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By Tina Moe, CPA


ust thequestionalonecanmakemostbusiness

owners cringe, but the repercussions of not

asking the question can be so much worse. Of

course, the question I usually get in response to

this is, “What does that even mean?”

Tax compliance is a vast - very vast- topic and

covers everything under the sun, from paying

your employees properly to income recognition

and much more. The question I always ask

is, “If the IRS or any of the various state

governmental entities came knocking, what

would be their points of contention? Where are

your vulnerabilities?”

The IRS and other governmental agencies

aren’t always looking at what you think they are.

What may seem irrelevant and unimportant to a

business owner can mean a significant change

to your tax picture.

Matt owned a local construction business where

he had both employees and subcontractors.

Like many in his industry, he’d pay one guy as

a subcontractor to try him out and, if the guy

was any good, he’d put him on payroll. What

Matt didn’t realize was that he couldn’t do this

if the guy was performing the same job as both

a subcontractor and as an employee, and that

issuing both a 1099 and a W-2 to the same

individual in the same year could flag him for a

closer look by the IRS.

The IRS did, in fact, take a closer look, and after

performing an investigation deemed that the

1099 payments were really wages. Matt was

faced with owing the back employer taxes on

over $35,000, as well as penalties and interest.

A costly and painful lesson to learn!

Deborah was in sales and had several

manufacturers she used to make her equipment.

The equipment she sold was custom made,

so she required a deposit from her customer

before the equipment went to manufacturing.

Once the equipment was delivered, she would

collect the additional amounts due and the deal

was finalized. In Deborah’s mind, the initial

deposit wasn’t income because the sale hadn’t

finalized; but what she didn’t know cost her.

According to the IRS, if you take a nonrefundable

deposit from a customer it must be recognized

as income in the year it is paid. This means

Deborah underreported her income for three

consecutive years.

The IRS discovered this, taxed the additional

income and charged penalties and interest,

which she is still paying back.

Is Your







| JULY 2015 |

Core Business Strategies