Basic Steps to a Tax Audit

No one likes to see that letter from the IRS “congratulating” you on being audited. Before you throw the notice aside and bury your head in your couch, read these basic steps to a tax audit. You should always consult a tax professional, and with our assistance you can get through an audit. We promise. 

1.  Read Letter and Response Time

The first basic step to a tax audit is to read the letter you receive from the IRS. The letter will outline the next steps you need to take. You generally have 30 days to respond to the notice. Responding in a timely fashion will get the ball rolling. This also means you may have a lot of work to do to get ready. It helps to have a tax professional at your side to keep you focused.

Should you decide to engage in the bury-your-head-in-the-couch tactic, the IRS foregoes giving you a chance validate your figures. They just automatically adjust your amount owed and send you a bill. That bill will undoubtedly include penalties and interest on the outstanding amount they think you owe.

2. Win Brownie Points for Being Organized

Think of this like a court case for your taxes. Get all your records together for the portions in question. Any documentation that corroborates with your tax return will help you case and make their life easier. You may save your receipts in a shoe box but sharing them that way will not help your case.

Having the requested material organized will expedite things. Plus, the easier you make going through your files for the IRS examiner, the more they will trust your documentation.

3. Leave Sideshow Material at Home

Also, only provide what they request. Trying to distract them with material from another part of your return will only accomplish two things. You will annoy the auditor with extraneous stuff or potentially make them interested in something they weren’t before. Neither of which is a good thing if you’re looking to get out of your meeting in minimal time.

4. Keep Your Original Documentation

Always make copies of supporting documentation you provide to the auditor. If for some reason production of an original document is necessary, request the auditor make copies for themselves. Do not leave your meeting without the original documents. Any material you give to the IRS, they will likely lose. Also, you should know they will not be responsible for records lost while in their possession. You, however, will need those originals for any future questions. It sucks, we know. Think of it like giving a toddler ringbearer the REAL wedding bands. 

5. Be Nice

No matter what we talk about in our office with clients, above all we tell them to be nice. IRS auditors are people, too (believe it or not). In a world steeped with negativity and quick fuses, it’s easy to forget that crappy behavior will yield crappy results. Also, you can face serious consequences if you engage in threatening or physically aggressive behavior. That’s a federal offense… and likely a highlight on the evening news. So just be nice, even if you perceive they’re acting rude, which the Service rarely does. Seriously per a famous Pennsylvanian, Ben Franklin: “You catch more flies with honey than vinegar” 

These basic steps to a tax audit can help you know what to expect. However, throughout the entire process, you should know your rights as a taxpayer. The IRS mission is to provide America’s taxpayers top-quality service by helping them understand and meet their tax responsibilities. They also pledge to enforce the law with integrity and fairness to all. An experienced tax attorney will help to ensure they uphold their mission.

Don’t go it alone. We can walk you through the basic steps of a tax audit and minimize your tax liabilities. Call John A. Cochran, Esquire, in Greensburg at 724-216-0704 or use our online form.

Considerations when Setting up a Business

A photo of all aspects that go into structuring a business

A strange thing happened as part of the global pandemic and economic crises. Many people, especially if laid off or furloughed, are having “COVID epiphanies.” No longer interested in working for someone else, they’ve decided to go into business for themselves. Congratulations if you’re one of them! You may only plan to run a part-time business as a side hustle for now. However, there are many considerations when setting up a business. 

No two businesses are the same. I encourage you reach out to an experienced business attorney before making any decisions. Different structures offer different sets of pros and cons. Below is a very brief description of a few areas to consider. 

Ease of Establishing

The size and structure you select determines how easily a business becomes a legal entity. Usually businesses start small, helping guide which structures to consider. 

Sole proprietorship’s simple business structure offers easy entry into owning a business, making it the most common small business structure. The sole prop basically acts as an extension of the person.

Partnerships operate much the same way as sole props with owners sharing responsibility.

Limited liability corporations (LLCs) require a bit more work to set up. But they minimize risk while offering flexible management. Most small businesses fall into these categories. 

However, structures also exist for larger entities, including Chapter C and Subchapter S corporations. Here, shareholders exchange money, property, or both for the corporation’s capital stock.

Tax Implications

Tax implications may hold more overall weight than how hard it is to form an organization. 

Owned and operated by one person, the sole prop takes total responsibility for the business’s debt and taxes. LLCs may offer lower risks with less complex taxes than corporations. A C corporation is separate, paying taxes and passing on profits to shareholders.

For more than 35 years, we have guided business owners through decisions involving nearly every type of business. Our past clients include sole props, partners, LLCs, and Chapter C and Subchapter S corporations. Each decision comes from many smaller choices. These choices include business control, asset protection, tax rates, and other matters.

Interested in learning how to turn your COVID epiphany into a proper business? We can walk through considerations when setting up a business with you. Call John A. Cochran, Esquire, in Greensburg at 724-216-0704 or use our online form.

Do Not Approach Filing Taxes like Speed Dating

Read that again. Do not approach filing your taxes like speed dating, especially for small businesses. You cannot expect to whirl through filing your business taxes like a gigolo at a speed dating event. What kind of success can you expect running to meet a new person every three minutes? Check the statistics: speed dating only results in a 4-percent success rate in the long run. Anticipate the same dastardly (I love that word) results if you approach filing business taxes with a similar attitude.

The Future is Now

Yes, the IRS extended filing federal taxes until July 15, 2020 this year. In March or April, that probably felt like a million years away. You know, a Future You problem. Back then you needed to focus on following stay-at-home orders, COVID-19 concerns, and basically watching the world fall apart. The extension intended to give business owners time to get back to normal.

Newsflash for the Feds: we’re still not back to ‘normal’ business. But that doesn’t give you as a small business owner any more leeway. The extended deadline the federal government so graciously bestowed upon us is fast approaching. The future is now. Time to face reality and get moving.

Business taxes require more paperwork, documentation, and time to process. Meaning, business owners face a tighter crunch time that typical W-2 filers. As a double whammy, business owners also must file your first and second quarter estimated income tax payments the same day. 

Get It Together… Now

Don’t try to excuse your procrastinating ways by saying you work better under pressure. I don’t subscribe to the tactic of creating self-induced stressful situations. You want pressure? Try having only three minutes to pitch yourself to a potential mate. Nope, pressure doesn’t seem to help the speed daters, regardless of their schticks. The IRS doesn’t want your smooth operator lines either. 

That means you have to dig in, burn the midnight oil, and grind this out. My recommendation? Pull together all your spreadsheets, paperwork, and crumpled receipts before you get started. I promise you, if you have to get up to retrieve a stray document, something will distract you… especially food. Or finding Mr./Ms. Right.  

Our offices can’t help with your dating problems, but we’re here to help you end your procrastinating ways. We can get you through this tax season and set you up for success moving forward. Future you will thank you.

Do you have business tax issues, need filing an extension, or have specific tax-related questions? RELAX. Call our office at 724-216-5180 or complete the online form to schedule a free consultation.  

Five Steps for Creating an Estate Plan

photo law book for creating your estate plan

What do you think about when someone talks about creating an estate plans? If you’re like most people, you assume that means they have a will. Full stop. But did you know that’s only part of the equation? Below we’ve listed five steps for creating an estate plan. 

1. Wills

Yes, wills serve as the backbone of an estate plan. Probating a will usually lacks the Hollywood drama of fainting, crying, and shouting in an attorney’s office during the reading. But without one, relatives automatically become heirs, even if you’d rather they not. Don’t want your mom to gain possession of your prized comic book collection? Ensure you have a valid will that gives them to your comic-con buddy. 

2. Beneficiaries

More than just who gets what in your will, you also need to name beneficiaries on all life insurance, retirement plans, and other assets. Spouses with joint ownership of assets – like a house – will automatically inherit the asset, so long as the deed reflects this. Also, revisit these beneficiaries periodically, especially after a large life change. I hate explaining to a deceased’s wife that the ex-wife inherits the insurance money because he never updated his policy beneficiaries.  

3. Memorandums or Letters

Not everything will be captured in a will. Some sentiments require additional explanation. For example, some people want to dictate every aspect of their funeral, including what songs to play during the service. We recommend these individuals write everything down in a document colloquially called a Memorandum of Death. Maybe that sounds creepy, but if you feel strongly about NOT playing Amazing Grace at your funeral, better record it. This also works for making sure the right people receive sentimental items with an explanation of why.

4. Power of Attorney 

No one wants to think about losing their facilities and not being able to make their own decisions. But if you plan to live a long life, the odds favor those with a durable power of attorney (POA). With a POA, a trusted individual can advocate for your financial affairs. They will act on your behalf to pay bills and disperse your funds according to your wishes. PS: it’s not always a relative who serves in this role.

5. Declutter your files

Grieving loved ones don’t need additional obstacles to closing a deceased’s affairs. Nobody wants to sift through losing lottery tickets, old magazines, and canceled checks to desperate need to find your estate plan and other important paperwork necessary to file for probate in the courts. Don’t be “that guy” that keeps everything in a grocery bag in the back of the hall closet. Organize your stuff. 

Ready to make sure your estate plan needs your needs? Relax! Call our office at 724-216-5180 or complete the online form to schedule a free consultation.  

Reminder: You Need a Will

you need a will, especially during uncertain times

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Expecting an Economic Impact Payment? Five Reasons to Check Again

a graphic of money depicting why if you're expecting and economic impact payment, there are five reasons to check again.

The much-anticipated economic impact payments have started rolling out across the nation. If you’re expecting an economic impact payment, you may be waiting expectantly. Americans eligible for the payment check their online banking statements like kids on Christmas looking to see if Santa came. Those receiving paper checks will have to wait weeks more.

Tens of millions of Americans will receive their payments without issue. Well, this is the federal government, we know there will be glitches and delays. Aside from the usual red tape, the CARES Act has a few loopholes that could eat into that Christmas morning miracle.

1. Child Support Arrears

Anyone who owes child support can have their checks fully or partially garnished like their wages. Note: married couples where one spouse is behind on child support from a previous relationship can see their payments garnished, too. That’s right, the current spouse could see some or all of their portion taken as well.

2. Private Collection Agencies

Currently, anyone in collections may also see those funds diminished. Debt collectors can freeze bank accounts, too. If this feels sneaky and underhanded, there are a number of senators who agree. They’re working with both the Treasury Department and states to close this loophole. But for now, it’s still perfectly legal.

3. Parents of Teens Over 16

As is true of regular tax filing, the child tax credit cuts off by at a kid’s 17th birthday. This may come as a big surprise when you’re counting heads around your dinner table. The IRS doesn’t count older teens as dependents eligible for the $500 dependent payment, regardless of how much they cost you in groceries.

4. College Students Still Claimed by Someone Else

College students under the age of 23 that are still claimed by someone else are not eligible to receive payments. Those claiming them as dependents will likewise not receive funds for claiming them as a dependent child. This is true even if the student lives on their own and has a part-time job while going to school. 

5. Disabled, Elderly or Otherwise Dependent Adults

Adults claimed by someone else for tax purposes are not eligible to receive a payment. Neither are their caretakers – including adult children – able to claim them as dependents for the $500 payment. 

The government’s economic impact payment program has additional holes, creating even more questions. The IRS is notoriously difficult to get answers from. This is especially true now with a skeleton crew pumping out unprecedented checks to tens of millions of people on antiquated computing systems. Figuring out the CARES Act and how loopholes affect your payments could require a more trained eye. If you’re expecting an economic impact check and need help, call our office at 724-216-5180 or complete our online form.

Common Tax Filing Mistakes

A graphic depicting tax filing materials

Whether you file your own taxes or work with a professional preparer, there are a few common mistakes you must avoid. Some could even delay your receipt of your funds from the CARES Act. You may laugh at these common tax filing mistakes below… unless you make them. 

Misspelled or different given names

If you ever took the SATs in high school, you may recall you got 200 points just for spelling your name right. There’s a lot more riding on spelling correctly and using your legal name now. Even if you hate your legal name, you’ll love the refund attached to it. The same goes for anyone who legally changes their name (ex: marriage, divorce, for fun). Whatever name the Social Security Administration has on file, use it on your tax paperwork.

Direct Deposit Errors

It’s more secure to request a direct deposit of a refund than having the IRS mail you a refund check and you receive your cash WEEKS earlier. However, the danger lies in making sure those digits are correct when you provide them. Errors in routing or account numbers could see your refund heading to another person’s bank account. The funds could also be returned to the IRS, delaying your receipt of your hard-earned cash. 

Side Hustles and Investment Earnings
Did you receive a 1099 for contract work last year? Guess what, you need to claim this on your taxes (yes, the IRS knows about it since the client sent a copy of your 1099 to them, too). Likewise, if you received funds from investments, you must claim this as income. If you “forget” about either of these, the IRS will remind you. Unfortunately, these reminders tend to include a penalty and interest on unreported income taxation.

Qualified Charitable Distributions

Make sure you adhere to the charitable donations guidelines posted on the IRS site. Bonus: If you’re an avid reader of my blog – and of course you are – we recently discussed a number of tax tips for filers over age 50. One of those tips offered advice for individuals who must take required minimum distributions from Traditional or Roth IRAs. By donating the full amount to charity, you exempt that income from taxation. 

With the IRS extending filing dates to July 15, you have time to ensure your information is complete and correct. Our office can help ensure you stay in good graces with the IRS. We can also find additional avenues for you to pay the lowest taxes possible while staying in compliance. To learn more, call our office at 724-216-5180 or use our online form.

9 Tax Tips if You’re Over 50

A photo of a person doing their taxes: discussing 9 tax tips if you're over 50

Taxes probably rank pretty low in order of importance right now during the coronavirus pandemic. Timing when to file could work to your advantage if you have concerns about income, especially if you consider these 9 tax tips you may overlook if you’re over 50. 

If you anticipate getting a refund, adhering to the April 15 deadline will get your refund to you more quickly. If you may owe the IRS, I suggest filing as soon as you can but holding out until July 15 to pay what is due. Keep that cash longer in your pocket instead. 

When you do file, finding every possible avenue to decrease your tax liability is all the more important this year. To help, check out these lesser known tax tips for anyone age 50 and older.

1. Catch-Up Contributions to 401(k)

Contributing to your 401(k) maxes out each year for everyone. In 2019, that limit was $19,000 until the age 50. From that point on you can contribute an additional $6,000 as “catch-up” in preparations for retirement for a total annual contribution of $25,000. 

2. Catch-Up Contributions to Traditional or Roth IRAs

Likewise, if you’re age 50 or older, you can also contribute an additional $1,000 to either for a total of $7,000. The underage set can only sock away a total of $6,000. By the way, you must withdraw required minimum distribution (RMDs) by age 70.5. BUT, if you donate that amount to charity, you don’t have to pay a dime of taxes on it. However, if your 70th birthday is July 1, 2019 or later, you do not have to begin your RMD until the age of 72.

3. Health Savings Account Contributions

It’s a fact of life. The older we get, the greater the likelihood we will need increased care. HSAs provide a tax-deductible way to save for these inevitable expenses, allowing single taxpayers over the age of 55 to put away $4,500 and $8,000 for families. 

4. Drawing down Cash from 401(k) Retirement Funds

If you’re over the age of 59 ½ (yes, we start counting half-birthdays from here on out), congratulations! You’ll no longer pay a 10 percent penalty for withdrawing funds from your retirement accounts. Bonus: among various exceptions to the 10 percent penalty, if you’re over the age of 55 and leave a job, you can start receiving distributions immediately from your 401(k).

5. Lifelong learning credits

While not only for the 50+ crowd, the Lifetime Learning credit can be claimed for you or your spouse for more than four years. The credit, worth up to $2,000 annually, can be claimed for education expenses that lead to new or improved skills. Again, this credit has modified adjusted gross income restrictions, phasing out between $58,000-$68,000 for singles and $116,000-$136,000 for married couples.

6. 529 Education Plans

Similarly, grandparents can finance education costs for their grandkids and score a tax break for 529 plans. Once meant only for eligible colleges and universities, 529 plans now cover K-12 expenses for any public, private or religious institution.

7. Increase you Standard Deduction

If you’re over the age of 65, you automatically qualify for a larger standard deduction. How much? The standard deduction in 2019 for those over age 65 increased by $1,650 for single households; if you and your spouse file jointing and are both over age 65, you can add a total of $2,600. (Caveat: your standard deduction could be reduced is someone else claims you as a dependent.)

8. Medical and Dental Expenses

If your unreimbursed medical bills account for more than 10.0 percent of your adjusted gross income – and you itemize your deductions – you may be able to deduct some or all of those expenses. This also applies to buying long-term care insurance, which, depending on your age, could add up to more than $5,400.

9. Tax Credit for Elderly or Disabled Care

Finally, you may qualify for the tax credit for the Elderly or for the Disabled. To qualify, you must either be 65 or older or retired on permanent and total disability with taxable disability income. A reminder: this credit as strict income limits.

Of course, this list of tax tips provides just a sampling of the many additional perks of being a “Boomer.” The IRS helpfully offers this “simple” guide to understanding all the tax breaks for older Americans. Our office can help break down the guide for you and find additional avenues to pay the lowest taxes possible. To learn more, call our office at 724-216-5180 or use our online form.

How will taxes affect your business strategy?

If you’re a business owner, you know that every decision affects your business in myriad ways. With tax season in full swing, these aspects are likely (or should be) on the forefront of business owners’ minds. So, how will taxes affect your business strategy this year?

Informed Decisions

For example, finance and business strategies often fail to consider the role of taxes during the decision-making process. This is especially true of plans for small businesses. Effective business planning means accounting for every possible impact of a transaction on the overall health of a business. Owners must factor in all tax and non-tax costs into final decisions by reviewing their Strengths, Weaknesses, Opportunities and Threats. Anyone familiar with SWOT analyses knows that the entries that populate the classic project planning quadrant for decisions have far-reaching, and often unexpected implications.

At least partly, taxes affect your business strategy because of the implications of a move. Whether forming a business, raising capital, expanding or divesting business, taxes have a direct impact on cash flow. Taxes can divert as much as 40 percent of a business’s pretax cash flow to the government. Planning accordingly for these implications can prevent a business owner from being caught “flat-footed” and finding themselves deep in the red with the IRS. 

Whole fields devote study to taxes and business strategy. Every business school worth its weight in saIt offers a full program on considering the taxes, accounting and financial trade-offs involved in strategic planning. I won’t attempt to surpass thought leaders like Scholes, Wolfson and company (google them); however, there’s a reason their classic text, Taxes and Business Strategy, and others after have been so popular. The complexity of the tax code, coupled with how it can impact a business’s future plans, requires expert eyes. A true analysis takes a holistic approach to decision-making. 

Tax Structure

Business owners need to consider both explicit taxes (tax dollars paid directly to taxing authorities) and implicit taxes (taxes paid indirectly as lower before-tax rates for overall return on investments). I cannot stress how important it is to have a team of experts review any business deals before finalizing them. Experts in these fields can potentially save your business tens of thousands of dollars in the long run. 

Let’s say you receive the green light for moving forward with a proposition. Your next goal should be to minimize the amount of tax revenue the IRS makes off your transaction. Certain structuring can help you lower your tax bill while staying in compliance. 

If you’re considering more complex maneuvers, you need a tax attorney to help you navigate processes. This includes converting ordinary income into capital gains that are subject to lower tax rates or completing legal moves that shift transactions and tax consequences. 

With extensive experience in tax preparation and tax law, we’ve helped our clients save thousands of dollars in federal taxes. We can help you pay the minimum amount of taxes possible while still being in compliance with federal tax law. If you have questions or would like to schedule a consultation discuss your specific needs, call our office at 724-216-5180 or use our online form.

Business Tax Preparation 101: 5 Tips to Make Filing Easier

a grid of with photos of taxes, money and John Cochran, who provides business tax preparation 101: 5 tips to make filing easier

Tax season can be a tough time for everyone getting ready to file their tax returns. Even with a basic W-2, there is a lot of additional paperwork that can go with filing. If you’re a business owner, the entire process gets that much more complex. Get organized to help tame the annual beast. I advise all my clients to get their stuff together as soon as possible. Consider this my Business Tax Preparation 101 course.

Need help getting started? Follow these 5 things you can do to make your life (and your tax preparer’s) easier: 

1. Get Started Now

Allow plenty of time to find all your receipts, invoices and statements. Pull everything together into one place so that when we start to go over material, you can readily pull out the correct paperwork to keep moving. Also, schedule your appointment for preparation as early as possible. Taxes aren’t (or shouldn’t be) something you cram the night before the deadline.

2. Want to Save Money? Do the Legwork

Having a CPA or tax attorney prepare your taxes is an expensive, but necessary expense for business owners. If you want to cut costs, don’t skimp on the quality of the preparer. Instead, do as much of the prep work as possible before you hand over your material. This way you only get billed for high-value hours. That means adding up your expenses and revenues BEFORE you get to the office. 

3. Ask Questions Ahead of Time

Much like adding up your receipts on your own, do research on what is considered a qualified write-off before you come to your appointment. A quick review of Business Expense Deductions on the IRS site can help. If you’re still unsure about something, call and ask your tax preparer questions ahead of time so you have all the information you need at your fingertips.

4. Former tax problems? Self-Disclose Now

I don’t like surprises. If you already owe money to the IRS, received a letter from them, or are currently under investigation, don’t try to hide this because of embarrassment. Be up front before we get started, it’ll save us both a lot of heartache (and you a lot of money) down the road. As a tax attorney, knowing you have a problem, I’d  approach your current tax responsibilities much differently – and focus on the bigger problems at hand – than I would otherwise. 

5. File for an Extension

I personally hate dragging out processes, but sometimes things happen. You may have an upcoming hearing, a large change in income on the horizon, or a very busy quarter preventing you from filing on time. There is no penalty for filing for an extension, IF you do it on time. If you fail to file, you could be facing hefty fines and penalties, compounded by interest.

With extensive experience in tax preparation and tax law, we’ve helped our clients save thousands of dollars in federal taxes. We can help you pay the minimum amount of taxes possible while still being in compliance with federal tax law. If you have questions or would like to schedule a consultation discuss your specific needs, call our office at 724-216-5180 or use our online form.