New York State Sales Tax Audits

Adequate Books and Records

New York State Department of Tax and Finance begins a sales tax audit by requesting the taxpayer’s books and records.  If the auditor doesn’t consider the records “adequate”, he has extensive discretion in making a reasonable calculation of taxable sales.  It is important that you maintain and organize your records so they are “adequate’ for an audit.

So what is adequate?

There are specific requirements in recording sales tax and maintaining records.  The required records include:

• Exemption documents
• Sales slip, invoice, or other original sales document
• Cash register tape

The sales record must provide detail to determine tax due and collected for each sale.  Invoices and sales slips must have items sold indicating which are taxable and a separate line item for sales tax.  The cash register tape must also have this level of detail.  A tape with total sales may not be deemed adequate.  Any deductions, credits, or refunds must also be supported with detail records

Financial records related to the preparation of the sales tax return must also be maintained and available for the audit.  These include tax worksheets, general journal, ledgers, sales and purchase journals and schedules accounting for the difference between gross sales and services and taxable sales and services. 

Having the records is not sufficient to meet the adequacy test.  The records must be organized, such as by date, invoice number, or other ordering method, to permit direct reconciliation of the sales documents with the entries in the books and the sales tax return.

The penalties for not maintaining adequate records are substantial.  The taxpayer can be assessed up to $1000 for the first quarter of the failure and up to $5000 for each subsequent quarter.   A taxpayer audited for a three-year period could face up to $56,000 in record-keeping penalties.

If the taxpayer has adequate records, the auditor may take several approaches to review the accuracy of the records.  He may examine a representative sample of transactions, matching the sales transactions to the journals, following through to the sales tax return.  The sample might be a specific time period, such as a full month, or it might be specific group transactions, say for one client, or a combination.  If errors are found, the error rate for the sample is applied to the entire audit period.  For instance, if the auditor found the sample resulted in taxable sales 5 percent higher than reported, taxable sales for the audit period would be increased by 5 percent

If the books and records are deemed inadequate the auditor may use a variety of methods to calculate sales tax liability.  For example, the auditor could extrapolate from industry averages or use indices including rent, utilities, or markup of goods sold.  It is difficult to contest the auditor’s conclusions when your own records are not used.

New York State is being aggressive in approaching sales tax audits.  Your best effort in maintaining records is your best defense.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Starting a Business in a Recession

Starting a business in a recession might seem counter-intuitive. However, history shows that economic slow downs have been fertile ground for new business start-ups. Many companies started in economic downturns including Google and General Electric. A good idea is a good idea. A recession might just be the right time to bring that idea to market.

Why?

Financial need is a strong impetus. Maybe you are unemployed or underemployed. You’ve been mulling over a business venture for years but you never had time or you felt tied to a secure paycheck. The recession might just be the push you need.

Getting started is cheaper. Prices often drop in a recession. You’ll find or be able to negotiate good prices on equipment and supplies. Office space is plentiful and less expensive. To keep costs low you might want to start your business in your home.

With high unemployment, qualified talented people are available. They, like you, will be highly motivated to make the business work.

It is easier to find partners. Maybe you don’t want to go it alone. There are others like you who would savor the opportunity to start something new. A partner would spread the investment risk and could complement your talents.

Friends and family may be looking for investments other than the stock market. Returns on money market accounts and other saving vehicles are extremely low. If you have a clear, viable business plan, your family and friends may help finance some of your venture.

Competitors are weakened. The status quo may not be working for companies. Operating companies are more willing to look for changes in suppliers, seeking more cost effective and innovative partnerships. A new company will have a chance to step in.

You’ll face less competition. Most people are reviewing why they can’t or shouldn’t start a new business now.

Starting in a slowdown shows your faith in business. Your optimism will help sell your product. Laying the groundwork in a recession will position you to take advantage of the inevitable upturn.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Protecting Yourself from Identity Theft

Identity theft refers to fraud that involves using another’s identity to obtain money, goods or services. With so much financial activity occurring electronically, identity theft has become a booming business. The consequences to the victim can be extensive and take years to clear. The financial loss may be accompanied with a ruined credit rating, creditors calling constantly, and the possibility of having your name linked with illegal activities. There are some simple ways to protect yourself and reduce the risk of your becoming a target.

Shred. We’ve heard this before but it is essential. Careless disposal of documents which have identifying information is a fertile source for identity thieves. The information doesn’t have to be complete or all in one document. By sifting through a variety of trashed mail, a thief could build a fairly complete profile. A boon to the identity thief is the pre-approved credit card offers. Shred them on disposal or better yet opt out of receiving them. (1-888-5-OPTOUT).

Use on-line access to your bank and credit card accounts to check activity between statement cycles. A lot can happen in a month. If you check weekly, you’ll find any problems that much sooner. Additionally, some banks allow you to set up alerts on your accounts so you can receive an e-mail or text message when activity on an account exceeds levels you set.

If an expected bill doesn’t show up in the mail, don’t sigh with relief. Better to wonder whether your mail has been stolen. If you are comfortable with e-mail, arrange for bank and credit card statements to be sent to you via e-mail.

Identity thieves use equipment called skimmers to capture debit card numbers and pins. The skimmer is attached to an ATM card slot or to any card swipe unit. If the card swipe looks strange, don’t swipe your card.

Be careful responding to e-mails or phone calls asking you to confirm identity information. If the requester is someone with whom you normally do business, call that business using a number you have from a prior statement.

Be aware of people around you when using your debit card. Cell phones have cameras. These cameras can be used to capture your account and PIN.

Identity thieves favor debit cards over credit cards. Stealing debit card information gives the thief direct access to your bank account. If you can control your credit card use, use credit cards instead.

Taking precautions will go a long way toward preventing identity theft.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Are You Ready for a Disaster?

Every business should have a plan for a disaster. A disaster can be large or small, impact part of a business or shut down a business in its entirety, be localized to the business itself or caused by an external event occurring in the business’ community. Long Island has experienced storms that have brought extended electrical outages and flooding. Buildings may experience fires or gas leaks or environmental issues that make them inaccessible. Whatever the cause, a business must take steps to ensure its ability to function and survive, safely, when it has been impacted by a disaster.

Developing a comprehensive plan can be difficult. Many businesses don’t address the issue at all finding the process overwhelming, time consuming and tedious. However, tackling some key areas would be better than doing nothing at all.

Communication

When a business experiences an outage, you would like to easily contact those affected. Copies of contact lists should be maintained offsite and distributed to the appropriate personnel. Remember to update the offsite copies periodically.

Employees – have phone numbers (home & cell) for every employee. Decide who will call employees. A calling tree might be advisable if there are many employees. Each employee should have a contact number (home or cell) for a supervisor or the business owner which is not a business number.

Clients – Your clients are essential to your business. Have a copy of your client contact list offsite. Phone numbers and e-mail addresses should be on the list.

Suppliers/Support - Maintain a contact list of suppliers and service companies you use. It will be easier to get help if you have the phone number and your account number for insurance, utilities, phone, tech support, etc. You may want to contact suppliers to delay or reroute deliveries. You should include in your list alternate suppliers. What if your supplier has a disaster?

Data

The most common business disaster is loss of data. This can result from human error, computer failure, natural disaster, or theft. To protect yourself, know your data – what is it, where is it, and what is most important to your business.

Data kept in paper form is vulnerable to fire, flood, theft, or loss. You can maintain copies offsite. If paper files are too voluminous to offsite, consider making digital copies for offsite storage.

Most small businesses today use computer technology whether for accounting support or as an integral part of the business. It is essential that regular backups are taken and stored offsite. If you do your own backups, take the media home with you at least weekly. If you are not computer savvy or your system setup is sophisticated, a technology support company can help design the most efficient, cost-effective way to provide backup support. An essential step to successful backups is actually testing a recovery from one of those backups – time consuming but worth the effort.

Additionally, the business should know each software product used by the employees and the login id and password for each employee. If an employee could not be reached, you might have to perform the employee’s function. Would you have access?

A comprehensive disaster recovery plan could include much more, costing time and money to develop. However, thought about some crucial pieces of a plan, documenting your plan, and sharing it with your employees, will go a long way to help, if a disaster ever befalls you.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

New York State Tax Enforcement

We have all heard or read about New York State’s financial difficulties. In its efforts to increase revenue, New York is aggressively addressing the “tax gap”, the term for the billions of tax dollars not paid by businesses and individuals. The number of audits is rising as is the number of criminal fraud investigations.
With a hefty investment in technology to aid in “data mining”, the Tax Department is getting access to and analyzing third party information to identify possible errors in tax filing. A franchise’s sales may be verified against the parent company’s records. DMV records are matched to car sales. If retail sales can not be proven with sales receipts, the state tax department is allowed to calculate sales based on other criteria, for example comparable store sales or rental space. The burden is on the taxpayer to prove the state wrong.
New York is not relying on technology alone. More representatives are making unannounced visits to businesses. The representative will check for the store’s certificate of authority, take a head count of employees, and, perhaps, engage an employee in a discussion about the business. All efforts are aimed at identifying discrepancies between what is seen at the place of business and what the business has reported to the State. A discrepancy will likely result in a bill to the taxpayer or an audit.
The Tax Department is also closely examining contractors’ returns for the amounts of credit taken for materials purchased. The cost of materials purchased to complete a job is a valid deduction but the State might request that the contractor provide documentation to support the credit. Again, an audit might be initiated.
New York State is looking for money. The Tax Department is examining returns, visiting businesses and seeking ways to bring in revenue. The best defense for the taxpayer is better record keeping, longer retention of records, and professional advice in responding to the Tax Department.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Employees vs. Independent Contractors

W-2 vs. 1099-MISC

Small business owners have to understand the IRS definition of an employee and an independent contractor. The designation impacts employment taxes paid and who pays them. As the employer, you may be liable for taxes plus penalties if you misclassify an employee as an independent contract without reason.

An independent contractor is an individual or business who provides services to your business. Generally, when using an independent contractor, the employer has control over the result of the work, not the details required to get to that result. With an employee, the employer controls the when, how, and where as well as the what.

To determine the status of a worker, the worker’s relationship to the business is examined to assess the degree of control and degree of independence of the worker. Facts about the worker’s position fall into three categories defined by the IRS: behavioral control, financial control, and type of relationship.

Behavioral Control. An employee is subject to the business’ instructions about what work to perform, when and where to do the work, what tools or equipment to use. Materials and support services may be provided. An employee may receive training to perform his job. An independent contractor works with little or no direction, receives no training, and may set his own hours. He is responsible for delivering a product.

Financial Control. An employee is generally guaranteed a regular wage. An independent contractor is usually paid for a product, although some professions may charge by the hour. An independent contractor is free to seek other business opportunities, and can realize a profit or loss from his business.

Type of Relationship. If the worker is expected to work indefinitely and is not tied to a specific project, if the worker receives employee-type benefits, or if the worker performs activities key to your business, it is likely the worker is an employee.

The IRS assumes a worker is an employee, so you as the employer must have factual evidence to support the designation of an independent contractor.

W-2 vs. 1099-MISC
If a business has used an independent contractor during the year and paid him $600 or more during the calendar year, the business must provide the contractor with a 1099-MISC indicating the amount paid to the contractor during the year.

A business with employees must withhold federal and state income taxes, withhold social security and Medicare taxes, pay the employer share of social security and Medicare taxes, and pay unemployment taxes for each employee. By January 31st, the business must provide a W-2 for each person employed during the prior year.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Protecting Your Business From Employee Theft

Small businesses are more likely to experience employee fraud than larger corporations. In the current economic climate, employees are facing greater financial stress. This could translate to more employee theft. Fraudulent activities include stealing cash, falsifying financial records, manipulating timesheets and pilfering supplies. Intellectual property, such as client lists, is essential to the life of a company and also can be subject to theft.

• Hire the “right” employees. Interviewing, checking references, and doing background checks can’t be underestimated. Your employees are key resources for the success of your business and for controlling fraud.
• Have a written statement which outlines ethics policies and repercussions for fraudulent actions.
• Implement financial controls. Separation of duties is the simplest way to avoid fraud. The person processing the transaction should be different from the one recording it. If the company size prevents the distribution of responsibilities among staff, it becomes the owner’s responsibility to audit the financial activity. Some simple things to do follow.
  o Deposit cash and checks daily.
  o Secure blank checks.
  o Don’t sign blank checks.
  o Review invoices prior to signing checks and file original invoices.
  o Verify new vendor’s name, address, and association with your business.
  o Review bank statements and cancelled checks. Statement envelopes should be opened by the owner, not an employee.
  o Periodically hire an outside accountant to audit your books. If at all possible, let the audit be a surprise to your accounting personnel.
• Implement technological controls.
  o Each person using your computers should have an individual ID and password.
  o Restrict access to sensitive applications, functions within an application, and files.
  o Use your systems support as a resource to help implement technological controls.
• Implement physical controls.
  o Install video cameras near cash registers, entrances and exits.
  o Keep petty cash locked. Periodically make a surprise count of petty cash.
  o Maintain a list of valuable inventory and keep the inventory locked.
• Implement management controls.
  o Have employees fill out and sign time sheets.
  o Don’t allow accounting personnel to work longer than a year without a vacation.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.

Cancellation of Debt

The current economic times have impacted many credit card users. In some cases, borrowers have renegotiated credit terms and/or had credit balances reduced. Often, the borrower is surprised to learn that the reduction in a credit balance may be taxable income.

To understand the logic of this tax law, follow the transaction from inception. When a person borrows money from a commercial lender, the loan amount is not counted as income since you have an obligation to pay it back. When part or the entire loan is forgiven, you don’t have to pay it back. The bank gave it to you. Therefore, the forgiven amount is income. The lender reports the amount of cancelled debt (the amount you no longer have to repay) on Form 1099-C, Cancellation of Debt.

Here’s a very simplified example. You have $10,000 in credit card debt. You have been having difficulty making your monthly payments. You negotiated with the lender and agreed to pay $6,000 on an installment schedule. The lender has forgiven $4,000. This $4,000 is taxable income. The lender will report the amount to you and the IRS on a Form 1099-C, Cancellation of Debt.

Cancelled debt is not always taxable. Debts discharged through bankruptcy are not considered taxable income. Additionally, if you are insolvent, some or all of the debt may not be taxable. You are insolvent when your total debts are more than the value of your total assets. Insolvency can be difficult to determine and the help of a tax professional is recommended.

Mortgage debt is a special case. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows a taxpayer to exclude from income debt forgiven on the mortgage on his principal residence. This act applies to mortgage debt forgiveness from 2007 through 2012. Debts reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualify for this relief. If the taxpayer remains in the home, the forgiven amount reduces the taxpayer’s cost basis in the home.

IRS Circular 230 Disclosure


Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that any federal tax advice contained in this communication, including attachments and enclosures, is not intended by the Sender or Sandra G Johnson, CPA, P.C. to constitute a covered opinion pursuant to regulation section 10.35 or to be used for the purpose of (i) avoiding tax-related penalties under Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any tax-related matters addressed herein.

DISCLAIMER

Privileged/Confidential information may be contained in this message and any related attachments. If you are not the addressee indicated in this message (or responsible for delivery of the message to such person), you may not copy, review, distribute or forward the contents of this message to anyone. In such case, you should notify the sender by reply e-mail and delete this message from your computer.