It’s a fact of life that physicians and dental professionals operate under an increased level of scrutiny. Increasingly, compliance checks are digging in to more than charts and coding. The IRS is paying particular attention to these hot-button compliance areas: 

Worker misclassification 

Is your practice classifying hired physicians as independent contractors? The IRS may come knocking for a look at your payroll records. Violations can result in practice owners and officers being held individually liable for back payroll taxes (including withholding taxes) plus penalties and interest. 

Generally, for professionals, the IRS looks at three important factors to make the legal distinction between the employee vs. contractor status of a physician/dentist:

• Does the practice direct and control how the medical/dental professional does the job?  For example, does the employer specify when and where the worker provides services? 
• How much control does the employer have over the business and financial aspects of the worker’s job?  Determine if the worker has invested in his/her own business, has other clients and is not dependent on the employer.
• What is the relationship between the employer and the worker?  Generally contractors work on projects, not open-ended jobs and usually do not provide core services of the employer.

Experts in employment law say that, against this backdrop, most hired physicians/dentists legally fall under the category of employee. Obvious exceptions include physicians and dentists who do locum tenens or who have their own professional medical entities and bring their own ancillary personnel to the job.

Action:  To avoid sending up an audit red flag, don’t convert an existing physician employee to contractor status unless he or she has a significant change in job duties. And if you have workers doing the same job, don’t classify some as employees and others as contractors. Consult your attorney regarding appropriate classification and contracts.

Read More: To learn more about this important issue, see our January, 2016, article here.

Medical buildings

Physicians who own their medical building are facing increased IRS scrutiny. In particular, auditors are looking for the cozy transactions that can occur when the medical practice is both the tenant and the landlord. 

Action: Experts say the best approach is to treat it as if you were renting office space from someone you didn't know. Have a formal lease in place and make payments by physically writing a check or transferring money from your practice account into a separate medical building account. 

Sales and use tax

Most states impose a “use tax” on certain personal property that was purchased from a seller outside of the state for use in that state. Essentially, it taxes the use of goods on which no sales tax has been paid. Unlike sales taxes, which are charged and collected by the vendor, the use tax is self-reported by the purchaser. 

Action: If you purchase supplies or equipment from out-of-state vendors, determine whether state and local sales tax applies to these items. Then report any taxable sales on your monthly or quarterly sales tax report. Ask your CPA for guidance in this critical area.

Retirement plan audits

Managing the typical 401(k) plan can be incredibly challenging, and the IRS (and Department of Labor) cuts offenders no slack. Penalties for noncompliance — even unintentional errors — may be severe, and can even result in the loss of a plan’s tax-deferred status. 

One of the most common compliance errors involves failing to follow the terms of your original plan document — either taking actions that aren’t covered or allowed, or making changes to the plan document and then not following them in day-to-day practice. For example, maybe you’ve begun allowing participants to take out loans and hardship distributions, even though these weren’t included in your original written plan. 

Action: Make sure you understand how to detect — and correct — errors in plan administration. Start by downloading the IRS’ comprehensive 401(k) Fix-It Guide at http://www.irs.gov/pub/irs-tege/401k_mistakes.pdf.

Head off an audit before it occurs by taking steps now to identify potential compliance problem areas. Contact our office for guidance in ensuring that your practice remains compliant in all areas of operation.

The reporting of employer expense reimbursements by employees will vary based on whether the employer reimburses under an accountable or nonaccountable plan. This article will briefly discuss the two types of expense reimbursement plans and what the tax consequences are for the employee. 

The Basics

To qualify as an accountable plan, the employer’s reimbursement arrangement must require all of the following:

1. The employee’s expenses must be connected to the business. This means that the employee must have paid or incurred deductible expenses while performing services as an employee. 
2. The employee must adequately account to the employer for the expenses within a reasonable period of time.
3. Any excess reimbursement must be returned to the employer within a reasonable period of time. 

On the other hand, nonaccountable plans are reimbursement arrangements that do not meet one or more of the requirements listed above.  For example, an employee who is reimbursed under an accountable plan, but fails to return, within a reasonable time, excess reimbursements. In this example, the excess reimbursements would be treated as if paid under a nonaccountable plan. In addition, if an employee is repaid for business expenses by reducing the amount reported as wages, it will be considered a nonaccountable plan. 

What is a Reasonable Period of Time? 

The IRS states that a reasonable period of time depends on the facts and circumstances of each situation. However, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time:

• Employee adequately accounts for expenses within 60 days after they were paid or incurred. 
• Employee returns any excess reimbursement within 120 days after the expense was paid or incurred. 
• Employee is given a periodic statement (at least quarterly) that asks the employee to either return or adequately account for outstanding advances, and the employee complies within 120 days of the statement. 

What is Adequate Accounting?

The second requirement for an accountable plan says that the employee must adequately account to the employer for expenses. Examples of adequate accounting by the employee include providing the employer a statement of expense, account book, diary, or similar record in which the expense is entered at or near the time it was paid. The employee also must provide documentary evidence, like receipts, of travel, mileage, and other business expenses. 

It’s important to note that the employee must provide the employer with the same type of records and supporting information that would have to be provided to the IRS if the IRS questioned a deduction on the tax return. 

Tax Reporting

So why does it matter if your employer uses an accountable or nonaccountable plan? It matters because it affects how you will report the reimbursements and expenses for tax purposes. Expense reimbursements under accountable plans should not be included in box 1 wages on the employee’s Form W-2. In addition, as long as the expenses equal the reimbursements, the employee should not file Form 2106 to report employee business expenses nor claim a deduction. 

In the case of reimbursements under a nonaccountable plan, the employer will include the amount of reimbursements in box 1 wages on Form W-2. The employee must complete Form 2106 and itemize deductions to deduct business expenses. Only the business expenses greater than 2% of adjusted gross income will qualify for a deduction on Schedule A of Form 1040. 

Conclusion

Whether a reimbursement arrangement is an accountable or nonaccountable plan is determined based on whether the plan meets all three requirements of an accountable plan. While accountable plans have requirements that must be met, they could be viewed as more favorable to employees for tax reporting purposes. 

If you have questions about your expense reimbursement plan – as an employer or an employee – please contact us to discuss.

Many businesses host a picnic for employees in the summer. It’s a fun activity for your staff and you may be able to take a larger deduction for the cost than you would on other meal and entertainment expenses.

Deduction limits

Generally, businesses are limited to deducting 50% of allowable meal and entertainment expenses. But certain expenses are 100% deductible, including expenses:

• For recreational or social activities for employees, such as summer picnics and holiday parties,
• For food and beverages furnished at the workplace primarily for employees, and
• That are excludable from employees’ income as de minimis fringe benefits.

There is one caveat for a 100% deduction: The entire staff must be invited. Otherwise, expenses are deductible under the regular business entertainment rules.

Recordkeeping requirements

Whether you deduct 50% or 100% of allowable expenses, there are a number of requirements, including certain records you must keep to prove your expenses. If your company has substantial meal and entertainment expenses, you can reduce your tax bill by separately accounting for and documenting expenses that are 100% deductible. If doing so would create an administrative burden, you may be able to use statistical sampling methods to estimate the portion of meal and entertainment expenses that are fully deductible.

For more information about deducting business meals and entertainment, including how to take advantage of the 100% deduction, please contact us.

1. Get Educated. Educate yourself about the types of scams, malware, phishing, spyware and other common and emerging threats that exist on the internet and how to avert them.
2. Install Protective Software. Install a firewall and antivirus software, with automatic updates, on all computers and networks (including wireless) to avoid hackers, malware and viruses.
3. Enable two-factor authentication (passwords and PINS) on devices, apps and on-line accounts, including e-mail accounts, whenever possible–one of the strongest cybersecurity measures available. Most on-line banking, finance, e-commerce and social media sites, as well as many e-mail providers, allow two-factor authentication.
4. Use strong passwords with a combination of 10 to 15 upper and lower case letters, numbers and special characters. 
5. Change Passwords Frequently. Passwords should be changed every 90 days and should be different for each account.  
6. Click with caution.  Don’t open emails, download files or click links received from people or organizations that you don’t recognize. Even if the message is from someone you know, be cautious and look for information that indicates that the message is legitimate.
7. Use Alerts. Add alerts to your on-line bank and credit card accounts so that you’ll know about unusual transactions immediately.
8. Be Vigilant. Check your on-line bank and credit card account balances and transactions for fraudulent activity every day.
9. Surf safely.  Use a search engine to navigate to the correct web-address to avoid phony web-sites. 
10. Practice safe shopping.  Before you enter any payment information look for the following items on the web-site:  look in the address bar to see if the site starts with “https://; look for a trustmark to make sure the site is safe; when you’re on a payment page, look for the lock symbol in your browser, indicating that the site uses encryption or scrambling to keep your information safe. 

What you need to know to combat tax identity theft

Individual tax identity theft

IRS actions 

Risks for businesses

Tips for preventing tax identity theft

• Use antivirus and other security software on all workplace and personal computers,
• Update your data security plans regularly to reflect new risks,
• Educate employees about phishing schemes,
• Truncate or redacte identifying numbers where possible,
• Keep identifying numbers and other sensitive information in a secure location and restrict access on a need-to-know basis,
• Update business filings with the IRS and the secretary of state for your state when contact information changes,
• Monitor your credit reports, IRS and state tax authority accounts, and other business filings,
• File W-2s, W-3s and 1099s as early as possible, and
• Develop an action strategy for dealing with tax identity theft, including identifying whom to notify in the event of theft.

Don’t put your head in the sand

If your business claims deductions for meal, entertainment, vehicle or travel expenses, be aware that the IRS may closely review them. Too often, taxpayers don’t have the necessary documentation to meet the strict requirements set forth under tax law and by the IRS.

Be able to withstand a challenge

Whether you file a business return or file Schedule C with your personal return, these deductions can be a hot button for the IRS. Here are some DOs and DON’Ts:

DO keep detailed, accurate records. Documentation is critical when it comes to deducting meal, entertainment, vehicle and travel expenses. You generally must have receipts, canceled checks or bills that show amounts and dates. In addition, there are other rules for specific expenses. For example, you must record the business purpose of entertainment expenses, as well as the names of those you entertained and their business relationship to you. If you reimburse employees for expenses, make sure they comply with the rules.

DON’T re-create expense logs at year end or wait until you receive an IRS deficiency notice. Take a moment to record the details in a log or diary at the time of the event or soon after. Require employees to submit monthly expense reports.

DO keep in mind that there’s no “right” way to keep records. The IRS website states: “You may choose any recordkeeping system suited to your business that clearly shows your income and expenses.”

DO respect the fine line between personal and business expenses. Be careful about trying to combine business and pleasure. For example, you can’t deduct expenses for a spouse on a business trip unless he or she is employed by the company and there’s a bona fide business reason for his or her presence.

We can help

These are general rules and there may be exceptions. If your records are lost due to, say, a fire, theft or flood, there may be a way to estimate expenses. With guidance from us, you can maintain records that can stand up to IRS scrutiny. For more information about recordkeeping, contact us.

Individuals

Charitable Deductions

Charitable Travel

1. You must volunteer to work for a qualified organization. Ask the charity about its tax-exempt status. 
2. You may be able to deduct unreimbursed travel expenses you pay while serving as a volunteer. You can’t deduct the value of your time or services.
3. The deduction qualifies only if there is no significant element of personal pleasure, recreation or vacation in the travel. However, the deduction will qualify even if you enjoy the trip.
4. You can deduct your travel expenses if your work is real and substantial throughout the trip. You can’t deduct expenses if you only have nominal duties or do not have any duties for significant parts of the trip.
5. Deductible travel expenses may include:
   • Air, rail and bus transportation
   • Car expenses
   • Lodging costs
   • The cost of meals
   • Taxi fares or other transportation costs between the airport or station and your hotel

Renting Your Vacation Home

Businesses

Traveling for Business

Entertaining Clients

Using Your Home Office  

Current requirements for white-collar exemptions

1. Salary basis test. The employee is salaried, meaning he or she is paid a predetermined and fixed salary that’s not subject to reduction because of variations in the quality or quantity of work performed.
2. Salary level test. The employee is paid at least $455 per week or $23,660 annually.
3. Duties test. The employee primarily performs executive, administrative or professional duties.

Significant changes under the final rule

The duties test

Compliance options

• Pay employees a salary for the first 40 hours of work per week and overtime for any hours over 40.
• Pay a straight-time salary for more than 40 hours in a week for employees who regularly work more than 40 hours, and pay overtime in addition to the salary. You will only be required to pay an additional half-time overtime premium for overtime hours already included within the salary, plus time and a half for hours beyond those included.
• Agree with the employee on a fixed salary for a workweek of more than 40 hours, with the salary including overtime compensation under certain conditions. Employees must always be paid based on the hours actually worked during the workweek, though, so salary adjustments may be necessary at times. This will likely work best for employees who consistently work the same amount of overtime every week.
• For employees with fluctuating hours, pay a fixed salary covering a fluctuating number of hours at straight time if certain conditions are met.

The big picture

If your nonprofit became a victim of fraud, it wouldn’t just hurt your organization’s bottom line — the infraction also could do devastating damage to your reputation. By implementing some simple controls, though, your organization can help protect itself from these risks.

1. Segregate duties

One of the most important preventive measures is the segregation of accounting duties, especially those related to executing outgoing payments. You should assign different employees to approve, record and report transactions. And the employee who generates checks for payment or approves invoices shouldn’t also be responsible for signing checks or initiating online payments.

Similarly, the staffer who makes bank deposits shouldn’t be charged with reconciling the organization’s bank statements. If the nonprofit is too small to segregate duties fully, consider rotating staff through the various duties regularly, or involving a board member to oversee the process. You also can adopt a mandatory vacation policy to make it more difficult for fraudster employees to conceal their schemes.

2. Provide training

Research conducted by the Association of Certified Fraud Examiners (ACFE) shows that organizations with antifraud training programs experience lower losses, and frauds of shorter duration, than those without. Nonprofits should provide targeted fraud awareness training not just for managers but also for employees.

At a minimum, the ACFE recommends explaining which actions constitute fraud, how fraud harms everyone in the organization and how to report suspicious activity. Managers and employees also should be educated on the behavioral red flags of perpetrators and encouraged to keep an eye out for them. Red flags include an employee who appears to be living beyond his means or one who refuses to take time off. Additionally, some insurance providers offer discounts if certain antifraud training is attended by a majority of staff members.

3. Set up a hotline

Fraud hotlines are one of the most effective strategies for uncovering fraud. The ACFE has consistently found that tips are the most common means of detecting fraud. The majority of tips come from employees, but the hotline also should be available and publicized to vendors and constituents.

Management should encourage employees to report any suspicious activity and enforce an anti-retaliation policy so employees aren’t reluctant to speak up. Ideally, the hotline should be anonymous, or at least confidential.

4. Assess risks

In 2013, the AICPA published its Audit Risk Alert: Not-for-Profit Entities Industry Developments. The alert urges not-for-profits to develop a formal fraud risk management program, including a fraud risk assessment.

According to the AICPA, a fraud risk assessment should identify:

• The fraud schemes that could potentially happen,
• The possible concealment strategies that a fraudster can use to avoid detection,
• The individuals within or outside the organization who pose the highest risk of committing fraud, such as accounting or information technology personnel,
• The controls currently in place to deter or detect fraud, and
• A list of warning signals or red flags that can be used to educate the organization, including both employees and board members.

The goal of the assessment is to identify any vulnerabilities and gaps in internal controls that could leave your nonprofit susceptible to financial and reputational damage.

5. Make it a joint effort

Cutting the risks of fraud requires the board of directors and management to be aware of your nonprofit’s vulnerabilities. Staff also must pitch in, staying on the lookout for red flags, conflicts of interest and other potential issues — and they must be comfortable reporting any concerns. Your financial advisor can help, too, by conducting a fraud risk assessment and suggesting ways to establish appropriate controls.

Stay on top of filing and reporting deadlines with our tax calendar! Our tax calendar includes dates categorized by employers, individuals, partnerships, corporations and more to keep you on track.