year’s return, you are encouraged to do so as soon as possible to minimize late-filing penalties. 

If a return is over 60 days late, the minimum penalty for failure to file is the lesser of $435 ($450 in 2022) or 100% of the tax shown on the return. While the obvious way to avoid a late-filing penalty is to file in a timely fashion, the IRS will consider abating the penalty if it can be proven that there was reasonable cause and not willful neglect.

Late-Paying Penalty – If the tax owed on a return is paid after the unextended due date of the tax return (usually April 15 but is May 17 for 2020 returns filed in 2021), then the taxpayer will be subjected to a penalty of 1/2% per month (maximum 25%) of the unpaid balance. Taxpayers are frequently caught by this penalty when they need an extension to file their tax return; many fail to realize that the extension does not include an extension on paying. The only way to avoid or minimize this penalty is to have little or no balance due on the return when it is finally filed. The extension form includes a provision to pay the projected balance owed when filing the extension. 

Negligence – When underpayment is due to taxpayer negligence or when there are errors in tax valuations, a penalty of 20% of the tax underpayment will be charged. This penalty is frequently encountered when the IRS adjusts a filed return due to unreported income or overstated deductions. 

Fraud – The fraud penalty is 75% of the tax unpaid due to fraud. 

Dishonored Check – The penalty for dishonored checks of over $1,250 is 2% of the check amount. If the amount is $1,250 or less, the penalty is the amount of the check or $25, whichever is less. If you don’t have sufficient funds to pay your tax when you file your return, rather than writing a check that you know will bounce, you may be able to arrange an installment payment plan with the IRS. You may still incur late-payment charges, but the penalty rate will be lower if you are on a payment plan.

Missing ID Number – A $50 penalty for each missing number applies when a taxpayer doesn’t provide a required Social Security number (SSN) for themselves, a dependent, or another person on their tax return. It is also charged when the taxpayer doesn’t provide their SSN to another person or entity when required. 

Early Withdrawal Penalty – If a taxpayer is under age 59½ and withdraws assets (money or other property) from a qualified retirement plan, including traditional IRAs, the taxpayer must pay a 10% additional tax, commonly referred to as the early withdrawal penalty. This tax is 10% of the part of the distribution that the taxpayer was required to include in their gross income for the year of the distribution. A number of exceptions apply to this penalty.

As part of COVID-19 relief, this penalty was waived on distributions of up to $100,000 from qualified retirement plans and traditional IRAs during 2020. Early withdrawals in 2021 and later years are subject to the penalty unless one of the several exceptions applies. 

Failure to Report Tips – A penalty will be charged if a taxpayer didn’t report tips to their employer. It equals 50% of the Social Security tax on the unreported tips. 

Reporting Foreign Accounts and Assets – There are numerous and substantial penalties for failures to report a variety of foreign accounts and assets, and some of the penalties are even draconian. Please contact this office if you have a foreign financial account, foreign trusts, ownership in a foreign corporation, received foreign gifts, and so on. 

Excessive Claim Penalty – If a claim for refund or credit for income tax is made for an excessive amount, the person making the claim is liable for a penalty equal to 20% of the excessive amount. The excessive amount is the amount by which one’s claim for any tax year exceeds the amount of the claim allowable for that tax year. 

The penalty doesn’t apply if it is shown that the claim for the excessive amount was made with reasonable cause. The penalty also does not apply if any portion of the excessive amount of credit is subject to an accuracy-related penalty. 

Accuracy-Related Penalty for Non-Itemizers – For 2021, taxpayers are allowed a deduction of up to $300 ($600 on married joint returns) for cash contributions to qualified charitable organizations. Usually, only individuals who itemize their deductions can deduct donations to charities. As part of the accuracy-related penalty, a non-itemizing taxpayer who overstates their charitable donation can be penalized by 50% of the tax attributable to the overstatement, rather than the normal 20% penalty.

Frivolous Return – In addition to any other penalties, the law imposes a $5,000 penalty for filing a frivolous return – one that does not contain information needed to establish the correct tax or that shows a substantially incorrect tax because the taxpayer takes a frivolous position or displays a desire to delay or interfere with the tax laws. This includes altering or striking out the pre-printed language above the space where the taxpayer signs. Under limited circumstances, the IRS may reduce the penalty from $5,000 to $500.

Failure to File Information Returns – A taxpayer who, without reasonable cause, fails to file a required information return in the manner the law specifies or by the proper deadline, fails to include all of the information required, or includes incorrect information will be subjected to a penalty of $280 for each return required to be filed during 2021 or 2022. The penalty will be reduced to $50 if the failure is corrected within 30 days of the due date and $110 if corrected by August 1.

Talk with your own tax pro if any of these penalties have been assessed against you, to see if it is possible to have them reduced or removed. 


As always folks, don’t trust anything from the internet. These posts are meant to inform and educate, not to advocate for any position. Always reach out to your own tax preparer for your own advice. 


The Art of Running a Successful Family Business: Breaking Things Down

At its core, a family business is exactly what it sounds like: a company or other enterprise owned, operated, and actively managed by at least two people from the same family. This can be a parent and their kids, two siblings, or some other configuration — it doesn't actually matter, as the management is made up of people with some type of similar close relation.

According to one recent study, family businesses make up between 80% and 90% of all business enterprises in North America. They contribute approximately 64% to the gross domestic product of this country, equaling roughly $5 trillion every year. Not only that, but they also comprise around 60% of the workforce — making their contribution every bit as significant as it is comprehensive.

Having said that, as is true with so many other types of businesses, simply beginning an enterprise with someone you trust isn't nearly enough to guarantee success. Family organizations often fail the same as others do, and if you truly want to make sure that yours gets off on the right foot, there are a few key things to keep in mind.

Building a Family Business: An Overview

By far, the biggest thing to understand about running a successful family business is that not every family member necessarily has a place in the proceedings.

Indeed, experts agree that this is one of the major traps that most new entrepreneurs, in particular, tend to fall into — a deeply-rooted obligation that kids or other relatives "need" to join the company. The issue is that while this is a kind gesture, it could also create a situation where people with authority aren't invested in being there.

For parents trying to bring their kids into the business, it's far more beneficial to create a situation where they feel free to join the organization should they so choose. It shouldn't feel like an obligation to them, as that will only cause problems later on.

Along the same lines, not every family member is necessarily qualified for this level of responsibility — a similar issue that causes problems from a different perspective. Experience still needs to be the driving force behind what role someone will be given in an organization if any. There's no sense in bringing someone with no experience into an industry and elevating them to a position of authority simply out of some sense of obligation that "there is always a place for you here." Doing so isn't just doing them a disservice — it also dramatically increases the chances that the business will ultimately fail.

Another major pitfall that many family businesses fall into is where the organization simply cannot grow fast enough to support everyone at the same time. If one were to start a business and immediately give their four kids management-level positions, especially in those early days, there might not be enough work to go around. There certainly may not be revenue to support those salaries, either.

Instead, all family businesses need to be created in a strategic way that allows them to grow and scale over time — only bringing new members into the fold when the time is right. And putting them into positions that play to their strengths and talents. As the organization gets larger, there may be enough revenue and work to support additional family members — and only then should new entries be considered.

Beyond that, there are several essential best practices to lean into that can help increase the chances of success for any family business. Communicating openly and often with all parties is critical, especially in making sure that everyone is always on the same page and moving in the right direction. Family members need to be kept abreast of major decisions regarding the company's trajectory and the reality of competitive challenges. 

Similarly, it's always important to solidify the values of the family — and thus the business — as early on in this process as possible. Before you even begin to think about a direction for the business, consider how this path might impact the family. If everything is overwhelmingly successful, what will that look like? What does each participating family member see happening in five or even ten years — from their point of view and in the overarching sense of the company? What does the organization stand for, what entity is best for succession and taxes, who is it dedicating itself to serving, and does everyone agree on these things?

The answers to these questions need to impact many of the decisions that one will make moving forward. Exploring the holistic context that your business and family exist within, is extremely important, but almost universally overlooked. 

In the end, if you're going to be starting a family business in a leadership position, you also need to respect everyone involved. Remember that just because they're relatives doesn't mean that they cannot bring fair value to the table. They're not there to simply take orders — they're there to offer a unique perspective that you might not have access to through other means. If one or more of your children don't want to join the family business, that's okay — but the qualified ones who do should be given the room they need to perform to the best of their abilities.

Sometimes that means allowing them to give their objective, third-party opinions — even when they don't necessarily align with your own. Sometimes it means them taking a role in the company that you didn't necessarily see for them, so long as it is one that they excel at.

Following these best practices means that you'll end up with something more effective than a traditional family business. You'll have a true legacy that has the potential to last several generations — which in and of itself is the most important benefit of all.

Feel free to reach out with any questions or concerns in running and managing your family business or farm.If your tax pro or bookkeeper isn’t open to these conversations, it’s time to find a new trusted partner. Finances don’t exist in a vacuum, and professionals and business owners need to adapt to the complicated landscape we live in.

As always folks, this post is educational and informational only. Don’t take advice from the internet. Ask your own tax pro or financial advisor for specific information about your situation.

Here’s What Happened in the World of Small Business in October 2021

Here are five things that happened this past month that affect your business.


1) Higher corporate rate appears to fall out of the economic package

Biden’s advisers said that they are pursuing a range of ideas that could still raise substantial sums of money from corporations and the rich, including a tax on billionaires’ assets

Full story via the Washington Post 

https://www.washingtonpost.com/us-policy/2021/10/20/white-house-tax-plan/

Why this is important for your business:

It appears policymakers are going after increasing taxes on the super-rich versus many small business owners with their new proposals. 


2) Returning to the office can be stressful for many team members. Make it easier by following these 5 tips. 

The Covid-19 pandemic and the Delta variant have postponed many office rezonings. For many of your employees, the fear and delays have created added stress. A seasoned therapist shares her top five strategies for making the return to work as stress-free as possible.

Insight via CNBC 

https://www.cnbc.com/2021/10/19/therapist-tips-on-making-your-return-to-the-office-less-stressful.html

Why this is important for your business:

Businesses nationwide are struggling with retention and finding new hires. Make sure you take care of your current team first. 


3) Pushback to proposed $600 bank reporting causes the new threshold to increase to $10,000 in annual deposits or withdrawals

The revised version of the bank reporting proposal will also weaken its scope by exempting all wage income from counting toward the $10,000 threshold withdrawal, intending to ensure it applies to only larger account holders.

Details via the Washington Post

https://www.washingtonpost.com/us-policy/2021/10/18/democrats-irs-bank-reporting/

Why this is important for your business:

A higher threshold would have made small business reporting more complicated. 


4) Entrepreneur burnout is a real thing.

If your business is a startup or you're an independent consultant with a handful of clients, chances are you're burning the midnight oil binging on caffeine-laced drinks to stay alert and functional.

Here are three ways to avoid entrepreneur burnout from entrepreneur.com. 

https://www.entrepreneur.com/article/386772

Why this is important for your business:

As entrepreneurs, we shouldn't want to "hustle harder." We should organize and automate the hustle. 


5) Have you noticed? Cyber attacks are on the rise. 

This is in part due to COVID-19 — hackers, wanting to take advantage of the chaos caused by the pandemic, growing digitalization, and the pivot to work-from-home, have stepped up their attack efforts over the past 18 months.

Tips to identify critical vulnerabilities from venture beat. 

https://venturebeat.com/2021/10/15/cybersecurity-report-reveals-critical-business-vulnerabilities/

Why this is important for your business:

As attacks become more frequent, exploitable assets can become a serious liability for businesses.

As always folks, this post is educational and informational only. Don’t take advice from the internet. Ask your own tax pro or financial advisor for specific information about your situation.