As many individuals and businesses prepare to file their 2017 income tax returns, the question many people forget to ask is “what am I missing?”
Now when many people hear that question in the context of taxes, they think what deductions or credits am I missing. Although this is indeed a great question, and one your CPA should be asking you all year long, this is not the only things that we need to worry about missing in today’s tax world.
As the IRS and many state governments continue to struggle for funding, they have begun to move to a new revenue stream, penalties. With the politics involved in increasing taxes nearly impossible to sometimes overcome, the taxing authorities have turned to fines and penalties as a way to increase revenue. Years ago, a penalty notice meant a small fee “slap on the wrist”, or having to write a letter to get it waived; but in today’s world, the fines have become substantial and are becoming harder and harder to get abated. Those penalties are not just for the normal “failure to file your income tax returns”, but more often they are now for informational filing deficiencies.
But what does that mean? For the 2017 individual returns, the IRS will now reject returns that fail to answer the ACA mandate question. Failing to check the box that lets the IRS know you have money overseas may mean fines of up to 50% of the amounts you hold overseas. Or what about just missing details on one of the forms you did file if it doesn’t affect the numbers? In a recent Revenue Ruling, a taxpayer that gifted some appreciated property and took a charitable deduction failed to include his cost basis on the form. Although this has no effect on the tax deduction, the IRS disallowed the entire deduction because the form was not properly completed.
From a business standpoint, there are a slew of informational type returns that are required and failure to properly complete them can mean fees or other tax detrimental consequences. Does your company rent or utilize the services of any third parties? If so, forms 1099 are required, and that is so even if the third party is the business’s owner. Failing to issue a 1099 form to a required party now carries with it a $250 penalty. Or maybe you did file the 1099 but because you never obtained the contractor’s id number when you hired them you left that blank; that too carries a $250 penalty. Also, don’t forget to file those forms with the states in which the contractor actually performed the services. States are also looking for unreported income and also impose penalties for not filing the forms with them when required. Some states also have their own informational forms as a part for the tax filings. Wisconsin, for example, requires taxpayers to report details on some transactions between related parties on a separate form. Failure to include these details on this informational return can mean the item is not deductible by the payor business (although it remains taxable to the recipient!)
So what does this all mean? Although some regulations have changed to make some filings easier, not knowing all the requirements buried in the miles and miles of “simplified” tax code can mean lost deductions, penalties and many other tax problems. At RPB, we know the tax laws, we ask the questions, we are here to help.
Brad Voght is the tax partner at Reilly, Penner & Benton, LLP, a public accounting firm and trusted adviser specializing in business and personal tax matters as well as in not-for-profit work, school organizations as well as government and municipal agency work. The firm also provides ERISA audit services to publicly held entities throughout the country. A PCAOB registered firm, Reilly, Penner & Benton CPAs also known as RPB CPAs, has served closely held businesses and has provided tax preparation and advice, financial statement audits, reviews and compilations, employee benefit plan audits, bookkeeping services, business valuations, fraud prevention and consulting services since 1907.