Monthly Archives: January 2015

To Probate or Not to Probate

Victor (our fictional character) has decided to face his mortality and pay attention to taking care of his family.  He is married to Sarah (second marriage) and there are three children, all from Victor’s first marriage. Sarah also has children from her prior marriage. Victor’s friends are telling him to set up a living trust to avoid probate for the following reasons: probate is expensive generating court and additional attorney fees; protection of privacy can be accomplished by avoiding probate because wills are in the public domain; avoiding probate  saves taxes.

The first two reasons in the above paragraph often are sensible ones; however, avoiding probate does not save taxes. A decedent’s assets are subject to estate tax even if not part of the probate estate.

What works for Victor’s friends may not work for Victor.  The decision to set up a trust or to put assets in joint name to avoid probate involves many factors, and they have to be analyzed based solely on Victor’s situation. Frequently in second marriage situations, setting up a trust under a will works well to make sure the surviving spouse gets sufficient income during her lifetime; however, upon his/her death, the  remainder goes to the children from the first marriage.

Often people have assets that can’t legally be put into a trust, or, more commonly, they neglect to transfer title of their assets to the trust. Setting up a living trust is in good measure prepaying your probate costs by paying the attorney to set up the trust document (and a “pour-over will” to cover assets or situations that can’t fit into the trust format). The overall savings may be minimal or even non-existent.

The purpose of probate is to carry out the desires of the decedent that he/she sets forth in the last will and testament. Having an estate go through the probate process provides a method by which an independent third party (the probate judge) can make sure that the representative(s) of the decedent are doing what they were instructed to do.

Another very good reason to avoid probate is in the case where you own property in a state other than your state of residence. This can get quite costly. There are ways to transfer title to the property so that probate can be avoided in that state.

Eugene H. Fleishman, CPA, Principal

Knock, knock. Who’s there? IRS!

Those three letters can be the scariest acronym that individuals and business owners ever want to hear. Whether it’s a letter or by phone call, when it does come the first reactions are usually fear and panic. And because of what the IRS represents, even the most accurate and honest taxpayers usually suffer those same anxieties. An actual knock on the door is reserved by the IRS and state agencies for collection matters.

Before you become too worried about it, you should know that your chances of actually getting that call are very slim. Overall there is less than a 1% chance of getting audited.  As your income increases, so does your chance of being audited. For individuals with incomes over $200,000, the risk goes to 3%, with incomes that top $1M, the risk goes to 11%.  On average for wealthier tax payers, for every 363,000 income tax returns filed, approximately 39,000 will be audited. So if you like to play the lottery, the odds are better here, but still not a great chance of winning.

It’s much the same with business returns, but size is determined by assets. If your business has less than $10M of assets, the chances of it getting audited are only .61%, but if you are a large business, such as a corporation with assets over $10M, the chance goes up to 16%. Working in the taxpayer’s favor is that the federal budget for conducting these types of audits continues to shrink, which is forcing the IRS to be more selective in who they audit in order to achieve the possibility of greater collections. http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/IRS-Audits

The most important thing any taxpayer can do if they do get notified for an audit is to call their CPA immediately. And this goes for any type of audit, whether federal, state, local, payroll, sales tax or any other type of tax audit. Once you say something to the IRS, it’s hard to take it back. In a recent collection matter, I had a client have a tax agent come knocking at the place of business demanding to speak to the owner for a completely previously unknown situation. They did call me before seeing him, I had them give him my contact information and send him away. From there we were able to manage the matter in a completely orderly fashion.

The IRS makes contact, what’s next?  First your CPA will get a Power of Attorney providing them with the right to represent you in the particular matter. From that point on, the IRS will work through your CPA with all their questions and procedures.  They will then review your returns carefully looking for possible risk areas. They’ll ask themselves, why was this return selected? Sometimes returns are selected solely on a statistical formula, so there may not be anything wrong with your return. The IRS will provide the CPA with a list of questions and a request for documents and support related to your return that they will examine. CPAs are very careful to review the information for red flags and to know the problems and the solutions before the IRS reviews any of it. They are also cautious about not giving the IRS anything they did not ask for to ensure they are not expanding the scope of their audit.

The IRS does have up to three years from the date you file your returns to audit each year’s return. So it is essential that you keep your tax records for a minimum of those three years. It is also important to call your CPA as soon as you are contacted. Ignoring the IRS does not help to make them go away, what it may get you is that knock on the door. When you call your CPA they will handle your audit from start to finish and ensure you the best possible result for your personal situation.

–Wayne L. Martin, CPA, Partner

How to Mitigate the Opportunity for Occupational Fraud in a Small Business

The small business owner needs to be able to accept the potential for fraud and stealing from the business by dishonest employees. Even those most trusted might be tempted if provided with the keys to the kingdom (opportunity and possessing the motivation to do so).

So what is the small business owner to do? What is the responsibility incumbent upon the businessperson, assuming, for a moment, that he or she accepts this established fact of life? The answer is simple: Do not tempt employees. There are many ways organizations inadvertently tempt otherwise trusted employees to behave dishonestly. There are some simple cost beneficial solutions. Any evaluation requires identifying where a business is potentially vulnerable and what policies and procedures can be implemented to eliminate or minimize motivation and temptation. There are also procedures to detect any adverse acts should the prevention procedures be circumvented (other than by employee collusion). http://www.acfe.com/rttn/docs/2014-report-to-nations.pdf

There are many prevent types of control procedures, which can be effectively implemented to mitigate the opportunity to steal from an organization. Some of these may be simplified by owner interactive involvement and insertion into the process, such as receiving unopened bank statements and any mail from taxing authorities directly, and examining the statements. Just the perception of owner involvement can be a deterrent. Also, duties and responsibilities of employees should be segregated to the extent reasonable so that no one employee has complete control over any transaction. Other owner involvement: observation and surveillance of employees, cash register procedures, managerial oversight and frequent, if not daily, reconciliations and counts of cash, review of individual customer accounts receivable balances, daily bank deposits and sales transactions. Since the ability of smaller organizations to rely on internal staff to effectively segregate incompatible functions is limited, other frequent checks and balances encompassing additional reliance on detect types of controls should be implemented. A system of reviews, approvals and authorizations of transactions should be designed to implement additional safeguards, effect accountability and reduce risks.

–Dennis Kremer, CPA/ABV/CFF/CGMA, CVA, Partner

 

The New York “State” of Unemployment Taxes

In recent years, New York State business owners have definitely seen that unemployment payroll taxes are an exception to the rule that states, what goes up must come down. This has been true at both the state and federal level for unemployment taxes.

New York’s unemployment tax is based on a specific amount of an employee’s payroll factored by the employer’s rate, which ranges based on experience. In 2013, the applicable employees’ wages were the first $8,500 paid, which was then increased 21% in 2014. This change had an immediate impact on the bottom line of employers at a cost per employee of $144. The cost can add up fast depending on the size of your labor force.

On the federal level, the FUTA tax rate is generally 6% on the first $7,000 of an employee’s taxable wages. However, the effective tax rate is often reduced to as low as 0.6% as employers generally receive a credit for SUI tax payments up to maximum of 5.4%.  Unfortunately, this credit reduction gets limited for those states deemed “credit reduction states.”  In 2011, New York State became one of twenty states earning this designation.  So what does that mean for New York employers?

First, we need to understand what causes a state to be labeled a credit reduction state.  When a state can’t meet their unemployment liabilities, they can borrow from federal funds.  However, if the state has outstanding loans as of the beginning of two consecutive years, and does not pay back the balance by November 10th of the second year, they become a credit reduction state.  As a result of the economic downturn in 2008 and 2009, and the extended unemployment benefits from the Obama administration, NYS found itself borrowing to meet its unemployment obligations.  These borrowings have been outstanding  for five years now.

So New York is a credit reduction state, but the real question remains, what is the cost impact to you as an employer?  Starting in 2011, New York employers were subject to a 0.3% basic reduction to the eligible FUTA credit.  In each subsequent year since, an additional 0.3% was added on, aggregating to a 1.2% basic reduction in 2014, or $84 of additional cost per employee ($7,000 factored by 1.2%).  In 2015, the credit reduction will be up to 1.5%, resulting in an additional $21 cost per employee.

On a positive note, New York State continues to pay down the borrowings each year.    However, until New York repays the borrowed funds to the federal government, which was approximately 1.3 billion as of November 2014, this particular reduction will continue to grow 0.3% each year until the entire FUTA credit is eliminated.  If the amounts are repaid early enough, perhaps 2016 will see the removal of the basic credit reduction, equating to an estimated savings of $105 per employee.

If you have any questions or wish to discuss this topic further, please feel free to contact Ray Neubauer at RNeubauer@GKGCPA.com .

–Ray Neubauer, Partner