ffaadmin

At the heart of the matter is determination of where work is conducted by a telecommuting employee. Previous court rulings have determined that an employee telecommuting to work from home is working in the state where the business is located. The new court decision twists that around by claiming that the business has established nexus in the employee’s state of residence. This impacts the allocation of income among various jurisdictions studied to become a certified public accountant.

The court judgment means that New Jersey will collect its business tax on any company with an employee arrangement like Telebright Corp. That company is incorporated in Delaware and has offices in Maryland. The web application business permitted an employee to conduct her job under an employment contract by telecommuting from her New Jersey home.

This triggered the New Jersey court to rule that Telebright was doing business in the state. By having an employee create computer code that became part of the corporation’s web-based service, the employment from New Jersey makes Telebright subject to that state’s tax. Consequently, Telebright needs to hire someone with CPA courses covering division of income among multiple states. This is normally accomplished by applying a formula that weighs a company’s percentage of sales, property, or payroll. Because all states do not deploy the same calculation, a company could run into a situation of counting the same wages for multiple
states.

The court ruling omitted any reference to the employee’s taxable income. But, presumably, New Jersey is entitled to tax on that as well. The employee cannot conceivably have Maryland earnings as a telecommuter while simultaneously causing Telebright to have a presence New Jersey.

This issue entails the topic of tax home from CPA exam courses. A person commuting to another state for work owes income tax to that state as a non-resident. The employee includes income from telecommuting days. Thus, even income earned by the individual while working from home in her state of residence is taxed by the state where the business is located.

Conversely, the logic in the New Jersey case is that the business has adopted a presence in the employee’s state of residence. New Jersey will apparently tax income of residents in other states earned on the days they telecommute to jobs at New Jersey companies plus tax companies located in other states with telecommuting employees in New Jersey.

Determining nexus is usually encountered in CPA exam review material when addressing a foreign company. For example, a business has some allocation of income to an area where its employees manufacture components that are assembled in another region. A single employee is usually sufficient for most political entities to declare nexus for a company.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

A recent decision by the United States District Court for the District of Idaho demonstrates the impact of tax liens. Joseph and Carol Filicetti reached a divorce settlement in 2005. The division of assets left Carol with the marital residence. One of the details covered in CPA exam material is that no income tax effect is incurred by the property settlement in a divorce.

However, a twist in the settlement required that Carol split any equity received from sale of the home within three years of the date of entry for the decree. After the expiration of the three-year period, Carol was entitled to retain all proceeds from any sale of the property.

An accountant may occasionally need to examine divorce decrees in order to apply accurate tax reporting on divided assets. For example, a CPA course addresses the tax impact of selling real estate jointly owned by former spouses. Any taxable gain or loss is shared based upon the retained interests of the separate individuals. But this was not Carol’s problem. In fact, she faced no personal income tax consequence of selling her residence.

Instead, Carol’s difficulty appeared as a result of Joe not paying his income tax liability for 2005. The IRS filed a tax lien against any property owned by Joe. This included his interest in the home that then comprised Carol’s personal residence.

Carol sold the home more than three years after entry of the divorce decree. Apparently, however, Carol was required to record the divorce decree with the county recorder in order to perfect her rights to the real estate. She waited until October 2010 to conduct this filing requirement. Meanwhile, the IRS had already filed a notice of federal tax lien in September 2008.

Carol discovered the tax lien when she attempted to sell the house. Any professional who has become an accountant should know how to explain to Carol the impact of a federal tax lien. It means that the IRS is entitled to the same rights as the property owner. The government is the first party paid from sales proceeds.

Carol needed assistance from an attorney with knowledge derived from CPA training. Her lawyer argued that the tax lien was invalid. The IRS thought otherwise. The court ruled that the lien was valid because at the time of its filing Joe had a contingent right to proceeds from sale of the property.

Regardless, Carol sold the home after the expiration of Joe’s claim to any sales proceeds. The result was that the court awarded the IRS what Joe was entitled to obtain at the time of the property sale â€" which was absolutely nothing.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Therefore, plenty of professional opportunities await accountants who want to utilize their knowledge to help small businesses. Attracting business owners as clients is easiest for accountants who complete CPA testing. Earning that top designation in the accounting field garners instant respect among operators of small businesses. They know that having the help of a tax expert to identify the right amount of tax on time is far better than ignoring tax payments.

Tax avoidance â€" even on a small scale â€" is unlikely to save money for a business owner. The right choice is relying upon an accountant to capture all legally eligible tax deductions. Accountants select small business tax work as a professional specialty soon after their CPA exams. They know after years of study that their accounting strength rests with small business issues. Entrepreneurs need CPAs to assure accurate tax reporting and avert trouble with the IRS.

Tax collection enforcement by the IRS reaches both large and small business operations. Accountants present the superior defense by deploying their expertise mastered in courses for CPA certification. A few business owners recently learned of the heavy price for resorting to the alternative of tax evasion.

James L. McCarthy of Easton, Connecticut, pleaded guilty to tax fraud after court evidence showed he engaged in a scam with two companies he controlled. One of the businesses deposited payments for work performed by the other entity, which was a corporation. This resulted in understated income for the incorporated company.

The scheme permitted McCarthy to obtain money for personal use that rightfully belonged to the corporation. He could have avoided the substantial fine and prison time he faces by relying upon an accountant specializing in small businesses. An accountant’s study for CPA certification includes all the intricacies of corporate taxes and personal income for the owner.

In Albuquerque, state contractor Shelda Sutton-Mendoza is similarly charged with tax evasion involving her corporation. The indictment against her alleges that she filed false corporate and personal income tax returns. One example of the claim against her is that a corporation tax return for 2005 reported $0 taxable income, but the IRS has evidence that the business earned $248,389.

Whenever business owners seek intelligent ways to address their tax situations, they have plenty of demand for tax experts possessing CPA qualifications.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Even tax preparation software has limitations. It only processes the data that’s entered. The prompting for information by tax software is not always clear. For example, capturing the tax impact of various items from pass-through entities calls for assurance from a tax expert. This expertise about the tax forms involved in unusual situations demands the involvement of an accountant with courses for CPA certification.

In addition, accountants are trained to know what expenses are tax deductible and when certain tax credits are applicable. Preparation for obtaining the CPA designation entails studying a large number of sample CPA exam questions that address these many scenarios. As a consequence, CPAs know how to aid taxpayers in avoiding mistakes that cause costly IRS penalties while still benefiting from all legally eligible tax deductions and credits.

Accountants can actually help people recognize if they are likely to encounter an advantage from professional tax preparation. This is accomplished by showing individuals the complexity level of their tax returns. Business activities are an area that typically necessitates input of knowledge gained from study for CPA credentials. Business owners simply have a multitude of potential tax deductions. Moreover, several distinctive tax reporting forms are often required. For example, home office deductions and depreciation of capital goods are separate from other business expenses. Tax software doesn’t know to compute these
expenditures separately unless the user applies applicable tax rules.

In addition, taxpayers with extensive investments normally benefit from accountants who have met CPA requirements. Hiring a tax professional assures gathering accurate cost basis, which tax software does not automatically know. Even retirement plan withdrawals are tricky for taxpayers who have basis in their contributions.

These are just a few examples of how individuals can benefit from paying for tax preparation by a CPA. Other advantages include the ongoing annual tax CPE that keeps accountants aware of tax law changes. Plus, a CPA is prepared to defend the tax treatment of any item in the event of an IRS audit. As CPAs working in the tax industry develop their high level of skill, they can easily underestimate how much more they know than the general public. They should not permit themselves to take for granted that their ability is common. CPAs must remain vigilant in remembering to explain the advantages they offer.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Representing someone during an audit is certain to create a sustainable professional relationship for ongoing tax work. Many CPAs prefer to utilize the tax skills they sharpen during CPA exam courses for representing taxpayers before the IRS. The focus of these CPA practices is therefore individuals with substantial income. This is the group targeted by the IRS. One in eight people with million dollar incomes were audited during the most recent government fiscal year.

The IRS has not only increased audit examinations over recent years. A rise has also occurred in tax liens, levies, and seizures over the past decade. The rate of increase in these IRS measures far exceeds gains in tax return filing.

The growth of tax returns during the last decade was only ten percent. Meanwhile, during the same period, tax liens increased 144 percent, tax levies 456 percent, and seizures 231 percent. The message is that accurate tax preparation by accountants who study for CPA certification is vital. Failure to correctly remit voluntary tax payments is unlikely to evade IRS detection.

Accountants who complete CPA exam preparation and pass the testing requirements are also eligible to represent taxpayers in resolving the stringent IRS enforcement actions. An IRS tax lien is placed on property and prevents the owner from selling or borrowing against the asset. This enforcement effort also impacts the credit rating of the affected taxpayer.

Tax levies are a procedure for the IRS to obtain a tax payment from wages, bank accounts, investments, IRAs, and even amounts due from business customers. The increase in tax levies by the IRS is indicative of the difficulty taxpayers face who file inaccurate tax returns or fail to properly defend themselves from challenges by the IRS.

Seizures by the IRS are the capture of physical property. The IRS can seize a home, automobile, or other personal property. When items are taken outright in seizures, they are sold at auction to satisfy the tax amount owed.

Taxpayers have the right to appeal liens, levies, and seizures. An accountant who has passed the CPA examination is also qualified to help taxpayers with appeals after any of these IRS processes are initiated.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

One of the ways that RMD is relevant to accounting work is the impact on tax planning. Accountants know from their CPA exam courses that annual withdrawals from these plans are required in retirement years.

RMD is the mandatory minimum amount that a person must take from any retirement plan that allows tax-deductible contributions. These plans are referred to in CPA exam study as “qualified” retirement plans because they qualify for tax advantages when money is put into them.

But the tax advantages don’t last forever. Individuals must eventually start taking out the money, including prior year contributions plus earnings. Annual required minimum distributions typically start in the year that a person turns age 70½. This is the general rule covered in CPA exam review.

RMD applies to all regular IRAs, even an account containing contributions for which a tax deduction was not allowed. Retirement plans provided by employers also have RMD. This includes 401(k) and 403(b) plans. However, RMD does not apply to these plans that are established with designated Roth contributions, such as a Roth 401(k).

Another tax planning item from study for CPA credentials is that RMD is not required for an employer sponsored retirement plan until the account holder retires. Therefore, someone over age 70½ who is still working does not have a minimum annual distribution from a plan sponsored by the employer. But, if this same person has an IRA, that account has RMD at age 70½ even though none is applicable for the plan at work.

A CPA working with the general public is commonly called upon to calculate the tax impact of RMD. The distribution amount from a retirement account may change the tax bracket of the recipient. In these cases, withdrawals are taxed at higher graduated rates than a person experienced on other income prior to initiating retirement plan distributions.

An avenue for eliminating RMD is converting all regular IRAs and retirement plans to a Roth IRA. However, this creates an immediate tax on the converted amount. The conversion comprises a distribution of prior tax-exempt contributions plus the untaxed accumulated earnings in the accounts. Nevertheless, this technique might have advantages if conducted in a year in which the person can control a reduction of other income and thus limit tax on the conversion. Uncovering the potential benefits of this maneuver is best accomplished by hiring a CPA to aid in the calculations.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Representing someone during an audit is certain to create a sustainable professional relationship for ongoing tax work. Many CPAs prefer to utilize the tax skills they sharpen during CPA exam courses for representing taxpayers before the IRS. The focus of these CPA practices is therefore individuals with substantial income. This is the group targeted by the IRS. One in eight people with million dollar incomes were audited during the most recent government fiscal year.

The IRS has not only increased audit examinations over recent years. A rise has also occurred in tax liens, levies, and seizures over the past decade. The rate of increase in these IRS measures far exceeds gains in tax return filing.

The growth of tax returns during the last decade was only ten percent. Meanwhile, during the same period, tax liens increased 144 percent, tax levies 456 percent, and seizures 231 percent. The message is that accurate tax preparation by accountants who study for CPA certification is vital. Failure to correctly remit voluntary tax payments is unlikely to evade IRS detection.

Accountants who complete CPA exam preparation and pass the testing requirements are also eligible to represent taxpayers in resolving the stringent IRS enforcement actions. An IRS tax lien is placed on property and prevents the owner from selling or borrowing against the asset. This enforcement effort also impacts the credit rating of the affected taxpayer.

Tax levies are a procedure for the IRS to obtain a tax payment from wages, bank accounts, investments, IRAs, and even amounts due from business customers. The increase in tax levies by the IRS is indicative of the difficulty taxpayers face who file inaccurate tax returns or fail to properly defend themselves from challenges by the IRS.

Seizures by the IRS are the capture of physical property. The IRS can seize a home, automobile, or other personal property. When items are taken outright in seizures, they are sold at auction to satisfy the tax amount owed.

Taxpayers have the right to appeal liens, levies, and seizures. An accountant who has passed the CPA examination is also qualified to help taxpayers with appeals after any of these IRS processes are initiated.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

Innocent spouse claims often land in tax court. Therefore, any CPA involved in these matters must assure that the tax returns involved are accurately prepared. But more action is required than merely deploying the rules from the tax section of CPA exam courses. When a marital conflict exists, an accountant should caution a spouse about the possibility of filing a separate return to avert any difficulty caused by the other spouse.

A recent case in Tax Court reveals the advice that would have benefited a wife. Unfortunately, she did not learn a vital fact found in CPA exam material. That is, filing a separate tax return when married is the only sure path to avoiding tax difficulty created by a spouse. Farzana Zaher is a dentist who was married in 2006. Her husband, Mohamed Zaher, owned a gas station. Mohamed sold his business in 2006 for a gain of $587,760. After paying off business debt, the remaining $315,000 of sales proceeds was deposited into a joint savings account. No estimated tax payments were made but the funds in the bank
were reserved for 2006 taxes.

Following the couple’s separation in November 2007, Mohamed sent Farzana a draft of their joint 2006 tax return requesting her signature. This was how Farzana first learned that the tax return had not been filed by the due date. Mohamed urged Farzana to sign the return for immediate filing with the IRS. He also set an appointment for her with their accountant to discuss the return.

This is where the facts stray from the typical procedure described in CPA classes regarding tax returns. The initial step in tax work is identifying filing status. Given the facts in this matter, the accountant should not have assumed that Farzana file jointly with Mohamed. This was an obvious consideration when noticing the tax due of $63,379 on the joint return. Sound advice to Farzana would include a recommendation to file separately.

Filing a joint tax return is an irrevocable election. Once done, it cannot be undone. Farzana needed this information but did not receive it. As a result of filing the joint tax return, she was hit with the tax liability. She expected Mohamed to pay the tax because she no longer had access to proceeds from the gas station sale. But, Mohamed also no longer had the money. He gave it to various relatives in late 2007, claiming the transfers were loan repayments.

Mohamed did mention in an email to Farzana in January 2008 that he was seeking another accountant to redo the 2006 tax return. But the damage for Farzana was already done. As explained in CPA exam study, a married couple can amend separate tax returns by changing to joint filing, but not the other way around. Sure, a join tax return typically produces a lower tax calculation than the combination of two married filing separate returns. That’s irrelevant to Farzana, who simply needed to avoid joint tax liability with Mohamed relating to his income.

Fortunately, Farzana Zaher prevailed in Tax Court on her claim for innocent spouse relief. Despite this victory, an accountant helping her file a separate 2006 tax return would have saved her substantial attorney fees and years of grief in the court system.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

The percentage of professional liability claims against auditors that allege failure to identify fraud more than doubled between 2008 and 2010. As the frequency and severity of corporate fraud increases, more accountants must sharpen their fraud detection ability as they take CPA exam steps.

In fact, any type of engagement may require identification of fraud. Audit is not the only accounting service creating liability for noticing fraudulent and illegal acts. Among the 2010 claims of accountant failure to detect fraud, 52 percent entailed tax work or accounting services other than audit.

Therefore, even tax and compilation assignments should deploy fraud-detecting skills perfected during CPA exam study. Much fraud is identifiable during tax return and financial statement compilation projects. Accountants should not overlook potential fraud at companies engaging them for more limited services than audit.

Passing the CPA exam in any state proves only part of the aptitude needed for auditing. Detection of fraud and theft situations requires experience. The general tone of senior management is often indicative of the integrity applied to company operations that may create environments for fraud.

Fraud is sometimes a mismanagement cover-up instead of an overt scheme of personal enrichment. Lax management is just one indicator of potential fraudulent activity. Another contributor to fraud cases is aggressive management that pressures employees to mask financial irregularities out of fear about job elimination.

The majority of corporate fraud arises at companies lacking sufficient internal controls. Auditors look for situations where duties are not adequately segregated among employees. These cases present opportunities for employee theft. Specific details about any particular fraud scheme are then uncovered using audit techniques groomed by CPA exam preparation.

Some examples of the problems discovered by CPA auditors are negligent cash handling procedures, poor inventory control measures, and lack of adequate account reconciliation activity. When an accountant notices any of these circumstances, a professional responsibility exists to notify the client company. In fact, this is a best practice for all types of engagements â€" not just audits.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.

The specific facts in any one of the cases could comprise a question for a sample CPA test. Because of the similarity, the pattern is easily revealed without specifically identifying any one of the unfortunate taxpayers.

Each trial centered on incentives provided by the same company in Hawaii for sales of solar water heaters. The Hawaiian business offered a program to buyers of the product to obtain “free” units by purchasing one for personal use and one for investment. The latter was installed at the location of a party that paid a monthly fee to the owner of the investment water heater.

Financing was provided plus a tax incentive commonly discussed in CPA study courses was utilized. That is, the investment cost was written off using a Section 179 expense deduction. In addition, an LLC was created that collected the monthly fees on the investment water heaters. This LLC then made the financing payments and remitted state excise taxes. The investors had no responsibility.

The entire process resulted in an after-tax cost for the personal water heater of essentially zero. In fact, the LLC generated a tax loss. All three taxpayers deducted the losses on their tax returns. However, this arrangement triggers factors described in CPA exam prep about material participation.

Any activity in which a taxpayer does not materially participate is defined as passive. Losses on passive activities are not eligible to offset earned income. The Tax Code identifies seven tests a taxpayer can apply to demonstrate material participation. Two of these tests are typically identified most prominently in study for CPA exam requirements. One is that material participation arises when a person contributes substantially all of the participation by all individuals in an activity. The second case of material participation transpires when someone spends more than 100 hours on the activity
during the year and no other individuals spend more.

The Tax Court held that the taxpayers failed to meet the material participation requirements. They did not install any water heaters or collect any payments. Hence, the taxpayers could not claim substantially all of the participation. Moreover, they did not provide any records showing more than 100 hours of participation during any of the years. A combination of inactivity and inadequate records is certain to doom taxpayer claims of material participation, as the individuals in these Tax Court cases learned.

IRS Circular 230 Disclosure

Pursuant to the requirements of the Internal Revenue Service Circular 230, we inform you that, to the extent any advice relating to a Federal tax issue is contained in this communication, including in any attachments, it was not written or intended to be used, and cannot be used, for the purpose of (a) avoiding any tax related penalties that may be imposed on you or any other person under the Internal Revenue Code, or (b) promoting, marketing or recommending to another person any transaction or matter addressed in this communication.