Tax and Financial News for August 2016
New IRS Business Audit Campaigns
Traditionally, the IRS subjects large corporate taxpayers to nearly continuous audits of their tax returns. In recent years however, IRS funding has been substantially reduced, making this strategy unsustainable. As a response, the agency is creating new approaches to how it audits businesses – and companies need to prepare.
As part of its new approach to auditing certain business segments, the IRS is focusing on specific high potential issues, moving its emphasis away from specific taxpayers. Up until now and moving forward, the IRS is focused on three main issues: inbound distributions, basket options and captive insurance. These are just the start, though, as the IRS is expected to implement additional campaigns that will bring less esoteric issues into the fold.
Most experts believe the IRS will approach these campaigns with its full force. Companies subject to these types of audits so far have had to endure constant documentation requests. As a result, these new audit approaches require a well-constructed defense against the IRS.
Here are five tactics that can be used to deal with the new IRS audit campaigns.
- Get ahead of a possible audit. Create internal procedures for documenting and preserving transactions, documents and data. Pay attention to details so you can maintain and preserve attorney-client and tax-practitioner privileges to protect and limit IRS access to data.
- Quick and nimble wins the day. By focusing on certain high-impact transactions, IRS audits are moving far faster than in the past. Preparation is key; however, because you need to be able to respond swiftly.
- Be clear with the facts. As audits come to a close, the IRS often gives taxpayers a write-up of the facts as examined. Taxpayers are then asked to either verify that they agree with those facts or dispute them. It is best to ensure you have a clear and coherent story so you can dispute their examination results if you do not agree with them.
- Get ready to state the record. The IRS is substantially increasing informal interviews of taxpayers and employees and recording them. Treat these interviews like they are depositions as anything you say or do can come back to bite you.
- Prepare for a show of strength. During the past several years, the IRS has been more aggressive and assertive in challenging attorney/accountant privilege claims. They are regularly issuing summonses to obtain documents in response to privilege claims. These summonses frequently result in standoffs that end up in court – which means even if you win, it can still be a costly process in terms of both time and money.
In the end, remember that the IRS is restructuring in response to shrinking resources and getting more aggressive as a result. The best way to protect yourself and your business is through preparation and strategic planning. Use the five steps above to be proactive and protect yourself against potentially intrusive IRS audits that ultimately can be extremely costly.
General Business News for August 2016
Is Factoring Right for Your Business?
Without cash flow, it’s only a matter of time before a business will close its doors. Right behind building a clientele base, invoicing is an important step in creating and maintaining positive cash flow over the long term. For businesses looking for a faster way to collect on invoices, factoring might provide another avenue to quickly generate cash flow.
Factoring works by letting companies receive an advance on their billing invoices, between 70 percent and 90 percent of the original amount, within 24 or 48 hours of application. The company advancing payment for the invoices, called the factor, often makes this loan conditional upon a credit check of the invoiced client. The greater the invoiced client””””””””””””””””s credit rating, the more likely that the factor will be approved. The final step is when the invoice is paid by the client: the factor pays the balance of the invoice, minus their factoring fee.
Types of Factoring
It””””””””s important to note there are two types of factoring – recourse and non-recourse. Recourse factoring is more widely used and often cheaper. Recourse factoring makes the business owner responsible to refund any unpaid invoices to the factoring company if invoices remain unpaid after an agreed upon time. Non-recourse factoring often does not require the entrepreneur to refund any outstanding invoices a factor is not able to collect on. However, the decreased liability businesses have with non-recourse factoring are accompanied by more thorough and higher criteria for credit checks.
Since one of the factors banks look at is a business”””””””” creditworthiness, factoring may provide startups with another avenue for quick cash flow if traditional lending is not an option. For early stage companies that want to consider another type of financing, factoring may be an attractive option if they don’t have adequate personal credit, enough business collateral or long enough operating history to meet a lender’s criteria.
While factoring has its advantages, there are some considerations to think about before going ahead with the process. If there are a large number of invoices, service fees can accrue quickly when they go through the risk-worthiness review phase. In addition to the processing and review fees, there are application, credit check and overdue fees (for overdue invoices) that can account for the factoring’s cost.
One test to determine if factoring is right for you is to look at past labor costs. This can be accomplished by analyzing how many hours were used for in-house collection efforts taken to recover outstanding invoices. Metrics for collection efficiency can be compared against common late timeframes of 30, 60 and 90 days. A simple test like this can be implemented as a cost benefit analysis between internal collection efforts versus selling invoices to a factor.
The choice and necessity to use factoring for a company’s invoice is one that isn’t always considered, but for the right type and stage of a business, this service can provide a jumpstart for frozen cash flow. With proper due diligence in choosing the right company, factoring can be a temporary solution to keep a business moving in the right direction over the long term.
Tip of the Month for August 2016
Tip: Revised U.S./European Transfer Pact
After months of debate, European and U.S. negotiators agreed on a data transfer pact to stop European regulators from imposing restrictions on the transatlantic transfer of data. The European courts had struck down the previous Safe Harbor framework following information leaks in 2013 that exposed intrusive U.S. surveillance practices. Since that time, the European Union and the United States have been struggling to replace the previous framework, which was outlawed following disclosures made by Edward Snowden, the former National Security Agency agent, concerning worldwide privacy breaches made by American intelligence services. The new Privacy Shield, a commercial data transfer agreement, is expected to facilitate more than $250 billion in transatlantic trade in digital services.
Why is the new accord important?
The new agreement will involve many companies – both large and small – that share credit card, financial transactions, human resources and/or travel information through cross-border data transfers. Free flow of data between Europe and the United States is crucial to international trade and finance. Digital data transfers are integral to the operations of the 4,000 or so businesses registered with the Department of Commerce – businesses that rely on being able to move information quickly between regions. Major U.S. companies are affected, including credit card companies like MasterCard, major internet companies like Google and Amazon, and social media giants like Facebook. They all had been left in legal limbo after the collapse of the Safe Harbor agreement. Key among the points of agreement are measures to safeguard the privacy of Europeans – not their counterparts in the United States. The Privacy Shield accord places stronger obligations on U.S. companies to protect Europeans’ personal data, and the U.S. government has agreed to safeguards and limitations affecting U.S. surveillance activities.
What are the main points?
The guarantees in the pact protect the privacy of people living in Europe – these assurances do not apply to people living in the United States whose data is transferred across the Atlantic. Privacy laws are tougher in Europe, where privacy is regarded as a fundamental right and expectations of privacy protection exceed those in the United States.
The accord gives Europeans the right to go to U.S. courts to seek redress if they believe their privacy has been breached by companies or by the U.S. government. It also reassures Europeans that U.S. government agencies will not gather and monitor Europeans’ data without cause. A new ombudsman position has been created in the State Department to handle any European complaints involving unauthorized collection of digital data from European citizens by U.S. government departments, including intelligence agencies.
Although the new pact goes further than the original Safe Harbor agreement, mistrust still remains and legal challenges could be on the horizon. Austria and Slovenia are concerned that the new Privacy Shield still fails to provide adequate privacy for their citizens. They abstained from voting to accept the new agreement, along with Bulgaria and Croatia. European privacy campaigners are also lobbying for more safeguards. On the other hand, its supporters – especially those in the United States – believe that the Privacy Shield agreement outlines clear and strong privacy obligations and that its enforcement clauses and rules will provide sufficient protection.