First Quarter 2017 Newsletter

After the tax filing season [Fifth Season of the year] ends we catch our breath and clean house. This year, however, a week after the deadline, our main computer imploded and we were down for several weeks with new equipment and software nightmares. We came to the realization that no matter how good the equipment is, whether it is Hewlett Packard or Dell servers, three years appears to be the life [or death] of the equipment and backup devices are never configured correctly. Accordingly, keep the short life in mind for your personal or business equipment.

Tax fraud is the latest demon on the horizon for most of us. The scamsters come from various sources; mostly the telephone and internet, I cannot recite how many times I have received phony calls from “”The IRS”” and somebody in Nigeria wants me to invest to get a million-dollar hung up inheritance or other device. I even had calls from people wanting to free my niece or to save a client from jail overseas. Lately there are new “”job opportunities”” on the computer offering huge salaries and benefits for home office applications requiring no experience”. If you receive calls or messages of suspicious nature delete it or hang up. If in doubt, call me, and we will review the nature of the inquiry for you. Above all, never offer information or money in any way unless you know the party is legitimate. Unless you are in collection status with the IRS for past taxes, never pay any attention to telephoned IRS demands for payment scams that are so intimidating. The IRS always corresponds by mail many times before collections are instituted.

We have been seeing many new clients these past years because of our successful web sites. We appreciate all good new clients but have rejected clients who relied on fraudulent returns in past years. By careful screening and proofing all returns the best we can, we have had only one audit [I had told the client his large deductions were suspect and he assured me he had backup receipts for everything claimed] over the past four years, which is only one of 1,200 returns. We had two audits in the prior two years but both were no-change audits because the client had perfect records. The IRS is certainly doing less audits than in prior periods, but this is a very low percentage and far below the norm. I would like to thank our clients for listening to us over the years to lower the possibility of future confrontations.

We did have three IRS audits last year, complements of other tax preparers who could not attend by lack of licensing. Most of the returns currently being prepared are either by people doing their own returns or people who are not capable or cannot legally represent their clients before the IRS. We had five requests for audit representation and turned one down because the client wouldn’t attend his own audit with us, and the other declined to find a cheap representative. This year, as with past years, we detailed proofed all returns before completion. This expensive step resulted in almost flawless work which results in fewer client letters and problems from the tax authorities.

Many of our clients have Subchapter S Corporations which dispense profits as officer’s salaries and dividends. Sub S Corps split the profits between officer’s salaries and a K-1 form to the owners/principals. An important point, which is missed by many clients, is that the split separates active income from passive income. Active income is from material participation in the operations and control of the business representing salaries paid to active ownership. The residual profits, amounts paid out tax-wise on partnership K-1 forms, is passive income which is nominally from invested capital. This income is not subject to Social Security Self-Employment taxes. It is important to have both elements in the business to be correct and audit proof. There have been only fraud-related audits of corporations in recent years but any day now, the IRS or the new administration, could zero in on these businesses to conform. While we are on corporate matters, an officer or owner cannot be on 1099 miscellaneous income in lieu of wages because they are truly an employee. Even board of directors people are on wages. Please contact us about this matter if you are subject to the above rules and we will handle your payroll requirements. I have testified in court about whether a client “managed his business as a corporate professional, and not a private person” and it can break a corporation to be on the wrong side of the fence when push gets to shove.

Although I retired as a stock broker, I still maintain insurance licenses and provide tax planning and investment planning for IRA’s, pensions and other insurance needs [insurance annuities still pay more than bank interest rates and are highly regulated by California insurance authorities for adequate reserves and ethical business practices]. Please call if you have any questions about your investments or need an IRA.

Continuous best wishes for this year. Don’t forget to give us a call if there are any problems or questions about your taxes or investments.

Phil Chute, EA
Phillip B Chute EA Financial Inc


(951) 302-4491

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