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Things you need to know if you have claimed, or plan to claim the Employee Retention Credit

·        You are required to amend your 2020 and 2021 Business and Individual Income Tax Returns.

·        You will owe 15 to 45 percent tax on the credit depending on your individual tax bracket.

·        The cost to amend the 2020 and 2021 Business and Individual Income Tax Returns will be at least $2,000 or more depending on the amount of owners in the Partnership or Corporation.

·        When you are audited and it is determined that you did not qualify for the credit you will have to return the money with interest and penalties.

·        You will not be refunded the cost paid to the company that calculated your credit or the cost paid to your accountant that prepared your amended returns.

If you qualified due to Supply Chain Disruption, the following proof is required:

If you are unable to attain documentation on all of the following, you are not qualified for ERC

1.      Suppliers name and location that was unable to make deliveries due to a Government order

2.      The specific Government order and the specific U.S. State or Local Government imposing the order. (Foreign jurisdictions don’t apply).

3.      The period in which this Government order applied (ERC can only be claimed during the order).

4.      Proof that critical goods could not be attained elsewhere

IRS audits have already begun on the Employee Retention Credit. The IRS just hired 77,000 new auditors and it is expected that most, if not all ERC claiming taxpayers will be audited.

https://www.withum.com/resources/irs-begins-auditing-the-employee-retention-credit/

Here is the IDR (Information Document Request) the IRS will present to you when you are audited and audit representation will be expensive whether you win or lose:

1.      On what grounds are you eligible for ERC? Explain in detail how qualification test were met

2.      List government orders that either fully or partially suspended your business

3.      Provide gross receipts computations, spreadsheets and backup financial records for 2019, 2020 and 2021 by year and by all relevant quarters

4.      Submit your ERC calculation

5.      Submit payroll journals

6.      Submit all 2020 and 2021 payroll tax returns and income tax returns

7.      Submit list of owners

8.      Submit list of employees

9.      Submit related party information

10.   Submit PPP loan forgiveness information

11.   Submit proof of allocation of wages between PPP and ERC

12.   All of the above Supply Chain Disruption documentation

Last Updated by Admin on 2022-10-24 10:39:37 PM

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April 15th (March 15th Corporations) was the deadline to file income tax returns or October 15th if an extension of time to file income tax return was timely filed (September 15th Corporations). The lntenal Revenue Service assesses late filing penalties and interest for late filing of returns and or late payments of income tax.

Individuals & Corporations — Failure to Pay - The failure to pay penalty is .5% for each month (or part of a month) the payment is late. For example, if you were six months late the penalty would be 3%. The maximum penalty for failure to file is 25%. This is based on .5% times maximum penalty period of 50 months. If a taxpayer has 90% of tax paid by the original due date of a retum they will not be charged a penalty but will be charged interest on the remaining balance

Failure to File - A failure to file penalty is based on tax owed. Therefore, if a taxpayer has no tax due, no penalty will be imposed on a late filing of a tax return. If a taxpayer has a tax due, the penalty is 5% per month (or partial month) up to a maximum of 25%. The minimum penalty for filing more than 60 days late is the smaller of $100 or 100% of the tax required to be paid on the return.

Failure to File & Failure Pay — If a taxpayer has a late return as well as a late payment, the failure to file penalty is 4.5% per month so that the combined penalty remains at 5% per month for the first five months. After the first five months the failure to pay penalty continues at .5% per month for 45 additional months. Thus, the combined penalties can reach a total of 47.5% if a taxpayer is 50 or more months late in filing and paying income tax due.

Interest on Underpayments of Tax — In addition to failure to pay penalties the Internal Revenue Code also charges interest. The underpayment interest rate is the federal short-term rate, rounded to the nearest full percent, plus three percentage points. The rate is adjusted quarterly. The current rate for the calendar quarter beginning April 1, 2007 is 8% for individuals and most corporations. Large corporate underpayments are taxed at the federal short-term rate plus five percentage points which (is 10%) for the current quarter.

S Corporations - If an S corporation does not provide a K-1 to a shareholder when due or gives incorrect information or missing information, they will be charged a $50 penalty for each K—1 for which a failure occurs. If information is intentionally disregarded the penalty will increase to $100 per K-1

Partnerships — Partnership income is passed through and taxed on the partner‘s personal income tax return. Since a partnership does not get assessed tax directly, the penalty is not based on tax due. Instead, it is based on the number of partners in a partnership and how late the partnership is filing the return. The penalty is $50 for each month or part of a month (maximum five months) the failure continues, multiplied by the total number of partners in the partnership during any part of the tax year for which the return is filed. For partnerships with many partners this penalty can be quite steep. For example, if a partnership was two months late in hling and had 50 partners, the penalty would be $5,000 (two months x $50 = $100 x 50 or $5,000). Relief may be available for partnerships with fewer than 10 partners where the income was timely reported by all the partners.

Inability to Pay Income Tax When Due — A taxpayer can file 9465 to request the IRS to enter into an installment agreement. An installment agreement does not, however, stop interest from being charged at the current rate on the unpaid balance. The late payment penalty will be 25% instead of .5% per month. The IRS charges a fee of $105 for entering into an installment agreement.

A corporate taxpayer expecting an NOL carry back can file form 1138 which is an extension of time for payment of tax. it needs to be filed after the beginning of the tax year the NOL is expected but before the due date for paying the previous year's income tax.

Last Updated by Admin on 2015-10-12 10:08:26 PM

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Dear Client,

In response to many requests of what tax records should be kept and how long, we have prepared the following list for your reference based on Federal Laws.

Income tax returns and supporting documents - Keep at least 4 years and preferable 7 if space is not critical. Once this period has elapsed, the documents can be discarded, but the returns themselves, which do not take much space,

should be retained indefinitely.

Residential property records - All escrow statements (purchase and sale) plus receipts for improvements should be kept for at least 4 years after the property is sold (including refinance papers).

Purchase receipts for stock, bonds, mutual funds - These should also be kept for at least 4 years after the asset is sold: This would include record of dividends, splits and reinvested dividends. "

Depreciation records - For any rental real estate or depreciable business property you own, keep records of the property’s cost, date acquired, and schedule of depreciation claimed in previous years. This record should be kept

until 4 years after the property is disposed of.

Retirement plan contributions — Records of non—deductible lRA deposits, employer plan stock purchased, rollovers, and Keogh plan deposits should be kept until 4 years after the plan assets have been withdrawn.

 Personal records - Important papers such as estate and gift returns, divorce and property settlement, deeds, title insurance policies, and all trust documents should be kept in a permanent file, or perhaps safe deposit box.

Miscellaneous papers - All other documents to include bank statements, canceled checks, credit card statements, deposits slips, charitable contribution receipts, and medical bills can be discarded after 7 years.

Last Updated by Admin on 2015-10-12 09:58:48 PM

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We have had Clients audited recently and here are some of the questions they asked.

1. How many hours are you open?

1. Provide a schedule of who is operating the store during business hours.

1. Are they the owner, family members or employees?

1. Show me your payroll records and Time Sheets.

1. Do you have Workman Compensation Insurance? 

Why are they asking these questions?

Questions # 1, 2

    Is everyone on payroll that should be?  

Question # 3

    If the store is a Sole Proprietor, everyone except the Store owner and his wife must be on payroll. 

   If the store is a Partnership, everyone except the partners and their wife’s should be on payroll.

   If the store is a Corporation, everyone should be on payroll.

Question # 4

    This is to see if all hours are accounted for and if everyone who should be on payroll is on payroll.

Question # 5

    Workman Compensation Insurance is mandatory in the State of California for all business with employees.

   Not having the correct answers to all of these questions can result in additional payroll taxes and penalties. 

Last Updated by Admin on 2015-08-13 01:56:41 PM

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This is the home of our new blog. Check back often for updates!

Last Updated by Admin on 2012-07-31 01:43:12 PM

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