Today, The Wall Street Journal has an editorial posted, ObamaCare vs. Small Business, written by Dan Danner on behalf of the National Federation of Independent Business (NFIB). In it he lays out the case for why The National Fedaration of Independent business is against the recently passed Healthcare plan and how it will adversely affect small business owners.
We have highlighted some of the benefits (tax credit for small businesses) and some of the negative impacts (1099 reporting to all corporations that you spend more than $600 with).
Take a look at the article and see why they are opposed to this legislation and why they have joined the other 20 states in the lawsuit against this new law.
$994 billion!!! No, it is not the cost of a new stimulus plan, more TARP, another government health care plan. It is the estimated amount that U.S. organizations lost to occupational fraud in 2008.
The Association of Certified Fraud Examiners recently issued its report - Report to the Nation on Occupational Fraud and Abuse. The report was conducted by compiling data from 959 cases of occupational fraud between January, 2006 and February, 2008. It was Certified Fraud Examiners who provided data for the study. As you will see from the highlights below, fraud is a costly matter for all businesses regardless of size. Small businesses are as susceptible to it as large organizations and the private sector as susceptible as the public sector.
Because fraud is so costly, it's important to implement controls, processes and procedures for detecting fraud or potential fraud before it occurs. One of the best models you can follow is the IRS model - compliance through fear. Most taxpayers are not enthused about paying taxes and filing their returns each year, but they do so because it's the law! Most tax payers are fearful of the IRS and the consequences of not complying with the tax laws. If someone knows that their work will be reviewed, and there are procedures in place to detect fraud, it is much more likely that an individual will not attempt fraud.
Some common tips for preventing fraud are surprise audits, having a second person review work, having a follow behind to double check the bookkeeping and preparing financial statements, calling vendors to check on orders and verify they are real orders, and reconciling invoices to payments.
Here are some quick highlights of the Report To the Nation on Occupational Fraud and Abuse:
- Median loss by fraud - $175,000
- 25% of the frauds committed cost organizations more than $1 million
- Typical time frame for a fraud is 2 years
- Often times, the fraudster is a first time offender
- Most frequent way to catch frauds was through tips - 46% of cases were uncovered based on tips from employees, customers and vendors
- Anti-fraud controls did help reduce or catch fraudulent schemes. Organizations that conducted surprise audits had a median loss of $70,000 compared to $207,000 for those that did not have a plan in place.
- Most common industries victimized by fraud: banking and financial services - 15% of cases; government - 12% of cases; health care - 8% of cases
- Small businesses are not immune to fraud: Median loss for businesses with fewer than 100 employees - $200,000.
- inadequate internal controls are most common reasons that permitted fraud to occur.
- most organizations closed the barn door after the horses escaped. Anti-fraud controls were implemented by 78% of the organizations after they discovered the fraud.
- Most frequent perpetrators of fraud were upper management and accounting departments. Median loss for fraud committed by upper management was $853,000.
As a business owner you may now have an opportunity to either receive a payroll tax savings for the rest of 2010 on employees you hire or take a tax credit against business income on your 2011 tax return.
The Work Opportunity Tax Credit offers business owners to take a tax credit against the income of the business if they hire an individual that is part of a "targeted group." Currently there are 11 differented targeted groups. The Work Opportunity Tax Credit Guide includes the list of targeted groups along with the definitions and the amount of credit that you can obtain by hiring a new employee from one of these groups.
The HIRE Act of 2010, aka '"The Jobs Bill", passed last month includes an opportunity for businesses to not have to pay the 6.2% employers portion of social security tax if they hire an individual that has not worked for more than 40 hours in the previous 60 days. the employee will have to fill out and sign an affidavit to that effect. This HIRE Act Guide of 2010 includes a more detailed summary of the Act and here is the HIRE Act affidavit that has to be filled out and signed.
If you have been in noncompliance with the tax laws, playing around the edges of the tax laws, hiring 1099 contractors, rather than employees and are not worried about an audit, because the chances of an audit are low, then the next couple of posts are a must read for you.
The post, Are You Self Employed or a Small Business Owner? If So, The IRS Is Gearing Up to Evaluate How you Classify Workers, is in regards to the Dept of Treasury's recent Internal Audit Report: Employment Tax Compliance Could Be Improved with Better Coordination and Information Sharing. The othe other post, What Whistleblowers and Hedge Fund Investors have in Common should make you take notice that your business and complaince to tax law will be under the scrutiny of many prying eyes including your employees.
Both posts underscore the seriousness that the IRS is taking regarding tax fraud including the misclassification of 1099 contractors as employees. As the budget deficits grows and additional revenue is needed by the government the logical thing to do is to raise revenue through increased compliance.
In it's recently released report, Employment Tax Compliance Could Be Improved With Better Coordination and information Sharing, the Treasury states:
The misclassification of employees as independent contractors is a nationwide issue affecting millions of employees that continues to grow and contribute to the tax gap. According to program documents, closing the tax gap remains as one of the biggest challenges for the Small Business/Self-Employed Division. The Internal Revenue Service (IRS) has several opportunities to enhance compliance in its Employment Tax Program by taking measures to ensure that employment tax forms are not misused to avoid paying proper tax... 
If you combine the statements in this audit report with the IRS' recently launched program to audit 6,000 businesses, that was highlighted in a previous post, What's Your Exposure to This 1099 Issue?, there appears to be a pattern forming, i.e., the IRS will be targeting the use of 1099 workers and going after businesses they believe are misclassifying employees.
If you are a business that relies heavily on using 1099 contractors, you may want to reevaluate your use of 1099 contractors and determine if you are in compliance. Here is a link you can use to learn about more information about how the IRS classifies an employee verses an independent contractor.
Whistleblowing becomes a for-profit business. In David Kocieniewski's article, Whistle-Blowers Become Investment Option for Hedge Fundshe outlines how the hedge funds and private equity groups are getting into the Whistleblowing business by buying a percentage of future payouts.
Informants who turn in tax cheats have to wait years to get their share of any rewards from the I.R.S.'s recently expanded whistle-blower program. So hedge funds, private equity groups and other big investors are offering an alternative. they are essentially agreeing to buy a percentage of those future payouts in exchange for a smaller amount upfront to the whistle-blowers.
The surging size of the potential awards is driving all the interest.
The Whistleblower/informant program has been on the books since 1867 and allows the Secretary of Treasury to pay rewards
for detecting and bringing to trial and punishment persons guilty of violating the internal revenue laws or conniving at the same time.
Prior to 2006, the law had been largely unchanged and then in December, 2006 the Tax Relief and Health Care Act of 2006 was passed. prior to 2006, the rewards were discretionary, the new law changed this and provided that the rewards would be 15% to 30% of the collected proceeds. It also added Whistleblowers rights and set-up the Whistleblower Office reporting to the commissioner. The first director of the Whistleblowers office, Stephen Whitlock, was appointed in February, 2007.
Since then the program has taken off. Prior to 2006 there were very few tips of reported infractions. As the author highlights in his article:
I.R.S. offices now receive a torrent of big money claims. Accountants and company employees have taken to trooping in bearing computer records and boxes of documents to back up their claims of underpayments by big companies.
The author goes on to report the first of these big payouts.
In what is believed to be the first of these structured tax payouts, an I.R.S. informant who reported that an overseas multinational corporation had underpaid its taxes by billions of dollars received $4 million last month from a private equity firm. In exchange, the firm will receive a portion of the award the informant expects to collect eventually.
To put it simply, one just has to follow the money. If the money guys and investors see potential profits from this investment then isn't it reasonable to think that the number of whisleblowers will increase. If your business is not in compliance or you are doing things that appear to be shady, you could have an employee, bookkeeper, or contractor reporting you to the IRS for profit.
Your best strategy is always compliance and when in doubt seek the assistance of a professional CPA for guidance.
Do you hire 1099 contractors for your business? if so, this CNNMoney.com article is a must read. The IRS launched an initiative this spring to audit businesses that hire 1099 contractors. Initially, the plan calls for auditing 6,000 businesses to determine if businesses are improperly classifying workers as 1099 contractors rather than employees. The obvious benefit to the employer doing this is they do not have to pay employer's payroll taxes on 1099 contractors.
The program, to audit businesses, coincides with a number of state auditors also launching their own programs to look at misclassification of employees. The obvious reason for such programs is to raise additional revenue for both the state and federal government. An additional benefit is the wealth of information the IRS will obtain. Speculation is, they will use this information to develop parameters for quickly identifying businesses that improperly classify 1099 workers.
If it is found that your business hires 1099 contractors improperly and they reclassify those workers as employees, you will be exposed to severe fines, penalties and back-taxes for those workers. Not only are you liable for all the back-taxes as an employer, but you may be liable for the taxes that should have been paid by the worker as an employee.
The typical ways a business can be found to have misclassified workers is by an audit or by an investigation that is opened by the Department of Labor. An investigation is opened after they receive a complaint regarding the use of 1099 contractors for the business. These complaints, often times, come directly from a 1099 contractor or an employee. It is not uncommon to have a dissatisfied worker you released, or a 1099 contractor that owes thousands of dollars in taxes, to file a complaint against the business.
More information about how the IRS classifies employees verses 1099 contractors can be found here at the IRS web site.
Earlier this year, the Hiring Incentives to Restore Employment (HIRE) Act was signed into law. In that bill, a company, hiring a "qualified employee" could save the 6.2% social security tax that employer's are obligated to pay on employees' salaries. In a previous post we outline the benefits. You may also find additional information in our HIRE Act Guide found here.
The IRS has published answers to frequently asked questions, Form 941for reporting the "qualified" new hire earnings, instructions for the new form and an affidavit that must be signed by the qualified employee.
This is a great opportunity for a business to save some money this year when they hire a new employee.
Does your business accept credit cards? be prepared, beginning in 2011, merchant processors that process credit cards, debit cards and third party network transactions will be required to issue their clients a 1099. A 1099 will be required when the number of transactions processed for their merchant client, exceed 200 in a calendar year or when they process more than $20,000 in gross revenue for that client.
This the text from the IRS news release regarding this new provision.
The provision was enacted as part of the Housing Tax Act of 2008 and is dedicated to improve voluntary tax compliance by business taxpayers and help the IRS determine whether their tax returns are correct and complete.
The IRS commissioner in the same news release issued the following statement.
Time and again, we have seen that better information reporting helps the tax system work better by ensuring everyone pays what they owe. The new law gives us an important new tool for closing the tax gap and also provides business taxpayers better documentation to compute and report income and expenses. The IRS will work closely with stakeholder groups to ensure a smooth implementation of this new program.
Businesses most affected by this new requirement are the ones whose customers use credit cards frequently such as, on-line sales, restaurants, retail stores, gas stations, doctors and dentists offices that accept payments via credit cards, etc.
The first 1099s that will be required to be issued will be in 2012 (by January 31, 2012) for credit card transactions for the year 2011 year ending. Here is a sample draft of the 1099-K from the IRS website.
All of these new reporting requirements make it more important for you, as a business owner, to stay current and be accurate with your bookkeeping records and reporting requirements. otherwise you may find yourself in the IRS crosshairs. Not a place you want to be.
Beginning in 2012, all businesses, including sole proprietors, partnerships and corporations will have to issue a 1099 to any person or business when they purchase any goods or services that exceed $600 per year.
That's correct, now when Larry the landscapers buys gasoline from Bill's Stop & Go because he has the cheapest gasoline, and spends more than $600, Larry will have to issue Bill's Stop & Go a 1099. When Joe the plumber purchases more than $600 at Home Depot or Lowe's he will have to issue them a 1099.
Every business, including sole proprietors and consultants, are subject to this new law. No longer will it be enough to have the name of the corporation, it's Employer Identification Number (EIN) and receipts for purchases from them to write off as a business expense. You will now be required to issue them a 1099 and submit that information to the IRS.
For example, a small business owner of an autobody shop or supply store that purchases thousands of items, in a given year, from hundreds of different vendors, will have to issue every vendor, where he spent more than $600, a 1099. This will require a business to spend additional resources and money on 1099 compliance.
The reasoning behind this, is that it will allow the IRS to track all income, to every individual or business where more than $600 was spent in a given year by any one business owner. This little requirement buried in the Health Care Bill places a major burden on all companies across the country. Now managers and owners, rather than spending their time running and growing their business to create jobs, will have to spend their resoucres to deal with this additional, burdensome, tax reporting requirements.
Neil deMausein in his article Health care law's massive hidden tax change, reports on this little hidden gem from the Health Care Bill.
Section 9006 of the health care bill--just a few lines buried in the 2,409 page document--mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.
Nancy Pelosi was right when she said they had to pass the bill to see what is in it....a massive new tax filing requirement for all businesses.
Because of the various states' budget crisis and growth of on-line sales over the past decade, a few states have been passing laws in an effort to collect sales tax from -on-line retailers. To date, these states have had little success.
Most recently, the battle lines have been drawn between Amazon, and North Carolina. Last year, NC passed a law requiring on-line retailers to collect sales tax on products sold through NC marketers and affiliate marketers and referral sites. Currently, the NC Department of Revenue has put this number at greater than 350.
During an audit with Amazon last December, NC sate auditors requested detailed information related to Amazon's sales to NC residents. The request was for the NC sales dating back to August 2003. Amazon, citing privacy laws, refused to turn over the information.
Last month NC announced that on-line retailers must sign an agreement by August 31, in which they agree to collect sales tax from on-line sales to NC residents. If they do not, the NC revenue Secretary, Kenneth Lay, has stated NC would go after them for uncollected sales tax dating back to August 2003. This is well before the passage of the law.
As with all things that end up in court, the outcome is any one's guess. Whatever the outcome, you can be sure the decision will be appealed by the losing party. In 1992, the US Supreme Court ruled states could not force retailers to collect sales tax, unless the retailer had a presence in that state. The court reasoned that because the rates in every state, city and county and the products or services taxed were all different, it would be impossible for a retailer to keep track and conform to all the various sales tax laws and rates across the country.
The two states at the forefront of, of this attempt to collect sales tax from on-lin retailers are NC and Colorado. Amazon's strategy to date, when faced with these new state laws, has been to discontinue it's affiliate marketing program in those states. . This action effectively shuts down and hurts the small business owners, whose business model is selling products via, affiliate marketing programs such as ones like Amazon.
Currently more than a dozen other cash strapped states are debating whether to try and pursue the collection of sales tax from on-line retail sales. You can bet that other states will be closely monitoring the court case between Amazon and NC.
Jake Grovum does a great job outlining this issue in his article The Amazon Tax War Escalates, posted on Stateline.org.
If you're in th e-commerce business, you'll want to keep a close eye on these developments.