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The IRS "Dirty Dozen"

Posted By Lisa Novack, IRS, Thursday, March 15, 2018

Compiled annually, the “Dirty Dozen” lists a variety of common scams that taxpayers may encounter anytime but many of these schemes peak during filing season as people prepare their returns or hire someone to help with their taxes. Don’t fall prey.

For a detailed description of each scam, please refer to the list below:

  • Falsely padding deductions highlighted in IRS 2018 ‘Dirty Dozen’ tax scams - See IR-2018-54
  • IRS ‘Dirty Dozen’ list of tax scams for 2018 contains warning to avoid improper claims for business credits - See IR-2018-49
  • Taxpayers alerted against falsely inflated refunds in ‘Dirty Dozen’ list; Seniors, many others at risk - See IR-2018-48
  • Fake charities make 2018 ‘Dirty Dozen’ list; taxpayers should be alert to scams involving disasters, worthwhile causes - See IR-2018-47.
  • Tax Return Preparer Fraud Ranks on 2018 ‘Dirty Dozen’: Taxpayers Urged to Choose Reputable Tax Preparers - See IR-2018-45.
  • Despite Major Progress, Identity Theft Still on IRS ‘Dirty Dozen’ Tax Scams List - See IR-2018-42
  • Phone Scams Pose Serious Threat; Remain on IRS ‘Dirty Dozen’ List of Tax Scams - See IR-2018-40.
  • Phishing Schemes Make IRS ‘Dirty Dozen’ List of Tax Scams for 2018; Individuals, Businesses, Tax Pros Urged to Remain Vigilant - See IR-2018-39.


To read the original article, click here.

Tags:  IRS  small business  tax filing  taxes 

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Posted By George (Clint) Frederick CPA PLLC, George Frederick CPA PLLC, Monday, July 18, 2016


The American Institute of Certified Public Accountants (AICCPA) this week suggested a letter to mail to all accounting firm clients with suggestions for protecting you and your family from identity theft.  The issue hits close to home since my daughter was a victim of identity theft last year.  We did not discover the theft until we tried to file her 2014 income tax return.  The Internal Revenue Service (IRS) promptly notified us that she had already filed her tax return.  What to do?  First, call the police department and report the theft.  File form 14039 (Identity Theft Affidavit) with the IRS. If you need specialized assistance, call the IRS at 800-908-4490. The IRS does not accept an electronic return when you are a victim of identity fraud.  Instead, the old-fashioned paper return is required.  My daughter has yet to receive her refund.  Per the IRS it might be as long as six months.   

The Government Accounting Office (GAO) estimates that for 2013 fraudulent tax returns obtained about $5.8 billion and affected 2.4 million US taxpayers.  That number is increasing.  In a recent seminar I attended on identity theft for professional tax practioners the moderator asked the audience how many had clients that were victims of identity theft.  The show of hands was unanimous.  All had clients that were victims.

The AICPA recommended the following safeguards:

·         Secure private personal information.  Safeguard family names and birthdays, account numbers, passwords, and especially Social Security Numbers. Carefully consider all requests to provide your Social Security number before giving it out.  Do not carry your social security card in your purse or wallet. Shred unneeded documents that contain personal information, including junk mail solicitations.

·          Monitor personal information shared on social media.  Cybercriminals methodically gather data from online sources, including commonly used identifiers such as birthdate, maiden name, pet names, hometown, significant other, and children’s information.  Be cautious with who you communicate with online and be selective before accepting electronic invitations from people you do not know or recognize.  Separate what you post publically and from what you post with your personal contacts.  Do not post personal and family data.     

·         Secure your computer.  Use current version of antivirus, malware protection, and firewalls and update these programs frequently.  Consider having this software updated automatically, as well as using separate computers for business and finances than you do for social media and personal matters. Use strong passwords and change them frequently.

·         Beware of impersonators.  Criminals use sophisticated computer technology, such as dialers and automated questions, to contact thousands of targets daily.  Do not provide personal information to callers you do not know.   Watch out if a caller requests you verify personal information. Ask questions; their telephone number, name of their supervisor, email address, mailing address, their website.  The IRS never initiates contact by telephone.  They contact you using USPS. 

·         Unsolicited emails and phishing swindles. Do not open attachments or electronic links unless you know the sender.  Internet sites should they are encrypted.  Always be aware of entering sensitive data.  Forward emails received from IRS impersonators to  The IRS never initiates contact by email, text message, or social media channels. 

·         Monitor your personal information.  Review your bank and credit card statements often.

·         Electronic transmission of financial information.  Do not send sensitive tax or personal information via unsecured email, even information transmitted to CPAs, bankers, and/or financial advisors.  A secure portal, encrypted email or physical mailing of sensitive information is necessary. 

·         Order your free annual credit report.  Call 877-322-8228 or go to to request your report and search for creditors you do not know.  Choose to use only the last four digits of your Social Security number on your report.  Consider placing a credit card freeze on your account so only approved creditors can access your file. 

Another swindle becoming quite popular is the "Grandparents scam”.  In the conference I attended, one person in the audience related her story of her parents being a victim.  A swindler called her parents, identified by name their Grandson, identified himself as their Grandson’s good friend.  The Grandparents   recognized the name of their Grandson’s friend.  The caller said they were traveling in Mexico and their Grandson is in jail and needs bail money.  "Please don’t call our parents, the friend pleads!”  The Grandparents wired $8,500 to the caller.  The person relating the story stated, "Why my parents didn’t call me I’ll never know!”  The money is lost and not recoverable.

 The reality is your personal data is already at risk everywhere.  However, following the above suggestions reduces the likelihood of becoming an identity theft victim.  The main thing however, just be cognizant and aware, think about why someone wants your information. Maybe, disclosure not necessary.  

Tags:  accounting  fraud  identity theft  IRS  tax 

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So You Filed Your Taxes. Now What?

Posted By Kenyatta Turner, LegalShield Independent Associate, Friday, May 6, 2016


After filing your taxes there are a few things you can do to prepare yourself for next year’s filing, protect yourself from scammers and even ease worry about a potential audit. This may include storing documents where you can easily find them, protecting your personal financial information from thieves and being ready should you be selected for an audit. 

•    Hold on to your tax documents. Save copies of your return as well as all of the receipts and other documents you use to prepare your taxes. Keep the documents in a safe and accessible location. You may be asked to produce documents to back up your return. Having all of the information organized and accessible will make it easier for you to validate your return should the IRS come calling. It is a good rule of thumb to retain your tax records for six (6) years. While you may not need all of your tax documents for that long, it is better to have them available should you need them.

•    Keep your documents safe. Whether you file online or use a professional you must keep your personal information safe. Tax returns are a goldmine for identity thieves. Never store sensitive information on public computers or transmit financial information through unsecured WiFi. 

•    Watch for signs of identity theft. Your tax information may be at risk of falling into the wrong hand at no fault of your own. Scammers have been targeting human resources and payroll professionals. Scammers have requested W-2s by email using spoofing to pose as company executives. Click here to learn more about this scam. If you believe you may be the victim of identity theft and you have an IDShield membership call (800) 806-3991. If you do not have an IDShield membership visit to learn more.

•    Beware of phony audit or IRS correspondence. If you receive a phone call at home or work from someone claiming to be an IRS official collecting a debt do not make a payment or provide them with your personal information. Scammers pose as IRS officials and use severe threats to convince victims to make immediate payment or to provider personal financial information. The IRS will not contact you by phone, email or in person for an audit or to collect back taxes. Legitimate communication from the IRS will come via postal mail. Do not respond to, open or click on any links in emails claiming to be from the IRS. If you believe you may owe back taxes you should contact the IRS directly at 800-829-1040 or the Canada Revenue Agency at 800-959-8281.

•    Be ready if you are audited. Only a small percentage of tax payers will ever face an audit, but the threat alone is enough to make many worry. Often, you will simply be asked to clarify a particular portion of your return rather than face a full audit. If you are audited, your LegalShield family plan offers audit legal services starting with your tax return due on April 15th of your first membership year. This includes an attorney at your initial audit meeting and if necessary an attorney to represent you further at the preferred member rate. If you receive notice of an audit, call your LegalShield provider law firm right away.

•    Improve the process for next year. If getting your documents together to file and figuring out deductions was difficult this year, learn from those challenges. Is there a better way to track expenses or file receipts? Figure out how to improve the process so you don’t face the same headaches next year.



Tags:  bookkeeping  identity protection  identity theft  IRS  legal competency  tax planning  tax strategy  taxes 

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Fraudster Ticks - Those Sly Devils

Posted By George (Clint) Frederick CPA PLLC, George Frederick CPA PLLC, Wednesday, May 4, 2016

Was that really the ‘Wrong Number’? Have you ever called your bank and received a recording to enter your account number, then to enter your account passcode, then your date of birth to verify your account, followed by the last 4 digits of your social security number… and then the recording goes blank? If so you have been hacked. The fraudster really does not need all of that information. The first two – account number and any of the other information will allow a fraudster enough information to hack your account. How do the thieves do it?

Here is an example. If you Google the customer service number for say Wells Fargo Bank, you will get a number 800-869-3557. Fraudsters will buy up numbers that are very similar to the customer number, say 800 -869-3555 – easy enough to misdial the number. The scoundrels buy up numbers that are the same except for one digit. When you call the number, you get a recording asking for personal information.
A variation of the swindle. You receive a call from your bank telling you there is a problem with your account instructing you to call a certain number. That number could be a call to the thief. I am using the term ‘bank’, but it applies also to credit cards and for that matter the Internal Revenue Service.

How do you avoid the swindle? First, call the number on the back of your bank or credit card. Be sure of the website where you get the customer service number. These are the tips from the May/June issue of FRAUD Magazine published by the Association of Certified Fraud Examiners. The article also noted as I have mentioned before, IRS swindles are on the rise despite efforts and advertising by the IRS of the frauds perpetuated.

There has been a 400% increase in IRS fraud activity. Just note – the IRS will not call or email you. All correspondence will come by way of the US Postal Service.

Tags:  banks  credit  fraud  IRS  small business 

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Tax Resources for Small Businesses

Posted By George (Clint) Frederick CPA PLLC, George Frederick CPA PLLC, Saturday, April 30, 2016


Tax Resources for Small Businesses

National small business week is May 1 – 7.  Your friends at the Internal Revenue Service (IRS) are there to help.  Do you believe, "Hello, I’m from the IRS and I’m here to help you!”  Actually, in my experience they are getting to be a bit more friendly, if not helpful in assisting business to succeed.  IRS e-News for Small Business 2016-1, for small business published on April 29 will assist small business. 

The IRS letter follows.  It provides links to seminars, tips, forms, recommendations, events, and instructions.  The first link under tax resources, "Small Business and Self-employed One Stop Resource, is particularly helpful, especially if one is contemplating a new business.

e-News for Small Businesses

April 29, 2016

Tax Resources for Small Businesses

Small Business and Self-Employed One-Stop Resource

Small Business Forms & Pubs

Small Business Events

Small Business Webinars

e-File for Businesses and Self-Employed

Businesses with Employees

Small Business Products

Self-Employed Individuals

S Corporations

Other Resources

Find it Fast!

All Forms and Pubs

Filing Your Taxes

Make a Payment

IRS Tax Gap

Taxpayer Advocate Service

Retirement Plans

Tax Information for Charities
and Other Non-Profits

State Links

SSA/IRS Reporter

IRS Social Media

Back to Top


Issue Number:  2016-1

Inside This Issue


1.     National Small Business Week, May 1 – 7

2.     Help IRS promote the free webinars using Thunderclap

3.     Work Opportunity Tax Credit

4.     Reminder for employers and providers: file health coverage information returns 

  1.  National Small Business Week, May 1 – 7

During National Small Business Week, IRS is offering a series of educational webinars for small businesses and self-employed taxpayers.

Register now for:

Back to top

  2.  Help IRS promote the free webinars using Thunderclap

Thunderclap is a "crowd-speaking" platform that lets individuals and companies rally people together to spread a message.

Supporters on Thunderclap signup and agree to share a message on social media accounts, e.g., Facebook, Twitter, Tumblr.

Follow this link for the IRS Small Business Week Thunderclap:

  • Select support with Facebook / Twitter / Tumblr
  • Click on the "Support With” tabs to authorize Thunderclap to post this one-time message to your social media platform
  • Input social media username and password

It's  completely safe and will automatically post only one message on your own social media account.

Back to top

  3.  Work Opportunity Tax Credit

Recent legislation extended the Work Opportunity Tax Credit  retroactively for 2015 for employers that hire members of targeted groups.

It also expanded the targeted groups of individuals to include qualified long-term unemployment recipients.

Back to top

  4.  Reminder for employers and providers: file health coverage information returns

The deadlines to file information returns with the IRS are approaching for self-insured employers, applicable large employers and health coverage providers.

IRS Health Care Tax Tip 2016-47 has more information.

Back to top


Tags:  entrepreneur  IRS  small business  tax planning  tax strategy 

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The IRS Can't Take Your Call Right Now

Posted By Mark Wahlstrom, Sequence Media Group, Wednesday, April 15, 2015


If you called the IRS recently and couldn't get weren't the only one. A new report shows that because of budget cuts, the IRS can't answer 60% of the calls it receives.

Online Video Services

We specialize in timely, broadcast quality HD video, designed specifically for web syndication and distribution.

Tags:  60%  arizona small business  budget cuts  IRS 

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Five Ways To Avoid Tax Foolishness

Posted By Jason Trujillo, Woodbury Financial, Monday, April 6, 2015

Five Ways To Avoid Tax Foolishness by Steve Parrish

Article appeared on April 6th, 2015 on

Click here to read original article.

Between April Fools’ Day and Tax D-Day (April 1 through April 15), taxes are on many people’s minds. With all the April fooling behind us, what better time to start taking tax savings seriously?

The challenge is to avoid foolish tax moves caused by the panic of an impending deadline and bad news from your tax advisor. I talked with a business owner friend who visited his tax advisor last weekend. He commented, “Once I heard that my taxes had gone up, even though my income hadn’t, I stopped listening.”

Ignoring tax planning opportunities? Foolish.

Another acquaintance told me he planned on saving taxes by “setting up some sort of trust.” Until he understands his plan and is certain that this “sort of trust” is founded on good law, his tax strategy has the potential to be foolish as well.

Taxes may be inevitable, but you have some say over how much you pay in taxes and when. Let’s consider five tax strategies, and ponder whether they are an unwitting, belated April Fools’ joke or are a tax relief tactic to consider for next year’s April 15 filing deadline.


Some taxpayers are tempted to delay filing their tax return and, even worse, delay paying their taxes. As long as an extension is filed, a delayed return is not necessarily a problem. Delaying payment is definitely a problem. Both interest and penalties will apply.

In many ways, putting off paying the IRS by April 15 is tantamount to a very expensive payday loan. There are better ways to borrow money for taxes than borrowing from the IRS.


A few years ago, it was considered passé, even foolish to defer income. The thinking was that taxes would go up, so it made sense to pay tax currently while tax rates were low.

The situation has changed. Taxes have already gone up. Accordingly, a legitimate strategy is to defer taxes, particularly as part of a retirement strategy. An advantage to deferring is not only the time value of money saved on the deferred taxes but also the potential to pay future taxes at a lower rate.

Your money may currently be subject to a high marginal tax bracket because of the Alternative Minimum Tax, the Net Investment Income surtax and other high-income-tax regimes. But income you receive during retirement may not be subject to these additional taxes.

You will likely be in a lower income bracket and not subject to those high-tax-bracket regimes. Consider deferring taxes by contributing to your 401(k) or your nonqualified deferred compensation plan. Or, use your after-tax excess income to fund a tax-favored product such as municipal bonds, annuities or cash value life insurance.


It’s hard to argue with taking a legitimate tax deduction.

Incurring the expense simply to generate the deduction? Foolish.

The highest tax rate is still not much more than 50 percent. Why pay $2 for something you don’t need just to save $1? There are instances, though, where you get something for your expense. For example, money put into your qualified retirement plan is money saved for retirement – and you get a tax break besides.

There are other tax-advantaged benefit plans such as health, disability and life insurance programs.


It sounds foolish to say “pay taxes now,” but in many cases this is an opportunistic tax approach. Look for situations where either:

  1. The asset is expected to substantially increase in value in the future.
  2. Or where the product being used has future tax advantages. That way you pay tax on the seed but not on the harvest.

Here’s an example of a future gain idea. In certain situations, the holder of a stock option can elect current taxation in lieu of paying tax when the stock option is actually exercised. It’s commonly called an “83(b) election.” If the anticipated appreciation on the option is high enough, it makes sense to pay tax now, before the appreciation occurs.

For a tax-favored product example, consider a Roth IRA. You use after-tax dollars now but avoid tax on both the gain and the payout in the future.


Tax planning should not be a fourth quarter activity. Now that you know what last year’s tax bill is –and while it’s still the first half of the year – do something about it. Decide to save future taxes by doing something now.

Not deciding is a decision. The decision to go through the same foolishness next year. So stop fooling around, and start saving taxes.


Tags:  after-tax dollars  Alternative Minimum Tax  annuities  April 15th  April Fools  business owner  IRS  life insurance  payday loan  Principal Financial Group  retirement income  Roth IRA  Steve Parrish  tax brackets  tax deduction  tax extension  tax planning  tax rate  tax return  tax strategy  taxes 

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Don't Give Your Business Away, Sell It

Posted By Jason Trujillo, Woodbury Financial, Tuesday, March 3, 2015

Don't Give Your Business Away, Sell It by Steve Parrish

Article originally appeared on on March 2, 2015.

To read original article, click here.

I often address business groups, and many of the attendees own family-operated businesses. I challenge these individuals with this question: “Do you want your kids to be heirs or successor owners?”

Here’s the difference. A successor owner is one who takes the legacy of the business you built and moves it to the next level. An heir is a loafer who sits around waiting for you to die.

To encourage children to act like successors, you need to get them thinking like business owners sooner. And the best way to do that is to make them owners now – but for a price.

There simply has never been a better time to facilitate the transfer of some of the family business to the kids.

The primary economic driver for these positive conditions is incredibly low interest rates. This makes the transaction workable from a cash flow standpoint. Second, the tax environment is also favorable in that owners can still legitimately discount privately owned business interests for valuation purposes.

But both of these conditions can change. Interest rates are likely to increase, and tax law writers may ultimately succeed in limiting what discounts can be used in valuation of a family-owned business.

How a transfer works

Assume you own a family business, and your daughter wants to succeed you in ownership of the business. Rather than gifting her stock or, worse yet, having her wait for you to die to inherit the stock, sell her part of your business now.

Here’s the process:

  1. Value your business. You may know your business, but that doesn’t mean you know what an outside party – or the IRS – will attach for a value.
  2. If control is an issue for you, recapitalize or restructure your business. C or S Corporations can issue non-voting stock. A partnership can be changed to a limited partnership. An LLC can have members as well as managers. You don’t have to hand over the keys to your business in order to have your daughter become an owner.
  3. Sell a portion of your business to your daughter. She would buy an equity stake for a contractually agreed, IRS-defensible value. She can either sign a long-term installment note or an interest-only note with a balloon payment far into the future. Your daughter now owns a part of your business, has established a tax basis in her stake, and can start thinking like an owner.

Why now?

Your daughter is not wealthy. How can she possibly afford to buy into the business?

It’s all about the terms of the loan. The IRS is required to use tables known as the Applicable Federal Rate (AFR) to determine the minimum interest rate to charge so as to avoid the loan being treated as a gift.

The March 2015 annual, long-term AFR is an incredibly low 2.19 percent. Ten years ago it was 4.52 percent. Fifteen years ago it was 6.75 percent. Think of these current low AFR rates as a tax and cash flow gift to business owners.

You can set up a long-term agreement with your daughter to sell an interest in your business and be able to lock in a rate of only 2.19 percent. This rate will not increase during the period of the loan, even though interest rates are likely to increase in the future.

Consider how this could work. If you sell your daughter a stake in your business worth $1 million, the annual interest charge on that stake would be $21,900.

How can she afford the interest payment? The earnings she receives from her equity stake in the business can provide her with the working capital needed to pay you the interest on the loan and perhaps some of the principal. And this doesn’t necessarily mean a loss of cash flow for you. What you give up in earnings from the sold stock will be recovered in whole or in part by the loan payments your daughter makes to you.

For estate planning purposes, you’ll probably want your daughter to pay off the loan no later than the date when you die (hopefully a long way down the road). A common planning technique is to have her use some of the earnings from her equity share to purchase life insurance on your life. That way she’ll pay off the loan at your death. She’ll own her stake in the business free and clear, and your estate will have liquidity for other estate planning needs.

The benefit

The bottom line is that your daughter will now start thinking about your bottom line. She’ll think like an owner because she will be an owner.

For example, if your company makes additional profit because of her contribution to the business’s success, she will share in the financial rewards through her stock ownership. Conversely, she’ll feel the cash flow pinch when times are bad.

This will set her up for eventually taking over the legacy you’ve created and becoming a successor owner.

This favorable alignment of the stars will not last forever. Both interest rate and tax changes are looming. If you want your children to be your successor owners, now is the time to act.


Tags:  Applicable Federal Rate  business loan  business valuation  cash flow  equity stake  estate planning  family business  family-operated business  heir  installment note  interest rate  IRS  legacy  life insurance  Principal Financial Group  Steve Parrish  stock ownership  successor owner  tax basis 

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Why You Should Pay Taxes Now

Posted By Jason Trujillo, Woodbury Financial, Friday, January 23, 2015

Why You Should Pay Taxes Now

Article originally appeared on on January 20, 2015.

Click here to read original post.

Shortly before the Great Recession, I was with an advisory team that counseled a business owner to pay $1.2 million in income taxes – taxes he could have deferred. Time has proven that we were right.

He had an $8 million gain from the sale of a commercial building, and was contemplating rolling over the gain in a tax-deferred, like-kind exchange. Instead, he paid the then top capital gain rate of 15 percent versus the 23.8 percent tax he would be facing today.

On $8 million, that’s a difference of more than $700,000.

Paying taxes now that could be deferred until later sounds like crazy talk. But sometimes the numbers show a demonstrable financial saving by paying taxes currently. The scenarios in which this logic prevails are many but can be summarized into the following six situations.

Pay tax on the seed, not on the harvest

A Roth IRA is a classic example. You pay tax on income currently and put the net into a Roth IRA account. If requirements are met, the Roth builds tax free and pays out tax free.

Cash value life insurance is another example. Using after-tax dollars, you can put premiums into a life insurance contract that builds cash values tax-deferred. The proceeds pay out tax-free either as a death benefit (personally, I don’t recommend this approach) or by the owner taking tax-free withdrawals of the cash value up to the tax basis and then switching to loans.

With both a Roth and life insurance, the tax strategy is to pay taxes on a small amount currently so as to avoid taxes in the future on a potentially high amount.

Get the clock running

Sometimes reporting a taxable transaction does not mean you actually pay a tax currently. Gift taxes are an example. An individual has a lifetime $5.43 million gift-tax exemption.

This means a lot can be given before an actual gift tax is incurred. Particularly where the gift involves an uncertain valuation, it may make sense to make and report the gift currently. For example, a business owner who is contemplating transferring a business interest to a family member might do well by making that gift now.

First, it takes the asset out of the business owner’s taxable estate without necessarily causing a current gift tax. Second, future income taxes on the asset won’t be attributable to the business owner. And finally, it starts the clock on the statute of limitations for tax purposes. If the IRS wants to challenge the valuation of the asset, they have a limited period in which to do so.

Better the enemy ye know

With many business transactions, the amount of gain that will be generated in the future is unknown. It may make sense to pay the tax now, when the gain is known. For example, there is a tax provision referred to as an 83(b) election.

Say the founder of a business grants stock to a key person but makes it subject to a vesting requirement. Normally, the key employee defers paying tax on that grant until it vests; however, an 83(b) election allows the employee to be taxed currently. If the key employee anticipates the stock will grow wildly, it may make sense to elect to pay the tax now, when the value is known.

A second example involves IRC 280G. This provision disallows a tax deduction for certain compensation payments made to “disqualified individuals” – such as officers, shareholders and highly compensated individuals – when the compensation is paid pursuant to a change in control. It also assesses an additional 20 percent excise tax on the amount of the payment that is an “excess parachute payment.”

This tax is designed to penalize certain compensation payments associated with taking a business public. One of the ways tax planners avoid this punitive tax is to anticipate the sale and make some compensation payments in earlier years.

This is a complex topic, but the point is that, in this situation, paying tax in advance may avoid confiscatory taxes in the future.

Change the character of the tax

Personally, I think this strategy is oversold, but it’s at least worth considering. Some advisors suggest that rather than putting large amounts of wages in tax-deferred qualified and nonqualified plans, it may be better to pay tax on the income currently and then invest the proceeds in capital gains properties.

The idea is that capital gains taxed at a top 23.8 percent rate is better than deferred ordinary income taxed at a top 39.6 percent rate. The good news is that this isn’t an all or nothing decision. The employee may just defer some wages.

Flow-through beats double taxation

This typically involves the decision as to whether the business should be taxed as a C Corp, an S Corp or an LLC.

There’s a reason the majority of businesses in the U.S. are taxed as flow-through entities. It avoids double taxation. A C Corp pays tax at the corporate level and then is taxed again when excess earnings are distributed as a dividend.

Flow-through entities (S Corps and LLCs) result in the owners paying tax on income as it is earned. With privately held companies, it is typically preferable to be taxed as a flow-through entity.

The overall tax paid may be lower, and it avoids money being trapped in the corporation when it’s time to liquidate or sell the business.

Tax rates may go up

Now that the 114th session of Congress is open for business, we’re all wondering what will happen with taxes. While it can be argued with both houses in Republican control, the session will tilt more toward tax relief, the current federal debt and infrastructure needs are a demand for additional government revenue.

If you feel tax rates will go up in the future, consider paying some taxes now. If you feel tax rates will go down or stay the same in the future, tax deferral techniques may be more attractive.

For most business owners I talk with, taxes are neither a political nor a moral issue. They are a cost of doing business. In some situations, the simple fact is that paying taxes currently will save taxes in the future.

Tags:  after-tax dollars  business owner  C Corp  cash value life insurance  Congress  double taxation  federal debt  flow-through entity  Forbes  gift tax  income taxes  IRS  key person  LLC  Principal Financial Group  Republican control  Roth IRA  S Corp  Steve Parrish  tax deferral  tax strategy 

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3 Tips To Avoid A Majority/Minority Stockholder Smackdown

Posted By Jason Trujillo, Woodbury Financial, Tuesday, December 2, 2014

3 Tips To Avoid A Majority/Minority Stockholder Smackdown by Steve Parrish.

Article originally appeared on December 1, 2014 on

Click here to read original post.

“All animals are equal, but some animals are more equal than others.”

- Animal Farm, George Orwell

Most of us had to read Animal Farm in school. The basic idea is that animals rise up to take over a farm, and through various political maneuvers, they end up running the farm much as their former human rulers did.

Whether you consider the book a dystopian allegory … or just a good read… the point is that those in control get to define the meaning of “equal.”

This cynical view of things certainly doesn’t apply to most aspects of business management. But it is a reminder that those business owners who are in control get to determine what’s fair and not fair for the other owners.

Being a shareholder in a privately held business is usually a voluntary condition, and typically, the shareholders know each other. Accordingly, in most situations, the issue of control is not a problem for these owners. The majority shareholders and their management team run the business, and the minority shareholders are employees, family members or passive investors.

As long as the business is doing well, conflict is rare.

Still, in the business world, control has value, and lack of control has disadvantages. When a major issue bubbles up, it’s the controlling interest that determines the outcome. This is one reason why the IRS often imposes a valuation premium on a controlling block of stock and allows a valuation discount for minority stock ownership.

Majority vs. Minority

Occasionally the control issue erupts into a legal challenge. There is a long history of minority shareholders claiming that the majority owners are acting unfairly.

Shareholder disputes may involve corporate policy, dividend policy or stock valuation. And some of these cases end up in court. Consider two derivative shareholder cases:

  • One that’s 95 years old.
  • One that’s only a year old.

Dodge vs. Ford Motor Company

In Dodge v. Ford Motor Company, the Michigan Supreme Court held that Henry Ford owed a duty to the shareholders of the Ford Motor Company to operate his business to profit the shareholders, rather than the community as a whole or employees.

The essential dispute was that the Dodge brothers, who at the time owned 10 percent of Ford Motor, wanted a higher dividend payout while Henry Ford wanted to share the company’s significant surplus with a broader audience.

After winning the case, the Dodge brothers used their increased dividend payout as capital to build their own business.

You may be familiar with that Detroit-based business.

Baur vs. Baur Farms, Inc.

Fast forward to 2013 where in Baur vs. Baur Farms, Inc., the Iowa Supreme Court also held in favor of the minority shareholder.

In this decades-long dispute between cousins, the court declared that a minority shareholder who wants out needs to be offered a fair return on his investment. Essentially, the case established that the majority shareholders can’t simply use their voting control to impose an unfairly low buyout price on a minority shareholder.

Avoiding Disputes

These cases should not overly concern business owners.

Courts give businesses a wide berth in determining how and when to pay out dividends and how to determine the value of shares when a buyout is involved. Still, who wants a smackdown between shareholders?

No business benefits when the owners are in conflict.

These cases remind us that planning is the best way to avoid conflict. There are some common-sense planning steps to avoid, or at least mitigate, clashes between majority and minority shareholders.

1. Determine and update the value of the business.

Closely held businesses do not trade on a public exchange. Consequently, valuation is always in question. Yet these businesses need to determine their value in order to, among other things, obtain loans, create executive compensation plans and execute buy-sell agreements.

Updating the value of the business, even informally, can help shareholders mutually understand the wealth and challenges of the business they collectively own.

2. Make sure the buy-sell agreement reflects the actual value of the business.

Updating the value of the business alone is not sufficient to assure a conflict-free transfer of shares.

Too many buy-sell agreements state a sale price for shares, but fail to update that price to reflect current conditions. A best practice is to have the buy-sell agreement:

  • State the financial basis for the valuation.
  • State the actual value to be used in the buying and selling of shares.
  • Determine how often that stated value will be updated.
  • Provide a backup method in case the value has not been updated.

3. Communicate.

Control of a closely held business will evolve with changes in marital status, family additions and owner departures. Further, because of possible voting blocks, preferred share classes, management changes and myriad other corporate conditions, there is not always a clear delineation between majority and minority shareholders.

The best solution is ongoing communication.

The corporate formalities of shareholder communication and meetings need not be just bureaucratic necessities. They can be a way to head off trouble.

If everyone knows how the business is doing financially, differences can be managed quickly, and major disputes can be averted.

Company shareholders have an equal interest in seeing their business prosper, but they don’t necessarily share equally in that success. Some shareholders are “more equal” than others, to paraphrase Animal Farm. Much of this can be worked out as long as the affected parties know what’s going on. Through planning and communication, most problems can be kept from turning into a battle.


Tags:  Animal Farm  block of stock  business valuation  buy-sell agreement  capital  communication  dividend payout  Dodge  Ford Motor Company  George Orwell  IRS  Principal Financial Group  shareholder  small business  small business owner  Steve Parrish  stockholder 

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