Archives for July 2013

AICPA Framework for Small Business

On June 10, the American Institute of CPAs announced the new framework to help small businesses with their financial reporting. The new framework is to provide a new accounting option for small- and medium-size entities. While these new accounting option are not required as US Generally Accepted Accounting Principles (GAAP) they will help to streamline relevant financial information for statements for privately held, owner-managed businesses..

The purpose of the new framework for small- and medium-size business is to help prepare financial statements clearly and concisely. The report shows the business’s profitability, cash available, assets to cover expenses and concise disclosures. The framework provides a report that makes it easy for lenders, insurers and other people that use the financial statement.

With a blend of traditional accounting and accrual income tax methods, the framework uses historical cost, target disclosure requirements, options to presenting the information, and reduces book-to-tax differences. This new framework expands options for CPAs and other companies for providing consistent, cost-beneficial financial statements.

The framework was developed by a group of CPA professionals that are experts in understanding the needs of private company financial statements. There has also been public and professional scrutiny to improve the new framework for any users.

Almost half (46%) of the 200 CPA firms surveyed are familiar with the new framework and half of them expect their client to use the new framework. There are a few critics to the new framework, but the opinion remains that the framework will help provide less complexity for the daily business.

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Simple Tips to Selecting an Employee Benefit Plan Auditor

Under federal law, businesses with at least 100 participants must provide an audit as a component of their annual return. Even small businesses will benefit from this process. However, selecting an employee benefit plan auditor can seem like a challenge. Numerous companies may tell you they can provide this service to you, but the question may be more clearly defined as, “what should you look for in a business auditor for an employee benefit plan.”

Invest Time in the Selection Process

Perhaps the biggest mistake a business can make when selecting a employee benefit plan auditor is to rush to a decision. This person you bring on board will need to provide a quality audit that looks at the overall financial integrity of the business’s funds and assets. If this process is not conducted with care, not only will the company become required to undergo more thorough investigations of the employee benefit plan, but the company will, undoubtedly be faced with fines and more complications. Choose a well-qualified professional for the job.

Avoiding Errors Is Easy

The Department of Labor reports that the most common reason for reporting failures are inaccuracies filed by a deficient accountant’s reports. To avoid these errors, ensure the auditor is given full information and that nothing is left to be “found” on its own. That is, providing accurate, thorough records and files is important. The employee benefits plan auditor will work closely with you to provide you with methods to fix errors you may have, but not sharing important information sets your business up to fail.

Get an Engagement Letter

At the start of the employee benefits plan audit, the auditor will provide an engagement letter. Read it. Understand specifically what work will be performed and what will not. Ensure that the timing is accurate. It should also clearly list the cost of this service, something you can negotiate if you believe the service is not accurately represented. The letter should also provide a description of the responsibilities of the auditor as well as your employee plan administrator. If there are questions about the engagement letter’s details, review them now. Do not put this off or assume it is a standard form.

When taking these steps, the employee benefit plan auditor can work for you to provide an accurate, detailed outline of what you can expect. You also can ensure that the process will provide you with helpful information that can help you to manage your business. This information is invaluable to you not just to the IRS.

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Top 5 Myths About Business Audits You Believe

Business audits are a type of service that can answer questions and provide clarity to any business owner. No matter the size, type, or structure of your business, without a third party investigation of your finances and assets, there is no clear way for you to know what to expect. You should never be okay with assuming information you have on hand is accurate.

Take a look at some of the most common myths that small business owners believe about business audits. Some of these are costing you money if you believe them.

#1 – Business audits are too expensive to have done. Not only can this be a business expense you write off (check with your accountant for clarification on this in your situation) but it is also nearly always the best method for understanding the financial strength of your organization. That’s more valuable.

#2 – It’s too time consuming. Yes, it will take some time to go through your documents and accounting records. However, this does not get in your way of doing business. It does not limit your resources and cause your business to be held back during the process. So, there’s really no time hindrance here.

#3 – Your records are accurate. It is rare that, during a business audit, that the auditor will find no errors. In some cases, companies have continued operations with massive errors and inaccuracies only to learn about these when the financial implication were severe. There are likely errors but they can be fixed now.

#4 – You don’t have to. Not all businesses are required to use business audits. However, just because you do not have a federal law requiring this does not mean you should put it off. In fact, as a business owner, you need the reassurance of knowing your business is financially sound.

#5 – Tax time is enough. Many businesses put off business audits until tax time. They find that the reporting requirements then and the work their business accountant does at tax time is enough. However, a business audit now will give you the best indication of the steps you can take now to ensure that tax time goes well.

Business audits are a valuable tool not to be overlooked. Bring in an external auditor to give you a clear picture of where your business stands. Doing so could be the difference in financial success and financial risk. As a business owner, the information given to you in a business audit is invaluable to making management decisions.

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Tax Audit Red Flags

Many people know that an audit is not typically a good experience, but what triggers an audit from the IRS. There are several red flags that the IRS look for when determining what tax returns will be audited.

The first red flag is foreign assets. Since 2009 the IRS has been increasing efforts to regulate offshore accounts. On Schedule B, a taxpayer is asked about ownership in foreign accounts. If they check the box but do not provide any information on the assets it will automatically trigger an audit.

The next red flag can be ex-spouses. Many time following messy divorces and ex can want to cause problems for the other spouse. They contact the IRS with information about the other spouse which may include money laundering, serious financial crimes, underreporting income, etc. Some of the claims are real and others are not, but they have to be investigated.

Too many zeros on a tax return will also be a red flag. It is ok to round to the nearest dollar, but not to the nearest hundred or thousand. It is unlikely that all the sums come out perfect, so too much rounding will cause problems.

Many times a home office credit will send up the red flag. The IRS is cracking down on home office deductions. The credit can only be claimed if your home office is the primary place of business and  used just for work.

Other red flags are miscellaneous income over $600 that was not reported; fishy tax deductions; earning over $5 million; say the wrong thing to the wrong person, even if it is a  joke, you never know who will turn you in; too much work-related driving; exaggerated donations; owning a business that is losing money; and unreliable tax preparers.

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