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My past experience with these audits is: 1. Reconcile payroll records with quarterly reports 2. Review any subcontractors with Form 1099s to see if their classification is appropriate 3. Review Cash Disbursement and GL Records for payments to individuals with no 1099s. All of mine have been audits in my office.

Get the POA, then share your Covid concerns with the auditor. I am fairly certain they will want to do this via correspondence (they probably don't like going to offices where they don't know the people either). Follow the advice above. When I have done these in the past, I will try to know the results before the auditor sees anything. And if something was missed, I lead with that item and agree to that adjustment right off the bat. No sense trying to hide something. I find it buys some goodwill if you admit there was a mistake and it is corrected. Tom Modesto, CA

The general rule is never let an auditor and client meet, especially for a form you prepared. How about requesting a correspondence audit?

That has also been my experience with Oregon Employment Dept., but auditor was happy to have it done by correspondence (email) vs 4 hour round trip to my home office.

Does your client have any subcontractors? Most likely its for testing for independent contractor status.

Correct. Because there will always be basis in IRA, a calculation should always be done for how much of distribution is taxable for the rest of their lives.

I have a very reasonably priced policy with Hiscox through my local insurance agent.

But there are potential pitfalls that would not occur if a front door roth contribution was made. For a taxpayer with existing traditional IRAs, the recharacterization can become a significant taxable event due to the pro-rata rule. Also need to keep in mind the 5 year rule.

For the backdoor Roth, when qualifying to convert, but not to contribute, to a Roth: open up a non-deductible Traditional IRA (works best if you have no other Traditional IRAs), do NOT deduct it, and then CONVERT the thing into a Roth, hopefully before any earnings. Yes, it is because a Traditional IRA can NOT be deducted at high income levels. A non-deductible Traditional IRA with basis still DEFERS taxes on the earnings/appreciation. But there WILL be taxes on everything in excess of the basis. A Roth IRA ELIMINATES taxes on everything if used per the regulations. You can convert some or all of an existing Traditional IRA to a Roth IRA at any time, but having basis in some of your Traditional IRAs adds more computations. Someone will jump in to let me know if I should be using the term Roll Over instead of Convert, and explain the whole process better than I can. But the Back Door Roth has a place in retirement planning for high-income clients. Many want a mix of taxable and not-taxable income when they retire, or are trying for non-taxable Roths due to already expecting taxable pensions and SS, or want a non-taxable account to leave to heirs so their heirs won't have to sell things to pay the taxes or...

Thanks, everyone. I will get a POA from client for this. I've never had anyone in over 40 years have an unemployment audit. I don't know how well a correspondence audit will work, but I can ask. That would probably beat sitting in my garage. I do not want Covid again and I don't want to spread it. We were exposed to it two weeks ago, but thankfully, tested negative.

I have $ 250,000 of coverage for $340.00

Good conversation. The biggest potential pitfall apparently occurs when a Traditional IRA already exists. If basis in the Traditional, taxpayer cannot pick and choose when to relinquish the basis. Basis must be eliminated pro rata.

IRS has been unhappy with the back door approach for years but congress won't change it. Who knows, maybe most of them take advantage of it? Heed Danrvan's advice if the client already has a traditional IRA. Say you're over AGI and contribute $6k to your traditional that's nondeductible. You can't just pull that $6k out and convert it to a Roth. If your IRA balance was $100k and you convert the $6k, only .06 percent will be treated as basis and the rest will be taxable. Also be aware that before this year, people 70 1/2 or older couldn't contribute to a traditional at all, so the back door was closed.

My niece is starting a business. I am going to try to get her started on the right foot, so I started writing a document to go over the things I think are most important. Having just come back from church, I thought I would put it in the form of the 10 commandments. Let me know what you think: 1. Commandment #1 - I am your business and Tax Advisor. You shall listen to no hairdressers, contractors or co-workers regarding tax and business matters. You shall not believe everything you read on the internet, hear on the radio, or see in a TV commercial without checking with me. You shall not call an 800 number for advice on borrowing, lending or tax issues. You shall keep me informed of all major decisions related to the business, its ownership, its structure, and its profitability. 2. Commandment #2 – Thou Shalt Keep your business and personal money separate a. Business checking account b. Anything you take from business for personal is recorded in both accounts c. Reconcile your bank accounts monthly d. Get a separate credit card for the business (only charge business expenses on business credit card) 3. Commandment #3 – Thou Shalt Record all your business transactions a. Every single one, every single time, every single day, no exceptions, no whining about it b. You will keep a mileage log of all the trips you make in your vehicle for business. It will not be created at my desk during your tax appointment, but will be kept on a daily basis. You may use any fancy dancy millennial app that you can put on your phone to keep the log, but at the end of the year you will produce a mileage log that I can print out on old fashioned paper and put in my files that tells me where you went, why you went there, what the date was, and how many miles were driven to get there and back. c. You have to do this to follow Commandment #4… 4. Commandment #4 – Thou Shalt Know your costs of doing business a. How much do materials cost b. How much is your office and other overhead costs (electric, business licenses, taxes, etc) 5. Commandment #5 – Thou Shalt Price your products and services correctly a. At a minimum, you need to mark up your material costs by 40% b. You need to have a billing rate for your time i. 40% more than you want to get “paid” from your business ii. If you want to earn $20 per hour for your time, your billing rate is $28 per hour c. You need to add at least 10% to the above numbers for overhead d. You need to add at least 25% to your billing rate and overhead rate to cover taxes 6. Commandment #6 – Thou Shalt Put into savings a minimum of 25% + any sales tax collected from every payment you receive to cover your tax bill a. Sales tax collected is not yours – don’t treat it like it is. Put it in savings until it needs to be paid. b. Federal SE tax rate is 15.3%. This is your SS and Medicare contributions c. Lowest Federal Tax Rate is 10% d. State Taxes – Find out what your tax rate is and add that to the 25% above 7. Commandment #7 – Thou Shalt NOT hire any employees until you do all of the following a. Get an EIN from the IRS i. You don’t want to give your SS# out to every business customer who asks for it ii. You must have one if you ever hire employees b. Get a State EIN - to get a state EIN you need a Federal EIN c. Get General Liability Insurance d. Get Workers Comp Insurance e. Know the Minimum Wage requirements for your State/City f. Know the Benefits Rules for your State/City i. Paid Time Off? ii. Sick Time iii. Health Insurance iv. Anything else any Government Entity requires you to provide to your employee g. Have the ability to process payroll yourself or hire out the process h. Pay your Payroll Taxes on time every time (The IRS takes a dim view of employers who withhold from their employees and does not remit to them – They call it THEFT) 8. Commandment #8 – Thou shalt have the proper local business licenses and follow your local business laws a. States, Counties and Cities can be more brutal than the IRS b. If you have an office in the home, make sure it is allowed by the local government c. If you are a professional, you must have the required licenses to perform the services offered by your business. 9. Commandment #9 – Thou shalt keep your appointments with me a. My goal is to help you succeed in business. You will be busy running the operations, trying to sell and trying to develop new products and services. I know your time is important and limited, you need to recognize that my time is as well. I will do all I can to accommodate your schedule. However, government entities impose deadlines that cannot be missed. Don’t ignore me all year and then show up on April 14th with a shoebox and a flimsy apology and expect me to get your documents ready on time. There is no 10th commandment, since I am not God, but on earth I am your Tax Daddy! Tom Sparks, NV

Of course He does! Have you ever looked at a platypus?

Yes; don't forget that! Plus there is usually a fee (sometimes hefty) for dissolution.

To Gail. I remember a professor tell us that when you start this job you are given a bag of marbles. When are are gone then its time to quit. I am getting close.

That would be a corporate liquidation where the shareholder exchanges his stock for remaining assets. So your client would have a capital gain equal to $20,000 less basis in stock per section 331(a). Technically, form 966 should be filed and 1099-div showing the $20,000 liquidating cash distribution in the specific box. Final paper work also needs to be filed with the state.

I don't think that in this business being crazy is a reason to quit - I thought it was a requirement?

The penalty is indeed based on the number of partners, not the tax liability (partnerships usually pay no federal income tax). It can be waived using the first-time penalty abatement. Be sure it's a first timer. I had a partner once who was chronically late, got hit with a penalty, and to appease him I wrote a letter asking for the first-time abatement. I knew he wouldn't get it, and he didn't. After that year he got his docs to me well before Oct 16 (now that would have to be Sept 15)! Be aware that no penalty if they file an extension, but if they miss the Sept 15 deadline the penalty is assessed back to March.

It's now $210 per partner per month for a max of 12 months.

As a practical matter a new small business could do all of these things correctly and still fail to make a profit. They still have to sell a product or service to a customer willing to pay.

My niece and I were meeting after church on Sunday. As I started writing the notes that I wanted to touch on with her, I thought it would be funny to put it into a 10 commandments format. She got it, cracked up about it. Not sure I would send this out to a client either (unless they were members of my church). If God does not have a sense of humor, I am gonna fry for this.... Tom Sparks NV

Great starter set of advice for your niece, Tom!

Tom, this is wonderful and timely. I would replace the Tax Mommy as my son sort of kind of discussed maybe he might be considering starting his own business. While encouraging him, I did rattle off many of the things on your list but really stressed that he needs to have a conversation with his tax/business advisor. Good luck to and with your niece!

Tom, after reading your post again, it's pretty "tongue in cheek" so I can't see giving it to a client

If you are a practicing CPA, you are correct. However, if you are an EA like myself or an LTC then this doesn't apply, even though there are lots of quasi professionals out there giving very bad advice.

Seeing how this client is related to me and I have been her tax preparer for nearly 20 years, I think I can give her those general guidelines. These were talking points for our in-depth conversation on the phone. I have seen other clients over the years be very good at their trade or profession and start a business. They underprice their services and get lots of business that is not profitable, because they don't understand the costs of doing business. We see it in the tax business all the time, a new tax pro comes to town and starts underpricing. They get lots of business and revenue, but not profits. I wanted to make sure my niece did not do that, especially in the business she is going into. Thanks Tom Sparks, NV

Looks like your are engaged in Client Advisory Services (CAS) at level II or level III. CAS is recognized as a specialized area of practice by the AICAP. It would be a violation of ethics for me to perform that level of CAS without proper training or experience. At a minimum, would need work with client for a year or two at level one before advancing to the next level and give out that kind of advice.