Use these tips and avoid these slips with your practice when dealing with tax compliance and the the IRS
In December, when most people were thinking about new year’s resolutions or goals for the coming year, most small business owners were gearing up to close their books and finalize their tax compliance with the seemingly endless requirements for federal and state taxes.
Tax year 2020 is still fraught with uncertainty for many of us — especially those companies that received Payroll Protection Program (PPP) funding. As I write this article, we believe that PPP-related expenditures will be deductible and that the PPP loans will be forgiven. Despite this uncertainty, the majority of annual tax requirements remain the same. Before you close the books on last year and start anew, consider the following to ensure compliance with tax regulations, maximize your tax deductions and reduce your risk of fraud.
File payroll tax forms on time
Whether you are using an outside payroll company (which I highly recommend to reduce risk of non-compliance with payroll tax requirements), or are still preparing payroll in your office, make sure you file the requisite quarterly (Form 941) and annual payroll tax forms (Form 940 and Forms W-2/W-3). Depending on the state where you operate, you may have quarterly and annual payroll tax forms due as well.
PRO TIP: If you are struggling financially, it is imperative to file the forms even with absence of payment for tax compliance. Filing forms on time will help you eliminate late-filing or non-filing penalties and interest. If you can, prioritize the payment of payroll taxes, as non-payment or late payment of these amounts result in hefty penalties and interest as well.
File 1099 forms
Did you pay a lawyer or rent last year? Did you pay for the services of a consultant or other person (accountant, electrician, IT services, etc.) last year in excess of $600? If you answered yes to these questions, then you are required to file Form 1099 (now called Form 1099-NEC) with the IRS.
PRO TIP: Beat the rush to complete your forms at the last minute by requiring all vendors to provide a Form W9 before you pay them. This form will provide all information you need to file the 1099 forms. Too late and you don’t have a W9 on file? Call and request one from the vendor (or send them this link: irs.gov/pub/irs-pdf/fw9.pdf).
One of the best ways to get behind with the IRS is to not pay your estimated tax payments each quarter, instead spending the money on your practice or over-distributing amounts to yourself. Get in the habit of paying your estimates each quarter (January, April, July and September).
PRO TIP: Set up a separate bank account and call it your “tax savings account.” Each month (or each week), take a certain portion of your gross income and put it in your tax savings account (your CPA can help you figure out the appropriate percentage). Setting aside money on a regular basis ensures a seamless and non-stressful payment of quarterly estimates.
Identify large purchases
Did you make any investments in software, property, furniture or equipment last year? If yes, you will likely be eligible to depreciate those new items on an accelerated basis, lowering your taxable income.
Make sure to point out these items for your CPA.
PRO TIP: Want to make your CPA happy? Itemize the following information for them: date of purchase, vendor, amount of purchase and nature of purchase.
Want to ensure you don’t have to go looking for this information in the future? Instruct your bookkeeper to record all large purchases in one ledger account (e.g., Furniture and Equipment) each year so that this information can be directly printed from your accounting system.
Verify your gross income
Ensure that the income recorded on your tax returns is only income received from revenue sources, and not loans, capital contributions, etc.
The best way to do this is to print the “gross revenue” or “sales” ledger from your accounting system and make sure that your bookkeeper did not mis-record any deposits from loans or capital contributions as income.
PRO TIP: As a forensic accountant who has investigated fraud in dozens of practices, the number one fraud I see is skimming of revenues from the practice (i.e., incoming deposits are diverted).
I highly recommend that you run a revenue report from your medical practice software and compare that to your bank statements (not your accounting software) to ensure that your revenues were actually deposited to the bank. While you’re at it, review your contractual write-off (or credits) reports to make sure that those amounts appear reasonable for your practice (and do not indicate that someone is stealing incoming revenues and covering it up by posting write-offs or credits to patient accounts).
Stop the personal spend
Business expenditures should be the only expenditures run through your business bank accounts. Period.
As a small business owner, I get it. Sometimes it is just easier to spend business funds for personal purchases. After all, the money is yours, right? In the event that you have co-mingled business and personal funds, make sure that you or your bookkeeper segregate those amounts into an “Owner Draw” account on the ledger. This will remove the amounts from your deductible expenditures and ensure that you are in compliance with tax regulations.
PRO TIP: Never have time to review your bank account statements, cancelled check images or credit card statements? You may be surprised to find out that the second-most common fraudulent activity I see in practices is employees’ improper use of business funds.
This is typically seen when employees write checks to themselves or their personal vendors or use the practice debit or credit card for personal expenditures. I highly recommend that you review these statements (ideally, on a monthly basis) to verify this activity is not occurring in your practice.
Ensuring tax compliance and minimizing your risk of fraud do not have to be enormous or overwhelming year-end or tax-time tasks. By implementing simple changes to your practice management routine, you can decrease your risk of employee theft and decrease the stress of tax time.
TIFFANY COUCH, CPA/CFF, CFE, is the founder and CEO of Acuity Forensics, a nationally-recognized forensic accounting firm based in the Pacific Northwest. She is the author of “The Thief in Your Company,” a book that explores the financial and emotional impacts of fraud on business. She can be reached at tcouch@acuityforensics. com or 360-573-5158.